I Just Don’t Get It

Why do so many construction contractors use lame contracts?

Builders who know better continue to use agreements that don’t comply with the law. That’s no way to run a business. And I think the day of reckoning is not too far off.

If not renewed, the 30% solar tax credit expires on December 31, 2016. Solar leases will be out. Solar loans will be in. Right now, the major residential photovoltaic leasing companies are ramping up loan programs to replace their lease deals. A solar contractor I know predicted what’s going to happen when installations start under these new loan programs. I’ll let him explain.

“I have yet to see a fully legal contract from another solar contractor. Not too long ago, I reviewed contracts offered by two major solar finance companies. Both contracts had obvious errors – mistakes in the notices and disclosures required by state law. A home improvement contract that doesn’t comply with state law can be void. A homeowner not completely satisfied can sue to recover the full contract price. But that’s just the beginning.

“Deep-pocket lenders are the real targets. Courts are going to rule that installing contractors were acting as agents for their finance companies. That makes finance companies liable for these refunds. It’s just a matter of time until class action attorneys and state attorneys general discover all these bogus solar contracts. They’ll claim widespread abuse in the solar home improvement business. Reputations and political careers are going to be built pummeling solar contractors and their finance companies. It’s going to be ugly. And when the installing contractors go broke, the finance companies will be sucked in to make up the difference. That’s going to be a wake-up call for heavy-hitters in the solar home improvement finance industry.

“I saw the same thing happen in auto finance. Class action attorneys go after the deep pockets. The settlement in Coleman v GMAC is typical. GMAC settled for just over $10,000,000.

• $9,000,000 plus an extra $600,000 for expenses went to plaintiff’s counsel.
• $1,600,000 went to consumer education programs.
• $0 went to the borrowers.

 “In another case, the only mistake was a technical violation. A clerk changed a legal notice from bold to italic because she thought it would be more effective. That one cost over $8 million!

“Starting next year, solar finance companies will be risking similar treatment if their independent installers continue using these lame contracts.

1. The class action attorneys and attorneys general will go after the Deep Pockets, not the individual contractors.
2. The Deep Pockets will then go after the contractors who did not have compliant contracts.
3. The Deep Pockets will demand the originating contractor reimburse losses or buy back noncompliant contracts. Most contractors will go bankrupt if they have to make three years of refunds on defective contracts.
4. Class action attorneys look for three things: (a) A contract defect. (b) Three people who are dissatisfied. (c) A Deep Pocket.

 “My solar company is committed to keeping it clean. We don’t want to be a target. Too many others are inviting trouble. My advice: Either learn to comply with the law or be ready to pay the price.”

Well said. And I agree 100%. Protect yourself. It’s easy. Construction Contract Writer will draft agreements that are perfectly legal, no matter the state and no matter the type of work. The trial version is free.

Construction Contracts and Licenses

Do you know any contractor who collects in full on every job?

Even if there’s no real dispute about quality of work, every contractor is going to have trouble collecting, at least now and then. Why? It’s simply human nature to get the best deal possible. When it comes time for final payment, an owner has all the leverage. If there’s any doubt about the amount due, you’re going to hear complaints and excuses.

An iron-clad agreement drafted with Construction Contract Writer leaves an owner little wiggle room. That’s a point made many times in this blog. But there’s one collection pitfall I’ve never mentioned: licensing. Where contractors need a license, unlicensed contractors have no right to sue. Legally, that makes payment voluntary.

About half the states and many cities and counties require a license for at least some types of construction. Contractors without the right license lose every time in court. That’s black letter law. And having the right license isn’t a simple matter. Note a case decided earlier this month in Maryland: Glen Valley Builders v. Whang.

Glen Valley agreed to make improvements to the home of James S. Whang in Potomac, Maryland. This was no small project. Living area of the Whang home was 17,000 square feet before work started. Remodeling would nearly double the size of this home.

Two years into the job, Whang fell into a dispute with Glen Valley Builders. Whang had paid $2,220,000 for work done so far but refused to pay any more. So Glen Valley sued. Whang’s attorney did what every attorney should do when defending a construction case. He checked licenses and discovered that Glen Valley Builders was never licensed, either in Montgomery County or in the state of Maryland. He asked the court to dismiss the action. The trial court agreed, ruling that Glen Valley Builders was unlicensed and had no right to collect what was due.

But the case didn’t end there. 

Lewis Friedman, sole owner of Glen Valley Builders, had a perfectly valid Montgomery County (Maryland) New Home Builder license. Friedman’s name was on the contract as guarantor of the work. Even more persuasive, Friedman's license number appeared on the building permit application. Friedman’s attorney appealed the trial court decision, arguing that Friedman's agreement as a licensed builder made him responsible for the work. Being licensed in Montgomery County as a new home builder qualified Friedman under Maryland law to handle a $2 million remodeling project. No other license was needed.

The appellate court agreed with Glen Valley Builders. The appellate court sent the case back to the trial court to decide two issues. Did Mr. Freidman's guarantee make him a party to the construction contract? If so, does a new construction license from Montgomery County exempt a builder from Maryland’s Home Improvement Law?

Four take-aways from this case.

Glen Valley Builders has another bite at the apple. Eventually the trial court will decide if Glen Valley Builders gets paid. In the meantime, it's easy to avoid Glen Valley’s mistake:

• Understand that unlicensed contractors can't sue to collect.
• Have the licenses your state, city and county require.
• Limit work to what's allowed under your license.
• Write contracts in the name of the license holder.

Arbitration and Warranty Claims

Every contractor and subcontractor has to deal with warranty – a claim that something wasn't done right and should be fixed at no cost to the owner. If you haven’t had a warranty claim yet, stand by. It’s going to happen. Nearly all states either require an express (written) warranty or impose an implied (understood) warranty on residential contractors. See my blog post of June 12, 2014.

For owners, warranty is simple. Just complain to the prime contractor. For contractors, warranty can be anything but simple. It’s a blame game. Who’s at fault? The subcontractor? The designer? The material supplier? The inspector? Lawsuits can resolve finger-pointing problems like that. Join everyone on the job as a defendant and let the jury decide.

But not so fast. There’s another problem lurking here. It’s called the Federal Arbitration Act (FAA). The FAA requires federal courts to “rigorously enforce” arbitration agreements. If there’s an arbitration agreement, a federal court may halt all proceedings until arbitration has been completed. A California case decided last month makes the point.

 A home owner, Robert Hoekman, hired Truckee River Roofing to re-roof his home in Truckee, California. The contractor installed Tamko shingles, relying on a claim by Tamko that their shingles would be "free of defects for 50 years". After seven years, Hoekman discovered his Tamko shingles were cracking, blistering, losing granules and prematurely failing. He filed a warranty claim against Tamko. After Hoekman completed several forms, Tamko sent a check for $100, a copy of their limited warranty and a "Material Certificate" that prorated the cost of forty squares of the same shingles. Hoekman wasn’t amused. He filed a class action suit against Tamko asking for declaratory, monetary, and injunctive relief.

Now Tamko rolled out the big guns, asking the court to halt or dismiss Hoekman’s suit pending arbitration. Tamko shingles come with an arbitration notice printed on the wrapper. Tamko claimed that notice was enough to invoke the FAA. Hoekman didn’t agree. He never saw the notice. His contractor bought the shingles. He never agreed to arbitrate anything. His class action suit should proceed.

The court agreed with Tamko, dismissing Hoekman’s complaint and referring the case to arbitration. Too bad for Hoekman. There is no right to add additional defendants or seek a class action in arbitration. Moreover, conventional wisdom is that 80% of arbitration suits are settled in favor of the merchant.

What this Means to You.

Arbitration clauses are potent medicine. They can work in your favor, even if not included in your contract. Notice in the Hoekman case that the contractor, Truckee River Roofing, wasn’t involved in the claim.

Any time you install materials that come with a warranty, save a copy of that warranty. Give another copy to the owner. Describe how the owner can make a warranty claim. If the warranty requires arbitration of disputes, explain that any warranty claim has to be settled by arbitration.

Of course, an arbitration clause in your contract is the best protection against an unreasonable warranty claims. To see good options for both warranty and arbitration, get Construction Contract Writer. The trial version is free.

“You’re Fired. Get Off My Property”

Have you heard those words from an owner? Last week I got a call from a contractor who had been told exactly that. He still had tools and equipment on the job. He was owed money. His crew and subs expected to be paid. Now what?

A contractor terminated for good cause could be liable for both the extra cost of finishing the job and the cost of fixing everything the owner didn’t like about the original work.

What would you do?

First, understand there is only one cheap, quick solution in a case like this: a heavy dose of common sense. An owner who orders a contractor off the job has grievances, either real or imagined. Offer to resolve every one of those issues. Then make that offer in writing. Save a copy for your file. An owner who refuses your offer to continue work on the owner’s terms has breached the contract. If the case ends up in court, you’re the one who acted reasonably. Documents in your file will prove that.

If common sense doesn’t help, the law has answers. An owner who orders a contractor off the job without good cause has committed a breach of contract. The contractor is entitled to payment for work completed plus lost profit. But an owner's breach of contract is excused if the contractor was the first to commit a material breach of the agreement. A material breach is a question of fact, usually decided by a jury.

The courts could take years to decide who committed the first material breach. Legal fees in a case like that will be many thousands.

Better Choices

Arbitrate. If your contract requires arbitration, do exactly what your contract requires. If you have agreed to arbitrate, no court will hear the dispute. Mobile mediators and arbitrators are available in nearly every major city. Some will meet on the job site and provide a written decision in a matter of days. That decision is fully enforceable, just like a judgment in court.

Record a lien on the property. Lien rights are entirely separate from contract rights. A recorded lien gives you the right to foreclose. But watch four points: (1) Where a license is required, unlicensed contractors don’t have lien rights. (2) If the construction site is the primary residence of the owner, there are no lien rights if the owner didn’t get the Federal 3-day right to cancel form. (3) Your lien must be recorded promptly after work stops. (4) You have a limited time to bring a foreclosure suit after recording a lien. Wait too long and your lien rights are gone.

Look to your contract. Many construction contracts give either the owner or the contractor or both the right to terminate – either for cause or without cause. If your contract has a termination clause, contract terms will explain who has to do what after termination.

A good contract is your best protection against an unreasonable owner. The best contract drafting tool I know is Construction Contract Writer. The trial version is free.

Short vs. Long Construction Contracts

Pick up a contract for any good-sized commercial or industrial project and you’ll be holding 50 to 100 pages. I’ve never seen a contract for a significant public works project shorter than 50 pages. Even the most popular A.I.A. model contract (A201) is 40 pages.

Why so long? That’s easy. Both sides are trying to avoid surprises – and lawsuits. One-size-fits-all construction contracts pave the way to the courthouse steps. A good contract resolves disputes before they happen. Cover all the issues precisely in your contract. If the unexpected happens, let your contract do the talking.

“OK”, you say. “But I’ve been doing business for years on a 2-pager and never had a problem.” I don’t doubt that. But it’s like driving on bald tires. Not recommended.

I’ll let Ed Stewart of Admiral Construction in Cocoa, FL explain why he uses long contracts:

Years ago, for my 14 hours of continuing ed. for Florida contractors, I took a course on construction law taught by a construction attorney. The attorney asked the class of about 75 contractors, “How many have 2 or more pages in your contract?” Just about all hands went up. Then he said, “As I count up, drop your hand when I get to your number of pages.” At 12, my hand was 2nd to last. At 15, my hand was still up, the only one in the class. He asked me, “How many pages?” I said, "Just finished writing an 18-page contract." The class laughed. Someone shouted "Who in the hell is going to sign an 18-page contract?" The attorney's reply was, "All you guys that have under 10 pages are setting yourself up for a major lawsuit. The contractor that has 18 pages is probably well protected." The attorney asked to see me after class. When class was over, the attorney asked me, “Why so many pages?” I said "Craftsman Contract Writer". He said that was an excellent choice, well worth the purchase price. To date, Contract Writer has saved me many times, although I add more detail to my contracts. Just finished an 18-page contract, and a few weeks before, a 28-pager. So far, I’ve never had a contract turned down for being too long.

Contracts on Steroids

No matter how you feel about short vs. long contracts, include everything state law requires. For home improvement work, a two-page contract you found on the Web is a poor choice. In California, for example, every home improvement contract needs 32 distinct notices and disclosures – a minimum of 14 pages. There’s no (legal) way to avoid that.

Finally, if your contracts are short because you’ve run out of things to say, have a look at Construction Contract Writer. You’ll find dozens of good ways to protect yourself – grouped into 24 categories, from defining scope of the work to completion and final payment. Just answer the questions to write contracts – either short or long – that fit your jobs precisely.

Bad Faith Contracting

Nearly every state requires notices and disclosures in construction contracts, especially residential contracts. What’s required varies from state to state. But most states require at least several of the following:

• A signed and dated written contract
• Contractor license or registration number
• Date when work will start and be finished
• Payment schedule
• Mechanics’ lien warning
• A statement about insurance or bonding
• Three-day right to cancel

What happens if your contract omits one of these notices and disclosures? In most states, that’s an invalid contract. It’s enforceable against the contractor but almost certainly not binding on the owner. A recent Connecticut court decision makes the point: Aqua-Scapes sued Mason to collect final payment on a pool job. Mason refused to pay, claiming the contract didn’t comply with Connecticut law. The court (2014 Conn. Super. LEXIS 3819) ruled for Mason:

"There is nothing dishonest or sinister about homeowners proceeding on the assumption that there is a valid contract, enforcing its provisions, and later, in defense to a suit by the contractor, in learning that the contract is invalid, then exercising their right to repudiate it."

It’s easy to make Aqua-Scapes’ mistake in a construction contract. What’s required by state law can vary with the contract price, the type of work (residential, commercial or insured loss), where the contract was signed (on site or in an office), the number of payments, when payments are due and even the age of the owner. In the Aqua-Scapes case, the contract was void because it:

• Omitted the contractor’s registration number
• Wasn’t signed by the owner. The owner gave his OK by email.
• Didn’t include starting and completion dates
• Omitted a notice of the owner’s right to cancel

Take this as black letter law: If your contract is a dud, the owner wins every dispute. In most states, you’ll have to jump through legal hoops to collect anything the owner doesn’t want to pay.

Bad Faith Contracts

Now go one step further. Suppose the owner spots a defect in your contract right from the start. Something required by state law simply isn’t there. The owner knows you’ll have no right to collect if there’s a dispute. But the owner signs anyhow, saying nothing about the defect – in effect, laying a trap. Heads, the owner wins. Tails, you flip again.

Oops! That owner has given the contractor what’s called a bad faith defense. The owner knew the contractor had no right to collect and went ahead anyhow. That’s bad faith. But proving it won’t be easy. As quoted in the Aqua-Scapes decision:

“Bad faith of a nature to preclude enforcement of [The Home Improvement Act] must involve ‘actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive’.”

Aqual-Scapes couldn’t meet that challenge. You shouldn’t have to. There’s a better way. Use contracts that comply precisely with the law in your state, no matter the type of job. The best way to protect yourself is with Construction Contract Writer. The trial version is free.

Indemnity: Contractors Beware

You’ll see the words “defend, indemnify and hold harmless” in many construction contracts. That’s an indemnity clause – and it can be toxic for contractors. I’ll explain.

One common form of indemnity gives an owner or a designer the right to recover from a contractor for every loss on the job, even losses caused 100% by the owner or a designer. Is it fair to make a contractor cover losses like that?

Nearly all states have said “no.” They void what’s called broad form indemnity agreements: anything in a contract which would require a contractor to cover a loss caused 100% by the owner or designer. That makes perfect sense. Responsibility for a loss should rest with the party best able to control the loss.

Here’s a state-by-state rundown of the type of indemnity agreements allowed in each state.

Broad form – A contract can require indemnity of the owner or designer for all claims arising out of the work, even losses caused 100% by the owner or designer: AL, DC, FL (private jobs only), ME, ND, PA (except home improvement), VT, WI, WY.

Intermediate form – A contractor can be required to indemnify the owner or designer for any loss caused either in whole or in part by either the contractor or a subcontractor: AK, AR, GA, HI, ID, IN, LA, MA, MD, MI, NJ, SC, SD, TN, VA, WV.

Limited form – A contractor is responsible only for losses caused by the contractor: AZ, CA, CO, CT, DE, FL (public works only), IA, IL, KS, KY, MN, MO, MS, MT, NC, NE, NH, NM, NV (as of 3/15), NY, OH, OK, OR, PA (home improvement), RI, TX, UT, WA

How to Protect Yourself

The best option is to keep indemnity out of your contracts. Without an indemnity clause in your contract, you’re liable only for your own mistakes. If the owner insists on an indemnity contract, OK. But add some extra protection. All of the following make perfect sense – at least to contractors:

• Exclude indemnification for design errors. Those are clearly not your problem.
• Cap indemnity at your insurance policy limits. Without this cap, you could be liable for any amount, even if not covered by insurance.
• Limit your liability as an employer to coverage under workers compensation law. Workers comp insurance insulates you from suit by an employee injured on the job. But nothing prevents an injured employee from suing the property owner. If your contract requires indemnity for the owner’s losses, you could once again be liable for injury to your employee.
• Add the owner as an additional insured on your liability policy. This is restricted in some states. But it’s a good way to avoid indemnity claims by an owner.
• Require indemnity by your subs. If the owner makes you responsible for every loss, OK. Two can play that game. Put a similar indemnity clause in your subcontracts. That makes subs liable for your losses, regardless of the cause. Obviously, this makes no sense. But it’s common on large industrial and commercial jobs – where allowed by state law.

Be aware: I’ve painted with a broad brush. Most states have exceptions and exclusions. There’s plenty more to know. The best way to protect yourself is with Construction Contract Writer. The trial version is free.