This blog is taken from a webinar that was presented by SunRay Construction Solutions and Patrick L Edgerton from Edgerton & Edgerton, Attorneys at Law. Patrick is a board-certified construction attorney, who serves clients in the state of Illinois. In this blog we will discuss how to get paid as a contractor, subcontractor or supplier.
Written Contracts are Important
Written contracts are important. Ironically, most of the time they are not required to win, but without them, it makes it hard to define the scope and the prices, which leads to the next part – what is the most important thing to include in a written contract?
a. What to include in written contract
Sometimes contracts written by lawyers have 14 pages of single space small type of terms and conditions, which is fine. But there are key things when you actually litigate, not just drop construction contracts that you like to see.
b. Most important parts are the scope of work and price(s) to be charged
One is the scope of work and the prices to be charged. This is because the debate comes in many times. Attorneys deal with homeowners or other property owners as to what was included in the scope of work and the price to be charged. It is known that sometimes a contract has in mind what they believe is included. But that does not always equate to the same or similar thought of what the owner believes is included.
As a balanced approach to this for a multi-million-dollar job, you have drawings with specifications. When you have similar jobs, many times it is just a list. You have to take a balanced approach; you do not want to spend $20,000 to do a $10,000 job.
But it is important to make sure you have an accurate scope of work and the prices to be charged and at least a balanced approach depending on how big the job is.
c. Attorney fee provision
There are so many individuals who do not have any attorney fee provision in their contract. That does give you some teeth if you have to file a lawsuit.
It is best if it is in your favor where they agree to pay your reasonable attorney’s fees and costs. But many times, it is fair to have it as a prevailing party clause. When you see the example language below, note that it does not have to be exactly that language.
This language when it comes time to file a lawsuit will help you win:
In the event, the parties take action to enforce the terms and conditions of this contract, the prevailing party shall be entitled to reasonable attorney's fees and costs.
It is not always automatic; the judge will have the final say as to whether you win attorney’s fees if you are the substantially victorious party. Many times, judges have their own opinion. It is all over the place as to how much they will give, when they will give it, and if they give it.
But it does give you at least a better opportunity to settle with a defendant knowing that if they lose, they might have to pay your attorney’s fees. Do not forget the attorney’s fee provision in there. Obviously if it is your contract, it does make the customer agree to pay you, but be willing to do prevailing party if you can.
Sometimes other people just want it on their side, but that may compromise prevailing party if they are not willing to do prevailing party. That may be one of the red flags that you need to think of when you contract either with this general contractor when you are the subcontractor or the property owner when you are the general contractor.
Venue (Forum Selection Clause) – Personal Jurisdiction
Now this is the part that comes up – venue. Of course, you want to sue in the county that is close to you because that is your home court. So you can include a forum selection clause, where the parties agree that in the event of litigation, the venue shall be ‘ABC County.’
Now venue and personal jurisdiction are two separate concepts. Personal jurisdiction has to do with whether you can sue someone in Illinois. And when you are doing construction in Illinois, that does not come up too often, but it can if someone tried to hire you for Indiana, Wisconsin, or Iowa.
If you can slip in a personal jurisdiction where they agree that in the event that people have to enforce the terms or defend the terms of the contract, that each party submits to the jurisdiction of Illinois, that at least helps you in Illinois.
And then you agree that the venue shall be ‘XYZ’ and pick whichever county you want. So personal jurisdiction is a state concept. Venue is generally a county concept or a federal versus state court concept.
So it is important if you are commercial. If you can put that in there, it makes it more efficient for you and it makes it more efficient for the litigation if it is near you, for your purposes. Now if they have to travel, so be it. But we are talking about getting paid as the individuals who are doing the work or contracting to do the work.
However. There are exceptions:
One is if it is a consumer.
a. If consumer
If a consumer, you have to sue where the contract was signed, or the defendant resides. When referring to a consumer, the consumer uses the same definition as the Fair Debt Collection Practices Act, the Consumer Fraud Act, and the Family Expense Act.
It is basically done for someone’s personal use, for example, their home. Sometimes people think residential means commercial consumer, not necessarily if you are contracted with a landlord for a tenant unit. That is not consumer, that is technically commercial.
But if it is consumer, you are contracting directly with the property owner for their home, you have to sue where the contract was signed, or the defendant resides.
For example, there is a lady who contacts an attorney. She lives in Kendall County and the contractor resides in McHenry. There was a foreign selection clause, and the lawyer sued McHenry.
The lady could not afford to hire a more expensive attorney even though the dispute was for $3,000. So she just hired a counterclaim under the Fair Debt Collection Practices Act for $1,000. The lawyer actually paid $1,000 during the pendency of the litigation in order to get that part of the case dismissed.
b. If not consumer
For non-consumers, you can sue basically wherever the transaction took place, and if there is a Foreign Selection Clause. You can include a venue clause in whichever county you desire. You can have out-of-state customers agree to submit to personal jurisdiction in Illinois.
Arbitration clauses are in one word, ‘cool.’ They are a barrier to entry to getting paid.
a. Private arbitration is expensive
Arbitration is not cheap, and it is not quicker on average than just going to court. Who pays for the judge? The people pay for the judge. You are not paying for the judge’s time.
And keep in mind that for arbitration you are not just paying the demand to get started for the arbitration facilities, you then have to pay the arbitrator. This on average is probably $400 to $600 an hour.
That gets expensive, because usually what the arbitrator will do is, they may say that they need an advance with half the amount from each person. That gets very pricey.
So unless you want to deal with the cost of arbitration and the arbitrators, it is recommended not to go ahead with this option. It can be faster, but you are going to pay a prime dollar for it. But keep in mind it only goes fast if both parties want it to go fast.
You may find this hard to believe, but if one party wants to slow it down, it is not that hard to slow down a case. It is hard to stop a case, but it is not too hard to slow it down.
b. If more complex with multiple parties, may be better route
There is an exception when you have a more complex case with multiple parties. Sometimes you get mechanic’s lien cases, and they just go bad. When there is a dispute between the property owner and the general contractor it is usually a multi-million-dollar case. Whenever such a dispute happens, all the money stops.
For example, even if the contractor might have something to do with the structural steel. That seems to be where it blows up the most – when it gets to be the biggest litigation. The money stops and they just stop paying everybody.
Then you start getting multiple liens in place and people file suits. Sometimes there can be up to 30 parties to a lawsuit where everyone has their own lawyer. Each subcontractor and sub-subcontractor (material providers) have filed a Claim for Lien, and there is that much litigation.
It is hard to try to litigate a mechanic’s lien case with 30 parties before a court. It would be very difficult. The arbitrator will then basically take parts of the case where they try to schedule which part you litigate, meaning the electrical contractor or the plumbing contractor.
Now could something come up when your lawyer is not there that could adversely affect you? Yes, it could. If something comes up between the general contractor and the owner, and you did not have your lawyer, they are paying them, but it does provide for a more balanced approach.
Generally speaking, judges want everyone there. Attorneys may sometimes try to get judges to not formally sever a case, but basically litigate this part. Generally speaking, the judges will not do that.
So it is recommended not to agree to arbitration in the contract. If you think it is better after you do it and the parties agree, then it is more effective or with a more complex or expensive litigation. This means there will be multiple parties. You might want to consider it as well.
Keep in mind that if it is not in a contract, it does not mean you cannot do it, it just means everyone has to agree to it later.
Written Change Order Requirements Are Good
Next is written change order requirements. People keep hiring lawyers that do not do litigation and put this in the contract. Getting written change orders is important. It is probably the most important thing to do.
It is recommended that you keep projects moving. You cannot just stop a construction project, go back, type up agreements and send it. It is recommended that you get an NCR paper where you have the white, yellow, and pink. You can draw it up on there at least better than nothing as to what the homeowners were requesting.
Then you at least do a ballpark description of the scope, the date, and the price to be charged. You might be off a little bit, but it is better than nothing. Then they could agree to it. If they did not, you could basically write on there that you proposed, and they rejected it. It gives you good documentation of what was discussed during the project.
Even without change order requirement, good practice is to put change orders in writing
But it is very important to get written change orders when you can. The problem is when you require it.
For example, there is a case where in the contract it required written change orders. The problem with the clear and convincing standard which is ‘clear and convincing evidence.’ Think of it this way – when you are in court, you will hear about the standard ‘beyond a reasonable doubt.’ That is criminal.
Then you might hear proponents of the evidence – that is when it is than 51% more likely than not. That is the lower standard to prove your case. You have to prove that it is more likely than not what your contract was, whether you scope your prices that you substantially performed, you credit the amounts due, and then you have your amount due.
However, if you have a written change order requirement, meaning a signed and written change order, and you do not comply, that standard jumps to clear and convincing. This is somewhere between preponderance and beyond reasonable doubt.
But it is a higher standard, all because you and most likely in your contract you included a written change order requirement. Get it out of there! This does not mean you should not do it. Always make sure you try to, the best you can – even if it is just an email.
The nice thing about phones now is you can email your written proposal to anyone and then basically tell them that if you agree with this, just send an email back saying you agree. Right now, with litigation, you can have a full-blown contract with a battle of documents with emails.
So if you send at least a quasi-detailed email with a scope price and they email that they agree. Then you call it Change Order #1. Now boom, at least you have something. Just do not make it a requirement. It becomes very difficult for litigation to prove by clear and convincing evidence and it is clear and convincing evidence that they waived (the written change order requirement).
So get rid of them but follow them. It may be unusual to advise not to put it in the contract but to do it anyway, and we are doing that now.
If Private Job, What Must Subcontractor do on Owner-Occupied Property to Perfect Mechanic’s Lien?
Mechanic's liens are a very powerful tool. They allow you to have a non-consensual prejudgment lien on someone’s property because you fill out a form.
a. Mechanic’s lien requirements for subcontractor vs non-contractor
Now we are not going to get into all the requirements of a subcontractor versus a non-contractor. If you are a subcontractor, you have to serve your subcontractor notice on the owner and the financial institution such as the mortgage company.
Then you have to record a Claim for Lien verified under oath. But there are very few areas that have non-consensual liens. It is very similar to a mortgage but remember a mortgage is consensual. The property owner literally signs to the lender that they hereby give you a mortgage as security for the note.
The mechanic’s lien says that even though the owner has not given you the consent, has not given you the authority to put a lien on you, you can do it unilaterally now. Of course, there are a lot of rules and a lot of consequences if you lie.
b. Misdemeanor charges if you overreach
There are even misdemeanor charges if you overreach too far. But it is a very extreme concept, and everyone forgets how extreme it is. Because it has been around since the late 1800s.
So keep in mind that it is great to do it and it does have teeth. It ties up the property but there are a number of individuals who think that if they put a lien on the property that the owner cannot sell it. But the owner can sell it, it is just subject to the lien or they can bond over it now.
c. Can you enforce a waiver of mechanic’s lien rights in contracts?
The answer is no. You cannot write in your contract that they waive Illinois mechanic’s lien rights. That is not permitted. It is in the act. The supreme court says you cannot do it and there is a statute that says you cannot do it. So do not do it because it is not enforceable anyway. You are just giving yourself a false sense of security if you are with an owner who is trying to get you to waive it or a general contractor trying to get a subcontractor to waive it.
d. Invoicing regularly
Invoicing regularly as a project goes along is great evidence if you go into court. Because if you think about it, if you keep invoicing someone and they never object to an invoice, they keep having you work, and then at the end they object to your invoice, that is a very effective cross-examination technique.
This is to try to convince a judge that they are just making this up as a pretextual reason not to pay you because they should have objected when you first submitted the invoice.
e. Mechanic’s lien on private jobs
For private projects, you are considered a contractor for either owner-occupied or non-owner-occupied commercial. This is the part that is weird – for a general contractor, you do not have to record a Claim for Lien.
It is either to record a Claim for Lien or file a lawsuit within four months of the completion date. But if you file the lawsuit, you also file something called a Lis pendens, which is a record against the property.
The subcontractor has to serve a subcontractor’s notice on the owner and the financial institutions within at least 90 days. Generally speaking, there is an argument for residential within 60 days. It says it is a requirement, but it is not. It just says if the owner is prejudiced.
Generally speaking, it is for the 90 days of the last day of substantial work on both the owner and the financial institution, and then still record a Claim for Lien within 4 months. The requirements of a subcontractor’s notice are above, and the Claim for Lien are here.
Public Jobs for a Governmental Entity
We talked in part about the public projects you are not supposed to do. Now we will talk about the Home Repair Remodeling Act.
This act is a subsection of the Consumer Fraud Act which federally requires that you have written contracts that have to have certain elements in them and that you have to give what they call a consumer rights brochure to the property owner.
This is for consumer transactions – residential properties generally speaking. You have to comply with this otherwise it kind of gives them an open door to file a counter claim against you for a violation of the Home Repair Remodeling Act, or more importantly, the Consumer Fraud Act which is a derivative of the Home Repair Remodeling Act, or vice-versa.
It has some consequences though; they can see you individually under the Act even though you are a corporation or LLC. And it provides for attorney fees and punitive damages. It is not automatic. There is the K Miller decision that came down that says just because of technical violation you cannot enforce your contract or that you automatically lose.
That is not true. But it gives them arguments. It can be problematic. The Illinois Attorney General’s website has an excellent section on it. There is even an example form that you can give them with the acknowledgment form that you can hand to the customer to have them sign showing that they got or received the consumer rights brochure.
It even tells you the terms that you should include in your contract. So basically, make sure you look at the requirements or the basic terms to be included in the contract. Make sure it is in your contract. Do not give a consumer the right to use that as a defense against you even though it is not as automatic as it used to be.
Special Considerations if Residential – Home Repair and Remodeling Act
According to the HRRA, the following apply:
a. Consumer Fraud and Deceptive Business Practices Act
The act provides in pertinent part, as follows:
Unfair methods of competition and unfair or deceptive acts or practices, including but not limited to the use of employment of any deception, fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact, with intent that other rely upon the concealment suppression or omission of such material fact, or the use or employment of any practice described in Section 2 of the ‘Uniform Deceptive Trade Practices Act’ in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled deceived or damaged thereby... (815 ILCS 505/1, § 2).
b. Illinois Consumer Fraud and Deceptive Practices Act
Furthermore, the Illinois Consumer Fraud and Deceptive Practices Act, among other things, provides:
Any person who suffers Damages as a result of a violation of this act committed by any other person may bring an action against such person. The Court, in its discretion may award actual damages or any other relief which the court deems proper... in any action brought by a person under this section, the Court... may award, in addition to the relief provided in this section, reasonable attorney’s fees and costs to the prevailing party... (815 ILCS 505/1, § 10(a))
c. Consumer Fraud Act amended by Home Repair and Remodeling Act
Also, effective January 1, 2000, the Consumer Fraud Act was amended by the Home Repair and Remodeling Act, 815 ILCS 513/1 et. Sec. The Home Repair and Remodeling Act provides:
1. The Attorney General or the State’s Attorney of any county in this State may bring an action in the name of the people of this State against any person to restrain and prevent any pattern or practice violation of this act. In enforcement of this Act, the Attorney General or the State’s Attorney may accept an assurance of voluntary compliance from anyone engaged in any conduct, act, or practice deemed in violation of this Act.
2. All remedies, penalties, and authority granted to the Attorney General or the State’s Attorney of any county in this State by the Consumer Fraud and Deceptive Business Practices Act shall be available to him or her for enforcement of this Act, and any violation of this act shall constitute a violation of the Consumer Fraud and Deceptive Business Practices Act.
The HRRA requires generally, the following:
i. Written contract
costs enumerated. Prior to initiating home repair work for over $1,000, a person engaged in the business of home repair or remodeling shall furnish to the customer for signature a written contract or work order that states the total cost, including parts and materials listed with reasonable particularity and any charge for an estimate. In addition, the contract shall state 5 of the business name and address of the person engaged in the business of home repair or remodeling. If the person engaged in the business of home repair or remodeling uses a post office box or mail receiving service or agent to receive home repair or remodeling business correspondence, the contract also shall state the residence address of the person engaged in the business of home repair or remodeling.
815 ILCS 513/35
ii. Consumer rights brochure
(For any contract over $1,000, any person engaging in the business of home repair and remodeling shall provide to its customers a copy of the Home Repair: Know Your Consumer Rights pamphlet prior to the execution of any home repair and remodeling contract. The consumer shall sign and date an acknowledgement form entitled Consumer Rights Acknowledgement Form that states: “I, the homeowner, have received from the contractor a copy of the pamphlet entitled Home Repair: Know Your Consumer Rights.” The contractor or his or her representative shall also sign and date the acknowledgement form, which includes the name and address of the home repair and remodeling business. The acknowledgement form shall be in duplicate and incorporated into the pamphlet. The original acknowledgement form shall be retained by the contractor and the duplicate copy shall be retained within the pamphlet by the consumer.
815 ILCS 513/20
iii. Insurance required
Insurance required. Any person engaged in the business of home repair and remodeling shall obtain and maintain in full force and effect during the operation of the business public liability and property damage insurance in the amount of $100,000 per person and $300,000 per occurrence of bodily injury, $50,000 per occurrence for property damage, and in the amount of $10,000 per occurrence for improper home repair or remodeling not in conformance with applicable State, county, or municipal building codes, unless the person has a net worth of not less than $1,000,000 as determined on the basis of the person’s most recent financial statement, prepared within 13 months.
815 ILCS 513/25
d. Statement of Illinois Legislature in Home Repair and Remodeling Act
Policy. It is the public policy of the State that in order to safeguard the life, health, property, and public welfare of its citizens, the business of home repair and remodeling is a matter affecting the public interest. The General Assembly recognizes that improved communications and accurate representations between persons engaged in the business of making home repairs and remodeling and their consumers will increase consumer confidence, reduce the likelihood of disputes, and promote fair and honest practices in that business in this State.
815 ILCS 513/5
e. Illinois Consumer Fraud and Deceptive Practices Act, among other things provides
Any person who suffers Damages as a result of a violation of this Act committed by any other person may bring an action against such person. The Court, in its discretion may award actual damages or any other relief which the court deems proper... In any action brought by a person under this section, the Court... may award, in addition to the relief provided in this section, the Court... may award, in addition to the relief provided in this section, reasonable attorney’s fees and costs to the prevailing party...
815 ILCS 505/1 § 10(a)
f. How Illinois Consumer Fraud and Deceptive Practices Act defines ‘person’
The Illinois Consumer Fraud and Deceptive Practices Act defines ‘person’ to include “any natural person or his legal representative, partnership, corporation... and any agent, employee, salesman, partner, officer, director, member, stockholder, associate, trustee... thereof.”
815 ILCS 505/1©
g. In Home Repair and Remodeling Act, how Illinois Legislature defines unlawful acts
Unlawful Acts. It is unlawful for any person engaged in the business of home repairs and remodeling to remodel or make repairs to charge for remodeling or repair work before obtaining a signed contract or work order over $1,000,000. This conduct is unlawful, but it is not exclusive nor meant to limit other kinds of methods, acts, or practices that may be unfair or deceptive.
815 ILCS 513/35
h. Consequences of Violation HRRA
The consequences are:
1. Use to be total bar to recovery: Smith v. Bogard, 377 III. App. 3d 842, 879 N.E.2d 543, 316 III. Dec 476 (4th Dist. 2007) is the only case that indicates that a contractor who fails to comply with the HRRA is a complete bar from recovery including quantum meruit. Id.
2. However, in K. Miller Constr. Co. v. McGinnis, 238 III. 2d 284, 938 N.E.2d 471 (2010), over-ruling Smith v. Bogard, the Supreme Court rejected the homeowner’s argument that contractors' technical violations of the Home Repair and Remodeling Act (i.e., failure to have a written contract and no consumer rights brochure) made the contract ipso facto (i.e., automatically) unenforceable. 238 III. 2d, at 294-96.
Thus, if residential is more than $1,000,000 it is required to get a written contract signed complying with HRRA requirements and provide consumer rights brochure. The Illinois Attorney General website has an excellent section with the form.