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.
Reported Court Opinions
Awarding of Attorney’s Fees. In City of Phoenix v.
Glenayre Electronics, Inc.,
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
In S&S Paving and Construction, Inc. v. Berkley Regional
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.
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
Priority of Mechanics’ Liens. In Markham Contracting
Co., Inc. v. Federal Deposit Insurance,
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
City Procurement Code. This case, Falcone Brothers &
Associates, Inc. v. City of Tucson,
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
“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
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.
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.,
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
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
 City of Phoenix v. Glenayre Electronics, Inc.,
240 Ariz. 80, 375 P.3d 1189, (Ariz. App. May 2016)
 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)
 Sirrah Enterprises, LLC v. Wunderlich, 741
Ariz. Adv. Rep. 15, 240 Ariz. 163, 377 P.3d 360 (Ariz. App. June 2016)
 Markham Contracting Co., Inc. v. Federal
Deposit Insurance, 745 Ariz. Adv. Rep. 19, 240 Ariz. 361, 379 P.3d
257 (Ariz. App. August 2016)
 Falcone Brothers & Associates, Inc. v. City of
Tucson, 240 Ariz. 48, 381 P.3d 276 (Ariz. App. August 2016)
 “Unconscionable” due to “arbitrators” being
interested parties, i.e., City employees.
 Ramsey v. Arizona Registrar of Contractors,
2016 WL 6440361 (11/1/16)
 Cemex Construction Materials South, LLC v.
Falcone Bros. & Assoc., Inc., 349 P.3d 210 (Ariz. Ct. App. 2015)