Arbitrate Your Construction Dispute

Many times I’ve recommended inserting an arbitration clause in your construction contracts. Why? It’s conventional wisdom:

• Vendors usually win in arbitration.
• Arbitration typically costs far less than a court case.
• Courts won’t touch a dispute if the contract requires arbitration.
• Most arbitration awards are final, not subject to court review.

Of course, there are exceptions. One happened last month, in New Jersey. Here are the details.

Frank Garvey agreed to have Oliver Building Contractors remodel his Strathmere, New Jersey home. The contract price was $389,796. Six months into the job, work was thirty percent complete. But Garvey had paid almost the full contract price. A month later, Oliver sent an invoice for an extra $176,377, claiming higher costs:

• Floor joists ran in the opposite direction shown on the plans.
• Garvey’s planner delayed the job by not having plans ready for the building department.
• Winter weather delayed work even more.
• The cost of construction materials increased while work was halted.

Garvey didn’t agree but paid the $176,377 into his attorney’s trust account. Then he asked Oliver for a meeting on site. Oliver agreed to a walk-through but didn’t show up at the scheduled time.

With no payment, Oliver stopped work. Garvey and Oliver were at an impasse. Their contract called for arbitration of disputes. Oliver filed a demand for arbitration alleging breach of contract. Garvey counterclaimed, alleging violations of New Jersey’s Consumer Fraud Act (CFA) and Home Improvement Practice Regulations (HIPR)"

The Arbitration

After a six-day hearing, the arbitrator found no actual fraud by either Garvey or Oliver. But the arbitrator awarded Oliver $48,396, reasoning that Garvey’s failure to hire a contract administrator created a culture and environment ripe for CFA and HIPR violations. The arbitrator blamed Garvey’s for the confusion. Garvey had to pay.

Now, that’s interesting. New Jersey HIPR was enacted to protect owners. Here, the arbitrator used HIPR to reward the contractor!

Garvey had a few complaints about the arbitrator:

• Interrupted Garvey’s witnesses;
• Criticized Garvey for not hiring a professional to review the contract;
• Questioned whether CFA and HIPR applied;
• Prevented Garvey from fully testifying about defects in Oliver’s work;
• Fell asleep during Garvey’s presentation;
• Ignored the CFA and HIPR;
• Coached Oliver’s attorney;
• Suggested Garvey’s architect was "not trustworthy" and
• Complimented Oliver’s representative for being a hard worker.

Garvey filed suit to vacate the arbitration award. As noted earlier, courts seldom do that. Bias of the arbitrator isn’t enough to vacate an arbitration award. But misapplying the law is a fatal flaw. The court vacated the arbitrator’s decision. In the court’s opinion, nothing required Garvey to hire a professional to manage his project. The CFA and HIPR "place the burden of eliminating informal and confusing communications between a homeowner and a . . . home improvement contractor squarely on the contractor." Oliver, not Garvey, had to be sure the scope of work was clear and change orders were signed. The arbitrator imagined a requirement that simply doesn't exist under the law. The arbitrator's interpretation "turn[ed] the purpose and intent of the [CFA and HIPR] on its head."

Oliver appealed. The appellate court affirmed the trial court’s decision and made a recommendation. Get a different arbitrator when the case goes back to arbitration. Good advice.

Take Aways for Garvey v. Oliver

1. As the contractor, it’s your job to prevent misunderstandings. A good contract resolves disputes before they start. The best contract drafting tool I know is Construction Contract Writer.
2. If you want to require arbitration, it has to be in your contract: who does the arbitration and what rules apply? There are many choices. Some good and some bad. Construction Contract Writer lays out the options.

 

Painful Lesson in Pennsylvania

Ty and Carissa Schott planned to add a pool in the back yard of their Allegheny County Pennsylvania home. Country Pools bid $53,160 for the work and got the job. The Schotts advanced $26,580 as a deposit. To get their backyard ready for the pool, the Schotts paid separate contractors over $20,000 to install a retaining wall and perimeter fence.

Before signing the contract, the Schotts asked Country Pools whether permits were required from their municipality, Franklin Park Borough. Country Pools suggested that “no permits would be necessary until installation of the swimming pool." After completion of the retaining wall, the Schotts applied for their permits. Surprise! Franklin Park's zoning regulations prohibit construction of their swimming pool. The Schotts applied for a zoning variance. No luck. Application denied. The Schotts weren’t going to get their pool.

The Schotts demanded a full refund, including money spent on the retaining wall, fence and permit fees. County Pools refunded $20,429 but refused to refund the remaining $6,151.

The Schotts filed suit and made three claims:

1. Unjust enrichment for the $6,151 Country Pools refused to refund.
2. Omission of contract terms required by Pennsylvania's Home Improvement Consumer Protection Act (HICPA).
3. Fraudulent or deceptive conduct in violation of Pennsylvania’s Unfair Trade Practices & Consumer Protection Law. UTPCPL allows the court to award three times actual damages plus attorney fees. The Schotts claimed actual damages of $32,000.

You decide.

Should County Pools be responsible for the Schotts’ loss, including triple damages and attorney fees?

We don’t know the answer yet. Pennsylvania’s appellate court ruled last month that County Pools’ liability insurance doesn’t cover the loss. “"The purpose and intent of such an insurance policy is to protect the insured from liability for essentially accidental injury to the person or property of another rather than coverage for disputes between parties to a contractual undertaking."

The case goes back to the trial court to decide how much County Pools owes the Schotts. But this is clear. A few minutes of contract drafting could have saved County Pools thousands in legal fees and damages.

First, An extra sentence in County Pools’ contract with the Schotts could have headed off this dispute:

Except as provided elsewhere in this agreement, owner will secure all approvals for the project that are required by government authority, including planning, easements, remediation, environmental, and zoning approvals.

This clause makes it clear. The owner is responsible for approvals that have nothing to do with construction. Every pool contract needs a sentence like this.

Second, every Pennsylvania residential contractor needs to know HICPA. Work valued at $500 or more on any existing residential property requires a written agreement with specific notices and disclosures. The definition of “home improvement” includes just about every type of repair, replacement or installation, including swimming pools. The act applies to work on a single unit in a multi-family residence (such as a rented apartment or condo) or a duplex, even if the owner doesn’t reside on the premises. Ignoring HICPA makes the contract void and unenforceable. Worse, violation of HICPA is automatically a violation of Pennsylvania’s UTPCPL.

Protect yourself. Construction Contract Writer drafts residential agreements that comply perfectly with Pennsylvania law – and the law in any other state, no matter the type of work or the site. The trial version is free.

Collection Made Easy

 Does this sound like any job you’ve had?

Tim Clancey’s Indiana home needed repairs. Clancey signed a contract with Terry’s Discount Windows to do the work. On completion, Clancey had some complaints and refused to make the final payment -- $13,530. When Terry’s demanded payment in full, it got ugly. Clancy, the homeowner, filed suit, claiming fraud, negligence, breach of contract, and non-compliance with Indiana’s Home Improvement Fraud Act, Home Improvement Contract Act, and Indiana Consumer Protection Act.

To collect the last payment, Terry’s had no choice. He filed a counter-claim for $13,530. At this point, Terry’s contract with Clancy took center stage.

After a jury trial, Terry's won. Clancy got nothing. But the trial court denied Terry’s post-trial motion for attorney fees and interest. True, the signed contract included a clause on attorney fees and interest on the delinquent account. But the trial court judge didn’t see it that way. Terry’s counsel considered that a mistake. And it made a big difference. Attorney fees and interest were far more than the $13,530 awarded at trial. Terry’s appealed. And here’s where Terry’s contract saved the day.

Most state courts won't award attorney fees if there is no written contract -- or if the written contract doesn’t cover the subject. So, what did Terry’s contract say?

In the event that Terry's is required to so initiate legal proceedings, Terry's shall additionally be entitled to recover all costs and attorney fees incurred in connection with such collection proceedings, as well as interest on the contract balance outstanding and unpaid at the rate of 1% per month.

A clause like this raises the stakes when there’s a dispute. An owner with frivolous claims or a weak defense has reason to pay up without a fuss. But every state has different law on the award of attorney fees. For example:

California -- The right to collect attorney fees is reciprocal. If a contractor can collect attorney fees after winning a contract dispute, an owner has the same right. California Civil Code § 1717.

Arizona -- Courts can award "reasonable" attorney fees to the successful party in any contract dispute. Arizona Revised Statutes § 12-341.01

Connecticut -- If a contractor has the right to collect attorney fees, a homeowner is given the same right. Connecticut General Statutes § 42-150bb.

Georgia – Better to leave attorney fees out of the contract. Official Code of Georgia Annotated § 13-11-8 gives contractors the right to collect attorney fees if the dispute is over delinquent payment.

Appellate Court Decision

Earlier this week the Indiana Appellate Court came to Terry’s rescue.

1. Parties to litigation pay their own attorney fees unless their contract says otherwise.
2. Terry’s contract provided for an award of fees and interest on the money owed.
3. A trial court judge has an obligation to rule on the award of attorney fees.
4. Judges, not juries, decide what constitutes a reasonable attorney fee.

The appellate court sent the case back to the trial court to calculate attorney fees and interest due. Conclusion: Terry’s was saved by a good contract.

Protect yourself. Write contracts as professional as your work. No matter the state, no matter the type of job, Construction Contract Writer drafts agreements that can save thousands when a job turns bad. The trial version is free.

More on HomeAdvisor (ANGI)

If you’re a residential contractor, you’ve probably been solicited by HomeAdvisor, better known as Angi or Angi’s List. HomeAdvisor was back in the news last week. A federal court certified a class of “service providers” authorized to bring suit against HomeAdvisor. If you’ve paid HomeAdvisor for annual membership or leads in the last 20 years, you may have skin in this game. But don’t expect a windfall from the suit. I’ll explain.

Angi’s business is connecting contractors with owners who need home services – “selling leads” in the vernacular. Angi is a big fish in this business – sales of over $100 million a month – with an advertising budget to match. Call centers in 6 states cover the nation. Some home improvement contractors get several calls a month.

HomeAdvisor’s contract includes an annual membership fee (typically several hundred dollars), a fee for each lead (up to $100), a monthly “help desk” charge of $60 and a cancellation charge (as much as 35% of the annual fee). According to the plaintiffs, HomeAdvisor’s “brand promise” is that these leads are from legitimate, real homeowners serious about getting work done. Plaintiffs claim many HomeAdvisor leads had no value: wrong or disconnected phone numbers, wrong contact information, people who never heard of HomeAdvisor, didn’t own a home or completed their project months or even years ago.

According to plaintiffs, HomeAdvisor knew it was deceiving subscribers:

(1)  HomeAdvisor's call tracking system could connect with only 14% to 30% of leads.

(2)  64% of members tried to stop auto payments to HomeAdvisor.

(3)  80% of HomeAdvisor members dropped out annually.

(4)  HomeAdvisor's top management admitted that many leads were “garbage.”

(5)  HomeAdvisor retained profile pages of former members on its website and falsely represented that the member was no longer in business or not accepting new clients.

Under the first four points (“deceptive practices”), plaintiffs claimed money damages for fraud, presumably at least a partial refund. For the fifth point (“misappropriation”), plaintiffs asked for an injunction to stop the practice but no money damages.

The Upshot

The court refused to certify a class for the deceptive practice claims. Fraud statutes in each member’s home-state had to govern any decision. And fraud statutes vary too much from state to state. Claims made about HomeAdvisor sales practice might be fraud in some states and not in others. A class action suit was a poor way to resolve these claims.

The court certified a class for the misappropriation claims. That litigation will go forward. But there won’t be a payout to former members. That’s a big win for HomeAdvisor.

Still, HomeAdvisor has been under pressure to change their sales pitch. Last April, HomeAdvisor reached an agreement with the Federal Trade Commission to refund over $3 million to 110,372 businesses who bought HomeAdvisor memberships. The FTC complaint charged HomeAdvisor with making false, misleading or unsubstantiated claims about the quality and source of their leads. If you signed a HomeAdvisor contract and have a claim number, use this link to apply for a refund. The application deadline is February 24, 2024.

My Advice

HomeAdvisor has plenty of competition: Houzz, Porch, Thumbtack, Yelp, Bark and Google. Before making any commitment to buy leads, consider the options. No matter the choice, you’ll have to sign the vendor’s “standard contract”. You can’t write that agreement. But you can draft the contract for any of your construction projects. Use Construction Contract Writer to draft letter perfect agreements for any type of work in any state. The trial version is free.

Every Contract Requires a Meeting of the Minds

Dr. Julie Clark, a Tennessee veterinarian, wanted to fix up her home before selling. After a meeting on site, Dr. Clark selected Jeffrey Givens, a handyman, to do the work.

According to Dr. Clark, she agreed to pay Givens $9,775 for a total of four tasks:

• $8,500 to paint the house,
• $400 to remove and repair kitchen cabinets,
• $675 to strip, prime and paint those cabinets, and
• $200 to replace the bathroom countertops.

Givens didn’t remember it that way. He remembered bidding $11,575 for the entire job, including work on the driveway and garage floor, painting and replacing handrails on the porch. Dr. Clark admitted asking for a quote on that extra work. But Dr. Clark insisted none of this extra work was authorized.

Dr. Clark hoped the work would be finished in two weeks. But she didn’t specify a deadline or completion date. Givens estimated six-weeks would be needed just for painting the inside of the house. But his understanding was he could take as much time as necessary to do a good job.

Dr. Clark kept detailed notes on their conversation and the bid price. But there was no written contract. You know what’s going to happen next. When the job ran off the rails, Dr. Clark and Givens launched a 7-year court battle. Here’s how it happened.

Dr. Clark advanced Givens $2,500 to start work. That was January 2016. Two weeks later, she checked on the job and was disappointed. Not much progress. Givens assured her he would pick up the pace. Givens asked for and got another $2,000.

Dr. Clark returned to the job site a week later. Still little progress. According to Dr. Clark, she gave Givens a deadline. She would hire someone else if he didn’t do better in the coming week. Two weeks later, she hired a new painter.

Now What?

Dr. Clark demanded return of $3,700, part of the $4,500 she had paid Givens. When Givens didn’t pay, she filed suit for breach of an oral contract. In court, Givens claimed he was actually due more than the $4,500 he had already been paid. The trial court found there was a “mutual mistake” in an oral contract and entered a $5,075 judgment in favor of Givens. Both Dr. Clark and Givens appealed.

The appellate court reversed the trial court decision and remanded the case back to the trial court for another decision. After an attempt at mediation, the second trial court decision awarded Givens $4,500, the amount he had already been paid. This time, the trial court ruled there was no oral contract. Givens could collect for his time and materials and nothing more. Every contract requires a “meeting of the minds”. Dr. Clark and Givens had never agreed on the cost, contract terms or the work to be done. Again, both Dr. Clark and Givens appealed the trial court decision.

Last month (November 2023) the appellate court affirmed the second trial court decision. “The oral contract contemplated by the parties was not sufficiently definite to be enforceable because the parties did not agree on essential terms.”

After seven years, including two trials, mediation and two appellate decisions, the case of Clark v. Givens may finally be resolved. My advice. It’s easy to avoid legal nightmares like this. Take a few minutes to write a good, enforceable contract, even for simple jobs. There’s no better tool for creating a meeting of the minds than Construction Contract Writer. The trial version is free.

Note for Tennessee contractors: Anyone can work for wages. But Tennessee is one of 31 states that requires a written contract for home improvement work. Tennessee’s Home Improvement Contractor Act prohibits oral contracts on home improvement jobs.

 

Working Without a Written Subcontract

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

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

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

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

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

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

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

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

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

Non-disparagement Construction Contracts

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

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

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

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

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

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

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

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

Can You Enforce Non-disparagement?

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

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

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

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

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

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

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