Contracting Diseases: Mishaps in contract drafting, limitation of liability edition

One of the problems I regularly encounter with new clients is that they have come to me too late to do the most good. This frequently happens in the area of drafting contracts relating to their business or project. Many people say they want a “simple” contract, or they think they know what they’re signing, or that they trust the other party to the deal, so they don’t need to overthink what they’re doing. A recent decision by a Federal Court in Indiana demonstrates how costly this kind of “penny-wise” thinking can be.

SAMS Hotel Group, LLC set out to build a new hotel. Unfortunately, the architecture firm the company retained to provide the design work for the project apparently did not employ or even consult with a registered professional structural engineer for the project. The county building officials later found structural design defects, which resulted in the condemnation of the structure and its ultimate demolition before the hotel ever opened its doors to the public.

SAMS sued its architect, Environs, Inc. The trial court held that Environs breached the applicable standard of care by failing to involve a structural engineer and for failing to timely inspect the project during construction. SAMS proved damages in the amount of $4.2 million.

Now the story turns truly tragic for the developer. Environs incorporated a clause in its contract with SAMS that sought to limit its liability:

The Owner [SAMS] agrees that to the fullest extent permitted by law, Environs/Architects/Planners, Inc. total liability to [SAMS] shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract, or breach of warranty.

SAMS, as the “Owner” under the applicable contract, paid Environs a lump sum fee of $70,000. The court enforced this limitation of liability provision and held that SAMS could recover only $70,000 of its $4.2 million loss, even though the source of Environs’ liability arose out of negligence rather than a breach of the parties’ contract. The United States Court of Appeals for the Seventh Circuit affirmed the trial court’s ruling. It noted, under Indiana law, that sophisticated parties aren’t entitled to protection from even the apparently unfair terms of the contracts they sign:

[T]he general rule of freedom of contract includes the freedom to make a bad bargain.

Parties are free to enter into any kind of contract they like, but just know that if you assume you are sophisticated enough not to need a lawyer’s assistance with your contract, the court just might agree with you and hold you to what you signed.

The complete order of the Federal District Court for the Southern District of Indiana can be read here.

The complete opinion of the Seventh Circuit Court of Appeals can be read here.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Minnesota Court of Appeals Holds Buyer Was Earnest About Real Estate Purchase Even Though It Didn’t Pay the Earnest Money Due Under the Purchase Agreement

In the case BOB Acres, LLC v. Schumacher Farms, LLC, decided on April 5, 2011, the Minnesota Court of Appeals held that, as long as the parties to a real estate purchase agreement clearly express the intent to buy and sell real property, the fact that the buyer did not provide the earnest money stated in the contract did not render the contract invalid.  Read it here.  It may at first seem remarkable that the Court of Appeals would hold that a party that did not provide the earnest money specified in the purchase agreement might still be able to enforce the agreement, but there were several factors involved.

The earnest money was a fairly nominal amount ($500 earnest money on a $70,000 contract for the purchase of 25 acres of undeveloped land).  This suggests that the earnest money was not a significant factor in the seller’s decision to sell the property to the buyer, but rather earnest money is provided simply to show the buyer’s good-faith intentions.

The Court also noted that the failure of a party to perform a material provision of the agreement could be a breach that permits the non-breaching party to discontinue performance, but the seller did not raise any objection to buyer’s failure to tender the earnest money until it had already announced that it no longer wished to be bound by the purchase agreement.  This resulted in a waiver by the seller of any right to object to certain breaches of the agreement by buyer, which might have allowed it not to go through with the sale if it hadn’t waived its rights.  The Court of Appeals explained that there is a difference between the issue of contract formation and contract performance.  As far as contract formation is concerned, the Court cited to a treatise on contract law (but apparently found no prior Minnesota case law on point) to hold that a promise is sufficient consideration for a promise.  In other words:  the buyer’s promise to buy the property (presumably for the purchase price stated in the agreement) was sufficient consideration for the seller’s promise to sell the property; the modest earnest money payment was simply incidental to the agreement.

Thomsen Nybeck represents both buyers and sellers, as well as lenders and other parties involved in real estate transactions of all types and sizes.  If you have a question about your next deal, contact one of our attorneys for advice about how to ensure you get the deal you intend.

Matt Drewes contributed to this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group. and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law and insurance.  He has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!Finance.com, Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Minnesota Construction Warranty Claims: New Procedures for 2011

You may be familiar with (or at least aware of) the warranties provided to homeowners under Chapter 327A of Minnesota Statues.  These warranties include a one-year warranty on all workmanship and materials, a two-year warranty on plumbing, electrical or other mechanical systems, and a ten-year warranty against major construction defects.  These warranties apply to new or newly remodeled residential property (which can include single-family homes or community associations, such as condominiums or townhouses), and are binding against the builder (of a new home) or contractor (in the case of a remodeling project).  Throughout the rest of this article, I will refer to both as a “contractor”, though homeowners should appreciate there can be a difference.

For years, Chapter 327A has contained certain procedures that owners must follow to preserve a claim for a breach of one or more of these warranties.  Effective January 1, 2011, these procedures now have been revised, and new procedures have been added.  You can read the complete text of the new statute here.  The legislature’s goal in making these changes is to try to reduce the number of lawsuits that are necessary to resolve these warranty disputes, but as with any new process there will always be traps for the unwary and navigating the new procedures is bound to catch more than a few homeowners off guard.

The process still provides that written notice of an alleged defect must be provided to the contractor within six months of the discovery of the defect, with the new exception being where the owner can demonstrate the contractor had actual notice of the claimed defect. Of course, it’s best to provide timely written notice if you wish to rely on this statutory warranty.  Many owners falter by failing to provide this notice within six months of discovering the defect.

After this notice has been provided, the contractor has always been required to inspect the alleged defect within 30 days and propose a repair.  The new amendment now requires the owner to allow the contractor to conduct “invasive” testing to determine the extent of any damage or the proper type of repair, however.  Invasive testing may involve making test cuts in stucco or interior drywall and/or using a probe to test the moisture content of the wood framing members of the home, though the statute does not specify.  It is of course fair to permit the contractor a reasonable opportunity to understand fully the defect (if any) involved, and the contractor is required to place the property back into “pre-inspection condition” following any invasive procedures, but it is unclear how this restoration process will be measured or enforced in practice.

In the event the contractor inspects the property and the owner and contractor cannot agree on the proposed repair (and owners should carefully evaluate proposed repairs, preferably with the assistance of a trusted contractor, engineer or attorney), the homeowner must (yes, must) follow through with the new “home warranty dispute resolution process”.  The new dispute resolution process requires the selection of a “qualified neutral” from a list maintained by the Minnesota Department of Labor and Industry, which will charge aspiring neutrals a $200 fee to be listed.  There are rather short timeframes applicable to the steps for selecting a neutral, so homeowners should consult with an experienced member of the construction industry and/or their own construction attorney before submitting their claim to the commissioner of the Minnesota Department of Labor and Industry.  Otherwise they will find themselves with little time to make a decision about the neutrals from which they must choose to evaluate their case.

After a neutral has been selected, the parties must meet together with the neutral and each will submit its own reasons why its proposed repair is proper.  There is a fee of $25 per party for participation in the process, in addition to the hourly fees of the neutral third-party the parties select.  It also is possible the parties will use attorneys to represent them through this process, and contractors with insurance coverage almost certainly will have attorneys present to represent them, though homeowners presumably will not be required to do so.  According to the amendment, at the end of this process the neutral third party does not issue a binding decision (it simply is an evaluation). Moreover, this evaluation may not be used as evidence in any later litigation if the “unreasonable” party does not care to acknowledge that it is being unreasonable. The process does, however, provide the parties with perhaps some further understanding of the potential damages at stake and chances of a favorable (or unfavorable) result.

Barring certain exceptions, the parties must complete this process before litigation can be commenced.  However, there are four situations which owners may commence litigation earlier if the contractor is not engaging in the process in good faith:

1) The homeowner may sue the contractor immediately if:

a) the contractor fails to conduct an inspection within 30 days after the owner has provided written notice of the defect;

b) the contractor performs the inspection but fails to provide a written proposal to make a repair of the alleged defective condition within 15 days after the inspection is complete;

c) the contractor provides a proposed repair, to which the owner agrees, but the contractor does not perform the repair.

2) The homeowner may also sue the contractor following the expiration of 60 days from the owner’s receipt of the contractor’s repair proposal, whether or not the dispute resolution process is complete.

In the event the evaluation process is not successful in bringing the owner and contractor to a resolution, the new amendment also alters certain timing considerations applicable to a construction defect lawsuit. This is because there are numerous claims (or theories of recovery) applicable to construction defect cases. These can include not just a claim that the contractor breached one or more of the statutory warranties under Chapter 327A, but also that the contractor breached an applicable contract, or that the contractor was negligent. There are also other warranties that may apply, including warranties applicable to common interest communities (condominiums and townhouses) as well as warranties covering the sale of goods (such as windows, doors, shingles, etc.). Each of these claims has not only its own standards, but each also has an applicable limitations period (the period within which you must sue or your claim is barred) which may be different from the next. The amendments to 327A now provide that, for as long as an owner is following this statutory procedure, or for 180 days, whichever is longer, all of those claims will be “tolled” (meaning their expiration will be delayed). This is a useful provision for ensuring a homeowner does not lose the right to commence litigation as a result of participating in this mandatory dispute resolution process.

The new provisions of Chapter 327A certainly have created more opportunities for construction defect cases to reach resolution outside of court, in theory.  However, there is little likelihood that a contractor who was being unreasonable under the prior procedures failed to realize it was being unreasonable, and there is little consequence to a contractor that fails to reach a reasonable resolution even under this new scheme.  Therefore, until we have seen this process utilized a few times, we do not know whether it will provide aggrieved homeowners with a legitimate alternative to litigation, or just another hurdle to clear to obtain a recovery under Chapter 327A.  In the meantime, if you have any questions about whether this process applies to you and how to comply with its provisions, contact Matt Drewes or one of the other construction litigation attorneys at Thomsen Nybeck.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!finance.com and Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Matt Drewes Quoted In Articles Published at Bankrate.com and Yahoo! Finance:

Matt Drewes recently contributed quotes for the following articles published at www.bankrate.com, a national web-based publication focused on educating the public about real estate, mortgage, insurance, tax, investment and other money issues, as well as Yahoo! Finance and Cincinnati.com:

• “How should you title your home?” Posted under Real Estate on March 19, 2010, by G. M. Filisko (read it at Bankrate.com here, Yahoo! Finance here, or Cincinnati.com here; and

• “7 choices for underwater condo owner” Posted under Mortgage on March 22, 2010, by Holden Lewis (read it here).

Matt Drewes is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, and has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years.  He can be reached at mdrewes@tn-law.com.

Matt Drewes Quoted in Articles About Construction Defects Appearing at HOAleader.com

Matt Drewes recently contributed quotes for the following articles published at www.hoaleader.com, a national web-based publication focused on homeowners association and condominium board members and association management professionals: 

• “HOA Construction Defects: Don’t Shoot Yourself in the Foot” (http://www.hoaleader.com/public/373.cfm), Matt Humphry, December 11, 2009, Publisher: Plain-English Media, LLC;

 

• “What Your HOA Must Know About Construction Defects” (http://www.hoaleader.com/public/372.cfm), December 2009, Publisher: Plain-English Meda, LLC

Matt Drewes is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, and has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years.  He can be reached at mdrewes@tn-law.com.

Matt Drewes Quoted In Several Articles at HOAleader.com: HOA Contracts; Maintenance, Rules and Enforcement; Recruiting Board Members; Cumulative Voting; Receiverships; Fair Housing Act

Matt Drewes recently contributed quotes for the following articles published at www.hoaleader.com, a national web-based publication focused on homeowners association and condominium board members and association management professionals: 

• “HOA Contracts: Can One Board Member Contractually Bind Your Homeowners Association?” (http://www.hoaleader.com/public/349.cfm), October 2009, Publisher: Plain-English Media, LLC;

 

• “Six Ways to Recruit Strong Board Members for Your Condo or Homeowner Association” (http://www.hoaleader.com/public/351.cfm), October 2009, Publisher: Plain-English Media, LLC;

 

• “HOA Elections: What’s Cumulative Voting, and Should You Use It?” (http://www.hoaleader.com/public/352.cfm), November 2009, Publisher: Plain-English Media, LLC;

 

• “HOA Financial Matters: What’s Receivership, and When Do Condo and Homeowner Associations Need It?”  (http://www.hoaleader.com/public/353.cfm), November 2009, Publisher: Plain-English Media, LLC;

 

• “HOA Legal Compliance: A Primer on the Fair Housing Act for Homeowners Associations” (http://www.hoaleader.com/public/354.cfm), November 2009, Publisher: Plain-English Media, LLC; and

 

• “HOA Maintenance: Know Your Options When Owners Won’t Maintain” (http://www.hoaleader.com/public/366.cfm), December 2009, Publisher: Plain-English Media, LLC.

Matt Drewes is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, insurance and employment, and has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years.  He can be reached at mdrewes@tn-law.com.

A Guide to Mechanic’s Liens for Property Owners, Subcontractors and Material Suppliers.

Mechanic’s liens in Minnesota exist to protect contractors, subcontractors and materials suppliers from going unpaid by giving them a lien on the property they helped improve.  Liens give the power to foreclose on property to ensure they are paid, and can provide protection against the bankruptcy of the person obligated to pay for the work.  In exchange for this powerful remedy, a potential mechanic’s lien claimant must comply with extremely technical requirements.  This posting will focus primarily on the rights of subcontractors, but they’re not the only ones who need to know what their lien rights may be.  Property owners may care about this as well.  You should understand when a subcontractor may place a lien on your home and when and how that mechanic’s lien can be foreclosed.  The rights of a general contractor are similar, but there are important differences that we will cover in a later post.

Subcontractors (the trades) and materials suppliers arguably face the greatest risk of nonpayment on a construction or remodeling project.  They rely on the owner to pay the prime contractor (or general contractor) and for the general contractor to use that money to pay them.  For them, the right to a mechanic’s lien is extremely important.  If you’ve been burned by non-payment one too many times, consider the following and talk to an attorney about getting a procedure in place to protect your lien rights.  Your collection costs can usually be recovered so there is no reason not to seek all possible protections even on relatively small claims.

Here are the steps to preserving and enforcing mechanic’s lien rights:

1.  When you start a project, gather the information you will need to protect and enforce your lien rights.  It is much easier to do this at the start of a project than after you’re not getting paid and people have become guarded and stop communicating.  Some things you will need to know are: the interest in the property held by the person or party arranging for the work to be performed (if it is a tenant this will be important); the Property owner’s name; and the street address of the property (as well as the legal description, if available). 

2.  Provide a “pre-lien” notice to the owner within 45 days from the date you start work.  A sub-contractor or material supplier who does not have a contract with the property owner may not claim a lien if it doesn’t give the appropriate notice to the property owner within 45 days of the date it first provided its service or materials.  There are certain exceptions, generally relating to large commercial projects, but it never hurts to provide the notice even when it’s not necessary.  The notice must be delivered to the property owner by personal service or by certified mail, and there is very specific statutory language that must be used.  There are even requirements about the size of print used. 

3.  Record or file the lien within 120 days after you complete your work.  A sub-contractor or supplier has 120 days from the last item of labor, skill or material contributed to the improvement.  To be safe, start counting from the last day you provided a significant amount or component of the work or materials required under your original contract.  Don’t assume tightening a screw, re-attaching some siding or even newly-added work will extend your rights.

4.  The devil is in the details.  The lien itself must contain certain information.  Also, it must not only be recorded in the real property records, but it must also be served on the property owner either by personal service or by certified mail.

5.  Do not delay.  If you serve and record your lien, but you still don’t get paid, you will have to bring a lawsuit to enforce the mechanic’s lien within one year from the date you contributed your last item of work or materials.  Before you start the suit, make sure you include all the parties who have a right to be included.  This will include the property owner, as well as all the other contractors, subcontractors, material suppliers and any others who have mechanic’s liens of their own, as well as any other party with an actual or claimed interest in the property.  

6.  It would be best to involve a competent attorney at the earliest step.  Mechanic’s lien law in Minnesota permits the recovery of attorneys’ fees spent enforcing the lien rights.

If you are owed money, but you don’t think you may have the right to a mechanic’s lien, you should still consider contacting an attorney.  You may fall into an exception for the required pre-lien notice.  You may also have certain other claims, and even small amounts, taken as a whole, may be worth pursuing.  If you own a home or property and are worried about how to handle mechanic’s liens or mechanic’s lien notices, there may be ways to resolve the issues and reduce your stress.  Regardless of your role or situation, if you have questions about a mechanic’s lien or other construction-related issue, contact Thomsen Nybeck.

Entry by Matt Drewes.

Is a signature still a signature?

A recent Minnesota Court of Appeals decision in National City Bank v. Engler confirmed that common sense can still prevail over creative reconstruction of a legal document. 

In the Engler case, a mortgage signed by husband and wife was later argued by her attorneys to not have been an actual signature for purposes of satisfying Minn. Stat. §507.02, which requires the signature of husband and wife on conveyance documents.  Their argument appears to be premised on the fact that she was not a “borrower” on the mortgage, and although she signed the mortgage, she signed solely for the purpose of waiving her homestead rights.

This “creative reconstruction” appears to have been based on the theory that since her signature was accompanied by the language “Signing solely for the purpose of waiving any and all Homestead Rights” it wasn’t actually a signature.  While the District Court allowed such an argument to prevail and held the mortgage void (for not having the signature of both spouses), the Court of Appeals came to the opposite conclusion.

The net result of this case is what many real estate and contract attorneys would already expect – the signature of the wife on the mortgage was in fact a signature, and the mortgage she signed is consequently not void. 

An article with various opinions on this issue, including a quote by the author of this blog entry (Thomsen Nybeck attorney Brad Boyd), appeared in Finance and Commerce February 1, 2010.  View the full article here: http://www.finance-commerce.com/article.cfm/2010/02/02/Court-Mortgage-valid-despite-wifes-failure-to-sign

This blog entry is written by Brad Boyd, Shareholder at Thomsen & Nybeck, P.A. Brad’s practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad works regularly with real estate buyers, sellers, and investors, real estate brokerages and agents, landowners, and small businesses.  He provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters