Congratulations to the city of Cleveland on finally bringing home an NBA Championship! With the attention of the sports world focused on The Land, it only seems natural to highlight some construction litigation that has taken place there. This case may not include the Cavaliers, but the Cleveland Browns faced issues of nonpayment during a restoration project in the late 2000’s. These issues ultimately resulted in settlement of a mechanic’s lien by the Browns and the general contractor paying a steep price following an appellate court ruling.

As we have discussed before, proper preparation can save you from contract disputes. Had the parties reduced their contracts to writing, years of litigation could have been avoided. Considering Ohio’s track record protecting subcontractors, it’s a good idea to stay out of court.

Background

The Cleveland Browns Stadium suffered damage in July of 2007 and hired ServiceMaster as contractor for the following restoration project. ServiceMaster brought on subcontractors, including Frank Novak and Sons, to repair the damage. In August of 2007, a severe storm compounded the damage to the stadium, requiring ServiceMaster to contract for additional work on the stadium by its subcontractors.

After the storm, Novak was asked to perform work not contemplated in the original agreement, and a second agreement was formed. ServiceMaster’s second contract with Novak was not put down in writing, however.

Weeks after reaching an oral agreement and beginning work, ServiceMaster provided a written agreement to Novak containing terms inconsistent with the original agreement. Novak continued to operate under the oral agreement and never signed or otherwise agreed to the written contract.

Lien Against The Browns

When Novak did not receive full payment for work provided under the first project, they filed a mechanics lien on the property. Novak and the Cleveland Browns settled the lien for $100,450. Novak was still owed money from ServiceMaster, however, so the settlement agreement between Novak and the Browns expressly saved the subcontractor’s right to pursue action on the second project. Novak proceeded to file suit against ServiceMaster claiming that ServiceMaster owed payment on the second project resulting from the storm damage.

The Case

One of the main issues disputed by ServiceMaster was whether the oral contract or the written contract was binding. Generally speaking, when a written contract and oral contract both exist, the one that has been reduced to writing is holds more weight. Further, beginning performance under a contract can serve as acceptance of the contract, even when the deal has not been formally agreed to. ServiceMaster contended that because Novak continued work after receiving the written contract, Novak accepted its terms. However, Novak began performance after the formation of an oral contract and made no actions to ratify the written deal provided by ServiceMaster.

The court found that Novak’s work subsequent to receiving a written contract did not serve as acceptance to the new deal. The court reasoned that because Novak had been working under the oral contract for weeks before receiving ServiceMaster’s new agreement, Novak’s work did not constitute acceptance of any changes to the contract. The decision can be found here.

Prompt Payment Act

Novak also claimed that ServiceMaster had violated Ohio’s Prompt Payment Act, which can be found here. According to the Act, when a subcontractor makes a timely request for payment, the contractor is required to pay for the portion of work that has been completed within 10 days of receiving payment from the property owner. If found liable under the Act, a contractor is liable for interest accruing from the 11th day on top of unpaid sums.

Here, Novak made a timely request for payment, and ServiceMaster never paid Novak for the second project. While ServiceMaster had made a payment that was requested for the first project, the two projects were distinct from one another and needed to be paid separately.

The court found for Novak, noting that even if some ServiceMaster’s payment for the first project was intended to go toward the second, the first project was not completely paid for. Further, when ServiceMaster was paid by the owner, some of those funds were earmarked for the second project specifically. The Court found that  ServiceMaster was not only liable for the disputed sum, but also for interest accruing from the 11th day after the contractor was paid.

Takeaway

Put everything in writing! It is easy to create or alter oral contracts when dealing with familiar parties. Requiring everything to be in writing can seem like a hassle or even damage business relationships. But covering yourself from liability should be your first priority. Had ServiceMaster been more organized and required a written contract, the issues leading to this litigation could have been avoided. Novak may have come out on top after the dust settled, but litigation took years to put the issue to bed. It’s in everyone’s best interest to make the agreement as clear as possible.

Summary
Oral Contracts Can Compound Your Problems
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Oral Contracts Can Compound Your Problems
Description
Reducing everything to writing is an important practice to reduce liability. Oral contracts are less predictable, and that can create issues for everyone.
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zlien
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