Lawyer Beware: New Procedures in Residential Construction Disputes

Sarah Read1	Catherine Barrie1	Robert D. Litz1

I. Introduction

Driving along Interstate 70, one can see many new construction sites. Business is booming. However, as the rural landscape changes and buildings rise, conflicts will also arise regarding the quality of construction. New legislation affects how such disputes might be resolved in the future. This legislation applies to both new home construction and to certain remodeling contracts.2

On July 12, 2005, Governor Blunt signed Senate Bill 168, a “notice and right to repair bill” that was introduced in the General Assembly with the support of the Homebuilders Association of Missouri, St. Louis Homebuilders Association, and Homebuilders Association of Greater Springfield, among others. This article outlines key provisions of SB 168 as it was enacted, provides a brief history of right to repair legislation in general and SB 168 in particular, and discusses some issues that have been raised by various commentators relating to the mediation provisions in the bill.

II. Overview of Senate Bill 168

In its simplest form, notice and right to repair legislation is designed to ensure that contractors and homeowners discuss any claims of construction defects, and that the builder be given an opportunity to make things right, before a lawsuit is filed. In addition to notice and right to repair provisions, SB 168, as enacted, included provisions requiring non-discrimination in the governing documents of a homeowners’ association and voluntary mediation provisions.3 Each of these is summarized below.

A. Notice & Right to Repair Provisions

SB 168 creates a process to resolve disputes arising out of alleged construction defects in residential property. When applicable, the process must be followed before an action can be filed on a homeowner’s claim.4 The provisions of the bill outline: how and when notice is to be given and by whom; time frames for responses and the type of response; and the points at which a consumer is free to file a claim in the courts. This process does not apply: (i) when a contractor has not given the required notice at the time of the original contract; (ii) if the claim is one originating in small claims court or one for wrongful death or personal injury; (iii) if the original contract provides for binding arbitration; or (iv) if the contractor has first sued the homeowner.5 The flow chart in Diagram 1 illustrates the notice and right to repair provisions process set forth in the law as enacted.

For the process outlined in the bill to apply, the contractor6 first must give “notice to each homeowner upon entering into a contract for sale, construction, or substantial remodel of a residence of the contractor’s right to offer to cure construction defects before a claimant may commence action against the contractor.”7 The statute requires this notice to be conspicuous and allows for the notice to be included with the underlying contract signed by the homeowner.8 The notice also must include the time frames set forth in § 436.365, RSMo Supp. 2005. A suggested form for this notice is included in § 436.353.2, RSMo Supp. 2005. As noted above, in the event that the contractor fails to provide such written notice, the homeowner will not be precluded or barred from action on claims against the contractor.9

When the homeowner identifies a defect, it must notify the contractor and provide the contractor an opportunity to respond to the notice. The contractor may: (i) offer to make repairs; (ii) propose to inspect the residence and offer to remedy the defect; (iii) remedy part of the claim without inspection and settle the remainder by monetary payment; (iv) offer to settle all of the claim without inspections; or (v) dispute the claim and either remedy or settle the claim.10 With one limited exception, if the homeowner makes repairs on his or her own before contacting the contractor or while awaiting its response, the costs of such repairs cannot subsequently be recovered from the contractor.11 The contractor also has certain rights to inspect the residence or to offer various remedies.12 The homeowner must formally accept or reject any offer made by the contractor.13

There are additional provisions that apply to homeowners’ associations that want to bring claims against contractors for alleged construction defects in the common areas within residential communities. The rules as stated above still apply, and there may be an additional step related to the homeowners’ association’s rejection of a written settlement offer from the contractor. This additional step would occur if the contractor includes in its written offer of settlement a request that the association hold a meeting of members, and in the event that the governing board rejects the written settlement offer. If such a request is made, the board must hold a meeting of the members to discuss the options available to address the construction defects prior to filing any action relating to the alleged construction defects.14

B. Non-Discrimination Pursuant to

§ 213.040, RSMo 2000: Prohibiting Restrictive Covenants

During the Senate floor debate, an amendment was offered to prohibit any declaration or other governing document of a homeowners’ association from including a restrictive covenant in violation of §213.040, RSMo 2000, which relates to unlawful housing practices and discrimination in housing. The law directs homeowners’ associations to amend existing documents to eliminate any such requirements, and specifically authorizes associations to take corrective action without obtaining approval of the owners and without changing the other provisions of the governing documents.15

C. Mediation Provisions

"'Mediation’ is a process in which a neutral third party facilitates communication between the parties to promote settlement.”16 As commonly understood, in mediation the neutral “may not[, and does not,] impose his or her own judgment on the issues for that of the parties.”17 As SB 168 moved to final passage, mandatory mediation provisions that were in the original bill (and in predecessor bills) were eliminated. Although the law as enacted encourages use of mediation, its use is voluntary. Either party may request mediation at any time, and mediation entered into as a result of the laws must be “nonbinding and independently administered.”18 This and other consumer safeguards in the mediation process provided for in the bill are discussed in section IV below. The law also includes time frame guidelines for the mediation process to keep the process on track and to prevent the use of mediation as a method for delaying administration of a claim.19

III. A Brief Overview of Right To Repair Legislation & The Evolution of SB 168

Laws providing for notice and right to repair have been enacted in a number of states in recent years. Prior to 2005, several states adjoining Missouri had passed such legislation. These included Kansas, Kentucky and Tennessee.20 The statutes passed in these states were procedurally less complex than SB 168 as originally proposed. Unlike the original version of SB 168, these laws did not include mandatory pre-suit mediation.21

Late in the 2003 legislative session, the Missouri General Assembly first considered a notice and right to repair bill, HB 573. This proposal died after an April 30, 2003 hearing before the House Judiciary Committee.22 In 2004, the General Assembly passed a notice and right to repair bill, SB 1081, which contained mandatory pre-suit mediation provisions and had a number of other procedural provisions that raised serious concerns regarding equality between the homeowner and contractor within the process. Governor Holden vetoed this bill, stating that “[w]hile it is a laudable goal to resolve disputes without litigation, this bill puts consumers at a distinct and unjustified disadvantage.”23 Governor Holden’s veto message specifically focused on mandatory mediation provisions in the bill. While recognizing that mediation could be “an appropriate and important form of alternative dispute resolution,” Governor Holden pointed out that “[m]andatory mediation, where parties with unequal leverage are involved, is unproductive, particularly in small construction disputes where the cost of mediation could exceed the value of the claim.”24 The veto message also pointed out a constitutional defect in the mandatory mediation provisions:

Provisions in this legislation contain procedural hurdles that, without adequate justification, delay the claimant from filing a lawsuit against a contractor. Article 1, Section 14 of the Missouri Constitution provides, “That the court of justice shall be open to every person, and certain remedy afforded for every injury to person, property or character, and that right and justice shall be administered without sale, denial or delay.” Missouri’s judicial branch has historically set high standards when evaluating the constitutionality of mandatory pre-filing procedures. Certain aspects of this bill may very well fail to satisfy the courts’ standards.25

Despite these concerns, the original version of SB 168 as introduced raised the same and additional procedural concerns as the previous year’s vetoed bill. SB 168 did not include an exclusion for small claims,26 required the consumer to provide detailed information regarding its claim to the contractor, including detail on “the nature and cause of the construction defect,” such as “expert reports, photographs, and videotapes,”27 eliminated various timeframes applicable to action by the contractor,28 eliminated requirements that a contractor conduct any necessary inspection during reasonable working hours, and failed to include a requirement that the contractor provide the homeowner with a copy of any inspection report.29 In several instances, the original version of the bill provided that a consumer’s claim would be entirely lost if the detailed procedures applicable to consumers were not followed exactly.30 The original bill also prohibited the consumer from filing suit before complying with mandatory pre-suit mediation provisions that were inadequate.31 Finally, SB 168 as originally filed added a provision that barred recovery if a consumer was subsequently deemed to have rejected a “reasonable offer,” while denying the consumer any access to the information needed to evaluate such an offer.32

On January 28, 2005, The Missouri Bar’s Board of Governors, through its executive committee – and after review of comments from several bar legislative review subcommittees – voted to oppose this bill as written. During hearings in the House and Senate, members of the bar (including two of the authors) provided testimony stating that the procedures in the bill were contrary to the fundamental principles of fairness of process and administration of justice that the bar is sworn to protect, and contrary to the open access to the courts guaranteed by Mo. Const. art. I, § 14.

During the first hearing before the Senate Judiciary Committee, Senator Matt Bartle, chair of the committee and a member of The Missouri Bar, announced both that the committee would immediately revise the bill to restore at least those procedures that had been set forth in the prior session’s SB 1081, and that further changes would also be made through the committee. With the leadership of Senator Chris Koster, a former prosecutor and member of The Missouri Bar, a number of significant additional amendments were made. These included: clarifying and simplifying the notices to be given; eliminating the claim preclusion provisions; providing reasonable limits on a contractor’s right to enter and inspect a home; requiring the contractor to provide a copy of any inspection report to the homeowner; eliminating the mandatory pre-suit mediation procedures; and inserting the voluntary mediation provisions discussed below.33 The revised bill was finally passed by the General Assembly on May 9, 2005, and the notice and right to repair provisions took effect on August 28, 2005.

As SB 168 was progressing through the Missouri General Assembly, similar legislation was being considered in the State of Oklahoma. SB 431, the Homeowner Construction Defect Protection Act, was passed by the Oklahoma General Assembly on May 17, 2005. Although the Oklahoma bill did not provide for mandatory pre-suit mediation, it contained many of the other procedural flaws eliminated by the Senate amendments to SB 168,34 and did not exempt personal injury or wrongful death claims from its required process. SB 431 was vetoed by Oklahoma Governor Brad Henry on May 25, 2005 with the following message:

I have VETOED Senate Bill 431. This legislation represents a significant change in Oklahoma law as it relates to the construction, repair and remodel of homes and the rights of consumers. It places substantial requirements on the consumer and unduly restricts the consumer’s rights when there are construction defects. It may necessitate that the consumer consult with an attorney when attempting to resolve a construction defect. While this legislation contains good concepts and should be discussed further, the legislation as drafted is fraught with problems.35

By revising SB 168, the General Assembly was able to eliminate or mitigate many of the procedural flaws that led to vetoes of similar proposals in Missouri and elsewhere. As noted above, one of the procedural amendments involved mediation provisions. These provisions are further discussed in the next section.

IV. Mediation Issues

As noted above, one significant change made in the mediation provisions of SB 168 through the legislative process was the elimination of mandatory mediation provisions and substitution of voluntary mediation provisions.36 Additional changes to ensure the fairness of the mediation process were made as well. These included the addition of provisions that mediations occurring as a result of this law be “nonbinding and independently administered,” that the contractor and claimant “mutually agree upon a qualified independent and neutral mediator,” and provisions to ensure the confidentiality of the mediation communications.37 The amendments further provided that “[n]otwithstanding any provisions of law or the agreements of the parties to the contrary, the resolution of the dispute by the parties through mediation or otherwise shall not operate to release any claim of the claimant except the claim described in the notice of defect, and shall not operate to release the claim described in the notice of defect until the agreed upon remedy has been accomplished.”38 Questions have already been raised in various forums sponsored by the Association of Missouri Mediators (AMM) as to the meaning and intent of the above quoted phrases.

The authors suggest that the reference to “nonbinding mediation” refers to the characteristic most often quoted as distinguishing mediation from arbitration – the parties cannot be bound without their consent, that is, no decision can be imposed by the neutral. This is consistent with the definition of mediation set forth in Supreme Court Rule 17. The phrases “independently administered” and “qualified independent and neutral mediator” further reflect consumer due process protocols that have been suggested and discussed within the mediation community since 1998. As defined by these protocols, the phrase “independently administered” would include oversight by an independent ADR institution that maintains panels of neutrals, facilitates neutral selection, collects and distributes fees and expenses, monitors neutral qualifications and performance, and implements rules and procedures, including those relating to the screening of conflicts of interest.39 Examples of independent administration would include programs run by the American Arbitration Association, United States Arbitration and Mediation Midwest, Inc., and the Better Business Bureau. Independent administration ensures that the consumer and contractor have an equal voice in the selection of the neutral, that the process is clearly understood by all parties, and that an unrepresented consumer is not placed at a disadvantage in the mediation process. Thus, this requirement for independent administration is consistent with the concern for fair process reflected throughout the amendments to SB 168. The provision for a “qualified independent and neutral mediator”40 also can be defined by consumer protocols and ethical rules regarding the qualification of mediators against published standards, and enforcement of rules governing conflicts of interest.41

The final quoted statement above from § 436.362.5, RSMo Supp. 2005, relating to release of claims, is a protection for the unrepresented consumer who has been brought into the statutory process through the contractor’s notice and agreed to a voluntary resolution through mediation. The consumer will not be deemed to have waived or compromised any claim other than the one presented and that one only when the remedy is completed, regardless of what language might be added in the mediation agreement. For this reason, if additional claims other than those that are identified in the notice of claim are identified by the parties during the notice and inspection period, the attorneys for the parties should make sure the appropriate additional notices are given prior to mediation so that those claims can be discussed, and, if possible, resolved as well.

V. Conclusion

The authors believe strongly in the benefits of early dispute resolution through voluntary discussions between the parties such as these promoted through SB 168. In particular, mediation can provide a highly efficient, cost effective way to resolve disputes that the parties cannot work out by themselves, and can allow for resolutions that are highly satisfactory to the parties, mutually beneficial, and not always available in a court of law. The authors also believe that the mediation process must be fair and properly structured. In its final form, SB 168 provides the opportunity for, and encourages, such consensual resolutions. It also, however, includes some traps for the unwary, and consumers would benefit from counsel experienced with various options for resolving conflict throughout the “notice and right to repair” process.

Diagram 1: Truly Agreed to & Finally Passed HCS for SS for SCS for SB 168

Footnotes

1 Sarah Read is an attorney, mediator and consultant in Columbia. She is currently a co-chair of The Missouri Bar’s Alternative Dispute Resolution Committee and is a graduate of Yale University and the University of Wisconsin. Catherine Barrie is The Missouri Bar’s Senior Legislative Counsel. She is a graduate of Duke University and St. Louis University School of Law. Robert D. Litz is of counsel to the St. Louis law firm of Carter Bauer Soule, LLC. He currently serves as a co-chair of The Missouri Bar’s Alternative Dispute Resolution Committee and is a graduate of Drake University and the University of Missouri-Kansas City School of Law.

2 Section 431.350(9), RSMo Supp. 2005, defines “substantial remodel” as “a remodel of a residence, for which the total cost exceeds one-half of the assessed value of the residence for property tax purposes at the time the contract for the remodel work was made.”

3 Sections 213.041, 436.350, 436.353, 436.356, 436.359, 436.362, and 436.365, RSMo Supp. 2005.

4 Sections 436.356.6-8, RSMo Supp. 2005, preserve the right to file a claim. The claim is then stayed if the applicable statute of limitations expires.

5 Sections 436.353.3, 431.350(1), 436.365.2, and 436.353.4, RSMo Supp. 2005.

6 Section 431.350(5), RSMo Supp. 2005, defines a contractor as “any person, company, firm, partnership, corporation, association, or other entity that is engaged in the business of designing, developing, constructing, or substantially remodeling residences[.]” Thus, it is possible that the owner might get a notice from an architect but not from a contractor or vice versa. Nor is it clear to what extent a notice by one such entity affects claims against the others. This is an issue to think about when advising a client who is building a house and working with several different entities.

7 Section 436.353.1, RSMo Supp. 2005. Section 431.350(3), RSMo Supp. 2005, defines a claimant as “a homeowner or association which asserts a claim against a contractor concerning an alleged construction defect.”

8 Id.

9 Section 436.353.3, RSMo Supp. 2005. Also see footnote 6.

10 Sections 436.356.2(1)-(5), RSMo Supp. 2005.

11 The statute does allow homeowners to undertake reasonable repairs necessary to mitigate conditions that threaten the life or safety of persons, including defective garage doors. (See § 436.356.10, RSMo Supp. 2005.) Unlike other repairs, costs associated with such emergency repairs may later be included in the original claim.

12 Sections 436.356.4(1) and 436.356.2(1)-(5), RSMo Supp. 2005.

13 Sections 436.356.3(2)-(3), RSMo Supp. 2005.

14 Sections 436.359.1-5, RSMo Supp. 2005.

15 Procedures for enforcing these provisions are enacted as § 213.041.1-4, RSMo Supp. 2005. See also Journal of the Senate, Wednesday, March 30, 2005, p. 524, Senate Amendment No. 2.

16 Rule 17.01(b)(3).

17 Id.

18 Section 436.362.1, RSMo Supp. 2005.

19 Id.

20 2003 Kan. Acts 74, § 4; 2003 Ky. Acts 123 § 5; and 2004 Tenn. Pub. Acts 741, § 4.

21 Kansas, unlike Missouri, requires the contractor to serve relevant subcontractors (Kan. Stat. Ann. § 60-4704(b) (2005)). Also refer to footnote 6.

22 See Journal of the House, Thursday, February 27, 2003, p. 482; Journal of the House, Thursday, March 6, 2003, p. 580. See also http://www.house.mo.gov/bills03/action/aHB573.htm.

23 SB 1081 veto letter from Gov. Bob Holden to Missouri Secretary of State of 7/6/04 (on file with author, Sarah Read).

24 Id.

25 Id.

26 SB 168 § 431.300(1). Note that the reference to SB 168 refers to the original Senate bill as introduced January 12, 2005. Subsequent revisions of this bill are referred to as substitutions. Statutory section numbers are used to identify the provisions of this bill as enacted.

27 SB 168 § 431.303.1.

28 Compare SB 168 §§ 431.303.2, 5, and 10 to HSC SS SB 168 §§ 431.306.2 and 431.306.4.

29 SB 168 § 431.303.5.

30 SB 168 §§ 431.303.1, 3-4, 7-9, 11, and 18-19.

31 SB 168 § 431.306.

32 SB 168 §§ 431.303.12 and 431.303.5-6.

33 Journal of the Senate, Wednesday, March 30, 2005, pp. 524-525.

34 Specific notice by a homeowner, including “[a]n itemized list of every item which comprises the construction defects[,]” was required in SB 431, 50th Leg., 1st Sess. (2005) §3 (A) of the Oklahoma legislation. Two additional consumer protections included in the truly agreed to and finally passed version of SB 168 § 431.306.4(1) – (i) the requirement that access for inspection be limited to normal working hours; and (ii) the requirement that the contractor repair damages caused by destructive testing or furnish the homeowner with a copy of the inspection report – were not included in the Oklahoma legislation.

35 http://www.gov.ok.gov/billtrack/index.php.

36 Section 436.362, RSMo Supp. 2005.

37 Sections 436.362.1 and 4, RSMo Supp. 2005.

38 Section 436.362.5, RSMo Supp. 2005.

39 See A.B.A. Model Standards of Conduct for Mediators (2005) and Consumer Due Process Protocol, Principle 2 (Am. Arbitration Ass’n, 1998).

40 Section 436.362.1, RSMo Supp. 2005.

41 Consumer Due Process Protocol, Principle 4 (Am. Arbitration Ass’n, 1998). Also refer to footnote 39.