Statute of Limitations: A Contractor’s Friend

How long should a contractor be liable for construction mistakes? A year? Two years? Ten years? Imagine being sued over a job completed 20 years ago. Memories fade. Witnesses die or disappear. Evidence gets lost. The property would have been out of your control for many years. Anything could have happened.

Without a time limit for making claims, construction contracting would be a very hazardous business. Fortunately, every state limits the time allowed to make claims against a contractor. But that’s just the beginning. Your contract can shorten the time to make claims. More about that later.

Consider the Minnesota Statute

In MN, construction claims for obvious defects are barred two years after substantial completion. For hidden defects, the two years starts from discovery of the defect. Of course, that could be many years after completion. So Minnesota, like other states, also provides a “statute of repose”. In MN, all claims are barred 10 years after completion no matter when discovered. Every state has a similar law. If this seems simple, consider a MN case decided last month.

• February 2020: Morningstar Remodeling contracted to improve a MN home. NB Electric Inc. was the electrical sub.
• July 2020: Work stopped when fire damaged the home. When work resumed, NB Electric was no longer involved.
• April 2021: A new general contractor replaced Morningstar.
• July 2021: Work was completed.
• July 2023: The owner’s insurance carrier filed suit against Morningstar and NB Electric alleging defective construction. That was more than two years after both Morningstar and NB Electric had been terminated.

The trial court dismissed the claim. The insurance carrier had waited too long to bring suit – filed more than. two years after Morningstar and NB Electric were terminated. The insurance carrier appealed, claiming the statute didn’t start running until two years after completion of the whole project, not just the work of Morningstar and NB.

How Would You Decide this Case?

Spoiler alert: Insurance companies usually win in appellate court. 

Here’s the court’s reasoning. Under the Minnesota statute, defect claims accrue at “substantial completion, termination, or abandonment of construction." The term “construction” refers to the entire project, not just to a particular contractor. Work on the full project was completed in July 2021. The insurance carrier filed suit within the two-year limit. If the legislature wanted the statute to run from completion of each contractor, the statutory term would have been “contractor”, not “construction”. Notice what that means.

1. Early contractors (excavators) have a longer risk period than later contractors (roofers).
2. A job running several years can extend the claim period well beyond the statutory two years.
3. An owner could delay completion for several years, resume work years later and then file suit against every contractor who set foot on the job.
4. Courts will have to decide: Was a job delayed, terminated or simply abandoned? It makes a difference. Delay extends the two years. Abandonment doesn’t.
5. Even worse, the term "construction" also appears in the MN statute of repose. Has the court's decision also extended the statute of repose beyond 10 years? 

I believe the appellate court’s decision defeats the purpose of the statute: To bar forever stale claims. The dissent by judge Cleary makes the point. Defining “construction” as the whole project begs the question. Ask an electrical contractor or a plumbing contractor about the job. His or her work is the “construction project". When that part of the job is done, the two-year statute should start running.

If you draft contracts for your jobs, you write the rules. Minnesota courts allow parties to define their own time limit for claims so long as the period is not unreasonably short. Take the hint. Let Construction Contract Writer draft agreements that protect your pocketbook. The trial version is free.

Can AI Draft Your Next Contract?

Artificial Intelligence is changing the way many documents are drafted. You’ve probably seen accounts of legal briefs written with AI. If AI can draft court documents, can AI draft your next construction contract?

No doubt, legal research tools have changed the practice of law. I use CaseText and like it. Digital tools make the full body of law available to anyone with a web connection and a few dollars a month. That’s good. In seconds, anyone can find relevant law or precedent. But is AI a substitute for experience and judgment?

To find out, I ran a test, maybe the most challenging test possible, a California Home improvement contract. Like 36 other states, California requires very specific notices and disclosures in home improvement contracts. Without these notices and disclosures, the contract isn’t legal and risks discipline by the state license board.

My AI tool was Microsoft Copilot. I gave Copilot:

• A job description,
• The construction site,
• Names of the parties,
• Scope of the work,
• Contract price.

I got a written contract back in seconds. For that, I give Copilot an A grade. It’s fast. Another plus: Copilot filled in many contract terms I had not specified:

• A payment schedule,
• Time of completion,
• Changes to the work,
• Permits and inspections,
• Warranties,
• Insurance,
• Termination,
• Governing law.

But Copilot left out nearly all the notices and disclosures required by California law. Worse, some parts of the Copilot contract were simply illegal. Here’s where Copilot blew it:

• The document title has to be "Home Improvement Contract" in boldface type.
• A statement in 12-point bold type: "You are entitled to a completely filled in copy. . .”
• The date when work will begin.
• The down payment can’t exceed $1,000 or 10%, whichever is less.
• California’s mechanics’ lien warning.
• A statement on release of lien in exchange for payment.
• A general statement about commercial general liability insurance.
• Confirmation that the contractor carries (or doesn’t carry) insurance.
• Information about the Contractor's State License Board.
• A statement on performance and payment bonds.
• California’s checklist for homeowners.
• A sample change order form including specs for any change order.
• Receipt acknowledging delivery of the California’s 3-day right to cancel.
• California’s 3-day Notice of Cancellation.
• The statement: "Any Notice of Cancellation can be sent to this address."
• The Federal right of rescission (Reg Z) notice.

For those omissions, I can’t give Copilot a passing grade -- at least for drafting residential contracts. To the discredit of Copilot, all the notices and disclosures Copilot missed are black letter law -- statutes readily available to anyone who cares to look. For example, the initial payment can’t be more than 10% for California home improvement projects. Copilot’s contract specified a 20% down payment. That’s dead wrong. Another mistake: Omitting the 3-day right to rescind required in all 50 states when working on an owner’s home.

Clearly Copilot needs one more disclaimer: “This contract may not comply with law in your state.” There’s a better choice. Construction Contract Writer drafts letter-perfect contracts for any state or type of work. The trial version is free.

Collect Progress Payments Your Way

I got a good question from a contractor a few weeks ago. I didn’t have an answer. There may not be an answer. But there are good choices and bad choices. Here’s the question:

“I’ve got a good payment schedule in my contract. But the lender won’t pay on my schedule. They have their own schedule. What should I do?”

Background

Any fixed price job that requires weeks of work needs a payment schedule. When are payments due and how much? Most contracts for larger residential jobs specify an initial payment plus progress payments based on completion of job phases. For example:

• 10% when Breaking Ground
• 10% when Foundation is Complete
• 15% when Rough Framing is Complete
• 10% when Rough Plumbing is Complete
• 10% when Doors and Windows are Installed
• 10% when Exterior Wall Finish is Installed
• 10% when Cabinets and Counters are Installed
• 10% when Mechanical and Electrical Pass Inspection
• 10% when Interior Finish is Complete
• 5% when passing Final Inspection

Contractors commonly front load payments – bigger payments during early job phases and smaller payments as the job nears completion. That bumps up working capital during construction. Lenders are leery of front loading. For obvious reasons, some lenders prefer their own back loaded payment schedule -- giving the contractor an incentive to finish work.

Black letter law: Lenders don’t have to pay on your contract schedule. That leaves owners caught in the middle – eager to see the job completed but with little leverage to pry money out of the lender.

So, what’s the answer?

Everyone involved in a construction project wants to see work completed successfully. No lender wants to torpedo a job. So the answer is early disclosure and cooperation. Once work starts, it’s too late to quibble over payment dates and amounts. 

If you have any contact with the proposed lender, ask about release of progress payments. Disclose to the lender your payment terms in the contract. Ask if there’s going to be a problem. Many lenders use fund control by a third party. Others rely on an architect or designer to authorize payments. Get clarity on when payments are due and who has authority to draw down loan proceeds. Don’t rely on the owner to settle payment issues. That’s the least of an owner’s worries.

Anticipate problems

Lenders don’t sign construction contracts. But you can put an owner on notice to resolve progress payment issues before work starts. If the lender has their own payment schedule, get a copy. Can you live with that schedule? An owner who won’t raise payment issues with a lender isn’t a good prospect.

If you use Construction Contract Writer, it’s easy to drop a payment schedule and the following into your agreement:

Progress payments are due as each phase of the Work is completed. Owner will advise any lender for this project of the progress payment schedule in this contract. Before work begins, owner will advise the contractor if a lender is unwilling or unable to release funds in compliance with the progress payment schedule in this agreement.

Is that language enforceable in a court of law? Probably not. But it’s going to head off the worst payment problems.

Ohio’s New Home Improvement Law

Last year I complained about a court decision that crippled Ohio’s home improvement statute. The decision was Beder v. Cerha Kitchen & Bath Design Studio, LLC., decided by Ohio’s Eleventh District Court of Appeals. You can read my critique here.

The Beder court decided that home improvement or repair isn’t “construction” and thus wasn’t covered by Ohio’s Home Construction Service Suppliers Act (HCSSA). I preferred the dissent by Judge Westcott Rice and made a prediction: Ohio’s legislature would revise HCSSA to include home improvement. That’s what just happened. As of September 20, 2024, the law was amended.  “Home construction service” now includes both new construction and repair or improvement of an existing residence. 

Ohio has now joined the list of 22 states (AR, CA, CT, DC, FL, HI, IL, IN, LA, ME, MD, MA, NV, NJ, NY, OH, OR, PA, TN, VA, WV,WI) that require written home improvement contracts with specific notices and disclosures.

What Does This Mean for Ohio Contractors?

Residential contracts for $25,000 or more must be in writing and must include:

1. The contractor's name, physical business address, business telephone number, and taxpayer identification number;
2. The owner's name, address, and telephone number;
3. The address or location of the job site;
4. A general description of the work including labor and materials;
5. The start date and job duration;
6. The total cost;
7. Any category of costs not included in the contract price;
8. A certificate of liability insurance with coverage to at least $250,000;
9. The dated signatures of owner or tenant and the contractor.
10. Initial payment not exceeding 10% of the contract price plus 75% of any special-order materials.
11. The following statement (in caps): IF AT ANY TIME A HOME CONSTRUCTION SERVICE REQUIRES EXTRA COSTS ABOVE THE COST SPECIFIED OR ESTIMATED IN THE CONTRACT THAT WERE REASONABLY UNFORESEEN, BUT NECESSARY, AND THE TOTAL OF ALL EXTRA COSTS TO DATE EXCEEDS FIVE THOUSAND DOLLARS OVER THE COURSE OF THE ENTIRE HOME CONSTRUCTION CONTRACT, YOU HAVE A RIGHT TO AN ESTIMATE OF THOSE EXCESS COSTS BEFORE THE HOME CONSTRUCTION SERVICE SUPPLIER BEGINS WORK RELATED TO THOSE COSTS. INITIAL YOUR CHOICE OF THE TYPE OF ESTIMATE YOU REQUIRE: Check one:  _____ written estimate _____ oral estimate"

If extra cost on the job will exceed five thousand dollars, the owner is due a written or oral estimate, depending on what’s checked above.

Some residential contracts are excluded:

• Contracts for work on 4 or more living units.
• Manufactured housing.
• Mobile homes.
• Public buildings.
• Cost-plus contracts.

Penalty for a Lame Contract

HCSSA has teeth. A defective contract gives an owner the right to:

Cancel the contract, or

• Sue for economic damages (actual losses) plus an extra $5,000 in non-economic damages (i.e. emotional distress).
• Seek a declaratory judgment or injunction to prevent similar acts by the contractor.
• Collect attorney fees if the defendant knowingly violated HCSSA.

Drafting an enforceable Ohio residential contract has never been easy. Now it’s a mine field. Any owner with a gripe about your work is sure to seek HCSSA penalties if your contract isn’t letter-perfect. Word to the wise. Use only contracts that comply precisely with Ohio’s HCSSA.

What’s the easiest way to do that? Construction Contract Writer drafts perfectly legal Ohio contracts. The trial version is free.

Hurricane Damage: Who Pays?

Thousands of homes and commercial buildings have been damaged or destroyed by hurricanes Helene and Milton. More than a few of those were buildings under construction or re-construction when the hurricanes hit. Losses will be major. Any time a project is damaged before final completion, who should pay? The owner or the contractor? Does it make a difference if the work was paid for or not?

What Every Contractor Should Know

As a general rule, any portion of the work completed belongs to the owner. For example, once framing is up, that framing belongs to the owner. Storm damage to any portion completed is the owner’s loss. Not true for a stack of lumber sitting on the job site or contractor equipment left on site. For those, any loss falls on the contractor. It doesn’t make any difference if the work was invoiced or not.

What This Means

• You’re owed for the portion of work completed. Be ready with proof: pictures, receipts, payroll records and expert testimony.
• You have no obligation to repair hurricane damage. That’s the owner’s responsibility – at extra cost.
• You still have a valid contract to finish the job as originally planned. Cancellation would probably be a breach of contract.

Of course, collecting could be a problem if there’s no readily available source of funds. That raises the next issue.

Insurance?

Obviously, it’s better if both owner and contractor are insured. The bad news: The owner’s property insurance probably doesn’t cover work in progress. Neither does your contractor’s liability policy. A builder’s risk policy is designed to fill this gap between owner and contractor coverage. Anyone with a financial interest in the project can buy a builder’s risk policy. But don’t be confused by the name. Builder’s risk insurance should be the owner’s responsibility, not the builder's. Remember the general rule: Any portion of the work installed is property of the owner.

Some builder’s risk (course of construction) policies require a special endorsement for rising water or earthquake. But most other risks are covered: theft, vandalism, fire, lightning, arson, collapse, windstorm, hail, debris removal, back up of sewers or drains. Premium will vary with scope of work. But don’t delay. The costs may be higher if work starts before applying for coverage.

How to Protect Yourself

Make risk of loss during construction part of your standard agreement. Make it clear:

1. The owner is liable for property losses once materials are installed.
2. Require the owner to give notice if not providing builder’s risk insurance.
3. Require coverage for any physical loss.
4. Be sure coverage extends through final completion.
5. Both the prime contractor and subs should be protected.
6. Make the owner liable for any deductible.
7. Policy proceeds should be applied first to rebuilding or repairing the work destroyed.

Occupancy or use of the building before completion should not limit the recovery for any loss. But it’s OK to exclude the value of excavation, backfill, foundations and underground utilities. Sitework and foundations are seldom destroyed.

Add good choices like builder’s risk coverage to your agreements. Savings could be in the thousands. Construction Contract Writer drafts letter-perfect agreements for any state and for any type of project. The trial version is free.

Get It In Writing

 Every residential job deserves a written agreement – for at least three good reasons:

• Written contracts are required in 31 states.
• A good contract can resolve disputes even before they happen.
• A written contract is the only way to guarantee arbitration of disputes.

Why Favor Arbitration?

Easy. Contractors usually win in arbitration. Arbitration is faster, cheaper and can keep the job going, even during a dispute.

So, how do you guarantee arbitration? That’s easy too. Add an arbitration clause to your construction contract. Black letter law: Courts won’t allow suit if there’s a written agreement to arbitrate. The August 2024 case of Rose v. Shore Custom Homes proves the rule. 

Attorneys for the owner made the strongest possible case to keep their client out of arbitration. The court wouldn’t buy it. Here’s how the case developed.

Shore Custom Homes wrote a contract to “raise, renovate, and build an addition” to the Rose home in Bayville, NJ. The contract price was $314,800. The contract included an arbitration clause that reads, in part:

In the event any dispute arises between the parties and the dispute is not resolved within thirty (30) business days, [plaintiffs] agree to submit resolution of the dispute(s) to [b]inding [a]rbitration . . .

Rose wasn’t happy with the work Shore Custom Homes did. Ignoring the agreement to arbitrate, Rose filed suit in Ocean County Superior Court. Claims included:

1. Breach of the New Jersey Consumer Fraud Act;
2. Fraud;
3. Breach of contract;
4. Breach of warranty;
5. Breach of the implied covenant of good faith and fair dealing;
6. Breach of the implied covenant that work will be performed in a workmanlike manner;
7. Negligence; and
8. Unjust enrichment.

Shore Custom Homes moved the court to compel arbitration. The court granted the motion. Rose appealed, claiming

• The arbitration provision is defective because it does not clearly and unambiguously convey the rights being waived;
• The arbitration provision is defective because it is unconscionable, goes against public policy, and contains multiple violations of New Jersey’s Truth in Consumer Contract Law; and
• There is no delegation clause that would arguably give the arbitrator authority to resolve issues of arbitrability.

The appellate court didn’t agree. Any contract clause that “clearly and unambiguously evidences a waiver of plaintiffs' right to pursue any claims [in court] obligates plaintiffs to resolve their claims through arbitration.” New Jersey courts were closed to this dispute. An arbitrator would settle all Rose claims.

But Be Careful

All arbitration clauses are not created equal. AAA (American Arbitration Association) is not the best choice for every construction dispute. Many construction disputes can be settled quickly and at modest cost, either by on-site meeting, a Zoom call or even E-mail. To discover the arbitration clause that best fits your jobs, have a look at Construction Contract Writer. The trial version is free.

 

Get Two Signatures on that Contract

Last June I described a solar job that fell off the rails. Leonard signed the agreement as owner. Wife Rhonda didn’t. That left the solar contractor with half a contract. Under New Jersey law, Rhonda wasn’t bound by the contract’s arbitration clause. That made enforcement a true headache – half arbitration, half lawsuit.

Black Letter Law  

If two adults reside in a home, assume both are owners. A signed agreement by one owner doesn’t bind the other. Without signatures from all owners, you’re at a big disadvantage if there’s a dispute. How do you identify each “owner”? Easy. Your county recorder’s web site lists the owner of every property in the county. When in doubt, check the recorder’s site.

Texas puts another spin on this rule of two signatures. Witness Rock Solid Building v. Pounds, decided July 24, 2024.

Robert and Camille Pounds contracted with Rock Solid to install stucco and stone cladding on their new Travis, Texas home. As it turns out, the Pounds didn’t like Rock Solid’s work and refused to pay the contract price. Rock Solid filed a mechanic's lien on the property.

In most states, a mechanic’s lien attaches to the property being improved no matter who the owner may be, even if there’s no written contract. That’s what Rock Solid wanted. It’s easy to understand why. Camile hadn’t signed the contract! Under Texas Property Code § 53.254(c), to "fix a lien on a homestead," written contract must be signed by both spouses.

Did the Pounds have a homestead? In most states, an owner has to file a notice of homestead to have protection of the homestead law. The Pounds didn’t declare a homestead on their new home until more than a year after the Rock Solid agreement was signed.

Texas is famous for its homestead law. Every urban home on 10 acres or less can be protected as a homestead. Texas Property Code § 41.007(a) requires a special notice in every contract for building or remodeling a homestead. Failure to include this notice is a deceptive practice and invalidates any mechanics lien.

Were the Pounds protected by Texas homestead law? Remember, they didn’t declare a homestead until a year after contracting with Rock Solid. And they hadn’t moved in when the contract was signed.

Decision of the Texas Court

1.  In Texas, filing for a homestead is not necessary.
2.  It’s enough to show intent to claim a homestead eventually.
3.  Property intended to become a homestead is legally a homestead from the day of acquisition.
4.  An owner may establish a homestead even before he or she takes up occupancy.

An Expensive Lesson for Rock Solid

They lost the balance claimed on the contract and had to reimburse $9,523.25 in Pounds’ attorney's fees.

Suggestion: Next time, use a good contract form. Get signatures from all owners. Construction Contract Writer drafts agreements that include all required notices and disclosures, no matter the site or type of job. The trial version is free.