The “Contract Wars”
Bad contracts lead to collections nightmares.
One gloomy morning in 2010, major water damage inundated an upscale Los Angeles residence owned by an unscrupulous and wealthy entrepreneur. He contacted a prominent restoration contractor and signed a generic Work Authorization which did not specify the scope of work or the price.
The laws of California and many other states require contractors working on residential property to provide a sufficiently-detailed written scope of work and an exact price “stated in dollars and cents” in a document signed by the owner prior to the commencement of work. The villain described above later signed a second work authorization which, like the first one, did not include the total price of the work, but did include a price list. But then the job was billed according to a totally different set of prices from Xactimate.
Bad guy owner refused to pay the bill, alleging that the contract was unenforceable as it did not comply with California law because no price or scope was agreed upon. The contractor counter-argued that the owner is seeking an unfair windfall and essentially trying to characterize the work as some sort of a “gift,” and sued for breach of contract, common counts, unjust enrichment and quantum meruit (reasonable value of services rendered).
|A contract is an agreement between two or more parties intended to impose legal obligations. It may be written, oral, or implied from the facts [but cleaning and restoration contracts should always be in writing.|
Significant confusion arose as a result of the fact that two conflicting authorizations were signed. It created an ambiguity as to how the project was to be billed, and which of the two documents was controlling. Moreover, neither of the Work Authorizations looked like contracts, and they poorly described the customer’s payment obligations. All of this led to a heap of trouble, unnecessary legal expenses and delay in settling the invoice.
Finally, the customer alleged that he did not agree to any of the prices set forth in the Xactimate invoice. In deposition, the owner’s counsel asked the project manager where in the price list he could find the amounts billed on the invoice. The project manager had to admit this could not be done. Gulp. After a long and ugly legal battle, including multiple court hearings, the customer finally paid the invoice and the contractor’s legal fees, which saved the project manager’s head from the proverbial chopping block.
Become intimately familiar with the statutes that dictate how to execute and price contracts for residential work in the states where you do business. Revisit these laws on an annual basis because, unlike many other areas of law, they tend to change.
Regardless of the legal requirements, or the type of loss, it is generally the best practice to execute lump sum contracts rather than contract based on a “time and materials” basis or a price list. A very large percentage of legal disputes in the restoration industry arise simply because the owner claims he “didn’t know it was going to cost this much.” Like a law of physics, that statement is always followed by: “If I had known it was going to cost this much, I never would have hired him.” This causes the judge to look at the contractor with a jaundiced eye.
Recognizing that quoting a fixed price for emergency service jobs presents challenges, the best practice is to give a good faith estimate in a signed contract explaining that it is subject to change upon further inspection of the loss, and that the owner will be presented with a change order, as appropriate. Perform a re-inspection on day two or day three of the loss, and execute a change order as necessary. Present the change order prior to performing the change order work, and cease work if the customer refuses to sign it (of course, after taking reasonable steps to secure the property to prevent further damage). Give the customer the feeling of control to dictate how much money he spends, and you will encounter far fewer collections challenges.
Lesson No. 2:
Don’t assume that signing multiple contracts with one customer strengthens your position.
Some project managers tend to assume that when in doubt, it’s better to get another contract signed. In most cases, however, a change order is preferable. This helps to avoid confusion about which documents are controlling. One exception would be if totally different contracts are used for emergency service than structural repairs or contents. Invariably, it is worth a small investment to get a quick review from an attorney to tweak the agreement to customize it to suit any potentially-confusing situations. The expense is a tiny fraction of the cost of litigation.
Lesson No. 3:
Collections are expedited when the price calculations in invoices mirror the pricing structure in the signed contract. The restorer is in a much stronger position when he can respond to price objections by pointing to the specific place in the contract where the customer agreed to that particular price.
Considerable grief can be avoided if each page of a price list is initialed by the customer. For some reason, many restoration contracts refer to price lists “attached,” when there is no attachment. Or, when they were attached to the original agreement, the agreement is forwarded to an attorney without the price list attached. The more confusion and disorganization in a file, the more time it will take a law office to sort it out, and the more legal expense the restorer will incur. None of this is necessary in an organized paper flow system.
Don’t Skimp on Contracts
Aside from high quality workmanship and good people skills, good contracts and documentation are the most important tools to prevent collection hassles, operational inconsistency, strained customer relations and expensive and time-consuming legal controversy. They should be professionally-prepared and reviewed annually by an attorney. This adds a layer of protection in the form of accountability.
Effective restoration project administration focuses on the use of good written contracts; good communications with all involved parties; thorough project documentation, monitoring and recordkeeping; appropriate methods to manage risk; responsiveness, and an ability to understand and coordinate multiple tasks and effectively manage the expectations of the interested parties.
Standards of Care
As a general rule, the legal standard of care is practices that are common among reasonably prudent members of a trade that are recognized as qualified and competent. The written scope of work helps to establish a standard of care of sorts for the completion of a particular project.
There is considerable disagreement in the restoration industry about what methods truly represent the standard of care. Certain industry documents include the word “standard” in their titles, but they are not binding on any court. If they do not represent practices that are common among reasonably prudent members of a trade who are recognized as qualified and competent, they are irrelevant.
Documents that are the result of an unbiased consensus process will likely be deemed the prevailing standard of care. A good rule of thumb is to make reasonable efforts to comply with the IICRC standards. However, the IICRC standards correctly state that it is impractical to prescribe procedures to apply to every conceivable restoration situation, and that under certain circumstances deviation from the standards may be appropriate, especially where common sense, experience or professional judgment may justify deviation. In other words, the industry documents are not intended to be inclusive of all pertinent requirements. It is always best to stay current on new methods and technologies available.
How To Interpret a Contract
Unlike some areas of law, contract law is actually pretty logical. Contracts are interpreted under the “objective theory of contracts.” This means that in the event of a dispute regarding the meaning of a contract, the court will assign the reasonable and ordinary meaning of the words within the four corners of the paper contract.
Although the best business practice is to reach a true meeting of the minds when agreeing on any transaction, enforcement of a written contract in court does not require proof of a meeting of the minds.
The written contract exists to eliminate confusion and disputes as to the reasonable intent and expectations of the parties. Many restoration customers try to insist on services not expressed in the written contract, especially later in the job. Restoring property does not require you to be a mind-reader. However, if your agreement lacks a thorough description of the scope of work, you face an uphill battle trying to exclude something not described in the agreement, unless it is clearly unrelated to the obvious purpose of the work. Do your best to make sure Mrs. Jones understands exactly what you will do to her kitchen, and then get her to commit to it in writing.
How To Draft a Contract
Many lawyers who draft contracts focus on what should be in a contract, but hardly any attention has been paid to how it should be said. As a result, the average contract is cluttered with redundant synonyms, incoherent formatting and legal mumbo jumbo that make it a colossal hassle to read or interpret. But if you’re in control of the language and format of a contract, good things can happen. The goal in contract drafting is to defend ourselves without offending, confusing or overwhelming the customer.
One must strike a balance between protective clauses and generous ones. Customers expect contractors to favor themselves in drafting contracts, but if the contract is too one-sided, it will be the death of the sale. Be firm but fair, and be prepared to make some sacrifices in the interest of practicality.
Contrary to popular belief, it is entirely possible to write strong contracts in plain English! The enforceability of any given contract provision depends on a variety of different factors, not the least of which is the overall clarity of the document. Key terms must be reasonably conspicuous, and the laws of many states specify font sizes and bold text for residential contracts. It is difficult or impossible to draft a perfect contract, and in our litigious society, it is unrealistic to think that any contract is completely “ironclad.” Instead, we should focus on formulating a set of clear, concise and equitable clauses that clearly describe the parties’ reasonable expectations of one another.
Courts appreciate parties who conduct themselves fairly at the contract stage and throughout the business relationship. Although some companies prefer to be gentle in the style of their contract drafting for purposes of protecting their image and avoiding conflict, the contract is the key opportunity to secure the restorer’s legal rights, so it is not the time to be shy. And once it is executed, it can be difficult to reach results not articulated in the contract, aside from ordinary changes in scope and price that would be the customary subject of a change order.
Part II of this article will address home improvement laws, limits of liability, indemnity clauses, arbitration provisions and the delicate process of contract execution. Until then: document, document, document!