Play by the Rules in Minnesota

Warranties come in two flavors, express (written in the contract) and implied, either by court decision or by state law. Forty-six states and the District of Columbia enforce an “implied” warranty on nearly every construction project. All states enforce the terms of any express warranty in the contract.

In Minnesota, nearly every residential contract has to include three paragraphs of express warranty: a one year guarantee on materials and workmanship, two years on plumbing, electrical and HVAC and ten years on any "major construction defect". Minnesota also implies a guarantee that work will comply with the building code. Minnesota’s Housing Statutory Warranties Act also:

• Prohibits waiving or disclaiming these warranties.
• Covers both the first owner and subsequent owners for a period of the warranty.
• Any contractor who ignores the law can be assessed a penalty of up to $10,000.
• Claims for breach of warranty must be made in writing within six months of discovery.
• Breach of warranty entitles the owner to sue for repair or collect the cost of repair.
• On home improvement jobs, the warranty begins running when work is completed.

With that background, consider the case of Liberte Construction v. Dustin Smith, decided last month by the Minnesota Court of Appeals.

Wind and hail damaged Dustin Smith’s Brooklyn Park home, including roofing, siding and gutters. Liberte bid $62,755 to make repairs. The contract included a warranty. You decide. Does this warranty comply with Minnesota’s Housing Statutory Warranties Act?

LIBERTE DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, EXCEPT AS SPECIFICALLY EXPRESSED HEREIN. Liberte warrants that for the one-year period from and after the substantial completion of the Scope of Work, the home improvement shall be free from defects caused by faulty workmanship or defective materials due to noncompliance with building standards. This Agreement and warranty shall not be assigned except by or with the written permission of Liberte.

Smith signed the agreement and made a $19,000 initial payment. Liberte started work.

A month into the job, Smith and the owner of Liberte did a walk-around inspection. Smith found some problems with siding and roof tiles. A month later, the City of Brooklyn Park did its first inspection. Cardboard shims under siding corners had to be replaced with proper shims. A second inspection a month later found no correction. A month later, a third inspection found proper shims. But a section of siding was loose.

Over ten months after the contract completion date, a city inspector returned to the property for the fourth time. This inspector found siding had been installed with drywall screws, not siding screws. One corner of the siding was loose. The inspector also found more cardboard shims. Again, the job failed inspection.

Liberte agreed to start repairs that month and asked for payment upon satisfactory completion. Smith wouldn’t agree to let Liberte do any more work on his home. Liberte filed to foreclose on its $35,719.18 mechanic's lien and for breach of contract. Smith counterclaimed, citing breaches of contract, statutory warranty, express warranty, and implied warranty.

At trial, Smith's expert testified that work Liberte did was so defective that the only proper repair was to start over. The trial court (1) awarded $12,000 to Liberte for breach of contract; (2) denied recovery on the express warranty because the job never got to substantial completion; (3) awarded Smith $28,697.75 in damages for Liberte's breach of implied warranty; (4) awarded Smith nothing for breach of an express warranty and (5) quashed Liberte's mechanic's lien.

What’s Wrong with this Case?

I don’t question the result. Smith got what he paid for. A defective roofing and siding job at a $60,000 discount. My complaint: Neither Liberte nor Smith played by the rules. Minnesota’s Housing Statutory Warranties Act lays out a set of procedures designed to avoid disputes like this. From the court’s report, neither Liberte nor Smith did what the law requires: (1) Liberte’s contract omitted the required warranty terms. (2) Smith didn’t give written notice when he discovered defects. (3) Liberte didn’t inspect those defects within 30 days. (4) The dispute wasn’t referred to Minnesota’s list of qualified neutrals for resolution. (5) Smith kicked Liberte off the job before substantial completion.

My advice: To avoid headaches and unnecessary expense, follow the rules. That begins with a good contract. The best resource is Construction Contract Writer. The trial version is free.

 

Mistake in the Plans

 Most surprises on a construction site fall into one of three categories:

• Differing site conditions – hidden or highly unusual conditions no one would have anticipated.
• Change in scope of the work – something discovered later, such as by the inspector.
• Mistake or omission in the plans – something the designer got wrong or didn’t consider.

I’ve covered differing site conditions and changes in the scope of work elsewhere. Mistake in the plans is different.

Earlier this month, a perfect example came across my desk. When it came time to connect the building sewer line to the sewer main, the plumbing sub discovered two mistakes -- both the diameter and location of the sewer main were wrong on the site plan. As with every surprise, the question was, “Who pays?”

Of course, construction contractors have to follow the plans. But it’s not that simple. Courts usually put it this way: A contractor has an implied duty to give notice when something in the plans either isn’t clear or seems defective. If the plans or specs seem inconsistent or wrong, take it up with the designer, engineer and owner before work starts.

But that wasn’t the issue with the plumbing contract on my desk. Nothing on the site plan was either missing or obviously wrong. Work was nearly done when the mistake was discovered. The civil engineer either made an error or didn’t bother to check district records.

What Should the Contractor Do?

1. Make the connection. Settle up on costs later.
2. Complete the job as shown in the plans. Leave the sewer line connected to nothing.
3. Stop work until the owner and prime contractor write a change order.

Before you answer, consider a case from the Wyoming Supreme Court (Hogan v. Postin).

The millwork sub, Hogan, agreed to make and install windows for restoration of the historic Tivoli Building in downtown Cheyenne. Postin was the architect and supervised Hogan’s work. When Hogan got started, he discovered a problem. The ceiling height on the plans wasn’t the same as the actual ceiling height. Hogan notified Postin of the mistake in his plans. Postin told Hogan to make the windows the size shown on the plans. To do that, the sill height had to be raised to 39 inches, not 27 inches as shown on the plans. Hogan built the storefront in his shop exactly as shown on the plans.

When Hogan installed the windows, Postin had a beef. He didn’t like the sill height. Postin wanted the sill height one foot lower (27 inches). Hogan agreed to re-do the windows and offered to keep track of the extra time and materials. The general contractor agreed that a 39” sill height was wrong and told Hogan to make the change. When Hogan tried to collect for the extra work, both the City of Cheyenne and the general contractor had a defense. There was no written change order, as required by both the prime and subcontracts.

So Hogan sued the architect, Postin. His plans were wrong. The trial court found in favor of Hogan, ruling the architect had to pay. Postin appealed. The district court reversed, ruling the architect was not personally liable for his mistake. Hogan appealed to the Wyoming Supreme Court. A majority of the supreme court affirmed the district court’s decision. Postin was not personally liable for his mistake in the plans. According to the majority, Postin was speaking for the City when he told Hogan to re-do the windows. As an agent of the City, Postin was not personally liable for a commitment made to benefit the City. But Hogan couldn’t collect from the City. There was no written change order. Pure Catch 22.

I prefer the dissent by Justices Rooney and Cardine. In directing Hogan to do the extra work, Postin waived the requirement for a written change order. Let Hogan collect from the City.

My Point

Mistakes in the plans can be a minefield. Tread carefully. The best protection is a well-written contract. In my sewer connection case, the plumber had an agreement drafted with Construction Contract Writer, including plenty of good language covering mistakes .Problem solved.

 

Get Reimbursed for Your Attorney Fees

Dianne Lee bought a new home in Contra Costs County, just east of San Francisco Bay. Her new house didn’t have a pool. And she wanted some exterior improvements. Dianne selected David Cardiff of Advantage Pools Bay Area to do the work: a pool and spa for $88,400, a pavilion with outdoor kitchen, fireplace and landscaping for $143,000.

It didn’t go well. After a dispute, Cardiff stopped work and walked off the job.

Dianne filed suit, claiming Cardiff’s work was defective. The trial court rejected most of Dianne's claims about the pool but agreed with some of her claims about the pavilion and landscaping. The court also agreed that Cardiff had violated state law by hiring workers as unlicensed independent contractors and not employees. The court ordered Cardiff to refund $238,470 plus contract and tort damages of $236,634. Of that, $35,000 was for defects in the pool.

Dianne won the case. But the court didn’t award reimbursement of her attorney fees. That was a surprise. California Business and Professions Code § 7168 authorizes an award of attorney fees to the “prevailing party” on swimming pool claims. Claims on other types of construction don’t qualify for an award of attorney fees -- absent specific language in the contract. Dianne’s contract with Cardiff didn’t say anything about attorney fees.

Dianne appealed the trial court decision, asking for an award of attorney fees. The appellate court had to decide:

• Was Dianne’s suit a swimming pool claim?
• Was she the prevailing party?
• Should the trial court have awarded Dianne her attorney fees?

The decision (Lee v. Cardiff, July 13, 2023): Reimbursement of attorney fees under § 7168 applies only to pools. Not spas. And not to Dianne’s other home improvements. Moreover, Dianne was not the “prevailing party” on the pool claim. True, pool plaster, tile and coping were defective. The trial court awarded Dianne $35,000 for that. But Cardiff had already offered to fix those problems before Dianne filed suit. So, on the pool issue, Dianne wasn’t the “prevailing party”. Her legal fees would not be reimbursed.

What About Your Contracts?

Should your contracts include the statement: Any judgment enforcing terms of this agreement shall include an award of court costs and reasonable attorney's fees to the successful party.

A clause like this raises the stakes. An owner with frivolous claims or weak defenses has an incentive to settle. But law on awards of attorney fees is different in every state. For example:

California -- The right to collect attorney's fees is reciprocal. If a contractor can collect attorney's fees after winning a contract dispute, an owner has the same right. California Civil Code § 1717.

Arizona -- Courts can award "reasonable" attorney's fees to the successful party in any contract dispute. Arizona Revised Statutes § 12-341.01

Connecticut -- If a contractor has the right to collect attorney’s fees, a home owner is given the same right. Connecticut General Statutes § 42-150bb.

Georgia – Better to leave attorney’s fees out of the contract. Official Code of Georgia Annotated § 13-11-8 gives contractors the right to collect attorney's fees if the dispute is over delinquent payment.

Most states won't award attorney's fees if the contract omits that subject. All states will enforce a contract clause awarding attorney’s fees to the prevailing party. But some states will enforce a one-sided clause – an award of attorney’s fees only if suit is necessary to collect what’s due. That always favors the contractor. 

To see what your state allows, have a look at Construction Contract Writer. The trial version is free.

 

Lame Contract is Worse Than No Contract at All

When a job goes bad, you better have a good contract. That’s a point emphasized many times on these pages.

But a New York case decided last month offers an interesting twist on this theme. When a Syracuse, NY job went south, the contractor claimed the agreement he drafted was void and unenforceable. Let’s see how a New York appellate court handled that. Hint: It cost the contractor plenty. The case is White Knight Construction v. Haugh.

Holly Anne Haugh of Madison County, NY wanted a new custom home. Kenneth Kovalewski of White Knight Construction agreed to build the home Holly Anne wanted. Kenny drafted the agreement, including a "New Home Cost Breakdown" listing both projected and actual expenses. The contract price was $93,287. But it wasn’t that simple. According to the court, Holly Anne and Kenny developed a “romantic relationship” before breaking ground.

This blog is about good and bad construction contracts. I’ll leave other issues to your judgment.

Well before final completion, Holly Anne’s romantic relationship with Kenny had cooled. But White Knight must have done considerably more work for Holly Anne than the contract required – without a change order. White Knight collected the contract price. But Kenny felt White Knight was entitled to more, lots more. White Knight filed a mechanic's lien for an extra $317,128 and sued to foreclose the lien.

At trial, White Knight had a problem – the original contract. With no contract or only an oral agreement, the $317,128 lien might be valid. With a good contract, White Knight could collect only the contract price. To collect on the lien, counsel for White Knight had to show the written agreement was void.

No Problem

Under New York General Business Law § 771, every home improvement contract has to include specific notices and disclosures. Kenny’s contract didn’t cite a start date or a completion date and omitted several other notices required by statute. Without these, White Knight could not recover for breach of contract.

But noncompliance with § 771 does not necessarily render the contract void. The statute bars a contractor from collecting under a defective agreement but doesn’t prevent a homeowner from recovery against the contractor. 

According to the appellate court:

“Given the context of the case at bar, it is crucial to recognize that General Business Law § 771 is a consumer protection statute designed to protect the homeowner. To allow a contractor to draft a noncompliant contract and then use its noncompliance to invalidate the contract so as to entitle him or her to relief that would otherwise be precluded by a valid contract would incentivize contractors to disregard the statute, thereby thwarting the intent of the statute.”

In other words, an owner may be able to enforce a lame agreement even if the contractor can’t. The appellate court dismissed the case and vacated the mechanic's lien. White Knight was out $317,128. 

Contractor Beware

Thirty-one states and the District of Columbia have consumer protection statutes that require written agreements on residential jobs: AR, AZ, CA, CT, DC, DE, HI, IL, IN, KY, LA, MA, MD, ME, MI, MS, ND, NH, NJ, NV, NY, OH, OR, PA, RI, TN, TX, VA, VT, WI, WV and WY. Twelve states don’t require a written agreement but do require a written notice or disclosure before work starts: AK, AL, FL, GA, ID, KS, MN, MO, MT, OK, SD and WA.

If you do work in any of these states, don’t make White Knight’s mistake. A bad construction contract may be worse than no contract at all. My advice: Use only contracts that comply precisely with state law. Construction Contract Writer drafts letter-perfect agreements no matter the site and no matter the type of job. The trial version is free.

 

Storm Damage Wipe-out in Nebraska

Insurance restoration contracting tends to be good work. No matter the season, no matter the economy, pipes break, kitchens burn, trees fall over, roofing gets blown away. With the insurance carrier funding repairs, payment is virtually guaranteed – or should be.

If you agree with that statement, keep reading. There’s more to understand. 

Twenty states (AL, AZ, CO, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI, WV) now set standards for insured repair contracts. These laws vary. But all require a very specific notice in the contract. The owner has at least a few days to cancel after any part of the insurance claim is denied. The contractor can not offer to rebate the deductible. And the contractor is prohibited from acting as the adjuster -- advocating for the owner, setting the scope of work.

Another difference: Property loss jobs have many more moving parts. The homeowner, the insurance adjuster, city and county officials if it’s a fire loss. If the site is a crime scene, law enforcement will be involved. And everyone comes with their own lawyer: the insurance company, the real estate company, the driver who hit the house, the owner, the city, the building department. Any time lawyers are hovering, you better have the best possible contract. 

A case decided earlier this year makes the point. RAD Services v. State Farm.

Here’s What Happened

Storms damaged twenty Nebraska homes, all insured by State Farm. State Farm's policy provides two payments:

1. Until repair or replacement is complete, State Farm pays only Actual Cash Value of the property before it was lost or damaged. ACV is the depreciated value based on age and condition. That’s like a tire warranty. If your 50,000 mile tires give out at 40,000 miles, you get a 20% credit on new tires.
2. When repair or replacement is complete, State Farm pays the cost to remediate damage less what was already paid as ACV. Replacement cost is usually far more that ACV. The owner gets a new roof to replace a roof many years old. That’s called “betterment” in insurance jargon. Not all home insurance policies cover betterment. 

State Farm made the first payment, value at the time of loss. When work was done, the contractor filed a claim for the second installment -- and discovered an expensive mistake.

There were no construction contracts. Instead, each of the 20 owners had assigned their claim rights to their contractor. Worse, the assignments didn’t show any contract price or scope of work.

That makes perfect sense – sort of. The scope of work should be whatever State Farm was willing to cover. The owner had to pay the deductible. The contractor and State Farm would settle up on the rest. No construction contract needed.

The court didn’t like that. In the opinion of the court, an assignment without an agreement on either scope of work or the price isn’t an assignment at all. As a matter of law, the 20 assignments were too vague to be enforced. Case closed. The contractor didn’t collect the second payment. Wipe-out.

If you do insurance repair work, you probably don’t agree. Property loss adjusters are very good at settling claims – both the scope of work and the price. Insurance carriers, owners and contractors need flexibility to negotiate settlements once scope of work is known. But until courts find a way to agree, you better have a good contract, especially on property loss jobs.

The best tool I know for drafting construction contracts is Construction Contract Writer. That’s true no matter the type of job or the site. The trial version is free.

If you’re new to property loss work, I can recommend another reference, Insurance Restoration Contracting by Paul Bianchina. Now available as an E-book from Craftsman.

Arbitration Road Blocks and Detours

When you sign a contract to buy a car or a cellphone, or apply for a credit card, you’re probably agreeing to arbitrate disputes. Why? Because lawyers who write these contracts agree. Arbitration saves time and money. And sellers usually win in arbitration.

So why doesn’t every construction contract require arbitration? Easy question. An agreement to arbitrate is an agreement not to litigate – sue in a court of law. That’s giving up an important right.

There are two broad currents running here -- in opposite directions. One limits access to arbitration. Another encourages arbitration. I’ll explain.

The current running against arbitration flows through state legislatures. Eleven states (CA, IL, MD, MA, MO, NE, OR, PA, SC, TX and VT) void any arbitration clause in a construction contract if the agreement omits certain disclosures. For example, specific language has to be in a certain location or in bold type or in caps or be initialed by the owner. Make a mistake in the contract and your dispute is headed to court. Why all these restrictions? Simple. It’s consumer protection law. No one should give up the right to sue by accident.

A second current runs in the opposite direction. Judges favor arbitration. It reduces their workload. Any hint in the contract that the parties agreed to arbitrate will get a sympathetic hearing in court.

Case on Point

Here’s an example, the recent California case of Leeor Builders, Inc. v. Forehand. You decide if the court got it right.

Leeor Builders agreed to improve LeRoy and Elizabeth Forehand’s southern California home. Near the bottom of the first page of the contract was a box with the text:

"ARBITRATION OWNER: Initial this box if you agree to arbitration.” The box was large enough to fit only one set of initials. In the box was written "EF" for Elizabeth Forehand.

The arbitration notice required by California law (in 10-point bold type) was on another contract page:

WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION.

Initials of “Direct Contractor” and Elizabeth were beside that notice. LeRoy’s initials are missing. He signed the contract but never initialed the agreement to arbitrate.

Below the space for initials, the contract provided, "in the event that Contractor and Owner have not each initialed the arbitration provision above, then it shall be conclusively agreed without a subsequent written agreement by all parties, that neither party agrees to arbitrate and the arbitration of disputes provision shall not be deemed to be a part of this agreement."

No doubt about who the “Owner” is, both LeRoy and Elizabeth Forehand. If Elizabeth agreed to arbitrate and LeRoy didn’t, then the contract did not require arbitration.

You can guess what came next. The Forehand job had problems. Eventually LeRoy brought a demand for arbitration. Leeor Builders objected, insisting the arbitration agreement was invalid. The reason: LeRoy was an owner, just like Elizabeth. Le Roy never initialed the arbitration clause required by California law. When the arbitrator refused to halt the proceeding, Leeor filed a complaint in superior court, asking for an injunction to stop arbitration.

This wasn’t a trivial issue. The arbitrator’s award came to $902,749. Now the court had to decide, does California law require initials of all owners. Or is one owner enough. The court’s decision: Elizabeth's initials were enough. The arbitrator’s award was confirmed. Hard cases make bad law.

Now you see the current running two ways. State law throws up road blocks to arbitration. State courts favor arbitration.

This time, I think the court got it right. But next time? Suppose one owner really didn’t want to arbitrate and refused to initial the contract. What then? In my opinion, the California legislature wanted to protect all owners. Any owner should be able to object to arbitration. Just don’t initial the arbitration notice.

If You Decide to Arbitrate

Don’t take a chance. Get the details right. Comply exactly with the laws of your state.

• The contract has to be clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
• Identify the arbitrator. AAA, CDRS and JAMS provide arbitration services nationwide. Disputes under $10,000 can usually be settled by email or video conference.
• Identify the arbitration rules. AAA, CDRS and JAMS rules are considered both fair and comprehensive.
• Make the arbitrator’s decision final. The words are, “Judgment on the award may be entered in any court having jurisdiction.”

Construction Contract Writer will help get it right, no matter the type of work or job site. The trial version is free.

 

Good Ways to Stay on Schedule

Have you ever had the electrician show up to rough-in the wiring before ceiling joists were installed? Have you ever had to keep the plumber waiting while relocating a partition wall? Whose fault is it when the inspector shows up for final inspection before the electricians are finished?

Coordination and scheduling are important tasks for every contractor. On the smallest projects, one person can keep track of nearly everything that has to happen. On a larger project, a calendar or checklist may be all that’s needed to remind you of important dates. As work becomes more complex and timing becomes more critical, someone has to begin laying out work schedules and charting progress.

Every task completed is a link in the chain that follows some prior link and precedes a later link. Scheduling is just making sure that each link falls neatly in sequence so work can go from start to finish by the most direct, most profitable route possible.

A schedule is a list of tasks to be executed in order – from top to bottom. Scheduling with pencil and paper works fine – until something changes. Then you need a good eraser. Some contractors schedule with a chalkboard or a grease pencil. That’s OK too. But you’ll need a big board to handle a large project. Years ago, most construction schedules were made with bar charts and arrow diagrams. Today, most scheduling is done with a computer.

Any scheduling tool you select has to be flexible. Schedules change. Revising the schedule should be a simple process. If the project lasts more than a month, you’ll want to review the schedule at least weekly. Identify both work completed on time and work not completed as planned. Consider ways to get back on schedule without increasing costs and without sacrificing quality. Then revise the schedule based on work yet to be done and what you’ve learned about performance of the trade contractors assigned.

A good schedule may be a contractor’s most useful tool. It makes prompt completion more likely and reduces idle or wasted time. A good schedule should also reduce or eliminate resource crises: essential labor or materials not on site when needed.

What’s in Your Schedule?

You’ve probably heard the terms CPM (critical path method) and PERT (Program Evaluation and Review Technique). They’re the same in many respects and can be referred to collectively as echeloning tools. Each identifies when a task can begin, how long it should take and when it should end. Detailed schedules show both a sequence of trades on the job and the sequence of tasks to be performed by each trade. With a detailed schedule, you can set both delivery times for materials and arrival times for trade contractors.

Every project schedule begins with a list of work elements (trades). Assemble those elements into a logical sequence. Excavation has to come before foundations, wall construction has to precede roof framing, subbase and base preparation come before paving. Identify the first day of work as Day One. Every day thereafter is assigned a number in sequence.

Of course, you don’t have to wait until every element is complete before beginning the next element. For example, plumbing and wiring rough-in can begin before the last roofing tile is laid.

Be especially sensitive to durations that don’t involve construction trades. For example, it takes time to get permits. Inspections aren’t always completed on the day scheduled. And, of course, nearly every job gets delayed by weather at one time or another. Delay is nearly inevitable – and can be expensive. That’s why a good schedule includes at least some float, the time a particular task can be delayed without delaying the entire project.

Even with the best schedule, delay can plague nearly any significant construction project. Protect yourself. Be sure your contracts cut extra slack when you need more time. Construction Contract Writer can resolve disputes in your favor any time there’s a schedule issue. The trial version is free.