Cross Examination: Are Work Authorizations Really Contracts?

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This question has been the subject of a lot of discussions in online groups lately. Some have written that an authorization is simply an “authorization to do work and not get paid; we have contracts to get paid.” This triggered a reply asking “What’s the difference if there’s a payment clause?”

The short answer is: Authorization + Payment Clause ≠ Contract.

What is a contract? A contract is an agreement between two or more parties that is intended to be legally enforceable. But the mere intention to make it enforceable does not make it so. Contracts must contain certain terms to make them enforceable, depending on the type of contract and which law is applicable. Many states have special requirements for contracts, particularly for residential work, and they change periodically.

The purpose of a contract is to lay out the rules of engagement between the parties, and the remedies that will be applied if those rules are broken. The biggest problem with traditional work authorizations is that they fail to specify the price of the work and who will pay it. Simply adding a price and the name of the responsible party does not magically turn an authorization into a contract. Most work authorizations are not contracts and are not enforceable. Properly-drafted contracts state specific and definite duties that make them enforce­able. Most work authorizations fail to specify the scope, price, commencement date, completion date, payment due date, mechanic’s lien rights, rights to cancel, and other vital legal terms. Performing work under a work authorization is like trying to play tackle football wearing sandals. You could do it, but it probably isn’t going to turn out very well.

Changing the title of a work authorization to “con­tract” does not solve the problem. Courts are gener­ally more interested in what is contained in the body of the agreement than in what the parties choose to name it. However, the best business practice is to incorporate the word “contract” into the title. I think the best title is “Restoration Contract,” but some states require specific titles. For example, all contracts for residential work in California and other states must be titled “Home Improvement Contract.” Other words can be added to that title, but I think they add unnecessary clutter.

“Work Authorization” is a bad title because it sug­gests that the customer is not obligated to pay, which leads to confusion, collection problems, and unnec­essary legal expenses.

Since we can’t assume the insurance company is going to pay you in full, you should reserve the right to collect from customers with a proper binding contract. When presenting the contract for signature, verbally explain that the customer is responsible for paying any amount not covered by insurance. I know this can be an uncomfortable discussion, but it’s not as uncomfortable as having to go to court to fight to get paid. If the customer has no intention of putting skin in the game, you want to know that before you invest time and money into the work.

Your right to get paid should be revered. Your agreements are precious. You should never call them “Work Authorizations.” Call them “Contracts.” Un­less prohibited by a TPA agreement or other arrange­ment, the contract should state that the customer is responsible for paying any amount not covered by insurance. I have them initial a line that says: “Cus­tomer understands that contractor has been hired by the customer and not customer’s insurance company. Customer initials: _____.”

In simple terms, the contract should explain every significant thing you expect from the customer and every significant thing the customer can expect from you. If the customer does not make a written com­mitment to do something for you, you could face a serious uphill battle trying to get a court to find that the customer breached the contract by failing to do that thing for you. A very wise Regional Manager we’ll call “Roger” used to say “if it’s not in writing, it didn’t happen.” These are words to live by. Think of your contract as your wish list of every conceivable thing you would want the court to award you if there was a dispute, including late fees, interest, and attor­neys’ fees. Expect the judge to say, “Show me where the customer agreed to what you are asking for to­day.” Judges and customers cannot read your mind.

5 Essential Elements of a Restoration Contract

Laws vary by jurisdiction, but most states generally require some version of these five:

#1 – Identification of the Parties
The contract must state the name(s) of the party or parties you expect to pay any amount not covered by insurance. A court will not give you a judgment for a breach of contract against a party who is not named in the contract. The contract should explicitly state: “The customer will pay [the contract price].”

#2 – Thorough Description of the Scope of Work
Strive to include reasonably detailed descriptions of your scope of work. Describe the labor, equipment, and materials that will be used, and whether or not the work will involve reconstruction. the scope does not have to identify every screw you will use, but it must be reasonably definite so that a court will know how to enforce it.

Actively and deliberately search for pre-existing conditions, photograph them, and show them to the customer. Thoroughly identify and exclude pre-exist­ing damage in the contract and disclaim liability for it.

#3 – Price & Payment Terms
Collections are vastly easier with lump sum con­tracts than with contracts based on other price models. With the possible exception of certain types of TPA work, I implore you to use fixed-price and lump sum contracts wherever possible. This meth­od eliminates sticker shock, prevents major losses incurred in performing projects for customers who never intend to pay, and facilitates a claim for tortious interference when it arises. Some states re­quire lump sum prices, approved in writing before residential work may begin.

If you don’t know what it will cost to return the property to its pre-loss condition, do not sign a lump sum contract stating that you will return the property to its pre-loss condition. Instead, divide the job into manageable segments that lend themselves to indi­vidual, lump sum calculations. this way, you will al­ways have consent to your price and price arguments when customers disappear. For emergency service projects, break off a part of the project: the first phase of the work. When you walk on a job, you’re going to know the minimum work that will be required to begin the project. this agreed-upon first phase may not complete the project, and that’s okay. You don’t have to have a contract that covers the entire com­pletion of the whole project, just enough clarity to start emergency services with a lump sum contract. Then, negotiate change orders for the remainder of the work. Your control lies in your scope of work, not with a price that says TBD, or “per insurance proceeds,” because those present a serious risk that a court would find the agreement void for vagueness.

#4 – Time for Completion
Many state laws require approxi­mate start dates and approximate completion dates in residential contracts. Whether they are required or not, including them is an important business practice. Please don’t underestimate how long it will take to complete the work. Many restoration disputes involved complaints that the restorer did not timely complete the work. Don’t rely on verbal agreements or text messages to memorialize completion dates. Include them in formal written contracts and change orders.

#5 – Notices & Disclosures
States have specific and unique notice requirements, particular­ly for residential work. Some of these requirements are disguised under the term “home improve­ment,” which makes some people think they only apply to remod­els. But no, the states usually mean “residential” when they say “home improvement.” Restorers must provide all legally required notices, and disclosures with their contracts, such as notices of lien rights, and notices of the right to cancel.

To reduce the risk of lead exposure, federal law requires renovators to provide homeown­ers, tenants, schools, and child care facilities with its Renovate Right pamphlet before renovat­ing more than six feet of painted interior surfaces or 20 feet of exterior surfaces in structures built before 1978. Follow the rules religiously or the lawyers representing your customers will claim your contract is “illegal” in an effort to disrupt your collections. Be very careful.

Parting Thoughts

You may be 100% correct in your position, and your workman­ship may be second-to-none, but jurors are suspicious of contrac­tors. Walk into court with a solid foundation of evidence showing integrity, honesty, and compas­sion and you will have the upper hand. Great weight is assigned to written documents, so make sure your contract obligates your cus­tomer to everything you want.

Seek legal counsel to update your contracts no less than annually. Fall is the time that I have found best to update con­tracts because by then, states have usually announced what new laws take effect on the first of the following year, so you can hit the ground running on January 1.

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Edward H. Cross, Esq.

Edward H. Cross is president of Law Offices of Edward H. Cross & Associates, PC in Palm Desert, California. Since 1997, he has specialized in representing restoration contractors across the country. He can be reached via email at EdCross@EdCross.com.

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