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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 had paid off the first loan.

City Procurement Code. This case, Falcone Brothers & Associates, Inc. v. City of Tucson[5], involved a classic maneuver by the City of Tucson. A city procurement code provision purported to set up a process whereby (a) a contractor with a claim against the City had to go through at two-tier administrative process to pursue its claim (with City employees deciding the case at both tiers), and (b) any appeal to Court after a decision against the contactor could only be by a writ of certiorari (a special action) and had to be taken within 30 days. The Arizona Court of Appeals said that the City cannot make an unconscionable[6] “arbitration” contract of adhesion supplant the Court’s rules and procedures. The unconscionable administrative process was thrown out.

ROC Recovery Fund. In Ramsey v. Arizona Registrar of Contractors[7], the Arizona Court of Appeals rejected a Registrar of Contractors challenge of a court’s award from the ROC recovery fund because the ROC did not contest the homeowner’s claim as to damages and the amount of damages.

Statutory Changes

Little Miller Act Notices. Over a year ago, the Arizona Court of Appeals interpreted the state’s Little Miller Act statute in a peculiar way. In Cemex Construction Materials South, LLC v. Falcone Bros. & Assoc., Inc.[8], the Court of Appeals had ruled that 20-day notices under the Little Miller Act could be served only by certified or registered mail service. During its 2016 session, the Arizona Legislature amended Section 34-221 to now clarify that such 20-day notices (and the 90-day notice of claim) can be sent by regular mail if a third-party affidavit of mailing is provided and served. Thus, 20-day notices (for Miller Act projects as well as private construction projects) will once again be sent out by regular mail.

Transaction Privilege Tax Reform. There has been a several-year struggle to simplify Arizona’s TPT law so that tax gets collected once, at “the point of sale.” Please see the diagram from Morrison, Clark & Conover CPAs attached hereto.

In “Maintenance, Repair, Replacement Alteration” (MIRRA) jobs, sales tax on materials is paid by a subcontractor on the materials when purchased. That sales tax is folded into the cost of those materials on a pay-application, and the sub pays no additional sales tax on those materials.

If materials are purchased for a non-MRRA job, then they are exempt from sales tax when purchased, and that tax is paid when the cost of those materials is paid by the owner and the General Contractor has to track, account for, and pay that tax to the State.

There are yards and yard of further materials to be had on this very complicated subject. The on-line portal (off of the Department of Revenue website) came on-line and a dozen TPN opinions came out, thereby confusing the contractor’s view on this very important matter (hence the attached important diagram).


[1] City of Phoenix v. Glenayre Electronics, Inc., 240 Ariz. 80, 375 P.3d 1189, (Ariz. App. May 2016)

[2] S&S Paving and Construction, Inc. v. Berkley Regional Insurance Company, 738 Ariz. Adv. Rep. 16, 239 Ariz. 512, 372 P,3d 1036 (Ariz. App. May 2016)

[3] Sirrah Enterprises, LLC v. Wunderlich, 741 Ariz. Adv. Rep. 15, 240 Ariz. 163, 377 P.3d 360 (Ariz. App. June 2016)

[4] Markham Contracting Co., Inc. v. Federal Deposit Insurance, 745 Ariz. Adv. Rep. 19, 240 Ariz. 361, 379 P.3d 257 (Ariz. App. August 2016)

[5] Falcone Brothers & Associates, Inc. v. City of Tucson, 240 Ariz. 48, 381 P.3d 276 (Ariz. App. August 2016)

[6] “Unconscionable” due to “arbitrators” being interested parties, i.e., City employees.

[7] Ramsey v. Arizona Registrar of Contractors, 2016 WL 6440361 (11/1/16)

[8] Cemex Construction Materials South, LLC v. Falcone Bros. & Assoc., Inc., 349 P.3d 210 (Ariz. Ct. App. 2015)