Changes in Construction Contract Law for 2017

Twelve states have made significant changes in construction contract law in the last few months. Here are the highlights:

Connecticut. Effective January 1, 2017, all home improvement contracts and all changes to home improvement contracts must be in writing and must cover 10 specific points. Connecticut General Statutes § 20-429. Every contract for emergency repair of an insured loss must include a statement that the owner can waive the usual 3-day waiting period. Connecticut General Statutes § 38a-313a

Florida. Wording of the required construction recovery fund notice was changed on July 1, 2016. Florida Statutes section 489.1425
 

Maryland. In rare cases, home improvement contracts must include the notices required by Maryland's Door-To-Door Sales Act, Commercial Law Code Annotated § 14-301 to § 14-306. See my blog post of July 16, 2016.

Minnesota. The limit for retainage on public works contracts and subcontracts was lowered to 5% effective August 1, 2016. Minnesota Statutes § 337.10

Oklahoma. Effective November 1, 2016, roofing contracts must include a statement affirming workers' compensation insurance coverage. For residential jobs, workers’ compensation insurance is not required for “legitimately exempt” workers if an affidavit of exemption is attached to the contract. For commercial jobs, all workers must be covered. Oklahoma Statutes Title 59 § 1151.22

Construction Contract Writer is the easiest way to stay current on these and other changes in construction contract law. The trial version is free.

Another Change

Every residential contractor knows about the three-day right to cancel. Any time you do work on the principal residence of an owner (whether new construction, improvement or repair), 12 CFR § 226.15 requires that you:

• Give each owner two copies of the federal Reg Z notice, and
• Show on each form the date the right to cancel expires, and
• Give the owner three days (excluding Sunday and holidays) to back out of the deal.

What if your client doesn’t want to wait? The exception in 12 CFR § 226.15(e) allows you to start work immediately if all of the following apply:

1. The owner has a true personal financial emergency. To me, a financial emergency means that delay is going to make things worse.
2. The owner signs a written waiver of the right to cancel. This can’t be a printed form. The waiver has to be handwritten, dated and signed by every owner with a right to cancel.
3. The statement has to describe the emergency. For example, “My roof blew off and it’s raining.”
4. The statement has to waive the right to rescind. For example, “I give up my right to cancel this contract.”

At your option, Construction Contract Writer will add a page to the agreement that explains the right to rescind and then coaches an owner through the waiver process. With that signed statement in your file, it’s safe to begin work right away.

 

How to Get Paid in 50 States

Many states protect construction contractors and subcontractors with prompt payment statutes: If a payment isn’t received within 30 days after the due date, the contractor is entitled to interest at 1% a month plus attorney fees. Retainage can’t exceed some percentage, usually 5% or 10%. Subcontractors must be paid within seven days after the prime contractor is paid. A contractor who isn’t paid on time has the right to stop work.

Not all states have these prompt payment statutes and the law is different in every state. For example, Michigan and New Hampshire don’t have prompt payment statutes. In many states, terms in the contract control if inconsistent with the prompt payment act. In other states, anything in a contract that doesn’t comply with the act is void. Payment deadlines for public works construction are usually different from what’s required on private jobs. In some states, the rules for payment on residential jobs are different from the rules on commercial jobs. Other states specify when invoices should be submitted for payment and set time limits for objecting to any charge on an invoice.

Prompt payment statutes give contractors and subcontractors extra leverage when an owner doesn’t pay on time. Construction Contract Writer can help you make good use of the leverage offered by your state – whether the job is commercial or residential, public or private. The trial version is free.

A Louisiana case decided last week (2016 La. App. LEXIS 2129) underscores my point about leverage.

Entergy Corporation, the big mid-south utility, needed repairs at their Perdido Street Gas Department warehouse in New Orleans. Gee Cee Group, a Louisiana commercial construction company, won the job as general contractor. Gee Cee selected Boes Iron Works to do the structural steel and iron work. Their contract had a "pay-when-paid" provision. Subcontractor Boes was to be paid when Entergy paid general contractor Gee Cee.

Boes finished their work and submitted invoices totaling $33,320. That was December 27, 2001. Gee Cee was paid in full by Entergy over a year later. But Gee Cee didn’t notify Boes of the payment and didn’t pay the $33,320 owed Boes. Nearly eight years later, Boes still had not been paid. In response to a demand, Gee Cee started making payments. In June 2010 they paid $5,000. Three months later they paid another $11,500. That left $16,820 still unpaid. Obviously, Boes needed some extra leverage.

Louisiana has a perfectly good prompt payment statute. Subcontractors on both public and private jobs should be paid within 14 days after payment is received from the owner. If payment is not received within 14 days, an interest penalty of 1/2 of 1% per day (up to 15%) accrues plus the applicable interest rate in the contract. In addition, the subcontractor is entitled to attorney's fees if payment was withheld without reasonable cause. Additional penalties can be assessed for misapplication of payments due laborers or subcontractors.

Armed with that leverage, Boes faxed an invoice to Gee Cee for $82,739.80. That included the $16,820.00 still due plus interest for the last eight years. The fax didn’t elicit any more payments. In February, 2013, Boes filed suit.

At trial, Gee Cee had no complaint about the work Boes had done. But Gee Cee had other excuses: The statute of limitations (called peremptory exception of prescription in Louisiana) had run on this old debt. The Gee Cee Group had been succeeded by the present company, Gee Cee LA. The new company wasn’t liable for the old company’s debts.

The trial court didn't agree. Boes was awarded the $16,820.00 still owed plus penalties of $4,998.00, plus $8,000.00 in attorneys' fees plus $5,161.81 in costs plus interest as provided by Louisiana law. Both Boes and Gee Cee appealed and the award was modified by the appellate court. Still, Boes made good use of Louisiana’s prompt payment statute. I recommend doing the same if your state has a prompt payment statute. But don’t wait eight years to do it.

 

Should I Set Up My Own LLC?

 

I’ve heard that contractors should do business as an LLC so they can’t be sued. Is that true?

 A conversation I had earlier this month answers the question.

But first, let’s define some terms. Members of an LLC (limited liability company) get the advantage of limited liability (like a corporation) but have the option of paying tax as either a partnership or a corporation. The IRS considers a single-member LLC to be the same as the owner for tax purposes but a separate company for employment purposes. The cost of setting up an LLC to comply with law in your state will be at least several hundred dollars for filing and recording forms. Plus, most states charge LLCs a minimum franchise tax. In California that’s $800 a year plus a fee on gross revenue that adds another $900 for up to $500,000 in income.

Question: So what do I get for all that trouble and expense?

Answer: Most important is what you don’t get.

• Debt relief? Not hardly. There’s no practical way to shift personal debt to an LLC.
• Easier to borrow money? Not likely. Lenders and credit card companies want a personal guarantee before extending credit to an LLC.
• Protection from liability for your negligence? Almost certainly not. You’ll be personally liable for your negligence, malpractice and errors committed while working for the LLC.
• A place to hide assets from creditors? No way. Nearly all states allow creditors to claim an owner’s interest in an LLC, either with a charging order or foreclosure or by having the LLC dissolved.

Question: But can’t I use the LLC name on all my contracts? That way, unhappy clients can’t sue me. They have to sue my LLC.

Answer: It’s not that simple! First, where contractors are licensed or registered, the name on a contract usually has to be the name on file with the state board. To understand what your state requires, get Construction Contract Writer. The trial version is free.

But suppose both your state and your clients are OK with the LLC alone listed as the construction contractor. Are your assets protected? Not necessarily. Courts routinely “pierce the corporate veil” of both LLCs and corporations to find an owner personally liable for company debts. A case decided last month in Alabama makes the point.

In March of 2013, Deann Fialkowski decided to put new shutters, doors, exterior siding and a raised deck on her home in Huntsville. Bruce Kitchura, supervisor for TLIG Maintenance, agreed to do the work. By December, Bruce had been paid nearly $38,000 but was in trouble with the building inspector. Work wasn’t being done according to code. Neither Bruce nor TLIG had a homebuilder’s license. The license TLIG had didn’t allow contracts for over $10,000. Deann told Bruce he could not "continue to build the way it is." Bruce asked Deann for more money to finish the work. She refused and Bruce walked off the job. Deann had others complete the work at a cost of $23,247.69 and filed suit against Bruce, TLIG and Bruce’s girlfriend, Gala P. Rusich, the only officer and stockholder in TLIG. Bruce was the sole employee.

The court of appeals found both TLIG and Gala liable for Deann’s loss, and for good reasons. Courts ignore shell companies that exist in name only. A company that isn’t keeping books and records isn’t really a company at all.

In the case of TLIG, Deann’s payments were deposited in the company account. So far, so good. But, according to Bruce, the only limit Gala put on use of TLIG money was "common sense things" like gambling or going to strip clubs, "things that would just be outrageously stupid." Bruce and Gala spent TLIG money at Dillard's and TJ Maxx, for medical prescriptions, haircuts, groceries, at bars and restaurants, trips to the Jack Daniel's Distillery in Kentucky and to Bruce’s family in Pennsylvania. Gala got new tires for her Mercedes paid for by TLIG. With all those expenses, TLIG didn’t have money left to finish Deann’s project.

The appellate court found both TLIG and Gala liable for Deann’s loss. The court’s decision was unanimous except for a dissent by Judge Moore. He would have found Bruce liable as well as Gala and TLIG.

Conclusion: Forming the corporation didn’t do Gala any good at all. The court's decision would have been the same whether TLIG was a corporation or an LLC. Neither would protect Gala from personal liability for TLIG debts given her business practice.

My advice: There’s no advantage in setting up your own corporation or LLC unless you’re willing to pay the extra fees, do the extra paperwork and separate company funds from personal funds. Until that day comes, there’s nothing wrong with writing contracts in your own name.

 

Can’t I Just Fire My Contractor?

This blog is for contractors. So I try to respond to questions I get from contractors. But I get questions from owners too. The most common is “Can’t I just fire my contractor – order him off my property?”

I had a question like that last week. The owner was disgusted when his home improvement contractor damaged the existing electrical system, didn’t show up for days and didn’t return calls. “Can’t I just fire this guy?”

A contractor working under a written agreement is not like an ordinary employee. Rights and obligations are laid out in the contract. With a few exceptions, ordering a contractor off the property is a breach of contract. The owner is going to be liable for damages. Case in point:

Mike and Cori Jones had moisture problems in the basement of their Iowa home. They signed a contract with Standard Water Control Systems to solve the problem. While working in the basement, one of Standard’s employees cut through concrete with a jackhammer, accidentally slicing into encased water and sewer lines. Standard continued work, finishing 95% of what they had agreed to complete. But there was water damage from flooding. The next day, Jones ordered Standard off the property – permanently. Standard sent a bill for $5,400, the balance owed on the job. Jones refused to pay because of the damage and because work wasn’t finished. Jones had another contractor finish the job and repair the damage. Standard filed suit to foreclose their mechanics lien and for breach of contract. Jones filed an answer and asked for damages. That was October 2013.

Last week an Iowa court (2016 Iowa App. LEXIS 899) decided the case. (1) Standard’s contract excused the accidental damage. Jones got nothing for the repair work. (2) Standard had a valid lien for $5,400 plus 12% interest. (3). Standard was awarded $43,835.25 in attorney fees from Jones, though the trial court is going to reconsider details of that award.

So when can you simply fire (terminate) a contractor?

• If the contractor committed a material breach of contract. A material breach is anything that defeats the purpose of the agreement.
• If the contract allows termination, either at will or for cause. Any contract can do that.
• If the contractor refuses to comply with the building code or state law.
• If the contractor pulls off the job. A flat refusal to do more work is grounds for termination. But be careful. A contractor who isn’t paid can stop work. That’s no breach. Neither is stopping work after an owner has breached the contract.

It’s not a material breach if:

• Giving a discount would solve the problem, or
• The contractor has made a good faith promise to perform, or
• Most of the work has already been done as agreed.

Insubordination alone isn’t a material breach. Neither is leaving the job idle for a while or accidental damage to the owner’s property or failure to supply the 3-day Reg Z notice or refusing to negotiate changes.

Judges usually decide what is a material breach and what isn’t. If the facts are in dispute, breach will be a question for the jury – and could require years in court to resolve. If it’s a close question, don’t put yourself in the position of Mike and Cori Jones.

There’s nearly always a better choice. If your state has a construction dispute resolution service or a department of consumer protection, get the state involved. If contractors have to register or are licensed in your state, request an administrative review by the license board. If nothing else works, get a private construction mediator to help. Or complain to your state attorney general. No matter the resources available, prepare your case carefully. Take pictures, get statements and the opinion of experts. Preserve notes and correspondence. Facts win cases.

A final point: Any contract can give an owner the right to terminate the agreement; either for cause or for any reason you want. Construction Contract Writer makes that easy. The trial version is free.

 

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.