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New Hawai‘i Construction Defect Claims Law by Goodsill Partner Lennes Omuro

Feb 2, 2005

By Lennes N. Omuro, Esq.

Introduction to Act 119 Relating to Construction Claims.

Developers, designers, contractors, suppliers and others involved in the construction industry are frequently the subject of claims and demands arising out of alleged construction defects. High levels of construction litigation obviously impose financial burdens on such parties and often make it difficult to obtain insurance at reasonable rates. Consumers are also affected to the extent such costs are passed on to them in the form of higher prices.

In 2004, the Hawai‘i Legislature found that there was a need for a method of resolving construction disputes that would reduce the need for litigation while still protecting a claimant’s rights. Accordingly, the Legislature promulgated Act 119 (22nd Legislature, 2004) which provides a new means of resolving construction defect claims with respect to residential property. Act 119 took effect on July 1, 2004 and is presently codified under Haw. Rev. Stat. chapter 672E.

In particular, Act 119 provides an alternative dispute resolution mechanism for construction defects that requires a claimant to serve a notice of claim on the responsible construction personnel and provides such construction personnel with an opportunity to resolve the dispute without litigation by way of repairs or monetary settlement. The claimant must follow the procedure set forth under Act 119, including mandatory mediation, before the claimant can commence legal action.

Whether Act 119 will reduce the amount of construction litigation remains to be seen. All persons and parties who may be involved in a construction dispute over residential property must, however, be aware of the requirements and ramifications of this new Hawai‘i law. Developers and contractors must modify their forms of contracts to provide statutorily required notice to purchasers and owners about Act 119. Persons or parties who want to file an action and/or developers and contractors who are served with a notice of claim and who wish to involve other subcontractors or design professionals must be aware of and follow Act 119’s procedures or risk having their actions and claims dismissed. The timing of settlement offers, whether to inspect the premises, and the possible adverse consequences of rejecting a settlement offer are all addressed by Act 119 and may influence the strategy for prosecuting or defending a claim. Act 119 may even influence when a party may want to notify its insurance carrier about a pending or threatened claim.

The remaining portion of this article provides a general summary of Act 119. It is not intended to cover every aspect or ramification of Act 119 nor is it intended to serve as or substitute for legal advice. Convenient links to Goodsill attorneys who may assist you with Act 119 or any other construction or real estate litigation issues are provided at the end of this article.

Scope of Act 119.

The first issue to consider, is whether Act 119 applies to your situation. In particular, Act 119 provides “Contractors” with the right to resolve alleged construction defects before a claimant may initiate action against them. Under Act 119, however, a “Contractor” is very broadly defined to include “any person, firm, partnership, corporation, association, or other organization that is engaged in the business of designing, manufacturing, supplying products, developing, constructing, or selling a dwelling.” (H.R.S. Section 672E-1). The Act therefore encompasses essentially all entities involved in residential development and construction. This may include not only matters related to the actual dwelling but also any common areas and improvements including structures and recreational facilities that may be appurtenant to the dwelling. (Id.) On the other hand, Act 119 does not appear to apply to construction disputes relating to purely commercial property. Likewise, Act 119 will not apply if there are claims of personal injury or death. (H.R.S. 672E-2).

Notifying Purchasers About the Contractor’s Right To Repair or Resolve Dispute Before An Action May Be Filed.

When entering into a contract for the sale of a new structure or for the construction or substantial remodeling of a premises, Act 119 requires (1) the seller of the new structure or (2) the contractor involved in the construction or substantial remodeling, to provide the purchaser or owner with notice of the contractor’s right to resolve alleged construction defects before an action may be commenced against the contractor. (H.R.S. 672E-11). Previously existing forms of sales or construction contracts for residential property will thus need to be modified to satisfy this statutory notice requirement to purchasers and owners. The notice requirements are set forth under H.R.S. Section 672E-11(b) and sample language is provided in that section. By now, all relevant forms of sales or construction contracts should comply with Act 119 requirements.

Required Notice to Contractor About a Construction Defect Claim Before Filing An Action.

As indicated above, a key feature of Act 119 is the contractor’s right to attempt to resolve the alleged construction defect before the claimant can file an action. Accordingly, when a construction defect claim arises, the claimant is required to serve the contractor with a written notice of claim no later than 90 days before filing an action against the contractor. (H.R.S. 672E-3). The term “action” is defined to include “any civil proceeding, including but not limited to arbitration, in which damages or other relief may be awarded or enforced with respect to an alleged construction defect.” (H.R.S. 672E-1). Act 119 does not, however, apply to actions that include claims for personal injury or death. (H.R.S. 672E-2).

When preparing the notice of claim of construction defect, the claimant must describe the claim in detail and include the results of any testing. (H.R.S 672E-3). Any contractor served with a written notice of claim may, in turn, serve other appropriate subcontractors with the notice of the claim. (Id.) It is therefore important for those served with a notice of claim to identify relevant parties at an early date so that such parties may also be served and brought into the Act 119 procedure.

Moreover, in what appears to be an attempt to limit the impact of such claims on insurance premiums, Act 119 specifically provides that this notice of claim shall not constitute a claim under any applicable insurance policy and will not give rise to a duty of any insurer to provide a defense unless and until the process set forth under Section 5 of the Act (concerning the acceptance or denial of settlement offers) is completed. (Id.) When to notify an insurance carrier and whether the insurance carrier must immediately pay defense costs (including investigative costs) are therefore issues that may possibly need to be considered in light of Act 119 as well as the under the terms of the insuring contract.

Responding to a Notice of Construction Defect Claim.

In general, Act 119 allows a contractor to respond to a notice of construction defect claim by denying the claim, by offering to settle by repairs, monetary payment or a combination of both, or by requested an inspection of the premises. (H.R.S. 672E-4). If the parties cannot settle the dispute, then the Act provides for mediation.

More specifically, within 30 days after service of the notice of claim, the contractor must provide a written response that either (1) offers to settle without the need to inspect the alleged defect by way of making a monetary payment, by making repairs, or both, or (2) contains a proposal to inspect the premises of the alleged construction defect. (H.R.S. 672E-4). Alternately, the contractor may serve a written rejection of the claim or, if the contractor fails to provide a timely response to the notice of claim within 30 days as indicated above, then the contractor will also be deemed to have rejected the claim. (Id.)

If the contractor submits a proposal for inspecting the premises, then the claimant is required to provide access to the premises within 30 days to allow the contractor to: (1) inspect, (2) document alleged construction defects, and (3) perform any testing required to evaluate the defect and necessary remedial work. (H.R.S. 672E-4). If the claimant is an Association of Apartment Owners, then such Associations have 45 days to provide access. (Id.) If destructive testing is required, the contractor must provide advance notice of such testing and return the premises to its pre-testing condition. (Id.) If the initial inspection or testing reveals a condition that requires additional testing, then the contractor has the ability to request additional testing by providing notice to the claimant and the claimant is required to provide additional access to the premises. (Id.) Act 119 does not, however, specify the time period by which additional access must be provided and/or whether a contractor has the ability to make repeated requests for additional testing.

Within 14 days following the inspection and testing, the contractor must serve on the claimant, in writing, either (1) an offer to fully or partially remedy the defect including a description of the construction and time table for completion, or (2) an offer to settle the claim by monetary payment or a combination of repairs and monetary payment, or (3) a statement that the contractor will not proceed to remedy the alleged defect. (H.R.S. 672E-4). Failure by the contractor to make an offer or statement as indicated above will be deemed to be a statement that the contractor will not proceed further. (Id.)

After a claimant receives a settlement offer from the contractor, which can be made either without or following an inspection as indicated above, the claimant has 30 days to accept the offer by providing a written notice of acceptance. (Section 5). Associations, however, have up to 45 days to respond. (Id.) If the claimant does not respond by serving a written notice of acceptance, then the claimant is deemed to have denied the settlement offer. (Id.)

In addition, at any time after service of the notice of the claim, any party may serve an offer of settlement. (H.R.S. 672E-6). If such an offer is not accepted within 10 days after service, the offer shall be deemed withdrawn and evidence of the offer is not admissible except to determine costs. (Id.) In particular, if a judgment or award obtained in a subsequent proceeding is not more favorable than the offer made, then the offeree is required to pay the costs incurred by the offerer after the making of the offer. (Id.) Act 119 does not, however, define, what constitutes “costs” under this section. In addition, there is an inconsistency among the various sections of Act 119 with respect to the time period for responding to settlement offers. For example, Section 5 provides the claimant with 30 days (or 45 days if the claimant is an Association) to respond to a contractor’s offer. However, Section 6, provides only 10 days within which to respond to a settlement offer. In any event, the potential adverse consequences associated with rejecting an offer may affect the way parties evaluate the timing and handling of settlement offers.

Mediation Requirement.

If the parties are unable to resolve the claims by way of accepting offers made under Sections 5 or 6, then Act 119 requires the parties to attempt to resolve their disputes through mediation, even if mediation may not be otherwise required in the contract documents. (H.R.S. 672E-7).

Statute of Limitations Exception and Additional Claims.

Finally, Act 119 does allow a party to promptly file an action against a contractor if an applicable statute of limitation or repose might otherwise bar the action if the claimant were to wait for the dispute to be resolved under Act 119. (H.R.S. 672E-8). Such an action, however, must be immediately stayed pending the contractor’s opportunity to repair or the submission of the dispute to mediation. (Id.) In addition, if additional construction defects are discovered after the initial notice of claim, then the claimant must again provide notice of the new claim to the contractor. (H.R.S. 672E-9).

This article is only a general summary of Act 119 and is not intended to cover every aspect or ramification of Act 119. Likewise, the article is not intended to serve as or substitute for legal advice. Accordingly, it is recommended that you contact an attorney if legal advise is needed concerning Act 119.

Lennes N. Omuro is a partner in the firm’s Litigation Section working in construction, premises liability, insurance, professional malpractice, personal injury and other litigation areas. Goodsill Anderson Quinn & Stifel represents developers, contractors and other parties in a wide range of construction and real estate litigation matters. Click for more information on the Real Estate and Construction Litigation subpractice area, or you may also access information on other attorneys in this practice area, Jacqueline Earle, Edmund Saffery, Thom Benedict, Corlis Chang, Donna Kalama, Lindalee Farm, and Audrey Ng.

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