HawaiiConstructionLaw.com

Oral Argument on Licensing Case

On Thursday we watched oral argument at the Supreme Court on the licensing issue being pursued by petitioner District Council 50.  Michael Lilly argued on behalf of petitioners, and deputy attorney general Rodney Tam argued on behalf of the State. 

At issue was whether the Contractors License Board, Administrative Hearings Officer, Circuit Court, and ICA were correct in determining that a C-5 specialty contractor licensed to perform carpentry and renovation work, is suitably licensed to perform jalousie window replacement work that these tribunals determined was incidental and supplemental to the renovation project itself. 

Hawaii's licensing laws allow a contractor to perform work outside its license scope if the out of scope work is incidental and supplemental to the work the contractor is performing.  More importantly, the C-5 renovation license allows the contractor to perform work "incidental and supplemental to" the work covered by the C-5 license. 

The Contractors License Board promulgated a rule defining the term "incidental and supplemental" as work that is directly related to and necessary for the completion of the project.  At oral argument Petitioner argued  that the Board's rule defining “incidental and supplemental” is plainly erroneous, because, Petitioner argued, that definition is not what the legislature intended.   Petitioner argued that any logical interpretation of “incidental and supplemental” work MUST conclude that the work is “minor” and therefore any definition that does not include a requirement that the work is "minor" must be wrong and subject to reversal.

Petitioner argued that without the Court's intervention that the "incidental and supplemental" definition applied by the board is too vague, too standardless, and could give rise to exceptions that would destroy the intended public protection afforded by the license laws. 

Sitting justice Glenn Kim (who dissented from the grant of the cert. review) noted that from his reading, “incidental to” could mean attendant with, without any implication of cost or amount.  He noted that the definition applied by the Board went through the
normal rule making process, public hearings, etc., and that the Board is the entity charged with interpreting laws subject to interpretation.

Sitting justice Judge To’o To’o asked Petitioner,  isn’t the board comprised of five specialty contractors, five general contractors, etc, so if there is some concern about the scope of work a specialty contractor can do, wouldn’t the board be best suited to address it? 

 The arguments went back and forth but it is clear from the questioning that the Court’s main concern is whether the incidental and supplemental exception is too vague/general and allows too big a loophole for specialty work being performed by unqualified contractors.   In that vein in my opinion the attorney general did a very good job of addressing the court's concern.  Deputy AG Rodney Tam pointed out that the legislature had the opportunity to speak if the Board or its rules were out of accord with its intent.  It has not.  There is nothing in the statute that says incidental and supplemental must mean “minor” or that suggests that the question of what is incidental and supplemental is in any way dependent upon quantity.  As such, the board, which is statutorily charged with creating rules to enforce the laws, should be afforded deference in crafting its definition, especially as it has been very consistent in its interpretation as was pointed out to the Hearings Officer and Circuit Court below.

Justice McKenna asked Petitioner close questions about the scope of the exception afforded by the Board's interpretation of "incidental and supplemental," asking whether it would entitle a general contractor to perform "anything" including an entirely new condominium, because everything is "incidental and supplemental" to the job of building a new building.  No, answered Tam, it would not, because new construction is limited by the Okada Trucking decision.  Even for renovation work, a contractor cannot perform plumbing, electrical, or elevator work because those licenses are covered by separate statutes and require special permitting from the counties.  So there are limits.  He also wisely explained the process the board goes through in determining what is "incidental and supplemental," focusing on the purpose of the construction rather than the "amount," and refused to concede that any percentage could be set in advance to determine what is incidental to a job. 

Judge McKenna also asked well if the Board believes that certain specialty work, here C-22 glazing work, can be performed by renovation contractors if it is incidental and supplemental to their work, then why didn't the Board define the C-5 renovation license to specifically identify which specialty licenses are among the types of work the C-5 contractor can do?  Tam responded because it would be impossible to identify every possible specialty that could be included, or when.  That is why the Board is charged with the responsibility of answering scope questions and what it does at every meeting.  Judge McKennas asked if a scope question was raised by the contractor at issue in this case, and it was.  In fact, Tam noted, the Board did not get to the question of quantity or amount of specialty work because that is not its focus, and it is not even really necessarily part of the procurement process -- not all bids require bidders to list the amount of their subcontractor's bids -- just the names of the subcontractors.  Therefore, it is not even possible to have a clear delineation of specialty quantities for all bids.

This seemed to get to the crux of the problem with Petitioner's argument:  it wants the Court to impose a definition not included in the operatie statute or rule, i.e. that incidental and supplemental work must by definition be "minor" in quantity, on the basis that a failure to do so makes the definition too vague and subjective.  However, at hearing and in its moving papers Petitioner refused to acknowledge what numerical percentage would qualify as "minor" because, Petitioner argued, what is "minor" can change depending upon the size of a job.   This would seem to be replacing one allegedly subjective definition for another, just one that Petitioner prefers.  That seems an insufficient  reason for the Court to intervene in the rulemaking authority of the agency charged with enforcing the laws, especially since, as Judge To'o To'o noted, that Board has special expertise to make such scope calls, given that it is comprised of both specialty and general contractors. 

We were gratified to hear the court ask about the cost concerns cited in our amicus brief, and whether construction costs would be affected if renovation contractors were required to hire specialty subcontractors for every specialty that came up in the course of a renovation project.  Petitioner responded that costs would likely go up as a result of a general having to hire subcontractors for every bit of specialty work in a renovation project, but that could not be grounds for refusing to act.  This cost concern is a very real issue.  I earlier discussed the Sipco case I worked on 20 years ago, which was a pre-Okada case on the scope of a "B" license.  At that time, on that project, the difference between hiring a subcontractor for every possible trade versus self-performing the job, was $1,000,000 on about a $7,000,000 job.  A significant difference, which explains industry concern over the impact of this case.

 We will await the decision on this case with great interest.  In the meantime, here is a link to the taped oral argument. 

http://state.hi.us/jud/oa/13/SCOA_011713_28762.mp3

 

Upcoming Oral Argument on Licensing Question at the Supreme Court

On Thursday, January 17, 2013 starting at 11:00 a.m., the Hawaii Supreme Court will hear oral arguments in District Council 50, of the International Union of Painters and Allied Trades v. Lopez, No. SCWC-28762.

In that case, the court is presented with the question of whether the Okada Trucking Co. v. Bd. of Water Supply, 97 Haw. 450, 40 P.3d 73 (2002) dictates that in renovation, a contractor must hire specialty contractors for all work that is covered by a specialty license, or whether the contractor can perform any work necessary to complete the renovation (aside from work requiring a special permit, of course). The specific issue is whether the holder of a specialty renovation license is entitled to do certain specialty renovation work as "incidental and supplemental" to that license. The Hawaii Intermediate Court of Appeals ruled in favor of the licensee, and dismissed a challenge by another specialty contractor, and held that the Contractors' License Board was within its discretion when it adopted administrative rules defining the term "incidental and supplemental."

We filed an amicus brief in the case on behalf of the General Contractors Association, the  Building Industry Association of Hawaii, Hawaii Island Contractors Association, Contractors Assocition of Kauai, Gordon L. Scruton, Jas. Glover, Ltd., Kaikor Construction Co., Ltd., and Ralph S. Inouye Co. The brief urges the Supreme Court to affirm the ICA, and argues that the case implicates much more than the scope of contractors’ licenses, and whether a contractor with a C-5 specialty renovation license entitling it in a renovation project to perform "any other work" that will not change the structure, must employ a C-22 subcontractor to replace windows. Rather, this case asks whether the Board’s definition of "incidental and supplemental" work deserves deference because it is consistent with the plain meaning of those words, and whether the Board—comprised of five general contractors, five specialty contractors, and three members of the public who have been charged with the responsibility of carrying out the mandate of the contractor licensing statutes—"possesses expertise and experience in [its] particular field."

Three Supreme Court justices -- Chief Justice Recktenwald, and Justices Acoba and Pollack -- have recused themselves, and three circuit judges have been assigned in their places.

Here are the issues in the case, as framed by the Judiciary's web site:

Petitioners/Plaintiffs-Appellants, District Council 50 of the International Union of Painters and Allied Trades and Aloha Glass Sales & Service, Inc., filed an application for writ of certiorari to review the August 22, 2012 Judgment on Appeal of the Intermediate Court of Appeals (“ICA”), entered pursuant to its July 26, 2012 Memorandum Opinion. The ICA’s judgment affirmed the Circuit Court of the First Circuit’s (circuit court) judgment in favor of Respondent/Defendant-Appellee Kealiʻi S. Lopez, in her capacity as director of the Department of Commerce & Consumer Affairs. The circuit court affirmed the Department of Commerce and Consumer Affairs Contractors License Board’s (“Board”) finding that a B general building contractor may complete work falling within the C-22 specialty glazing and tinting license under the incidental and supplemental provisions of its automatic C-5 specialty remodeling and repairing license. This case arose from the State of Hawaii’s renovation project at Lanakila Elementary School, which included, in part, the installation of aluminum jalousie windows.

In their application, Petitioners argue that the ICA gravely erred in affirming the Board’s decision because: (1) the Board’s decision was inconsistent with this court’s opinion in Okada Trucking Co. v. Bd. of Water Supply, 97 Hawai`i 450, 40 P.3d 73 (2002); and (2) the Board’s interpretation of the terms “incidental and supplemental” was clearly erroneous, contrary to law, arbitrary and capricious, and inconsistent with the legislature’s underlying purpose.

I'll bring you a report after the arguments.

Honolulu High Rise Boom on the Horizon -- Construction Defect Litigation Ahead

Civil Beat has a new article out this morning about the multiple high rise condominiums planned for the Kakaako area, and what that means not only for the construction industry but for lawyers working in construction defect litigation as well. 

Last year we completed a chapter in a book called Construction Defects (2012, ABA).  My chapter dealt with the rights and liabilities of parties in construction defect litigation, and identified every potential participant in a claim for construction defects, and what potential claims could be made both for and against them.  The list is daunting:  everyone from owners, subsequent purchasers, associations, developers, design professionals, sub-design prorfessionals, contractors, subcontractors, lenders, construction managers, suppliers, and insurers and sureties have been drawn into defect litigation, and with the Group Builders decision still outstanding, it is an interesting time to be embarking upon large residential construction projects.  For owners and contractors, subcontractors, and others, one major caveat would be to craft insurance coverage provisions of such contracts very carefully, and to ensure before the project has started that the coverage purchased will cover expected claims. 

Friend of the Court Brief For the GCA

Today we filed an amicus curiae or friend of the court brief on behalf of the General Contractors Association, in another Okada Trucking related case.  At issue in the case is whether a C-5 renovation license allows a contractor to remove and replace jalousie windows in a school renovation project.  The bigger issue is whether the Okada Trucking decision of 2002 can be used to claim a monopoly of all specialty license work to specialty license holders.

This case is of special interest to me and therefore I am so glad we were able to help the GCA with this matter, because it brings full circle a case I worked on three months after starting at Damon Key -- involving one of the phases of the Stadium refurbishing projects.  The issue (back in 1993) was whether a general contractor had to have a specialty license to do painting and waterproofing work on a construction project, or whether the general's license allowed it to do specialty license work.  The case generated an inquiry with the Contractors License Board of what exactly the scope  of a general contractor's license may be, and the board answered that for the construction of a building, as long as the work involved more than two specialty trades or crafts, the general could do the whole job with its general contracting license, except for work that required a separate permit, including plumbing, electrical, and elevator work.  The Board's interpretation was memorialized in meeting minutes which were in turn used by us in a number of different bid protests through the years.

This was the law until the Okada Trucking decision came along in 2002.  In that case, the Supreme Court reviewed the licensing laws and the Board's administrative rules, and noted that the Board automatically awarded a number of specialty licenses to general engineering and building contractors upon licensure.  The Court decided that this must be the only work the Board believed the general engineering and building contractor capable of performing itself, and so ruled. 

In fact, as the 1993 meeting minutes demonstrated, the reason the Board issued separate licenses was in order to increase, not decrease, the work a general contractor could perform, by allowing a general contractor to still work on a project even if there was no building involved, and even if the project involved less than three specialty trades or crafts.

However, presumably because the meeting minutes were never before the court until reconsideration, it denied the rquest, and Okada became the law, disrupting contracts and making construction more expensive. 

The present case deals with renovation.  The C-5 renovation license is written very broadly and in fact has been interpreted somewhat broadly by the Board.  The question is whether the Okada decision dictates that in renovation, a contractor must hire specialty contractors for all work that is covered by a specialty license, or whether the contractor can perform any work necessary to complete the renovation (aside from work requiring a special permit, of course).  A ruling on this issue against contractors will have a potentially reverberating effect, just as Okada did when it wsas first published.

We feel strongly that we are correct on this issue, but invite others to read the case and make their own judgments.

General Contractors Association of Hawaii's Amicus Curiae Brief in Support of Respondent/Defendant-Appellee...