YOU NEED WRITTEN, SIGNED CONTRACTS
By Roger C. Justin

December 2006

Although it does not seem like long ago that hand-shake deals were common, we have been telling builders for years that it is essential that they get their contracts with their client in writing. Not only is it good business practice, it is required by the state of Minnesota. An unpublished decision issued on October 3, 2006, from the Minnesota Court of Appeals, Hanson Construction and Specialty Cabinets, LLC. v. Worlein addressed some of the problems of working under oral instructions only.

Hanson Construction was contacted by Worlein in relation to a remodeling project on Worlein’s home. Worlein apparently provided Hanson Construction with minimal drawings and a material list for the project, and Hanson Construction, despite saying that it needed much more details, put a bid in at about $321,000.00. Negotiations and reductions relating to the project resulted in a revised estimate of about $284,000.00 for the project. Without entering into a signed contract in that amount, Hanson Construction began work. Construction went on for a period of time, and over seven months, Hanson Construction sent invoices to Worlein of approximately $250,000.00. Worlein was also making payments directly to the lumber yard for the materials, but there came a point in time where Worlein ceased making payments, complained about cost overruns, and charges which he was being asked to pay which he thought were excessive. Not surprisingly, Hanson Construction believed everything was due and owing and the matter proceeded to trial at District Court.

At District Court, the Worleins used as a defense that Hanson Construction could not bring the lawsuit because Hanson had failed to get the contract in writing, which violated Minnesota Rule 2891.0030. That Rule states, in part, that “contracts between a contractor and a customer for the performance of a licensee’s services must be reduced to writing and must contain the following: a) A summary of the work to be performed; b) A description of material to be used or a list of standard features included; and c) The total contract price, or a description of the basis on which the price will be calculated. The licensee shall provide at no cost to the customer a copy of all written contracts between the licensee and its customer, including, but not limited to, proposals, quotations, change orders, and purchase orders at the time the document is executed.” The materials referenced in Minnesota Rule 2891.0030 were absent in the Hanson/Worlein transaction. However, the Court found that the Minnesota Rules related only to the powers the Commissioner had, individual customers of the contractor could not rely on them or seek to enforce those rules. The District Court, and the Court of Appeals, therefore allowed the suit to proceed as if based on an oral contract for which Hanson Construction recovered a portion of the contracting fees it was claiming.

Despite the fact that Hanson Construction was allowed to proceed in District Court without a written contract, this case brings up several points about why all licensed contractors should use a written contract in every matter. First, it is important to remember that the law requires those contracts. The Commissioner has the authority to enforce its rules in relation to your license. The Commissioner may deny, suspend, or revoke any license if the Commissioner feels that the licensee has violated its orders. Similarly, the Commissioner has authority to issue a civil penalty for violations in an amount not to exceed $10,000.00 per violation. Despite the fact that such penalties may be rare, you would not want to be the one having your name in an article discussing the imposition of such a penalty.

Another reason you want to have a contract in writing and signed is that it is highly unlikely you would have provided sufficient pre-lien notice to the homeowner without a written contract. Without proper pre-lien notice to perfect your Mechanic’s Lien, you are giving away a large percentage of your recovery because of your inability to recover your attorney’s fees in prosecuting the claim. For instance, in Hanson Construction, the jury awarded Hanson Construction the amount of $65,000.00. However, Hanson had to pay its attorneys to conduct a trial in District Court and then defend that Judgment on appeal to the Court of Appeals. No doubt it incurred significant attorney’s fees in doing so. Had proper pre-lien notice been given and the Mechanic’s Lien perfected, the District Court would have been allowed to award attorney’s fees as well as the amount of money owed under the contract.

The second practical matter in having the contract reduced to writing is the certainty factor. The Hanson lawsuit dealt, in large part, with the cost of change orders and determining whether something in fact was part of the original plan or was a change order. Having a written contract with detailed plans and specifications from the beginning, and following up with written change orders in a prompt fashion, eliminates the proof problems associated with changes to the original scope of work. As we all know, change orders on a project are as common as power tools. Taking steps to insure you are paid for such a change order is part of the necessary written process.

In a perfect world, it may not be necessary or desirable to have written contracts. However, that is not our situation. On all projects, before you begin any work, you should have signed written contracts which details exactly what you will be doing on that project and for what amount. Make this a habit on all your projects and your life will either become, or remain, a lot simpler.

Roger Justin practices in the areas of employment, business, and real estate/construction litigation.

© 2006 Rinke-Noonan.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.