SC Employers Are Liable for Negligent Selection of Contractors: Understanding Ruh
“Under South Carolina law, can an employer be subject to liability for harm caused by the negligent selection of an independent contractor?”
This was the certified question posed to the Supreme Court of South Carolina by the US Court of Appeals for the Fourth Circuit in the recent case Ruh v. Metal Recycling Services, LLC (2023) (read it here).
The SC Supreme Court’s answer: YES.
If you’re an employer in South Carolina, this might sound concerning, but rest assured, the court insists that “the sky is not falling.” Here’s what this decision means for you.
Brief Background of Ruh v. Metal Recycling Services, LLC
Metal Recycling Services, LLC, hired an independent contractor, Norris Trucking, LLC, to transport scrap metal. A truck driver employed by Norris Trucking hit the car of Lucinda Ruh, who was injured in the accident.
Ruh sued. She later amended her complaint to claim that Metal Recycling Services was negligent in its selection of Norris Trucking as an independent contractor and thus had liability for the accident that injured her. The case ended up before the US Court of Appeals for the Fourth Circuit, a Federal Court, which sent the certified question to the SC Supreme Court.
Employers Have a Duty to Hire Competent Independent Contractors
It’s important to understand Ruh’s main argument. Ruh did not contend that Metal Recycling Services was liable because the independent contractor it hired, Norris Trucking, was negligent. She argued that Metal Recycling Services, the principal (the court’s term for “employer” throughout the opinion) was itself negligent in its selection of Norris Trucking as an independent contractor.
The Supreme Court of South Carolina says Yes, a principal can be held liable for its own negligence.
In its conclusion, the court states, “We answer the certified question ‘yes.’ The potential liability we recognize today is consistent with fundamental principles of tort law. It is based solely on a principal’s own negligence in hiring or selecting an independent contractor. It is not a form of vicarious liability nor is it an exception to the general rule that a principal is not liable for the negligence of an independent contractor.” (Emphasis added.)
This aligns with current South Carolina law, and, as noted by the Fourth Circuit in its certification order, “every other state in the Fourth Circuit has… recognized a duty to hire a competent independent contractor.”
What the Ruh Decision Means for South Carolina Employers
South Carolina employers may be understandably concerned about the effect this decision could have on its business and its vetting and contracting practices. Will this decision “open the floodgates” and “expand… the scope of liability” to every principal, as Metal Recycle Services argued? Will it adversely affect the business environment in the state, as others argued?
The SC Supreme Court goes into detail in its opinion about the possible ramifications of this decision, and says it wants to “assure those potentially affected by our decision that, in fact, the sky is not falling.” (Emphasis added.)
The court begins by affirming the general rule that a principal is not liable for the negligent act of any independent contractor it hires and that nothing in the Ruh opinion affects this general rule. This should come as a relief to South Carolina employers.
Four Factors Employers Should Consider When Hiring Independent Contractors
Next comes the most critical section of the decision for employers.
The court lists four factors that can guide principals (employers) when hiring independent contractors. Its analysis is based on section 411(a) of the Restatement (Second) of Torts.
- Reasonable Care
An employer must use reasonable care when selecting an independent contractor.
This is not a very high standard, and the court even states that “most participants in the modern economy already act reasonably in selecting contractors,” meaning the Ruh decision will not add extra burden to the “vast majority of principals.”
If a plaintiff does bring a claim against a principal for negligence over the selection of a contractor, the plaintiff must use proof to establish a standard of care the principal should have used and also show that the principal breached that standard.
- Risk of Harm
An employer must take into account the risk of harm associated with the work in question.
The standard of “reasonable care” varies depending on the degree to which the work involves risk of physical harm unless it is done “skillfully and carefully.” A riskier job requiring a higher level of competence and care on the part of the worker requires a “more thorough assessment” when hiring on the part of the principal.
- Competent and Careful
An employer should take on a “competent and careful” contractor with the knowledge, skills, experience, and proper equipment to do the job at hand safely.
For a successful claim, a plaintiff must show that the principal breached the standard of care. The principal’s knowledge about the contractor’s competence and carefulness in previous work – or lack of it – “will always be relevant” in determining whether the principal breached the standard of care.
- Proximate Cause
An employer’s negligence in selection of a contractor for the particular work must be a proximate cause of physical harm in order for a plaintiff to bring a successful claim.
Here, the court gives a good example to illuminate the nuance involved: “[…] if a principal hires a contractor unqualified to handle emergencies that may arise while hauling toxic chemicals, the principal is negligent in hiring the contractor. But if the contractor causes an accident by negligently failing to yield the right of way, and the dangerous quality of his cargo plays no part in the accident or injury, then the plaintiff will be unable to establish cause-in-fact and thus unable to establish proximate cause.”
Continuing: “In this example, the principal may be liable for his negligence in selecting the contractor only when the contractor’s lack of qualifications to handle an emergency involving toxic chemicals is the cause-in-fact of the plaintiff’s injury.”
The Takeaway
The court’s answer in Ruh does not set a very high bar for employers in South Carolina. If you’re an employer in South Carolina, you should hire independent contractors with care, ensuring that any contractor you engage has the appropriate qualifications and experience for the job. Be extra careful when hiring someone for a potentially risky or dangerous job. If you know or discover that the contractor performed poorly in the past, you might want to look for alternatives.
If you’re a business owner, you need to be proactive about protecting your interests and limiting your liability. For legal help and advice on business law and contracts, contact Gem McDowell of the Gem McDowell Law Group. Gem has over 30 years of experience helping South Carolina employers and business owners protect their interests, grow, and thrive. The Gem McDowell Law Group has offices in Mt. Pleasant, SC and Myrtle Beach. Call 843-284-1021 today to schedule a free consultation.
South Carolina Rejects the Mortgage Replacement Doctrine
The Supreme Court of South Carolina rejected the mortgage replacement doctrine in the 2023 case ArrowPointe Federal Credit Union v. Bailey (PDF), upholding the decision of the SC Court of Appeals.
Under the replacement mortgage doctrine, if an older (original) mortgage is released and replaced with a new mortgage in the same transaction, the newer mortgage maintains the same priority for repayment as the original.
But the replacement mortgage doctrine is not part of South Carolina law, and the SC Supreme Court rejected it. Here’s some brief background on the case and the court’s main points.
The Background of ArrowPointe Federal Credit Union v. Bailey (2023)
In late October 2009, Jimmy Eugene Bailey and Laura Jean Bailey took out a mortgage from Quicken Loans on their Winnsboro, SC home in the amount of $256,500. In early November, they took out an equity line of credit with ArrowPointe Federal Credit Union (ArrowPointe), secured by a mortgage, with a maximum principal amount of $99,000.
Less than three weeks later, in December 2009, the Baileys refinanced and got a new mortgage from Quicken Loans in the amount of $296,000. At closing, they signed a document saying the only lien on the property was the original Quicken Loans mortgage. Quicken didn’t have ArrowPointe sign a subordination agreement to ensure that it (Quicken Loans) would be paid back before ArrowPointe. It appears the ArrowPointe loan was not discovered during a title search, even though it had been properly recorded and Quicken Loans had constructive notice.
Sometime later, the Baileys defaulted on their ArrowPointe loan, which stood at $187,201.60 in March 2017.
Who Gets Paid First?
In 2017, ArrowPointe filed this action seeking a declaration that its line of credit had priority over the second Quicken Loans mortgage – now held by U.S. Bank – and should be paid first.
U.S. Bank argued it was entitled to priority over ArrowPointe under the replacement mortgage doctrine. ArrowPointe argued that it was entitled to priority, as Quicken Loans had recorded notice of the ArrowPointe line of credit at the time the second mortgage was signed.
A special referee agreed with ArrowPointe, finding that South Carolina does not recognize the replacement mortgage doctrine and that ArrowPointe had priority over U.S. Bank under South Carolina’s race-notice statute (discussed below). The referee ordered the foreclosure of the mortgage and the sale of the Bailey home. The SC Court of Appeals affirmed the special referee’s decision. The matter then went to the Supreme Court in May 2022.
The SC Supreme Court Rejects the Mortgage Replacement Doctrine
The SC Supreme Court affirmed the lower court’s decision. Here are some takeaways from its opinion.
South Carolina Statute is Clear, and the Court is Not a “Superlegislature”
U.S. Bank’s argument for priority was based on the replacement mortgage doctrine, but that is not part of current South Carolina law. The Supreme Court agrees with the SC Court of Appeals that whether South Carolina should adopt the replacement mortgage doctrine is an issue for the General Assembly, not the court, saying, “We do not sit as a superlegislature to second-guess the General Assembly’s decisions.”
Current law is clear. South Carolina has a race-notice recording statute, which is one way of determining the lawful owner of a piece of property when more than one party makes a claim to it. In states with a race statute, the party that records the sale with the recording office first is the legal owner. In states with a notice statute, a subsequent buyer who is not aware of a previous sale of the property, through actual or constructive notice, is considered the owner. The buyer may be made aware of a prior conveyance either through actual notice or constructive notice, such as the recording of a deed which is public record.
In a race-notice statute state like South Carolina, a subsequent buyer must have no actual or constructive notice of a prior conveyance and must record the purchase before the prior buyer. Under this statute, ArrowPointe has priority over U.S. Bank.
Equitable Subrogation Doctrine and Replacement Mortgage Doctrine Are Not the Same
U.S. Bank also argued that because the South Carolina Supreme Court has adopted the equitable subrogation doctrine as an exception to the race-notice statute in the past, it may also adopt the replacement mortgage doctrine.
But the two are different, says the court. With equitable subrogation doctrine, a new party essentially “steps into the shoes” of the existing mortgagee, to use the court’s analogy. The party has changed, but the loan itself has not. With the mortgage replacement doctrine, however, the old mortgage is satisfied and replaced with a wholly new mortgage that may or may not have similar terms. In the present case, the second mortgage the Baileys took out was substantially more than the first – $39,500 more – so the two mortgages were significantly different. The second mortgage was not an exact replacement for the first.
A Thorough Title Search is a Better Solution
A thorough title examination is “inherent” in our state’s race-notice statute, says the court. Quicken Loans should have discovered the ArrowPointe line of credit in a title search and addressed it during refinancing, but it didn’t.
“We conclude the replacement mortgage doctrine invites needless litigation that could be avoided by a simple examination of the title to the real property,” says the SC Supreme Court. “We see no reason to adopt a doctrine that excuses the failure to conduct such a title examination—or, when a title examination is conducted, the failure to ascertain the existence of an intervening lien.” (Emphasis added by Gem McDowell Law Group.)
Don’t take chances or shortcuts when it comes to real estate deals. Work with an attorney who can help you cover all your legal bases so there are no surprises in the future.
Call South Carolina Attorney Gem McDowell
For help with contracts, commercial real estate transactions, and other estate planning and business law needs, call Gem and his team at his Mt. Pleasant office. Gem has over 30 years of experience helping individuals and businesses in South Carolina to protect their interests and avoid potentially costly mistakes. Call 843-284-1021 today to schedule your free consultation.
