7.4 Disputes and Subcontractor Agreements

The Dispute Ladder

Disputes on Maryland home improvement jobs climb a recognizable ladder, cheapest rung first.

Rung 1 — Negotiation. Direct communication resolves most disputes. MHIC itself encourages homeowners to contact the contractor first, and the Commission may deny a Guaranty Fund claim if the homeowner unreasonably rejected the contractor's good-faith efforts to resolve the problem.

Rung 2 — MHIC complaint and mediation. A homeowner files a complaint, which triggers an MHIC regulatory investigation. MHIC offers free mediation through trained mediators who are not affiliated with the Commission; the sessions are confidential and can be scheduled far sooner than a hearing. If either party declines mediation or it fails, the matter moves up the ladder.

Rung 3 — Arbitration, if the contract clause is valid. Maryland strictly regulates mandatory arbitration clauses in home improvement contracts. A compliant clause must state the name of the person or organization that will conduct the arbitration, whether mandatory fees will be charged (listing the fee schedule), whether the arbitrator's findings are binding, and a disclosure that a claim against the Guaranty Fund will be stayed until the arbitration is completed. The parties must initial and date the contract next to the clause. If the clause is valid, the homeowner must make a good-faith effort to arbitrate before recovering from the Fund — though the claim itself must still be filed within the deadline.

Rung 4 — Guaranty Fund claim and hearing. The claim must be brought within three years after the claimant discovered or should have discovered the loss. The contractor must respond in writing within 10 days of receiving the claim. Claims of $7,500 or less may be decided by the Commission without a hearing; larger claims go to a hearing before an Administrative Law Judge at the Office of Administrative Hearings (OAH) in Hunt Valley, where the homeowner bears the burden of proof and an Assistant Attorney General represents the Fund — not either party. The judge issues a recommended decision, the Commission issues a proposed order, either side may file exceptions, and the final order may be appealed to the Circuit Court within 30 days.

Rung 5 — Litigation. Courts remain available, but note the interplay: if the homeowner sues or counterclaims on the same contract, MHIC closes its file until the court case concludes, and the Fund will not pay on a default judgment. The Fund pays only actual loss — the cost to repair, replace, or complete unworkmanlike, inadequate, or incomplete work — never consequential damages, attorney's fees, or court costs, and never for work by an unlicensed contractor.

Guaranty Fund Limits and Contractor Consequences

The maximum recovery is $30,000 per claimant, or the amount the homeowner paid the contractor, whichever is less (the cap was raised from its long-standing $20,000 level — be alert for older study materials still showing $20,000). All claims against one contractor are capped in aggregate at $250,000, and if approved claims exceed that, the Commission prorates payments so each claimant receives the same percentage. When the Fund pays, the contractor must reimburse the Fund plus 10 percent annual interest, and the contractor's license is suspended until reimbursement is made — the Fund is homeowner protection financed by licensees, not a gift to contractors.

Subcontractor Agreements

Since July 1, 2016, when Senate Bill 285 took effect, Maryland eliminated the MHIC subcontractor license category. A subcontractor may now perform home improvement work without any MHIC license, so long as the work is done for a licensed contractor. What did not change: only a licensed MHIC contractor may contract directly with a homeowner to perform home improvement work. The licensed contractor remains fully responsible to the homeowner for the sub's performance — if the sub damages the property or performs substandard work, the contractor's license and pocketbook answer for it.

That responsibility is why prime contractors manage subs with written agreements containing:

• A defined scope mirroring the prime contract's plans and specs
• Flow-down clauses, which incorporate the prime contract's terms into the subcontract so the sub is bound by the same standards, schedule obligations, insurance, and safety requirements the contractor owes the owner
• Insurance and indemnification requirements, allocating risk for jobsite injuries and damage
• Payment terms, including the contingency language below

Pay-When-Paid vs. Pay-If-Paid

A pay-when-paid clause is a timing mechanism: the contractor will pay the sub within a stated period after the owner pays the contractor. It delays payment; it does not eliminate the debt — the sub gets paid eventually even if the owner defaults.

A pay-if-paid clause attempts something far more aggressive: making the owner's payment an express condition precedent, shifting the risk of owner nonpayment onto the sub entirely. Courts enforce such risk-shifting only when the conditional language is unmistakably clear — words like "condition precedent" or "payment is contingent upon receipt" — and ambiguous language is construed as mere pay-when-paid timing. The exam distinction: pay-when-paid = when; pay-if-paid = whether. And regardless of what passes between contractor and sub, the homeowner's contract is only with the licensed contractor, whose obligations to the owner are unaffected by any subcontract clause.