Arizona’s New Construction Defect Law is Effective the Summer of 2015

by Jaburg Wilk
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On March 23, 2015, Arizona Governor, Doug Ducey, signed into law House Bill 2578.  This new legislation relates specifically to Arizona’s construction defect claims and revises the Purchaser Dwelling Actions statute - ARS § 12-1361, et al. The new law is effective the summer of 2015.

The intent of this new law is to limit the number of construction defect lawsuits brought by homeowners. However, expansion of defined terms may increase litigation and interpretations of many of the law’s provisions by legal and construction experts are conflicting.  The courts will eventually interpret the new provisions and definitions. Following are a few of the highlights which may impact the construction industry.  

The repeal of ARS § 12-1364 - Attorney Fees provisions

ARS § 12-1364 was repealed.  Previously, the “successful party” under the Purchaser Dwelling Action (“PDA”) statute was entitled to attorney fees.  The new law has removed this provision. However, this does not mean that homeowners will not have the ability to still recover attorney fees.  Original purchasers retain their rights based on contractual privity. Specifically, ARS § 12-341.01 allows for recovery of attorney fees to a successful party in any action arising out of contract.  A homeowner who has a contract with a builder/contractor may, if deemed a successful party, recover attorney fees.  By contrast, subsequent purchasers of the property will lack contractual privity with the builder/developer and will be barred from recovering attorney fees.  However, subsequent purchasers will not be barred from filing suits, as they will still be able to sue under an implied warranty and tort/negligence theory, much like in personal injury claims. All homeowners will have the ability to recover expert fees and taxable costs under Arizona Rules of Civil Procedure 68.

New Definitions 

House Bill 2578 has, for the first time, provided a definition of construction defect.  In Arizona, “construction defect” will mean “a material deficiency in the design, construction, manufacture, repair, alteration, remodeling or landscaping of a dwelling that is the result of one of the following:  (a) a violation of construction codes applicable to the construction of the dwelling; (b) the use of defective materials, products, components or equipment in the design, construction, manufacture, repair, alteration, remodeling or landscaping of the dwelling; or (c) the failure to adhere to generally accepted workmanship standards in the community.” 

This definition of “construction defect” is misleading.  Phrases and words contained within the definition of construction defect, such as “material deficiency,”  have their own separate definitions, which any savvy plaintiff expert will easily exploit.  Likewise, the definition of a construction defect encompasses any one of the following:  a violation of construction (building) codes; defective material or the failure to adhere to generally accepted workmanship standards in the community. 

The definition of a construction defect hinges on the presence of a “material deficiency.”  Material deficiency is defined:  as a deficiency that actually impairs either the (1) structural integrity (2) functionality or (3) the appearance of a dwelling or is reasonably likely to do any of the three in the “foreseeable future.” 

The actual terms used in the definitions are disparate.  Examples of questions that are raised include:  

Is a violation of a building code, which was arguably established to ensure the stability and functionality of a structure or dwelling, a “material deficiency?”  

How will a material deficiency in “appearance” be interpreted?  Who will make this interpretation?  

If an impairment of the appearance of a dwelling exists or if a building code violation is determined to impair the structural integrity or functionality of a dwelling, then, according to the law in Arizona, will a construction defect exist?

Lack of clarity + an abundance of confusion = more questions than answers

In addition to defining construction defect, the new law includes definitions of seller and construction professional.  

“Seller” means:  any person, firm, partnership, corporation, association or other organization that is engaged in the business of designing, constructing or selling dwellings, including construction professionals.

“Construction Professionals” are defined as:  architect, contractor, subcontractor, developer, builder, builder vendor, supplier, engineer or inspector performing or furnishing the design, supervision, inspection, construction or observation of the construction of any improvement to real property.” 

This new definition of “Seller” includes the term “construction professionals.”  Therefore, if you are a seller you are now also a construction professional and vice versa. This means that all subcontractors, vendors, suppliers, architects, engineers and inspectors are “sellers” and subject to all provisions of this new law as it relates to sellers.

A seller (which now includes subcontractors, vendors, suppliers, architects, engineers or inspectors) who receives notice of repairs has “a right” to repair or replace any alleged construction defects. The question is one of practicality.  Historically, under the Arizona PDA statute, the homeowners provided a “notice and opportunity to repair” to the general contractor/developer. This was done because the identity of the general contractor/developer was most readily ascertainable. However, now general contractors, developers, subcontractors, vendors, suppliers, architects, engineers and inspectors are all deemed a seller.  This creates confusion and more than a few unanswered questions.  A few examples are:

To whom shall notice be provided?  

What if one group of seller(s) does not receive the right to repair notice, do either and/or both the homeowner and seller forfeit their rights? 

Is a homeowner in violation of ARS § 12-1363 if they do not provide notice to all seller(s)?  

Does a homeowner only need to provide notice to one seller, if so, which one?  

How would a homeowner obtain the knowledge of all seller(s)? This is particularly difficult as even general contractors often find it extremely challenging to determine which entities work on their own projects. 

The homeowners and seller(s) are to select the “construction professionals” who will make the repairs to the home. Which one, or do all the sellers need to agree on the entities that will make the repairs? What if one seller does not agree, what is the result?

Homeowners cannot “unreasonably withhold” consent to have any one construction professional performing the repair work.  However, if a homeowner does not consent on “reasonable grounds” who is to perform the repair work? The seller(s) are, with consent of the homeowner, to select other professionals to perform the repair work. This could result in a seller being put in the position to consent to allow a direct competitor to perform repair work to their original work.

If repair work is performed by an entity other than a seller of the home, who receives and pays the repair invoice?  Is a seller, which is defined to include a contractor and/or subcontractor, required to pay the invoice for repair work by a direct competitor? Will a general contractor or any other seller be held responsible for all, some, or none of the repair work invoice?  

Other Important Considerations

Although a seller/construction professional may now have a right to repair, that does not mean that it won’t be sued by the homeowner.  In fact, even if a seller/construction professional does make a repair, they are not entitled to a release. A contractor can make a repair to a home or pay for a competitor to make a repair to a home and still be sued by that same homeowner for the home that they just repaired. 

The definition of “construction professional” includes inspectors, which adds another potential layer of complication.  Is notice required for a city inspector and thus a city or municipality?  Will a homeowner be required to provide notice of claim against a governmental entity pursuant to ARS §12-821.01, requiring that “persons who have claims against a public entity or a public employee shall file claims ... within 180 days after the cause of action accrues.”

The conduct of the parties during the notice to repair period is now admissible as evidence.  Any conduct, negotiations or communications during the right to repair will now be admissible and available for a jury to read and consider. Offers, communications, and promises that a construction professional makes - or does not make - during repairs will be available to a jury at trial.  Caution needs to be exercised.

Conclusion

This new law was intended to change the way construction defect claims are brought in Arizona and it will most certainly do that.  It remains to be seen if the impact of this new law will be as complete as some are suggesting. The multitude of definitions, phrases and terminology introduced by this new law will undoubtedly leave many courts cringing and struggling with their interpretation. 

There may be more hurdles for would-be plaintiff homeowners to bring actions, but once those obstacles have been surmounted, homeowners may very well find a cornucopia of new terminology and definitions upon which to feast.  Time will tell.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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