Making a Mountain Out of a Molehill

Most of my blog posts are about missed opportunities -- how a good contract could have avoided a costly mistake. But occasionally, a contractor does it right – and saves thousands. Consider a case decided last week by a Ventura, CA court. Plyley v. Renovating Specialist, Inc. (RSI). Here’s a summary.

The job was simple. Replace two oak doors with two sliding glass doors. Plyley agreed to pay $3,885. RSI wrote the contract, got it signed and did the work. The new doors passed inspection. Plyley rated the work as “Excellent” on RSI’s job completion certificate. But satisfaction didn’t last. A dispute followed. Eventually, Plyley filed a 42-page complaint, insisting the new doors didn’t meet contract specs and didn’t comply with the building code.

Essence of the dispute was height of the door sill. The sill on the old doors was nearly flush with the interior floor level. The new doors slid in the old frame, making the height of the new sill almost two inches above the interior floor level. Even worse, the drop from the new sill to the exterior patio was now 9 inches. The building code limits step height to 7-3/4 inches.

Sliding a replacement door into an existing frame is called retrofit construction. As anyone doing window and door replacement knows, there’s another choice. Remove and replace the entire frame: demo existing siding around the door perimeter, remove the old sill and frame, install a new door and frame, waterproof the opening and restore the siding. That’s like new construction. It’s also more work and more expense. But doing it that way would leave the height of the new door sill nearly the same as the old sill.

When Plyley sued, RSI was forced to defend both their work and their contract. The trial ran for 6 days. The trial court found no problem with either RSI’s work or their contract, awarding RSI costs of $1,223 plus $95,531 in attorney fees. Plyley appealed. Key points in that appeal: 

1. The contract violated California Business and Professions Code § 7159 which requires written contracts and written change orders.
   The appellate court found no violation of § 7159 in the RSI contract. A contract doesn’t have to list all job specs.
2. RSI had agreed to perform new construction, not retrofit construction.
   The appellate court allowed RSI’s salesman to testify about what he told Plyley. Retrofit replacement and new construction are different. In retrofit, the sill was going to be higher. Plyley insisted on retrofit.
3. The contract was unconscionable, allowing RSI to install the unsafe doors in violation of the building code.
   The appellate court didn’t agree. “Appellant cites no authority to the effect that building codes are implied terms of all home improvement contracts and that the contractor must comply with them at his own expense despite the homeowner's insistence that he not comply.”
4. RSI violated Business and Professions Code §7160. Their contract included 'false or fraudulent representation or false statements knowingly made'.
   The trial court found no false or misleading statements in the contract. The appellate court agreed.
5. Because RSI’s contract required the losing party to pay attorney fees of the winning party, the appellate court affirmed an award of $95,531 to RSI.

The appellate court’s conclusion: Plyley's complaint was “making a mountain out of a molehill”. Chalk one up for good contracts.

If you want to draft nothing but good contracts, regardless of the type of project or the state where you work, have a look at Construction Contract Writer. The trial version is free.

Powerful Words in Any Contract

Disputes are common on construction sites. Every contractor knows that. And any dispute can derail a project – turn a potential money-maker into a money pit. Many disputes profiled on these pages became epic legal struggles lasting years. A few of those cases ran up legal fees more than the cost of construction.

My advice: Stick to building. Don’t get stuck in a legal quagmire.

The best way I know to stay out of court: Write contracts that require arbitration – alternative dispute resolution (ADR). Courts won’t touch a contract dispute that requires arbitration. Require ADR and there’s no right to sue. That’s a game changer when an owner or owner’s attorney threatens legal action.

Statistics show that sellers are more likely to win in arbitration. That makes arbitration a good choice for construction contractors.

If you write the contract, you decide how disputes will be settled. Your contract should:

• Make it clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
• Identify the arbitrator. AAA, CDRS and JAMS are common choices. But a Web search will turn up qualified independent arbitrators in your community. Consider a “mobile” neutral – someone willing to meet on the construction site.
• Identify the arbitration rules. The arbitrator you select will suggest rules he or she prefers.
• Make the arbitrator’s decision final. The words are, “Judgment on the award may be entered in any court having jurisdiction.”

On Residential Jobs

Eleven states (CA, IL, MD, MA, MO, NE, OR, PA, SC, TX, VT) void any residential arbitration agreement that omits disclosures required by state law. Requirements are different in each state. Sometimes specific words are required, or all upper case, or underlined, or initialed or placed above the signature line, etc. Without the precise disclosure required by state law, your agreement to arbitrate isn’t going to hold water – or worse, will require a court to decide if ADR is required.

A Louisiana case (S. LA Contractors v. Kraus Construction, May 5, 2022) illustrates what’s likely to happen with a broken ADR clause.

Kraus Construction was the general contractor on a school job in Longville, Louisiana. South LA was the site work subcontractor. When site work was finished, South LA claimed a balance due of $135,660 and filed suit to collect. Citing the ADR clause in their contract, Kraus asked the Louisiana court to delay action on the suit until arbitration was complete. South LA insisted their contract’s arbitration clause was defective. The agreement required ADR under "Arbitration Rules of Better Business Bureau". The BBB doesn’t have arbitration rules. Now what?

The trial court ruled that arbitration was required. South LA appealed. The appellate court affirmed the trail court’s decision. The ruling by Judge Perret: Louisiana law favors arbitration as a speedy way to resolve contract disputes. Any agreement to arbitrate is irrevocable and enforceable, assuming:

1. The contract is valid, and,
2. The dispute falls within the scope of the arbitration agreement.

OK. Kraus Construction got their arbitration hearing – after decisions by both a trial court and an appellate court. But isn’t this obvious? A few more seconds spent drafting the ADR clause would have saved hours (days?) in court.

Don’t make the same mistake. Construction Contract Writer drafts letter-perfect contracts (and arbitration clauses) no matter the state and no matter the type of project. The trial version is free.

 

A Busted NY Home Improvement Contract

Last month I explored what Pennsylvania courts allow contractors who use a bum contract. The rules in New York are different – and the difference is major. I’ll explain. 

Like Pennsylvania (and 30 other states), New York requires a written contract for residential construction work. Like Pennsylvania, New York contracts have to include a long list of notices and disclosures. But unlike Pennsylvania, New York courts are split on what happens when a contractor uses a defective agreement. Pennsylvania allows the contractor to sue for quantum meruit, Latin for "as much as deserved". That’s a clumsy tool, as explained last month. But at least the contractor collects something. New York may or may not allow as much. The New York case of Chapman v. Davis (decided March 22, 2022) illustrates the point.

Cheryl Davis wanted to convert the basement of her Pleasant Valley, NY, home into bedrooms for her two daughters. Chapman Construction offered to do the work and wrote up the agreement. 

When it came time to make the final payment, Chapman Construction got hung out to dry. Cheryl claimed egress windows in the basement didn’t comply with the code and had to be re-done. Cheryl refused to pay. Chapman sued.

As I’ve explained before, when the job goes bad, you better have a good contract. Chapman didn’t:

• The contract was signed by a friend, not Cheryl, the homeowner.
• Chapman Construction forgot to put their address on the contract.
• The estimated starting and ending date was nowhere to be found.
• A state notice warning about mechanics liens was omitted.
• The state notice on deposit of progress payments was absent.
• The required notice of 3-day right to cancel didn’t appear anywhere.

In short, Chapman Construction’s contract didn’t even come close to meeting requirements in New York General Business Law § 771. 

Now What?

What does a New York contractor recover on a bad home improvement contract? New York courts are split on the issue.

Appellate divisions in the Third and Fourth Judicial Departments rule that failure to comply with GBL § 771 renders the home improvement contract unenforceable and bars recovery for breach of contract.

In the Second Judicial Department, some courts have ruled that failure to comply with GBL § 771 does not make the contract unenforceable. Other courts in the same Judicial Department have come to the opposite conclusion: Failure to comply with GBL § 771 leaves the contract void and unenforceable.

Eventually, the New York State Court of Appeals will wade in with a decision that’s binding on all New York courts. Absent that decision, Judge Fairlie elected to treat the Davis contract as void and unenforceable. Chapman Construction got nothing for breach of contract.

But What About Quantum Meruit?

Couldn’t Chapman Construction at least recover part of what they were owed, "as much as deserved”? That’s what Pennsylvania courts allow.

Sorry. That doesn’t work in New York Justice Courts. Quantum meruit is an equitable remedy, New York Justice Courts lack equity jurisdiction. The result: Chapman’s claim was denied and dismissed.

Don’t make the same mistake. Construction Contract Writer drafts legally enforceable contracts and subcontracts for any state and for any type of project. The trial version is free.

 

Five Hundred Pages Later

As pointed out last month, 31 states require a written contract for residential construction. The question I didn’t answer last month: What can the contractor collect if there is no valid contract?

Last month, a Pennsylvania court framed a very precise answer to that question. First, the facts:

So Young Jang wanted to renovate the kitchen of her home in Berwyn, PA. She selected Artisan Builders Inc. (ABI) of East Norton, PA to do the work. ABI got a signed contract. That was February of 2016. When the kitchen was done, Jang had more work for ABI: new flooring, renewing the master bathroom, baseboards, lighting, crawlspace insulation, replacing joists, multiple doors and frames. In all, ABI wrote five contracts and got eighteen signed change orders.

That was all before June 2016. After working together for over five months, Jang fired ABI and refused to pay any more. ABI was stuck. They filed a lien claim for work completed and not paid. At the close of trial on the lien claim, Judge Tunnell granted Jang’s motion for a non-suit. The 23 contracts and change orders omitted notices and disclosures required by Pennsylvania’s Home Improvement and Consumer Protection Act ("HICPA"). The contracts were invalid under PA law.

Now what? ABI claimed they were still due $35,371. Judge Tunnell gave ABI leave to file an amended complaint for quantum meruit. That’s the reasonable value of services requested by Jang.

Six months later, trial resumed. This time ABI had their paperwork ready, over five hundred pages of receipts, time sheets, and invoices -- including costs and expenses, estimates and invoices all kept by QuickBooks. ABI claimed damages of $43,525 as quantum meruit (the value of services requested). Counsel for ABI added an unjust enrichment claim (value Jang received). Work done by ABI had increased the value of Jang’s home by over $100,000.

Once again, the trial court ruled in favor of Jang. “[ABI] cannot merely submit its own loss, i.e., the value of labor and materials expended, as the measure of recovery, but must instead demonstrate that the defendant has in fact been benefitted . . .” So ABI got nothing.

ABI wanted another try, this time at the appellate court. Last month the Pennsylvania Superior Court reversed the trial court. A busted contract leaves the contractor with:

1. No lien rights.
2. No right to recover for benefits received (unjust enrichment).
3. But with a suit for the reasonable value of services (quantum meruit).

Fine. ABI was going to get something. But the court wasn’t willing to accept ABI’s invoices as the reasonable value of services. “Therefore, we remand to the trial court to determine the reasonable value of the services based on the evidence presented at the January and June 2020 proceedings, and to convene an additional hearing if it deems it necessary to do so.” And that’s where the case of ABI vs. Jang stands now, six years after work started. ABI has to show that every expense on the job, both labor and materials, was “reasonable”.

Don’t go down that road. Working under a void contract is foolish, like building what can’t possibly pass inspection. Construction Contract Writer drafts perfectly legal contracts for every type of work and for any state. The trial version is free.

When Do I Need a Contract?

Every construction project needs a contract. Thirty-one states and the District of Columbia require a written contract on all 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 that the contractor deliver a set of written notices or disclosures before work starts: AK, AL, FL, GA, ID, KS, MN, MO, MT, OK, SD and WA.

And the other seven states? You still have to provide the written Federal 3-day right to cancel on nearly any residential job.

What Happens Without a Contract?

I’ll let a New Jersey case decided last month frame my answer.

Sharon Park planned to move from Illinois to New Jersey and bought a condo in Cresskill, NJ. The unit needed some work. Sharon called a local design and remodeling company, Kuken LLC. Kuken recommended new flooring, new kitchen cabinets, remodel of the master bathroom and painting throughout. That was July, 2017. 

On August 10, Sharon visited the Kuken showroom to review sample cabinets, flooring, and paints. She liked what she saw. Two weeks later, Sharon returned to the showroom and made her selections. A week after that, Sharon and Kuken met again to review the estimate -- $34,380. Sharon gave her OK to proceed and wrote two checks, the first for $9,523 with a memo “cabinets”. The second check was for $9,000 and included a note, “deposit”. She also gave Kuken keys to the condo so work could proceed while she was gone. Completion was to be by the end of October.

All this was perfectly routine -- except for one minor detail. There was no signed contract. What should have been a short, easy project became an expensive odyssey. And it's still not finished. I'll explain.

New Jersey requires a written contract for any home improvement project over $500. The contract has to include specific disclosures. Penalty for failure to comply: Refund of all money collected or treble damages plus legal fees. And it’s always the contractor that pays. The owner has no obligation to sign a valid contract.

Work Starts

Kuken started by removing several cabinet doors as samples. Days later, Sharon sent a message asking for a change:  "If the bathroom remodel is going to take several months then I would rather just replace the vanity in that bathroom . . . and just get kitchen cabinets, floors, and paint done." Keuken agreed to send a new estimate covering just what Sharon wanted.

Four days later, Sharon and Kuken met again at the showroom. Kuken assured Sharon that they would send a new estimate. The job would be finished on time.

As of September 25, there still wasn’t any written contract. But Sharon and Kuken worked together on an application to her home owners’ association. Sharon needed permission to begin work. Kuken supplied the liability certificate required by the HOA. The following day, Sharon advised Kuken that the application had been approved and asked once again for a final estimate. Kuken sent the “final”’ estimate three days later – but still no contract.

In a conference call two days later, Sharon complained that the “final” estimate didn’t mention paint or primer. Kuken offered to correct the estimate and promised that work would be completed by the end of October.

Two days later, Kuken called to say they couldn’t meet the October completion date. Work wouldn’t be done until the end of November. Sharon threatened to cancel the project. Kuken explained that Sharon couldn’t cancel now. The doors were already on order and would arrive by October 6, 2017. Installation was scheduled for October 11. Sharon accepted the new schedule but cancelled the flooring and painting part of the job – reducing her cost by $7,194.70. And she wanted a new estimate.

Kuken sent the new estimate on October 3, 2017 – but still no contract. According to Sharon, this new estimate still wasn’t right. She wanted another estimate for just the cabinet doors.

Kuken responded with two options: The first was to install the cabinet doors and issue a refund for $7,310.83. The second option was to deliver the cabinet doors and hardware and refund $8,810.63. Sharon agreed to the first option if work would be done by October 13, 2017. She refused to sign anything that did "not have [that] level of detail."

On October 5, Kuken sent a new estimate, including a note that delay was possible, depending on the schedule of the manufacturer. Sharon crossed out that language, added her signature and returned the amended estimate. Kuken didn’t like that, insisting on a signed copy of the estimate without any deletions. Sharon never signed the revised estimate.

Here Come the Lawyers

On October 12, Sharon’s attorney sent a letter to Kuken demanding refund of the full $18,523. Now Kuken needed a lawyer. Kuken’s legal counsel recommended limiting contact with Sharon and advised against returning anything to her.

As I’ve said before in this space. When the job goes bad, you better have a good contract. Kuken had no contract at all.

What came next was three years of litigation in New Jersey courts. The trial court awarded Sharon $72,569, including treble damages, attorney's fees and costs. Kuken appealed. The appellate court affirmed that judgment in part, vacated it in part and remanded the case back to the trial court for further proceedings. That’s where the case of Park v Kuken LLP is today, more than four years after work started.

Be aware: Any job without a contract can morph into a slow-motion train wreck. Don’t let your next project run off the rails. Lock in the price and terms before lifting that first tool. Construction Contract Writer does that -- and meets legal standards of all 50 states. The trial version is free.

Traps for Construction Managers

Many experienced construction pros prefer working as construction managers rather than construction contractors. And for good reason. Compared to conventional construction contracting, construction management contracting offers major advantages: far less risk, very little working capital needed, no employees, no inventory, no payables, no warranties or callbacks, no investment, no liens. And it’s perfectly legal.

Better still, some states don’t even require CM contractors to be licensed. More on that later.

What’s different about CM contracting?  A construction manager is a consultant to the owner, pure and simple. The consultant's job is to protect the owner against high costs, delay, shoddy work and risk of loss. No one else on the site shares that agenda. The CM recruits contractors and subs, schedules work, orders materials, and tells the owner when it’s time to pay bills. All contracts are in the name of the owner. So what could go wrong?

Plenty. Here’s a short list.

Trap 1, Bad Contract

CM contracts are very different from construction contracts. There’s no set price for the work. Your contract has to define precisely what’s included in your responsibilities as CM. The only charge is your consulting fee. Usually that’s some percent of construction cost. But it could be a set cost per week or per month. For more on the CM contractor’s scope of work, click here.

CM contracts can include an estimated cost of completion – or set a maximum consulting fee. But that’s not a construction cost. CM contractors don’t guarantee construction costs.

For CM contracts that comply with both federal law and the law in your state, regardless of the type of construction, have a look at Construction Contract Writer. The trial version is free.

Trap 2, Mistakes in Execution

CM contracting is walking a fine line. Slip out of the CM consultant role and into construction contractor mode and you’re in trouble. A case decided earlier this month in Washington DC illustrates the point.

Karen and Charles Evans hired the C.A. Harrison Companies, LLC (CAH) to manage their home improvement project. CAH recommended another company to serve as prime contractor. Karen and Charles ratified that choice. So far, so good. But shortly after work started, the prime contractor quit. CAH didn’t mention any of this to Karen or Charles. Instead, CAH set out to finish the job as prime contractor. Eventually, the Evanses discovered what happened and terminated their agreement with CAH. When CAH sued for breach of contract, the Evanses counterclaimed, arguing that CAH had no enforceable construction contract and wasn’t licensed to do home improvement work. The Superior Court agreed, ordering CAH to refund $314,394.35 to Karen and Charles.

That’s the obvious case. But this theme has subtle variations. For example: Every significant job comes with changes. What does a CM do when the owner wants to change some construction detail? The thing not to do: authorize the change and sign a change order. That’s construction contracting. Instead, draft a change order for signature by both the owner and the contractor.

Another example: Any CM contractor who writes a check to cover job site labor or material costs is courting trouble.

Trap 3, Check Your License

Some states (CA, DC, TN, NY, VA) have decided that CM consultants need a contractor’s license. Other states (MT) have gone the other way, no license is required. Louisiana went half way: CM consultants aren’t construction contractors but have to offer the same warranty that’s required for construction contractors. In other states, the issue is still open. My guess: Construction is a heavily regulated industry. States aren’t going to let clever operators slip under the net by claiming to be consultants rather than contractors. Eventually, most states will task CM consultants with meeting requirements set for conventional prime contractors. For residential work, that will include giving all the notices and making all the disclosures required in residential construction contracts. But this hasn't happened yet. So CM contractors in most states still have plenty of wiggle room.

If you need a good "hands on" guide to CM contracting, have a look at the book Paper Contracting. A PDF download is available for less than $30.

Use a Written Warranty To Limit Claims

 Most builders avoid any mention of warranty in their contracts. Why ask for trouble? Right?

 If that’s your attitude, keep reading. You may be missing an opportunity.

Like it or not, every builder issues at least an implied (unwritten) warranty on every job. In most states, this is called the implied warranty of workmanlike construction. It covers whatever state law says it covers and whatever a court considers reasonable. Except in rare cases, you can’t disclaim this implied warranty. It goes with the job.

But your contract can include an express (written) warranty that limits or modifies your implied warranty. A case decided in Colorado earlier this month is a good example.

Weyerhaeuser manufactures wood floor beams. Dream Finders Homes and a subsidiary installed those I-beams in their new homes. The beams came with a written warranty against manufacturing defects. For breach of this written warranty, Weyerhaeuser agreed to cover the cost of repairs “not to exceed 3 times the original purchase price.” Weyerhaeuser’s warranty disclaimed any responsibility for other damages.

In December 2016, Weyerhaeuser changed the formula for fireproofing their G2 floor beams. The new G4 floor beams had a coat of urea-formaldehyde. By spring 2017, buyers of homes with these G4 floor beams were complaining of a chemical odor in the basement that irritated their eyes and throat. Weyerhaeuser stopped shipping G4 beams and hired a contractor to remove the coating in 38 homes. The cost of remediation was far beyond three times the original price of the joists.

Dream Finder Homes conceded that Weyerhaeuser met their obligation under the warranty. Still, they sued for negligence and fraudulent concealment. Dream Finder’s suit asked damages for lost profits, extra legal expense, financing costs, builders risk insurance and higher operating costs. The trial court awarded damages against Weyerhaeuser of over $14 million. Weyerhaeuser appealed.

What Would You Decide?

If Weyerhaeuser met their obligations (under the contract), were they still liable for negligence? Every law student will recognize the issue: contract law (promises made) vs. tort law (an obligation to the public entirely apart from any agreement). The “economic loss rule” limits recovery in tort when there’s an underlying contract. Someone injured by a breach of contract has no claim for tort damages absent an independent duty of care under tort law.

Last month, a Colorado appellate court (2021 COA 143) reversed the trial court decision. According to the appellate court, Dream Finder Homes was trying to recover for damages expressly excluded by their written warranty. Contract damages were enough. That warranty saved Weyerhaeuser $14 million.

There’s a lesson here for every builder. A written warranty can save you a bundle. Define in your contract exactly:

• What constitutes a defect, and,
• What you plan to do if the warranty is breached.

Any reasonable attempt to resolve warranty claims is likely to be upheld by a court.

So where do you get good warranty contract language? That’s easy. Construction Contract Writer includes warranty language for nearly every trade and every type of project. The trial version is free.