Construction businesses of relatively small size often operate on a less than formal basis. For example, as construction attorneys, we frequently encounter clients who perform residential construction work and execute change orders with a general contractor, or even the homeowner directly, based upon a handshake. Such a practice, while understandable from a personal relations standpoint, is extremely dangerous when it comes to a small business’s bottom line. By failing to document the modification of contract terms or a change order in writing, a contractor exposes himself to the possibility that the customer will refuse to pay for additional work, claim the contractor did not perform in accordance with the contract, or, even worse, claim that the contractor committed consumer fraud.
In the absence of a signed change order or contract, a contractor is left with his word against the customer’s that the change was agreed upon. If the contractor is not inclined to simply write off the loss resulting from non-payment for work or materials and wishes to obtain payment by filing suit, his burden of proof will be more substantial in the absence of a written change order. Rather than simply asking a court to enforce written terms explicitly establishing the customer’s obligation to pay for work performed, the contractor and his construction attorney will likely need to proceed based upon other legal theories, such as promissory estoppel, which require the contractor to prove the customer promised to pay for work performed in the first place.
To prove a claim for promissory estoppel, the contractor must show that:
(1) the customer made a clear and definite promise to pay for certain work;
(2) the promise was made with the expectation that the contractor would rely on it by performing the work;
(3) the contractor in fact reasonably relied on the promise, and
(4) the contractor suffered damages of a definite and substantial nature as a result of relying on the promise.
See Malaker Corp. Stockholders Protective Committee v. First Jersey Nat. Bank, 163 N.J. Super. 463 (App. Div. 1978). Without a signed change order or contract, the above elements are not easily established. If the contractor claims there was a verbal agreement, but the customer denies asking that the unpaid work be performed and promising to pay for it, a judge or jury is faced with a he said, she said situation. Third party witnesses, who may prefer to avoid taking sides due to ongoing business relationships, may be necessary to establish the credibility of one party over the other.
Not only does the absence of a signed document jeopardize the contractor’s ability to collect payment for his work, by undermining his ability to file a construction lien for example, but it also exposes him to a possible claim for consumer fraud under New Jersey’s Consumer Fraud Act. Although such a claim may be unmeritorious when alleged by a commercial customer, a homeowner’s claim can easily appear at least superficially viable and require extensive litigation to defeat. This type of litigation can require a great deal of time from even the best construction attorney. There are specific requirements set forth in the New Jersey Administrative Code, which, if not complied with in relation to homeowners, amount to per se violations of the Consumer Fraud Act. See N.J.A.C. 13:45A-16.1 and 16.2 et seq. These requirements include such simple things as failing to specify materials, work or a commencement date in writing. Moreover, if proven, a claim for consumer fraud justifies an award against the contractor of triple the amount of actual damage caused. See N.J.S.A. 56:8-19. Due to these risks, taking precautionary measures like requiring customers to sign an initial contract and change orders for any modification to the work is advisable.
The construction attorneys of the Law Office of Bart J. Klein, located in Maplewood, New Jersey, counsel clients throughout New Jersey regarding contract and construction related disputes. If you believe you are in need of a construction attorney, we welcome you to contact us for further information.
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