Wisconsin Lawyer
Vol. 79, No.
9, September 2006
Modernizing Wisconsin Residential Construction Laws
The past year has seen much new
Wisconsin legislation affecting residential construction. The new laws
require consumers to afford contractors a right to cure construction
defects before filing suit; fine-tune existing construction lien laws;
and mandate licensing and continuing education requirements for
residential contractors. Read how modernizing of the state's residential
construction laws will affect your consumer and contractor
clients.
By Mark R. Hinkston
esidential construction is a multi-billion dollar industry in
Wisconsin, with more than 20,000 new homes built annually and many more
home improvements performed each year. This boom has proliferated
cutting-edge construction methods and an influx of many new contractors.
Growth and innovation in the residential construction industry led to a
desire to resolve construction defect disputes short of litigation,
modernize applicable lien laws, and heighten regulation of residential
contractors. As a result, the Wisconsin Legislature's 2005-06 session
produced three new laws that will affect homeowners and contractors and
the attorneys who represent them. All three bills were signed into law
on March 27, 2006.
Foremost among the legislation is 2005 Wisconsin Act 201, known as
the "Right to Cure" Act, which becomes effective Oct. 1, 2006. It
establishes procedures that are designed to resolve complaints about
alleged construction defects by requiring consumers to notify
contractors of alleged defects and give contractors an opportunity to
cure defects by making repairs or paying money. Consumers may not
initiate litigation or arbitration unless they provide the notice of
claim and the contractor fails to respond, rejects the claim, or makes
an unacceptable settlement proposal.
The two other new residential construction laws are: 2005 Wisconsin
Act 204, which significantly revises Wisconsin's construction lien laws;
and 2005 Wisconsin Act 200, which mandates annual continuing education
for residential contractors, requires previously uncertified residential
contractors to take an examination for licensure, and jeopardizes the
ability of contractors that engage in financial malfeasance to obtain
necessary financial certification to procure building permits.
Right to Cure Act
Background and Applicability. In the past, there
were no specific procedural guidelines in Wisconsin law to resolve
residential construction disputes short of filing suit. Builders' groups
lobbied to make Wisconsin one of a growing number of states to enact a
law to afford contractors an opportunity to timely repair defects. The
Wisconsin Legislature's primary goal was to facilitate resolution of
construction defect disputes without litigation by implementing a system
that requires contractors and consumers to attempt to systematically
address problems before commencing a court action or arbitration.1 In March, Wisconsin became the 28th state to enact
a contractor "right to cure" (also known as "right to repair")
law.2
In general, Wisconsin's new Right to Cure Act requires homeowners and
other specified claimants to give contractors written notice of alleged
construction defects and an opportunity to cure them as a prerequisite
to filing suit. It is comprised of two new statutes. Section 101.148,
entitled "Contractor notices," requires contractors to supply consumers
with notice of the defect claim procedures before, and at the time of,
contracting. Section 895.07, entitled "Claims against contractors and
suppliers," contains those claim procedures. The Act states that the
term "construction defect" means the definition of "defect" contained in
a warranty or, if there is no warranty, a deficiency resulting from
defective material, violation of applicable codes, or failure to follow
accepted trade standards for workmanlike construction.3
The Right to Cure Act applies to written or oral contracts to
construct a new dwelling or remodel an existing one. It applies to any
premises used as a home or residence and includes existing structures on
or adjacent to the dwelling, such as driveways, sidewalks, swimming
pools, patios, garages, and basements. Thus, it does not apply to
nonresidential (commercial) construction. It excludes maintenance or
repair work. It also does not apply to a situation in which the consumer
alleges a construction defect as an affirmative defense or counterclaim
in a suit initiated by a contractor.
Section 101.148, the contractor notice statute, refers to
"contractors" and "consumers," collectively defined as persons who enter
into an oral or written contract to construct or remodel a
dwelling.4 Yet section 895.07, the claims
process statute, refers to "claimants" and "contractors."5 This difference in terms likely resulted because
the drafters recognized that to limit the reach of section 895.07 to
"consumers" (as defined in section 101.148) would ignore that in some
situations the original contracting party may not be the party
ultimately bringing a defect claim (for example, when a house is sold to
a subsequent owner who discovers defects). Thus, "claimant" means a
dwelling's owner, tenant, or lessee who has standing to bring suit
relating to a construction defect against a contractor or supplier. The
term also includes homeowners' and condominium associations that have
such standing.
Mark R. Hinkston, Creighton 1988
cum laude, practices with Knuteson, Powers & Quinn S.C., Racine.
"Suppliers" also are addressed in the new law, primarily in the
context of contractors' contribution claims against suppliers that may
be at fault for the alleged defects. However, the Act applies only to
door and window suppliers.
Contractor Notice to Consumers. Under section
101.148, before entering into a contract, a contractor is required to
deliver to a consumer a brochure prepared by the Wisconsin Department of
Commerce (DOC) that explains the process of handling construction
defects under section 895.07. The brochure is available on the DOC Web
site.
Section 101.148 also requires contractors to provide consumers a
written notice that alerts consumers of their obligation to follow the
notice and right to cure process before filing a lawsuit against a
contractor or door or window supplier for defective construction. The
statute provides recommended language for this "Notice Concerning
Construction Defects." (See Figure 1). The
notice language must be conspicuous and may be included in the contract.
In situations in which oral contracts are used, the notice must be
provided in writing as soon as reasonably possible after the oral
contract is formed but before the work is commenced.
Notice and Opportunity to Repair. The flowchart
marked as Figure
2 summarizes the right to cure process set forth in section 895.07.
"Days" in section 895.07 means working (or business) days.6
Figure 1
Notice Concerning Construction Defects
Wisconsin law contains important requirements you must follow before
you may file a lawsuit for defective construction against the contractor
who constructed your dwelling or completed your remodeling project or
against a window or door supplier or manufacturer. Section 895.07 (2)
and (3) of the Wisconsin statutes requires you to deliver to the
contractor a written notice of any construction conditions you allege
are defective before you file your lawsuit, and you must provide your
contractor or window or door supplier the opportunity to make an offer
to repair or remedy the alleged construction defects. You are not
obligated to accept any offer made by the contractor or window or door
supplier. All parties are bound by applicable warranty provisions.
At least 90 days before commencing any action against a contractor or
door or window supplier relating to a construction defect, a claimant
must give the contractor or supplier written notice of the alleged
defect and an opportunity to repair it. The notice must "contain a
description of the claim in sufficient detail to explain the nature of
the alleged defect and a description of the evidence that the claimant
knows or possesses, including expert reports, that substantiates the
nature and cause of the alleged construction defect."7
Contractor Response. Under section 895.07, a
contractor has 15 days to serve the claimant with a written response to
the claimant's notice. The contractor's response may take one of several
forms: 1) a written rejection of the claim specifying the reason for
rejection and including a comprehensive description of all evidence the
contractor knows or possesses, including expert reports, that
substantiates the reasons for rejection, as well as any settlement offer
received from a supplier; 2) a written offer to remedy the defect at no
cost, with a description of the construction that is necessary to remedy
the defect and a timetable to complete the work; 3) a written offer to
settle by paying money; 4) a written offer that includes a combination
of repair and money; or 5) a proposal for inspecting the dwelling. If
the contractor rejects the claim or does not respond within 15 days, the
claimant may commence an action against the contractor without further
notice.
If the contractor makes an offer to repair or pay money (or a
combination of the two), the claimant has 15 days to accept or reject
the offer. If he or she rejects the offer, within 15 days the claimant
must serve a written rejection notice on the contractor, specifying the
reasons for the rejection. The claimant is to alert the contractor to
any items omitted from the contractor's offer and if the claimant
considers the offer unreasonable, he or she must specify why. The
contractor then has five days to respond by serving a written
supplemental offer to repair or remedy the defect or a notice that no
additional offer will be made. If no supplemental offer is made, the
claimant may proceed with an action without further notice.
If the contractor makes a supplemental offer, the claimant is to
respond within 15 days. If the claimant rejects the offer, the rejection
notice must specify the reasons for the rejection and the basis for any
contention that the supplemental offer is unreasonable. The claimant may
then bring an action without further notice.
If any offer or supplemental offer is accepted, the claimant is to
provide the contractor with reasonable access to the dwelling to allow
the contractor to perform the repair work per the contractor's proposed
timetable. If the contractor does not repair or remedy the defect per
the settlement offer and timetable, the contractor will not be penalized
but the claimant may proceed with an action without further notice.
Inspection and Testing. Sometimes a contractor will
want to inspect the dwelling and conduct testing to assess a defect
claim. Under the new law, if the contractor makes a proposal for
inspection, within 15 days of receiving the proposal, the claimant is to
grant the contractor reasonable access to the dwelling to inspect it,
document alleged defects, and perform any testing needed to evaluate
fully the nature, extent, and cause of the claimed construction defects
and the nature and extent of any necessary repairs or replacements.
If destructive testing is required, the contractor is to give five
days' advance notice to the claimant and any suppliers against whom a
claim is asserted. Within a reasonable time after testing, and at its
own expense, the contractor is to return the dwelling to its pretesting
condition. If additional testing is needed, the contractor is to deliver
notice that such testing is needed and the claimant shall provide
reasonable access to the dwelling. Within 10 days after all inspection
and testing, the contractor shall serve on the claimant a notice of
rejection or make an offer to repair, pay money, or repair and pay
money.
Contribution Claims Against Door and Window
Suppliers. Section 895.07 also details a contractor's
obligations to window and door suppliers against whom contribution
claims are made.8 The section does not apply
to a contractor's right to seek contribution, indemnity, or recovery
from any other supplier.9
The Act mandates that a contractor intending to make a contribution
claim against a window or door supplier must serve the supplier with a
written notice of the original claimant's claim and the contractor's own
contribution claim within five days after the contractor's receipt of
the original claim. Contractors must follow the same notice procedures
as those imposed on claimants to put the supplier on notice of the
contribution claim, including notifying the supplier of the defect and
affording it the opportunity to repair the subject windows or doors. The
supplier has 15 days within which to reject the claim, serve a written
offer to repair or pay money (or a combination of the two), or request
an inspection.
In cases involving a contribution claim, the contractor will have 25,
not 15, days within which to respond to a claimant's initial notice. The
contractor is to forward any response from the supplier to the original
claimant and include in its written response rejecting a claim any
settlement offer received from a supplier.
Consequences of Noncompliance. If a claimant
proceeds with litigation or arbitration without giving notice and a
right to cure, the new law requires the judge or arbitrator to either
dismiss or stay the proceedings. If the claimant received a brochure and
notice from the contractor but failed to give the contractor notice and
an opportunity to cure, the action will be dismissed without prejudice.
If a claimant did not receive the brochure and notice, the action is to
be stayed pending compliance with the notification requirements.10
Some critics of right to cure laws stress that their protections may
be somewhat illusory. For example, under Wisconsin's new law,
contractors are not penalized for failing to provide the initial
brochure or notice. Contractors also are not penalized for ignoring
claims or reneging on agreements with claimants that arise from the
right to cure process. Likewise, claimants are not required to respond
to or accept any offer from a contractor. In other words, the law
imposes no penalty on claimants who do nothing more than give the
required notice and an opportunity to repair or remedy the alleged
defects. However, while the law imposes no penalty, claimants who reject
reasonable settlement offers may nonetheless face in ensuing litigation
the affirmative defense of failure to mitigate damages.
Practical Considerations for Consumers. As the new
law is implemented, there are certain points that consumers should
consider, generally with respect to their assessment of defects,
delivery of the defect notice, and timing of repairs.
First, although claimants are not required to hire a construction
expert to identify and analyze defects, it may be necessary to do so in
situations involving complexity beyond the ken of the normal person.
This is especially true because the claimant must provide "a description
of the claim in sufficient detail to explain the nature of the alleged
defect."11 Another reason that an expert
may be helpful is that claimants often do not have and cannot obtain
necessary documents from the contractor relating to the project (and
there is no requirement under the new law that the documents be
produced).
Second, claimants should be as thorough as possible in detecting
defects and notifying contractors of all defects because if
additional defects are discovered after an initial notice has gone out,
the claim process must start anew as to the newly discovered defects. A
construction defect discovered after an initial claim notice has been
provided to a contractor may not be pursued in an action until the
claimant complies with the notice and right to cure process as to the
new defect.12 There may be some consolation
for claimants facing statute of limitation issues who need to supplement
their defect claim because the law provides that the limitation period
is tolled during the notice of claim process (provided that the
limitation period did not expire before service of the initial notice of
claim).13
Third, some confusion may exist as to when a claimant must use
certified mail to send notices to a contractor and when regular mail
will suffice. This is due to the interchangeable reference to "serve"
(or service) and "deliver" (or delivery) in the two statutes comprising
the Right to Cure Act. Both Wis. Stat. sections 101.148(2) and 895.07(2)
reference that the claimant is to "deliver" the initial claim notice to
the contractor. "Deliver" is defined in Wis. Stat. section 101.148(1)(c)
as depositing the notice in the U.S. mail or with a commercial delivery
service or personally giving the notice to the contractor. There is no
certified mail requirement. Yet confusion comes in because Wis. Stat.
section 895.07(2) also provides that the contractor's response deadline
is within "15 days after the claimant serves a notice of
claim."14 "Serve" or "service" means
"personal service or delivery by certified mail, return receipt
requested" to a last-known address.15
Confusion also may occur because while claimants may not need to send
their initial claim notice by certified mail, they apparently must send
written notices rejecting a contractor's settlement offer by certified
mail, since Wis. Stat. section 895.07(2) requires them to "serve" the
contractor with such notices (again, "service" by mail under that
statute means certified mail). In view of the potential confusion, it
seems prudent to err on the safe side and use the stricter mode of
certified mail for all communications with the contractor during the
claim process.
Finally, there may be emergency situations when defects need to be
repaired immediately. Yet claimants should exercise caution when
assessing whether to fix a defect before giving a contractor an
opportunity to cure. Under the law, a claimant may make immediate
repairs to a dwelling to protect the health and safety of its
occupants.16 Thus, in nonemergency
situations not threatening life or limb, claimants who jump the gun and
have other contractors do repair work without first allowing the initial
contractor to repair the defect may be barred from pursuing legal action
because they have in effect destroyed the contractor's "right to
cure."
Practical Considerations for Contractors. Some
contractors may view the Right to Cure Act and its brochure and notice
requirements, and the pre-suit claims process itself, as onerous.
However, the new law poses an opportunity for contractors to review and,
if necessary, tweak or overhaul their written agreements. Toward this
end, although the law does not require that the notice to the consumer
be included in the contract, and allows contractors to provide the
notice via a separate writing, it is prudent to include the notice to
consumers in the contract. When amending their contract forms to comply,
contractors' counsel also may wish to ensure that the contracts, as
applicable, include required lien notices,17 notice of a consumer's right to cancel under the
Wisconsin Consumer Act,18 and the content
prescribed by the Wisconsin Home Improvement Trade Practices
Code.19
The Right to Cure Act provides that after service of the initial
notice of claim, a claimant, contractor, or supplier may agree to alter
the notice of claim process.20 Contractors
should be aware that any agreement to alter the process must be in
writing. If contractors put the agreement in writing, they should be
careful to avoid using language that is so broad that it violates
Wisconsin laws prohibiting the inclusion of contract language
exonerating the contractor from negligence or waiving a consumer's
claims.21
Like the claims procedures for consumers, contractors making a
contribution claim must give a supplier written notice and an
opportunity to cure as a prerequisite to filing suit. Like consumers,
contractors could end up waiving their claim if they do not honor the
suppliers' right to cure. Contractors should recognize that they have a
short deadline of five business days to notify the suppliers of a
contribution claim. Contractors should attempt to work in concert with
suppliers in addressing consumers' claims, because the new law provides
that the supplier and contractor are to use their best efforts to
coordinate their responses to consumer claims and contribution
claims.22
Practical Considerations for Suppliers. Like
contractors, suppliers technically have no legal obligation to respond
to a claim once they receive notice. Suppliers should be aware, however,
that if they do respond and their offer is accepted but they do not
follow through, the contractor may pursue the contribution claim in
circuit court and "may also file the supplier's offer and contractor's
acceptance in the circuit court action, and the offer and acceptance
create a rebuttable presumption that a binding and valid settlement
agreement has been created and should be enforced by the court."23 A similar penalty does not apply to contractors
if they renege on an offer accepted by a claimant. Claimants are not
allowed to file a contractor's offer and acceptance if a contractor
reneges.
Contractors, door and window suppliers, and consumers alike should
not be cavalier or indifferent concerning the impact of the Right to
Cure Act. In view of the new law's potential benefits of facilitating
communication, promoting settlement, and eliminating contractor
surprise, it behooves attorneys who consult with residential
construction parties to understand the procedures under the new law so
they can advise their clients accordingly.
Construction Lien Law Changes
2005 Wisconsin Act 204 made several changes to existing construction
lien laws set forth in subchapter I of Wis. Stat. chapter 779. The
changes, based on recommendations by the Lien Law Committee of the State
Bar's Construction and Public Contract Section, represent the most
significant revisions to the lien laws in several decades.24
The Act became effective on April 11, 2006. While the Act provides
that it "applies to improvements that visibly commence on the effective
date of this subsection [April 11, 2006],"25 it is reasonable to assume that the law applies
to improvements that visibly commence on or after April 11,
2006. It also is reasonable to assume that the prior lien laws would
apply to lien claims relating to improvements commenced before April 11,
2006.26
Changes were made in all lien contexts, affecting commercial,
residential, public, and private projects. Several changes apply to
residential construction and fall under two categories of changes:
linguistic and procedural.
Linguistic Upgrades. Numerous changes were made to
synchronize and modernize wording. For example, the terms "general
contractor" and "contractor" are changed to "prime contractor."27 Reference to those who supply materials is
changed from "materialmen" or "material suppliers" to simply
"suppliers."28
The Act expands the definition of "improvement," which previously was
defined as including "any building, structure, erection, fixture,
demolition, alteration, excavation, filling, grading, tiling, planting,
clearing or landscaping which is built, erected, made or done on or to
land for its permanent benefit." "Repairing or remodeling" done on or
for the land's benefit is now added to the list. The Act eliminates the
requirement that the improvement be done for the land's
permanent benefit.29
The Act also revises the definition of "prime contractor" to
specifically include "construction managers" and "other service
providers."30 Finally, references to "plans
and specifications" have been added to confirm the item's status as a
lienable activity.31
Procedural Upgrades. The Act also makes several
procedural changes. Under previous law, prime contractors that failed to
give the requisite 10-day lien notice could be saved and still claim a
lien if subcontractors and suppliers had been paid and no subcontractor
or supplier served a lien notice.32 This
payment requirement was problematic because on large projects, lien
claimant prime contractors would be forced to satisfy the lien claims of
subcontractors or suppliers even if they did not hire them.33 The new law specifies that the savings provision
applies when the prime contractor claimant's own subcontractors or
suppliers, as opposed to all subcontractors and suppliers on a project,
are paid and have waived their lien rights.34
Under prior law, lien notices could only be served via hand delivery
or by registered mail. The new law expands the service options to allow
service by "personal delivery, delivery by registered or certified mail,
service in a manner described for service of a summons under s. 801.14,
or any other means of delivery in which the recipient makes written
confirmation of the delivery."35
To make a lien claim, a claimant must file the claim for a lien with
the circuit court within six months after the claimant last performed
work or furnished materials. Although the lien claimant previously was
required to deliver to the owner a notice of intention to file claim for
a lien at least 30 days before filing the lien claim, a lien claimant
was not required to serve the owner with the claim for a lien once it
was filed. The new law changes that situation, mandating that "a lien
claimant shall serve a copy of the claim for lien on the owner of the
property on which the lien is placed within 30 days after filing the
claim."36
Prior law allowed release of a lien if an owner filed with the clerk
of court a bond or undertaking by two sureties. Now only one surety is
necessary to "bond over" a lien.37
Finally, under prior law the private project theft-by-contractor
statute provided that personal liability for theft could be imposed on
officers, directors, or agents of a corporation. The new law recognizes
the increasing use of business formations other than corporations by
expanding liability to representatives of other entities. It provides
that in cases of theft by contractor in which the prime contractor or
subcontractor is a corporation, limited liability company, or other
legal entity except a sole proprietorship, such misappropriation also
shall be deemed theft by any officers, directors, members, partners, or
agents responsible for the misappropriation.38
Contractor Education Act
2005 Wisconsin Act 200, known as the Contractor Education Act,
mandates the establishment of new continuing education requirements for
residential contractors. Its passage was intended to crack down on
substandard work and enhance as a whole the professionalism and
competency of Wisconsin's residential contractors.39
Under Wisconsin law, a contractor needs a certificate of financial
responsibility from the DOC to engage in residential construction and
get most necessary permits.40 To obtain the
certificate contractors previously only had to meet certain insurance
and bonding requirements. The DOC's new rules will require that to
obtain a building permit for residential construction, in addition to
obtaining insurance and bonding, a person also must annually complete at
least six hours of continuing education relevant to the person's
professional area of expertise and attend at least one professional
meeting or seminar designed for both building contractors and building
inspectors.41 Persons applying for a
certificate of financial responsibility for the first time will have to
pass a DOC examination on the required continuing education courses.
The DOC will establish a contractor certification council to advise
on the continuing education process. The continuing education aspect of
the new law does not go into effect until Jan. 1, 2008. After that date,
contractors will have to show proof of compliance with the continuing
education requirements to the issuer of permits, and the DOC may suspend
or revoke a certificate of financial responsibility if a contractor
fails to comply with the continuing education regulations. The DOC also
may suspend or revoke a building inspector's certification if the
inspector knowingly authorizes issuance of a building permit to a
contractor who has not complied with the new requirements.
Other aspects of the new law went into effect in April 2006. The DOC
now may suspend or revoke a certificate of financial responsibility if a
contractor constructs a dwelling without a required permit, is convicted
of a crime related to the construction of a dwelling, or is adjudged
bankrupt on two or more occasions.42 These
higher standards for certification, when coupled with mandatory
continuing education, will aid in separating competent and financially
responsible contractors from those who lack the character and competency
to responsibly engage in residential construction. Continuing education
also will allow smaller-scale contractors (one- or two-person entities),
as well as their larger-scale colleagues, to keep abreast of ongoing
changes in residential construction law. In the past, larger-scale
contractors perhaps had an educational advantage if they belonged to
builders' trade associations that routinely update their members on new
developments.
Conclusion
Some people tout the new Right to Cure Act as establishing a process
that will promote construction defect dispute resolution and thereby
avoid the complexity and cost attendant to construction litigation.
Other people believe that the Act's maze of deadlines and procedures may
be counterproductive to that goal, because all parties may need
attorneys to help interpret the Act. While it is true that contractors,
consumers, and their attorneys may need time to become familiar with
this law, its salutary effect of promoting dispute resolution short of
litigation should outweigh any perceived burden of a learning curve.
As with all new legislation there may be glitches and periodic need
for judicial interpretation. In the meantime, the Right to Cure Act, the
lien law changes, and the Contractor Education Act will have the
laudable collective effect of modernizing residential construction law
in Wisconsin.
Endnotes
Wisconsin Lawyer