SC Lawyer, March 2004, #3. The new construction disputes law cooling off or chilling out?.

• Author: By Roger Jellenik

South Carolina Lawyer

2004.

SC Lawyer, March 2004, #3.

The new construction disputes law cooling off or chilling out?

The new construction disputes law cooling off or chilling out?By Roger JellenikResidential construction contractors build new homes for homebuyers and additions to existing homes for homeowners. Because contractors are human and humans are imperfect, omissions and errors often occur in the course of construction. The result is the so-called "punch list." A builder routinely may go back to a job to complete punch list items even after a certificate of occupancy is issued to make sure that the homeowner is satisfied, punch list items are addressed and any remaining payments have been earned. Nevertheless, every so often, major or minor problems may persist, communications may not work well and the contractor or the homeowner may get upset enough to consider litigation.

Typically, thoughts of litigation come after unsatisfactory written or face-to-face communications that have left issues unresolved and the parties frustrated. Rightly or wrongly, the homeowner may perceive that the builder is trying to evade responsibilities, or the builder may perceive that the homeowner has unrealistic expectations. At such times, a pause for rational "give and take" or help from a third party mediator may help.

Advocates of tort reform see here the opportunity to keep unnecessary lawsuits out of court by fostering an environment in which settlements are encouraged by allowing the builder a right to cure construction defects. Following this logic, as of September 2003, 15 states had enacted legislation requiring a "right to cure" before construction defect lawsuits could be prosecuted to completion. See Lawyers Weekly USA, 2003-20, 14, 17 for a review and status of state legislative initiatives. The legislatures in at least four other states were considering similar bills. One of the enacting states was South Carolina. The purposes of this article are to summarize important provisions of South Carolina's new legislation, discuss some issues it presents and offer a suggestion or two.

As one part of tort reform in South Carolina, the Legislature passed and the Governor signed S. 433, The South Carolina Notice and Oppor-tunity to Cure Construction Dwelling Defects Act (Act). The Act became effective July 2, 2003, for causes of action arising on or after that date. 2003 South Carolina Laws Act 82 (S.B. 433), Section 2.

The Legislature's basic concept was to promote non-judicial dispute resolution by requiring the homeowner to list and, if needed, clarify the nature and extent of alleged defects. The builder gets a chance to respond and fix real defects and to explain why other complaints are not real defects. The parties may agree to a resolution consisting of corrective work, payment, refund or some combination of the options.

Of course, this process takes some time, and the Act provides for this time in the form of a 90-day "cooling-off" period. The effect of this "cooling off" period is to furnish a contractor with limited protection from a homeowner's lawsuit. If a claimant - for example, a homeowner - files an action without first following the procedure set forth in the Act, a party to the action may move the court to stay the proceeding until such time as the claimant has followed that procedure. 2003 South Carolina Laws Act 82 (S.B. 433), Section 1, § 40-59-830. Upon receiving such a motion, "the court shall stay the action until the claimant has complied with the requirements of this article." Ibid.

The intentions here are good. And there is certainly nothing wrong with the Legislature paving a road through the claims maze in the form of a negotiated or mediated solution. But, as always, the devil is in the details. And the details of this Act raise questions as to where this road, paved with good intentions as it is, will lead. Let's look at three areas: scope, fairness and practicality.

Scope

Scope issues relate to both coverage and protection. Not surprisingly, in examining these matters, it is instructive to examine the definitions of terms. The Act defines the term "action" as "any civil lawsuit or action or arbitration proceeding for damages or indemnity asserting a claim for injury or loss to a dwelling or personal property caused by an alleged defect arising out of or related to the design, construction, condition or sale of the dwelling or a remodel of a dwelling." Act, § 1, § 40-59-820(1).

The Act defines the term "claimant" as a homeowner, including a subsequent purchaser, who asserts a claim against a contractor, subcontractor, supplier or design professional concerning a defect in the design, construction, condition or sale of a dwelling or in the remodel of a dwelling. Id. at § 40-59-820(2).

But the Act does not define the term "contractor." The S.C. General Assembly worked on a longer version of this legislation - H. 3744 (bill) - as part of a broader tort reform package. The bill did define "Contractor." The bill sets up procedures more detailed than those in the Act. This omission raises several questions:

* Since the Act furnishes contractors with limited protection, is the scope of that protection affected, or should it be, by the contractor's license status? In order to protect the public, contractors are required to be licensed in South Carolina through various agencies of the Department of Labor, Licensing and Regulation (LLR). The licensing scheme administered by the Residential Builders Commission allows a contractor to seek registration for up to three specialties (i.e., carpentry, electrical, HVAC, etc.) or to seek a license as a residential homebuilder. In this context, since the Act does not define who is a contractor, it logically follows that it does not define who is not. And the Act fails to differentiate licensed contractors from either licensed contractors operating beyond the scope of their licenses or unlicensed contractors. Thus, the Act evidently protects all contractors - irrespective of license status. The bill does not seem to address this issue either. However, § 15-47-80 of the bill requires written notice to the initial purchaser of a residence of the name, license number, business address and telephone number of "each subcontractor, supplier, and design professional who performed work on the design or construction of the dwelling along with a brief description of such work."

* The Act is written in a litigation context. But how, if at all, does it relate to state agency license enforcement activities? Could it be argued that the Act's 90-day "cooling-off" period and attendant procedures apply to a homeowner's complaint to LLR? If a member of the public files such a complaint, the agency in LLR with jurisdiction, e.g., the Residential Builders Commission, follows procedures for investigating and dispositioning that complaint. If the complaint is not dismissed or resolved earlier, those procedures include provision for an administrative hearing. But an argument might be made that allowing administrative hearings as a result of licensing complaints without compliance by the claimant with the Act's procedures circumvents the legislative intent behind the Act and to that extent frustrates the Act's purpose.

* How does the Act deal with unscrupulous contractors? The average contractor knows far more than the average homeowner about the construction process, building techniques and applicable codes and regulations. Unfortunately, there are unscrupulous contractors just as there are unscrupulous practitioners of every profession or occupation, and they prey upon an unsuspecting public in need of information, guidance and expertise. While not representative of professional contractors, these "bad actors" pass themselves off as experienced professionals; prematurely secure excess deposits, advances and construction draws; do poor and incomplete work; violate or ignore codes; and then, having taken all the money, simply abandon the job. The homeowner is left to clean up the mess and may have to start all over again. But the Act does not distinguish between the legitimate and the unscrupulous. Thus, a contractor with a history of code violations, adverse judgments and license complaints (or, as noted, no license at all) evidently qualifies for the same protection under the Act as a contractor who follows the rules.

* What about professions and occupations other than construction contractor or subcontractor? Are the protections of the Act extended as well to real estate agents, home inspectors, architects and interior decorators? The legislative history and the language used, for example, in the Act's definition of the word "action" suggest that at least some other professions and occupations are likely included. The definitions in §§ 15-47-20(5) and (6) of the bill suggest that interior designers and home decorators were intended to be covered, but not necessarily home inspectors. The intended status of real estate agents is unclear; on this point, the bill seems generally to be aimed at construction. But see the reference to "selling dwellings" in §§ 15-47-20(5) (Contractor) and to "sale of a dwelling" in § 15-47-20(1) (action) and(3) (claimant). However, the words used (or perhaps more accurately, the lack of words used) arguably leave room to debate whether the Act's coverage is intended to embrace or can be applied to real estate and design professionals, home inspectors and perhaps others. Indeed, the Act's language does not appear to resolve the issue of where its outer boundaries are.

Fairness

In addition to the foregoing, there are questions related to fairness - some obvious and some not so obvious - in the Act's procedural treatment. A couple of examples:

* As noted earlier, South Carolina has a number of statutory provisions designed to curb the activities of unlicensed individuals seeking to prey upon an unsuspecting public. For example, such a "contractor" is not permitted to market, contract for performance of or perform construction work unless duly licensed. S.C. Code. Under such circumstances, if an unlicensed contractor is sued by a claimant, and therefore has already violated state law by selling, contracting for and performing the job in the first place, could that contractor's offer to correct or correction of defective work be any less violative of state law? Is it fair to compel a homeowner to negotiate in such a setting? Likewise, would reputable homebuilders really want the Act to appear to sanction negotiations with unlicensed contractors?

* What if a contractor decides to sue a homeowner for payments withheld? There is nothing in the Act that mandates a "cooling off" period for such litigation. Conceivably, a contractor could sue a homeowner while the homeowner is working through the Act's procedures. Why should a claimant be restrained from suing when a contractor is not? Is this result fair and consistent with tort reform goals?

* What about a homeowner's right to counter-claim in response to a lawsuit by the contractor alleging non-payment? Assuming that construction work has been performed and the contractor's lawsuit for non-payment has been filed in good faith, still the homeowner may have withheld payments because of concerns with real or imagined defects. Of course, a defendant in such litigation would normally have the right to counter-claim based upon construction defects. But, given the procedural requirements of the Act, may the homeowner counter-claim for construction defects right away, or must the homeowner first observe the 90-day "cooling off" period? Will the Act's stay provision be enforced in this context? If so, how? And how will the 90-day "cooling-off" period in the Act be reconciled with the 30-day responsive pleading period in the South Carolina Rules of Civil Procedure?

* What if a contractor abandons the job and informs the homeowner that he is going out of business? Is the concept of a 90-day "cooling off" period as compelling in such circumstances? Litigation already represents a long, frustrating process, which many homeowners simply cannot afford. Is it fair to lengthen and complicate the process in all situations? Would enforcement of the Act in such a situation achieve tort reform or aid the unscrupulous?

Practicality

It can be argued that there are certain situations in which imposition of a 90-day "cooling-off period" might not make sense.

* If a contractor and a claimant have already tried negotiation or mediation in good faith, is there any purpose to an additional 90-day "cooling-off" period? Might they simply agree that such a delay would serve no useful purpose?

* What if a homeowner or subsequent purchaser bought a warranty against defects from a warranty company? If after complaints from the homeowner the warranty company refuses to honor the warranty, under the Act, the homeowner would seem to be faced with the 90-day "cooling-off" period and attendant procedural requirements. Is this result intended?

* What about mitigation of damages? For example, if the defect alleged by the homeowner is a leaking roof, how does the homeowner reconcile her duty to mitigate damages from leaks with her obligation to negotiate and afford the warranty company or contractor an opportunity to cure for 90 days?

* What about an unscrupulous homeowner unjustifiably trying to delay payment to a contractor? Suppose a contractor sues because he has not been paid. Suppose further that the homeowner asserts a counter-claim based upon alleged construction defects and deliberately fails to comply with the Act's procedures. Under such circumstances, could the homeowner move for a stay under the Act? Remember, the court must grant a stay "on motion of a party to the action." Id. at 40-59-830.

From the beginning, one may be tempted to argue that, notwithstanding its laudable objectives, a reasonable balancing of tort reform interests may simply be too difficult to achieve in the real world. But then one may also wonder whether we are trying too hard, i.e. whether we are trying to reinvent the wheel once too often. Two existing mechanisms deserve attention and perhaps further exploration: i) existing alternative dispute resolution pilot programs and ii) Rule 68, SCRCP, "Offer of Judgment." The intent behind these mechanisms seems consistent with and no less "good" than the intent behind the tort reform movement in general. The point here is not that ADR and Rule 68 are perfect as they now exist; rather, the point is that we already know something about how they operate. The devil in the details of tort reform might be more easily exorcised if we shape and improve what we already have before moving into tempting, but uncharted territory.

So, where does all of this leave us? Certainly, the Act represents a well-intentioned effort at tort reform. However, as adopted, it will likely add significant time, cost, effort and risk to an already cumbersome process. Despite the good intentions behind it, the Act presents issues that will likely have to be resolved over time by the courts or alternatively, by legislative reconsideration. Until then, the practitioner should recognize that the Act presents uncertainties for contractors and claimants alike.

Roger Jellenik, is a sole practitioner in Columbia He practices in the areas of contracts, real estate and costruction, estates and probate and civil litigation.

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