READ ABOUT: What you should know about construction contracts

By Rudman Winchell Attorney

By: Rudman Winchell Attorney Robert W. Laffin Jr.

CONSTRUCTION CONTRACTS

If you are a property owner and are going to have work done on your property, there are a number of statutes you should know about. If you are a contractor (even if you are a small, one-person operation) you also need to be familiar with these statutes. Taken together, they confer benefits on both the property owner and the contractor, but also impose obligations on both. Failure to be aware of them can result in unpleasant surprises for either side.

There are several statutes addressing various types of construction, and some of them overlap. Each of the statutes is considered separately below:

Home Construction Contracts

Title 10, Section 1486 et seq. of the Maine Revised Statutes provides some basic obligations and protections on home construction contracts. This applies to any contract “to build, remodel or repair a residence” and includes not only structural jobs, but also plumbing, heating, carpentry, window replacements, and the like.

  • Limitations: this statute applies only to contracts for more than $3,000, and only regarding work on residential buildings with 3 or fewer units. The statute requires the contractor to provide the homeowner with a written contract, signed by both the contractor and the homeowner, that sets forth certain basic information, including:

 

  • Contact info: Names, addresses and phone numbers of both parties
  • Location of the property where the work is to be done
  • The estimated start and completion dates
  • The Total Contract Price (or, if the work is “cost-plus”, then the agreed formula and an estimate of the cost of labor and materials)
  • Method of Payment (the initial down payment cannot be more than 1/3 of the total contract price
  • Description of the work and the materials to be used
  • A Warranty statement that reads:

“In addition to any additional warranties agreed to by the parties, the contractor warrants that the work will be free from faulty materials; constructed according to the standards of the building code applicable for this location; constructed in a skillful manner and fit for habitation or appropriate use. The warranty rights and remedies set forth in the Maine Uniform Commercial Code apply to this contract”;

  • Change orders: a provision providing that change orders affecting the contract price must be in writing and signed by both parties, and must state both the previous price and the revised contract price

There are certain other disclosure requirements, as well.

Penalties.

Many homeowners and contractors are not aware of this statute, and others are aware of it and proceed without a contract anyway. Failure to provide by the statute may be costly for a contractor. The statute provides for a civil penalty between $100 and $1000 for a violation. In addition, a violation of the statute is deemed to be “prima facie evidence” of a violation of the Unfair Trade Practices Act. That does not mean that it is automatically a violation of the UTPA, but it might be. And that could be even more costly for the contractor, because the UTPA awards the homeowner attorneys’ fees if a violation is proved. This could conceivably end up being more than the contractor is trying to collect; at the very least, it may seriously reduce the amount the contractor ultimately collects.

Opting Out.

Certain jobs are small and many times the property owner and contractor know each other or for some other reason are comfortable without a contract, so they just move forward on a handshake. To make this possible without running afoul of the law, the statute provides that, if a contractor informs the homeowner of all the homeowner’s rights under the statute, the parties may then agree to do without. So, contractors beware – if you and the homeowner decide no contract is needed, you would do well to get a written statement, signed by you and the homeowner, that you advised the homeowner of his/her rights under this statute, and you and the homeowner agreed such a contract was not necessary. That way you will have some proof you followed the statutory requirements.

Attorney General’s Forms.

Preparing a contract does not need to be time consuming or expensive. Contractors can download a basic form contract from the Maine Attorney General’s website. In addition, homeowners can download numerous helpful brochures and explanations of their rights under this statute and others. Many contractors and owners find that, with contracts, the more detail provided the better. Especially in the description of the work to be performed and the materials to be used. For more information, see the Attorney General’s website: http://www.maine.gov/ag/consumer/consumer_law_guide.shtml

Insulation Contracts

Title 10 M.R.S. §1481 contains some further requirements for contracts to install insulation in a residence, or multifamily housing of up to three units. Under this statute, there must be a written contract and it must provide at least the following information:

  • Resistance Factor. The R factor per inch, and the thickness in inches to be installed
  • Type of Insulation.
  • Area covered. Estimate of square footage.
  • Degree of Flammability.
  • Method of Installation.
  • Type of Ventilation. Type to be installed, or if no ventilation to be installed, the contract must so state.
  • Guarantee against Settling. Whether there is a guaranty against settling and if so, to what degree, and how long is the guarantee for. If there is no guarantee the contract must so state.
  • Type of Vapor Barrier. Or, if no vapor barrier to be installed, the contract must so state.
  • Area to be Insulated. Meaning, the areas of the building to be insulated.
  • Changes Required. Identify any structural changes required to install the insulation.
  • Work Following Insulation. And restoration/cleanup work to be performed.
  • Provisions of Warranties.
  • Name, Business Address and Owner of the firm providing the goods and services.
  • Formaldehyde Insulation: If formaldehyde insulation is to be used, there must be warnings of side effects and possible allergic reactions and the contract must state whether the contractor will take corrective action if an allergic reaction develops.

Note several things: (1) the requirement for a written contract here applies regardless of contract price. There is no minimum of $3,000, as there is with Home Construction Contracts; (2) if the insulation contract price is greater than $3,000, all the contract requirements under the Home Construction Contract statute will also apply; and (3) there is no opt-out provision, as there is with Home
Construction Contracts.

Penalties.

The statute provides for a fine for failing to provide the owner (or tenant) with a contract containing at least the above information. The (civil) fine is not less than $200 for the first offense and not less than $500 for subsequent offenses. There is an exemption for contractors who are not primarily engaged in the insulation business (meaning they don’t receive more than $2500 for labor, or $4500 for materials in any calendar year for the installation of insulation).

In addition subjecting the contractor to the civil penalties, a violation of this statute “shall constitute a violation of the Unfair Trade Practices Act.” This is different from the Home Construction Contracts statute, which provides that a violation of it is prima facie evidence of a violation. That means it is some evidence, but the evidence may be rebutted, so that a violation of that statute does not automatically mean the UFTPA will apply. But in this Insulation Contractors statute, it says that a violation “shall” be a violation of the UFTPA, so the UFTPA automatically applies once a violation is proved. The application of the UFTPA is important, because it provides for attorneys’ fees to be paid to the substantially prevailing party. These fees are paid by the losing party, so this provision is a substantial incentive for contractors to comply with the statute.

General Construction Contracts

Title 10 M.R.S. §1111 et seq. governs construction contracts generally, not just home construction contracts. This statute applies to written or oral agreements for labor or materials for work on any real property, residential, commercial or governmental. There is no dollar value limitation.
This statute applies to excavating, grading, filling, construction of driveways, roads, bridges, wells, septic systems, etc. It also applies to work by architects, engineers, surveyors and landscape architects.

The statute applies not only to contracts between the owner and the contractor, but between the contractor and any subcontractors. It mainly provides basic terms regarding payment, interest, and retainage.

Contractor – Owner Agreement.

If the contract (written or oral agreement) does not provide for terms of payment, then the statute provides that the contractor can bill the owner at the end of each billing period (the “billing period”, if not specified in the agreement, is the calendar month), and the owner must pay within 20 days. If payment is not made within this time, interest on the unpaid balance accrues starting with the 21st day. The interest rate is a statutory formula, which currently is 6% above the most recent year-end T-bill rate. This would be approximately 6.11% in 2012.

Contractor – Subcontractor Agreement.

As between the contractor and subcontractors, the statute requires certain disclosures and provisions. This is unlike the provisions between the owner and contractor, where the parties can make their own agreements, and the statutory provisions apply only if they don’t.

Requirements: The contractor MUST disclose to the subcontractor (or material supplier) the due dates for receipt of payment from the owner. The payments from the contractor to the subcontractor are due 7 days after receipt by the contractor of payment from the owner. If payments are delayed, the contractor must pay the subcontractor interest at the same statutory rate above.
These provisions are mandatory – the parties cannot agree otherwise. If the contractor fails to disclose to the subcontractor the payment dates for payments from the owner, then the contractor must pay the subcontractor within 7 days of the due date whether or not the owner has paid the contractor.
Invoice Errors. The statute also requires that the owner notify the contractor within 10 days if any invoice is incorrect or incomplete, otherwise the document errors are waived. The same applies between contractors and subcontractors. This normally will not extend the due date for payment; payment is still due on the original date if the person submitting the invoice has completed the work in a timely manner.

Retainage.

If the contracts so provide, the owner or the contractor may withhold retainage in accordance with the agreement, but the retainage must be paid within 30 days of final acceptance of the work. If an owner or contractor unreasonably withholds final acceptance of the work (or materials), or fails to pay the retainage as required by the statute, they can be subject to certain penalties.
Penalties. If an arbitrator or court finds that an owner or contractor has failed to comply with the payment provisions above, they must award a penalty of 1% per month of any amounts wrongfully withheld. This is in addition to payment of the actual amounts owing. Note that the statute does not prevent an owner or contractor from withholding payment in connection with a dispute over quality or performance of the work, but the amount withheld must bear a reasonable relation to the value of the claim. The owner can’t withhold payment for the entire job over a dispute about the quality of one small portion.

If arbitration or a lawsuit is brought, the statute requires that the substantially prevailing party be awarded reasonable attorneys’ fees. This is the case even if the agreement between the parties provides otherwise.

Conclusion.

It behooves the owner, the contractor and any subcontractor to carefully read the statute prior to contracting, and to know their rights. It is especially important that owners and contractors understand these provisions and penalties for violating them, before withholding payment from contractors or subs. An owner who withholds more than is reasonably attributable to what he considers is a defective aspect of the work or materials, may unwittingly find himself in the position of paying the contractor’s attorneys’ fees if he (or she) runs afoul of this statute.

Mechanic’s Lien Statute

Title 10 M.R.S. §3251 et seq. contain the provisions regarding what are commonly known as mechanic’s liens, or materialmen’s liens. This is in addition to the provisions of the statutes discussed above, and provides that anyone performing labor or furnishing materials relating to real estate or improvements thereon (including not only persons in the construction trade, but also surveyors, architects and engineers, among others), under a contract with, or by the consent of the owner of the property, has a lien on the building and the land it is located on to secure payment for the work/materials.

Note that while a person contracting with an owner can file a lien, there is not a requirement that there be a contract signed by the owner. Anyone performing labor or furnishing materials can file a lien as long as the work was done, or materials furnished, with the consent of the owner. (Similarly, an owner may avoid having a lien placed in the case where there is no contract, if he provides written notice to the person performing work or furnishing materials that he will not be responsible.) This means that subcontractors can have a lien even though they did not have a contract directly with the owner.
Notice of Lien must be filed within 90 days. If a person claiming a lien does not have a contract with the owner (such as a subcontractor), then they must file a notice of lien in the registry of deeds where the property is located within 90 days after ceasing to provide labor or materials.

The recorded notice of lien must state the amount due, with all just credits given, must describe the property affected by the lien, and the name of the owner, if known. The statement must be subscribed and the truth of it must be sworn by the person claiming the lien. A copy must be provided to the owner(s) of the property by mail, with a certificate of mailing issued by the post office.

A person who does have a contract with the owner does not need to file a notice of lien within 90 days to preserve their claim, but they often do, as it puts the owner and the public on notice of the claim, and may also protect them in case the property is sold.

Filing of Complaint must be filed within 120 days. An action by the claimant against the owner must be filed in the District or Superior Court within 120 days after the last labor is performed or the last materials provided. Once this action is filed, all matters relating to the work or materials, including contract issues and violations of statutory provisions relating to construction contracts discussed above, are likely to be litigated.

Filing of Notice of the Complaint must be filed within 60 days of filing the Complaint. A further filing is required: A certificate issued by the court clerk setting forth the names of the parties, the date of the complaint and its filing date, and a description of the real estate, and an affidavit of the claimant setting forth similar information, but also including the name, address and telephone number of the claimant or the claimant’s attorney, must be filed in the registry of deeds in the county where the property is located.

Protection in Event of Sale of Property. If the property is sold to a bona fide purchaser during this process, the purchaser takes the property free of the lien except to the extent the notice of lien or the court action described above have been filed and recorded.
Residential Projects. There is a provision in the statute that the owner will not be liable to subcontractors to the extent he has already paid the contractor for the subs’ work at the time the court action was commenced (in the case of a contract) or after receiving written notice from the contractor/subcontractor (if there is no contract). A subcontractor can enforce a lien against the owner only to the extent the owner had not paid the contractor for the work at these times.
Remedies. The statute provides that the lien may be enforced through attachment procedures, or though sale of the property, conducted by an officer of the court. These procedures may be employed where the owner is in financial difficulties and cannot pay, but often the amounts are paid to the claimant prior to any date set for the sale. If an owner wants the lien released, as in cases where the owner is trying to sell the property, they may petition the court to release the property upon providing a bond sufficient to pay the claimant any amounts he is ultimately determined to be due.

CONCLUSION

The above summaries are just that – summaries of the main provisions of the statutes indicated. They are simply to provide a general overview of the statutes that exist, for informational purposes only. Anyone with an actual legal dispute involving any of the matters referenced above should see an attorney for a full review of their case before taking action. There are smaller details and exceptions in the statutes that may affect the situations; the above review is not exhaustive. Because of the deadlines that may apply, it is important for contractors and subcontractors to act promptly.
Note also that there is now a State building code, the Maine Uniform Building and Energy Code. Enforcement of the Code was phased in, but by July 1, 2012, all municipalities of over 4,000 residents must enforce the Code. For municipalities with fewer than 4,000 residents, the Code does not apply unless the municipality has adopted the Code (or parts of it). In either case, we recommend you check with your municipal Code Enforcement Officer.

Disclaimer


These materials have been prepared by Rudman Winchell for educational purposes only. They should not be considered legal advice. The transmission of this information to you is not intended to create a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should not send any confidential or private information to Rudman Winchell until a formal attorney-client relationship has been established, in writing.