Working Without a Written Subcontract

Do you write contracts for work assigned to subs? Many prime contractors don’t. And for good reasons, as I’ll explain later. But first, consider a Kansas case decided last month. Lux Building v. Prof’l Mech. Contractors.

Lux, the building owner, selected Farah Construction to turn a former Wichita office building into a mixed-use Leadership in Energy and Environmental Design (LEED) certified property. Farha subcontracted with PMC to install the chilled water Daikin VRV HVAC system. Unfortunately, there were problems. After doing call-backs for several years, PMC refused to do any more repair work. Lux and Farha had to hire another sub to keep the HVAC system working – at a cost of over $2 million. Farah sued PMC, claiming breach of their subcontract. But there was a problem. The PMC subcontract was in Farah’s file. But the subcontract had never been signed! How did that happen?

Farah and PMC had drafted and re-drafted the written agreement. It was ready for signature. And PMC started work. But PMC never signed the final draft of the agreement. Not a problem. For commercial work, Kansas does not require a signed written agreement. An oral contract is enough. Except for one little issue.

Under Kansas law, the statute of limitations on oral contracts is three years. Three years after breach, Kansas courts don’t permit suit on oral contracts. In the Lux case, more than three years had passed since the claimed breach. OK. But there’s a five-year statute of limitations on written contracts. PMC would still be on the hook for contract claims if the agreement had been signed. But a written agreement requires that all material terms be in writing, including a signature. The trial court’s ruling: A contract which is partly in writing and partly oral is an oral contract. The three-year statute applies.

Ted Farah explained why he didn’t always get written subcontracts:

“Depends on the sub and the scope of work. There are subs I have worked with for 20-plus years and, you know, have relationships and we often don't have -- we go to work without subcontracts, written subcontracts on I would say on-not today, but used to on a regular basis. I have worked with trusted [subcontractors] on small jobs in the past without a written subcontract. I would never work on a job of this size [the Lux job] with a party with whom I had not worked before without a written subcontract."

In essence, Ted admitted it was his mistake. He should have insisted on a signed contract before PMC started work.

The Kansas appellate court upheld the trial court decision. Farah Construction’s unsigned agreement was no longer an enforceable contract. PMC wasn’t liable for the extra $2,000,000 in repair work.

Word to the wise: Don’t get stuck like Farah Construction. On larger and more complex jobs, get a written and signed agreement with your subs. It’s easy. Construction Contract Writer drafts letter-perfect agreements for both prime contracts and subcontracts – no matter the state and no matter the type of work. The trial version is free.

Non-disparagement Construction Contracts

 Owners start most residential jobs with a Web search. Yelp and Angi and Thumbtack and a few others offer lists of local contractors categorized by construction specialty. Some include reviews volunteered by owners claiming to be former clients. Contractors can buy good placement and solicit kind words on these bulletin boards. That’s not cheap or easy and there’s plenty of competition.

Still, good reviews are like a magnet. They attract potential clients. But one angry customer with access to the Web can do plenty of damage to your reputation. A single one-star review carries more weight than a half-dozen five-star reviews. And getting bad reviews deleted, even fake bad reviews, takes time and effort – even when possible.

Unfavorable comments are called disparagement. They’re perfectly legal. Defamation is different and isn’t legal. Defamation is saying or writing something false with intent to do damage. So, what can you do to keep negative comments off the Web?

Non-disparagement contracts are common in many business situations. Most agreements that settle a lawsuit include a non-disparagement clause. Major employers commonly require a non-disparagement agreement before cutting an employee’s severance check.

In construction, disparagement wasn’t a high-profile issue until recently. The Web has changed that. Contractors who live off favorable Web listings recognize the importance of five-star ratings. When a job runs off the rails, dissatisfaction can run deep. That’s when disparagement becomes a hot topic.

Any time a business relationship ends on other than favorable terms, it’s best to have a non-disparagement agreement. Of course, the easiest time to get that agreement is before work starts. In construction, that’s when the owner signs the contract. For example:

Owner agrees not to disparage contractor by making any statement that would impugn the character, integrity, reputation or professionalism of contractor. Any evaluation of contractor provided by owner for distribution on public media will give contractor a neutral or better rating. Nothing in this agreement prevents owner from making truthful statements reasonably necessary to comply with law or regulation.

Notice that the sample clause above is unilateral. Only the owner is restricted. The clause works about as well if it were mutual. Both owner and contractor could agree not to make disparaging comments. Little harm in that. I don’t know any contractor who tried to destroy an owner’s business reputation.

Can You Enforce Non-disparagement?

It depends. First, understand that every negative comment isn’t disparagement. Suppose an owner posted on some Web site:

Case 1. “Their work was terrible. I’ll never call them again.”

Case 2: “They left the gate open and the dog got out.”

Both statements could be true. And both are likely to discourage potential clients. But the first is a hatchet job based on impressions. The second is not an attack on the contractor’s character, integrity, reputation or professionalism. It’s a legitimate caution. Anyone with a dog in the back yard might want to know.

Second, nothing can prevent an owner from responding truthfully to an inquiry from government (such as a building inspector) or legal process (such as a deposition).

If you have a non-disparagement contract and true disparagement (such as Case 1 above), the remedy is money damages, the value of your lost reputation. Proving that is mostly smoke and mirrors. But collecting money damages isn’t the purpose of non-disparagement clauses. Instead, non-disparagement forces an owner to think twice before making careless accusations.

Construction Contract Writer makes it easy to include non-disparagement in your agreements. The trial version is free.

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.