[authors: James J. Sienicki and Eric H. Spencer]

This year has been a busy one so far for legal developments affecting the Arizona construction industry. Here is a brief summary of court cases and legislation of interest.

Case Law:

1. In Wang Electric, Inc. v. Smoke Tree Resort, LLC, 2012 Ariz. App. LEXIS 120, 640 Ariz. Adv. Rep. 15 (Ariz. Ct. App. July 31, 2012), the Arizona Court of Appeals addressed the enforceability of five subcontractors’ mechanics’ liens and unjust enrichment claims against a landlord of commercial property. The lease agreement required the tenant to remodel the leased premises, but the landlord approved the plans and specifications and was obligated to reimburse the tenant a substantial amount in remodeling expenses.

As to the unjust enrichment claims, the Court held that the subcontractors must show that the landlord engaged in improper conduct—such as directly retaining the general contractor and refusing to pay—in order for liability to attach. Otherwise, the landlord’s active role in construction and the landlord’s contractual right to retain the improvements did not, by themselves, make retention of those improvements without payment to the subcontractors unjust. On the other hand, mechanics’ liens may attach to the landlord’s property if the tenant acted as the landlord’s agent in requesting the remodeling work.  A lease provision stating that no liens shall attach to the property is void against public policy.

Addressing whether the subcontractors properly perfected their mechanics’ liens against the landlord’s interest in the property, the Court held as follows: (1) serving the mechanics’ lien on the landlord (along with the lien foreclosure complaint) three months after recording the lien constitutes service “within a reasonable time” after recording the lien under A.R.S. § 33-993(A); (2) initial service of a preliminary 20-day notice on the landlord suffices to apprise the landlord of potential lien claimants, even if subsequent preliminary notices named only the tenant, and not the landlord, as the property owner; (3) a mechanics’ lien contains a sufficient legal description pursuant to A.R.S. § 33-993(A)(1) if it contains the county assessor parcel number and incorporates by reference a property description contained in the public records; (4) a preliminary 20-day notice may be served on the tenant’s managing member as the “reputed owner” pursuant to A.R.S. § 33-992.01(B) and is not invalid for failing to serve the landlord; and (5) a mechanics’ lien exclusively against the tenant’s leasehold interest that has been terminated is extinguished if the lien is imposed against improvements in which a landlord has a continuing or reversionary ownership interest, unless the tenant acted as the landlord’s agent (which it did in this case for purposes of the lien statutes), or the landlord is estopped from denying the agency relationship, the lien may be enforced against the landlord’s property interests.

2. In Technology Construction, Inc. v. City of Kingman, 636 Ariz. Adv. Rep. 20, 278 P.3d 906 (Ariz. Ct. App. June 12, 2012), the Arizona Court of Appeals affirmed the award of delay damages to a contractor on a public project. After the City of Kingman presented the contractor with a contract and notice to proceed four months late, the contractor submitted a notice of claim due to the increased cost of asphalt, changes in the work, delays beyond the contractor’s control and the cost impact on oil-based product caused by Hurricane Katrina. The Court held that despite the existence of a “no liability” clause stating “in no case…will the City…be liable for any portion of the expenses of the work,” the contractor nonetheless could recover damages pursuant to uniform specifications that were incorporated into the contract that contained delay damages and changed conditions clauses. The Court also rejected the City’s reliance on the classic rule in Hadley v. Baxendale, which holds that only reasonably foreseeable damages can result from a breach of contract and the City’s argument, that delay damages for increased material costs were not foreseeable, the Court held that these delay damages were reasonably foreseeable because “[p]rices of commodities…change over time and in accordance with market forces under many influences, including weather.”

3. In KAZ Construction, Inc. v. Newport Equity Partners, 629 Ariz. Adv. Rep. 8, 275 P.3d 602 (Ariz. Ct. App. March 2, 2012), the Arizona Court of Appeals held that even though a construction deed of trust was invalid for failure to have the trustee execute the deed of trust, a contractor could not enforce its mechanics’ lien against the reputed lender due to the contractor’s failure to serve a preliminary 20-day notice on that lender. A.R.S. § 33-992.01(B) requires that a mechanics’ lien claimant “shall, as a necessary prerequisite to the validity of any claim of lien, serve the owner or reputed owner, the original contractor or reputed contractor, the construction lender, if any, or reputed construction lender, if any,…with a written preliminary twenty day notice as prescribed by this section.” The Court reasoned that the policy underlying the statute was to provide notice to parties with an interest in the property so they might protect that interest. Since the contractor had constructive notice of the lender's reputed interest in the property and was statutorily required to provide that lender with a 20-day notice, the mechanics’ lien was invalid as to the lender.

4. In Alliance Trutrus, LLC v. Carlson Real Estate Co., 629 Ariz. Adv. Rep. 4, 270 P.3d 911 (Ariz. Ct. App. February 28, 2012), the Arizona Court of Appeals held that a contractor did not timely file suit against a mechanics’ lien discharge bond. The contractor originally recorded a mechanics’ lien against the property, but the owner executed and served a lien discharge bond pursuant to A.R.S. § 33-1004. The contractor thereafter filed suit on the bond. However, the contractor filed that suit more than six months after the contractor had recorded its mechanics’ lien, arguing that A.R.S. § 33-1004(D)(2) extended the statute of limitations since the lien discharge bond was served less than 90 days before the six-month lien foreclosure period expired. However, the Court held that the plain language of A.R.S. § 33-1004(D)(2) does not grant a claimant an additional 90 days to file its lawsuit, it merely allows an additional 90 days to amend any complaint to add the principal and sureties as parties. Since the contractor did not timely file its action within six months, the bond claim was already discharged as a matter of law before the action was filed.

5. In Hall v. Read Development, 623 Ariz. Adv. Rep. 11, 274 P.3d 1211 (App. 2012) (summarized in our June Under Construction newsletter), the homeowner plaintiff purchased a previously-owned house and experienced various structural problems. The homeowner filed suit against the original contractor alleging breach of the implied warranty of habitability and requesting “rescission of the purchase,” or damages for the cost of repair in the alternative. The jury found in favor of the homeowner on her breach of implied warranty claim and awarded $30,000 in damages. Both parties then requested their attorneys’ fees pursuant to A.R.S. § 12.341.01(A). The homeowner cited the court’s discretionary ability, in absence of a contractual provision addressing attorneys’ fees, to award the “successful party” its reasonable attorneys’ fees in any action arising out of contract. The original contractor, citing past settlement offers, based its request for fees on the statutory provision stating “if a written settlement offer is rejected and judgment finally obtained is…more favorable to the offeror…, the offeror is deemed to be the successful party from the date of the offer and the court may award [that party] reasonable attorney fees.”  The homeowner countered that the original contractor’s prior $40,000 and $126,000 settlement offers did not exceed the “judgment finally obtained,” because the judgment finally obtained consisted of the $30,000 verdict plus the homeowner’s attorneys’ fees and costs. The trial court agreed: since the homeowner would be awarded $225,000 in fees and $10,757.79 in costs as the “successful party,” the aggregate amount, including the $30,000 in damages awarded by the jury, exceeded the contractor’s prior settlement offers.

The Arizona Court of Appeals upheld the trial court’s decision to include attorneys’ fees and costs in the “judgment finally obtained,” but on different grounds. As a preliminary matter, the court agreed there can be two competing “successful parties” in a contract-related case—(1) the overall successful party in the litigation, based on the jury’s verdict, and (2) the party whose offer was rejected and never beaten by the “judgment finally obtained,” but that party is deemed “successful” only from the date of the offer forward. The court clarified that the amount of fees and costs the trial court should consider in determining what the “judgment finally obtained” are those fees and costs incurred up to the date of the offer, not through the date of the judgment. In this case, the original contractor made a $40,000 settlement offer in January 2007 but, at the time of that offer, the homeowner had incurred $69,396.50 in fees. Later, about one month before trial, the original contractor made another settlement offer for $126,000—however, the homeowner had incurred $206,692.81 in fees as of that date. In both cases, the “judgment finally obtained”—the homeowner’s pre-offer attorneys’ fees and costs along with the $30,000 damages award—exceeded the original contractor’s various settlement offers and therefore precluded the original contractor from being a “successful party” from the date of the offers. Therefore, since the homeowner was the only “successful party,” the trial court’s $225,000 fee award and $10,757.79 cost award in the homeowner’s favor was upheld.

The Arizona Court of Appeals also agreed that the homeowner could not seek rescission of her home purchase. Although the Supreme Court long ago eliminated any privity requirement for subsequent homeowners to maintain a breach of implied warranty of habitability claim against the original builder, privity of contract is nonetheless required for any homeowner seeking rescission of the contract. Thus, a subsequent purchaser is limited to the remedy of recovering damages for any breach of the implied warranty of habitability.

Legislation:

1. H.B. 2123 – Transaction Privilege Tax Reform Committee. This bill establishes the Transaction Privilege Tax Reform Committee and requires it to study and make recommendations regarding the collection of revenues to the state General Fund - including individual and corporate income tax as well as the transaction privilege tax. The bill also requires the committee to make recommendations to minimize the fiscal impact to cities, towns and counties. The committee will submit its report to the Governor and Legislature by October 31, 2012.

2. H.B. 2830 – Energy Savings Accounts. This bill indefinitely extends the current expiring law allowing school districts to enter into long-term energy savings contracts at no initial outlay of money, and extends this contracting ability to the rest of state and local government.

3. S.B. 1441 – Residential Construction, Fall Protection. This bill creates a more flexible standard for residential fall protection of Arizona construction workers. In particular, the bill:

• Requires each residential construction employee who is engaged in construction activities that are 15 or more feet above areas or surfaces to which the employee can fall to be protected by guardrail systems, safety net systems or personal fall systems, except when an employer can demonstrate that it is impractical or creates a greater hazard.
• Allows for the suspension of residential construction fall protection requirements if the work in question is of a short duration or non-repetitive.
• Includes requirements for temporary or emergency conditions where there is a danger of employees or materials falling through floor, roof or wall openings or from stairways or runways.
• Permits the employer to develop and implement a fall protection plan that meets the requirements pursuant to current statute if the employer demonstrates that it is infeasible or creates a greater hazard to use these systems.
• Permits an employer to develop a single fall protection plan covering all construction operations.

Employers whose work does not fall within the Arizona Department of Occupational Health and Safety’s jurisdiction, such as federally owned or managed lands, and work on Native American lands, must still comply with federal OSHA’s residential fall protection enforcement policy.