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#9:  Licensing of Contractors: Is It Needed?

6/25/2014

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The widespread practice of licensing professionals – doctors, lawyers, architects and engineers, insurance brokers, real estate agents, even barbers – stems from the notion that a basic level of competence ought to be demonstrated before these professionals are turned loose on the public to practice their trade.  In about half of the states (check out www.nascla.org for a list) and in some cities or counties of other states (New York comes to mind), residential and occasionally even commercial contractors are included among those who must be licensed.  Here in the land of “Live Free or Die,” however, contractors are free of state licensing requirements.  No demonstration of skill or knowledge of building codes is required as a condition of going into business.  

There are exceptions for certain specialty trades.  New Hampshire does require licensing of plumbers, electricians, septic system installers, water well contractors, asbestos abatement and lead abatement contactors.  The Department of Transportation also requires bidder prequalification for its projects, a process that does inquire somewhat into the bidder’s experience and abilities.  But when it comes to most tasks involved in the construction process, be it digging a cellar hole, pouring concrete, framing, roofing, installing HVAC or masonry, anyone can be in business, whether or not they know which end of a hammer to grab or which lever of a backhoe to pull.  It’s not that our Legislature thinks that contractors can do less damage than barbers (they surely realize that a bad haircut eventually corrects itself, a bad building doesn’t).  Still, every time a bill has been before the Legislature to require statewide licensing of contractors, it has been defeated.  Soundly.

If I may offer my $0.02 here, I don’t see a compelling need for contractor licensing, even in the residential arena where owners tend to be less sophisticated than their commercial counterparts and less likely to engage an architect or other professional to protect their interests by reviewing compliance with plans and specs and certifying payment of requisitions. 

First, in construction settings the market does a particularly good job of weeding out incompetence.  The various trades involved in constructing a building are coordinated by a general contractor who interfaces with the owner, relieving the owner of the burden of hiring individual subs.  The GC is in a far better position than the owner to check on the competence of drywallers, insulators, painters, etc. – and has every incentive to hire only the good ones, because the GC is on the hook to the owner for their performance.  If they are bad, they make the GC look bad -- and in this era of electronic communication and Better Business Bureau/Angie’s List websites, bad builders don’t last in business. 

Second, most municipalities have building inspectors and code enforcement officers whose job it is to review construction for compliance with building code requirements.  When they do their job right, this regulatory inquiry provides owners with at least some basic protection from unsafe structures – which is precisely the rationale of a licensing scheme.  Sure, they miss things occasionally, but a builder can’t count on that, and so must at least try to build a code-compliant structure.

I am not saying that there is no need for legislation of any kind related to contractors – but I do think that where problem areas are identified, legislation addressing them should be targeted and narrow.  For example, one of the largest category of complaints against contractors made to the Consumer Protection Bureau at the Attorney General’s Office is not poor quality construction, but abandonment of the project after taking a substantial deposit.  That type of fraudulent practice can be dealt with by requiring a surety bond as a condition of taking a sizeable deposit.  A full blown licensing law would be overkill here.

All things considered, the quality of construction in the Granite State does not appear to be below average.  If it ain't broke . . .


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#8:  Payment Bonds

6/16/2014

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If they’ve been in the game long enough, subcontractors and suppliers all eventually run into difficulties getting paid for their work and materials by those who contracted for them.  The option of suing for payment isn’t always attractive and won’t always be fruitful (e.g., when a general contractor goes under).  For those occasions, wouldn’t it be nice to have a third party with deep pockets step up and guarantee payment?  That is precisely what a payment bond is supposed to do.  In exchange for the contractor’s payment of a premium and a written promise to indemnify any losses (secured by a pledge of assets and personal guarantees of the contractor’s principals), a bonding company will put its own credit on the line.

On some private construction projects and on virtually all public construction projects, general contractors are required to furnish a bond, typically issued by an insurance company, for the benefit of those who supply labor and materials to the job.  In the public setting this is a matter of statute (RSA 447:16-18 for state and municipal work, 40 U.S.C. §§ 3131-3134 for federal work), intended as a substitute for mechanic’s liens, which do not attach to public buildings. 

Bond claims are subject to strictly-enforced notice requirements.  Under the federal statute the claim must be made by giving written notice to the contractor within 90 days of the claimant’s last day of work or furnishing of materials.  The state statute is more generous: a claim must be filed with the appropriate governmental body “within 90 days after completion and acceptance of the project by the contracting party.”  The express terms of the bond may have additional notice provisions and deadlines – but if these differ from the statutory provisions, the statutory provisions will control for any bond given on a project that is subject to the statute.

One important difference between payment bonds on federal projects and payment bonds on state or municipal projects lies in who can claim under them.  The federal project payment bond covers persons having "a direct relationship with the principal or a subcontractor of the principal;" lower tiers are shut out.  The state statute has no such limitation.


A payment bond guarantees payment of what the contractor actually owes, and that amount may be in dispute.  If the contractor purchasing the bond disputes the claim in whole or in part, the bonding company will typically do some investigation to determine how much is justly due―including asking for a sworn itemization of the claim and supporting documents, and getting its principal’s side of the story documented as well.  If a good faith investigation leaves the matter unclear, it’s a safe bet that the bonding company won’t pay the amount in dispute without its principal’s consent, which usually means that a lawsuit must be filed on the bond.  Those lawsuits have their own separate statutory and/or contractual requirements and deadlines.

Procedural defenses like insufficient notice or untimeliness aside, it is often said that a bonding company has all of the defenses to payment that the general contractor has (bankruptcy being the most notable exception).  That may be overstating things.  Thus far no reported New Hampshire case has ruled on a key question that has divided courts in other states: if there is a “pay-if-paid” provision in the subcontract and the general contractor hasn’t been paid by the owner, can the bonding company also hide behind the “pay-if-paid” clause and avoid paying the sub?  The issue is nuanced; I will elaborate in a future blog.  It may seem unfair to the bonded contractor to require the bonding company to pay in such circumstances, given that the contractor must reimburse the bonding company for every penny paid out on a claim, despite not having been paid itself. But there are a few precedents reaching that result.

A payment bond takes the place of a mechanic’s lien only in the public works arena; the availability of a payment bond on a private project does not prevent simultaneous pursuit of a mechanic’s lien remedy.  Even on a state or local government project, a bond does not preclude the claimant from also getting a lien on the monies due or to become due from the awarding authority to the general contractor under RSA 447:15.  And in my experience, liening the money is the more powerful choice.


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#7:  Statutes of Limitation, the Discovery Rule, and Statutes of Repose

6/4/2014

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Statutes of limitations – deadlines for bringing a lawsuit – are premised on the notion that the passage of time naturally tends to result in lost evidence, disappearing witnesses and faded memories, eventually reaching the stage where justice cannot confidently be dispensed by the courts and forcing a defendant to defend becomes unfair.  In New Hampshire this length of time is generally three years from the time of the breach of duty – and in the construction setting, this will typically be a breach of a contractual duty.

If forcing a defendant to defend a stale claim is unfair, so is shutting out a plaintiff who couldn’t sue within three years of the breach because he or she didn’t have a fair opportunity to discover it―for example, when a latent construction defect first surfaces after three years. In that case the three-year clock will start ticking only when the breach is or reasonably should have been discovered.  Naturally enough, lawyers call this the “discovery rule.”

You can see the tension between these twin fairness concerns.  Theoretically, the discovery rule could allow a lawsuit to be brought decades after a breach, making defense an iffy proposition.  But in the construction setting, the Legislature has restruck the balance by enacting an eight year statute of “repose” – a deadline after which breaching parties can rest easy even if their breach has not yet been discovered.  RSA 508:4-b states:

“Except as otherwise provided in this section, all actions to recover damages for injury to property, injury to the person, wrongful death or economic loss arising out of any deficiency in the creation of an improvement to real property, including without limitation the design, labor, materials, engineering, planning, surveying, construction, observation, supervision or inspection of that improvement, shall be brought within 8 years from the date of substantial completion of the improvement, and not thereafter.”


There are some exceptions in the statute, but in general a claim is extinguished eight years after substantial completion regardless of whether the breach has yet been discovered.  In practical effect, the statute of repose is simply a cap on a plaintiff’s invocation of the discovery rule.  If the plaintiff knew or should have known of the breach within five years of substantial completion, the statute of repose isn’t really needed, because the statute of limitations will shut the plaintiff out anyway after eight years.  But if the breach is first discovered (or reasonably should have been discovered) more than five years after substantial completion, the repose clock will run out before the limitations clock does.  The plaintiff’s usual three-year post-discovery deadline is shortened by one day for each day beyond five years from the date of substantial completion that discovery occurred.

Note that neither the discovery rule nor the three year period applies to contracts for the sale of goods.  Unless the seller has warranted future performance of the goods for some longer period of time, the limitations period is four years from the date of sale, even if a problem with the goods is not discovered or reasonably discoverable until after those four years have expired.  (This can sometimes put a contractor in a pinch.  If you inadvertently build a building with defective goods, and the defect is first discovered by the owner more than four years after you bought those goods, the discovery rule may allow the owner to sue you, but you will have no recourse against the supplier!)

Whatever the statutory deadlines are, contracting parties are free to alter them by agreement, both as to length and as to triggering event – and many of them do.  The popular AIA form contract A201-2007, for example, overrides the discovery rule: “As to acts or failures to act occurring prior to the relevant date of Substantial Completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion.”  It is obviously smart to check your contract language at the first sign of trouble.  If you don’t, you may discover that SOL stands for something other than “statute of limitations!”


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    Frank Spinella

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