Directions to the Montana Supreme Court

Mike Mandell owned a residential lot in Paradise Valley, just outside Livingston, Montana. It was a beautiful site for a home – overlooking the Yellowstone River. Mandell asked the Bozeman firm of Bayliss Architects to design his new home. Mandell and Bayliss met on the site and struck a deal: Bayliss would design a 2,000 square foot home that could be built for $170 per square foot. His fee would be 8-10% for architectural design and structural engineering. 

So far, so good. But Mandell had one more request. And this is where Bayliss got into trouble. Mandell wanted Bayliss to handle construction management. For an extra 7-10%, Bayliss agreed to act as project manager and general contractor for the job.

Bayliss made it a “fast track” project, sending invoices as work progressed. By the time the job was substantially complete, Mandell had paid Bayliss $394,198. The final invoice added another $138,241:

• $75,409 owed to subs and suppliers
• $29,250 for architectural services
• The 7-10% construction management fee ($30,000+).

Mandell refused to pay that last invoice. He had an excuse. Montana Code § 28-2-2201 requires that all residential construction contracts be in writing and include several notices and disclosures. Bayliss never offered a construction contract for the job and Mandell didn’t sign any. They had only an oral agreement. Under Montana law, an oral agreement for residential construction is void. Mandell claimed he didn’t owe either the $75,409 due subs and suppliers or the construction management fee. Mandell filed suit to prove he was right. That was October 2013.

And that’s how Mandell and Bayliss found their way to the Montana Supreme Court. If Mandell was right, he saved over $100,000. If Mandell was wrong, Bayliss collected only what Mandell agreed to pay in the first place. Mandell had nothing to lose. And he didn’t even have to worry about paying Bayliss’ attorney fees. If there is no valid contract, Montana courts won’t award attorney fees to the winning party.

No Written Agreement = No Right to Collect

For the next three years, the case dragged through the Montana courts, finally arriving at the Supreme Court. Last week that court decided that Bayliss had a valid claim for $29,250 in architectural services and for $75,409 owed to subs and suppliers. But because there was no written contract, Bayliss was out his construction management fee (at least $30,000) and had to cover his own attorney fees. That’s a heavy price to pay for overlooking one little detail, a valid contract. With a written contract, collecting the full $138,241 would have been easy.

Two observations from an attorney who has seen dozens of cases like this. 

1. Working any job without a valid contract is like skating on thin ice. Expect trouble. In this case, the Paradise Valley home came in well over the initial budget of $170 per SF. Mandell had an axe to grind. 
2. I'll defend the notices and disclosures required by Montana § 28-2-2201 -- insurance, payment terms, warranty, inspections -- all important subjects that should be covered in residential construction contracts. The law makes sense and should help keep contractors out of court. 

Most states have laws similar to Montana § 28-2-2201. Don’t step into the trap that caught Bayliss. Construction Contract Writer drafts construction agreements that comply precisely with state and federal law, no matter where you do business. The trial version is free.

 

More on Maryland HB 439

Maryland home improvement contractors got some new law last June 1. It’s Maryland Commercial Law Code § 14-302.1, usually referred to as HB 439. The new law revises Maryland’s Door-to-Door Sales Act and the three-day right to cancel. Most owners now get five days to cancel. Any owner 65 or over gets an extra two days to cancel. And every owner has to acknowledge in writing receipt of the right to cancel form. To help answer questions about HB 439, the Maryland Home Improvement Commission sent an explanation of the new law to Maryland contractors on June 3.

All this is routine. It’s the next step that gets sticky.

As pointed out in my May 22, 2016 blog post, there’s something very peculiar about this new law, it almost never applies to any job. That’s because Maryland Commercial Law Code § 14-302(d)(ii) makes it clear: The door-to-door disclosures in HB 439 aren’t required if an owner has the three-day right to cancel under federal Regulation Z. Re-read the May 22 blog post if you don’t recall the details.

But I was curious. So I sent a query to the Maryland Attorney General. If an owner lives in the house being improved, we know that Reg Z applies, not HB 439. If an owner rents out the place, HB 439 doesn’t apply under terms of Maryland law. HB 439 almost never applies.

I got a prompt response from the office of Maryland’s AG:

“[Reg Z] applies when there is ‘a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling.’  Then the federal act would give a right of rescission.  Not every home improvement contract in which an individual is doing work on a primary residence meets these qualifications, however, and in fact, most, do not.”

The AG’s opinion rests on the definition of “security interest.” If the contractor has a security interest when work starts, then Reg Z applies, the federal three-day notice is required and the HB 439 notice is surplus. The AG says that’s not usually the case, almost certainly because of a quirk in Maryland mechanics lien law.

In most states, contractors, subs and suppliers have an “inchoate” lien (a security interest) from the day work starts. Not so in Maryland. Contractors have to petition the court (file suit) to have a lien in Maryland. So they don’t have a security interest from day one. According to the AG, Reg Z doesn’t apply and the HB 439 notice will be needed on most jobs.

I Don’t Agree, For Three Reasons.

1. True, Maryland prime contractors don’t have lien rights (a security interest) until they petition a court. But Maryland law gives subcontractors and suppliers a lien without filing anything in court. Subs and suppliers have a lien from the day they give written notice to the owner. That sounds like a security interest to me and should trigger a Reg Z three-day notice before work starts.
2. Fortunately, Federal courts settled this issue many years ago. “The possibility of a mechanic's lien is a ‘security interest’ which must be disclosed under TILA and Regulation Z even though a mechanic's lien may never actually be taken.” Rudisell v. Fifth Third Bank, 622 F.2d 243, 251 (6th Cir.1980). 
3. The Federal Reserve Board (the people behind Reg Z) has removed any doubt: The possibility of a lien arising is a “security interest” for purposes of a customer's right to rescission.

My May 22 blog post included a guess that HB 439 was simply a mistake. The explanation from the Maryland AG confirms my opinion. If the AG were correct about no security interest during construction, delivery of the Reg Z three-day cancellation notice would never be required until a contractor filed for an interlocutory lien -- weeks or months after the job was finished. That would both sabotage the purpose of Reg Z and lead to unintended consequences -- giving owners the right to cancel a job and get a refund weeks or months after completion. That’s plain nonsense.

The Maryland AG office goes on to cite Crystal v. West and Callahan, Inc., 328 Md. 318 (1992) for the proposition that “home improvement transactions are not excluded from the Maryland Door-to-Door Sales Act.” I agree. But only if Reg Z doesn’t apply, such as if you’re working on an owner’s second home, not the primary residence of the owner. For work on a second home, HB 439’s door-to-door disclosures are required. For all other home improvement work, give the Reg Z three-day notice. HB 439 disclosures would be surplus.

And there’s another, broader, issue here. In my experience, most contractors prefer to obey the law – especially if the law is clear and makes sense. Writing laws like that is an obligation of every legislature. In my opinion, Maryland’s General Assembly didn’t think very hard before passing HB 439. The June 3 message from the Home Improvement Commission only made it worse – omitting any mention of when the HB 439 notice was required. 

So home improvement contractors in Maryland are left to guess about what the new law requires. Every home improvement crew shouldn’t need a carpenter, an electrician and two lawyers. Construction contractors perform a valuable service. Maryland could support that effort with clear, sensible laws and regulations. HB 439 falls short of that standard.

For clear guidance on drafting construction contracts in any of the 50 states, have a look at

Construction Contract Writer. The trial version is free.

 

When a Job Goes Bad . . .

 

A case decided in Indianapolis last week makes the point once again: Any time there’s a dispute on a construction project, the contractor better have a good contract. Jim Dorey didn’t and paid the price. Here’s what happened.

 

A hail storm in December 2012 damaged the roof of Faye Warfield’s home. Liberty Mutual’s adjuster responded to the claim and asked a roofing contractor, Jim Dorey, to contact Warfield about repairs. Dorey made the sales call. He offered samples of shingles and Faye’s daughter signed Dorey’s roofing contract. At Warfield’s request, Dorey quoted a price for rebuilding Warfield's chimney before starting on the roof. 

Months later, while doing the shingle tear-off, Dorey discovered portions of the roof deck that had to be replaced. Liberty Mutual authorized Dorey to do that work too. Dorey added decking to the contract but didn’t ask Faye to sign a change order. The agreement for chimney work was entirely oral. 

When all work was done, Liberty Mutual paid with checks made out to Faye Warfield. Dorey expected those checks would be endorsed and turned over to him. Surprise! That’s not what happened. After several months, Dorey had to file suit to collect. An attorney for Warfield fired right back with counterclaims, alleging violations of Indiana law and claiming Dorey's lawsuit was frivolous.

 

Like nearly all states, Indiana sets standards for residential contracts. Dorey’s contract had problems: His delivery address was missing. There was no starting or completion date. The notice of right to cancel was omitted entirely. There was nothing in writing about the chimney. Faye didn’t actually sign the contract. Her daughter did. Worse, Dorey didn’t have a contracting license when the agreement was signed and didn’t pull a permit for replacing roof deck. Warfield’s attorney insisted the contract was void. Dorey had committed a deceptive act under Indiana’s Home Improvement Contracts Act (HICA) and had no right to collect the $13,925.78.

 

Notice this: Warfield had no complaint about Dorey’s work. Her complaint was about Dorey’s contract.

 

The trial court decided Dorey lame contract was good enough. Warfield wasn't damaged by any failure of Dorey to comply with Indiana’s HICA. Warfield appealed. The appellate court awarded Dorey his $13,925.78 under the theory of quantum meruit, the “amount deserved.” After all, it would be unjust for Warfield to benefit from Dorey’s work without paying for it. But the appellate court also found Dorey's contract to be void.

 

So Dorey Came Out OK?

Not quite. Notice the date December 2012. It took Dorey nearly four years in court to get a judgment against Warfield. That cost plenty. And because his contract was void under Indiana law, Dorey lost out on collecting attorney fees. My guess is that his attorney fees were several times the $13,925.78 award. A void contract left Dorey with none of the advantages contractors are welcome to write into their agreements:

• Contractor collects attorney fees if suit is needed to collect.
• Monthly interest is due on late payments.
• Anything not in the contract is at extra charge.
• Changes required by law are extra work.
• Changes are done at the normal selling price of contractor.
• Contractor provides no warranty other than required by law.
• Disputes have to be resolved by arbitration, not litigation.
• Full payment is due when work is done.
• The insurance carrier is authorized to pay the contractor directly..

Moral to the story: No contractor has to use a lame contract. Drafting a letter-perfect agreement is easy, no matter the state or type of job. Construction Contract Writer handles all the details. Just check a box to put any of these advantages in your agreement. The trial version is free.

 

An Enigma for Maryland Contractors

This blog is about consumer protection law – what contractors must do to stay legal in their state. It’s a big topic and grows every year. State legislators like piling the protection deeper and deeper – usually in the form of notices and disclosures that have to be inserted in construction contracts. 

Without the right words in your contract, you may have no right to collect. Or you could be fined or disciplined by the state board. Or you could face jail time.

Most consumer protection laws make sense – at least to the lawmakers. But every once in a while, a new law comes along that makes very little sense at all. Maryland Commercial Law Code § 14-302.1 fits that category. 

The law, passed as Maryland House Bill 439, becomes effective on June 1, 2016. If the law applies, home improvement contracts have to include a paragraph explaining the buyer’s right to cancel – five days for those under 65 and seven days for those 65 and older. For the contract to be legal, the buyer has to sign a statement acknowledging receipt of an oral explanation of the right to cancel. The signed statement has to be on a sheet separate from the contract and has to show the date when the right to cancel expires.

Make a mistake on any of this and you’ve committed an “unfair or deceptive trade practice” under Maryland law. Expect a $1,000 fine (first offense) or both fine and a year in jail (repeat offenses).

The new Maryland law is pretty routine stuff. Many states (CA, CT, DC, FL, GA, HI, IN, KY, LA, MI, MO, MS, ND, NH, NJ, NY, OK, RI, TX, VT, WA, WV, and WY) have similar statutes.

What makes the new Maryland law so peculiar is the exceptions. Section 14-302.1 goes on and on about what has to be in a home improvement contract. And then exceptions swallow the rule. I’ll explain.

The Rule Gets Swallowed

Exception 1: The new law doesn’t apply if the buyer has the 3-day right to cancel under federal law. That’s in § 14-301(d)(2)(ii). Any time you do work on the primary residence of the owner, the owner has the 3-day right to cancel.

Exception 2: The new law doesn’t apply to rental property because contracts for improvement of rental property are not for personal, family or household purposes of the owner. That’s in § 14-301(c)(1).

So if the owner lives in the house being improved, the new law doesn’t apply. If the owner doesn’t live in the house being improved, the new law doesn’t apply. There’s not much left.

So why the new home improvement disclosure statute? Like I said, legislators earn credit by piling on consumer protection law. But in this case, I believe it’s a simple mistake. The bill was sponsored by delegates Kramer and Fraser-Hidalgo. Did they get bad legal advice? Or maybe they didn’t read or understand their new law. We’ll see what happens in the next MD legislative session.

No matter how deep your state piles consumer protection law, Construction Contract Writer will make sure your agreements are letter perfect. The trial version is free.

 

What Warranty Do I Have to Offer?

Last week I got a question from a contractor who had read the June 2016 Consumer Reports article on home improvement. He told me that nine out of 10 contractors in the CU article claim to offer a written guarantee of their work. He wanted advice on the guarantee he should offer. My answer: “Fine. We can work up a written warranty. But understand that all your jobs come with a warranty already – even if you never breathe a word about it in the contract.”

Here’s why that’s a true statement. Forty-six states and the District of Columbia impose an “implied” warranty on contractors on nearly every construction project. Just by taking a job, you guarantee work will be done using customary skill and care, will comply with accepted standards and the finished project will be reasonably fit for the intended use.

Who enforces that warranty? Courts in every state decide construction warranty claims on a case-by-case basis. Exactly what meets state standards and how long the warranty lasts are a question for the judge and jury. Some states (AZ, CA, RI, SC) publish a list of construction standards – defining what constitutes a construction defect. Other states (DE, KY, LA) consider anything that doesn’t comply with the building code to be a defect.

Is there any way to avoid this implied warranty? Yes. That’s called a “disclaimer” of warranty. A carefully worded disclaimer will be enforced in most states if clear and conspicuous (bold type, upper case, “as is,” etc.), especially if the defect in question is part of the negotiations and will be obvious to the buyer. But don’t try to include a disclaimer in every construction contract. That won’t work.

Four states don’t imply any warrant. Instead, GA, ME, MN and NJ require contractors to give an express (written) warranty: Georgia requires a written warranty on single-family and duplex dwellings. See my blog post of March 31, 2009 for details. Maine requires a written warranty for residential jobs over $3,000. Minnesota requires a guarantee on materials and workmanship for one year, plumbing, electrical and HVAC for two years and structural components for 10 years. New Jersey contractors have to include a written guarantee with each bid.

What About an Express Warranty?

All states permit express written warranties in addition to the warranty required by state law. Here are the options if you want to offer more than the minimum warranty. These are listed in order of the least risk to the most risk to the contractor:

• When you install materials, equipment or appliances that come with a written manufacturer’s warranty, pass warranty documents to the owner.
• Offer a warranty on named components. For example, the roof won’t leak for five years or cabinet doors won’t sag for 10 years. Construction Contract Writer offers a good choice of warranties for 40 construction trades – everything from asphalt paving to windows and for any period you select.
• Offer a warranty on all material and workmanship. For example, “Contractor warrants that the work shall be free of defects due to faulty material or workmanship for the period specified in this agreement.”
• Offer a broad form warranty. This is the warranty usually required on public works projects: “Contractor warrants that work performed under this contract shall conform to the contract documents and be free of defects in material, design furnished and workmanship performed by contractor or any subcontractor or material supplier for the period specified in this agreement.”

If you use Construction Contract Writer, the choice is yours. Just check a box to offer the warranty you prefer.

Breach of Construction Contract

Most construction disputes begin with a surprise. And no job can astonish better than rehab work. So how do you stay out of disputes on repair jobs? Maybe you can’t. But a case decided earlier this month in Maine may be a good model for contractors on residential and light commercial repair jobs.

Chris Bond agreed to have Riley Woodwork remodel the Sebego Lake Rowing and Sailing Club in Standish, Maine. Before taking the job, Riley warned that the clubhouse was an old building – rotted floor joists and subfloor and outdated electrical system. Riley wrote what he called a “baseline” bid and added a caution about unforeseen problems. The job scope might change once work started. Riley estimated the baseline cost at $26,781. Bond signed a written agreement to pay more for approved extras.

That was a good beginning but not the end. Bond had another project for Riley, renovation of a condominium in South Portland. While work on the Sebego Club was still in progress, Bond had Riley start on the condo job – and even asked Riley to make that a top priority.

Two months later, Riley was about done with the condo. He requested final payment of $6,674. Bond admitted he owed the money but refused to pay until some additional work was done, about a day’s work, according to the trial transcript. Riley wanted to be paid first. Bond wouldn’t do it. The result was a general falling out between Bond and Riley.

Bond ordered Riley to stop work on both jobs. In Judge Walker’s words, “This refusal was the catalyst, along with a general pastiche of conflicting personality types.   . .” Riley pulled off both jobs and sent final bills. Bond refused to pay another dime. Riley recorded liens on both properties and filed suit to collect. Bond counter-sued, claiming faulty workmanship, late completion and violation of Maine’s Home Construction Contract Act.

At trial, the question was, “Who breached the contract, Riley or Bond?” The first to commit a material breach of contract is liable for damages. A material breach of contract is any "non-performance of a duty that is so material and important as to justify the injured party in regarding the whole transaction as at an end." Judge Walker concluded that Bond's failure to pay any amount on the final condo invoice was a material breach of contract. The only other issue was the amount to be awarded Riley in damages.

Riley was ready. He had the contracts, estimates, material receipts and time cards. Bond claimed Riley’s bills were inflated. The court found otherwise. Riley’s charges were “reasonable, necessary and customary” and supported by testimony at trial. The court awarded Riley $10,690.98 for Sebago, $8,062 for the condo plus interest and attorney fees, but less $300 for the last day of work on the condo.

Take-Aways from Riley v. Bond

Disputes are inevitable, especially on work in older buildings. So make a few precautions part of your business practice. It paid off for Riley and could for you too:

1. Caution that there could be extras.
2. Include payment for extras in your contract.
3. Keep good job records.
4. Be ready to sue when nothing else works.

The best way to vet potential disputes is with a good construction contract. You won’t find a better tool for drafting iron-clad agreements than Construction Contract Writer. The trial version is free.

Changes: Here Comes the Judge

Tom and Denise Ambrose wanted to add a pool to their home in Carmel, Indiana. They selected Dalton Construction to do the work. Dalton’s plot plan for the pool was approved by the city. Just to be sure, Dalton laid out the pool outline on the ground using metal stakes, string and orange paint.

When Dalton’s excavation crew arrived on site to begin work, Denise had a problem. The pool layout was wrong. Dalton re-staked the pool where Denise wanted it. And that’s where the pool was built. Tom and Denise monitored the work almost every day and never said anything more about location of the pool. But when a subcontractor began making stress cuts in the freshly poured concrete deck, Denise turned irate. The cuts were not like a neighbor's pool deck! And the concrete was the wrong color. Denise told the subcontractor to stop work.

Dalton Construction met with Tom Ambrose a few days later to get the job back on track. It wasn’t going to happen. Ambrose demanded that Dalton demolish the pool and replace it with a pool with squared corners. Ambrose refused to pay the $21,775 still due until the pool was replaced and refused to let Dalton finish the work or call for final inspection. Dalton filed a mechanic's lien against the property and won a judgment at the trial court for the $21,775 plus $42,525 in costs and attorney's fees.

Ambrose appealed, claiming the trial court’s decision was contrary to Indiana Law. He had some good points. The pool was built in the wrong place. True, Denise asked for that change. But any oral modification of their contract was invalid for two reasons. First, the contract prohibited oral changes. Second, Indiana Code § 24-5-11-10(d) prohibits enforcing oral changes: "modification to a home improvement contract is not enforceable against a consumer unless the modification is stated in a writing that is signed by the consumer." There was no written change order.

What Would You Decide?

Is Dalton out the $21,775 plus $42,525 in costs and attorney's fees for agreeing to an oral modification of contract?

Earlier this month, the Court of Appeals of Indiana sided with Dalton (2016 Ind. App. LEXIS 35), mostly on technical grounds: First, the location of the pool was not in the contract. So there was no oral modification. Second, Ambrose didn’t raise the argument about Section 24-5-11-10 during trial. In the opinion of the court, arguing that point on appeal was too late.

What can you learn from Ambrose v. Dalton Construction? That’s easy. Oral changes are toxic. Get every change in writing. A written change order could have saved Dalton Construction five years of legal wrangling. 

If you use Construction Contract Writer, simply click a box to put a blank change order form in your contract – what’s included in the change, what’s excluded, the cost, the new contract price, and an agreement to pay in full for extra work when the extra work is done. Any time you agree to make a change, whip out that form and start writing.