Often, attorneys are asked to assist their clients and friends in pursuing business claims for nonpayment. Much of the time, the claims are straightforward. In most instances, the attorney need only be armed with a cursory understanding of the Fair Debt Collections Practices Act to avoid stepping into troubled water. However, when the client is a construction contractor seeking payment for construction work, the situation can be quite different. This is certainly the case when the work involves residential home improvements and most other types of "noncommercial" construction work. In these cases, you should be aware of the intricacies of the law you are about to navigate your client through, courtesy of the New Jersey Consumer Fraud Act.
The state Supreme Court boasts that New Jersey has some of the strictest consumer protection laws in the country. See Cox v. Sears Roebuck, 138 N.J. 2 (1988). While the consumer protection laws are certainly welcomed and warranted, the application of the rigid legal framework involving the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 et seq., along with regulations promulgated thereunder — including, the Home Improvement Practices Act, N.J.A.C. 13:45A-16.1 et. seq., Contractors Registration Act, N.J.A.C. 13:45A-17.1 et. seq., and the Plain Language Act, N.J.S.A. 56:8-1 et. seq. — imposes a legal minefield for contractors. Virtually any misstep by the contractor may result in a prima facie violation of the CFA. When an attorney is tasked with pursuing a collections action in this arena, he or she must proceed with caution to avoid prompting a situation whereby the homeowner elects to invoke the CFA protections afforded to them, at the cost and expense of the contractor-client.
An all-too-common fact pattern goes something like the following: A contractor calls his attorney to report that he finished a job and the homeowner refuses to make the final payment. While the contractor is well versed on the Uniform Construction Code and has dutifully performed his work in compliance with the law, he has little knowledge of the nuances of the Home Improvement Practices Act. Although the contractor may have acted in good faith throughout the course of the project with respect to the homeowner, he unknowingly violated one or more of the regulations. Unbeknownst to the contractor’s attorney, the homeowner is withholding payment because he feels that the contractor should not have charged him to remediate a concealed defective condition that could only be found after the project started. The contractor’s attorney, in good faith, files a complaint to recover the remaining $3,000 to which the contractor claims to be entitled. The homeowner files a counterclaim under the CFA, citing a handful of regulatory violations. Ultimately, the parties reach a settlement prior to trial wherein the contractor pays the homeowner $50,000. Yes, you read that correctly!
While the result of the above scenario seems unfair and perhaps illogical, the regulatory framework imposed on the home improvement industry allows similar examples to regularly occur. Even though the contractor may be on the moral high ground, the regulations "stack the deck" in favor of the homeowner. For better or worse, settlement is often driven not by the alleged damages, but by the fee-shifting function of the CFA and the parties’ mounting legal fees.
Undoubtedly, a client will not like his attorney’s suggestion that he should take a less aggressive approach or even abandon the collection effort. That said, just about every attorney I have dealt with in these situations would have preferred a client who feels he has been wronged by the system, over a client who feels the same way, but also has to write a substantial check to his adversary. To avoid overpromising and underperforming, you must ask your client several questions prior to taking on a contractor collection case.
First, find out the nature of the work. If the work appears commercial in nature, it still may fall under the Consumer Fraud umbrella. This determination can be tricky, as courts have held, for example, that renovations to the interior and exterior of a tavern are "home improvements" because the building contained a residential apartment where a minor aspect of the renovation work was performed. See Blake Constr. v. Pavlick, 236 N.J. Super. 73 (1989). Likewise, work performed for a corporate condominium management company is also deemed to be "noncommercial" work, thus triggering CFA applicability. See B&H Secs. v. CKC Condo. Ass’n, 2008 N.J. Super. Unpub. LEXIS 981 (App.Div., 2008). If the work can be deemed "noncommercial" in any respect, keep asking questions.
Next, look at the contract documents, just as you would in any other breach-of-contract case. The attorney must look beyond the typical offer-acceptance-performance analysis, and review the documents in the context of the arcane regulations of the CFA, Home Improvement Practices Regulations and the Home Improvement Contractors Registration regulations. Regulatory violations, even innocent ones, carry strict liability. See Cox v. Sears Roebuck, 138 N.J. 2 (1988),citing, Huffmaster v. Robinson, 221 N.J. Super. 315 (1987).
After you confirm that the contractor is in good standing with his contract, ask about any change orders. Any change in the project specifications or terms must be committed to writing and signed by both parties. N.J.A.C. 13:45A-16.2(a)12. This is particularly important if the collection issue arises out of an add-on or deviation from the original contract. Did the homeowner request certain changes be made to the project scope contained in the original contract? If the contractor honored the homeowner’s request on a handshake with a minimal change in contract price, that’s a CFA violation. Oral agreements carry little, if any, weight in this context. The same regulations imposed on the contract itself also apply to change orders.
Finally, confirm that the contractor obtained all necessary construction permits at the appropriate times. See N.J.A.C. 13:45A-16.2(a)10. In certain circumstances, the Uniform Construction Code permits a contractor to perform "minor work" in the absence of a permit, so long as it subsequently makes application for the permit and has the required inspections performed. See N.J.A.C. 5:23-2.4(b)2. However, the CFA prohibits any work from being commenced prior to the issuance of a permit. See N.J.A.C. 13:45A-16.2(a)10i. For home improvement work, demand for final payment cannot be made until after final inspections have been satisfactorily performed or, if applicable, a certificate of occupancy has been issued, whichever occurs later.
It is evident that to address the problem of dishonest contractors, the New Jersey legislature has passed one of the nation’s most comprehensive consumer protection laws.??One of the consequences of the CFA is that contractors may be stymied from collecting on a home improvement contract, even after they performed their duties in good faith.??In order to determine whether a client falls into the CFA trap, an attorney must ask the right and tough questions at the onset of representation to determine whether to move forward with the case. It is the attorney’s obligation to ask the right questions of their client to ensure that they do not overpromise, under-deliver or cause additional harm to their client.¢