Some time ago I was in an electrical contractor's office in Cincinnati. There was a framed letter in the president's office representing the company's first contract. It read, “We will wire your house for $125.00.” In today's legal environment, that written agreement would violate more than a handful of statutes and regulations and would subject the contractor to criminal penalties.

What went wrong?

In a commercial setting, the parties can pretty much agree on whatever contract terms they want. There is a legal presumption that parties of equal bargaining power are free to frame their agreements as they choose. The legitimacy of that presumption is not the concern of this article.

For homeowners, the legal presumption is that the public needs greater protection from contractors. As a result, every state has enacted laws that describe prohibited acts in home improvement contracts. Of course, these statutes cannot prevent bad contractors from doing bad things. However, in the event of a lawsuit, these laws increase the contractor's exposure to liability and penalties. Simply stated, lawmakers throughout the country do not trust contractors.

What are prohibited acts?

You would be surprised by what is prohibited. The variations among the states and the federal government are extensive and the laws tend to be modified on an irregular basis.

I know of no comprehensive treatment of all applicable rules and regulations of home improvement contracts. And there is no uniform definition of what constitutes “home improvements” or even “home.”

The following is a description of what you may be subject to in your jurisdiction. The references are selected from a number of laws in different states. Keep in mind that these prohibited acts carry penalties in addition to monetary claims for breach of contract. Note that monetary harm to the homeowner may not be a necessary element for a violation.

1. Bait and switch

In its purest form, “bait and switch” consists of an offer (the “bait”) as an inducement to talk to a salesman, but when the customer arrives, the last one of those has just been sold although another item is available (the “switch”).

There are permutations. For example, “advertising goods or services with intent not to sell them as advertised, or with intent not to sell at the price or upon the terms advertised.” (Emphasis added.)

Applying this language in the abstract is not easy, particularly with regard to services. “Authorized dealer?” “Highly trained and experienced employees?” You need to look carefully at your fliers and ad copy.

2. Mortgage assistance

One state makes it illegal for a contractor to “participate in arranging ... any mortgage ... [for] the obligations of a home-improvement transaction” where the mortgage amount exceeds the contract price.The aim of this statute seems to be the avoidance of a homeowner pledge, which puts him at the mercy of the contractor in the event of a payment dispute. But many contractors assist their customers in obtaining financing, often for more than the price of the home improvement contract, so that there are sufficient funds to cover changes and extras.

3. “Also known as”

“Conducting a home-improvement business in any name other than the one in which the contractor is licensed” is a prohibited act. Not only are we talking about fictitious names, but also shortened or incomplete names. So, if the company is “John Smith Design-Build Electrical and Electronic Contracting,” it should not use letterhead or business cards that read “John Smith Design-Build” unless the shortened name is on the license.

Similarly, care needs to be taken if you have related companies. For example, one for design and one for construction, to make certain that the names are not used interchangeably.

4. “Thank you” payments

The wording of these statutes tends to be vague. You may want to thank a subcontractor or an owner who has recommended you to others by giving money or a present. Be careful, as the payment may look like an illegal kickback.

One statute provides, “No person shall offer to pay to any owner any compensation for the placing of home-improvement business with others.” Discounts can also be prohibited when tied into referrals.

5. Saying it's done before it's done

One state's law provides that it is unlawful to misrepresent “that repairs, alternations, modifications, or services have been performed.” This statute is extremely broad. An imaginative homeowner's attorney could do a lot with it. Exercise caution when confirming the status of a project in writing.

6. Not fulfilling a dispute agreement

How is this one? “If a contractor enters into a written agreement with a consumer to resolve a dispute ... failing to adhere to the terms and conditions of such an agreement” is a prohibited act. This statute could apply to many situations: “Pay me and that job will be done on time,” or “I'll make sure that there are no more leaks,” or “I'll take care of all the damage to your landscaping.”

7. The catch all

“Using any other deception.”

The penalties

In past articles, I discussed an owner's remedies for a breach of contract. Damages can be for the cost of repairs, cost of completion and other direct expenses. The home improvement laws add to these remedies. There may be fines and criminal misdemeanor charges, and in some states, treble damages assessed against the contractor for harm done to an owner.

In addition, if there is “fraud in the inducement” of the contract, the contract may be deemed void and all prior payments must be returned. Fraud in the inducement includes misrepresenting your prior experience, the status of your licensing and even your cost and time estimates.

In some ways, there is equal or greater harm to the innocent contractor simply by having to defend itself in court and before licensing boards against these broad statutes. Legal expenses and injury to reputation are serious cost impacts for what may be innocent mistakes on your part for not knowing the law.

Conclusion

Take preventive action. A starting point would be to have in-house instruction, particularly for your sales people, on how to present your company to clients, both in person and by advertisement. This instruction should be tied to the statutes in place in your jurisdiction. Know what words and phrases should not be used with homeowners when describing your business and giving the owner progress reports during construction. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.