Tues Tip: 8 Best Collection Practices

Posted on August 17, 2010 by Melissa Dewey Brumback

COLLECTION “TIPS”

Readers of this blog may not know this, but in addition to construction law I also head our firm’s Collections practice. What that means is that, once your client is no longer paying your bills or taking your calls, you can hire our Firm to either (1) get the client’s attention or, failing that, (2) sue the (former) client for unpaid fees or merchandise. However, if you establish good collection practices up front, before you extend credit to any client, you may be able to avoid having to hire a collection attorney to do the dirty work for you. Here are my top 8 collection practice management tips:

Be careful on the front side in who you extend credit to. Get personal guarantee if possible. Make a copy of the person’s driver’s license. (This helps if you have to sue to collect). Check their credit.

Have a written contract. Failing that, a signed purchase order agreement, with contract terms on the back, would be good. Just don’t rely on a handshake. You can include language for interest (up to 18% per annum in North Carolina) and reasonable attorney fees and collection costs. If you don’t have this in writing, you may not be able to get these items later.

With the first payment by the customer, make a photocopy of the check. (This is helpful to know where they bank in case they later stop making payments).

Bill regularly- at least monthly.

Charge an interest rate on past due accounts so your money isn’t being used for your client’s “float”.

If you are in the position to file a mechanic’s lien (contractor, subcontractor, etc)– be aware of time deadlines for both (1) filing a lien and (2) perfecting that lien. These are state-dependent so consult an attorney in your state.

Create a system for large A/R accounts. For example, when account is X days late, send a polite but firm demand letter. When account is Y days late, initiate lawsuit/have your attorney send demand letter.

Consider alternative payment arrangements. If your customer acknowledges the debt, and is willing to sign a note or confession of judgment, you can offer payment terms. If the payment terms are not met, then you can file the note and judgment.

Bonus tips– Steps for after a judgment, to help your collection efforts:

Send a copy of the debtor’s drivers license to the sheriff for execution on your judgment.
See if your jurisdiction allows for the seizure of bank funds. If so, provide the banking information to the sheriff to aid in his seizing assets.
If a judgment comes back with “no assets,” consider having your attorney serve supplemental discovery questions if allowed in your jurisdiction.
Some states (but NOT North Carolina) allow you garnish wages. Ask your local attorney if this is an option.

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Comments? Questions? Other good collection practices? Let me know in the comments section or drop me a line. And sign up for email updates by putting your address in the box on the top right so you will not miss any posts.

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Photo “Crayon Tips” by laffy4k via Flickr via Creative Commons License.

Follow your Change Order Requirements

Posted on August 12, 2010 by Melissa Dewey Brumback

It is extremely important that you follow your written contract requirements. No where is this more evident than in the change order process.

Most contracts have an explicit provision for the payment for additional work– and they generally require a written, signed change order (or change directive) before the work is performed. Can you get by with verbal agreements for additional work? Sometimes yes, sometimes no. Will it be much harder to get paid for additional services without a signed change order? You bet. So why put yourself through that trouble?

Often times parties begin to “waive” formal requirements for written change orders, and construction projects are often on tight deadlines where stopping work to get a fully executed change order would bog down the schedule. However, you run the risk of throwing yourself on the mercy of the Court when you don’t play by the contract rules.

A new case out of the Eastern District of Virginia demonstrates this fact very clearly. In Artistic Stone v. Safeco, 2010 WL 2977894 (E.D.Va July 27, 2010), the Court held that the requirement that change orders be in writing was to be strictly construed and the subcontractor in that case could not recover for verbal change orders that violated the written change order requirement. The Court held that where there is a method to ensure recovery of additional extra work in the written contract, the subcontractor could not recover additional money when it failed to follow that method.

“Written change order requirements maintain order and predictability in the construction business, and are meant ‘to avoid subsequent disagreement, and prevent just such a controversy as has arisen in this case. For this reason, ‘where there is a method under the contract by which a party can insure the recovery of the cost of extra work, that party is not entitled to recovery where it fails to follow that method.'” Artistic Stone Crafters at 5. [Internal citations omitted.]

A North Carolina court would likely concur.

To ensure you can fully recover for extra work, make sure it is authorized. Follow the contract. If circumstances make it so you cannot always follow the contract terms, document the situation as best as you can. A follow-up email, confirming a verbal change order, would at least provide written evidence you can present in Court, should it come to that. Otherwise, arguments can and will be made that the person who gave the change order wasn’t authorized to do so, and you may be stuck with no recovery for the extra work.

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Photo “white check mark on blue- acrylic on canvas” by kylemac via Flickr via Creative Commons license.

Exception to the Statute of Repose?

Posted on August 4, 2010 by Melissa Dewey Brumback

Hold the phone– didn’t I just say last week that the statute of repose was basically an absolute bar to any action after 6 years? Why, yes, yes I did.

BUT it too has exceptions! (If you’ve learned anything from my rantings, I hope it is that there is always an exception to the rule). In a recent Court of Appeals case, the application of the statute of repose was called into question.

In Dawson v. N.C. Dept of Environment and Natural Resources (June 15, 2010), a couple bought land only after inquiring of the Person County health department to determine that the lots perked. Based on a 1989 letter issued by the health department stating that the lots perked, the couple bought the land. In 2000 (that is, 11 years later!), the couple applied for building permits only to learn from DENR that the land was not suitable for building.

The couple sued DENR under a negligence theory, and DENR argued the time bar of the 6 year statute of repose. In its decision, the court held that because the 1989 letter was not based on an improvement to real property, the statute of repose was not applicable. The Court indicated that, had the county inspector been inspecting an existing septic system, their decision may have been different.

Moral of the story? Just because you think you have a good defense, don’t forget that there is always an exception to the rule or, rather, there are many times when the shoe looks like it fits, but it really doesn’t. Be careful– blisters are painful!

Photo “Dakota Composite Dual Toe” by Bottinex via Flickr via Creative Commons Attribution-Noncommercial-Sharealike license

Statute of Repose: Putting your Risk to Bed

Posted on July 29, 2010 by Melissa Dewey Brumback

Last week, I discussed the statute of limitations and how it is generally applied to North Carolina construction projects. Today, I want to introduce you to another important concept: the statute of repose.

What is the Statute of Repose?

The Statute of Repose is another time-barring statute within which your claim must fit. Like the statute of limitations, it depends on what state’s law will apply to your case, which is usually, but not always, the state where the project is located.

The Statute of Repose, under N.C. Gen. Stat. §1-50(a)(5)(a) provides:

“No action to recover damages based upon or arising out of the defective or unsafe conditions of an improvement to real property shall be brought more than six years from the later of the specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.”

When does it run for North Carolina construction projects?

The Statute of Repose in North Carolina for improvements to real property is currently six (6) years from substantial completion or the last specific act or omission of the defendant, whichever is later. N.C. Gen. Stat. §1-50(a)(5)(a); Nolan v. Paramount Homes, Inc., 135 N.C. App 73, 518 S.E.2d 789 (1999). Once you have been off of a job for 6 years, you cannot (successfully) be sued for any construction defect, regardless of when the defect was or is discovered. It is an extreme, bright line bar to any claim after that time; that is, it puts your risk to bed.

How is it different from the Statute of Limitations?

Unlike the Statute of Limitations, the Statute of Repose starts running whether or not you are aware of any defect. Bryant v. Don Galloway Homes, Inc.,, 147 N.C. App. 655, 556 S.E.2d 597 (2001). This is a double-edged sword—if you are the one whose work is being questioned, you can rest easy that after you have been off of a project for 6 years, no claim can thereafter be (successfully) brought against you.

On the other hand, you are also bound by the repose statute, regardless of any equitable considerations. For example, in Monson v. Paramount Homes, Inc., homeowners sued a general contractor for defective construction, and the contractor brought a third-party action against his subcontractor. The claims against the subcontractor were deemed time-barred under the statute of repose. 133 N.C. App. 235,515 S.E.2d 445 (1999). In Monson, the contractor had to defend the action but had no ability to recover from the subcontractor who actually performed the poor construction.

Does punch list or warranty work extend the Statute of Repose?

In most cases, no. Once the statute of repose starts to run, it generally cannot be tolled by any subsequent action. For example, in one case, even when the contractor had performed some punch list work after substantial completion, and even though the architect failed to issue a certificate of substantial completion, the court held that the statute began to run at the date of substantial completion of the contractor’s work. Mitchell v. Mitchell’s Formal Wear, Inc, 168 N.C. App, 212, 606 S.E.2d 704 (2005).

This is also true if you return to the job for minor warranty type issues during the 6 year period. The statute of limitations is tolled during the repair time, but in general, the statute of repose is not tolled once it begins running. The policy behind this interpretation is that the Statute of Repose is a substantive right designed to limit the potential liability for a set period of time.

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Photo “Cama nova do furas / Ferret’s new hammock” by Isa Costa via Flickr via Attribution-NoDerivs 2.0 Generic Creative Commons license.

The Sticky Statute of Limitations in NC

Posted on July 22, 2010 by Melissa Dewey Brumback

If you are not a lawyer, but you play one on TV, you may have a passing understanding of the legal concept of a statute of limitations. This is post is to provide you just a little more information about the concept, and how it applies to your North Carolina construction project.

What is a statute of limitations, and why is it important?

The Statute of Limitations is a time-barring statute which gives you a set time within which to bring an action (i.e., lawsuit) against another party. If you do not bring your lawsuit within that period of time, the court will kick it to the curb. The reasoning behind the statute of limitation (often, ironically, abbreviated as “SOL” in legal circles) is that people need to have some certainty in how long they can be sued for an event that happened in the past. Witnesses die or forget, papers are destroyed, and in general it is extremely difficult to try a case years after the fact. The law has, therefore, established a somewhat arbitrary deadline for when you can sue or be sued, and it is vital that you do not go past that deadline if you hope to bring a lawsuit.

What is the statute of limitations on a construction project?

The answer, as always, is: it depends. The statue of limitations is governed by whatever state’s law will apply to your case—usually, but not always, the state the project was built in. The statute of limitations is also determined by what type of lawsuit you are trying to bring (or defend against).

In North Carolina, the statute of limitations for most construction disputes (breach of contract, professional negligence, implied warranty of plans) is generally 3 years from the date time when you knew or should have known about the issue. N.C. Gen. Stat §1-52.1 ABL Plumbing and Heating Corp. v. Bladen Co Board of Education, N.C. App. 623 S.E.2d 57 (2005). See also AIA A201 para. 13.7. As always, there are exceptions. If a contract is “under seal”, a claim can be brought for up to 10 years. (N.C. Gen. Stat. §1-47).

If the contract involves merchandise and falls under the Uniform Commercial Code, the statute of limitations is 4 years. N.C. Gen. Stat §25-2-725. However, where a defect in merchandise results in bodily injury or damage to real property, the shorter 3 year statute still applies. Hanover Ins Co. v. Amana Refrigeration, Inc., 106 N.C. App. 79, 415 S.E.2d 99 (1992). In Hanover, a defective HVAC unit caused a fire, which destroyed a building. The court held that the shorter 3 year statute of limitations applied because the defective merchandise caused damage to the real property.

Therefore, it is best practice to assume that the Courts will find that the statute starts running at the first inkling of a problem, and bring your action accordingly. Also, regardless of the length of any warranty period, contractors can still be liable until the statute of limitations period expires.

What happens to claims after the owner accepts the project?

Once a project has been accepted by an owner, the owner waives his right to claim damages for all but latent defects. Acceptance by the owner with knowledge of a defective performance may be deemed a waiver of the defective performance.

Where, however, the defect is unknown (or “latent”), the owner’s acceptance does not waive the defective performance. Tisdale v. Elliott, 13 N.C. App. 598, 186 S.E.2d 685 (1972). If a defect is a “latent” defect, hidden or not readily discoverable, the statute of limitations starts running from the date of discovery. Under AIA A201 para 13.7, any statute of limitations is deemed to have accrued in any and all events not later than the date of Substantial Completion. This section may shorten the statute of limitations in some cases of latent defects.

Can the Statute of Limitations be lengthened or shortened?

Yes. But, as they say on television, “don’t try this at home.” Carefully drafted agreements for a shorter or longer period of time can be executed. Consult your attorney before you do so, however. You may also want to check with your insurance carrier to make sure you have sufficient insurance coverage for a longer warranty period.

What if the parties are working together to fix construction problems?

If the parties are working to fix problems, but the statute of limitations is fast approaching– run, don’t walk, to your attorney to discuss a tolling agreement to stop the running of the statute, or otherwise enter into legally enforceable agreements concerning the statute of limitations. Just because the parties are all working together to solve a construction issue now doesn’t mean that the finger-pointing won’t begin once the bill is presented.

Have a question about the statute of limitations?

Comment below, drop me an email, or find me on twitter @melissabrumback .