Avoiding the Restoration Blues

In the March issue, we featured the story of famed E Street Band drummer Max Weinberg and his bad restoration experience. Weinberg was motivated to contact “Legal Files” with his cautionary tale in the hope that fellow SCMers might avoid getting into a similar situation.

To recap, Weinberg agreed to pay $225,000 for a 1957 Mercedes-Benz 190SL that was to be restored to a concours level. The car was owned by the restorer, and although it was in poor condition, it was represented to be a great restoration candidate. After paying $125,000 of the total, Weinberg determined that the car was never going to be completed to the promised condition. The deal fell apart and he sued; his legal action is still pending.

A common story

Sadly, restoration deals that go bad are common. Some of the most frequent calls I receive are from collectors wanting to know what they can do about having come to loggerheads with a restoration shop. The problems are usually one of the following:

• Shoddy work.
• “I’ve already paid double the estimate and the car is still nowhere near done.”
• Long delays in completing the work, sometimes with the car sitting for years without any progress.
• The end product is not what it was supposed to be.

These deals, where the shop owns the unrestored car and sells it to you for a price including the restoration, are actually quite common. The restorers typically demand a large portion of the contract price — or even all of it — up front so they can “get started on the work.”

If you are tempted by such a deal, there are some things you can do to protect yourself. It should go without saying that any agreement like this should be documented up front in a well-thought-out legal contract drafted by your attorney. That is not an option, but a necessity. Never get complacent because you have a “good feeling” about the other party and believe they are trustworthy. There are a lot of moving parts here, and you should get everything on paper.

Two deals in one

The first thing to recognize is that you are really making two deals — you are buying a car, and you are hiring a restoration shop to restore it. It’s best to recognize that and treat them as two separate deals. Leaving it as a single transaction puts you at a severe legal disadvantage. The shop will certainly expect a sizable initial payment, and you won’t have anything to show for it. Potential issues with the car or its title won’t surface until the end. Furthermore, you have no assurance that the car won’t be grabbed by a creditor or, as has actually happened more than once, sold to another person.

The purchase portion of the deal should be handled the same as any other automobile purchase. Set a price for the car as it sits, get it inspected by knowledgeable people so you know exactly what you are buying, and confirm that the restorer actually has clean title. The purchase price should be low enough so that, if the restoration transaction falls apart and all you end up with is the car in its present condition, you still have enough money held back to pay for someone else to restore it.

Breakdown

The restoration shop will naturally want to be paid as work progresses. The timing of the progress payments is a critical process that needs to be managed, not left to the shop to bill as it pleases. You want to avoid the payments getting ahead of the work because, if they do, the shop will have a decreasing incentive to complete the work.

Every restoration is comprised of the same basic steps, although some may overlap or be completed concurrently. Treat each one as a separate job, with a separate contract price allocated to it:

To create a reliable management system, it’s helpful to consider how real estate construction projects are handled. Construction contracts routinely provide for progress payments to be made on a percentage-of-completion basis. For example, when 20% of the work has been completed, 20% of the contract price becomes payable. However, there is always a retainage, typically 10% of each payment. Thus, as each completion milestone is reached, 90% of the earned payment is made, and 10% is deferred to be paid at the completion of the project. That way, the contractor always has a financial incentive to finish the project, and the owner holds a fund that can be used to remedy defaults.

If you break the contract down into the various components, then you would have a separate progress payment schedule for each. For example, when 50% of the bodywork has been finished, 50% of the contract price for that component (less the 10% retainage) is paid to the shop.

Determining the percentage of the work that has been completed can be a difficult task. You can define it in the contract, assigning percentages to specific milestones, but you probably aren’t really as skilled at evaluating those points, and the shop has a natural bias toward overestimation of progress. It can be helpful to get assistance from someone who knows the process, such as another restoration expert.

Dispute resolution

No matter what you settle on, there will always be the chance of a difference of opinion. Your contract should provide for a workable method of resolving the dispute, preferably by staying out of court.

If a dispute arises, the first thing to make sure of is that the work doesn’t stop while the dispute gets resolved. You should pay the shop whatever you agree is owing, and the shop should keep working. But, as you can imagine, that requires a speedy dispute resolution process.

In construction contracts, disputes about percentage of completion are typically given to the architect to resolve. Architects have a good understanding of the work, and their determinations are reliable. You can replicate that in the auto restoration by selecting someone to fill that role who has similar familiarity with restorations. This could be a mechanic, restoration expert, appraiser or someone similar. The contract can make their determinations binding — that is “fair” because it is just a timing question and all will work out in the end — or non-binding. If non-binding, either side can go to the next step.

The normal non-judicial process is mediation, arbitration or both. In mediation, the parties select a neutral mediator who tries to help the parties negotiate a settlement. The mediator doesn’t decide who is right, but works with each party to understand what the other party thinks, what the law provides, and how to best resolve the dispute. Mediators will tell you that when the parties are genuinely interested in settlement, they run a 90% success rate.

Arbitration is much like a court trial, except that it is cheaper, faster and less formal. The arbitrator hears from both sides and their witnesses, and then makes a final and binding decision. Neither party has any right to appeal.

Separation

The restoration contract should also allow you to terminate the contract if you become dissatisfied, either with or without cause, as the parties agree. It is imperative that the contract specify what happens after termination. It should be clear about partial payment, as the shop is entitled to receive a fair amount for the work it has done. The retainage should also be considered. So should the owner’s cost to have someone else complete the restoration if the termination is on account of a breach by the shop. Since there will always be a high degree of risk of dispute, a clear resolution mechanism should be specified.

The contract should also make clear that you are entitled to pick up your car and all of its parts and components. The shop should be required to organize them and package them as appropriate, and there may be some additional compensation provided for that. The shop should waive any mechanic’s liens that the law allows.

Not so easy

As you’ve probably already recognized, this is not a simple procedure, and developing an appropriate contract can be expensive. But that reflects the reality that a car restoration is a complicated process. “Doing it right” requires consideration of all the things mentioned here, as well as other details that present themselves in a given situation. If you’re dealing with a $500,000 restoration project, all this legal effort might well be worth it, while it might not be if you’re restoring an MGB.

Whether you go “all the way” as described here, or just cover some of these bases is up to you, but the decision should only be made after consultation with a knowledgeable attorney. ♦

John Draneas is an attorney in Oregon and has been SCM’s “Legal Files” columnist since 2003. His recently published book The Best of Legal Files can be purchased on our website. John can be contacted at john@draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.