New Laws That May Affect Your Construction Business

By Thomas S. Smith and Dean M. Phillips
As appeared in “Legal Ease,” our monthly column in the Daily Journal of Commerce

The Oregon Legislature passed many important new laws this year that will affect the way many Oregon contractors do business. Following a push to minimize construction defect claims—protecting both consumers and diligent contractors—Oregon contractors will need to carry more insurance, rethink existing contracts, and eventually revisit the classroom under the new laws. In this article, we will outline the major new statutes that contractors need to know about.

Contractors and their contracts will be more heavily regulated

The following important new regulations under House Bill (HB) 2654 will affect all residential contractors.

• Liens: Jobs exceeding $2,000 already require a written contract. Now, however, contractors can no longer claim a lien for their work without having that contract in writing.
  
  
• Written Warranties: A contractor must give a home’s original buyer a written warranty against defects in both materials and workmanship. Customers may refuse to sign the warranty. If a customer refuses to sign the warranty before any written contract for the job itself is executed, the contractor may still withdraw the offer to build the home.
  
  
• Insurance and Bonding: Contractors must add coverage for products liability and completed operations to existing insurance requirements for public liability, personal injury, and property damage. The dollar amounts of required coverage and bonding may change depending on the license classification of the contractor. However, the surety bonds filed with the Construction Contractors Board (CCB) will increase by $5,000 for all types of contractors, developers and inspectors. This increase applies to new licenses issued beginning January 1, 2008, and to renewals beginning July 1, 2009.
  
  
• Required Information and Education: Residential contractors will need to supply initial home buyers with home maintenance information, including descriptions and prevention of moisture intrusion and water damage. This applies to residences completed beginning July 1, 2008. The CCB is still hammering out the rules implementing educational requirements. Contractors will need to complete classes, though not mandatorily for several years. Currently licensed contractors will not need to meet this requirement until 2010 at the earliest. Moreover, the CCB says it has not yet established the final rules or processes for continuing education. Once established, however, contractors will be unable to get their licenses renewed until after the education requirement has been fulfilled.
  
  
• Sanctions and Penalties: The CCB now has greater power to sanction contractors, including the ability to revoke a license (rather than merely suspend or refuse one) based on indebtedness or finding that the contractor is unfit for licensure. Penalties extend to Responsible Managing Individuals under the new law.

New License Endorsements and Warranty Requirements

Being a licensed contractor is no longer enough. In addition to the current licensure categories separating developers and general, limited and specialty contractors from one another, as well as divisions based on type of work performed, HB 3242 creates specific endorsement requirements. These endorsements each carry their own insurance and bonding requirements, as well as experience and education prerequisites.

For example, a home builder can be endorsed and licensed as a residential general contractor, a residential specialty contractor, a residential limited contractor, or a residential developer. Those building large commercial structures must hold one of five commercial endorsements, with “level 1” and “level 2” endorsements indicating the experience level of that contractor’s employees. Those contractors building small commercial structures can hold any of the nine endorsement types.

Bonding and insurance requirements vary based on the endorsement level, as the legislature attempts to reflect involved risks. For example, a “commercial general contractor level 1” must hold at least $2 million in general liability insurance and a $75,000 surety bond, but a “level 2” contractor needs only $1 million in insurance and a $20,000 surety bond. These requirements apply only to licenses issued or renewed beginning July 1, 2008.

New education requirements for commercial contractors will also vary with experience level; an entry-level contractor must account for 40 hours of continuing education annually, while a more experienced builder needs to have one or more key employees certify 16 hours annually. Very small contracting entities are subject to a separate formula requiring eight hours for each key employee.

Commercial general contractors will need to certify eight years total experience among key employees, and specialty contractors will need to certify four years of experience, though apprenticeship programs and academic degrees can substitute for as much as three years of experience.

Contractors building large commercial structures must provide a two year warranty on the building envelope against defects. Beginning July 1, 2008, contractors must annually inspect the building envelope under the warranty.

Changes to residential “flipping”

For years, a cottage industry has been prevalent in Oregon where residential owners would purchase a home needing repairs, fix it up and “flip” it shortly thereafter speculating on an inflationary housing market. This practice was commonly referred to as “flipping.” Many people thought that improvements to residential structures could be performed by the owner without a contractor’s license, whether general or specialty contractor. This assumption was correct unless the work was done “with the intent to sell the structure” or “with the intent of offering the structure for sale before, upon or after completion.” In other words, if the remodel was performed or improvements were made with the intent to sell the residence, the owner would become a “contractor” and would be required to register with and be licensed by the CCB as a general contractor. This exemption for a home owner's work on their own residence has been in the law since at least 1985 and the exemption applied whether or not the owner hired a general contractor to do the work. However, this law was honored more in the breach than in the observance. Finally, somewhat in desperation, in 2007 the legislature decided to recognize this cottage industry through House Bill 2498 (HB 2498) which modifies the licensing exemptions found in ORS 701.010. This Bill, which is effective as of January 1, 2008, exempts an owner from the licensing requirements if the owner contracts for the remodel work through a licensed contractor for not more than three existing residential structures each year.

This new law also makes it clear that an owner cannot directly hire subcontractors to perform any work, for which a permit is required (e.g., electrical or plumbing work), unless the work is performed under the direction of a general contractor. In short, if the owner acts as his or her own general contractor and hires subcontractors directly (for work requiring a permit), the owner loses this exemption from licensing and is required to be a licensed general contractor.

Future use of EIFS type (stucco) products prohibited

As of January 1, 2008, the use of “barrier-type exterior insulation and finish systems are prohibited for use by licensed contractors on any new buildings or existing buildings in Oregon. See House Bill 2112 (which will be codified in ORS Chapter 701). This new Bill defines these systems to mean any “foam insulation board inner layer, a polymer and cement base coat middle layer reinforced with glass fiber mesh and a textured finish coat exterior layer” in which “the layers are bonded to the outside face of an exterior wall; the middle or exterior layer, but not the inner layer, provides a water resistant barrier for the exterior of the building envelope, and the layers do not provide a means of drainage for water that accumulates behind the exterior surface and the layers insulate the building. This definition is extremely broad in that it prohibits all “barrier-type” systems meeting above the elements. The term EIFS (exterior insulation and finish system) came into disrepute because of the use of synthetic stucco material and was commonly known as synthetic stucco. This Bill should not affect true stucco systems that are applied correctly. However, if a stucco system incorporates an insulation backer board over exterior sheeting without a “rain screen” system, this application will also be prohibited. Because this statute is written in the conjunctive, any EIFS or stucco system that does not meet all of these requirements may still be used. For example, many synthetic stucco systems are now using a “rain screen” system to provide for water drainage behind the stucco to protect the interior wall. True stucco systems do not typically incorporate an insulation barrier as part of the stucco application. Any barrier-type system that does not meet all the prohibited requirements may still be used after January 1, 2008.

Furthermore, the statute does not prohibit the use of EIFS applications may still be used by homeowners, the use for repair or replacement of a previously installed barrier-type exterior insulation and finish system, the use as an architectural feature not intended to provide protection to an interior space, or for use on concrete or CMU walls.

Choice of forum clauses may not be enforceable

When a contract or job goes bad, under Senate Bill (SB) 484, Oregon residents now have more power to have their disputes heard in Oregon courts. When contracting with an individual Oregonian purchasing less than $15,000 in residential construction services, any out-of-state forums mandated in the contract are unenforceable.

This legislation allows individual residents to revoke agreed-upon clauses requiring non-Oregon forums for both arbitration and contract suits. The first lesson is clear: contractors cannot rely on contract language as concerns the choice of forums. The second repercussion presents a danger for contractors ignoring that first lesson: attempting to enforce the forum clause may make a contractor liable for the consumer’s resulting attorney’s fees.

Chimney Sweeps

SB 605 may be overlooked due to its narrow scope, but it makes a big difference to those earning their living cleaning or servicing chimneys. Chimney sweeps are considered “contractors” under the new legislation and therefore must be licensed as such, and at times appropriate insurance and bonds. This modifies the current law requiring a license to inspect or repair a chimney, but not to clean one. One exception: chimney sweeps have a grace period of one year after the date of enactment of this Bill before being disciplined for not being licensed.

Home Inspectors

A new fee structure under SB 95 means more up-front costs to fund licensing and regulation. In place of the current $75 maximum fee for annual certificate renewal, fees may now be levied totaling $150 for the initial two-year certificate and another $150 for renewal every other year.

Landscape Contractors

Mostly clarifying existing law, SB 62 lays out the circumstances under which property owners, their agents and subcontractors can make claims against landscapers for breach of contract, negligent work, or improper work.

In another consumer protection move ensuring money exists for homeowner recovery, the law provides that claimants other than the property owner cannot recover more than $3,000 from a bond. Additionally, no single recovery can exceed $3,000 for all dispute resolution costs, including interest and attorney fees. The law also formally approves mediation as a dispute resolution device. The State Landscape Contractors Board already uses mediation for most claims.

Personnel Changes

Licensed contractors must immediately notify the CCB upon an identity, name, or address change for the contractor, Responsible Managing Individual, or other controlling individuals named in SB 91. Moreover, when a partner or joint venturer leaves a construction partnership or joint venture, a new license is required before continuing work. These changes apply to personnel and license applications occurring Jan. 1, 2008 or later.

Another minor change contained in this legislation requires trustees’ information to be included in licensing applications by trusts.

Rights Following State Agency Action

Parties to a contested hearing before a state agency must now be served personally or in the mail by the agency under HB 2423. Additionally, they are entitled to a more extensive explanation of what the hearing will involve, including what evidence can be presented and explanations of when a default order can be entered. The State agency must also deliver notice of a right to hearing and information regarding how to request a hearing if one is not scheduled to anyone affected by actions of that State agency.

With the plethora of new laws enacted during the last session that can affect many different areas of an Oregon contractor’s business, we advise all contractors to seek legal counsel for a more thorough explanation of these bills and whenever assistance is needed.

For more information, please contact:

Thomas S. Smith Portland, Oregon (503) 241-2300 thomassmith@dwt.com

Dean M. Phillips Portland, Oregon (503) 241-2300 deanphillips@dwt.com

This advisory is a publication of the Real Property Group of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may be given only in response to inquiries regarding particular situations. Attorney advertising. Prior results do not guarantee a similar outcome.

Copyright © 2007, Davis Wright Tremaine LLP.

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