Under Arizona law, when a purchaser of a new residential dwelling unit alleges a construction defect, the purchaser generally is required to first provide notice of the defect to the homebuilder prior to filing a formal action against the homebuilder. This procedure, and the other “rules” that must be followed with respect to construction defect claims, is outlined in Arizona’s Purchaser Dwelling Act (the “Act”).
In 2015, the Act was amended to grant homebuilders the right to repair alleged construction defects. Prior to the amendment, the Act required notice to homebuilders of alleged defects, but a purchaser was not obligated to afford a homebuilder the opportunity to make repairs. Rather, after providing notice, the purchaser was free to pursue construction defect litigation. The 2015 amendments to the Act required purchasers to allow the homebuilder to repair or replace the defective item. While homebuilders were not obligated to make repairs, this change was viewed as a benefit to homebuilders, allowing them to address legitimate construction defect items in an effort to avoid formal litigation.
During the most recent legislative session, the Legislature adopted additional amendments to the Act. Governor Ducey signed SB 1271 into law in April 2019. The primary components of SB 1271 that relate to the Act include the following: (i) subcontractors (in addition to homebuilders, as described above) now have the right to repair alleged construction defects; (ii) a two-phased “trial system” is mandated, where the trier of fact is charged with apportioning liability between builders and subcontractors based on responsibility if it is determined that a construction defect exists; and (iii) a court may now award attorneys’ fees to the prevailing party on each contested issue in a litigation proceeding.
In the 2015 amendments to the Act, the homebuilders’ right to repair was not extended to benefit subcontractors or other construction professionals who were often responsible or involved in the building of a new home. Since 2015, many subcontractors or construction professionals who continued to become involved in construction defect litigation without having the right to repair or replace defective work. SB 1271 now requires that each homebuilder receiving notice of an alleged construction defect provide that notice to each subcontractor or construction professional that may be responsible for the defective work. Similarly, each subcontractor or construction professional now has the right to inspect the alleged defective work and to elect to repair or replace the alleged defect, but without any obligation to do so.
SB 1271’s two-phased trial system for any formal construction defect litigation is described in more detail herein. In the first phase, the trier of fact will determine whether a construction defect actually exists and, if so, the amount of damages to which the purchaser/plaintiff is entitled. If a construction defect is determined to exist, the trier of fact, in the second phase, is required to assign fault to one or more construction professionals involved in the defective work. This second phase is designed to allocate responsibility, and liability, to the responsible party or parties, rather than merely the homebuilder who may not have been responsible for the defective work. In this second phase, the homebuilder has the burden of establishing that another construction professional (i.e., a trade or subcontractor) was responsible or partially responsible for the defect and therefore should be responsible for the liability and damages associated therewith.
Lastly, SB 1271 includes provisions with respect to how a court may award attorneys’ fees to prevailing parties in construction defect litigation. Under an Arizona statute governing contract disputes, A.R.S. § 12-341.01, the court may award the prevailing party “reasonable” attorney fees in any contested action arising out of a contract. SB 1271 clarifies that with respect to dwelling actions involving construction defects, the court may award reasonable attorneys’ fees to the prevailing party with respect to each contested issue raised. Where there are multiple issues raised, and both the plaintiff and defendant have prevailed on distinct issues, a court could award attorney fees to both parties. The new law also prescribes factors to consider in determining what are considered reasonable attorneys’ fees. These new rules are generally anticipated to prevent what many in the homebuilding industry believe are frivolous and overly broad claims, as plaintiffs could be liable for payment of attorneys’ fees, even if they prevail on one or more issues.
These changes, along with other provisions incorporated into the new law, are generally viewed as industry favorable and were the result of meetings with various stakeholders. Homebuilders, subcontractors and other construction professionals should closely review these changes to fully understand the implications of the new Act, to ensure compliance, to protect their rights and to utilize the favorable provisions of SB 1271.
