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Arizona Construction Law 2016: Reported Cases and Statutory Developments

In a busy year for construction law decisions, a recap of 2016 case law and legislative actions.

David C. Tierney

Reported Court Opinions

Awarding of Attorney’s Fees. In City of Phoenix v. Glenayre Electronics, Inc.[1], the City of Phoenix was sued by Mr. Tarazon, a City worker, who claimed he had been harmed by asbestos exposure while working on pipe installations for the City (and others). He claimed that the City knew of the dangers to which he was exposed and negligently failed to warn or protect him.

The significance of the case lies in the City’s attempt to quickly file third-party complaints against 82 contractors and developers on the jobs on which Tarazon had been working over 25 years. Those third parties were sued under indemnity provisions found only in permits and permit ordinances, not in written contracts. The contractors argued that they were protected against the third-party complaint by Arizona’s eight-year statute of repose (sort of an end-all statute of limitations) (A.R.S. § 12-552A).

The Court found that the contractors did have to indemnify the City under those clauses. Also, the Court held that, although most statutes of limitation do not run against “the sovereign,” i.e. the City government, this statute does run against the City. Thus, Phoenix was too late in suing the contractors and developers.

A subsidiary ruling said that the language about indemnification duties in permits and permit ordinances was imported into the City’s contracts with the contractors and developers, such that they were “contract terms” in effect, thus the claims Phoenix had brought against the contractors were “in contract.” As a consequence, the contractors could be awarded their attorneys’ fees under A.R.S. § 12-341.01 (our Arizona attorneys’ fees statute for successful parties in claims brought “in contract”).

Surety Bad Faith. On public works projects in Arizona, there are no lien rights. Only a claim on a “Little Miller Act” (A.R.S. § 34-221) bond can be brought – or a contract claim if one fails to timely file a Miller Act claim (90 days after last work for notice, and one year after last labor or materials for filing suit).

In S&S Paving and Construction, Inc. v. Berkley Regional Insurance Company[2], S&S timely sent its notice of claim (before 90 days), but bond-provider Berkley kept stalling on paying. After more than the one year had passed, Berkley then denied the claim. S&S sued, but the Court dismissed the Miller Act claim (leaving the contract claim against the contractor, who was broke). S&S claimed that the bond company (Berkley) acted in bad faith. S&S tried to assert a claim against Berkley for not acting in good faith (to investigate and then to pay) under the contract, i.e. the bond.

The Court declined to create such a (bad-faith) remedy, distinguishing an insurance bad faith claim under the Dodge case from 1989, a case in which I was involved.

Awarding of Attorney’s Fees. Rather like the City of Phoenix v. Glenayre case above, the Court in Sirrah Enterprises, LLC v. Wunderlich[3] decided that attorneys’ fees under A.R.S. § 12-341.01 (attorneys’ fees in cases brought in contract) should be awarded when the complaint is based on an implied warranty of workmanship and habitability. Even though such is not written in the contract, such is implied in every construction contract, so the case was considered to be based on contract; thus, granting attorneys’ fees was appropriate.

Priority of Mechanics’ Liens. In Markham Contracting Co., Inc. v. Federal Deposit Insurance[4], the Court ruled on the priority of mechanics’ liens. A lender who paid off a first mortgage with some third mortgage loan proceeds claimed that, by doing so, he was equitably substituted into first place, ahead of the mechanics’ lien that was in second place. The Court said the lender was correct, but only to the extent that his third-place loan h