Time to Update Your Residential Construction Contracts
By: JOSEPH G. SPRINGER
March 22, 2011
Minnesota law requires that certain new items be included in all contracts for an improvement to residential property entered into after January 1, 2011. The new contractual provisions that must be included relate to new “written performance guidelines” and notice of a new home warranty dispute resolution process.
According to a new statute, for all contracts entered into on or after January 1, 2011, a Minnesota licensed residential general contractor or remodeler must “provide a prospective customer with written performance guidelines for the services to be provided” before entering into an agreement to perform the services. While the statute does not specifically define “written performance guidelines,” such written performance guidelines are intended to define what would, and would not, be considered to be a defect after completion of the construction.
Sample written performance guidelines have been published by various sources. For example, the Builder’s Association of Minnesota (BAM) has recently published its 2011 BAM Building Performance Guidelines for use by its members. The National Association of Home Builders (NAHB) publishes its Residential Construction Performance Guidelines, which are available to both members and non-members. Third party warranty providers also publish performance guidelines. The statute does not require that the performance guidelines be approved by the Minnesota Department of Labor and Industry or otherwise contain any minimum requirements. Therefore, a contractor may create its own performance guidelines. Presumably, the written performance guidelines must be consistent with all applicable codes.
The guidelines are intended to specify what a contractor will, and will not, fix. For example, BAM’s written performance guidelines provide that a contractor will repair cracks in drywall that are more than 1/8 inch wide. Because the written performance guidelines address future performance, they clearly differ from the specifications as to what will, and will not, be included as part of the original construction.
The statute requires that the written performance guidelines be given to “a prospective customer” before “entering into an agreement” and that “performance guidelines also must be included or incorporated by reference in the agreement.” The statute does not specifically indicate how long before entering into the agreement the performance guidelines must be provided. Under the statute, the written performance guidelines, even the copy that is provided before entering into the agreement, must be signed and dated by both the contractor and the customer. Consequently, to ensure technical compliance with the statute, both the customer and the contractor should sign and date the written performance guidelines prior to entering into the actual contract for the home improvement, and the written performance guidelines should then either be incorporated by reference or included as an exhibit to the actual new construction or renovation contract.
Although it is clear that the written performance guidelines must be included in all contracts, the legal effect of the actual guidelines is unclear. While the statute does not define the term “guidelines,” a guideline may not necessarily be a requirement. The fact that the legislature used the term “guidelines” instead of a term like “requirements” may indicate that the performance guidelines are not binding on either owners or contractors. Using the example above from BAM’s performance guidelines, what if a homeowner demands that a crack in drywall that is less than 1/8 inch wide be repaired, when the guidelines state that the contractor will only repair the crack if it is over 1/8 inch wide? If the contractor refuses to repair the crack, is the homeowner then precluded from asserting a claim against the contractor? Even if the homeowner is not precluded from asserting a claim, what effect will the performance guidelines have on a judge, jury, or arbitrator deciding the claim? Conversely, if the contractor does not fix an item that exceeds the guidelines, is the contractor deemed to have breached a contractual obligation to the homeowner? Since the written performance guidelines requirements are included within Minnesota’s contractor licensing statute, would a contractor’s failure to meet the guidelines subject the contractor to disciplinary action? Future court cases will need to determine these questions.
The second item that needs to be included in all home construction and remodeling contracts entered into after January 1, 2011, is notice of a new home warranty dispute resolution process administered by the Minnesota Department of Labor and Industry (DOLI). This new process is part of the “Notice and Opportunity to Repair” statute that was passed in 2006. Under Minnesota’s statutory housing warranties, often called the “327A Warranties” after the statute containing the warranties, a homeowner must report any loss or damage to the contractor within six months of when the homeowner discovers or should have discovered the loss or damage. After this notice, the contractor may offer to repair the loss or damage. If the parties do not agree on the scope of the repair, a homeowner cannot sue the builder for 60 days after the builder provides its offer to repair until the parties either complete DOLI’s home warranty dispute resolution process or another mutually-agreed dispute resolution process. DOLI summarizes the process as follows:
The basic timeline for the home warranty dispute resolution process begins when the homeowner rejects the builder or home improvement contractor’s offer to repair (though a builder can also initiate the dispute resolution process).
- The party initiating the process submits a completed application to DOLI.
- DOLI then selects three names at random from the roster of individuals who have been approved to act as neutrals. DOLI will send a disclosure form to each of the three potential neutrals, asking them to disclose any potential conflicts of interest that they may have with the parties.
- Once those responses have been received, DOLI will forward to the parties copies of these disclosure forms and the application forms that each of the three potential neutrals submitted to DOLI in order to be placed on the roster of neutrals. By law, the names of the three potential neutrals must be provided to the parties by DOLI within 10 days. The information submitted to DOLI by the neutrals will include a summary of their education, experience, training and credentials, as well as the hourly rate that the neutral shall charge (the costs of the dispute resolution process are split by the parties, unless otherwise agreed, and are to be paid directly to the neutral).
- Within five business days of their receipt of the neutrals’ information, the parties must select the neutral. If the parties cannot mutually agree on a neutral, the builder or home improvement contractor strikes one name from the list of three, and then the homeowner strikes a name. The remaining person is then assigned to be the neutral for that case and the parties are required to contact the neutral to inform them of their selection, and to provide the name to DOLI.
- Once the neutral has been selected, he or she shall convene a mandatory conference, which must take place within 30 days of the selection of the neutral, unless the parties mutually agree to hold the conference at a later date. At least seven days prior to the conference, the parties shall submit to the neutral all of the information and documentation that they feel the neutral will need to understand the dispute, including the scope of the alleged damages and any estimates of repair costs. Prior to the conference, the parties are free to communicate with the neutral to express their expectations and ideas for a successful outcome. Also, the law limits the number of hours the neutral can bill the parties to six, unless the parties mutually agree to allow the neutral to spend more time on the case, understanding that the fees charged by the neutral are to be split between the parties, unless otherwise agreed.
- The conference may be held at the home that is the subject of the dispute, or it may be held at any other site agreeable to the parties. Each party must remit payment of the $25 administrative fee to the neutral at the time of the conference. The neutral must then submit these fees to DOLI within 10 days of the conference.
- After reviewing the information and documentation provided by the parties and after consulting with the parties at the conference, the neutral shall issue to the parties a nonbinding, written determination, which must include, to the extent possible, findings and recommendations on the scope and amount of repairs necessary, if any. This written determination must be mailed to the parties within 10 days of the conference.
Under the statute, the written determination of the neutral and all communications relating to the homeowner warranty dispute process, other than those between a party and DOLI, are deemed “confidential settlement communications” under the Minnesota Rules of Evidence, meaning they generally may not be admitted as evidence to prove liability in any future court proceedings. Similarly, the statute provides that no party may use the written offer of repair provided by the builder or home improvement contractor as evidence of liability in subsequent litigation between the parties, and the neutral may not be called to testify regarding the dispute resolution proceedings.
The notice and opportunity to repair statute, including this new home warranty dispute resolution process, is all included in Chapter 327A of the Minnesota Statutes. For several years, Minnesota law has required that the 327A Warranties be included in home construction or remodeling contracts. In order to comply with the new disclosure requirements, you should update your contracts to include both the written performance guidelines and the current version of the 327A Warranties.