Letter from the Editor

Happy Holidays to all!

As we close out 2012 and welcome 2013, we are grateful for the numerous opportunities to serve our community and our clients. We extend to you, your family and friends joy, peace and prosperity.

This issue of Under Construction features five articles. In the first article, Scott Sandberg reviews Colorado construction law developments in 2012 and three Colorado Court of Appeals cases. Two of the cases were duty to defend cases and the third related to the statute of repose on a multi-unit and multi-phased construction defect claim. In the second article about an Arizona construction defect claim, authors Josh Grabel and Jennifer Phillips discuss a Court of Appeals case that held that Arizona’s statute of repose applies to implied warranty claims, that the economic loss doctrine does not apply without a contract and that you cannot recover your attorneys’ fees regarding implied warranty claims. The third article by Rick Erickson and Nicole Sornsin addresses an Arizona Supreme Court case that ruled on an employer’s liability for the unrelated work activities of employees who travel out of town on behalf of the employer. In the fourth article, Wade Budge and Nora Pincus discuss the issue of using cranes when they must cross a neighbor’s airspace. The article provides reasons why owners and contractors should limit airspace intrusion or work with neighbors and attempt to obtain an agreement to secure airspace rights. The final article addresses the new California anti-indemnity statute that goes into effect on January 1, 2013.

If you have any questions or comments about any of these articles, please feel free to email them to me. I would appreciate hearing from you and what topics you would like us to address in future editions.

Best Regards,

Jim Sienicki

Colorado Construction Law Developments in 2012

While Colorado’s General Assembly passed no significant legislation affecting construction law in 2012, the Colorado Court of Appeals handed down a number of significant rulings.

In Melssen v. Auto-Owners Insurance Company, the Colorado Court of Appeals held that a notice of claim made under Colorado’s Construction Defect Action Reform Act (CDARA) constitutes a “suit” such that an insurance company’s duty to defend was triggered. Relying on a policy definition of suit that included “any other alternative dispute resolution proceeding,” the court found that the CDARA notice of claim process constitutes an alternative dispute resolution proceeding. The ruling is significant because in 2010 Colorado’s General Assembly passed a statute that expressly states that a CDARA notice of claim triggers an insurer’s duty to defend. However, courts routinely held that the statute did not apply retroactively, but instead only applies to policies in effect on or after the date the statute was passed.

In TCD, Inc. v. American Family Mutual Insurance Company, the Court of Appeals held that an insurer’s duty to defend was not triggered by allegations of faulty workmanship standing alone, i.e., without resulting damage to other property. This decision was consistent with the prior cases but also noted that C.R.S. § 13-20-808, a statute imposing a duty to defend, did not apply retroactively. As time passes and more policies are subject to the provisions of C.R.S. § 13-20-808, the decision in TCD will no longer be applicable.

In Shaw Construction, LLC v. United Builder Services, the Court of Appeals considered when “substantial completion” of an improvement to real property occurred for purposes of triggering Colorado’s six-year statute of repose for construction defect claims. The case involved the construction of a multi-phase, multi-family residential project. The homeowners’ association sued Shaw, the general contractor, arising out of defects at certain of the condominium buildings at the project. Shaw subsequently sued a number of the subcontractors involved with the construction of those specific buildings. The subcontractors were not sued within six years of the completion of those specific buildings, but were sued within six years of the completion of the entire project. Shaw argued that the statute of repose did not begin to run until the entire project was completed. The subcontractors argued that the statute of repose began running upon completion of the building on which they performed work (i.e., when the certificate of occupancy for the building was issued). The court agreed with the subcontractors, holding “that an improvement may be a discrete component of an entire project, such as the last of multiple residential buildings.” The court declined to reach the subcontractors’ other argument, namely that “‘improvement’ should be determined even more narrowly on a trade-by-trade basis.” Consequently, in multi-unit and multi-phase projects, each building will likely be deemed to have its own statute of repose.

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Arizona Court of Appeals Issues Decision Related to the Application of the Statute of Repose and Economic Loss Doctrine for Subsequent Home Purchasers

On December 4, 2012, the Arizona Court of Appeals issued a decision in Sullivan v. Pulte Home Corporation that will have significant implications in the construction industry. The case revolved around a home built by Pulte in 2000. The original purchasers sold the home to the Sullivans in 2003, who discovered the defects in 2009. The Sullivans alerted Pulte to the defects in March 2009, and then ultimately sued Pulte in February 2010, asserting claims for breach of the implied warranties of habitability and workmanship, negligence, consumer fraud and common law fraud. The trial court granted Pulte’s Motion to dismiss, holding that all of the claims were barred by Arizona’s statute of repose, A.R.S. § 12-552 (the SOR). The Sullivans appealed.

Specifically, the Court ruled that:

(1) the SOR applies to the breach of warranty claims and equitable tolling does not apply to the SOR;
(2) tort claims by construction defect plaintiffs are not barred by the economic loss doctrine (ELD) if the plaintiffs were not in privity of contract with the builder;
(3) subsequent purchasers do not have a private cause of action for concealment of construction defects under the Arizona Consumer Fraud Act (the ACFA); and
(4) warranty claims are “implied-in-law” and, thus, not “arising out of contract,” meaning that a party defending such a claim is not entitled to attorneys’ fees under Arizona law.

Statute of Repose Applies to Breach of Warranty Claims. The SOR creates an eight-year statute of limitations[1] within which a party can bring a claim for breach of contract or breach of warranty against developers and builders. The Sullivans argued that the SOR was: (1) not applicable to breach of warranty claims; (2) that the SOR creates an unconstitutional abrogation of claims as applied to the Sullivans; and, (3) the SOR should be tolled as applied to them.

The Court rejected all three arguments. First, the Court noted that A.R.S. § 12-552(C) expressly says that the limitations period applies to warranty claims. Second, the Court noted that breach of warranty claims are contractual in nature and, as a result, the anti-abrogation provision of the Arizona Constitution does not apply to them. Third, the Court held that the SOR cannot be equitably tolled, noting that the clear purpose of the SOR was to “provide an outer limit – a cut-off date – beyond which no actions may be brought for breach of contract and implied warranty,” and that equitable tolling would allow a judge-made doctrine to trump the Legislature improperly.

The ELD Does Not Bar Warranty Claims for Parties Not in Privity with the Contractor. Despite having already ruled that the claims were dismissed under the SOR, the Court went on to discuss the application of the ELD to warranty claims by homeowners who are not in privity with the original contractor. The Court held that it does not. Citing the Flagstaff Affordable Housing case, the Court noted that the reason why the ELD applied to bar tort claims between contracting parties that involved breaches of the contract and solely economic damages was that the contracting parties had an opportunity to negotiate their contract terms and allocate the risks of future losses or latent defects during the contract negotiations. Since that did not apply to the Sullivans, the Court was “persuaded that parties like the Sullivans, who were not in privity with the builder, do not lose their tort claims merely because they have (or had) an implied warranty claim.” Thus, the ELD claim does not apply in instances where a subsequent homeowner has tort-related claims against a builder, and may not apply in instances in which a party is not in privity with the original actor.

There Is No Private Cause of Action for Concealment Under the ACFA or Common Law. The Sullivans also brought claims for both consumer fraud and common law fraud, alleging that Pulte had improperly concealed the alleged construction defects related to the house and that the Sullivans could assert that claim as subsequent purchasers. Pulte argued that, even if Pulte had made a fraudulent statement or fraudulently concealed the defects, the only party that those statements were made to, and that relied upon them, were the original purchasers of the home, and that Pulte had no interaction with the Sullivans until 2009—well after any alleged statements regarding the construction were made. The Court agreed with Pulte, finding that since Pulte made no representations to the Sullivans and, since they had no interaction until well after the Sullivans purchased their home, that the Sullivans were not placed in an unfair bargaining position vis-à-vis Pulte; and that Pulte had not made any misrepresentations or statements to the Sullivans “‘in connection with the sale or advertisement’ of the home.” Thus, the Sullivans had no ACFA claim against Pulte.

No Attorneys’ Fees to Pulte Under A.R.S. § 12-341.01(A), as the Claims Arise Out of an “Implied-in-Law” Contract. After prevailing on its Motion to Dismiss, Pulte sought attorneys’ fees pursuant to A.R.S. § 12-341.01(A), arguing that the breach of warranty claims made by the Sullivans arose out of contract, and the trial court agreed. The Court of Appeals reversed, finding that A.R.S. § 12-341.01(A) allowed recovery of fees in actions arising out of express contracts and implied-in-fact contracts, but not implied-in-law contracts. Since implied warranty claims are implied-in-law, the Sullivan Court reversed the fee award and denied Pulte’s fee request.

[1] There is an exception in that if a claim is discovered in the eighth year, a party can file suit in year nine and still be timely. [back]

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Engler v. Gulf Interstate Eng’g, Inc.: Employer Liability for Contractor Employees Working Away from Home

In today’s increasingly mobile construction industry, contractors are frequently involved in projects away from their home office. It is not uncommon for a construction company to send employees to another area and provide for their living expenses, transportation or housing, among other things, during a project. Whether you are a national builder working on jobs all over the country, or a local contractor reaching out to cities like Yuma or Flagstaff to supplement your business in a down economy, you need to be aware of your potential liability for the conduct of your out-of-town employees.

Until recently, if Arizona law applied, it was possible that merely sending an employee out of town for work and providing various support for their expenses could result in the contractor/employer being responsible for any actions done by its employees while out of town—regardless of whether they were performing work at the job site at the time.

In June of this year, the Arizona Supreme Court settled a disagreement between the Arizona Court of Appeals, providing a clearer standard limiting the extent to which a contractor/employer may be liable for an after-work accident caused by an employee who was on an extended away-from-home project.

The Recently Decided Case of Engler v. Gulf Interstate by the Arizona Supreme Court

In Engler v. Gulf Interstate Eng’g, Inc., the victim of an auto accident sued the employer of the driver who hit him, Gulf Interstate Engineering, alleging that Gulf was vicariously liable for the action of its out-of-town employees.

The driver/employee, Ian Gray, worked for Gulf, a Texas-based energy consulting company. He lived in Houston, but traveled each week to Yuma, Arizona. He stayed in a hotel in Yuma and commuted in a rental car to a worksite in Mexico, where he worked on the design and construction of a natural gas compressor. Gulf reimbursed Gray’s business expenses, including the cost of the hotel, rental car and meals. Gulf also paid Gray for his travel to and from the job site. Gulf considered Gray’s work day to begin when he left the hotel in Yuma and end when he returned to the hotel. Gulf did not supervise Gray after his work hours or control his activities.

On the day of the accident, Gray first returned to his hotel after a day of work. Shortly thereafter, he went to a restaurant with a coworker. Leaving the restaurant in his rental car, Gray hit Engler, who sustained serious injuries.

The Arizona Supreme Court found that Gulf was not vicariously liable because Gray was not subject to the control of Gulf at the time of the accident and therefore was not “acting within the scope of his employment.”

The Current Law of Vicarious Liability in Arizona

The Arizona Supreme Court held that a contractor/employer can be forced to pay for the wrongful actions of its employees if the employer is found to be “vicariously liable” for those actions. A contractor/employer is vicariously liable for the negligent work-related actions of its employees if the employee is acting “within the scope of employment” when the accident occurs. And, an employee is “within the scope of employment,” if he was subject to the employer’s control at the time of the action. In determining whether the employee was subject to the employer’s control at the time of the action, courts consider, among other factors, whether the act (a) was the kind the employee was hired to perform, (b) was commonly done by the employee, (c) occurred within the employee’s working hours, and (d) furthered the employer’s purposes.

Applying these factors, the Arizona Supreme Court held that an employee who maintains the right to choose where, when, and how to travel, and by what route, is not held to be subject to contractor/employer control. Mere reimbursement of travel expenses or payment of a travel allowance alone cannot create employer liability. Id.

The Prior Arizona Court of Appeals Split

At the trial court level, Engler’s case was dismissed on the basis that there was no vicarious liability for an out-of-town employee’s actions while traveling from a restaurant for a regular meal. The Arizona appeals court affirmed the dismissal. Shortly after the Court of Appeals affirmed the dismissal of Engler’s case, another Arizona Court of Appeals case found that “an employee on out-of-town travel status is within the course and scope of his employment and subjects his employer to vicarious liability while traveling to and from a restaurant for a regular meal.” McCloud v. Kimbro (McCloud II). Because the McCloud decision was seemingly contradictory to the decision in his case, Engler appealed. The Arizona Supreme Court granted review of the Engler case to resolve the conflict between the two Arizona Courts of Appeals.

The Arizona Supreme Court rejected the analysis in McCloud and upheld the Court of Appeals’ decision limiting the liability of the employer for activities unrelated to work while an employee is out of town. Providing that an employee’s negligent conduct falls outside the scope of employment when the employee engages in an independent course of action that does not further the employer’s purposes and is not within the control or right of control of the employer, the Court found that Gulf did not exercise any control over Gray at the time of the accident because: Gray was not serving Gulf’s interests in traveling to and from the restaurant during his off hours; Gulf did not control where, when or even if Gray chose to eat dinner; and, once Gray returned to his hotel at the end of the work day, he was free to do as he wished.

Contrary to Engler’s contention, the Court found that worker’s compensation principles, which apply to compensate an injured employee regardless of whether a party is at fault, should not be extended to vicarious liability cases. The Court also rejected Engler’s contention that all of Gray’s activities while in Yuma furthered Gulf’s business purposes, instead finding that “[n]ot every activity of an employee on a work assignment is under the employer’s control, even if the employer understands that such activity is necessary or might occur.”

The Arizona Supreme Court’s decision in Engler is encouraging for contractors/employers who send employees out of town on projects because it limits the scope of potential liability for the actions of their employees when the contractors/employers have no ability to control those employees. The analysis of liability is still based largely on the facts. Thus, there is no guarantee or hard line rule to determine when an employer may be subject to liability.

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Using Your Neighbor’s Airspace in Today’s Construction Projects

Since at least the times of the Ancient Greeks, cranes have been an important part of a construction project. Modern building designs and construction techniques have made cranes integral to today’s development projects. Increasingly, as old buildings are replaced and vacant spaces are in-filled among existing properties, the use of cranes requires crossing the airspace of a construction project’s neighbors.

Owners and contractors should determine whether the safe and efficient operation of a crane can be achieved without crossing over and through the airspace of neighbors. If the answer is no, it is advisable to secure temporary easements or licenses from those neighbors. Those use agreements should include the typical provisions found in temporary construction easements concerning duration, location of activities and restrictions on use. In addition, the agreements should include provisions specific to the use of cranes, such as granting the jib the room to swing with the wind when not in use, allowing for the passage of the jib for the purpose of constructing the improvements and transportation of construction materials and use of specified portions of the neighbors’ property for access to portions of the developer’s project that are accessible only from the neighboring airspace. The airspace agreement should name the beneficiaries of the agreement as the owner or developer and his or her contractors, subcontractors and suppliers. Finally, the agreement should take care to adequately define the “airspace” within which the owner or developer is permitted to operate. This will typically require language that is specific to the site and the project.

If a neighbor is not willing to execute a temporary easement or license agreement, then the party seeking to temporarily utilize the airspace above the neighbor’s property runs the risk of committing a trespass. Although the actual monetary damages associated with airspace trespass would typically be quite low or de minimus, the real risk involved is the neighbor seeking to enjoin the use of airspace, potentially causing significant delays to the project.

Despite the important role that cranes play in today’s construction projects, there is relatively little legal authority outlining the rights and obligations of those utilizing cranes in building projects vis-à-vis their neighbors’ airspace. The reason for this appears to be that any such “trespasses” are temporary and usually cause no actual damage. There are, however, a few cases providing some details that could become important if a neighboring owner were to bring a lawsuit to try to enjoin the use of a crane that happens to pass a neighbor’s airspace.

Historically, American courts have held that the owner of real property owns everything below the surface of the earth, extending infinitely into the airspace above the surface. However, with the advent of modern aviation, this general rule has been substantially circumscribed. In the United States Supreme Court case of United States v. Causby, the Court held that the flying of airplanes over a farm at elevations as low as 83 feet did not constitute a trespass. The court reasoned that a landowner “owns at least as much of the space above the ground as he can occupy or use in connection with the land.”

In the construction context, several courts have applied the Causby reasoning, attempting to balance the neighboring owner’s private property rights against the reasonable need of the contractor to temporarily utilize the airspace. A very instructive case on this point involves the use of scaffolding. In Slotoroff v. Nassau Associates, a case from New Jersey, a neighbor tried to prevent the owner of a nine-story building from erecting scaffolding that overhung the neighbor’s property, but did not touch it. The scaffolding was needed in order to resurface the nine-story building. The neighbor contended that the scaffolding was trespassing. The court held that because the scaffolding was not interfering with the neighbor’s use of its property, the neighbor could not maintain the lawsuit. The court emphasized that the scaffolding was temporary and that the result might be different if the scaffolding were permanent.

Similarly, in Geller v. Brownstone Condominium Association, the owner of a smaller residence sued a neighboring condominium tower for utilizing a mobile scaffolding machine in the airspace above the residence. The court refused to allow the homeowner to prevail. Although the court recognized that the homeowner is entitled to own and use as much of his air space as he could “practicably use,” the court would not allow the homeowner to prevent the condominium tower from using a scaffolding machine on a temporary basis.

As for cases directly involving cranes and charges of airspace trespass, only two U.S. cases directly address this issue. The first is a case from Louisiana where a neighbor sought to enjoin the use of the crane. Whitney National Bank of New Orleans v. Poydras Center Associates. The court agreed that the use of a crane over a neighbor’s property would constitute a trespass, but the court did not schedule a hearing until after the crane had completed its work. As a result, the court refused to issue an injunction. The other case involved a construction case in Texas. See Auburn Investments v. Lyda Swinerton Builders, Inc. As with the other cases, the court refused to issue the injunction against crane use, even where the neighbor brought evidence of fear of damage.

In sum, the best approach is to enter into a sufficiently detailed temporary airspace easement or license agreement under which the neighboring property owner agrees to allow the owner or developer to use the airspace above his or her property for so long as is necessary to complete the required work. If that is not possible and a neighboring property owner refuses to enter into a temporary easement or license agreement, the critical points to keep in mind in using a neighboring owner’s airspace are to make sure the use is minimized and temporary. The courts, from the above cases, are not sympathetic to neighbors who act as bad neighbors and attempt to prevent minimal intrusions of airspace that are needed to develop a property. But, for obvious reasons, this same inclination would not exist if there were actual damages resulting from the use of a crane. For these reasons, owners and contractors should carefully consider ways to limit airspace intrusions and to work with neighbors to secure airspace rights. Where agreements are not possible, owners and contractors should take every care to minimize the intrusions and to complete the work requiring a crane in a manner that is as expeditious and safe as possible.

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California Expands Prohibition on Certain Indemnity and Cost of Defense Provisions in Construction Contracts

Back in October 2011, California Governor Jerry Brown signed into law Senate Bill 474, which addresses indemnity provisions and cost of defense requirements in commercial construction contracts. The new law goes into effect on January 1, 2013.

The primary change is an expansion of California’s restrictions on indemnity provisions in construction contracts. Under existing law, provisions in construction contracts requiring a contractor or subcontractor to indemnify an owner or upstream contractor or subcontractor against liability caused by the indemnitee’s “sole negligence or willful misconduct” are unenforceable. However, as long as the indemnitor is at least partially responsible for the loss, then the indemnity provision may be enforceable. Thus, under existing law, for example, a subcontractor who has only five percent responsibility for a loss could be required to indemnify a general contractor who has 95 percent responsibility for the loss.

Effective January 1st, there is an additional restriction on the permissible scope of indemnity clauses. Under Civil Code Sections 2782 and 2782.05, most indemnity clauses in favor of owners, contractors, construction managers and subcontractors will be unenforceable to the extent the clause requires indemnity for the “active negligence” of the indemnitee. Exactly what constitutes “active negligence” is not entirely clear, and we expect this issue to be clarified by the courts over the next several years. But at a minimum, this should eliminate the ability of a party, who is primarily responsible for a loss, to be indemnified from a party who had only a minor, non-active role in the loss.

Along the same vein, the new law permits a general contractor or construction manager to agree with its subcontractors on the timing and immediacy of providing a defense and the reimbursement of defense fees. But, such an agreement cannot waive or modify the prohibition against indemnity for sole negligence, willful misconduct or active negligence. Moreover, a subcontractor will not owe a defense unless and until the general contractor or construction manager provides a written tender of the claim, including information from the claimant regarding the claims caused by the subcontractor’s scope of work and a written statement explaining how the reasonable allocated share of fees and costs was determined. If a proper tender is made, the subcontractor then has the choice to either defend the claim with counsel of its choice, but only for those portions of the claim alleged to be caused by the subcontractor, or pay the subcontractor’s “reasonable allocated share” of the defense fees and costs.

The intent of California’s new “anti-indemnity” law is to “ensure that every construction business in the state is responsible for losses that it, as a business, may cause.” The law applies to all applicable construction contracts, and the parties cannot opt out of these provisions by using a non-California choice of law provision in their contract.

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Tier 1 Construction Announcement

Snell & Wilmer is pleased to announce that it has been recognized for the second consecutive year as a national “Tier 1” firm in Construction Litigation in the 2012-2013 edition of “Best Law Firms” by U.S. News and Best Lawyers®. Selection to “Best Law Firms” is based on a peer-review survey comprising nearly 4 million confidential evaluations by attorneys in the country. View the announcement here.