Everett A. Kendall II and Christy E. Mahon
Sweeny, Wingate & Barrow, P.A., Columbia
I. Breach of Contract
III. Breach of Warranty
IV. Misrepresentation and Fraud
V. Strict Liability Claims
VI. Indemnity Claims
A. Contractual Indemnity
B. Equitable Indemnity
VII. Statute of Repose/Statute of Limitations
VIII. Economic Loss Doctrine
IX. Diminution in Value
X. Delay Damages
XI. Recoverable Damages
A. Direct Damages
B. Loss of Use
C. Punitive Damages
D. Attorney’s Fees
XII. Insurance Coverage for Construction Claims
A. Occurrences That Trigger Coverage
B. Bodily Injury
C. Property Damage
D. Defective Workmanship
XIII. Right to Cure
A. Right to Cure (Residential)
B. Right to Cure (Nonresidential Construction)
This section is intended to provide a brief overview of general South Carolina Construction Law.
South Carolina is a comparative negligence state. A plaintiff in South Carolina may recover only if his/her negligence does not exceed that of the defendant's and amount of plaintiff's recovery shall be reduced in proportion to amount of his or her negligence; if there is more than one defendant, plaintiff's negligence shall be compared to combined negligence of all defendants. Nelson v. Concrete Supply Co., 303 S.C. 243, 399 S.E.2d 783 (1991).
The law governing joint and several liability has been amended, which may impact a construction defects case. S.C. Code Ann. Section 15-38-15 took effect July 1, 2005, and applies to causes of action arising on or after that date except for causes of actions relating to construction torts which would take effect July 1, 2005, and apply to improvements to real property that first obtain substantial completion on or after July 1, 2005. For improvements that obtain substantial completion prior to July 1, 2005, there is pro rata contribution among persons jointly and severally liable in tort except for cases involving an intentional tort or breaches of trust or other fiduciary obligation. Under the 2005 amendments to the S.C. Contribution Among Tortfeasors Act, in an action to recover damages resulting from personal injury, wrongful death or damage to property or to recover damages for economic loss or for noneconomic loss such as mental distress, loss of enjoyment, pain, suffering, loss of reputation or loss of companionship resulting from tortious conduct, if indivisible damages are determined to be proximately caused by more than one defendant, joint and several liability does not apply to any defendant whose conduct is determined to be less than 50 percent of the total fault for the indivisible damages as compared with the total of: the fault of all the defendants and the fault (comparative negligence), if any, of the plaintiff. A defendant whose conduct is determined to be less than 50 percent of the total fault shall only be liable for that percentage of the indivisible damages determined by the jury or trier of fact. A defendant shall retain the right to assert another potential tortfeasor, whether or not a party, contributed to the alleged injury or damages and/or may be liable for any or all of the damages alleged by any other party. These provisions do not apply to a defendant whose conduct is determined to be willful, wanton, reckless, grossly negligent or intentional or conduct involving the use, sale or possession of alcohol or the illegal or illicit use, sale or possession of drugs.
I. Breach of Contract
A breach of contract claim can be asserted by the purchaser against the general contractor, as well as by the general contractor against its subcontractors. A breach of contract claim in South Carolina is subject to a three-year statute of limitations. See S.C. Code Ann. Section 15-3-530.
To prove negligence, a plaintiff must show: the defendant owes a duty of care to the plaintiff; the defendant breached the duty by a negligent act or omission; the defendant's breach was the actual and proximate cause of the plaintiff's injury; and the plaintiff suffered an injury or damages. Doe v. Marion, 373 S.C. 390, 645 S.E.2d 245 (2007).
The causative violation of a statute constitutes negligence per se and is evidence of recklessness and willfulness, requiring the submission of the issue of punitive damages to the jury. Wise v. Broadway, 315 S.C. 273, 433 S.E.2d 857 (1993). Violation of a statute does not constitute recklessness, willfulness and wantonness per se, but is some evidence the defendant acted recklessly, willfully and wantonly. Id. It is always for the jury to determine whether a party has been reckless, willful and wanton. Id. However, it is not obligatory as a matter of law for the jury to make such a finding in every case of a statutory violation. Id.; see also Nguyen v. Uniflex Corp., 312 S.C. 417, 440 S.E.2d 887 (Ct. App. 1994) (generally, the determination of whether a statute has been violated is a question of fact for the jury; additionally, whether the violation of the statute is the proximate cause of an injury is also ordinarily a jury issue).
III. Breach of Warranty
In construction cases, plaintiffs typically assert causes of action for breach of warranty. The breach of warranty can be based on express warranty provisions contained in the contract between the plaintiff and the general contractor and/or warranties implied by law. Three-year statute of limitations is applicable (when knew or should have known).
A builder who contracts to construct a dwelling impliedly warrants that the work undertaken will be performed in a careful, diligent, workmanlike manner. Smith v. Breedlove, 377 S.C. 415, 661 S.E.2d 67 (Ct. App. 2008). This is distinct from an implied warranty of habitability, which arises solely out of the sale of the home. Id. Although the warranty of workmanlike service arises out of the construction contract to which the builder is a party, a subsequent purchaser may sue a professional builder on the implied warranty of workmanlike service despite the lack of contractual privity. Id.; see also Fields v. J. Haynes Waters Builders, Inc., 376 S.C. 545, 658 S.E.2d 80 (2008) (“this Court has embraced the notion that in constructing a home, a builder warrants that the home is fit for its intended use as a dwelling, that the home was constructed in a workmanlike manner and that the home is free of latent defects. This warranty extends not only to the original purchasers of the home, with whom the builder is in privity, but to subsequent purchasers who may pursue a cause of action in contract or tort against a builder for a reasonable period after the home's construction.”).
One who provides plans and specifications to a contractor and undertakes to oversee the project impliedly warrants the accuracy of those plans in their purpose and view. Tommy L. Griffin Plumbing & Heating Co. v. Jordan, Jones & Goulding, Inc., 320 S.C. 49, 463 S.E.2d 85 (1995); Hill v. Polar Pantries, 219 S.C. 263, 64 S.E.2d 885 (1951) (one who undertook to design and oversee a construction project for another impliedly warranted the design and quality of construction despite the lack of privity between the parties); Beachwalk Villas Condominium Association v. Martin, 305 S.C. 144, 406 S.E.2d 372 (1991) (if a party furnishes plans and specifications for a contractor to follow in a construction job, he thereby impliedly warrants their sufficiency for the purpose in view).
The Uniform Commercial Code (UCC) establishes three types of warranty: implied warranty of merchantability, implied warranty for fitness for a particular purpose, and express warranty. If the predominant factor of the transaction is the rendition of a service with goods incidentally involved, the UCC is not applicable. Plantation Shutter Co., Inc. v. Ezell, 328 S.C. 475, 492 S.E.2d 404 (Ct. App. 1997). If, however, the contract's predominant factor is the sale of goods with labor incidentally involved, the UCC applies. Id. In most cases in which the contract calls for a combination of services with the sale of goods, courts have applied the UCC. Id. In considering whether a transaction provides for both goods and services is a contract for the sale of goods governed by the UCC, courts generally employ the predominant factor test. Id. (contract for special manufacture and installation of shutters for home was predominantly contract for sale of goods, and thus was governed by S.C. version of UCC; while contract did authorize “work” to be performed, contract was entitled “Terms of Sale,” and did not provide for installation charges); see also S.C. Code Ann. Section 36-2-725 (1) (“An action for breach of any contract for sale must be commenced within six years after the cause of action has accrued.”).
IV. Misrepresentation and Fraud
In a case of actual fraud, based upon representation, there are nine elements essential to recovery, which are: a representation; its falsity; its materiality; either knowledge of its falsity or a reckless disregard of its truth or falsity; intent that the representation be acted upon; the hearer's ignorance of its falsity; the hearer's reliance on its truth; the hearer's right to rely thereon and the hearer's consequent and proximate injury. Carter v. Boyd Const. Co., 255 S.C. 274, 178 S.E.2d 536 (1971).
Further, South Carolina recognizes the common law tort of negligent misrepresentation. See deBondt v. Carlton Motorcars, Inc., 342 S.C. 254, 536 S.E.2d 399 (Ct. App. 2000). Where the damage alleged by the plaintiff is a pecuniary loss, the plaintiff must prove the following elements for negligent misrepresentation: the defendant made a false representation to the plaintiff; the defendant had a pecuniary interest in making the statement; the defendant owed a duty of care to see that he communicated truthful information to the plaintiff; the defendant breached that duty by failing to exercise due care; the plaintiff justifiably relied on the representation and the plaintiff suffered a pecuniary loss as the proximate result of his reliance upon the representation. Id. For purposes of proving negligent misrepresentation, evidence a statement was made in the course of the defendant's business, profession or employment is sufficient to prove the defendant's pecuniary interest in making the statement, even though the defendant received no consideration for it. Id.
To recover punitive damages, the plaintiff must present clear and convincing evidence the defendant's conduct was willful, wanton or in reckless disregard of the plaintiff's rights. Cody P. v. Bank of America, N.A., 395 S.C. 611, 720 S.E.2d 473 (Ct. App. 2010). Punitive damages are not recoverable in an action based on negligent conduct. Harold Tyner Development Builders, Inc. v. Firstmark Development Corp., 311 S.C. 447, 429 S.E.2d 819 (Ct. App. 1993); see Lengel v. Tom Jenkins Realty, Inc., 286 S.C. 515, 334 S.E.2d 834 (Ct. App. 1985) (verdict for plaintiff on a cause of action for negligent misrepresentation did not support an award of punitive damages in the absence of proof of a willful, wanton or reckless act). Punitive damages are recoverable, however, in an action based on fraud. Harold Tyner Development Builders, Inc. v. Firstmark Development Corp., supra; see also Elders v. Parker, 286 S.C. 228, 332 S.E.2d 563 (Ct. App. 1985) (even though the jury returned a general verdict in an action for breach of contract and fraud, the plaintiff was held entitled to punitive damages where the evidence supported a finding of fraud).
The statute of limitations is three years. S.C. Code Ann. Section 15-3-530.
V. Strict Liability Claims
In South Carolina, it is firmly established that the strict liability statute applies only to sales of products and not to the provision of services. Fields v. J. Haynes Waters Builders, 376 S.C. 545, 658 S.E.2d 80 (2008) (builder, as general contractor for construction of home, provided services rather than product, and thus, was not subject to strict liability for damage from installation of defective stucco siding that allowed moisture intrusion, in homeowners' action against builder).
Under the S.C. Defective Products Act, one who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his or her property is subject to liability for physical harm caused to the ultimate user or consumer or to his or her property, if the following apply:
- The seller is engaged in the business of selling such a product.
- It is expected to and does reach the user or consumer without substantial change in the condition in which it is sold. The rule shall apply although (a) the seller has exercised all possible care in the preparation and sale of his product, and (b) the user or consumer has not bought the product from or entered into any contractual relation with the seller. S.C. Code Ann. Section 15-73-10; see also S.C. Jurisprudence Products Liability Section 18.
VI. Indemnity Claims
There are two forms of indemnity: contractual indemnity and indemnity implied in law, or “equitable indemnity.” Rock Hill Telephone Co., Inc. v. Globe Communications, Inc., 363 S.C. 385, 611 S.E.2d 235 (2005).
A. Contractual Indemnity
Indemnity is that form of compensation in which a first party is liable to pay a second party for a loss or damage the second party incurs to a third party. Toomer v. Norfolk Southern Ry. Co., 344 S.C. 486, 544 S.E.2d 634 (Ct. App. 2001). A right to indemnity may arise by contract (express or implied) or by operation of law as a matter of equity between the first and second party. Id. Contractual indemnity involves a transfer of risk for consideration, and the contract itself establishes the relationship between the parties. Rock Hill Telephone Co., Inc. v. Globe Communications, Inc., 363 S.C. 385, 611 S.E.2d 235 (2005). A contract of indemnity will be construed in accordance with the rules for the construction of contracts generally. Federal Pacific Elec. v. Carolina Production Enterprises, 298 S.C. 23, 378 S.E.2d 56 (Ct. App. 1989).
S.C. Code Ann. Section 32-2-10 (“Hold harmless clauses in certain construction contracts”) provides:
Notwithstanding any other provision of law, a promise or agreement in connection with the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating, purporting to indemnify the promisee, its independent contractors, agents, employees or indemnitees against liability for damages arising out of bodily injury or property damage proximately caused by or resulting from the sole negligence of the promisee, its independent contractors, agents, employees or indemnitees is against public policy and unenforceable. Nothing contained in this section shall affect a promise or agreement whereby the promisor shall indemnify or hold harmless the promisee or the promisee's independent contractors, agents, employees or indemnitees against liability for damages resulting from the negligence, in whole or in part, of the promisor, its agents or employees. The provisions of this section shall not affect any insurance contract or workers' compensation agreements; nor shall it apply to any electric utility, electric cooperative, common carriers by rail and their corporate affiliates or the S.C. Public Service Authority.
B. Equitable Indemnity
Equitable indemnity is based upon the specific relation of the indemnitee to the indemnitor in dealing with a third party. Rock Hill Telephone Co., Inc. v. Globe Communications, Inc., 363l S.C. 385, 611 S.E.2d 235 (2005). South Carolina has long recognized the principle of equitable indemnification. Toomer v. Norfolk Southern Ry. Co., 344 S.C. 486, 544 S.E.2d 634 (Ct. App. 2001). S.C. courts have traditionally allowed equitable indemnity in cases of imputed fault or where some special relationship exists between the first and second parties. Id. According to the principles of equity, the right exists whenever the relation between the parties is such that either in law or in equity there is an obligation on one party to indemnify the other, as where one person is exposed to liability by the wrongful act of another in which he does not join. Id.; see First General Services of Charleston, Inc., v. Miller, 314 S.C. 439, 445 S.E.2d 446 (1994) (relationship of contractor/subcontractor was sufficient basis for claim of equitable indemnity even though owner alleged negligence on part of contractor with respect to work that was performed by subcontractor).
The damages that can be claimed under equitable indemnity may include the amount the innocent party must pay to a third party because of the at-fault party's breach of contract or negligence as well as attorney’s fees and costs that proximately result from the at-fault party's breach of contract or negligence. Town of Winnsboro v. Wiedeman-Singleton, Inc., 307 S.C. 128, 414 S.E.2d 118 (1992).
In general, there is no right to indemnity between joint tortfeasors. Toomer v. Norfolk Southern Ry. Co., supra.
VII. Statute of Repose/Statute of Limitations
No actions to recover damages based upon or arising out of the defective or unsafe condition of an improvement to real property may be brought more than eight years after substantial completion of the improvement. S.C. Code Ann. Section 15-3-640. The 2005 amendment substituted "eight years" for "13 years" and became effective July 1, 2005, and applies to improvements to real property for which certificates of occupancy are issued by a county or municipality or completion of a final inspection by the responsible local building official after the effective date. The 13-year period applies to the improvements for which a certificate of occupancy was issued prior to July 1, 2005.
The limitations provided by Section 15-3-640 are not available as a defense to any person guilty of fraud, gross negligence or recklessness in providing components in furnishing materials, in developing real property, in performing or furnishing the design, plans, specifications, surveying, planning, supervision, testing or observation of construction, construction of or land surveying, in connection with such an improvement or to any person who conceals any such cause of action. S.C. Code Ann. Section 15-3-670.
The limitations period for most personal injury, products liability, negligence claims and an action upon a contract is three years for actions arising on or after April 5, 1988. S.C. Code Ann. Section 15-3-530.
VIII. Economic Loss Doctrine
The Court stated, “the ‘economic loss rule’ simply states there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself. In other words, tort liability only lies where the damage done is to other property or is personal injury.” Kennedy v. Columbia Lumber & Mfg. Co., Inc., 299 S.C. 335, 341, 384 S.E.2d 730, 734 (1989). The Court expressed its concern that a strict application of the economic loss rule would undermine S.C.’s policy of protecting purchasers of new homes and refocused the inquiry on activity, not consequence. The Court held a cause of action in negligence is available where a builder has violated a legal duty, no matter the type of resulting damage. Id. The “economic loss” rule will still apply where duties are created solely by contract. Id. In that situation, no cause of action in negligence will lie. Id.
In Kennedy, the Court found a builder owed legal duties to a home buyer beyond the contract, and thus, a builder could be liable in tort for purely economic losses “where: the builder has violated an applicable building code; the builder has deviated from industry standards or the builder has constructed housing that he knows or should know will pose serious risks of physical harm.” Id. at 347, 384 S.E.2d at 738. The Kennedy court concluded an expansion in traditional concepts of tort duty was needed to provide the innocent home buyer with protection. The Court for its holding noted the inherent unequal bargaining positions, the fact that home buyers no longer supervised construction of the homes, and S.C.’s acceptance of the legal maxim caveat venditor. Id.
In Colleton Preparatory Academy, Inc. v. Hoover Universal, Inc., 379 S.C. 181, 666 S.E.2d 247 (2008), the S.C. Supreme Court expanded the Kennedy exception to the economic loss rule beyond the residential home building context to manufacturers. The Colleton “majority held the economic loss rule will not preclude a plaintiff from filing a products liability suit in tort where only the product itself is injured when the plaintiff alleges breach of duty accompanied by a clear, serious, and unreasonable risk of bodily injury or death.” Sapp v. Ford Motor Co., 386 S.C. 143, 149, 687 S.E.2d 47, 50 (2009). In Sapp, the S.C. Supreme Court explicitly overruled Colleton “to the extent it expands the narrow exception to the economic loss rule beyond the residential builder context.” Id.
The Sapp Court expressed an inclination to be “cautious in permitting negligence actions where there is neither personal injury nor property damage,” and noted “[i]mposing liability merely for the creation of risk when there are no actual damages drastically changes the fundamental elements of a tort action, makes any amount of damages entirely speculative, and holds the manufacturer as an insurer against all possible risk of harm.” Id. The Court specifically stated the exception to the economic loss rule announced in Kennedy was not intended to extend “beyond residential real estate construction and into commercial real estate construction ... [m]uch less did we intend the exception to the economic loss rule to be applied well beyond the scope of real estate construction in an ordinary products liability claim.” Id. at 150, 687 S.E.2d at 51. The Sapp Court emphasized “the exception announced in Kennedy is a very narrow one, applicable only in the residential real estate construction context.” Id.
IX. Diminution in Value
Under S.C. law, “[t]he general rule is that in case of an injury of a permanent nature to real property ... the proper measure of damages is the diminution of the market value by reason of that injury or in other words, the difference between the value of the land before the injury and its value after the injury. Where the pollution ... results in a temporary or nonpermanent injury to real property, the injured landowner can recover the depreciation in the rental or usable value of the property caused by the pollution.” Yadkin Brick Co., Inc. v. Materials Recovery Co., 339 S.C. 640, 645-646, 529 S.E.2d 764, 767 (Ct. App. 2000).
Diminution in market value is an appropriate measure of damages where there is injury of a permanent nature to real property. Where the injury is temporary, the landowner can recover the depreciation in the rental or usable value of the property caused by the injury. Peoples Federal Savings and Loan Ass'n of S.C. v. Resources Planning Corp., 358 S.C. 460, 596 S.E.2d 51 (2004).
X. Delay Damages
A contractor may be liable for delay damages regardless of whether time was of the essence of the contract. Drews Co., Inc. v. Ledwith-Wolfe Associates, Inc., 296 S.C. 207, 371 S.E.2d 532 (1988). Where a contract sets no date for performance, time is not of the essence of the contract and it must be performed within a reasonable time. Id. Generally “no damage for delay” provisions are valid and enforceable so long as they meet ordinary rules governing the validity of contracts. U.S. for Use and Benefit of Williams Elec. Co., Inc. v. Metric Constructors, Inc., 325 S.C. 129, 480 S.E.2d 447 (1997). Every contract contains the implied obligation of good faith and fair dealing. Id. Delay caused by fraud, misrepresentation or bad faith is exception to enforceability of “no damage for delay” clause in construction contract, as fraud, misrepresentation, and bad faith in performance of one's contractual duties would give rise to violation of the implied obligation of good faith and fair dealing. Id.
XI. Recoverable Damages
A. Direct Damages
“Under S.C. law, a negligent defendant who injures another is liable for compensatory damages ‘in proportion to the character and extent of the injury, and such as will fairly and adequately compensate the injured party.'" 11 S.C. Jurisprudence Damages Section 3 (2013).
“Generally, actual damages in either tort or contract are designed to compensate, return the injured party to his or her pre-injury state or give the injured party an amount of money that will compensate adequately for not being able to return to a pre-injury state.” Id. “In tort actions, the plaintiff may generally recover for ‘all damages, present and prospective, which are naturally the proximate consequences of the act done …, [including] compensation for whatever it may be reasonably certain will result from future incapacity in consequence of [the] injury.’" Id. “In contract actions, the plaintiff may generally seek as compensation the difference between the value of the contract if performed and the value of the contract after the breach—the value of the loss actually suffered because of the breach.” Id. “Contract damages ‘should place the plaintiff in the position he would be in if the contract had been fulfilled.’" Id. “In property cases, the plaintiff may generally recover the difference between the value of the property immediately before and after the breach or the injury.” Id. “As a general rule, anything that restricts the use, enjoyment or disposal of property may be said to destroy the property itself because ‘the substantial value of property lies in its use.’" Id.
B. Loss of Use
“The measure of damages for loss of use of property is determined by its reasonable rental value. If the property has no rental value, damages are determined by the value of the use of the property during the time its use was interrupted. In the case of a manufacturing plant, the value of this use may be based on past performance and profits.” S.C. Jurisprudence Damages Section 53 (2013).
C. Punitive Damages
For a plaintiff to recover punitive damages, there must be evidence the defendant's conduct was willful, wanton or in reckless disregard of the plaintiff's rights. Taylor v. Medenica, 324 S.C. 200, 479 S.E.2d 35 (1996). A tort is characterized as reckless, willful or wanton if it was committed in such a manner or under such circumstances that a person of ordinary reason and prudence would have been conscious of it as an invasion of the plaintiff's rights. Id. A conscious failure to exercise due care constitutes willfulness. Id. The plaintiff has the burden of proving punitive damages by clear and convincing evidence. Id.; see also Kincaid v. Landing Development Corp., 289 S.C. 89, 344 S.E.2d 869 (Ct. App. 1986) (whether deficiencies in building of house resulted from reckless, wanton or willful conduct, thus justifying punitive damages, was properly left to jury in homeowners' action against developer, sales and marketing agent and contractor, alleging negligence and breach of warranty).
S.C. Code Ann. Section 15-32-530 ("Awards not to exceed certain limits; Board of Economic Advisors to calculate adjustments to maximum awards; publication in State Register") provides:
(A) Except as provided in subsections (B) and (C), an award of punitive damages may not exceed the greater of three times the amount of compensatory damages awarded to each claimant entitled thereto or the sum of $500,000.
(B) The limitation provided in subsection (A) may not be disclosed to the jury. If the jury returns a verdict for punitive damages in excess of the maximum amount specified in subsection (A), the trial court should first determine whether: (1) the wrongful conduct proven under this section was motivated primarily by unreasonable financial gain and determines the unreasonably dangerous nature of the conduct, together with the high likelihood of injury resulting from the conduct, was known or approved by the managing agent, director, officer or the person responsible for making policy decisions on behalf of the defendant; or (2) the defendant's actions could subject the defendant to conviction of a felony and that act or course of conduct is a proximate cause of the plaintiff's damages. If the trial court determines either item (1) or (2) applies, punitive damages must not exceed the greater of four times the amount of compensatory damages awarded to each claimant entitled thereto or the sum of $2 million and, if necessary, the trial court shall reduce the award and enter judgment for punitive damages in the maximum amount allowed by this subsection. If the trial court determines that neither item (1) or (2) applies, the award of punitive damages shall be subject to the maximum amount provided by subsection (A) and the trial court shall reduce the award and enter judgment for punitive damages in the maximum amount allowed by subsection (A).
(C) However, when the trial court determines one of the following apply, there shall be no cap on punitive damages: at the time of injury the defendant had an intent to harm and determines that the defendant's conduct did in fact harm the claimant; the defendant has pled guilty to or been convicted of a felony arising out of the same act or course of conduct complained of by the plaintiff and that act or course of conduct is a proximate cause of the plaintiff's damages or the defendant acted or failed to act while under the influence of alcohol, drugs, other than lawfully prescribed drugs administered in accordance with a prescription or any intentionally consumed glue, aerosol or other toxic vapor to the degree that the defendant's judgment is substantially impaired.
(D) At the end of each calendar year, the State Budget and Control Board, Board of Economic Advisors must determine the increase or decrease in the ratio of the Consumer Price Index to the index as of December 31 of the previous year, and the maximum amount recoverable for punitive damages pursuant to subsection (A) must be increased or decreased accordingly. As soon as practicable after this adjustment is calculated, the Director of the State Budget and Control Board shall submit the revised maximum amount recoverable for punitive damages to the State Register for publication, pursuant to Section 1-23-40(2), and the revised maximum amount recoverable for punitive damages becomes effective upon publication in the State Register. For purposes of this subsection, “Consumer Price Index” means the Consumer Price Index for All Urban Consumers as published by the U.S. Department of Labor, Bureau of Labor Statistics.
2011 Act No. 52, Section 7, provides: “This act takes effect January 1, 2012, and applies to all actions that accrue on or after the effective date except the provisions of Section [Three] do not apply to any matter pending on the effective date of this act.”
D. Attorney’s Fees
In South Carolina, attorney’s fees are not recoverable unless authorized by contract or statute. Historic Charleston Holdings, LLC v. Mallo, 381 S.C. 417, 673 S.E.2d 448 (2009). But see discussion of equitable indemnity supra.
XII. Insurance Coverage for Construction Claims
Questions of coverage and the duty of a liability insurance company to defend a claim brought against its insured are determined by the allegations of the complaint. City of Hartsville v. S.C. Mun. Ins. & Risk Financing Fund, 382 S.C. 535, 543, 677 S.E.2d 574, 578 (2009). If the underlying complaint creates a possibility of coverage under an insurance policy, the insurer is obligated to defend. Id. An insurer's duty to defend is separate and distinct from its obligation to pay a judgment rendered against an insured. Id. at 544, 677 S.E.2d at 578. However, these duties are interrelated. Id. If the facts alleged in a complaint against an insured fail to bring a claim within policy coverage, an insurer has no duty to defend. Id. Accordingly, the allegations of the complaint determine the insurer's duty to defend. Id. at 544, 677 S.E.2d at 578-79 (“Although the cases addressing an insurer's duty to defend generally limit this duty to whether the allegations in a complaint are sufficient to bring the claims within the coverage of an insurance policy, an insurer's duty to defend is not strictly controlled by the allegations in the complaint. Instead, the duty to defend may also be determined by facts outside of the complaint that are known by the insurer.”).
Insurance policy exclusions are construed most strongly against the insurance company, which also bears the burden of establishing the exclusion's applicability. Owners Ins. Co. v. Clayton, 364 S.C. 555, 560, 614 S.E.2d 611, 614 (2005).
A. Occurrences That Trigger Coverage
In Auto Owners Ins. Co., Inc. v. Newman, 385 S.C. 187, 684 S.E.2d 541 (2009), the S.C. Supreme Court held an arbitrator’s finding “the defective stucco allowed for continuous moisture intrusion resulting in substantial water damage to the home's exterior sheathing and wooden framing” was sufficient to “establish that there was ‘property damage’ beyond that of the defective work product itself, and that therefore, the Homeowner's claim is not merely a claim for faulty workmanship typically excluded under a CGL policy.” Id. at 194, 684 S.E.2d at 544. In addition, the Court held “although the subcontractor's negligent application of the stucco does not on its own constitute an ‘occurrence,’ we find that the continuous moisture intrusion resulting from the subcontractor's negligence is an ‘occurrence’ as defined by the CGL policy.” Id. This was in part because “the continuous moisture intrusion into the home was ‘an unexpected happening or event’ not intended by Trinity. In other words, an ‘accident’ involving ‘continuous or repeated exposure to substantially the same harmful conditions.’” Id. at 194, 684 S.E.2d at 544-45.
The Court was careful to “note that interpreting ‘occurrence’ as we do in this case gives effect to the subcontractor exception to the ‘your work’ exclusion in the standard CGL policy.” Id. at 195, 684 S.E.2d at 545.
B. Bodily Injury
In L-J, Inc. v. Bituminous, the Bituminous' CGL policy, subject to certain exclusions, provided: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies ... This insurance applies to ‘bodily injury’ and ‘property damage’ only if: The ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’ The policy defined ‘occurrence’ as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’” L-J, Inc. v. Bituminous Fire and Marine Insurance Company, 366 S.C. 117, 621 S.E.2d 33 (2005). In L-J as the majority noted, the Court explained there may be coverage where faulty workmanship causes third party bodily injury or damage to property other than the contractor's work product. Auto Owners Ins. Co., Inc. v. Newman, 385 S.C. at 200, 684 S.E.2d at 548. The standard CGL policy grants the insured broad liability coverage for property damage and bodily injury, which is then narrowed by a number of exclusions. Id. at 197, 684 S.E.2d at 546. Each exclusion in the policy must be read and applied independently of every other exclusion. Id.
C. Property Damage
The S.C. Supreme Court observed: “[t]he standard CGL policy grants the insured broad liability coverage for property damage and bodily injury which is then narrowed by a number of exclusions. Each exclusion in the policy must be read and applied independently.” Auto Owners Ins. Co., Inc. v. Newman, 385 S.C. 187, 197, 684 S.E.2d 541, 546 (2009). In Newman, the Court noted that “[a]lthough the subcontractor exception preserves coverage for property damage that would otherwise be excluded as ‘your work,’ another policy exclusion bars coverage for damage to the defective workmanship itself” by providing “the insurance does not cover damages ‘claimed for any loss, cost or expense ... for the repair, replacement, adjustment, removal or disposal of ... ‘Your product;’ ... ‘Your work;’ or ... ‘Impaired property;’ if such product, work or property is withdrawn ... from use ... because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.’” Id. at 197-98, 684 S.E.2d at 546. The Court stated, “[t]hese terms unambiguously prohibit recovery for the cost of removing and replacing the defective stucco—even when the replacement of the defective work may be incidental to the repair of property damage covered by the policy—and serve as one of the bases for this Court's acknowledgment that a claim solely for economic losses resulting from faulty workmanship is part of an insured's contractual liability which a CGL policy is not intended to cover.” Id. at 198, 684 S.E.2d at 546.
Turning to the issue of damages, the Court held “any amount in the arbitrator's allowance allotted to the removal and replacement of the defective stucco is not covered under the CGL policy.” Id. at 198, 684 S.E.2d at 546-47. However, the Court noted it was impossible from the record for the Court to “determine what portion of the arbitrator's itemized list of damages may be attributed to the removal and replacement of the defective stucco, and it is not the purpose of this declaratory judgment action to relitigate the issue of damages.” Accordingly, although the trial court’s decision was reversed “to the extent that it orders recovery under the policy for the removal and replacement of the defective stucco,” there was “no evidence in the record indicting which damages may be attributable to the removal and replacement of the defective stucco” and the Court affirmed the trial court’s decision finding that the CGL policy covered the damage awarded by the arbitrator to the homeowner. Id. at 198, 684 S.E.2d at 547.
In footnote five to the Newman decision, the Court stated when the arbitrator determined damages, Auto Owner’s did not seek review of or otherwise contest the damages award.
In Crossmann, expanding on its holding in Newman, the Court held the discussion in a progressive property damage case should involve the policy term “property damage.” The Court noted the standard CGL policy defines “property damage” in two different ways:
- Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
- Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it. Crossmann Communities of N. Carolina, Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 48, 717 S.E.2d 589, 593 (2011).
With respect to the first quoted definition of “property damage,” the critical phrase is “physical injury,” which suggests the property was not defective at the outset, but rather was initially proper and injured thereafter. Id. at 49, 717 S.E.2d at 593. The Court emphasized the “difference between a claim for the costs of repairing or removing defective work, which is not a claim for ‘property damage,’ and a claim for the costs of repairing damage caused by the defective work, which is a claim for ‘property damage.” Id.
Clarifying Newman, the Court held “the costs to replace the negligently constructed stucco did not constitute ‘property damage’ under the terms of the policy” because “[t]he stucco was not ‘injured.’” Id. at 49, 717 S.E.2d at 594. “However, the damage to the remainder of the project caused by water penetration due to the negligently installed stucco did constitute ‘property damage.’” Id. “Based on those allegations of property damage and construing the ambiguous occurrence definition in favor of the insured, the insuring language of the policy in Newman was triggered by the property damage caused by repeated water intrusion.” Id. at 48-49, 717 S.E.2d at 594.
The Court stated, “[i]n sum, we clarify that negligent or defective construction resulting in damage to otherwise non-defective components may constitute ‘property damage,’ but the defective construction would not. We find the expanded definition of ‘occurrence’ is ambiguous and must be construed in favor of the insured, and the facts of the instant case trigger the insuring language of Harleysville's policies. We note, however, that various exclusions may preclude coverage in some instances. Because the parties in the present case stipulated not to raise the issue, we do not address any policy exclusions and exceptions.” Id. at 50, 717 S.E.2d at 594.
D. Defective Workmanship
Negligent or defective construction resulting in damage to otherwise non-defective components may constitute “property damage,” but the defective construction itself would not. Crossmann Communities of N. Carolina, Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 50, 717 S.E.2d 589, 594 (2011). See discussion on Newman and L-J, supra.
XIII. Right to Cure
A. Right to Cure (Residential)
In an action brought against a contractor or subcontractor arising out of the construction of a dwelling, the claimant must, no later than 90 days before filing the action, serve a written notice of claim on the contractor. S.C. Code Ann. Section 40-59-840(A). The notice of claim must contain the following: a statement that the claimant asserts a construction defect; a description of the claim or claims in reasonable detail sufficient to determine the general nature of the construction defect; and a description of any results of the defect, if known. S.C. Code Ann. Section 40-59-840(A). The contractor has 15 days from receipt of the claim to request clarification. S.C. Code Ann. Section 40-59-840(A). The contractor has 30 days from service of the notice to inspect, offer to remedy, offer to settle with the claimant or to deny the claim regarding the defects. The claimant shall receive written notice of the contractor's or subcontractor's, as applicable, election under this section. The claimant shall allow inspection of the construction defect at an agreeable time to both parties, if requested under this section. The claimant shall give the contractor and any subcontractors reasonable access to the dwelling for inspection and if repairs have been agreed to by the parties, reasonable access to affect repairs. Failure to respond within 30 days is deemed a denial of the claim. S.C. Code Ann. Section 40-59-850 (A).
The claimant shall serve a response to the contractor's offer, if any, within 10 days of receipt of the offer. S.C. Code Ann. Section 40-59-850 (B).
If the parties cannot settle the dispute pursuant to this article, the claimant may proceed with a civil action or other remedy provided by contract or by law. S.C. Code Ann. Section 40-59-850 (C).
Any offers of settlement, repair or remedy pursuant to this section, are not admissible in an action. S.C. Code Ann. Section 40-59-850 (D).
If the claimant files an action before first complying with the requirements of this article, on motion of a party to the action, the court shall stay the action until the claimant has complied with the requirements of this article. S.C. Code Ann. Section 40-59-830. If the homeowner fails to comply with the Right to Cure Statute, the court will grant a contractor’s motion to stay litigation while the homeowner complies with the Section 840 notice requirements that gives the contractor an opportunity to address the alleged defects as provided in the statute. Grazia v. S. Carolina State Plastering, LLC, 390 S.C. 562, 573-74, 703 S.E.2d 197, 202-03 (2010).
B. Right to Cure (Nonresidential Construction)
Nonresidential construction is under the S.C. Notice and Opportunity to Cure Nonresidential Construction Defects Act at S.C. Code Ann. Section 40-11-500. The statute requires the claimant to serve a written notice of claim on the contractor, subcontractor, supplier or design professional. The notice of claim must contain the following: a statement that the claimant asserts a construction defect; a description of the claim or claims in reasonable detail sufficient to determine the general nature of the construction defect and a description of the results of the defect, if known. S.C. Code Ann. Section 40-11-530(A). The contractor, subcontractor, supplier or design professional must advise the claimant within 15 days of receipt of the claim, if the description of the claim or claims is not sufficiently stated and shall request clarification. S.C. Code Ann. Section 40-11-530(B). If the claimant files a civil action or initiates arbitration before first complying with the requirements of this article, on motion of a party to the action, the court or arbitrator shall stay the action until the claimant has complied with the requirements of this article. S.C. Code Ann. Section 40-11-520.
The contractor, subcontractor, supplier or design professional has 60 days from service of the initial notice of claim to inspect, offer to remedy, offer to settle with the claimant or deny, in whole or in part, the claim regarding the defects. Within 60 days from the service of the initial notice of claim, the contractor, subcontractor, supplier or design professional shall serve written notice on the claimant of the contractor's, supplier's or design professional's election pursuant to this section. S.C. Code Ann. Section 40-11-540(A). The claimant shall allow inspection of the construction defect at an agreeable time, during normal business hours, to any party, if requested pursuant to this section. The claimant shall give the contractor, subcontractor, supplier or design professional reasonable access to the property for inspection and, if repairs have been agreed to by the parties, reasonable access to effect repairs. Failure to respond within 60 days is considered a denial of the claim. S.C. Code Ann. Section 40-11-540(A).
The claimant shall serve a response to the contractor's, subcontractor's, supplier's or design professional's offer within 10 days of receipt of the offer. S.C. Code Ann. Section 40-11-540(B). If the parties cannot agree to settle the dispute pursuant to this article within 90 days after service of the initial notice of claim on the contractor, subcontractor, supplier or design professional, the claim is considered denied and the claimant may proceed with a civil action or other remedy provided by contract or by law. S.C. Code Ann. Section 40-11-540(C). An offer of settlement, repair or remedy pursuant to this section is not admissible as evidence in any proceeding. S.C. Code Ann. Section 40-11-540(D).
This Compendium outline contains a brief overview of certain laws concerning various litigation and legal topics. The compendium provides a simple synopsis of current law and is not intended to explore lengthy analysis of legal issues. This compendium is provided for general information and educational purposes only. It does not solicit, establish or continue an attorney-client relationship with any attorney or law firm identified as an author, editor or contributor. The contents should not be construed as legal advice or opinion. While every effort has been made to be accurate, the contents should not be relied upon in any specific factual situation. These materials are not intended to provide legal advice or to cover all laws or regulations that may be applicable to a specific factual situation.
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Robert L. Melbane, Jr. with Elmore Goldsmith, PA, Greenville
Hard Hat Decision
On November 13, 2013, the S.C. Supreme Court issued its decision in Hard Hat Workforce Solutions, LLC v. Mechanical HVAC Serv., Inc., 406 S.C. 294, 750 S.E.2d 921 (2013), and held that a remote subcontractor was under no duty to comply with the notice of furnishing provision of section 29-5-440 because its payment bond claim involved a common law bond as opposed to a statutory bond. In Hard Hat, Edifice, the general contractor, subcontracted certain mechanical and plumbing work to Walker White and required Walker White to furnish a payment bond as part of the contract. Walker White then subcontracted with MHS for ductwork installation. MHS then subcontracted with Hard Hat “for temporary skilled labor on MHS’ portion of the project.” Id. at 922. During the project Hard Hat’s territory manager sent three e-mails to Walker White’s assistant project manager. Hard Hat’s territory manager filed an affidavit that stated that “the purpose of these e-mails was to inform Walker White of the existence and nature of Hard Hat’s work on the project and to offer Walker White additional services directly” and that “he communicated regularly with Walker White’s agents and employees.” Id. at 922-923. Hard Hat’s regional manager also filed an affidavit that echoed his regular communications with Walker White’s agents and employees as well. Walker White paid MHS the full value of its contract but MHS failed to pay Hard Hat for its work.
Hard Hat subsequently filed a breach of contract action and payment bond claim against MHS. Hard Hat obtained a default judgment on its breach of contract action. Walker White’s surety, GAI, moved for summary judgment as to Hard Hat’s payment bond claim arguing that Hard Hat failed to comply with the notice of furnishing provision of section 29-5-440. The trial court granted GAI’s motion for summary judgment, holding that Hard Hat’s e-mails to Walker White failed to meet the requirements of section 29-5-440 because “they were in the nature of solicitations for business rather than notices of furnishing, and were sent to an assistant project manager stationed in a jobsite trailer.” Id. at 923. The trial court also stated that the legislative intent behind the statute “was that notice be delivered to a responsible person employed with the bonded contractor at its permanent place of business, not a jobsite.” Id. at 923.
On appeal, the S.C. Supreme Court reversed the trial court, holding that because Walker White’s bond was a common law bond as opposed to a statutory bond, “the bond must be enforced according to its terms, which indicate Hard Hat had no duty to comply with section 29-5-440’s notice provisions.” Id. at 925.
The Court’s distinction between common law and statutory bonds
In Hard Hat the S.C. Supreme Court defined “statutory bonds as those either (1) provided because required by statute and in accordance with the minimum guidelines set out in section 29-5-440 of the S.C. Code, or (2) [bonds] that contain express or implied reference to the provisions detailed in the statute.” Id. at 925. The Court defined a “common law bond as either (1) any bond not required by statute (i.e., voluntarily provided, perhaps to meet a contractual provision in the agreement between the parties), or (2) any bond required by statute but that specifically varies the statutory requirements so as to provide broader protection.” Id. at 925. The important distinctions that the Court focused on in reaching its holding were the fact that (1) Walker White’s payment bond was not required by statute, but rather by Walker White’s contract with the general contractor and (2) the payment bond did not reference section 29-5-440 or any notice requirements. Thus, the Court held that “the bond must be enforced according to its terms.” Id. at 925.
New amendments to S.C. Code Ann. § 29-5-440
S.C. Code Ann. § 29-5-440 (1976) outlines the provisions for filing a payment bond claim. On June 6, 2014, Gov. Nikki Haley signed new legislation that amended this section.1 The newly enacted version of S.C. Code § 29-5-440 now requires that a remote claimant give written notice of furnishing to the bonded contractor which “must generally conform to the requirements of Section 29-5-20(B) and [be] sent by certified or registered mail to the bonded contactor.”2
Furthermore, 29-5-440 has also been amended to require a remote claimant to provide the bonded contractor with written notice of furnishing labor, materials or rental equipment for any construction project with a “common law” bond. The newly amended version states that:
For purposes of this section, bonded contractor means a contractor or subcontractor furnishing a payment bond, and remote claimant means a person having a direct contractual relationship with a subcontractor or supplier of a bonded contractor, but no contractual relationship express or implied with the bonded contractor. Any payment bond surety for the bonded contractor must have the same rights and defenses of the bonded contractor as provided in this section.
This section shall apply to any payment bond, whether statutory, public, common law, or private in nature, that is issued in connection with a construction project or other improvements to real property within South Carolina when such payment bonds are not otherwise required or governed by any other applicable section of the South Carolina Code of Laws.
For the purposes of this section:
(1) Statutory bonds or public bonds means bonds that are either:
(a) provided because required by statute and in accordance with the minimum guidelines set forth in this section; or
(b) contain either express or implied reference to the provisions of this section.
(2) Common law bonds or private bonds means bonds that are either:
(a) not required by statute, such as a bond voluntarily provided to meet a contractual agreement between parties; or
(b) required by statute but that specifically deviates from the statutory requirements to provide broader protection.
S.C. Code Ann. § 29-5-440 (1976).
Gap period between the Hard Hat decision and new changes to S.C. Code § 29-5-440
It is important to note that the newly amended sections to S.C. Code § 29-5-440 do not have a retroactive effect on bonds that were issued between the date of the Hard Hat decision and the date of the new legislation. In other words, on private construction projects where “common law” bonds were issued between November 13, 20133 and June 6, 2014, South Carolina courts will presumably enforce those bonds according to their terms based upon the Hard Hat decision.
In light of the Hard Hat decision and recent amendments to S.C. Code § 29-5-440, all South Carolina construction attorneys should be aware of the differences between a common law and statutory bond when pursuing or defending a payment bond claim under this section.
1 The new law also amended S.C. Code § 11-1-120, 11-35-3030(2)(c) and 57-5-1660(b), which payment bond claims on public construction projects, construction projects which fall under the South Carolina Procurement Code, and construction projects with the South Carolina Department of Transportation.
2 The new statutory changes appear in bold type.
3 The South Carolina Supreme Court issued the Hard Hat decision on November 13, 2013.
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Bryan P. Kelley
Elmore Goldsmith, P.A., Greenville
As any construction practitioner knows, mechanic’s lien and bond laws vary greatly from state to state and require strict compliance in order to perfect a potential lien interest or bond claim. Since many successful contractors venture across state lines to perform work, it may be beneficial to advise those clients of recent and significant changes to the North Carolina “Little Miller Act” (N.C. Gen. Stat. Section 44A-25 – 44A35) and the North Carolina “Mechanic’s Lien Statute” (N.C. Gen. Stat. Section 44A-7 – 44A-24.14) which predominantly took effect last April.
I. Changes to the Mechanic’s Lien Law
North Carolina’s mechanic’s lien laws have undergone substantial changes regarding notice requirements imposed on owners, general contractors, subcontractors and suppliers. While the changes initially tend to appear complicated, the new requirements are designed to simplify the notice and service requirements for mechanic’s liens through the use of a centralized and internet-based notice and service system.
The most significant lien law changes revolve around the use of an owner-designated lien agent, the notices that must be sent to this lien agent, and the contractor’s obligations to provide the lien agent’s contact information to other parties.
First, there will an examination of what the new requirements are from the standpoint of the black-letter law, followed by a description of how the Internet system streamlines these requirements for both the parties and their counsel.
The principal changes to the law are as follows:
Owners of private projects are responsible for hiring a lien agent who can act on the owner’s behalf with regard to receipt of all notices required under the mechanic’s lien statute. On projects of $30,000 or more where a building permit is required, the owner must identify the lien agent as a prerequisite for the permit. Lien agents are not required on residential additions or renovations where the owner resides at the residence.
All contractors and subcontractors who provide labor and/or materials to the jobsite must identify themselves to the lien agent. Note that there is an important distinction between subcontractors and suppliers who supply labor and materials to the actual jobsite and suppliers who do not provide or deliver their materials to the jobsite. Contractors who purchase materials from these suppliers must provide those suppliers with contact information for the lien agent, as discussed in more detail below.
It is incumbent upon those supplying work or materials to the jobsite to obtain the lien agent’s contact information. The statute provides two ways to do this:
- Issue a written request to the owner: Upon receipt of the request, the owner must provide the mechanic’s lien agent’s contact information to the requesting contractor or subcontractor in writing, within seven days.
- For projects with a building permit, the owner is required to post the permit and lien agent information conspicuously on the jobsite. Contractors can obtain contact information from this posting.
After the lien agent’s contact information is obtained, the contractor must identify himself/herself to the lien agent. Potential lien claimants (all contractors, subcontractors and suppliers) are required to send notice to the designated mechanic’s lien agent within 15 days of first providing labor or materials to the job site. This notice must follow the following format:
NOTICE TO LIEN AGENT
- Potential lien claimant's name, mailing address, telephone number, fax number (if available) and electronic mailing address (if available):
- Name of the party with whom the potential lien claimant has contracted to improve the real property described below:
- A description of the real property sufficient to identify the real property, such as the name of the project, if applicable, the physical address as shown on the building permit or notice received from the owner:
- I give notice of my right subsequently to pursue a claim of lien for improvements to the real property described in this notice.
Potential Lien Claimant
The statute provides the notice to the lien agent may be transmitted by any of the following methods:
- Certified mail, return receipt requested;
- Signature confirmation as provided by the U.S. Postal Service;
- Physical delivery and obtaining a delivery receipt from the lien agent;
- Facsimile with a facsimile confirmation;
- Depositing with a designated delivery service with tracking information (UPS, FedEx)—we recommend you require a signature when using these methods; or
- Electronic mail, with delivery receipt.
However, as a practical matter, contractors and suppliers can easily comply with all of the statute’s new notice requirements by utilizing a centralized web-based mechanic’s lien notice service found at www.liensnc.com. Upon visiting the site, contractors and owners can create an account and designate and notify lien agents through the site. After registration is complete, the site provides the owner, contractor or design professional with clear instructions on how to complete online filings and comply with these notice requirements.
If, during the course of the project, the lien agent resigns or is removed, a successor must be appointed. This is the owner’s responsibility. The owner is required to provide the new agent’s contact information to any persons or parties who previously requested lien agent information. Notices transmitted to the predecessor agent are still effective and do not need to be re-sent.
There are no new notices a general contractor must give its first-tier subcontractors if those subcontractors are providing labor on the job site. In that situation, the subcontractor will be responsible for requesting lien agent information from the owner and for providing notice to the lien agent as described above. The subcontractor can also presumably get the lien agent’s contact information from the notice posted on the job site.
Conversely, all general contractors and subcontractors must provide written identification of the lien agent to all subcontractors and suppliers who do not provide labor or materials to the jobsite. This must be done within three days of entering the contract. This notice may be sent by any of the methods identified above for service of the Notice to Lien Agent. Failure to provide this notice may render the contractor liable to the offsite supplier for all damages incurred by virtue of failure to provide the required notice.
Contractors have no obligation to send lien agent information to any second-tier subcontractors and suppliers with whom they do not have a contract. The subcontractor or supplier who contracts with the second-tier party is obligated to provide lien agent information to that party. The subcontractor or supplier who fails to provide this notice may be liable to the second-tier party for all damages incurred by the second-tier party by virtue of the failure to provide the required notice.
II. Changes to the Little Miller Act
As an initial matter, North Carolina’s Little Miller Act is largely similar to its S.C. counterpart—it only applies to public projects when a particular contract exceeds $50,000. Prior to this year’s changes, the greatest differences between each Little Miller Act were: the time within which potential bond claimants must notify the general contractor of a potential claim (in North Carolina, 120 days after the date the claimant last provided labor or materials to the project; 90 days in South Carolina); and the absence of a “payment defense” in North Carolina, meaning second-tier and lower subcontractors and suppliers in that state needed not worry whether upstream contractors had been paid in full for the claim to be valid. The lack of this defense in North Carolina often exposed general contractors on Little Miller Act projects to the prospect of double payment when a first-tier subcontractor failed to pay a second-tier subcontractor or supplier, even when the general contractor had no knowledge of the claimant’s existence. While the new law does not go so far as to create a payment defense for these contractors, it does impose some claim restrictions on remote contractors who fail to properly and timely identify themselves to the general contractor.
Generally, changes to the Little Miller Act are not as expansive as those involving mechanic’s liens. Under the new law, general contractors on projects where the Act applies must provide all of its subcontractors and suppliers with a “Contractor’s Project Statement.” This statement must include the following information:
- The name of the project;
- The physical address of the project;
- The name of the owner of the project;
- The name of the general contractor;
- The name, phone number and mailing address of the contractor's registered agent; and
- The name and address of the principal place of business of the surety issuing the payment bond.
General contractors are not obligated to provide the Contractor’s Project Statement to any second-tier subcontractors and suppliers. First-tier subcontractors are responsible for providing the statement to any second-tier subcontractors and suppliers it hires. If a subcontractor is not provided with this statement, it is arguably excused from performing its contractual obligations, even if its failure to perform causes delay to the job.
Any subcontractor or supplier that is second-tier or lower with potential claims of more than $20,000 worth of labor or materials to a public project must provide the general contractor with a “Notice of Public Subcontract.” The Notice must contain said subcontractor or supplier’s contact information and a general description of the labor and materials provided to the project. This must be provided to the general contractor within 75 days after the second-tier subcontractor first provides labor or materials to the job. If the notice is provided later than that, the subcontractor’s bond claim can only encompass the labor and materials provided within the 75 days prior to the general contractor’s receipt of the Notice of Public Subcontract. Again, this requirement only applies to those claims in excess of $20,000—any subcontractor or supplier who is owed less can disregard this requirement.
N.C. practitioners should be mindful of these new notice requirements when advising clients who perform work in North Carolina.
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2014 Construction Law Conference
Sonesta Resort, Hilton Head Island
2015 NC/SC Joint Conference
Francis Marion Hotel, Charleston, SC
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Views and opinions expressed in articles published herein are the authors’ only and are not to be attributed to this newsletter, the section, or the S.C. Bar unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.