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Hawaii Contractor's Failure to Provide Required Information to Homeowner Extinguishes Lien Rights
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July 9, 2007
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| (A revised version of this article appears in The Construction Lawyer, Volume 27, No. 3, Summer 2007, published by the American Bar Association's Forum on the Construction Industry.)
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Howrey LLP
Hawaii's mechanic's lien law requires contractors on residential projects to make very specific and detailed disclosures to owners. Failure to provide this information to the homeowner voids the contract and is fatal to contractor's lien rights. The statute provides:
| (a) | Prior to entering into a contract with a homeowner involving home construction or improvements and prior to the application for a building permit, licensed contractors shall:
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| | (1) | Explain verbally in detail to the homeowner all lien rights of all parties performing under the contract including the homeowner, the contractor, any subcontractor or any materialman supplying commodities or labor on the project;
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| | (2) | Explain verbally in detail the homeowner's option to demand bonding on the project, how the bond would protect the homeowner and the approximate expense of the bond; and
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| | (3) | Disclose all information pertaining to the contract and its performance and any other relevant information that the [contractors license] board may require by rule.
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| (b) | All licensed contractors performing home construction or improvements shall provide a written contract to the homeowner. The written contract shall:
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| | (1) | Contain the information provided in subsection (a) and any other relevant information that the board may require by rule;
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| | (2) | Be signed by the contractor and the homeowner; and
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| | (3) | Be executed prior to the performance of any home construction or improvement.
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| (c) | For the purpose of this section, "homeowner" means the owner or lessee of residential real property, including owners or lessees of condominium or cooperative units.
| | (d) | Any violation of this section shall be deemed an unfair or deceptive practice and shall be subject to provisions of chapter 480, as well as the provisions of this chapter.
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Hawaii Revised Statutes §444-25.5.
The consequences of non-compliance with HRS §444-25.5 (d) are severe and governed by HRS §480-2 (a), which declares "unfair or deceptive acts or practices in the conduct of any trade or commerce" unlawful, and HRS §480-12, under which any contracts involving such unlawful practices are "void and... not enforceable at law or in equity."
Under this statutory scheme, a contractor who fails to provide written and oral notice and disclosure of lien rights and bonding options to homeowners before entering into a residential construction contract may not enforce the contract against the owner and, consequently, is not entitled to a mechanic's lien upon the property. The leading case on this point is Hiraga v. Baldonado, 96 Hawaii 365, 371, 31 P.3d 222, 228 (Haw. App. 2001) [contractor who complied with the requirements of HRS §444-25.5 (a) but failed to comply with the requirements of HRS §444-25.5 (b) was not entitled to a lien on the property because its construction contract was thereby rendered void].
Owners hired contractor to construct improvements on a residential project in Hawaii. The construction agreement did not include written notices and disclosures regarding lien and bond issues as required under HRS §444-25.5. After a dispute concerning payment, contractor applied to the Circuit Court for a mechanic's lien. The court ruled that the contractor's non-compliance with the informational procedures rendered the contract void and, therefore, contractor had no right to file a mechanic's lien.
On appeal to the Supreme Court, the contractor argued that the consequences for non-compliance set forth in the statute were "directory" and not "mandatory" and that the court should not construe the statute strictly when the contractor can show that the owner is sophisticated and knowledgeable about lien and bond issues.
The Supreme Court rejected both arguments. 808 Development, LLC v. Murakami, 111 Haw. 349, 141 P.3d 996 (2006). Whether a statute's provisions are to be deemed mandatory or directory is a matter of gleaning the legislature's intent. The court opened its analysis by focusing on the word "shall" in the statute.
HRS § 444- 25.5 states that licensed contractors "shall" provide verbal notice and disclosure of lien rights and bonding options and "shall" obtain a signed writing that includes the information explained verbally. Generally, the word "shall" as used in statutes is construed as imperative or mandatory. See Leslie v. Bd. of Appeals of County of Hawaii, 109 Hawaii 384, 393-94, 126 P.3d 1071, 1080-81 (2006); Coon v. City & County of Honolulu, 98 Hawaii 233, 256, 47 P.3d 348, 371 (2002). In certain situations, however, the word "shall" may be construed as directory. See Jack Endo Elec., Inc. v. Lear Siegler, Inc., 59 Haw. 612, 617 585 P.2d 1265, 1270 (1978).
The court went on to apply something akin to a materiality test: "In general, a statute is directory rather than mandatory if the provisions of the statute do not relate to the essence of the thing to be done or where no substantial rights depend on compliance with the particular provisions and no injury can result from ignoring them."
Applying this standard, the court concluded that the contractor's failure to comply with the informational requirements could result in serious prejudice to the homeowner. "[A] homeowner who has not been provided the requisite notice and disclosure may have his or her property subject to a mechanic's lien that could result in the homeowner being placed in precisely the kind of double pay situation that the legislature intended to protect against."
The court also held that there was no basis in the statute or in policy to vary the application of the statute based on the relative sophistication of the owner.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2007 Howrey LLP
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