Construction Defects, Courts and Contractors
By Leon F. Mead II

In 2003, the Nevada Legislature, after hard lobbying efforts by Nevada contractor groups including the Coalition for Fairness in Construction, Nevada Subcontractors Association, Nevada Contractors Association, Southern Nevada Homebuilders Association, Associated General Contractors and others amended Nevada Revised Statutes 40.600 et seq., to give Nevada's contractors the much needed right to repair alleged construction defects before being sued by homeowners and their lawyers.

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The amendments came none too soon, as recent rulings from Nevada's courts have shown what could be interpreted as hostility to contractors. Four cases from the Nevada Supreme Court handed down in 2004 show just how far Nevada courts are willing to go to protect Nevada trial lawyers' ability to get to a contractor's insurance coverage.

In the May, 2004 case of Olson v. Richard (a lawsuit by one of the state's construction defect lawyers against his own contractor), a majority of the Nevada Supreme Court ignored the explicit directive of the Nevada Legislature set forth in NRS 40.635(4) and held that a case for negligence can be made for construction defects under Chapter 40 despite clear language to the contrary because "it is reasonable to infer that the Legislature did not intend … to preclude a homeowner from alleging a negligence claim…"

September was an especially ugly month for contractors. On Sept. 13th in the case of DR Horton v. Green, the Nevada Supreme Court ruled that a mandatory arbitration clause in a home purchase contract was unenforceable because in the Court's view the arbitration clause was not "conspicuous and clearly put a purchaser on notice that he or she was waiving important rights under Nevada law".

This is despite the fact that the homeowner in these cases read the arbitration clause and/or refused an opportunity to read it and ask questions about it.

The same day that the DR Horton case was decided, the Nevada Supreme Court eliminated a protection that some Nevada contractors had used to protect themselves from old construction defect lawsuits.

Under NRS 78.585, corporations were able to avoid liability for cases that were not known to exist before a company dissolved. Despite the plain language of the statute, the Nevada Supreme Court in the case of Beazer Homes v. Eighth Judicial District Court found the statute to not apply to cases in which the alleged defect was discovered after the company was dissolved.

Thereby allowing a homeowner to pursue corporate insurance (or the corporate shareholders, officers and directors personally) for construction defects discovered after a corporation had dissolved and gone out of business. Apparently the entire Construction Defect Judicial Panel of the Clark County Court had made this same determination. In a demonstration of just how far Nevada Courts will go against contractors, one of the trial judges actually found that NRS 78.585 would have required the dismissal of a case discovered after the contractor had dissolved its corporation "but refused to enforce the statute because the judge thought it would be bad public policy." Judicial activism does not get anymore obvious than this.

And just to prove the point, three days after deciding DR Horton and Beazer, in Desert Fireplaces v. Eighth Judicial District Court, the Nevada Supremes determined that a subcontractor has no independent right to due process. The Court concluded that the applicable statute of limitations for bringing a claim against a dissolved subcontractor was tolled by the homeowner's giving notice to the general contractor - even though the subcontractor was not involved in the dispute between the general and homeowner, nor had any actual notice of the claim.

Hostility in any judicial forum is hard to discover. Certainly judges are expected to be fair, open and analyze the law with blindness to whom the participants are or who might have to pay a judgment. While we can all sympathize with an individual who may be harmed, courts need to also understand that their actions to obtain or protect a homeowner's right to a contractor's insurance money is also inflicting harm upon the contractor who is forced to pay higher insurance premiums or go out of business because he cannot obtain insurance. In these four decisions, however, Nevada's courts have decided that they are in charge of this issue: Neither legislative mandates, dissolution of the contractor's corporation, contract provisions read and signed by homebuyers nor even basic constitutional rights of notice and due process will stand between a Nevada trial lawyer and a contractor's insurance money. So what is a contractor to do? In the immediate term, it is uncertain.

None of these cases were decided based on the new legislative mandates on construction defect reform from the 2003 legislative session. Certainly, a contractor should take full advantage of its new rights to repair. Beyond this, contractor organizations should start paying attention to judicial elections. Only when judges understand that their constituents include Nevada's contractors and their employees (not just Nevada's trial lawyers) will they understand that their roll is to interpret the law, not establish public policy - good or bad.

Leon F. Mead II is an attorney specializing in construction defect law. He is partner with Lindborg Mead Drill & Pezzillo LLP in Las Vegas.