The Perils of a No-Contract Arrangement
One of the worst things you can allow to happen as a general contractor (or designer) is to have your subcontractors and consultants perform work without an appropriate written contract in place. Sure, understanding what you’re getting may be the only way for you to go ahead. No one can or should ever expect a subcontractor to undertake any work without having a written contract in place. You need to ask yourself: are you getting the very best protection for your money for hiring a subcontractor or consultant? What if the work is defective? What if the entire project is delayed due to the defective work performed by your subcontractor? Will the subcontractor be around for any future contract claims that you may have for defective work?
Without a written contract, your subcontractor or consultant may not have an incentive to return to perform extra work for free, or to fix defective work. You risk that your subcontractor or consultant will seek more money than they are already entitled to. You risk that they may "disappear" because they got the business (which was all they really wanted). You risk that your subcontractor or consultant’s performance will not meet the standards of care required of them, or that their work is not performed in accordance with the project documents.
But, with the current economy, it may be necessary to go ahead without a written contract with your subcontractor or consultant and hope that they perform their work to the applicable standard of care or that it is at least completed. So, when you find yourself in a situation where it is necessary to go forward, first always try to obtain your subcontractor’s standard form contract—because this form contract was drafted by their attorney in their best interests.
Second, you should always draw the contract with your subcontractor or consultant in your favor. For example, you must have a written change order. All modifications to their base scope of work (or base fee) must be in writing; carried in compliance with the law; with the proper insurance; and should have certain provisions that allow you to terminate them or withhold payment . A project architect-subcontractor agreement is always a smart idea for the design industry to make sure that the contract has no loopholes for your subcontractors or consultants to perform poorly or negligently.
Third, you want to always have the ability to bring suit for defective performance without having to prove negligence. By adding a level of law, each party (yourself and your subcontractor or consultant) is held to the same standard. The goal is to make sure that the subcontractor or consultant performs the work or services that they promised. No one wants to have to prove that a subcontractor or consultant "should have known better". It should be an objective measure. This is why a carefully drafted contract, which exceeds your subcontractor’s or consultant’s industry standard form contract may be your best bet to go forward.
Even if you need to go forward on a handshake arrangement, you should always attempt to get a written contract. You should also write-up a document (whether it be a ‘deed’ or ‘letter of intent’) that states the basics: the parties’ names, the work to be performed, how the work will be completed, completion date, payment, requirements for insurance, indemnification, etc. In other words, you should write what you expect of your subcontractor or consultant in clear terms. This is always an excellent practice to make sure that your subcontractor or consultant knows exactly what they are required to do under the contract.
Lastly, you should always follow up with pictures and memorialize any conversation that is made on a formal level. You cannot rely on just a mere promise by your subcontractor or consultant. If they say they will correct the wrong, you need to memorialize this by a formal notice in writing. A simple letter or email will do. It is important to have as much documentation of your existing contract (to prove that it exists) and the project correspondence to show what you want done under the contract. Don’t wait until the day before you plan to begin the work until you issue a large defect notice. Always provide as much notice through the course of the project so that everyone knows they are on notice to correct a defect that you may find.
The Law on Contractors Working Without a Contract
Performing work without a contract creates uncertainty for both the contractor and the property owner. Both risks can be mitigated with a written contract. The risks of not having a contract include a lack of legal protection for the contractor, which can have huge financial impacts on the contractor.
Whether the contractor is an employee or an independent contractor, there are many instances where the contractor may have some liability to the property owner. For employees, the primary legal consideration is of course whether the conduct occurred in the scope of employment. While few lawsuits are brought against a contractor for his or her actions outside the scope of employment, these types of claims are possible and result nonetheless. Without a written contract, the contractor may never be able to sue the homeowner for indemnification, since he or she will have no allegation of a contract anywhere. Even if the contractor was sued by the homeowner, the contractor could make a simple argument that the contractual relationship between the two should shield the homeowner from any liability. However, absent a contract, the contractor may be precluded from initiating a suit against the homeowner for indemnification.
Independent contractors also face litigation opportunities from the homeowner, especially where the contractor is a subcontractor to the general contractor. In this regard, the independent contractor has exactly the same concerns as a wage earning employee. A common example of this is a painter who uses tools or equipment of the homeowner itself. If the painter uses the homeowner’s own paint sprayer and that sprayer malfunctions, causing the home to burn to the ground, the homeowner could attempt to assert liability against the painter.
This leads then to the very real issue of liability of the contractor to other parties. A general contractor or a subcontractor that performs work that affects the structural components of a property without a contract often has other legal implications from this problem. A general contractor that fails to perform work in compliance with the building codes or other construction standards may face liability themselves, as well as the building code inspector who finally spots the error. If the failure to conform to the codes causes damage to the neighboring property or injury to persons, the general contractor may also be liable to them as well.
Legal Benchmarks and the Rights of the Homeowner
Homeowners do have the right to clean up after a contractor and are also entitled to recover their attorney fees in the event of litigation. If homeowners must pay up front for replacement work by others, they may be able to seek reimbursement later. Of course, the availability and precise contours of such legal claims depend on the statutes, case law, and circumstances (conduct) in each jurisdiction. On that note, it is important to understand that certain states impose strict rules about the content of home improvement or construction contracts to protect homeowners. Such rules provide additional rights and protection for homeowners. For example, contractors typically must set forth their license number, provide a detailed description of the work, disclose any separate or additional charges, and comply with other requirements. Some states also limit the prepayment amounts that contractors can charge to homeowners.
Whether a particular homeowner has such rights depends on how the law has evolved in their jurisdiction, the legislative intent behind the existence or absence of such a law, and how the agency charged with enforcing or investigating complaints is interpreting the law. However, avoiding disputes up front is always the best approach – and providing a contract to the homeowner for work to be performed is generally a simple and easy way to avoid such disputes.
How to Settle a No-Contract Dispute
There are various ways a homeowner can resolve a dispute with a contractor when a formal contract does not exist. Preferably, if an owner wants the work to be done and completed, they will simply use some other method of payment rather than going after the contractor for money damages. However, if the owner is in a position where it does not want or cannot continue to pay the contractor, he may have the following options to resolution:
- Mediation: If the owner wants the work to continue, but is satisfied with having a third party present during the duration of the project, a mediator may be retained to oversee the project and the amount of payments. Although the existence of a contract between the parties may be an issue, in the event a court would order the project to be completed, the owner has a greater chance of persuading the court towards mediation than without anything in place.
- Negotiation: The owner and the contractor , without a neutral third party, may resolve the dispute by negotiating new terms under which the contractor carries out the repairs. The type of negotiation depends on whether the parties believe or expect the court’s involvement. If the parties are in agreement as to the quality and quantity of work, it is likely that the owner will implement the terms. If the parties disagree as to the quality of the work, under the applicable laws, they may be forced to negotiate the quantity of work.
- Legal Action: The owner may seek damages. If the owner can establish that the contract existed, the owner is most likely to recover the cost of the contract. If there was never an agreement for payment or work to be performed, the contractor may be held liable for the reasonable value of the work.
How to Avoid a No-Contract Arrangement
Both contractors and clients must be proactive to ensure a work agreement will never devolve into one without a contract.
For contractors
Clearly define the work scope. While contracts should expand on, and clarify, each part of the work, an oral understanding between the contractor and client is key to making sure the scope is defined clearly to begin with.
Provide a written quote or estimate. For work that is expected to be more than a dollar-value threshold, many state Contractors Licensing Boards require that it be in writing. Even if an estimate is not required, clear estimates presented to clients communicates professionalism, and helps to avoid disputes.
Document the agreement in writing. For any major undertaking in particular, documenting, and having the client sign, an agreement detailing the total cost and all other important terms and conditions, will avoid confusion going forward. An experienced construction lawyer will be able to draft good template contracts that will serve one-off projects but also be updated and edited to account for different types of projects.
For clients
Get estimates. Clients should ask for an itemized estimate or quotation to help clarify how much work will be done, what materials will be used and how much each component will cost. This works to protect clients because the contractor cannot change the estimate this way.
Don’t pay up front. Reputable contractors won’t ask for payment until after the work has been completed. In cases starting with smaller, short-term jobs, if a contractor wants prepayment ask for a written agreement that details the progress payments and what work is completed at each stage.
Avoid paying cash. Paying in cash may not leave behind a clear record of payment and is best avoided.
Establishing a Legal Agreement After the Fact
If a contractor performs work without a contract, and neither the homeowner nor the contractor is happy with the result, it may be helpful to have an attorney attempt to put together a written agreement after the fact. Three important considerations are:
- (1) The scope of the work that was actually performed;
- (2) The amount (if any) that the homeowner will pay to the contractor; and
- (3) Additional provisions that address items such as warranties and liability if the court finds that the contractor breached the contract.
Another potential issue is that if a subcontractor performed the work , will the homeowner pay the subcontractor to complete the work? This provision should also be included in the written agreement.