Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committees on Consumer Protection and Commerce and Judiciary, to which was referred S.B. No. 2358, S.D. 2, entitled:

beg leave to report as follows:

The purpose of this bill is to address the litigation factor in the construction liability insurance crisis, by requiring that any person who wishes to file a lawsuit alleging defects in construction, must first engage in a statutorily prescribed negotiation process. The process provides the contractor with an opportunity to offer to cure any defects or otherwise settle the dispute prior to litigation. The bill also requires that the potential litigants attempt to mediate their dispute before resorting to litigation.

Testimony in support of the bill was received from the Insurance Division of the Department of Commerce and Consumer Affairs, Building Industry Association-Hawaii, General Contractors Association of Hawaii, Subcontractors Association of Hawaii, Paul Louie & Associates, Inc., CC Engineering & Construction, Inc., Kokea Construction & Consultants, Inc., Associated Builders and Contractors, Armstrong Builders Ltd., Armstrong Properties, Ltd., HSI Mechanical, Inc., the Hawaii State Council of the American Institute of Architects, Land Use Research Foundation of Hawaii, and a concerned individual. Testimony in support of the mediation requirement was received from the Judiciary.

Testimony in opposition to various provisions of the bill was received from the Hawaii Chapter of the Community Associations Institute (CAI-Hawaii), Consumer Lawyers of Hawaii (CLH), and an individual.

CLH objected to the provision disallowing an award of punitive damages arguing that these damages punish defendants for gross, wanton, or willful conduct and deter similar conduct by others. There being no evidence that punitive damages in Hawaii are awarded in excessive amounts or inappropriately, your Committees removed that provision.

CLH also objected to the limitation on the recovery of a claimant that rejects a "reasonable" pretrial settlement offer, to the greater of the cost of repairs, or the amount of the rejected settlement offer.

Your Committees find that the reasonableness of a pretrial settlement offer is highly subjective, at the time and under the circumstances that it is made. Judging reasonableness with the benefit of hindsight, after the discovery period is concluded and the evidence has been weighed by a jury, is still problematic and does not address the reasonableness of the action at the earlier time. Therefore, it is unfair to impose sanctions. Again, CLH was persuasive and the provision was removed.

CAI-Hawaii objected to the 30-day period to respond to a settlement offer. Your Committees, in response, have extended the period to 45 days.

CAI-Hawaii was concerned that section -12(f) of this bill would cause a waiver of the attorney-client privilege. That concern has been addressed. CAI-Hawaii was also concerned about the 100 percent approval requirement, and in two places, this has been reduced to require only a simple majority of the units.

Your Committees also attempted to address the other concerns of the individual and organizations that opposed various provisions, and in addition to the changes mentioned above, the bill has been amended to make it easier for both sides to understand the process and comply with the requirements.

While the amended bill reflects the policy decisions of your Committees, there may need to be additional technical changes to provide a more precise interface with the condominium statute and with court rules and procedures. In addition, there may be a benefit to providing some alternative procedures for smaller disputes.

Therefore, your Committees have included a defective effective date provision. This assures that the Senate will disagree with the House amendments and that the bill can be further refined in a Conference Committee.

As affirmed by the records of votes of the members of your Committees on Consumer Protection and Commerce and Judiciary that are attached to this report, your Committees are in accord with the intent and purpose of S.B. No. 2358, S.D. 2, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 2358, S.D. 2, H.D. 1, and be placed on the calendar for Third Reading.