Construction Advisor and Firm News

Construction and employment attorney Lori Metcalf joins Lang Thal King & Hanson

Wed, 08 Apr 2026 01:01:01 GMT

We are pleased to welcome construction and employment attorney Lori Metcalf to the firm.

A former general counsel for an international construction company, LORI METCALF focuses her practice on construction law, employment law, and government liability .

In her employment law practice, Lori helps contractors avoid and resolve employment disputes and government compliance issues, such as:

employee claims of workplace harassment, discrimination, or wrongful termination;
jobsite safety issues;
wage-and-hour compliance;
employment and independent contractor agreements;
severance and noncompete agreements; and
employee handbooks.

After earning her law degree at Arizona State University, Lori served for two years at the Arizona Court of Appeals as a law clerk for the Honorable Thomas C. Kleinschmidt and the Honorable Edward C. Voss. She then began her litigation career as an Assistant City Prosecutor for the City of Phoenix.

Lori served for 13 years as a Judge for the Phoenix Municipal Court and has practiced law in the Phoenix and Scottsdale areas with a variety of distinguished local and national law firms. She also serves as an adjunct professor for the School of Criminology & Criminal Justice at Arizona State University.

Lang Thal King & Hanson makes the top 4 in construction litigation and top 6 in commercial litigation in Ranking Arizona 2026

Fri, 03 Apr 2026 02:31:28 GMT

Lang Thal King & Hanson ranked #4 in the category of construction litigation and #6 in the category of commercial litigation in Ranking Arizona in 2026. Thank you for your support!

Vote for Lang Thal King & Hanson in Ranking Arizona 2027 for Construction Litigation

Vote for Lang Thal King & Hanson in Ranking Arizona 2027 for Commercial Litigation

Court: Unless the general contractor objects within 14 days, an Arizona subcontractor’s invoice may be deemed valid

Fri, 20 Mar 2026 23:47:17 GMT

The Arizona Court of Appeals’ application of Arizona’s Prompt Payment Act produces a favorable decision for subcontractors.

Brian Pouderoyen

Appellate court decisions that apply Arizona’s Prompt Payment Act are rare. As a result, the Arizona Court of Appeals’ recent memorandum decision in Canon v. Retail , which delivered a good outcome for subcontractors, is worthy of attention.

In a nutshell, the decision gives Arizona subcontractors a valid argument that, if a general contractor does not object to their invoice within 14 days of receipt, that invoice may be legally deemed as approved.

See Canon Electric LLC, v. Retail Contracting Group, Inc. , No. 1 CA-CV 24-0935, Arizona Court of Appeals, Division One

Background. In 2021, Retail Contracting Group was the general contractor on a construction project at a LensCrafters store in Scottsdale. Retail Contracting subcontracted the electrical work to Canon Electric for $91,000, which, with change orders, increased to $99,100.

Of significance to the eventual legal dispute, the subcontract contained several 24-hour notice provisions. One such provision required Retail Contracting, before claiming breach of contract and terminating Canon Electric, to give to Canon:

written notice of any failure to comply and
24 hours to cure the failure.

Canon started its work on the project and, per the subcontract invoicing schedule, submitted three invoices: $40,900 on September 20; $40,900 on November 19; and the remaining $17,300 on December 11, the contractual completion date.

Meanwhile, Retail periodically invoiced the project owner, with the final invoice certifying that all work – including the electrical – was complete.

The owner paid Retail in full; however, Retail paid none of Canon’s invoices.

Dispute. Shortly after issuing its final invoice on December 11, Canon stopped work on the project, having completed, it later argued, “almost all” of the electrical work in a “timely and workmanlike manner.”

On February 1, 2022, still unpaid, Canon issued a three-day stop work notice, pursuant to Arizona’s Prompt Payment Act, and a notice of intent to lien.

In August 2022, Canon sued Retail for breaches of contract for nonpayment, violations of the Prompt Payment Act, and, specific to section 4(G) of the contract, failures to give (a) written notice of failure to meet standards of workmanship and (b) 24 hours to cure.

Retail countersued, alleging breach of contract and breach of the implied warranty of workmanship. Retail argued that Canon committed the first material breach of the subcontract (for stopping work) and, later, failed to cure defective workmanship. Retail claimed that, because of Canon’s work stoppage and failure to cure the defects, Retail was forced to hire, at a cost of $145,000, another electrical contractor to finish the job. Retail sought a net $45,900 from Canon – the cost of the replacement contractor less Canon’s invoices.

Appeal. In March 2024, Canon filed a motion for summary judgment. In August, the trial court granted Canon’s motion and ordered Retail to pay to Canon its damages, interest, and attorneys’ fees.

Retail Contracting appealed, and the Arizona Court of Appeals upheld the trial court’s decision.

The Court of Appeals’ decision in Canon v. Retail is straightforward, and it is notable for the Court’s interpretation of the Prompt Payment Act’s notice requirements in cases where the general contractor objects to a subcontractor’s invoice.

In its decision, the Court states that, under the Prompt Payment Act:

“Retail was required to either (1) pay Canon’s invoices received within seven days of being paid by the owner … or (2) withhold payment and ‘prepare and issue a written statement’ to Canon detailing the reasons for doing so within 14 days of receiving Canon’s invoices (emphasis added).”

Although there were other bases for the Court to find that Retail owed Canon payment for its invoices, the decision implies that Retail was obligated to pay Canon’s invoices simply because Retail did not object to them within 14 days of receipt.

Some construction professionals will not agree that the Act – particularly A.R.S. § 32-1183(E) relating to subcontractors’ invoices – has such a requirement, and they will disagree with the Court’s interpretation.

Nevertheless, even though Canon v. Retail is not an official “Opinion” of the Court, it can still carry sway with judges, and it gives Arizona subcontractors a facially valid argument that, if a general contractor does not object within 14 days of receipt of a subcontractor’s invoice, that invoice may be legally deemed as approved, and therefore due and owing.

Questions? Contact Brian Pouderoyen by email .

What to do if you receive an ADOSH citation: Practical steps for Arizona employers

Mon, 12 Jan 2026 22:53:27 GMT

By Christian Lestinsky

Receiving a citation from Arizona’s OSHA equivalent – the Division of Occupational Safety and Health (ADOSH) – can be stressful, disruptive, and costly.

Beyond potential penalties, an ADOSH citation can affect employee morale, operations, insurance, and your company’s reputation. How your company responds, particularly in the first days after receiving a citation, can have lasting consequences.

Below are practical, real-world steps you should take if you receive an ADOSH citation.

1. Immediately Abate the Alleged Safety Risk. Employee safety is the top priority.

Whether or not you agree with the citation, the first step should always be addressing the alleged hazard. Prompt abatement protects employees and demonstrates good-faith compliance.

Depending on the circumstances, abatement may also include:

removing employees from hazardous conditions;
repairing or replacing unsafe equipment;
implementing interim administrative or engineering controls; and
reinforcing required personal protective equipment (PPE).

Taking swift corrective action not only reduces the risk of injury; it may also help mitigate penalties and strengthen your position during the enforcement process.

One of your first actions should also be posting a copy of the citation where the alleged violation occurred — something that ADOSH requires. If this is not practical, then you must post it somewhere where it will be visible to all affected employees.

2. Immediately Seek Legal Counsel. ADOSH citations are time-sensitive legal matters.

An ADOSH citation is a formal enforcement action with strict deadlines. If you wish to challenge any portion of the citation, a Notice of Contest must be filed within the required timeframe: 15 working days after receiving the citation(s). You may also request an informal conference with an ADOSH supervisor during this 15-day period to discuss the citation and any penalties.

3. Reinforce or Build a Strong Safety Culture. Use the citation as an opportunity to improve.

ADOSH citations often reveal broader gaps in safety systems, training, or oversight – not just a single isolated issue. You should use the citation as an opportunity to evaluate and strengthen your overall safety culture.

General steps might include:

reviewing and updating your written safety policies and procedures;
holding regular safety meetings or talks;
clarifying safety responsibilities for supervisors and managers;
encouraging employee participation in safety initiatives through incentives; and
improving incident and near-miss reporting practices.

4. Invest in Training and Education. Training is prevention – and evidence of good faith.

While a citation is pending, employers should actively pursue safety training for both management and employees.

ADOSH regularly offers training sessions, outreach programs, and employer education events designed to help businesses understand and meet safety obligations. ADOSH even has an in-house Consultation Unit that provides confidential advice to employers seeking concrete ways to build a safety culture.

5. Allocate Financial Resources to Safety Improvements. Safety spending is risk management.

Improving workplace safety often requires a financial commitment. You should be prepared to allocate resources toward meaningful safety improvements. This helps prevent future workplace safety incidents and demonstrates an overall commitment to safety.

6. Coordinate With a Safety Consultant. Align technical compliance with legal strategy.

Consider working with a qualified safety consultant, particularly when citations involve technical standards or complex work environments.

Final Thoughts

An ADOSH citation should be taken seriously. If handled correctly, the citation process can be an opportunity to reinforce a culture of safety, demonstrate good faith, protect your reputation, and position your business for success.

Need help responding to an ADOSH citation? ADOSH citations move quickly and can carry lasting consequences if not handled properly. Our experience in dealing with ADOSH citations can make a meaningful difference in the outcome for your company – especially if you involve us early in the process.

For additional information, please see the following articles by our attorneys and descriptions of our regulatory compliance services:

ADOSH inspection program focuses on heat-related illness, injury
Heat Stress: Reducing the safety risks to outdoor workers
Worker safety lawyers at Lang Thal King & Hanson
Government regulation defense at Lang Thal King & Hanson

Max Beall is Lang Thal King & Hanson’s newest attorney

Tue, 07 Oct 2025 22:09:19 GMT

We are pleased to welcome litigation attorney Max Beall as our newest associate attorney.

Best Lawyers honors four Lang Thal King & Hanson attorneys for 2026

Fri, 22 Aug 2025 18:00:51 GMT

The 2026 edition of The Best Lawyers in America ^® , released Thursday, recognizes nearly half of our firms attorneys.

Selected for the coming year are Kent Lang , Mike Thal , and Rick Friedlander , plus "Ones to Watch" honoree Jamie Hanson .

In addition, Mike Thal was named Construction Law "Lawyer of the Year" (Scottsdale) -- his third Lawyer of the Year selection since 2019.

Lang Thal King & Hanson makes the top 5 in construction litigation in Ranking Arizona 2025

Wed, 02 Apr 2025 23:46:49 GMT

Lang Thal King & Hanson ranked #5 in the category of construction litigation in Ranking Arizona in 2025. Thank you for your support!

Vote for Lang Thal King & Hanson in Ranking Arizona 2027 for Construction Litigation

Super Lawyers selects five Lang Thal King & Hanson attorneys for 2025

Tue, 01 Apr 2025 01:32:17 GMT

Five Lang Thal King & Hanson attorneys are 2025 Super Lawyers honorees: Kent Lang , Mike Thal , George King and Rick Friedlander , plus Rising Stars selectee, Brian Pouderoyen .

Christian Lestinsky joins Lang Thal King & Hanson

Mon, 30 Sep 2024 00:46:50 GMT

A former prosecutor with the Maricopa County Attorney’s Office, Christian Lestinsky uses his litigation skills to navigate disputes and advocate for our clients, both in and out of the courtroom.

ROC cases and the “trial de novo” statute: After three years, uncertainty endures

Tue, 17 Sep 2024 22:07:08 GMT

Inconsistency among Arizona’s trial courts in how the 2021 statutory revisions are to be applied make legal strategies difficult for contractors to employ statewide.

By Jamie Hanson

In September 2021, the Arizona legislature amended A.R.S. § 12-910 , which governs appeals of administrative decisions by the Registrar of Contractors and allows for a trial de novo after an ROC hearing.

We discussed the effects of those amendments in two previous articles:

Good News for Arizona Businesses: Appealing a State Regulatory Ruling Now Leads to a Fresh Trial in Superior Court (December 2021)

ROC Hearings and Arizona's "New Trial" Statute: Two Years Later, the Impact for Contractors (September 2023)

In September 2024, we now know more about how Arizona trial courts apply this statute. This article shares some of that knowledge and discusses some important differences in how the statute has been applied from county to county.

Despite the new statutory language, the Maricopa County Superior Court views a trial de novo under A.R.S. § 12-910 as essentially an appellate review.

In early 2024, the Superior Court in Maricopa County ruled that, even though A.R.S. § 12-910 was revised in 2021 to allow for access to a trial de novo, the statute still governs a process that is fundamentally an appellate review, not a brand-new proceeding.

Further, the Court held that, because the statutory process remains an appeal, the licensed contractor, rather than the homeowner, bears the burden of meeting the appellate standard. This is surprising, as A.R.S. § 12-910(F) prohibits the trial court’s deference to prior determinations of fact and law. (“[The] court shall decide all questions of law … without deference to any previous determination that may have been made on the question by the agency.”)

According to the Maricopa County Superior Court, the standard in an A.R.S. § 12-910 trial de novo is unchanged by the 2021 revisions. Consequently, the Court believes it must uphold the Registrar’s decision unless the licensed contractor can show that the Registrar’s decision “is contrary to law, is not supported by substantial evidence, is arbitrary and capricious or is an abuse of discretion.” A.R.S. § 12-910(F).

The Maricopa County Superior Court also ruled that the disclosure and discovery that are available in civil lawsuits under the Arizona Rules of Civil Procedure are not automatically available in these trial de novo cases. This is disappointing, because a provision states explicitly and without qualification that the Rules of Civil Procedure are applicable: “The rules of civil procedure apply to all proceedings in which the superior court orders a trial de novo pursuant to section 12-910.” A.R.S. § 12-914(B).

The Maricopa County Superior Court recognizes that a jury trial is required for a trial de novo, if such a trial is demanded.

No one seems to disagree that a trial de novo, even if it is somehow a review or an appeal, nevertheless needs to be a real trial of some kind. That leads to the question: Is the trial de novo under the revised A.R.S. § 12-910 supposed to be a jury trial? Or does it need to be a trial with only a judge (i.e., a bench trial)?

After the Maricopa County Superior Court received briefing on whether or not a jury trial is required, the Court criticized certain arguments in favor of the jury trial but also asked for additional briefing. Ultimately, the Court decided that, if a jury trial is properly demanded, the jury trial is required. The Court found the decisive point in A.R.S. § 12-910(C), which states: “On demand of any party, if a trial de novo is available under this section, it may be with a jury[.]”

The Maricopa County Superior Court ruled that the record before the Registrar and the Registrar’s findings must be part of the evidence considered by the jury. But in its ruling, the Court did not clarify what the practical implications for such a jury trial would be. The Court stated that the process for establishing jury instructions prior to trial would need to clarify what questions would be presented to the jury for decision.

At the moment, then, there is uncertainty about the precise role of the jury in a trial de novo under A.R.S. § 12-910.

The Maricopa County Superior Court is willing to permit a deposition of the Registrar’s personnel.

Even though the Maricopa County Superior Court did not allow the disclosure and discovery portions of the Arizona Rules of Civil Procedure to apply to a trial de novo automatically, the Court nevertheless did allow the parties to ask the Court for permission to conduct any discovery that a party believed it needed.

After the Court received a stipulation between the homeowner and the licensed contractor, the Court granted the licensed contractor permission to depose the Registrar of Contractors under Arizona Rule of Civil Procedure 30(b)(6). A deposition under that rule requires an organization (such as the Registrar) to identify a person to answer questions about specific subjects. In this case, the Court gave permission for a deposition about (1) the Registrar's disciplinary policy for licensed contractors in general, and (2) that policy’s application to the licensed contractor in that particular case.

Because of that case’s peculiarities, the licensed contractor did not actually depose anyone from the Registrar. But it remains noteworthy that the Maricopa County Superior Court was willing to permit such a deposition. It should be further noted, however, that the Registrar was never served with a notice of the deposition, and so it’s not yet known whether the Registrar would submit to such a deposition or object to it.

The superior courts in Maricopa County and Mohave County have approached the revised trial de novo statute differently.

The discussion above relates to the Superior Court in Maricopa County. But the Superior Court in Mohave County has also handled a trial de novo for an ROC case under A.R.S. § 12-910, and the Mohave County court reached some very different conclusions.

The Mohave County Superior Court was much more inclined to see A.R.S. § 12-910 as prohibiting the court from simply deferring to the Registrar’s findings. As the Court put it, the court “may not and will not accord any deference to the agency’s factual findings (who, what, where, why, and when).” But the Court was unwilling to treat that mandatory lack of deference as a requirement to completely ignore the administrative record. The Court ruled that it would need to consider both the record from the administrative proceeding and the record created by the trial de novo. (The Court did not clarify what it meant by the administrative proceeding’s record, which could be simply the Final Administrative Decision supported by the administrative law judge’s written recommendation or, much more broadly, all the exhibits and audio recordings from the evidentiary hearing.)

Importantly, the Mohave County court parted ways with the Maricopa County court on the issue of which party bears the burden in the trial de novo. Where the Maricopa County court had insisted that the licensed contractor bore the burden in an essentially appellate review, the Mohave County court ruled explicitly that the homeowners bore the burden of proving the elements of their original ROC complaint, which was the subject of the administrative hearing. In other words, the homeowner needed to present their case again , which is in keeping with the ordinary meaning of the Latin phrase de novo (i.e., “again”) in the legal term “trial de novo.”

The Mohave County court went on to explain that it viewed the trial de novo as having two possible outcomes:

If the court determines that the state agency’s factual and legal determinations are correct (based on the record and evidence presented in the trial de novo), the court can permissibly give deference to the agency’s prescribed discipline arising from those determinations.

If the court determines that the state agency’s factual or legal determinations are flawed (or not supported by the evidence presented by the homeowner), then no such deference can be afforded to the agency’s disciplinary decision, and it is then appropriate for the court to modify or vacate the agency’s decision.

But the Mohave County court apparently did not want to require the homeowner to establish, explain, or justify the ROC’s disciplinary policy for licensed contractors. The Court left the ROC’s disciplinary policy as something for the contractor to challenge (as opposed to something that the homeowner is primarily responsible for addressing). As the Court stated: “If the contractor wishes to argue that the discipline prescribed by the agency was arbitrary or an abuse of discretion, then it is incumbent upon the contractor to make such a showing in the trial de novo.

This was disappointing, because the bottom line for an ROC complaint and hearing is what does or does not happen to the contractor’s license. Should that license be disciplined for one day or ten days? Should restitution be required as a condition of continued licensure? Those are important questions, and providing solid answers should be part of the homeowner’s burden of proof. Requiring the contractor to explain why the discipline is inappropriate appears to shift the burden back to the contractor, in way that does not make sense in a trial de novo in superior court.

Conclusion

Trial courts have been applying the revisions in A.R.S. § 12-910 for several years now, but we do not yet have guidance from the Arizona Court of Appeals about what exactly is or is not required or allowed in a trial de novo. Important differences in how Arizona’s trial courts are applying those revisions could lead – hopefully soon – to a helpful opinion from the Court of Appeals.

Until we have that opinion, anyone involved in a Registrar of Contractors case – at whatever stage that case happens to be – should be aware of the possibility of a trial de novo following the Registrar’s final administrative decision.

For anyone litigating such a case or considering such litigation, it would be prudent to consult with a knowledgeable attorney about the possibilities and risks associated with the trial de novo, so that the litigation strategy can be as informed and successful as possible.

Best Lawyers honors five Lang Thal King & Hanson attorneys for 2025

Thu, 15 Aug 2024 21:26:23 GMT

The Best Lawyers in America ^® lists six Lang Thal King & Hanson attorneys in its 2025 edition. Honorees are Kent Lang , Mike Thal , and Rick Friedlander , plus "Ones to Watch" honorees Jamie Hanson , and Jason Clark .

New advantage for contractors in ROC hearings: the power to accept the licensing decision

Wed, 01 May 2024 18:22:09 GMT

Under a recent Arizona law, a contractor can lock in a favorable hearing decision before the ROC can modify or reject it.

Friedlander receives construction law “lion” honor

Fri, 26 Apr 2024 18:17:58 GMT

Rick Friedlander has been named a "Lion of the Arizona Construction Bar" by the Construction Law Section of the State Bar of Arizona.

Lang Thal King & Hanson makes the top 10 in two categories in Ranking Arizona 2024

Wed, 03 Apr 2024 23:30:16 GMT

Lang Thal King & Hanson ranked #8 in the categories of construction litigation and commercial litigation in Ranking Arizona in 2024. Thank you for your support!

Vote for Lang Thal King & Hanson in Ranking Arizona 2025 for Construction Litigation

Vote for Lang Thal King & Hanson in Ranking Arizona 2025 for Commercial Litigation

Jason Clark elected as a partner

Thu, 22 Feb 2024 23:37:38 GMT

We are pleased to announce that Jason Clark has been elected as a partner at Lang Thal King & Hanson PC.

A Super Lawyers “Rising Stars” and Best Lawyers® “Ones to Watch” honoree who joined our firm in 2015, Jason offers national law firm experience and an extensive track record of successful outcomes for his clients in all aspects of construction disputes and Registrar of Contractors proceedings .

Jason’s recent construction law experience includes matters involving:

construction defects
Prompt Payment Act claims
lien foreclosure
payment and performance bond claims
Purchaser Dwelling Act claims and
breaches of contract.

He also represents contractors and suppliers in ROC hearings involving non-payment complaints, workmanship complaints, and contractor’s license issues.

In his free time, Jason plays golf and enjoys spending time with his wife and their two young children.

Contact Jason Clark at 480-534-4876 or by email .

ROC hearings and Arizona's "new trial" statute: two years later, the impact for contractors

Tue, 19 Sep 2023 21:32:21 GMT

In 2021, the Arizona Legislature revised the statutes that govern appeals from Registrar of Contractors (ROC) hearings, with the result that an appeal of an administrative agency’s decision can lead to a fresh trial in Superior Court, where the agency’s decision is disregarded.

The hearing process is fair, and Arizona ALJs are consistently intelligent, honest, and professional. Nevertheless, at the hearing the contractor faces an uphill battle: The contractor will be accused of violating workmanship standards, the ROC’s investigator will offer evidence substantiating the alleged violation, and the ALJ will likely view the investigator’s testimony as credible.

It is not unusual for the contractor to receive some form of discipline, and even a one-day suspension of the license is a public, long-term blemish, and it allows the homeowner to access the ROC’s Recovery Fund, which can lead to a potentially expensive payout (up to $30,000) that the contractor is ultimately responsible to repay.

Appealing the License Discipline. A license suspension or revocation stemming from an ROC hearing does not need to be the final word.

The contractor can appeal the discipline to Superior Court, which has the power to “stay” the decision, pursuant to A.R.S. § 12-911 , until the case is argued and decided in the court in a trial de novo (“new trial”).

The stay of the discipline is not automatic. The contractor needs to know how to request the stay and how to argue for it, especially if the homeowner is actively opposing that request. (Remember that the homeowner will want to keep the discipline in place in order to access the Recovery Fund.) The contractor will need an attorney to appear in court, and the prudent contractor will hire an attorney familiar with the process of appealing from an ROC case.

During the two years since A.R.S. § 12-910 was amended, our firm has obtained in Superior Court a stay of the discipline in every case where we have requested it, even over the opposition of homeowners and their attorneys.

Where to Seek the Trial De Novo. Regardless of the county in which a contractor performs its licensed work, the hearing before the ALJ will be held either in Phoenix at the Office of Administrative Hearings (OAH) in person, or remotely from the OAH via Google Meet. Thus, a contractor seeking to appeal an ROC decision involving a project in a rural county needs to make a decision: file its appeal (a) in that county’s Superior Court or (b) in Maricopa County Superior Court using the Phoenix-based legal proceedings as grounds for that venue.

Which is the better choice? It depends.

It may make sense to keep a case with a local judge, especially if there is related litigation that could find its way to a jury.

However, one of the risks in keeping the appeal in the local court (rather than bringing it into Maricopa County) is the uncertainty. The revisions to A.R.S. § 12-910 are still only two years old, which is a very short time in the world of the law, and there have been no definitive or binding decisions about implementing the new provisions. Thus, how a trial de novo will be handled under § 12-910 is up to the judge.

In Maricopa County, the judges who have handled these cases seem to recognize that the new provisions of § 12-910 give the licensed contractor major new rights as a regulated party. The judges may not yet fully know what those rights are or their practical implications, but they seem to be recognized as meaningful. In other counties, however, judges are more willing to get a trial novo moving as quickly as possible and less willing to explore what rights the licensed contractor might have (including basic forms of discovery, such as depositions of witnesses).

A non-Maricopa County contractor seeking to appeal an adverse decision from an administrative hearing should consult with an experienced attorney about where to file the appeal and why.

Consolidation of Lawsuits Not Guaranteed. Why does it make sense to keep the trial de novo in the ROC case from happening too quickly? One reason is that other issues need to be explored through disclosure and discovery.

Many ROC cases involve a complaint from a homeowner who still owes money under the contract. Very often, the contractor does not want to perform additional work (including corrective work or work to complete the project) for a difficult customer who appears unwilling to pay the final amount due.

This can lead to a situation in which the contractor faces a license suspension because the contractor appears to be unwilling to take necessary corrective action. From that contractor’s perspective, the contractor is unwilling to continue performance on a contract that the homeowner has breached.

Unfortunately, the homeowner’s conduct, including the breach of the contract in a way that would excuse the contractor’s performance, is not really part of the ROC hearing. It is a situation that many contractors view as unfair: While the contractor is in the hot seat and its license is at risk in the ROC proceeding, that same proceeding poses no real risk for the homeowner. Unlike the contractor, the homeowner has no license to lose.

If the licensed contractor wants to level the playing field and hold the homeowner responsible for the breach of contract and failure to pay, the only way to do that is to file a lawsuit. Doing so makes sense when the amount owed is significant or when a mechanics’ lien is available.

That lawsuit for breach of contract, the ROC hearing, and any eventual trial de novo following the ROC hearing all involve two basic issues: the contractual relationship between the homeowner and the contractor, and the performance of the contractual duties of each party.

Because it is all one dispute, one might assume that having a single legal action would be the most efficient way of dealing with the dispute. The law allows related cases to be consolidated into a single action, and it is theoretically possible to consolidate the lawsuit with the trial de novo.

Unfortunately, judges in Maricopa County Superior Court have demonstrated some reluctance to consolidate the breach of contract action and a trial de novo. In one particular instance, the judge declined (at least for the time being) to consolidate the lawsuit and the trial de novo case, insisting instead that the parties participate in a mandatory settlement conference. The basis for this decision appeared to be skepticism about the robust rights of the contractor to a brand-new proceeding under § 12-910. (The consolidation was not permanently denied; it was denied merely for the sake of the settlement conference urged by the court.)

At the moment, it remains an open question whether a court will consolidate a contractor’s lawsuit against the homeowner and the trial de novo following an appeal from the homeowner’s ROC complaint.

Likelihood of a Settlement Conference. In several cases in Maricopa County in which the contractor has demanded a trial de novo under A.R.S. § 12-910, the court and the parties have been quick to get the matter to an early settlement conference. The court may push for the settlement conference so that the parties do not waste time or fees in a proceeding that could ultimately disappoint them.

Often, the settlement conference can succeed in resolving the case because the homeowner realizes that their victory in the ROC case was temporary and inconclusive. The stay of the discipline, and the realization that the case is now more difficult to win, can help put them in a mood to settle the dispute.

However, settlement can sometimes become more difficult. By filing an ROC complaint, the homeowner has chosen a forum with limited and very specific relief. The homeowner is not entitled to raise every conceivable issue in an ROC hearing, and a general award of money damages is not available against the contractor as it would be in a basic lawsuit.

Oddly, some homeowners, when they sit down to try to settle a case in the context of an ROC appeal with a trial de novo, decide that they want to ask for everything, regardless of whether they could receive it from the ROC. This is frustrating. It helps if the contractor or the contractor’s attorney has warned the homeowner that the ROC hearing is limited and provisional. That way, if the homeowner is annoyed that they cannot achieve maximum relief, the fault rests solely with the homeowner.

Still, a settlement conference in this context can be hard work, and both the homeowner and the contractor can become frustrated. There is much to be said in favor of an early settlement, even before the ROC hearing occurs. If the parties are willing to negotiate, seasoned counsel can help craft a reasonable settlement.

Trial de Novo and Attorney Fees. Arizona law ( A.R.S. § 12-341.01 ) allows the prevailing party in a contract dispute to seek an award of attorney fees.

Under the old version of A.R.S. § 12-910, it was fairly well settled that an appeal from an ROC decision did not trigger the fee-award provision.

That may no longer be true. While no court has yet decided whether fees are available under the new version of the statute, it makes sense to reserve your right to seek them.

Wrapping Up. The revisions to A.R.S. § 12-910 are still very new, and their implications are not yet fully known. Despite the uncertainty that surrounds the new provisions, some things are much more certain than others.

Knowing the difference between certainty and uncertainty can help the contractor navigate the proceedings with greater confidence. For that reason, a licensed contractor facing a complaint at the Arizona Registrar of Contractors would be wise to consult with an experienced attorney in order to chart the safest and smartest course.

Jamie Hanson is a Certified Administrative Law Specialist (Arizona Board of Legal Specialization) and a former Chief Counsel at the Arizona Registrar of Contractors. Contact Jamie at 480-534-4877 or by email .

More about Lang Thal King & Hanson's Government Regulation , ROC Contractor Licensing and Construction Law services

Phoenix magazine Top Lawyer list includes four Lang Thal King & Hanson attorneys

Thu, 24 Aug 2023 17:09:45 GMT

In its September 2023 issue, Phoenix magazine listed Lang Thal King & Hanson attorneys Kent Lang , Mike Thal , Jamie Hanson , and Rick Friedlander among its "Top Lawyer" selectees for 2023.

The magazine made its selections from voting conducted among Phoenix-area attorneys.

ADOSH inspection program focuses on heat-related illness, injury

Tue, 25 Jul 2023 20:34:53 GMT

In an effort to reduce heat-related illnesses and injuries for workers, the State of Arizona is stepping up the rate of workplace inspections for employers in high-exposure industries.

On July 17, 2023, the Arizona Division of Occupational Safety and Health (ADOSH) announced the launch of a “state emphasis program” (SEP) focused on “high heat” industries such as construction and agriculture. One provision of the SEP calls for inspections on any day that the National Weather Service has announced a heat warning or advisory for the local area.

Arizona employers in any industry that involves outdoor work (or work in non-cooled spaces) should pay special attention to heat safety measures in order to create a safe working environment and avoid inspection violations.

The following steps can help you comply:

Resources . Provide cold potable water, sufficient rest, and shaded rest areas; encourage workers to wear lightweight, breathable, and loose-fitting clothing; and provide access to cooling vests or other personal cooling devices to help regulate body temperature.
Heat safety training . Conduct heat safety training for outdoor workers before they begin their duties. The training should cover preventive measures, emergency-response procedures, and common signs and symptoms of heat-related health conditions, so that workers can be alert to and recognize the early signs in themselves and co-workers.
Heat stress monitoring . Regularly monitor weather conditions and heat-stress levels in the workplace and be proactive in assessing risks and implementing appropriate measures to protect workers from extreme heat.
Supervision. Ensure that supervisors are well-informed about heat safety measures and actively monitor employees for signs of heat-related stress. Encourage open communication between workers and supervisors regarding any discomfort or health concerns.
Written plans. Employers may submit plans to ADOSH for review, to reduce the risk of heat-related illness and injuries. These plans should reflect the preceding compliance and prevention steps.

Following the recommended steps will not only help you provide a better working environment; it can also protect you from potentially serious financial consequences, such as:

reduced productivity from ill or injured employees and their co-workers;
mandatory workplace shutdowns; and
significant fines from ADOSH, including “failure to abate” fines that can accrue daily.

If you have any questions about whether your employee policies adequately protect your workers from high-heat conditions and help your company comply with the heightened ADOSH inspections, contact your attorney or your human resources or worker safety professional.

Groundwater restrictions: The sky is not falling, and residential contractors can stay the course

Wed, 07 Jun 2023 15:30:46 GMT

Despite last week’s news that the state is pausing the approval of future Phoenix-area single-family development that over-relies on groundwater, don’t expect residential construction to dry up in your lifetime.

By Kent Lang and Mike Thal

On June 1, Governor Katie Hobbs released the Arizona Department of Water Resources’ (DWR) updated study of the Phoenix area’s groundwater conditions . The study projects that, 100 years from now, the demand for groundwater in the region will have fallen short of supply by about 4% (or 4.86 million acre-feet).

That is a significant projection, because Arizona’s groundwater laws bar the DWR from approving new residential real estate development if the agency cannot certify that the new homes will have a safe 100-year water supply.

Consistent with the DWR report, the Governor announced that the agency will stop approving new development that relies too heavily on groundwater for its water supply.

Predictably, headline writers for national media outlets had a field day: “Groundwater dwindles,” said CNBC. The Guardian warned of Arizona’s “lack of groundwater.” And Reuters noted the area’s “water shortage” as though your lantana is already dying. Phoenix Mayor Kate Gallego correctly noted that “some national coverage really confuses the issue … in a way that implies Phoenix does not have the water supply that we do.”

Local reporting was a little more business-like (see the Republic’s June 1 article and June 2 opinion piece, “ Metro Phoenix has shut down growth, right? Well, not exactly ”), as was the Governor’s announcement itself.

Nonetheless, hearing the news that some future single-family developments in rapidly growing, groundwater-dependent areas such as Buckeye and Queen Creek might not be built was not the way most residential contractors and construction suppliers wanted to start their day.

Perspective . Because the moratorium’s impact will generally affect only the outskirts of the Phoenix area, on developments that have not yet been planned, contractors and suppliers would be wise to look beyond the headlines and weigh the following:

Most Valley cities have already reduced their reliance on groundwater. (The City of Phoenix reports that groundwater accounts for only about 2% of its annual use.)

Cities have ample, diverse water supplies (including renewable supplies from the Salt, Verde and Colorado rivers) and will continue to grow. As the above-referenced Republic article notes, “Most cities have secured assured water supply designations from the state, which means they can show a 100-year water supply. That applies to 12 Phoenix-area cities and to areas supplied by three other water utilities.”

Arizona will continue to be among the nation’s fastest-growing states, and continuing demand for housing will trigger new supply.

Developers are in the business of profitable development, and they will find new ways to profit from the housing demand.

Infill development will become more prevalent in areas that are not as reliant on groundwater.

According to the Governor, about 80,000 unbuilt lots have been approved and can go forward.

The state will use $40 million from its unused federal Covid-19 recovery allocation for the Arizona Water Resiliency Fund, which will promote groundwater conservation and sustainable water supplies.

The ban on groundwater-reliant development is not permanent and is subject to future DWR studies of groundwater conditions.

Good Management, Good News? It is worth noting that news sources outside of Arizona have long predicted, since the state’s post-World War II population boom began, that someday Arizona would run out of water.

It hasn’t, and, if the state is playing this correctly, it won’t.

One might even argue that the restraint announced by the Governor this month will send assurances, to potential residents and relocating corporations, that our water supply is being effectively managed and that a future in Arizona is as bright as ever.

That would be good for Arizona’s business community – including the residential construction industry and the companies that supply it.

Contractors: Don’t let “friend of a friend” projects cause you to take costly shortcuts

Thu, 30 Mar 2023 17:32:20 GMT

Perhaps you’ve been there. You receive a call from a potential customer who says that they were referred to you by a mutual friend.

So far, so good – referrals from friends and satisfied customers are common (or should be). And because the prospect is a “friend of a friend,” you might have a higher level of trust than when dealing with a new customer with whom you have no connection.

But be careful; don’t let that connection lull you into a false sense of security. The scenario might play out like this:

At the beginning, everyone is friendly with each other and excited for the upcoming project. Your enthusiasm might cause you to shortcut your normal procedures and to dive into the project before you have executed a comprehensive contract. After all, this is a friend of a friend – what could go wrong?

What could go wrong is what always could go wrong when you aren’t protected by contractual safeguards. Starting work without executing a comprehensive contract beforehand can lead to costly (and avoidable) problems down the road, such as arguments over:

what is or is not included within the scope of work;
the total cost of the project;
when payments are due;
what happens if new unforeseen conditions are uncovered;
who is in charge of getting the permits;
how changes may be made and how they are paid for;
who is responsible for unexpected cost increases; and
timelines.

There is nothing wrong with wanting to make sure that everyone is on the same page ahead of time by executing a contract. If the friend of the friend is unwilling to memorialize the agreement through a comprehensive contract, then that is a red flag, and you should walk away.

When disputes unfold on the project itself, the good feelings quickly disappear. Disputes involving money can ruin even the best of relationships. Compounding matters, this was not your friend to begin with. The friend of a friend receives the benefit of your trust at the outset (or on the project itself), but because you are not actually friends, they are more likely to turn on you when problems arise.

Nobody enjoys thinking about what happens when things go bad, but a good contract at the outset can help avoid disputes and, better yet, resolve them. In his excellent article, “ Contractors: A Good Construction Contract Reduces Risk, Boosts Profits ,” Lang Thal King & Hanson partner George King describes how a good contract can confirm the contractor’s right to notice and opportunity to cure alleged defaults under the contract. Additionally, parties can agree to alternative dispute resolution procedures ahead of time, such as agreeing to mediate any disputes.

Without addressing the above issues in advance, disputes can, and often do, result in a lawsuit. When this occurs, especially without a contract containing an attorneys’ fees provision for prevailing parties, a party that “wins” in the underlying dispute may end up losing in the long run if the court does not award their full attorneys’ fees.

Takeaways . Without a comprehensive signed contract in hand, a friendly favor can quickly turn into a costly – and avoidable – nightmare.

Remember, just because someone is a friend of a friend, that does not mean they are your friend, nor does it mean that they would not be willing to take advantage of you simply because you failed to exercise good business practices.

OSHA backs off from threatened takeover of job safety in Arizona

Tue, 14 Feb 2023 20:29:31 GMT

In a good-news development for Arizona employers – including contractors – on February 14 the Labor Department announced that the Occupational Safety and Health Administration (OSHA) “will withdraw its proposal to … revoke final approval of Arizona’s State Plan for occupational safety and health.”

The decision leaves the state plan in place, and worker safety enforcement will remain in the hands of the Arizona Division of Occupational Safety and Health (ADOSH).

OSHA announced its threatened takeover in October 2021, subject to the results of a public comment period that was set to expire July 5, 2022. On that date, according to the Labor Department, the state advised OSHA that it had completed “significant actions” to address OSHA’s concerns, and OSHA extended the comment period.

“With today’s announcement,” the Labor Department announcement stated, “OSHA will withdraw its proposal to reconsider the final approval status of the Arizona State Plan, despite recent public reports of a downward trend in inspections in the plan’s enforcement program … and the agency is actively working with the Arizona State Plan to address these issues.”

Read the full Labor Department announcement .

Piece work done wrong: Contractor settles with Labor Department for $2.6 million

Thu, 29 Dec 2022 15:19:18 GMT

The contractor incurred the Labor Department’s wrath not because the company paid its workers on a piece-work basis, but because it did not keep accurate time records to show that the wages paid satisfied minimum wage and overtime requirements.

In 2020, while the Labor Department’s lawsuit was pending, Judge Snow issued an injunction ordering the contractor to:

stop maintaining false records;
implement a reliable timekeeping system under which employees would clock and clock out each day;
maintain accurate and complete records of wages paid and to stop paying wages through non-payroll accounts;
stop listing false regular rates of pay on payroll records;
provide a Court-approved notice to employees with their paycheck and by mail;
provide all time and payroll records to the Labor Department; and
every 30 days, provide a list of all current employees with current contact information to the Labor Department.

In an apparent attempt to convert to hourly wages, the contractor trained its superintendents on new time-keeping procedures, under which employees were to:

complete their own time sheet;
accurately document the time they worked, including the correct days of the week and times worked;
document their time contemporaneously as they worked it; and
total the number of hours worked at the end of the week, including by documenting any hours over forty in the box on the timesheet marked “Total O/T Hours.”

After the conversion, the contractor’s laborers began documenting time using a paper and pencil system. In reviewing the raw timesheets, the Labor Department noticed discrepancies and other issues with this timekeeping system, including wide variations in individual employees' hourly rates. Also, some timesheets displayed the wrong name and signature, resulting in some employees not getting paid. Other timesheets had hours, and even whole days, erased.

The problems with the contractor’s wage calculations and payroll procedures did not end there, and in March and April 2022 the parties were back in court for evidentiary hearings to determine whether the company violated the court’s injunction.

In the end, Judge Snow ruled that the contractor “failed to substantially comply with the preliminary injunction,” finding that the company continued to maintain false records, failed to maintain a reliable timekeeping system, and provided false regular rates of pay on payroll records.

For more details, read Judge Snow’s May 5, 2022, order, which imposed a $10,000 weekly fine that helped prompt the contractor to settle with the Labor Department for $2.6 million – $1.3 million in back wages and $1.3 million in damages.

Piece Work Done Right

Piece work requires employers to legitimately keep “two sets of books”:

hours worked and
work units (or “pieces”) completed.

Reconciling those sets of records with actual compensation paid allows you to demonstrate to workers and the Feds that, while you paid by the task, you also complied with the Fair Labor Standards Act.

The contractor incurred the Labor Department’s wrath not because the company paid its workers on a piece-work basis, but because it did not record and maintain accurate, contemporaneous time records to show that the wages paid by the yard also satisfied the FLSA’s minimum wage and overtime requirements.

When the contractor realized that it was in legal trouble, it resorted to falsifying time records – a doomed-from-the-start strategy that Labor Department investigators can detect before their second cup of coffee.

Also, a non-compliant employer that considers rolling the dice on avoiding a wage-and-hour investigation should be aware that any assessment for unpaid wages and the associated payroll taxes is a burden not just for the company. In most cases, the owners and any managers who have authority or responsibility for the payment of wages, withholding, and FICA are personally liable for unpaid amounts. That liability is “joint and several” – that is, each liable person is on the hook for the entire amount owed.

As my colleague Mike Thal explains in his popular article, “ Piece Work, Construction, and the Fair Labor Standards Act ,” piece work is a legal and permissible payment method (if properly executed and documented) that employers can use “to motivate workers who heighten their productivity beyond what a mere hourly wage would yield.”

Mike’s article includes a practical section, “Paying for Piece Work the Right Way,” that provides useful guidance for any employer that pays for piece work or is planning to do so.

If your reading through the litany of the contractor’s offenses evoked even one uh-oh, that should be a trigger for you to carefully review your pay methods and record-keeping and, if needed, bring in a wage-and-hour professional to help protect you against an FLSA claim.

Best Law Firms: Lang Thal King & Hanson a Tier 1 firm in three categories

Tue, 08 Nov 2022 15:00:16 GMT

U.S. News & World Report and the Best Lawyers in America have selected Lang Thal King & Hanson as a 2023 metro Tier 1 "Best Law Firms" honoree in Construction Law, Construction Litigation and Commercial Litigation, and Tier 2 in Mediation, Arbitration, and Bet-the-Company Litigation.

Liquidated damages in construction contracts: Are they enforceable?

Thu, 03 Nov 2022 18:34:19 GMT

Liquidated damages provisions are generally enforceable if they are intended to compensate the non-breaching party rather than penalize the breaching party.

The Court’s decision in Young v. Allen Homes provided more guidance on how to determine whether a particular liquidated damages provision is enforceable in the construction context. This guidance can help owners avoid common mistakes in drafting such provisions before construction begins, and it can help contractors resist unfair liquidated damages claims at the end of a project.

Background. In April 2018, Michael and Debra Young hired Allen Homes to build their new home. The parties’ contract called for a total project price of about $2 million and a non-refundable $80,000 deposit, which the Youngs paid.

After the Youngs fought their HOA for months trying to get approval of their building plans, they gave up, decided to cancel the project, and asked Allen Homes to refund their $80,000 deposit.

When Allen Homes refused, the Youngs filed a lawsuit, arguing that forfeiting the deposit was “unjust enrichment” because it exceeded Allen Homes’ actual and anticipated losses.

Allen Homes counter-sued the Youngs for breach of contract.

The trial court dismissed the Youngs’ unjust enrichment claim, granted Allen Homes’ breach of contract claim, and ordered the Youngs to pay Allen Homes its costs and attorneys’ fees.

The Youngs appealed, renewing their argument that the deposit was an unenforceable penalty, and the Arizona Court of Appeals agreed.

Lessons in Liquidated Damages. In Y oung v. Allen Homes, the Court noted that, citing the Arizona Supreme Court’s Dobson Bay decision , liquidated damages provisions are enforceable if they are intended to compensate the non-breaching party rather than penalize the breaching party .

The Dobson Bay decision also stated that a liquidated damages provision is enforceable “only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.”

Anticipated Loss. In ruling against Allen Homes, the Court of Appeals found that the deposit, which became fully nonrefundable at the moment it was paid, was an “inflexible forecast of losses” that did not reflect the actual magnitude of Allen Homes’ loss:

“Whether the Youngs breached on the first day of the contract or the hundredth day, they would lose the entire $80,000.00. This fixed amount weighs against concluding that the deposit was a reasonable estimate of anticipated losses at the time the contract was entered into. […] And the contract is silent about what anticipated costs or damages went into arriving at the $80,000.00 figure. On this record, we cannot say that $80,000.00 was a reasonable estimate of anticipated losses at the time the contract was entered.”

The Court ruled that the trial court erred in dismissing the Youngs’ lawsuit and awarding Allen Homes’ attorneys’ fees and costs and sent the case back for trial.

As for the disputed $80,000 deposit, the Court clarified that:

[We] do not conclude that the $80,000.00 provision is necessarily unenforceable, only that on this record $80,000.00 does not reasonably reflect Allen Homes’ actual losses. On a fuller factual record, the superior court may or may not conclude otherwise.

Actual Loss. The Court also noted that a liquidated damages provision may be upheld based on the actual loss. Regarding actual damages for the cancellation, Allen Homes claimed it:

paid a supervisor $18,900 for the five months between signing and cancellation;
incurred costs for pre-construction work; and,
lost money by passing up other projects.

But Allen homes provided no dollar amount, much less documentation, to support its claim for pre-construction work and lost opportunities. Similarly, Allen Homes provided no evidence to support its retention of the $80,000 deposit to cover anticipated losses. So, the Court sent the case back to Superior Court for more evidence.

Takeaways for Contractors and Owners

Labels matter. If you want to enforce your liquidated damages amount, do not call it a “penalty” in the contract. A surprising number of parties state up front that they want to penalize the other side for a breach. While a bad label is not absolutely fatal, it does not help.

Proportionality . The more directly proportional a liquidated damages amount is to the harm caused by the breach, the easier it is to enforce. A flat late fee of 5% on a promissory note – whether one day or one year late – is not proportional and was held unenforceable in Dobson Bay .

Construction contracts often contain daily liquidated damages amounts. These amounts are certainly proportional to the length of the delay, but they may not be proportional to the harm caused. That is, to be upheld, anticipated damages should “var[y] with the nature and extent of the breach” (Pima Savings & Loan v. Rampello).

For example, one of our clients was assessed 100% of liquidated damages for a 3,000-foot path, based on an issue with just the last 100 feet. This was obviously disproportional, and the issue would have gone to the jury had we not settled.

Basis . To be enforceable, a liquidated damages provision cannot be just a number pulled out of the air; it needs to have some basis. If you want to position yourself to collect, pencil-out your anticipated losses (such as rents for a building that cannot be opened on time), and then use real numbers. Flat figures with many zeros (like the $80,000 in Young v. Allen Homes ) are easily challenged. Just as in school, be prepared to show your work.

Actual damages. It may sound backwards, but if you want to enforce a liquidated damages provision, keep close track of your actual damages – for two reasons:

Proving substantial actual damages will support your liquidated damages provision.
If your liquidated damages provision is struck down, you can still prove your actual damages.

Liquidated damages on public projects. Finally, the recent decisions referenced above give new hope to contractors who face large liquidated damages penalties on public construction projects.

In many cases, public entities do not calculate damage amounts directly; instead, they use a third-party liquidated damages table, such as the Maricopa Association of Governments (MAG) “ Uniform Standard Specifications and Details for Public Works Construction .” This table simply assigns daily damage amounts based on the amount of the original construction contract – regardless of the type of contract or the actual harm caused by delay. In fact, the amounts are much larger proportionally for smaller contracts.

For example, any job under $25,000 has a $210/day damage provision, while jobs over $10 million face only a $1,780/day charge. At that rate, the liquidated damages would exceed the contract value in four months or less on the smallest jobs, but would not do so for over 15 years on the largest projects.

This math alone will likely help contractors to fight liquidated damages claims on public works projects, and their fight will be aided by additional developments in case law such as Dobson Bay and Young v. Allen Homes.

Risks of equipment leasing for contractors

Wed, 05 Oct 2022 15:33:56 GMT

As with any contract, understand your potential obligations when entering into an equipment lease.

While one of the leased cranes was in Sepesy’s possession, its telescopic boom was damaged, making the crane inoperable.

The damaged crane was stored for some time at Sepesy’s property before a towing company was hired to transport the damaged crane to a repair company. After loading the crane and leaving Sepesy’s yard, the tow truck driver drove into a ditch, flipping the trailer and damaging the crane’s exterior.

The crane was eventually repaired and returned to service, but only after more than 14 months of downtime, starting with the original damage to the boom.

Wilheit sued Sepesy for various claims arising from the lease agreement, including payment for rent and repairs. During the litigation, Sepesy’s insurance company paid $161,500 to Wilheit for repairs related to the crane’s telescopic boom, and the towing company (or its insurer) paid $85,900 to Wilheit for the damage sustained in the towing accident.

Unfortunately for Sepesy, its exposure did not end with repairs to the crane. At trial, the judge also found that, per the lease agreement, Sepesy was responsible for the rental payments for the entire period during which the crane was inoperable – from the time of the original damage to the boom, through the time it was stored on Sepesy’s yard and during its short tow trip, and while all of the boom and exterior repairs were being made – until the crane was finally returned to service.

The total rental bill was $269,000 ($19,000 per month for approximately 14 months). To make matters worse for Sepesy, the court also ordered it to pay Wilheit’s attorneys’ fees.

The moral of this story for contractors is clear. When you rent equipment, especially the expensive kind:

be clear on what your responsibilities are;
try to anticipate your financial exposure if things go badly (did either Wilheit or Sepesy foresee that a tow truck would land their crane in a ditch?);
run the contract by your insurance company to confirm your coverage; and
be confident that you can survive the out-of-pocket costs that could stem from your lease obligations.

More about construction law and contract -related services at Lang Thal King & Hanson.

*The company names in this article are fictitious, and any similarity to actual company names is coincidental.

Implied warranty protection overrules a conflicting contract provision

Tue, 04 Oct 2022 15:27:01 GMT

The Arizona Supreme Court rules that a homebuilder cannot contract its way out of its obligations under the implied warranty doctrine.

See: “ Court Reaffirms Contract Requirement in Implied Warranty Breach ,” by Mike Thal, March 2015

Despite the courts’ repeated reaffirmation of that doctrine, at least one homebuilder tried to use its sales contract to escape its implied warranty obligations. That strategy was shot down in September 2022, when the Arizona Supreme Court, in Zambrano v. M & RC II LLC , sent back for trial a homebuyer’s lawsuit that the Court ruled had been dismissed in error.

Background

In 2013, Tina Zambrano entered into a purchase contract for a home to be built by Scott Homes. The pre-printed contract provided that Scott Homes would give Ms. Zambrano a “Home Builder’s Limited Warranty” that would be “the only warranty applicable to the purchase of the Property.” The contract went on to state that:

All other express or implied warranties of merchantability … habitability and workmanship are hereby disclaimed by seller and its affiliates and waived by buyer, [and] any implied warranty that may exist despite the above disclaimer is hereby limited to a one-year period.

Scott Homes built the home and, as agreed, at close of escrow gave Ms. Zambrano a 40-page warranty administered by Professional Warranty Services Corporation (PWC).

Like the purchase agreement, the PWC warranty disclaimed all implied warranties. Further, it did not generally warrant the workmanship and habitability of the home. Instead, it arranged construction elements into coverage groups; warranted each group against damages from variances in materials or workmanship from defined standards of performance; and established responsibilities for the builder and the homebuyer.

During the first few years in her new home, Ms. Zambrano encountered a number of workmanship issues, including improper grading and soil movement mitigation, separation of windows from cracking stucco, separation of baseboards from the tile and walls, and nail pops in the ceiling.

She looked first to the PWC warranty, but it was of no help; for each of her claims, either the warranty period had expired or the claim was outside the warranty’s stated coverage. She then turned to Scott Homes, which invoked the purchase contract’s provision disclaiming any implied warranties.

In 2017, Ms. Zambrano sued Scott Homes for breach of the implied warranty of workmanship and habitability.

Scott Homes asked the trial court to dismiss the lawsuit, citing the purchase agreement’s waiver of the implied warranty. The trial court agreed and dismissed the suit.

Rulings on Appeal

Ms. Zambrano successfully appealed the ruling to the Arizona Court of Appeals, which found that “the public policy supporting the implied warranty clearly outweighs the freedom-of-contract interest in the waiver’s enforcement.”

Scott Homes asked the Arizona Supreme Court to review the Court of Appeals’ decision. The Supreme Court accepted the review, noting that “whether and to what extent the implied warranty of workmanship and habitability can be disclaimed and waived or replaced by an express warranty is a recurring issue of statewide importance.”

In September 2022, the Supreme Court sided with the Court of Appeals, reinstated Ms. Zambrano’s lawsuit, and sent it back to Maricopa County Superior Court for trial.

As the Supreme Court noted in its ruling, the case involved “a clash of two public policies recognized by the common law” – first, the freedom to enter into a contract, and, second, that Arizona “implies a warranty of workmanship and habitability in every contract … between a builder-vendor and a homebuyer.

“The issue here is whether a builder-vendor and a homebuyer may agree to disclaim and waive the implied warranty if they replace it with an express warranty. We hold public policy prohibits enforcement of the disclaimer and waiver.”

In its decision, the Supreme Court noted the following:

The freedom to contract “has long been considered a ‘paramount public policy’ [and] courts will not refuse to enforce a contract merely because one party made a bad deal, even when the terms are harsh.”
However, “the circumstances here present the rare case where public policy clearly outweighs enforcing a contract term.”
Specific to residential purchase contracts, “We impute the implied warranty of workmanship and habitability into all contracts between builder-vendors and homebuyers as a matter of common law.”
“The warranty is limited to latent defects that are undiscoverable by a reasonable pre-purchase inspection and serves to protect innocent purchasers and hold builders accountable for their work.”
Other remedies available to homebuyers – such Purchaser Dwelling Act protections and the ROC residential contractors’ recovery fund – are not substitutes for the implied warranty.

Takeaways for Residential Contractors

First, a residential contractor cannot contract its way out of its obligations under the implied warranty doctrine.

Also, a contractor is free to offer an express warranty, as Scott Homes did with its PWC warranty, but it can do so only as an add-on to, and not a replacement for, the implied warranty.

Finally, the Supreme Court’s commentary in Zambrano affirms that, while a person of any age and degree of sophistication is generally responsible to abide by the terms of contracts they sign, Arizona law and courts clearly recognize the unlevel playing field that exists between buyer and seller in a complex commercial transaction. The statutory and judicial protections that exist in Arizona are substantial, and residential contractors are cautioned not to play fast and loose with contract provisions that are intended to skirt well-established public policy.

More about Lang Thal King & Hanson's services for contractors

Contractors: A good construction contract reduces risk, boosts profits

Mon, 19 Sep 2022 15:39:24 GMT

Properly drafted contractual provisions can be among your construction business’s best allies.

limit risks
increase the costs and decrease the rewards for those who bring groundless claims
defend your business from costly lawsuits.

Before you invest time in drafting a contract, remember that some jobs just aren’t worth the risk. Customers who want you to build the impossible – overnight, on a very tight budget – will be trouble. If you think the customer is destined to be unhappy, you are probably right. Walk away. The profit you might make on the project is tiny compared to what you could spend in a lawsuit or defending a Registrar of Contractors complaint.

This article describes four types of provisions that, in a construction contract, can protect you from costly and business-threatening disputes.

Contract Provision #1: Attorneys’ Fees. Even without a specific contract provision, Arizona law allows the winner in contract litigation to ask the judge to award attorneys’ fees against the losing side. However, the award is entirely discretionary. The law allows the judge to award all, part, or none of the winner’s fees. (Note that this law does not apply in proceedings before the Registrar of Contractors, because the Registrar has no power to award any party its attorneys’ fees.)

In a lawsuit, a good contract can remove the judge’s discretion to deny fees to the winner. A contract that says that the judge “must” or “shall” award the winner’s attorneys’ fees requires that fees be awarded. The judge can still reduce the award if the fees aren’t reasonable, but there is no discretion to reduce the award because it was a close case or the losing party might have trouble paying.

On that issue, a client of our firm recently won a case on appeal. Disgruntled homeowners had sued over a $12,500 bathroom remodel. Our contractor client prevailed in the lawsuit but incurred over $110,000 in attorneys’ fees. After the trial judge awarded our client less than half of its fees, based on the homeowners’ complaint that they couldn’t pay that much, the Court of Appeals reversed, and the trial court reinstated the full fee award – because our client’s contract required an award of fees to the winner.

“Winning” a case where you can’t recover your attorneys’ fees is often hardly winning at all. A good attorneys’ fees contract provision can reduce the chances of costly “victories.”

Contract Provision #2: Damage Waivers. A good contract can include a list of types of damages that the parties agree they won’t seek against each other – often types of damages that are covered by insurance.

Generally, there are two types of contract damages: direct and indirect .

Direct damages are intended to give the damaged party the benefit of their bargain. If a homeowner pays $15,000 for a new roof, and the roofer takes the money and quits before the job is completed, the homeowner can sue for the money to complete the roof with a new roofer – even if the new roofer will charge more to finish the job.

Indirect damages are damages caused by the breach but go beyond the subject of the contract. A roofer who builds a leaky roof can be sued both for direct damages – the cost to repair the roof – as well as indirect damages, such as water damage inside the home.

A contract can waive the right to recover such indirect damages by waiving “incidental” or “consequential” damages. A well-drafted contract can identify specific categories of indirect damages that are waived, tailored to the particular type of work to be done. For example, a roofing contract could waive claims not only for water damage, but also for expenses like travel and lodging for the homeowners while repairs are being performed. Such a waiver is reasonable because homeowners typically have insurance to cover water damage and associated costs, such as replacement housing, and don’t need to recover those costs from contractors. (A properly drafted “subrogation waiver” can protect your business against claims from the homeowners’ insurance company.)

Such waivers can dramatically reduce risks to contractors and subcontractors. It’s easy to imagine that a mistake in a small roof repair job could lead to tens of thousands of dollars in claims for damage to furnishings, lodging costs, travel, meals, etc.

Contract Provision #3: Jury Trial Waiver. While the Arizona Constitution guarantees parties the right to a jury trial, state law allows that right to be waived in a well-drafted contract.

Jury trials have benefits to society, especially in the criminal context. But in a civil case, a jury trial is almost always more expensive, time-consuming, and uncertain than a trial to a judge. Parties with weak claims often rely on this cost and uncertainty to force an unfair settlement.

A jury trial waiver can reduce the power of threatened litigation. Combined with good attorneys’ fees provisions and damage limitation clauses, a jury trial waiver can convince a disgruntled customer that a lawsuit is not their best option.

Contract Provision #4: Notice and Opportunity to Cure. Angry owners and short-tempered general contractors often want to fire contractors, banish them from the jobsite, and get replacements started right away. Meanwhile, good contractors and subcontractors want a chance to stay on the project and fix problems. The law generally sides with the good contractors and subcontractors, allowing them an opportunity to rectify issues themselves. But that opportunity isn’t guaranteed.

A well-drafted contract can solidify the right to notice and opportunity to cure. Contract provisions can require the owner or general contractor to provide a detailed notice, together with a clearly defined, reasonable time to cure. Without such provisions, the parties are left to argue in court over what details were required and what was a reasonable time to cure.

Conclusion: A Good Contract Works. We have seen how a good contract can stop many problems even before they start. Recently, one of our subcontractor clients accidentally damaged a water heater on a residential project. As soon as they were notified of the issue, our client promptly paid the full cost, about $4,000, to replace the water heater.

The matter should have ended there, but the general contractor demanded an additional $21,000. Its demands included fifty hours of time (at an absurd $250/hour) to “supervise” the water heater replacement, even though the replacement was fully performed by the plumber. The general contractor also claimed profit and overhead on the fully paid plumber’s invoice, plus reimbursement of airfare for interrupting his California vacation to travel to the jobsite.

Our client’s response pointed out the provisions in the client’s contract (drafted by our firm) that barred the general contractor’s overreaching claims. The net result was that, after a few snarky emails, we never heard from the general contractor again.

Lang Thal King & Hanson assists contractors and subcontractors in drafting effective, enforceable contracts to protect their rights. Contact George King (480-534-4875) or Mike Thal (480-534-4873) to schedule an appointment.

OSHA takeover update: Comment period extended by 60 days, public hearing postponed

Fri, 19 Aug 2022 15:05:27 GMT

This article was originally published May 3, 2022.

If OSHA follows through on its threat to strip workplace safety enforcement from the state, Arizona employers should expect a much harsher regulatory environment.

On April 20, citing what it termed the State of Arizona's "decade-long pattern of failures" in enforcing private workplace safety, the federal Occupational Safety and Health Administration (OSHA) announced its intention to revoke the Arizona State Plan , under which the Arizona Division of Occupational Safety and Health (ADOSH) – in place of OSHA – conducts workplace safety inspections and enforcement.

Arizona is one of 28 states and territories that operate their own OSHA-approved state plans.

The threatened takeover announcement is the latest development in an ongoing OSHA-ADOSH dispute that became public last fall, when OSHA threatened to revoke ADOSH’s authority (which dates back to 1985) to regulate worker safety in Arizona. (See Andrew Wenker’s November 8, 2021, Construction Advisor ® article, “ OSHA ‘Power Grab’ Poses a New Regulatory Threat to Arizona Employers .”)

In announcing its proposed plan, OSHA stated that, if it revokes Arizona’s authority to regulate worker safety in the state, “Federal authority for discretionary concurrent enforcement would resume, allowing Federal OSHA to ensure that private sector employees in Arizona are receiving protections that are at least as effective as those afforded to employees covered by Federal OSHA.”

There is no deadline for OSHA to announce its decision.

UPDATE: After receiving nearly 200 public comments on its plan to revoke the State of Arizona's workplace safety enforcement authority, OSHA announced on August 10 that it was reopening the comment period for an additional 60 days. The agency also postponed the public hearing that had been tentatively set for August 16.

OSHA Preparation. Because no state that operates under a State Plan has involuntarily had its plan revoked, we cannot say for sure what life under OSHA would look like for contractors. However, it may be safe to assume that, because Arizona apparently has not lived up to federal safety standards, contractors might experience more frequent inspections, higher compliance standards, and/or tougher financial penalties (for the federal government, far more than most states, OSHA penalties are a revenue stream).

For employers in any high-risk industry, preparation will be crucial, as OSHA inspections occur unannounced. When the inspector arrives, it will be far too late to figure out what to do next.

You should have a written procedure for responding to an OSHA inspection, and you should provide periodic training for all managers and supervisors. To use a football analogy:

Prepare a written playbook.
Practice your plays.
Know what play to call.
Be ready to call an audible.

Resources . A 2008 (but still useful) EHS Today article, “ When OSHA Knocks ,” provides a detailed analysis of the inspection and complaint-and-response process, and you will find that article to be a valuable resource.

It goes in-depth on recommended preparations and strategies on:

an inspector’s arrival on your jobsite
the opening conference
accompanying the inspector on the walk-around
the closing conference
how to respond to a complaint and citations
understanding the options and courses of action available to you.

Also, a number of OSHA compliance firms offer online assessment tools, such as Insure Compliance's Safety Gap Self-Assessment .

Start the Process. While OSHA’s revocation of the Arizona State Plan is not a done deal, contractors and other employers would be wise to assume that it is.

Just as you should fully prepare for life with OSHA, we are doing the same. We are reviewing our lists of safety consultants, expert witnesses, and other professionals who have done battle with OSHA, administratively and in the courts, and can help you prepare for and protect your company against an OSHA inspection and challenge the citations that will invariably result.

We are ready to help your business tackle any OSHA issues it might encounter. In the meantime, please visit our Government Regulation web page.

Best Lawyers® "Lawyer of the Year": Kent Lang (Construction Law)

Thu, 18 Aug 2022 21:43:21 GMT

The Best Lawyers in America® has named founding partner Kent Lang as its 2023 Scottsdale "Lawyer of the Year" in Construction Law.

Rick Friedlander named mediation "Lawyer of the Year" by Best Lawyers®

Wed, 17 Aug 2022 21:33:40 GMT

The Best Lawyers in America® has named Lang Thal King & Hanson attorney Rick Friedlander its 2023 "Lawyer of the Year" (Scottsdale) in mediation.

Megan Schandle joins Lang Thal King & Hanson's litigation group

Mon, 25 Jul 2022 16:11:44 GMT

Litigation attorney Megan Schandle comes to Lang Thal King & Hanson from the Arizona Court of Appeals, where she served as a law clerk for Judge Maria Elena Cruz.

ROC license suspensions and Recovery Fund awards

Tue, 14 Jun 2022 16:08:59 GMT

On a residential project, even a minor ROC discipline against your contractor’s license can trigger a Recovery Fund award and a second license suspension.

If an ROC workmanship complaint results in a short suspension of a contractor’s license, some contractors choose not to appeal and instead serve the suspension and assume that the case is closed.

However, if the complaint involves a residential property, that may be where the real trouble begins.

Recovery Fund Blues. Residential homeowners who obtain any suspension (however minor) or revocation against a license may apply for an award of up to $30,000 from the ROC’s Recovery Fund. Although the Recovery Fund initially makes the payment, the contractor will ultimately bear the financial burden.

If the Recovery Fund makes a payment, the license will automatically be suspended again until the licensee has repaid the Recovery Fund, with interest. If the contractor does not incur costs at the outset to resolve the underlying complaint, it will inevitably do so at the end if it wants to continue in construction.

This creates a real hardship for contractors that have to generate income in order to repay the Recovery Fund award but cannot do so legally because their license is under suspension.

Compounding matters, any unresolved Recovery Fund suspension of one license could trigger the suspension of another contractor’s license, if there is overlap between pertinent personnel. (See “ Are You Really Sure You Want To Be the Qualifying Party on Your “Buddy’s” ROC License? ”) It may also bar certain individuals from being able to obtain licenses in the future until the Recovery Fund is repaid in full.

Given these lasting risks, it is important for contractors to take seriously even “small” complaints before the ROC.

ROC Investigation Overview. Let’s back up and take a refresher course on the anatomy of an ROC complaint and investigation.

At the outset, the ROC’s assigned investigator will inform the contractor that a complaint has been filed. The investigator will also request from the contractor an optional written response within ten days.

The investigator will schedule and conduct an inspection at the jobsite. At the inspection (which the contractor should attend), the investigator will document the project and allow both parties the opportunity to provide any relevant information for the case. Based upon the discussions at the jobsite, the investigator may ask the parties to provide supplemental documentary evidence to either prove or disprove claims.

Although the inspection generally governs workmanship and abandonment cases, the investigator could also use this opportunity to investigate other potential administrative violations , such as a statutorily deficient contract.

If, after the initial investigation, the investigator decides to issue a written directive to the contractor, the directive formally details what issues must be resolved by the contractor, and it provides a deadline for compliance. The compliance period is at least 15 days from the date the directive is issued; investigators have discretion to provide additional time if needed.

At the end of the compliance period, the investigator will confirm the status of the directive work with the party who filed the complaint. If the work has been properly completed, the case will be considered resolved. If there are allegations that the work was not properly completed or otherwise fails to meet minimum workmanship standards, the investigator will likely schedule a compliance inspection.

If the investigator determines that any issues (even minor ones) were not properly resolved, the investigator can recommend an ROC citation against the contractor. The citation informs the contractor of the ROC’s formal charges.

If the ROC issues a citation, it will include a deadline by which the contractor must provide a written answer. It is imperative for the contractor to meet that deadline; failure to do so allows the ROC to immediately discipline the license, without a hearing.

After the contractor files its answer, the case is referred for an administrative hearing, where both sides may put forward their case to show why or why not the contractor should be disciplined. Practically speaking, a contractor is likely facing an uphill battle; the assigned investigator will likely offer testimony that is unfavorable to the contractor.

If the administrative law judge rules against the contractor, that ruling can recommend discipline, which can range from just a small fine to a complete license revocation. The recommended decision is then referred to the ROC, which generally accepts the decision. As discussed above, in Recovery Fund-eligible cases, this initial discipline would be in addition to (a) repaying any Recovery Fund payout and (b) serving a suspension until the Recovery Fund is repaid.

If the ruling goes against the contractor and recommends discipline, the contractor can appeal the ruling in Superior Court. (See Jamie Hanson’s article, “ New Arizona Law on Administrative Appeals Creates Opportunities for Contractors in ROC Hearings .”)

Related “Construction Advisor” Articles:

Responding to an ROC Complaint , Kent Lang
The Headaches of Fighting a Registrar of Contractors Complaint , Mike Thal
The Anatomy of an ROC Workmanship Complaint (flowchart)

More about Lang Thal King & Hanson's ROC licensing and contractor defense services

No contract? Negligent architects, engineers not obligated to reimburse project owner for losses

Mon, 06 Jun 2022 17:12:28 GMT

The Arizona Supreme Court has ruled that, if an architect or engineer is negligent in their work on a project, and if they do not have a direct contract with the project owner, they are not obligated to reimburse the owner for the cost of their negligence.

That opinion does not mean that negligent design professionals get off scot-free. (“ Donnelly 's demise does not insulate design professionals from legal consequence for their negligence,” the opinion stated.) If a project owner has been damaged by design flaws, the owner’s primary remedy is to sue the general contractor who did contract with the design professional. The general contractor would then, presumably, file cross-claims against the design professional for indemnity.

Background . In 2014, Cal-Am Properties contracted with VB Nickle to design and build a clubhouse at a Yuma RV park. Nickle contracted with Edais Engineering to survey the property and place construction stakes to mark the building’s permitted site.

Edais erred in placing the stakes, causing the clubhouse to be built 10 feet north of the correct location and depriving Cal-Am of eight planned revenue-producing RV spaces.

Cal-Am sued Edais for negligence, among other claims. The trial court dismissed the negligence claim on the grounds that, because no contract existed between Cal-Am and Edais, Cal-Am could not recover its economic damages from Edais.

Cal-Am appealed, and the Arizona Court of Appeals upheld the dismissal, as did the Arizona Supreme Court.

In the wake of the Supreme Court’s opinion, Cal-Am Properties was left with the remedy of suing VB Nickle for breach of contract and Edais Engineering as third-party beneficiary.

Donnelly Undone. For more than three decades, the Donnelly opinion influenced multiple court rulings in which project owners, despite the lack of contractual privity, were allowed to sue negligent design professionals to recover economic losses. Donnelly held that a design professional’s liability extends to “foreseeable injuries to foreseeable victims.”

Donnelly took an initial hit with the Arizona Supreme Court’s 2007 opinion in a non-construction case, Gipson v. Kasey, in which the Court ruled that “foreseeability is not a factor to be considered by courts when making determinations of duty.”

The Court apparently had Donnelly and Gipson in mind when it decided to hear the Cal-Am case : “We granted review to reexamine our holdings in Donnelly ,” the Cal-Am opinion stated, “under Arizona’s current duty framework.”

Takeaways for Contractors . Cal-Am put the final nail in Donnelly ’s coffin, officially eliminating the foreseeability test to evaluate claims against design professionals.

Moving forward, only parties that have a direct contract with the design professional can sue for damages stemming from faulty design.

General contractors should consider this when deciding whether to offer design as part of their contract with an owner. If they do, and there are design problems, the law now requires the owner to sue its contractor, leaving the contractor to, in turn, sue the design professional.

More about: Lang Thal King & Hanson's Construction Law practice

Heat Stress: Reducing the safety risks to outdoor workers

Thu, 12 May 2022 17:11:29 GMT

Contractors in central and southern Arizona know all too well the work hazards that accompany Arizona’s notorious summers. OSHA’s recently launched National Emphasis Program on Outdoor and Indoor Heat Hazards (NEP) provides a useful reminder of the risks of heat stress and how to help workers avoid it.

Related article: ADOSH inspection program focuses on heat-related illness, injury (July 2023)

Before we describe some of the resources at your disposal, let’s briefly discuss the NEP and its application in Arizona. The NEP, which went into effect April 8 and is scheduled to continue for three years, calls for heat-specific workplace inspections in over 70 high-risk industries (including construction) at locations where the National Weather Service has issued a heat warning or advisory for the local area.

For now, per a recent OSHA Defense Report (Conn Maciel Carey), Arizona employers are not directly subject to the program, as workplace safety enforcement in the state is performed by the Arizona Division of Occupational Safety and Health (ADOSH) under OSHA’s “Arizona State Plan.” According to the Report:

State Plans are strongly encouraged, but are not required, to adopt the NEP. By June 7, 2022, the State Plans must submit a notice of intent indicating whether they already have a similar enforcement program in place, or whether they intend to adopt new policies and procedures at least as effective as this NEP.

However, as we reported in our May 3 article, OSHA is threatening to revoke the Arizona State Plan. If it makes good on that threat, all OSHA standards and requirements will go into effect in Arizona (see “ OSHA Takeover? How Arizona Contractors Can Prepare ”).

Therefore, employers would be wise to double-down on heat-stress prevention – not just to satisfy state and federal regulators, but because keeping workers safe, healthy, and on the job is good business.

Heat Stress Avoidance. As the Industrial Commission of Arizona’s Heat Stress Awareness page notes, “Worksites involving high air temperatures, radiant heat sources (e.g., sunlight, hot exhaust), high humidity, direct contact with hot objects, or strenuous physical activities have a high potential for causing heat-related illnesses.”

For employers, the ICA page provides links to useful resources, including a:

CDC list of heat stress-related recommendations related to workplace controls, training, acclimatization, hydration, rest breaks, etc.;
U.S. Department of Labor overview, “ Working in Outdoor and Indoor Heat Environments ,” that covers occupational heat exposure, OSHA standards, heat stress prevention, first aid, etc.; and
one-page OSHA QuickCard, “ Protecting Workers from Heat Stress .”

If you would like a private-sector perspective on heat stress prevention, these articles might prove useful:

“ Tools to Prevent Heat Illness on the Job ,” Construction Executive
“ Working in Heat: Heat Illness Prevention in Construction ,” Urbint, Inc.

We also recommend that you contact your trade association for information that is specific to your construction trade. The May 11, 2022, webinar sponsored by the ASA Health & Safety Committee provided some timely resources, including a presentation by Mobile IV Nurses, “ Heat-Related Injuries, OSHA, and How Mobile Hydration Can Benefit Your Employees .”

If you have a question about a workplace safety issue or violation, please contact Kent Lang or Jamie Hanson .

Are you really sure you want to be the qualifying party on your “buddy’s” ROC license?

Thu, 14 Apr 2022 16:24:50 GMT

An all-too-common occurrence is a friend (or a friend of a friend) asking someone to be the qualifying party (QP) on their contractor’s license issued by the Arizona Registrar of Contractors. They might even make some payments to the QP for their troubles.

Unless otherwise exempted, licensed contractors are required to have a qualifying party who meets minimum experience standards . However, being a QP is not just a hollow résumé stuffer or a source of “free money” – it carries actual risk.

By law , a QP must be able “to adequately supervise the work performed by the licensee.” That statute goes on to state – and this is where the risk kicks in – “the qualifying party is responsible for any violation of this chapter by the licensee for licensure regulatory purposes.” (Emphasis added.)

The QP’s responsibility applies “during the period of time that the qualifying party is named on the license." Although that provision does not create personal liability, it can cause lasting issues for the QP if a license on which they are named is disciplined.

Unintended Consequences. A contractor can be disciplined for, according to A.R.S. § 32-1154(A)(20) :

“having a person named on the license who is or was named on any other license in this state or in another state that is under suspension or revocation for any act or omission that occurs while the person is or was named on the license.”

Why that is bad: If someone serves as the QP on their “buddy’s” license, while simultaneously being the QP for their own company, their own company could be disciplined because of the discipline imposed on the other license.

Additionally, unresolved discipline from a previous license can prevent the QP from obtaining a new license. A.R.S. § 32-1122 (C) requires that each person named on a license:

“must be of good character and reputation. Lack of good character and reputation may be established by showing that … the person was named on a license that was suspended or revoked in this state or another state."

Even if the discipline occurred years prior, it can still prevent a new license from being issued.

Smart Moves. If, after weighing the risks and rewards, you are still inclined to serve as QP for another contractor’s license, these steps can reduce your risk of administrative liability:

Before becoming the qualifying party, perform due diligence on the licensee. If the company has a disciplinary history, proceed with caution.
Don’t be a “silent” QP. Do your job, and appropriately supervise the licensee.
If, in your supervision, you detect conduct or workmanship that heightens the risk of discipline to the license, disassociate yourself promptly and officially.

Caution . Because complaining parties have two years to pursue discipline against a contractor’s license, a QP may be responsible for up to two years after disassociation. If you disassociate, you will not receive notices of complaints filed against the license; consequently, you could be affected without knowing about it until you apply for a new license or renewal.

More about: Lang Thal King & Hanson's ROC licensing services

Under the same roof: A construction lawyers' look at the roofing trade

Fri, 04 Feb 2022 20:48:45 GMT

Construction lawyers’ perspectives on the unique qualities of the roofing trade, the benefits of ARCA membership, and dealing with OSHA and the ROC.

For more than a decade, roofing contractors have been a major client segment at Lang Thal King & Hanson, one of Arizona’s largest and most accomplished construction law boutiques.

Lang Thal King & Hanson's experience in advising and defending the roofing trade has proven to be a valuable – and sometimes business-saving – resource for many roofers.

Over lunch recently, three of the firm’s construction law partners -- firm founder Kent Lang , Best Lawyers’ construction litigation “Lawyer of the Year” Mike Thal , and former ROC chief counsel Jamie Hanson -- talked about working with roofers, dealing with OSHA and the ROC, the benefits of membership in the Arizona Roofing Contractors Association (ARCA), and how contractors can make smart use of their law firm.

Here are some excerpts:

Mike Thal: From a legal angle, roofing contractors have issues that are specific to the work they do, from worker safety to getting paid.

For example, fall protection is a much bigger deal for roofers than for other trades. Drywall and framing contractors typically don’t fall into empty swimming pools. Also, other trades don’t have to worry about people walking on their roof, breaking tiles, and blaming the roofer for the broken tiles, and we’ve crafted some very specific contract clauses for roofers, to deal with very specific issues.

We started drawing, on a Google image of the house, the area that the roofers would use for ingress and egress. The owner or general would have to agree that any defects found outside that area are not on us because we aren’t going into those areas. So when they find an upturned shingle or something 30 feet from where we were working, we can say, “No, we all agreed at the outset we were never going to walk over there, and we never did, and you don’t have any evidence that we did, so buzz off.”

Roofers also face unique workmanship issues. Some shingles come with instructions that say, “a nail right here and a nail right there.” Nobody does it perfectly like that – they’re almost never right on the bullseye. But then the owner’s lawyer will hire an expert to testify that the shingles weren’t nailed exactly where they should have been, and he’ll claim you voided the manufacturer’s warranty and either demand a refund or refuse to pay you for the roof.

GETTING PAID

Kent Lang: On insurance jobs, roofers also have to deal with their customers who squander the insurance payment because they get the front-end check from the insurance company and then, when the work’s done, they get the back-end check.

Well, the homeowner’s already got their roof, so when it’s time to pay up they tell you to pound sand. Unless you’ve got it pretty explicit in your contract, it can be like pulling teeth to get that second payment.

We just had a case where the homeowner said they weren’t going to make the second payment, and we had one of our associates file a lawsuit for the second payment. We got it settled, and now the homeowner is suing her attorneys because they gave her bad advice about not having to pay the second check.

LEGAL STRATEGIES

Mike Thal: Roofers also have to pay attention to legal strategies and the cost of winning a dispute.

How much does a residential roof cost? Twenty thousand bucks? Thirty thousand? There are very few half-million-dollar roof jobs, so when they’re fighting over money they’re not fighting over a ton of money, so cost effectiveness and good legal strategies might be more important to them than in some other trades.

The other day one of our roofers told me, “I got this lady, she’s already lawyered up, she’s going to make claims, but she’s just trying to cover up the fact that she hasn’t paid us.”

I said, “Well, how far are you into the project, how much are you owed, and how much do you have left now that she’s kicked you off the job, so that I know whether it’s worth it or not to sue?”

He said, “Well, she owes us 30 grand. We stood to make another 20 grand of profit off of the remainder of the work, so if we sued we’d be entitled to about 50 grand, and we have lien rights.”

I told him that’s right on the border of what I would consider to be worth running headlong into a lawsuit, and that’s where trust between a contractor and his attorney is really important. In this case, my client appreciated knowing that I’m not going to tell him to jump into a lawsuit unless I feel comfortable with it, and I’m looking at it from his perspective and not from our fee potential.

DEALING WITH THE ROC

Jamie Hanson: For many roofing contractors, the more important legal dispute is not about payment but about workmanship, and somebody is coming after their license. A lot of times roofers get screwed because, if there’s a leak, the roofer gets blamed and the investigator can’t really figure out where the leak is coming from, so the burden is on the roofer to show that it’s not their fault.

A lot of our clients in that situation find value in our good relationships with the Registrar of Contractors – we’re familiar with the ROC, and we know the investigators and understand how they work, which means that we know how to approach these cases in a way that’s intelligent and likely to succeed. A lot of lawyers may deal with the ROC either never or once every three years, and they fight the complaint with an adversarial, litigation mentality that’s more appropriate to a lawsuit, and that just doesn’t work, whereas we understand what’s possible within the ROC world.

THE VALUE OF ARCA MEMBERSHIP

Kent Lang: We mentioned worker safety earlier, and this is where we need to give a plug for ARCA. The companies that are part of an organization like ARCA are the companies that are already at the top of the class – they join and participate, they go to the safety meetings so they can get OSHA training and stay out of the kinds of trouble that hurts companies that are trying to do it on the cheap.

We have one roofing client – a small startup – that just got visited by OSHA. He goes, “What do I do?” and I said, “Don’t talk to me, go talk to ARCA. They’ve got OSHA training, and then the guy that does the training can call OSHA and tell them ‘we’ve got our guy in school, he’s already taking classes.’” So by belonging to ARCA, we know those kinds of things, so that even if they do something silly we can help fix it quick.

SMART USE OF YOUR LAWYER

Mike Thal: Other ways to keep your company out of trouble include making sure you have the right contractor’s license, the right corporate entity, a good operating agreement, a good contract, and a good lien-service provider. Then as soon as there’s a flare-up, call us to give you some advice on how to put it out before it turns into a forest fire.

For a lot of contractors, there’s an outsized value to having a lawyer who knows the construction business and who they can call and get some useful guidance.

We have nine construction lawyers here, of all ages and fee levels, and if one of us doesn’t have the answer, we’ll get you the answer, and if I’m not the right person, I’ll get you the person.

I think that closely held roofing companies that end up making it big, or haven’t made it big yet, really appreciate being able to pick up the phone and call us for quick legal advice.

Jamie Hanson: I think that’s right, and I think that contractors come back to us for more because they trust that we know what we’re doing and that we know ways to get contractors out of legal scrapes. They also trust us to come up with shortcuts that are against our immediate financial self-interest but are in the legitimate interests of our client.

They also appreciate that we have attorneys of different ages and therefore price ranges, and that some of the work will be done by guys who have some gray hair and a higher billing rate, and that other work will be done by younger attorneys who can do it well, at a lower cost.

Kent Lang: That brings us to a good place to wrap up this discussion. I just had two uncomfortable experiences – one was with the doctor that I’ve been going to since the mid-’80s, and the other was with the dentist I’ve been going to since the mid-’80s. They both retired, and I got a quick “By the way, here’s my replacement, I’ll see you in another lifetime.” I didn’t like that.

One of our advantages is we have some people of a certain age, like me, and then we have Mike and Jamie, and then we have younger attorneys, so we can continue to represent people over a period of many, many years, without there being a sudden, complete change in who is working with our clients.

That’s a real value for contractors who are serious about their business and are in it for the long run.

More about Lang Thal King & Hanson's ROC Contractor Licensing and Construction Law services

New Arizona law on administrative appeals creates opportunities for contractors in ROC hearings

Mon, 06 Dec 2021 18:23:42 GMT

An appeal of an administrative agency’s decision now can lead to a fresh trial in Superior Court, where the agency’s decision is disregarded.

See related article: " ROC hearings and Arizona's 'new trial' statute: two years later, the impact for contractors "

AMENDMENTS TO A.R.S. § 12-910 REMOVE ALL DEFERENCE TO THE AGENCY’S RULING.

Under older versions of A.R.S. § 12-910, the decisions of administrative agencies received deference from the Court. That is to say, in any close question of fact or law, the Court was required to defer to the agency’s decision or interpretation.

The Court’s duty to defer to administrative agencies began to erode a few years ago. In 2018 the Legislature amended A.R.S. § 12-910 to remove the Court’s deference to government agencies on legal issues:

“In a proceeding brought by or against the regulated party, the court shall decide all questions of law, including the interpretation of a constitutional or statutory provision or a rule adopted by an agency, without deference to any previous determination that may have been made on the question by the agency.”

This shift was important, but not startling. Allowing a judge, rather than a government agency, to decide how the law ultimately applies made sense.

More recently, pursuant to SB 1063, which became the law in September 2021, the Court’s deference to the administrative agency disappeared entirely, requiring the Court to decide factual issues for itself:

“In a proceeding brought by or against the regulated party, the court shall decide all questions of fact without deference to any previous determination that may have been made on the question by the agency.”

This is a seismic shift. And there is more.

UNDER THE 2021 AMENDMENTS, ANY PARTY CAN DEMAND A TRIAL DE NOVO.

NOTE: The amendments to A.R.S. § 12-910 apply to nearly all State of Arizona regulatory agencies. However, as licensed contractors were the original audience for this article, our examples from this point forward will refer to the Arizona Registrar of Contractors and parties to disputes involving that agency. With that in mind, the reader should look to A.R.S. § 12-910(D) for the “trial de novo” provision applicable to the Registrar of Contractors.

Ordinarily, an administrative agency such as the Arizona Registrar of Contractors (ROC) receives recommended factual determination from an administrative law judge at the Office of Administrative Hearings (OAH). The administrative law judge presides over an administrative hearing, in which the parties (e.g., a homeowner and a contractor facing an ROC complaint) present testimony, documentary evidence, and arguments.

After the hearing, the administrative law judge issues a “recommended decision” and forwards it to the originating agency (in this case, the ROC). The ROC’s final administrative decision generally accepts the recommended decision (although it can also reject or modify the decision).

Under the previous version of A.R.S. § 12-910, the factual determinations coming out of that hearing were very hard to challenge. The amended A.R.S. § 12-910 seems to change that radically. It states that, in an appeal from a “final administrative decisions of agencies that regulate a profession or occupation pursuant to title 32” (and that includes the ROC), “the trial shall be de novo if trial de novo is demanded in the notice of appeal or motion of an appellee other than the agency.”

In this context, a “trial de novo” is a “new trial,” held in Superior Court, that disregards the findings of the administrative hearing. All testimony and other evidence is considered as if the administrative hearing had never been held.

This is a radical change; it seems to mean that, if either the homeowner or the contractor in an ROC dispute is unhappy with the ROC’s final administrative decision in their case, that party has the right to demand a new trial, which would be held in Superior Court.

THE EFFECTS ARE POTENTIALLY FAR-REACHING.

The real-world implications of this shift in the law are momentous.

First, the potential length and expense of an ROC dispute seem to have increased. Previously, if a homeowner and a contractor had a dispute, the ROC’s final administrative decision was, for practical purposes, normally the end of that dispute. A legal challenge usually to the Registrar’s decision did not make sense, given the laws requiring deference to the Registrar and its determinations. But now, A.R.S. § 12-910 tells us that the Registrar’s decision cannot legally be the final word (i.e., no deference), and either party can have a trial de novo if they demand it. So the ROC’s decision after a hearing is not necessarily the end of the dispute.

Second, contractors now seem incentivized to assert their own claims against homeowners. Real-world disputes between contractors and homeowners often involve claims on both sides. The homeowner may have a claim for work poorly performed or not performed at all; the contractor may have a claim for the owner’s non-payment.

In the world of the ROC, the contractor is not allowed to assert a claim for non-payment. There is no procedure for it, and, more fundamentally, the ROC has no jurisdiction over a homeowner. The ROC complaint process is exclusively about the regulated party (the contractor) and its compliance with construction-related regulations.

However, under the newly amended A.R.S. § 12-910, a contractor in an administrative hearing is now incentivized to assert, in Superior Court, a claim against the homeowner for non-payment. If the administrative hearing against the contractor can easily lead to a new trial in front of a Superior Court judge, then why not assert the claim for non-payment against the homeowner (i.e., a lawsuit) and then consolidate the cases when the time is right?

This is legally possible, and it is prudent for contractors to consider. It may make homeowners think twice about filing a frivolous or questionable ROC complaint (which they can currently file for free at the ROC’s office).

Third, attorney fee awards appear to be increasingly possible in conjunction with ROC cases. The possibility of ultimately consolidating (a) an appeal from an ROC decision with (b) a contractor’s claim for non-payment against a homeowner raises another real-world issue, which is often the most critical issue in disputes: attorney fees.

In the ROC complaint process, neither party can receive an award of attorney fees, and traditionally no one gets their fees awarded in an appeal from an ROC decision either. The influential case on that issue is Keystone Floor & More. In that case, the Court explained that A.R.S. § 12-341.01, the statute that normally allows attorney fees to be awarded to the prevailing party in a contract dispute, does not apply in appealing an ROC decision. The Court’s explanation relies on describing the action before it as focused exclusively on the contractor’s statutory obligations and the ROC’s regulatory decisions.

But now, if the contractor can consolidate a suit for non-payment with an appeal from any ROC decision, the case seems to be more truly one that is “arising out of contract” (the critical phrase in the statute governing attorney fees) in a way that triggers the availability of a fee award under A.R.S. § 12-341.01. Such a possibility makes the prospect of a drawn-out ROC dispute with a homeowner a little less bleak for contractors.

Fourth, more contractors will likely need to hire lawyers to handle ROC complaints. If a homeowner wants to push an ROC hearing into a trial de novo before the Superior Court, most contractors will necessarily have to hire an attorney. The reason: Most contractors are either a corporation or an LLC; a corporation or LLC is allowed to represent itself in the Office of Administrative Hearings for an ROC complaint, but it is not allowed to appear without an attorney in Superior Court, where any appeal or trial de novo would be held.

The homeowner, who is allowed to self-represent in either setting, can therefore force a contractor to hire legal counsel if the dispute continues into Superior Court. The attraction of the trial de novo to a homeowner disappointed with an unfavorable ROC decision makes that possibility more likely than ever.

Finally, the new law throws uncertainty around Recovery Fund decisions. If a homeowner obtains discipline against a licensed residential contractor, the homeowner may seek a payout from the ROC’s Recovery Fund for “actual damages” attributable to the contractor.

For workmanship issues, the measure of actual damages is usually established by bids or invoices from other licensed contractors. For various reasons, the amounts involved are usually higher than those that the original, disciplined contractor would have charged or incurred. It’s cheaper to do it yourself; it’s more expensive if someone else takes over your work.

But who ultimately decides the amount that gets paid to the homeowner? (By the way, it is an amount that the original contractor is responsible for re-paying with 10% interest in order to stay licensed.) It is the ROC that decides how much money gets paid out. The ROC’s decision is subject to its own appeal; either the contractor (who wants the payout to be lower) or the homeowner (who wants it to be higher) can challenge the ROC’s calculation.

Under the new A.R.S. § 12-910, it is conceivable that the ROC and its Recovery Fund personnel are pulled deeply into cases that go to Superior Court, so that the ROC can explain precisely why a homeowner is or is not entitled to certain amounts for “actual damages.” If this is accurate, then the whole administrative complaint process seems less reliable for homeowners who believe they have been injured by a licensed residential contractor.

IN THIS NEW LEGAL LANDSCAPE, ANYONE INVOLVED IN AN ROC COMPLAINT SHOULD CONSULT WITH A KNOWLEDGEABLE ATTORNEY.

As this article is written (December 2021), the latest revisions to A.R.S. § 12-910 are brand new. No one has yet subjected the revisions and their implications to litigation, which is where courts and practitioners work out the details that need to be decided.

Nor has the ROC yet published any substantive policy statement about what it will or will not do in light of the statutory revisions. And that is not a criticism of the ROC. It is too early to tell how things will work under the revised § 12-910 and how the ROC’s complaint process actually will be affected.

But one thing is clear: Anyone dealing with an ROC complaint or thinking about filing one should be aware of this new statutory framework. There are great possibilities created by the changes, but also some potential pitfalls. Thus, it is more important than ever to consult with experienced, informed attorneys about how to handle the ROC complaint process prudently and strategically.

Jamie Hanson is a Certified Administrative Law Specialist (Arizona Board of Legal Specialization) and a former Chief Counsel at the Arizona Registrar of Contractors.

Contact Jamie at 480-534-4877 or by email .

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Good news for Arizona businesses: Appealing a state regulatory ruling now leads to a fresh trial in Superior Court

Mon, 06 Dec 2021 16:54:29 GMT

Thanks to 2021 amendments to Arizona law, in an appeal of a state regulatory action, the Superior Court must disregard the state regulator’s original decision.

AMENDMENTS TO A.R.S. § 12-910 REMOVE ALL DEFERENCE TO THE AGENCY’S RULING.

This shift was important, but not startling. Allowing a judge, rather than a government agency, to decide how the law ultimately applies made sense.

This is a seismic shift. And there is more.

NOW, ANY PARTY CAN DEMAND A TRIAL DE NOVO.

In a common example, an administrative dispute begins with a complaint by a member of the public against a state-licensed business. The regulatory agency that issued the license investigates the complaint and either dismisses it or imposes on the licensee a consequence – a fine, an order to cure the issue, and/or a license suspension or revocation.

If either party is dissatisfied with the agency’s finding, it can appeal that finding to a hearing before an administrative law judge. At the hearing, the parties present testimony, documentary evidence, and arguments, after which the judge issues a “recommended decision” and sends it back to the originating agency. The agency’s final determination generally reflects the judge’s recommended decision, although the agency can reject or modify the decision.

Under the previous version of A.R.S. § 12-910, the factual determinations coming out of that hearing were very hard to challenge. The amended A.R.S. § 12-910 seems to change that radically. It states that, in an appeal from a “final administrative decisions of agencies that regulate a profession or occupation pursuant to title 32 … the trial shall be de novo if trial de novo is demanded in the notice of appeal or motion of an appellee other than the agency.”

This is a radical change; it seems to mean that, if either the complaining party or the licensee is unhappy with the agency’s final administrative decision in their case, it has the right to demand a new trial, which would be held in Superior Court.

THE EFFECTS ARE POTENTIALLY FAR-REACHING.

The real-world implications of this shift in the law are momentous.

First, the potential length and expense of an administrative dispute seem to have increased. Previously, the agency’s final administrative decision was, for practical purposes, normally the end of the dispute. A legal challenge usually to the state agency’s decision did not make sense, given the laws requiring deference to the agency and its determinations. But now, A.R.S. § 12-910 tells us that the agency’s decision cannot legally be the final word (i.e., no deference), and either party can have a trial de novo if it demands it. So the agency’s decision after a hearing is not necessarily the end of the dispute.

Second, licensees may now be incentivized to assert their own claims against the complaining party. Real-world administrative disputes often involve claims on both sides; for example, in a construction workmanship complaint, the homeowner may have a claim for work poorly performed or not performed at all, while the contractor may have a claim against the homeowner for non-payment.

Continuing with that example, at the administrative level, the contractor is not allowed to assert a claim for non-payment. There is no procedure for it, and, more fundamentally, the Arizona Registrar of Contractors has no jurisdiction over a homeowner. The complaint process is exclusively about the licensed contractor and its compliance with construction-related regulations.

In administrative disputes in general, such a strategy would be prudent for the licensee to consider, especially if it makes the complaining party think twice about filing a frivolous or questionable complaint (which they can file at no cost).

Third, attorney fee awards appear to be increasingly possible in conjunction with a trial de novo. The possibility of ultimately consolidating (a) an appeal from an agency decision with (b) a licensee’s claim against the complaining party raises another real-world issue, which is often the most critical issue in disputes: attorney fees.

In the administrative complaint process, neither party can receive an award of attorney fees, and traditionally no one gets their fees awarded in an appeal from an administrative decision either.

But if the licensee can consolidate its claim against the complaining party with an appeal from any agency decision, the case seems to be more truly one that is “arising out of contract” (the critical phrase in the statute governing attorney fees) in a way that triggers the availability of a fee award under A.R.S. § 12-341.01. Such a possibility makes the prospect of a drawn-out administrative dispute with a member of the public a little less bleak for licensed companies.

Finally, on the downside for licensees, more companies will likely need to hire a lawyer to represent them in an administrative complaint. The reason: Many licensed businesses are either a corporation or an LLC. Either form of legal entity can represent itself in a hearing before an administrative law judge, but it is not allowed to appear without an attorney in Superior Court, where any appeal or trial de novo would be held.

If the complaining party is an individual or couple, who is allowed to self-represent in either setting, they can force a contractor to hire legal counsel if the dispute continues into Superior Court. The attraction of the trial de novo to a complainant disappointed with an unfavorable administrative decision makes that possibility more likely than ever.

IN THIS NEW LEGAL LANDSCAPE, ANYONE INVOLVED IN AN ADMINISTRATIVE COMPLAINT SHOULD CONSULT WITH A KNOWLEDGEABLE ATTORNEY.

As this article is written, the latest revisions to A.R.S. § 12-910 are brand new. No one has yet subjected the revisions and their implications to litigation, which is where courts and practitioners work out the details that need to be decided.

But one thing is clear: Anyone facing an administrative complaint or thinking about filing one should be aware of this new statutory framework. There are great possibilities created by the changes, but also some potential pitfalls. Thus, it is more important than ever to consult with experienced, informed attorneys about how to handle the administrative complaint process prudently and strategically.

Administrative attorney Jamie Hanson is a Certified Administrative Law Specialist (Arizona Board of Legal Specialization) and a former Chief Counsel at the Arizona Registrar of Contractors.

Contact Jamie at 480-534-4877 or by email .

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Do-it-yourself subpoena: a useful tool in an administrative hearing

Wed, 01 Dec 2021 20:22:13 GMT

If you have a case before the Arizona Office of Administrative Hearings, an administrative subpoena can help you get the information you need to support your argument.

By Jamie Hanson

In an administrative proceeding, there are two types of subpoenas: One compels a witness to attend the hearing, and the other – more common and often more useful – compels a party to produce documents.[1]

Obtaining a Subpoena. Getting either type of subpoena is a two-step process.

First, you create the actual subpoena document, which includes the title of the case, what the subpoena is asking for, the deadline for compliance, etc.[2] The Office of Administrative Hearings offers a downloadable subpoena form and instructions .

Second, your subpoena must be signed by an administrative law judge. To obtain a signature, you must send to the Office of Administrative Hearings (a) your completed subpoena document (discussed above) and (b) a statement of reasonable need – a simple statement describing why the witness’s presence or the requested documents are relevant.[3]

If the judge agrees that there is a reasonable need for the subpoena, he or she will sign it. However, if the judge finds the subpoena’s request to be “unreasonable or oppressive,” he or she can modify it or refuse to issue it.[4]

Serving the Subpoena. After the judge signs the subpoena, it can be served. The process of serving a subpoena in an administrative case is the same as serving a subpoena in a civil case: Any person who is not a party to the case and who is at least 18 years old can serve a copy of the subpoena.[5]

Next, the person who served the subpoena must provide proof of service.[6] The proof of service should include a certified statement from the person who served the subpoena, including the date the subpoena was served, the manner it was served, and the name of the person who was served (e.g., it was hand-delivered to John Smith on December 8).[7]

Finally, the party that served the subpoena must file the proof of service with the Office of Administrative Hearings.[8]

Getting What the Subpoena Requests. In an ideal world, once the steps above are completed, the work is done; i.e., the subpoenaed party complies and sends what is requested.

However, in some cases, the party receiving the subpoena does not respond. If that happens, the first step should always be to reach out to the subpoenaed party to try to resolve the issue. A phone call, with written follow-ups documenting the phone call, is best. (Having had a phone call can prove important later, if the party still refuses to comply). It is important to use reasonable efforts trying to get the subpoenaed party to comply – which, again, will be important later. What is “reasonable” depends on the circumstances.

If, even after trying to resolve the issue, the subpoenaed party still refuses to comply, you still have options available to you, but they are a little more complicated.

Enforcing the Subpoena at the Superior Court. Arizona law requires a party to enforce an administrative subpoena at the Superior Court.[9] The Superior Court must enforce the subpoena “in the manner provided by law for the service and enforcement of subpoenas in civil matters.”[10] That means enforcing the subpoena under Rule 37 of the Arizona Rules of Civil Procedure.

Under Rule 37(a), the Superior Court can compel a party to comply with the subpoena, because “a party may move for an order compelling disclosure or discovery.”[11] To move for such an order, you must first have tried in good faith to work with the subpoenaed party to resolve the issue (such as via the phone calls and emails discussed above).[12]

The strange part: Subpoenas enforced under Rule 37 normally arise under existing civil cases.[13] But this kind of enforcement requires you to file a new civil case. We have had success calling the action an “Application to Compel [Party’s] Compliance with a Subpoena Duces Tecum ” and noting in the caption that the application is “Relating to” a specific administrative case number.

Therefore, to succeed in enforcing a subpoena at the Superior Court, you must file:

an “application to compel” that briefly describes the case history, subpoena, and why the court should enforce the subpoena (both legally and factually); and
a good-faith-consultation certificate, pursuant to Rule 7.1(h), that explains that you have conferred, or tried to confer, with the subpoenaed party. (Rule 7.1(h) requires an in-person or telephonic conversation, not just letter or email.)

Finally, if the Superior Court orders the subpoenaed party to comply with the subpoena and produce whatever is requested, you can seek the payment of expenses.[14] Our attorneys have been successful getting an award of attorneys’ fees and costs in enforcing an administrative subpoena.

Practical Considerations. If you are willing to go through the steps above to enforce a subpoena at the Superior Court, there are a few important considerations.

First is an issue of timing. Although the Superior Court should hear the case quickly, administrative hearings are usually held in relatively short windows. You will likely have to request that the administrative hearing be continued for 60 days or more. That means deciding whether getting what the subpoena requests is worth delaying the administrative case.

Second is an issue of the practice of law. In contrast to an administrative hearing, a corporation or LLC cannot represent itself before the Superior Court; it must be represented by an attorney. If a party is seeking an administrative subpoena on behalf of a business, it may not be able to ask the Superior Court to enforce the subpoena without an attorney.

On the plus side, if you follow the procedure described above, there is a good chance the Superior Court will grant expenses in enforcing the subpoena. In other words, you may not incur additional costs to procure legal help in enforcing the subpoena.

More about Lang Thal King & Hanson's Government Regulation and Construction Law services

[1] A.R.S. §§ 41-1062(A)(4) and -1092.07

[2] A.A.C. R2-19-113(A)

[3] A.R.S. § 41-1092.07(F)(4) and A.A.C. R2-19-113(B)

[4] A.A.C. R2-19-113(E)

[5] A.R.S. §§ 41-1062(A)(4), 40-1092.07(C); A.A.C. R2-19-113(C); Ariz. R. Civ. P. 45(d)

[6] A.A.C. R2-19-113(C)

[7] Id.

[8] Id.

[9] A.R.S. §§ 41-1062(A)(4) and -1092.07(C)

[10] A.R.S. §§ 41-1092.07(C) and -1062(A)(4)

[11] Rule 37(a)(3)(B)(v)

[12] Rule 37(a)(1)

[13] Rule 37(a)(2)

[14] Rule 37(a)(5)

Jamie Hanson joins St. Thomas More Society board

Thu, 11 Nov 2021 14:49:21 GMT

Jamie Hanson has been named to the board of directors of the St. Thomas More Society of phoenix, an organization of Catholic attorneys.

OSHA “power grab” poses a new regulatory threat to Arizona employers

Mon, 08 Nov 2021 20:53:07 GMT

If the federal government wrests worker safety enforcement from the state Industrial Commission, Arizona employers will face greater regulatory compliance burdens.

On October 19, 2021, in a letter to Industrial Commission of Arizona director James Ashley, the Occupational Safety and Health Administration (OSHA) threated to revoke the Commission’s authority to regulate Arizona worker safety.

OSHA’s threat stems from “Arizona’s continued failure” to adopt the Biden Administration’s COVID-19 Healthcare Emergency Temporary Standard (Healthcare ETS) in place of Arizona’s allegedly “less effective” State Plan.

OSHA issued the Healthcare ETS in June 2021. It includes measures for the healthcare industry such as:

having a written plan to mitigate the spread of COVID-19;
providing personal protective equipment to workers;
ensuring social distancing where possible; and
providing paid time off for workers to become vaccinated or recover from side effects.

Because Arizona had laws and regulations in place that would potentially address the contents of the ETS, in July 2021 the Industrial Commission requested certain deviations that would exempt the state.

Specifically, Arizona law already permitted employees to use earned paid sick time to be vaccinated and tested for COVID-19 and to deal with business or school closure or quarantine. Those provisions are in addition to allowing employees to use paid sick time for actual illness. Additionally, Arizona law prohibits retaliation against employees and provides whistleblower protection.

Governor Ducey called the OSHA threat “nothing short of a political stunt and desperate power grab.”

“The ICA is actively engaged in a public input process, encouraging Arizonans from every corner of the state to participate,” Ducey stated, “and now the Biden administration is attempting to silence input from citizens and stakeholders alike. We won’t allow it without a fight.”

State Safety Plans. In part to localize workplace safety enforcement, OSHA allows states to implement a State Plan under which a state oversees worker safety within its boundaries. Under federal regulations, a State Plan must be “at least as effective” as federal programs.

Arizona’s State Plan was approved in 1985, and the state’s regulation of worker safety has continued without interruption for more than 36 years.

Federal Intervention. If OSHA makes good on its threat, regulation will revert to Washington, D.C., and Arizona employers would be forced to deal with a distant federal bureaucracy and comply with more arbitrary, one-size-fits-all safety regulations and enforcement.

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Arizona law eases advertising requirements for licensed contractors

Mon, 18 Oct 2021 16:25:13 GMT

Effective September 29, 2021, amendments to a pesky Arizona law make many forms of advertising – radio, television, internet, and outdoor – a bit simpler for Arizona licensed contractors.

By Jason Clark (480-534-4876, email )

Specifically, licensed contractors are excused from displaying or mentioning their license number on broadcast, internet or billboard advertising (including vehicle signage) if the ad includes a web address that “prominently displays the licensee’s name and license number.” (See the revised A.R.S. § 32-1124 .)

For these purposes, the ROC has explained that a licensee’s name and ROC license number are “prominently displayed” if they:

appear directly on the home page of the website (other than in the footer);
are clearly visible without obstruction from photos or other graphics;
appear in an appropriate font size; and
are not just in the website's footer.

To help contractors comply with the statutory changes, the ROC also has issued Substantive Policy Statement 2021.02, " Online Advertising & Prominent Display of License Number ."

Please note that the new exception applies only to internet, broadcast, and outdoor advertising . Contractors are still required to display their ROC license numbers on all written bids, estimates, print advertising, letterhead, and any other documents that the contractor uses to communicate with customers or potential customers.

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Mike Thal named Construction Litigation "Lawyer of the Year"

Thu, 19 Aug 2021 18:31:48 GMT

Jamie Hanson certified as an Administrative Law Specialist

Thu, 05 Aug 2021 17:09:12 GMT

See also: Lang Thal King & Hanson's Government Regulation and Administrative Law practice

A Super Lawyers Rising Stars honoree in Construction Litigation, Jamie is a member of the State Bar's Construction Law Section and an Executive Council member of the Bar's Administrative Law and Regulatory Practice Section.

Jamie is active in the construction industry, wi th trade memberships including the American Subcontractors Association of Arizona, Mechanical Trade Contractors Association of Arizona, Ceramic Tile & Stone Association of Arizona, Arizona Landscape Contractors Association, and Southwest Business Credit Services.

Law firm hosts winning Veritas Prep team in Arizona mock trial competition

Mon, 29 Mar 2021 17:48:51 GMT

Our firm hosted the winning team in the 2021 Arizona High School Mock Trial Tournament, which occurred March 5-6 (regional) and March 25-27 (state).

The team of eight students from Veritas Preparatory Academy in Phoenix took first place in the Arizona competition, with several members also winning individual awards, and qualified for the national competition.

Higher OSHA penalties raise the stakes for worker health

Wed, 27 Jan 2021 15:22:15 GMT

Not many people like to be told what to do – especially by the federal government – but complying with tighter OSHA standards and keeping your workforce intact are good for business.

Employer efforts to protect workers from Covid-19 are a focus of the Biden Administration. On January 21, the President issued an Executive Order on Protecting Worker Health and Safety, which, among other things, requires the Labor Department to:

“review [OSHA] enforcement efforts […] related to COVID-19 and identify any short-, medium-, and long-term changes that could be made to better protect workers and ensure equity in enforcement”; and

“focus OSHA enforcement efforts related to COVID-19 on violations that put the largest number of workers at serious risk or are contrary to anti-retaliation principles.”

Compliance

To prepare for the heightened enforcement efforts, employers should periodically review OSHA’s Covid-19 webpage .

For contractors, OSHA offers construction-specific guidance intended to help protect their workforce, including:

using personal protective equipment (PPE) “necessary to protect workers from other job hazards associated with construction activities” [1];

training workers on how to put on, use and remove protective clothing and equipment;

cleaning shared tools with EPA-approved chemicals ; and

cleaning and disinfecting portable jobsite toilets and providing hand-sanitizer dispensers.

Other construction-specific OSHA guidance (see “Construction Work”) includes task-specific precautions, engineering controls, administrative controls, and useful details concerning safe work practices and PPE. The administrative controls include sample screening questions that employers should ask before sending employees to work indoors if the area may also be occupied by other people.

[1]Although the CDC recommends using cloth face coverings as a protective measure against COVID, it is not an appropriate substitute for PPE .

Violations

OSHA standards can result in fines on contractors for Covid-19-related violations. Some pertinent standards govern:

access to employee exposure and medical records;

sanitation;

personal protective equipment;

eye and face protection; and

respiratory protection.

In addition, Covid-19 could be a recordable illness that must be included on a contractor’s OSHA 300 log, if:

there is a confirmed case of Covid-19;

the case is “ work-related ”; and

the case involves at least one or more general reporting criteria , such as days away from work or medical treatment beyond first aid.

Failure to adequately ensure workplace safety could result in an investigation by OSHA and significant fines.

OSHA Penalty Increases

On January 8, OSHA announced its intention to increase its maximum penalties for 2021 :

Type of Violation / Penalty per Violation

Serious / Other-Than-Serious / Posting Requirements: $13,653

Failure to Abate: $13,653 per day beyond the abatement date

Willful or Repeated: $136,532 per violation

With these increasing penalties, it becomes that much more important to achieve OSHA compliance by reviewing your internal policies and procedures regarding worker health and safety.

For help with an OSHA compliance issue, contact your Lang Thal King & Hanson attorney .

AzBusiness Leaders: Kent Lang, Rick Friedlander are 2021 selectees

Thu, 17 Dec 2020 17:34:10 GMT

Lang Thal King & Hanson attorneys Kent Lang and Rick Friedlander are featured in the annual "AzBusiness Leaders" edition of AzBusiness magazine.

Kent's selection, for Construction Law, is his first, while Rick was selected for the fourth time (Alternative Dispute Resolution, 2016-2018, 2021, and Construction Law, 2019).

Rick Friedlander named arbitration "Lawyer of the Year" by Best Lawyers

Thu, 20 Aug 2020 14:24:45 GMT

The Best Lawyers in America has named construction arbitrator and mediator Rick Friedlander as its "Lawyer of the Year" (Scottsdale) in arbitration.

Purchaser Dwelling Act: Contractor protections against residential construction defect lawsuits

Tue, 18 Aug 2020 23:39:07 GMT

Contractors can enjoy the PDA’s protections only if they are aware of their rights and obligations, and they comply with the requirements that the PDA imposes at each step of the process.

Dwelling Action

The PDA applies to all “dwelling actions” – any action “involving a construction defect brought by a purchaser against the seller of a dwelling arising out of or related to the design, construction, condition or sale of the dwelling.”

While it uses the terms “purchaser” and “seller” (see definitions at the end of this article), the PDA is not limited to new home construction and sales; it also extends to construction projects that repair, remodel, or alter an existing residence. Thus, the PDA arguably applies to most residential construction defect lawsuits.

Exceptions . The PDA does not apply to personal injury or death claims; claims to damage to property other than a dwelling; common law fraud; complaints filed with the Arizona Registrar of Contractors (ROC); or claims solely seeking recovery of monies the purchaser already expended to repair alleged defects.

Pre-Litigation Notice

Except when there is an immediate threat to the safety of occupants or visitors, a purchaser cannot file a dwelling action before it provides the contractor with written notice that specifies:

the address of the subject dwelling

each alleged construction defect with sufficient detail to allow the contractor to identify the alleged construction defect

the location of each alleged construction defect at the subject dwelling

the impairment the construction defect has caused, or is reasonably likely to cause, to the structural integrity, the functionality, or the appearance of the dwelling if the defect is not repaired or replaced.

This pre-litigation notice must be sent via certified mail, return receipt requested.

Your Rights, Obligations After Receiving a PDA Notice

The contractor’s receipt of a purchaser’s written notice triggers important rights and obligations.

First, the contractor must promptly forward the notice to all construction professionals that the contractor reasonably believes are responsible for any of the alleged defects. Notice can be sent by mail, fax or email.

Second, upon request, the contractor is entitled to inspect the dwelling and the alleged construction defects. The purchaser must make the dwelling available for such inspection within 10 days from when the inspection request is made.

Third, the contractor must provide a good-faith written response to the purchaser’s pre-litigation notice of alleged defects. The response must be sent via certified mail, return receipt requested. The response can include the contractor's notice of intent to repair or replace any alleged construction defect, or an offer to provide monetary compensation to the purchaser.

The content of the contractor’s written response dictates the remaining pre-suit obligations between the parties under the PDA:

If no written response is timely provided, the purchaser is free to proceed to litigation.

If the written response contains only an offer of monetary compensation, the purchaser may reject the monetary offer and proceed to litigation.

If the contractor’s response contains a notice of intent to repair or replace the alleged construction defects, the purchaser must allow the contractor a reasonable opportunity to repair or replace the alleged construction defects, as detailed below, before commencing litigation.

Opportunity to Cure Construction Defects

Once a contractor provides a notice of intent to repair or replace the alleged defects, the purchaser and contractor have 30 days to schedule the anticipated repairs and replacements, and must make all reasonable efforts to start the repair or replacement work within 35 days from the contractor’s notice. If a permit is required to perform the repair work, the parties must make reasonable efforts to begin the repair work within 10 days from receipt of the permit or 35 days from the contractor’s notice of intent to repair, whichever is later. The parties can agree in writing to extend any of these time periods.

The purchaser must provide the contractor with reasonable access to perform the repairs or replacements, and the contractor must complete the repairs or replacements with reasonable care and within a commercially reasonable time frame, based on the nature of the repair or replacement (and any issues with access or unforeseen events).

However, regarding the repair or replacement work, a purchaser may ask the seller to select a construction professional that was not involved in the original work and that is acceptable to the purchaser. In that case, the purchaser may not unreasonably withhold consent to the selected replacement contractor.

If, at the end of the repair and replacement process, the purchaser is unsatisfied with the finished product, the purchaser may then commence a dwelling action.

A purchaser may supplement its list of alleged construction defects to include additional defects that that were identified in good faith after service of its original notice, or even after a dwelling action is initiated. In either instance, the contractor is entitled to the same notice and opportunity to inspect and cure the supplemental alleged construction defects.

Litigation Impact

In addition to the pre-litigation requirements, the PDA contains several provisions that affect the litigation of dwelling actions.

With its dwelling action, the purchaser must verify the facts and allegations in the complaint and affirm that he or she is not receiving, and has not been promised, anything of value in exchange for filing the dwelling action.

If a purchaser fails to comply with the PDA before bringing a dwelling action, the court must dismiss the dwelling action.

Each identified construction professional allegedly responsible for a construction defect that forms the basis of a dwelling action must be joined as a third-party defendant, if feasible.

The parties’ pre-litigation conduct during the repair and replacement process, including the purchaser’s written notice and the contractor’s written response, may be admitted into evidence.

To the extent permissible, each dwelling action will be bifurcated into two phases. In phase 1, the purchaser has the burden to demonstrate the existence of a construction defect and the damages incurred as a result of the construction defect. In phase 2, the court or arbitrator shall determine and assess the relative degree of fault for each construction defect to the contractor and to any third-party defendant construction professional.

The prevailing party in any dwelling action is entitled to recover its reasonable attorneys’ fees and court costs.

In a dwelling action brought by a single purchaser, the prevailing party may recover its reasonable expert witness fees.

Additional Provisions: Sale of Dwellings

In the sale of a newly constructed dwelling, all contracts between a buyer and the contractor responsible for the original construction of the dwelling must contain or attach the following notice, in at least 10-point bold type, alerting the buyer of its right to file a complaint with the ROC:

Under Arizona Revised Statutes section 32-1155, a buyer of a dwelling has the right to file a written complaint against the homebuilder with the Arizona registrar of contractors within two years after the close of escrow or actual occupancy, whichever occurs first, for the commission of an act in violation of Arizona Revised Statutes section 32-1154, subsection A.

Also, a contract for the sale of a dwelling may require disputes to be resolved through arbitration rather than litigation. However, an arbitration provision in the sales contract is enforceable only if (a) the arbitration procedures are conspicuously displayed in the contract in bold and capital letters, and (b) the face of the contract contains a disclosure statement, in at least 12-point, bold and capital letters, that identifies the location of the arbitration procedures.

Conclusion

Consistent with its legislative intent, the PDA requires a fair and effective process by which residential contractors and subcontractors receive a reasonable opportunity to cure alleged construction defects before they must defend a construction defect lawsuit. By the same token, purchasers are also afforded a vehicle to achieve correction of alleged construction defects before resorting to the court system.

However, contractors can enjoy the PDA’s protections only if they are aware of their rights and obligations and they comply with the requirements that the PDA imposes at each step of the process.

Definitions

The PDA defines dwelling, purchaser, seller, construction professional and construction defect as follows:

Dwelling: a single or multifamily unit designed for residential use, and common areas and improvements that are owned or maintained by a homeowners’ association.

Purchaser: a person or entity who files a dwelling action.

Seller: a person or entity that “is engaged in the business of designing, constructing or selling dwellings, including construction professionals” (but excluding real estate brokers or agents involved in the resale of a dwelling).

Construction professional: an architect, contractor, subcontractor, developer, builder, builder vendor, supplier, engineer or inspector.

Construction defect: “a material deficiency in the design, construction, manufacture, repair, alteration, remodeling or landscaping of a dwelling” that (a) violates the application building codes; (b) results from defective materials, products, components, or equipment; or (c) violates the applicable workmanship standards.

Force majeure: What do you do when a disaster interferes with your contract?

Fri, 17 Jul 2020 15:44:29 GMT

Whether the coronavirus has relieved either party of its contractual responsibilities depends on the specific facts of your situation and the wording of your agreement.

As you work your way through the recent economic downturn and rebound, you may have concerns about meeting your contractual obligations or enforcing the obligations that other parties owe to you. In adapting your business practices to comply with CDC guidelines and the Governor's orders, it is critical that you understand the provisions of your contracts and the steps you can take to protect yourself and your business.

CHECK YOUR CONTRACTS

Does your contract contain force majeure, "Act of God," or other disaster- or delay-related provisions?

If " force majeure " (or "superior force") is an unfamiliar term for you, you are not alone. It is a common, boilerplate element of many business contracts - so common, and so seldom invoked, that contracting parties and their attorneys have rarely bothered to acknowledge it, much less negotiate its finer points.

That is likely to change.

Per Black's Law Dictionary, a force majeure provision allocates "the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled."

The degree of force majeure protection varies with the language of the contract, and with the state under whose laws the contract is to be enforced. Courts have historically interpreted force majeure provisions narrowly, excusing contractual performance only when unexpected and unforeseeable events make performance truly impossible or pointless.

For example, many courts ruled that the 2008 economic downturn was not a force majeure because, generally speaking, a recession is an economic reality that parties can acknowledge and bargain around when forming their contracts.

In contrast, it is conceivable that a court would find that the coronavirus's specific impact - employee absences, supply-chain disruption, reduced productivity, etc. - generally meets force majeure 's textbook definition, without being persuaded by the pandemic's general impact on customer demand or the general state of the economy.

Be advised, though, that courts have narrowly construed force majeure clauses, with close attention to the unique circumstances of the dispute and the precise language of the contract. Some legal observers have speculated that, if a clause does not reference a pandemic, disease, quarantine, etc., it may not be found to apply to the current situation.

Does your clause kick in if performance is "impossible" (meaning precisely that), or just "impracticable" (meaning that the burden would make it unreasonable to move forward with the contract)? Or can a party be excused from its contractual obligations if its performance is merely "substantially hindered" by the prevailing conditions?

OTHER QUESTIONS

Does your contract provide for a remedy in the face of such an event? Courts have often held that, when a force majeure situation is temporary, contractual performance is suspended only for the duration rather than canceled altogether. However, your contract may explicitly spell out what remedies are available. It may also provide that some aspect of your performance, but not others, is excused or suspended.

Does your contract contain requirements for taking advantage of the force majeure provision? For example, you may need to provide written notice to the other party within a certain timeframe, detailing how and why you intend to modify your performance.

Are there ways you can mitigate your damages? Can you keep your business operational on a limited basis, have employees work remotely, or make a claim under a business disruption insurance policy? The duty to make serious efforts to mitigate your damages pervades all of contract law, and force majeure situations are no different.

Alternatively, does your contract contain a "hell or high water" provision that commands performance regardless of the circumstances? Even if it does contain such a provision, you may have other options available.

OTHER LEGAL EXCUSES FOR FAILURE TO PERFORM

Even if your contract is silent on the parties' rights and obligations in times of crisis, various affirmative defenses may be available to you, such as commercial impracticability or frustration of purpose due to supervening governmental acts. (Note that these are usually available only if your performance has been rendered futile or impossible, not merely difficult or inconvenient.)

For example, if your business was forced to stop operating because your industry was not included in the Executive Order's list of essential businesses, you may have a valid legal excuse for a failure to perform. (We emphasize "may" because, in light of the financial relief efforts that the federal government extended to businesses via the CARES Act, Paycheck Protection Program, et al., even a business that had to shut down may have to show that it earnestly sought financial relief and that the relief was insufficient to meet its needs and support its obligations.)

Federal assistance aside, courts have generally held that it is against public policy to require a party to continue to attempt performance when a subsequent government regulation or ordinance has made that performance illegal or practically impossible. However, again, in the case of the COVID-19 pandemic, it may be that performance is only temporarily suspended rather than fully excused.

WHAT YOU CAN DO NOW TO PREVENT OR MITIGATE DAMAGES

Communicate . Depending on the specifics of your contract, you may want to provide written notices of expected delays or difficulties and propose contractual addendums for extended project schedules and the resulting increased costs. You should be prepared to prove a clear cause-and-effect connection between the pandemic and your grounds for setting aside your contract.

Document . The steps your business is taking to comply with health authorities' guidelines, worker productivity, revenue, and material and labor shortages may later become evidence of the efforts you made to mitigate your damages, or why your performance became impracticable.

Draft . Depending on how COVID-19 plays out, courts may be even less likely in the future to classify events like a pandemic as unforeseeable events that suspend or excuse performance. Going forward, draft your contracts with provisions that make arrangements for these types of disruptive events.

Negotiate . Due to court closures and related litigation delays, both parties may be better off renegotiating their contracts rather than going to war.

Ask for Help. It is safe to assume that the impact of the coronavirus will trigger hundreds of lawsuits, and how the courts treat this wave of litigation is likely to evolve dramatically over the coming months and years. Your Lang Thal King & Hanson attorney can help you navigate all of the above, based on what is known at any given point, and position your business to move forward.

Remote Control: Rick Friedlander successfully mediates eight-party dispute - totally online

Fri, 10 Jul 2020 14:57:42 GMT

More about Lang Thal King & Hanson's mediation and arbitration services

Step by Step. The mediation commenced with a joint session with all eight parties. Rick then facilitated numerous separate sessions, in virtual breakout rooms, with the owner, the construction team (both collectively and individually), and the design team (both collectively and individually).

Our Zoom mediation team (with paralegal Therese Mayo as host or co-host) was able to seamlessly transition from one breakout room to the next, which allowed Rick to raise settlement funds from each defendant, report to the defendants collectively the status of his efforts and to discuss with all the defendants the collective offer to be made to the owner, and to make numerous settlement offers back and forth with the owner and the defendants collectively.

As necessary, Rick also held a number of virtual conversations with adjusters (separate from each other and their respective insureds) to discuss insurance coverage issues that impacted the amounts available from each insurance company for settlement from their insured.

Same-Day Agreement. After just over 12 hours, the parties reached an agreement that, on the day of the mediation, was documented and signed through a virtual electronic process.

NEW NORMAL?

The benefits of remote mediations and arbitrations are so significant that we expect them to be part of the "new normal" in pursuing out-of-court resolution of business and other disputes.

Our remote dispute resolution services include (a) a proprietary Zoom manual that we circulate to the parties/counsel to assist in the ADR process; (b) technical setup assistance by skilled personnel before proceeding with any arbitration or mediation, and (c) confidential breakout rooms for multiple parties in mediations.

To schedule a mediation or arbitration with ADR attorneys Rick Friedlander, Kent Lang or George King , contact them via phone or email or request a mediation or arbitration session.

Does your insurance cover coronavirus-related business losses?

Mon, 06 Apr 2020 18:08:51 GMT

Business owners would be wise to proactively review their insurance policies to determine whether any virus-related losses may be covered.

With the global pandemic's devastating effect on the nation's health and economy, business interruption and other losses caused by the coronavirus are projected to total in the billions of dollars. Understandably, business owners are worried about how it will all impact their operations, and whether they have any recourse for their financial losses.

You would be wise to proactively review your insurance policies to determine whether any virus-related losses may be covered. While the scope of protection will depend on the specific terms of your policy, various types of coverage may insure against the coronavirus losses that are being experienced by commercial policyholders. Chief among the types of coverage is business interruption insurance.

What is business interruption insurance?

Usually purchased as part of a business's property insurance policy, business interruption insurance is intended to protect a business from losses sustained as a result of disruptions to their operations. Similarly, contingent business interruption insurance provides coverage for losses due to a disruption to a company's customers or suppliers.

A typical business interruption clause resembles the following:

"We will pay for the actual loss of business income you sustain due to the necessary suspension of your 'operations' during the 'period of restoration.' The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a covered cause of loss."

To take advantage of such coverage, an insured generally needs to prove:

physical damage resulting from a covered cause of loss to covered property;

an actual and necessary suspension or interruption of the insured's business caused by the physical damage to the covered property;

the existence of actual loss resulting directly from the covered interruption; and

the loss must be incurred during the effective coverage period in the policy.

It is the second requirement - a "physical loss" - that will likely provide the basis for many insurers to deny coverage for coronavirus-related interruption to business.

Policyholders should bear in mind, though, that the definition of a "physical loss" is unsettled, and courts have held that the term is ambiguous unless explicitly defined in the policy. That ambiguity creates an opening for a court to find that the insured had a reasonable expectation of coverage, which can be enough for that court to declare that there is coverage, regardless of the policy language. Thus, in many cases, an insurer's denial of a claim can and should be challenged by the insured.

Courts will determine the extent of coverage.

Because the scope of business interruption coverage is unresolved, there is likely to be a massive wave of litigation over disputed payouts. A few such lawsuits have already commenced, including ones filed by the Oklahoma Chickasaw and Choctaw nations against their insurers for loss of casino income, and others filed by high-profile restaurateurs.

There may be reason for optimism that such "declaratory actions" have a chance of success. Courts in a number of jurisdictions have found that contamination and other incidents that render properties uninhabitable or otherwise unfit for business constitute a "physical loss" sufficient to trigger coverage. These cases included the presence of bacteria, contamination by a dangerous chemical, infiltration by smoke from nearby wildfires, and the presence of asbestos.

Coverage litigation regarding asbestos may provide a useful analog for the presence of coronavirus. Courts have concluded that "contamination by asbestos may constitute a direct, physical loss to property," and that if "the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its 'owner' which would constitute 'physical loss.'"

Thus, determining whether "physical loss" occurred will require courts to examine the policy language and particular facts of each case.

You might have other useful types of coverage.

In addition to business interruption insurance, there may be other sources of coverage, including "civil authority" insurance for when a governmental authority restricts public access to your business, or coverage for "communicable and infectious diseases" that does not require physical damage to the insured's property. Conversely, there can be virus or bacteria exclusions in your policy that would render any coronavirus-related claims futile.

Beyond just business interruption, claims under other policies you hold could arise if an employee catches the virus while on the job, or a customer gets sick while at your place of business.

Lang Thal King & Hanson can help you review your policy and file a claim.

Due to the expected deluge of litigation over business-interruption insurance, business owners are advised to make their claims sooner rather than later. However, for those claims to have a chance, it is critical to have a detailed review of policy language and an understanding of potential sources of coverage. In fact, courts have held that an insured's reasonable expectation of coverage matters only if the insured actually read the policy.

When finally making a claim, an insured must be sure not to include any information in their notice of claim that could later be used by the carrier to deny the claim.

Our experienced attorneys are here to help you review your policies, file claims, and navigate the claims process during these unprecedented times. Together, we will make sure your business takes full advantage of any available insurance coverage to help you blunt the effects of the pandemic on your bottom line.

Lang Thal King & Hanson partner George King contributed to this article.

Rick Friedlander listed among "Top 100 Lawyers in Arizona"

Thu, 27 Feb 2020 14:57:09 GMT

Construction mediator and arbitrator Rick Friedlander is featured in the "Top 100 Lawyers in Arizona" issue of AzBusiness magazine.

Jamie Hanson is elected as a firm partner

Fri, 10 Jan 2020 16:36:15 GMT

Jamie is our firm's fourth partner, joining Kent Lang, Mike Thal and George King.

Welcome, construction mediator Rick Friedlander

Tue, 31 Dec 2019 19:11:52 GMT

A nationally recognized mediator, arbitrator, construction lawyer and commercial litigator, Rick Friedlander is a five-time Best Lawyers® “Lawyer of the Year” (Phoenix) in three practice categories

Victory for client: Court affirms contractor's right to cure workmanship issues

Fri, 15 Nov 2019 19:42:41 GMT

In a September 2019 decision favorable to contractors, the Arizona Court of Appeals upheld a contractor's right to have notice of, and a reasonable opportunity to cure, its alleged workmanship issues before it can be found in breach of contract.

In May 2015, Handyman Connection entered into a contract with two homeowners to remodel the home's master bathroom. The total contract price was $7,125, and the homeowners made a $2,850 down payment.

When work commenced on the bathroom in July 2015, the homeowners verbally expanded the scope of the project. The project progressed smoothly at first, but in September the homeowners began complaining about Handyman's work and service. Handyman worked to resolve the homeowners' complaints - repairing and replacing items at its own cost, including items that were not Handyman's responsibility - but was constantly met with new grievances.

For example, the homeowners were unhappy with the appearance and functionality of the vanities that they ordered for the bathroom. Although the materials were the homeowners' responsibility, Handyman trimmed the vanity drawers to improve their functionality. When that result did not please the homeowners, Handyman ordered new drawer fronts from the manufacturer, only to receive complaints from the homeowners about manufacturing blemishes.

In October, Handyman offered the homeowners a credit in lieu of additional repairs but made clear that, if the homeowners preferred, Handyman would fix the remaining grievances.

In response to Handyman's offer, the homeowners:

refused to let Handyman complete the project,

refused to pay Handyman the balance of the contract price and for verbal change orders that expanded the scope of the project, and

sued Handyman for $200,000.

Handyman offered to settle the lawsuit for a "walkaway." When the homeowners rejected that offer, Handyman filed an answer and counterclaims for breach of contract and unjust enrichment for the unpaid contract price.

After a four-day trial, in which Handyman was represented by Lang Thal King & Hanson , the jury awarded Handyman $8,835, plus a portion of Handyman's attorneys' fees. (The jury determined that imposing all of Handyman's attorneys' fees on the homeowners would have created a financial hardship.)

The homeowners moved for a new trial. Their motion was denied, and they appealed.

At the Court of Appeals, Handyman was represented by our firm in its cross-appeal. In unanimously affirming the trial court's refusal to grant a new trial, the Court of Appeals noted that the jury was correctly instructed on a contractor's right to cure, as follows:

"A contractor has the right to cure its allegedly deficient work, and the contractor must be afforded a reasonable opportunity to cure those alleged defects. No curable breach can be deemed sufficiently material to warrant termination of the contract without the breaching party first having been given notice of and an opportunity to cure the breach."

In addition, the Court noted that substantial evidence existed for the jury to find that:

the homeowners did not act reasonably in preventing Handyman from completing its obligations under the contract, and

alleged "technical violations" of the contract by Handyman did not amount to a material breach.

Collecting Attorneys' Fees

With respect to the partial award of attorneys' fees, the Court emphasized the importance of including attorneys' fee language in a construction contract. In particular, the Court found that the trial court erred by limiting the attorneys' fee award to Handyman on the basis of hardship because the parties' contract included an attorneys' fee provision.

"Attorney's fees requests according to contract are presumed reasonable absent evidence of its unreasonableness," the Court stated, going on to note that reasonable fees should be awarded in full unless the party that is ordered to pay can show that the full fees are excessive.

Arizona Supreme Court clarifies applicability of fiduciary duties in LLCs

Mon, 02 Sep 2019 15:37:15 GMT

Avoiding fiduciary duties requires a specific provision in an LLC's operating agreement.

This article was updated September 1, 2020.

When the Arizona legislature enacted the state's first LLC law in 1992, it did not address whether LLC managers and members were saddled with the same fiduciary obligations as their counterparts in other types of entities, such as partnerships, joint ventures, and corporations.[1]

These fiduciary duties typically include the obligations of loyalty, good faith, and to act with a certain degree of care in handling company matters.

In June 2019, the Arizona Supreme Court clarified that issue through its answers to three questions submitted by the U.S. Bankruptcy Court[2]:

1. Does a manager of an Arizona LLC owe fiduciary duties to the company? The Supreme Court's answer: In manager-managed LLCs, managers are agents and therefore owe fiduciary duties to the company.

2. Does a member of an Arizona LLC owe fiduciary duties to the company? Answer: Members owe fiduciary duties to the LLC to the extent they have been delegated the authority to act as agents by the LLC's managers or operating agreement.

3. Can an Arizona LLC's operating agreement limit or eliminate those fiduciary duties? Answer: An operating agreement may limit or eliminate the fiduciary duties owed to the LLC by its managers or members, but it may not eliminate the covenant of good faith and fair dealing implied in every contract under Arizona law.

The Court's ruling ensures that, by default, an Arizona LLC enjoys the same protections afforded to other types of entities when its agents are conducting business on its behalf.

However, the ruling simultaneously preserves freedom-of-contract principles by allowing an LLC to deliberately limit the fiduciary duties of its agents through express provision in an operating agreement.

New Arizona LLC Act

For LLC managers and members, the ruling was timely, as the new Arizona LLC Act - which started phasing in on September 1, 2019 - contains certain default provisions that include the imposition of fiduciary duties.

In light of the Court's ruling and the default provisions of the new LLC Act, LLC members who do not want to impose fiduciary duties on their LLC's managers or members must affirmatively express that provision in their LLC's operating agreement.

The new LLC Act, which is discussed in Kent Lang's article, "Compliance with 2018 Arizona LLC Law Calls for Operating Agreement Review ," became effective September 1, 2019, for all Arizona LLCs created on or after that date. Further, it became effective on September 1, 2020, for all Arizona LLCs - period - regardless of their creation date.

As Kent discusses in his article, if your LLC does not have an operating agreement and you take no action in response to the new law, the new Act's default provisions - including fiduciary duties - will be imposed on your LLC, creating a de facto operating agreement that may conflict with how your LLC is currently governed and operated.

Further, if you do have an operating agreement but it fails to address any provision of the new Act, by default the applicable new Act's provisions will be imposed on your LLC.

Action Item

A legal review of your LLC's operating agreement may be vital if you wish to avoid any of the default provisions contained in the new LLC Act.

For a review of your operating agreement, contact your Lang Thal King & Hanson attorney.

Footnotes

[1] Arizona law has long made clear that, when it comes to partnerships, joint ventures, and corporations, the people empowered to act on behalf of those types of businesses owe the companies certain fiduciary duties. Less clear, however, was the extent to which these traditional fiduciary duties applied to the managers and members of limited liability companies (LLCs).

[2] The questions arose from multiple bankruptcy cases consolidated under In re Sky Harbor Properties, LLC v. Patel Properties, LLC.

Arizona legislature corrects a key provision of the Prompt Pay Act

Mon, 22 Jul 2019 16:19:09 GMT

Thanks to a new law, contractors can continue to receive Prompt Payment Act protection for qualifying invoices not supplied within the preceding 30-day billing cycle.

In January 2019, the Arizona Court of Appeals issued a ruling in SK Builders, Inc., v. Smith that weakened a valuable protection to contractors that has traditionally been afforded by the state's Prompt Payment Act. The issue pertained to invoices for materials or labor provided before the 30-day billing cycle preceding a payment application.

After an effective lobbying effort by construction industry leaders, the Arizona legislature recognized the court's error and in April restored order by passing S.B. 1397. The new law's stated purpose is "to make the legislative original intent clear and to overrule legislatively the S.K. Builders decision."

As of August 27, 2019, contractors can again assert Prompt Payment Act claims for invoices for work that falls outside the preceding 30-day billing cycle.

Background

In September 2010, Mr. & Mrs. Smith hired SK Builders Inc. as the general contractor for the construction of their new home. The contract included a price of approximately $1.63 million and called for the Smiths to make progress payments in response to SK's periodic payment applications.

By the time the home was completed in March 2012, the Smiths had made $1.5 million in progress payments, leaving about $126,500 to be paid under the contract. Shortly after completion, the Smiths' contract administrator advised SK Builders that there were some outstanding construction issues, that the Smiths would not make any further payments until those issues were corrected, and that SK actually owed money to the Smiths.

The construction issues consisted of an interior concrete crack and the absence of wire mesh in the concrete that formed the back patio. Prior to the contract administrator's letter, SK had repaired the crack by injecting epoxy. As for the patio, the engineer that SK hired to test it concluded that, while the concrete deviated from the plans, it was stronger than the plans specified.

The Smiths moved into the house and did not replace the back patio.

Payment Application. On May 1, 2012, the Smiths received from SK a payment application for approximately $180,300. The application did not contain a request for payment related to the concrete work, as the Smiths had already paid for it without objection. However, the requested amount did include work performed prior to the preceding 30-day billing cycle. In fact, at trial the contract administrator testified that none of the items billed in SK's final payment application occurred during the preceding 30-day cycle.

The Smiths did not respond to SK's payment application and, four days later, they terminated their contract with SK, leaving unpaid the requested $180,300.

SK sued the Smiths for the unpaid amount plus $10,200 for interest and attorney fees, claiming violation of the Prompt Payment Act, breach of contract, and unjust enrichment.

At trial, the court ruled for SK on its Prompt Payment Act claim but dismissed SK's claims for breach of contract and unjust enrichment. The court awarded SK $50,000 in attorney fees and the $180,300 requested in the final payment application.

The Smiths appealed, resulting in a nightmarish reversal suffered by SK.

Timely Billing

For the focus of this article, the key issue in this case was whether SK was entitled to Prompt Payment Act protection for items not falling within the 30-day billing cycle that preceded their final payment application.

The court focused on the Prompt Payment Act's language requiring an owner to make progress payments to a contractor "on the basis of a duly certified and approved billing or estimate of the work performed and the materials supplied during the preceding 30-day billing cycle. " [Emphasis added.]

SK had argued that, because the cost of some of the items was not known until after the earlier 30-day billing cycle had passed, it should be entitled to payment. However, the Court noted that the Prompt Payment Act provides for such situations by allowing a contractor to include in its payment application an " estimate of the work performed and the materials supplied." [Emphasis added.]

In the end, the contract administrator's trial testimony, in which he stated that all of the work billed in SK's final payment application was performed prior to the preceding 30-day billing period, combined with the failure of SK to refute that testimony, proved to be SK's undoing.

The Court of Appeals reversed the trial court's judgment allowing SK's Prompt Payment Act claim. Since the trial court's judgment on that claim provided the basis of SK's attorney fee award, that too was reversed, and SK ultimately was ordered to pay reasonable attorney fees to the Smiths.

Reminders for Contractors

In addressing the parties' claims and arguments, the Arizona Court of Appeals provided some useful reminders concerning Arizona's Prompt Payment Act:

Payment is not required pursuant to the Prompt Payment Act "unless the contractor provides the owner with a billing or estimate for the work performed or the material supplied in accordance with the terms of the construction contract between the parties."

Payment must be made within seven days after the billing or estimate is certified and approved. The "billing or estimate shall be deemed approved and certified fourteen days after the owner receives [it] unless before that time the owner or the owner's agent prepares and issues a written statement detailing those items in the billing or estimate that are not approved and certified."

An owner may object to "a billing or estimate or portion of a billing or estimate for unsatisfactory job progress, defective construction work or materials not remedied, disputed work or materials, [or] failure to comply with other material provisions of the construction contract[.]"

A construction contract cannot alter the rights of any contractor, subcontractor or material supplier to receive prompt and timely progress payments.

The Prompt Payment Act links the owner's progress payments to work done by subcontractors billed in the contractor's payment application.

A subcontractor is not obligated to provide the contractor with payment applications limited to the preceding 30-day billing cycle. Therefore, the burden is on the contractor either to (a) estimate the work performed and materials supplied by subcontractors during each 30-day cycle, or (b) contractually obligate its subcontractors to submit their respective billings and estimates on time.

We welcome new attorney Brian Pouderoyen

Tue, 16 Jul 2019 00:00:00 GMT

The newest addition to our litigation practice joined our firm on July 15 after serving two terms as a clerk at the Arizona Court of Appeals.

Successful defense of pool contractor affirms contractors’ right to cure

Thu, 30 May 2019 14:48:59 GMT

Client's countersuit resulted in a six-figure award.

Background. In November 2013, homeowner Amy Fisher contracted with Rondo Pools to redesign and remodel her swimming pool, and she paid a deposit of $17,723. Work began in December. Multiple disputes soon arose, and Ms. Fisher terminated her contract with Rondo in January 2014. She did so without affording Rondo a reasonable opportunity to resolve her issues with the project.

Five months later Ms. Fisher sued Rondo, alleging breach of contract (among other claims) and demanding a full refund of her deposit, plus amounts paid to a subsequent pool contractor, and punitive damages (which are usually awarded only when a party acts with an "evil mind").

Rondo, represented by Mike Thal, filed a counterclaim against Ms. Fisher, alleging that she wrongfully terminated the contract.

After a six-day trial in Maricopa County Superior Court, the jury found against Ms. Fisher on all of her claims and found in favor of Rondo on its counterclaim. The court awarded Rondo $310,351, including $286,048 in attorney's fees - in a case that, at its core, was over a $17,723 deposit plus the costs of finishing the project.

Appeal Rejected. Ms. Fisher appealed, alleging that the trial judge erred by instructing the jurors that they could consider whether Rondo was ready, willing and able to rectify Fisher's complaints. Mike Thal and George King represented Rondo at the Arizona Court of Appeals, which rejected Ms. Fisher's appeal and upheld the award to Rondo.

Keys to Victory. A vital asset in Rondo's trial court victory was their ability to produce emails and texts between Rondo and Ms. Fisher that documented (a) Rondo's multiple offers to fix the problem and (b) Ms. Fisher's termination of the contract without reasonably allowing Rondo to do so.

In terms of facts and issues of law, the Rondo case is remarkably similar to another recent Lang Thal King & Hanson success (see " Victory for Client: Court Affirms Contractor's Right to Cure Workmanship Issues "). In each case, the contractor prevailed because it was denied the opportunity to cure the workmanship issues raised by the owner.

Contract Addition. Also in each case, the contractor could have been spared the ordeal of a lawsuit if it had included in its contract a clause that required the owner, before being permitted to terminate the contract, to allow a defined period of time for the contractor to evaluate and cure any workmanship issues.

Adding this simple clause helps keep the issue out of the Court's hands and makes clear that you are entitled to an opportunity to cure.

See: Amy S. Fisher v. Rondo Pools and Spas, Inc. , No. 1 CA-CV 18-0343, 5/16/2019

Arizona ROC rule eases contractor licensing standards

Thu, 18 Apr 2019 00:00:00 GMT

Applying for an Arizona contractor’s license has historically required passing two examinations and verifying your experience. A 2019 Arizona Registrar of Contractors (ROC) rule changes – for the better - the examination and experience requirements for a new contractor’s license.

The new rule is largely favorable to contractors, with no detriment to the public, continuing a recent trend in which the Registrar has simplified the license application process, removed the dual-license requirement, enhanced the fairness of ROC hearings, and removed the “project form” requirement from the application.

Here are the rule’s highlights regarding examination and experience requirements.

WAIVING THE EXPERIENCE REQUIREMENT

The Registrar predicts that the rule will increase the percentage of successful applicants by reducing, eliminating and clarifying experience requirements. The Registrar is now able to waive experience requirements and instead accept either (a) the applicant’s passing of an appropriate trade examination (not more than two years prior to application for consideration of waiver of experience) or (b) a nationally recognized certification, valid at the time of application to be considered for waiver of experience.

The new rule also eases the experience requirement. When the Registrar reviews experience, it must recognize experience that a person gained even while working without a license or for an unlicensed entity. The rule also requires the Registrar to recognize experience acquired when a person was younger than age 18.

Minimum trade experience required for licensing includes (a) military service or training; (b) diplomas or transcripts from accredited training programs; and (c) completion certificates from an apprenticeship approved by the U.S. Department of Labor or a state apprenticeship agency.

THE REASON BEHIND THE RULE

In support of the rule change, the Registrar cites a 2017 Institute of Justice report, “License to Work: A National Study of Burdens from Occupational Licensing” (2nd edition).

The report identifies Arizona as the nation’s fourth “most broadly and onerously licensed state.” Although the report considers all Arizona occupational licenses (contractors, cosmetologists, opticians, etc.), it specifically identifies contractor licenses as part of the burden, stating “Arizona should reduce or repeal its onerous licenses for contractors and other occupations.”

The Registrar also cites its own comprehensive 2017 study of each license classification, which found no correlation between (a) the experience and examination requirements and (b) the percentage of licensees with a complaint. The Registrar’s conclusion: Requiring more experience and examinations from a licensee does not necessarily lower that licensee’s likelihood of receiving a complaint.

ONLY NEW LICENSES AFFECTED

The new rule does not directly affect anyone currently holding a contractor’s license. Licensed contractors do not need to take a new examination or obtain certification to remain licensed or renew a license.

The new rule affects only those who are interested in obtaining a contractor’s license from the Registrar, either their first license or a license for a new trade. If, forexample, you are a licensed landscape contractor who wants to be able to install pools, the new rule would affect only your application for a B-5 General Swimming Pool Contractor license.

MORE INFORMATION. You can read the new rule in the March 31, 2019, issue of the Arizona Administrative Register .

"My Dog Ate the Evidence": Spoliation in Construction Disputes

Wed, 15 Aug 2018 00:00:00 GMT

“Spoliation” is the destruction, alteration, or loss of evidence in connection with a lawsuit. While it can occur in almost any type of litigation, it is especially prevalent in a construction project, where rapid change is constant (and necessary), and where owners, contractors, subs, and suppliers are generally more focused on finishing the job than on preserving evidence for a potential lawsuit.

Spoliation can occur negligently or intentionally; either way, if a construction dispute ends up in a lawsuit, a party that that has destroyed, altered, or failed to preserve evidence can jeopardize their right to recover damages or create additional liability for themselves.

LEGAL CONSEQUENCES OF SPOLIATION

A basic understanding of spoliation’s legal effects will help you appreciate the harsh results of even negligent (i.e. unintentional) spoliation. After determining that spoliation occurred, the court will generally look to the culpability of the bad actor (you or the other party) and the relevance of the missing evidence. These two considerations will affect the severity of the court’s chosen remedy.

If you lose or destroy evidence, the consequences can include discovery sanctions imposed on you by the court, and/or an adverse-inference jury instruction, in which jurors are told to infer that the spoliated evidence would have been detrimental to your position.[1] (Such an instruction is less likely to be given where the spoliation was negligent and the altered evidence had marginal relevance.)

In Arizona, the harshest sanction for spoliation of evidence is dismissal, although the trial court must consider less severe sanctions before dismissing a case. Dismissal is generally relegated to intentional spoliation cases, especially where the innocent party has no control over the evidence and has asked for its preservation or inspection.

AVOIDING SPOLIATION: PRESERVING EVIDENCE ON THE JOBSITE

Spoliation is not limited to destroying or altering evidence in a lawsuit that has already been filed; it can also apply to failure to preserve certain evidence in reasonably foreseeable litigation. When litigation becomes reasonably foreseeable, that triggers the duty to preserve evidence; once the duty is triggered, an intentional violation can lead to a debilitating presumption of prejudice in a later lawsuit.[2]

At that point, a written “litigation hold” can be a useful legal tool. A litigation hold is a written directive that instructs holders of certain documents and electronically stored information (ESI) to preserve any potentially relevant evidence in anticipation of future litigation. With the litigation hold in place, the adverse parties can communicate with each other to conduct inspections and implement discovery protocols.

In many construction scenarios, indefinite preservation of evidence is unrealistic, and alteration becomes unavoidable. Nonetheless, the duty to preserve evidence persists, even at an incredibly untimely point in the construction of a 15-story mixed-use structure. In such cases, the parties anticipating litigation must be issued written notification that specific property will be altered within a certain period of time, thereby allowing them to inspect and document the evidence they need to effectively litigate. If a given party objects to moving forward with construction, it would not be unreasonable to request that the objecting party cover any delay or other costs connected with the preservation.

With a better understanding of the common pitfalls involved in spoliation and its intersection with construction law, all parties, from homeowners to contractors, can take a more prudent approach to any construction project, or at the very least comprehend spoliation’s future effect in litigation.

[1] Although in many jurisdictions spoliation is recognized as a separate tort claim, the Arizona Supreme Court has effectively rejected spoliation as its own cause of action, no matter if a party or nonparty to a lawsuit committed the spoliation. Even so, A.R.S. § 13-2809 does criminalize the intentional concealing or alteration of evidence.

[2] This is especially true where bad faith or intentional spoliation occurs. The presumption generally does not exist where the spoliating party was merely negligent.

Compliance with new Arizona LLC law calls for operating agreement review

Wed, 11 Jul 2018 16:54:23 GMT

The 2018 Arizona Limited Liability Company Act has a significant impact on many Arizona LLCs.

JULY 2018 (REV. SEPTEMBER 1, 2020)

Union Card No Longer Required for Community College Course

Thu, 17 May 2018 00:00:00 GMT

The new Section C of A.R.S. § 15-1410 states:

"A community college under the jurisdiction of a community college district governing board may not offer a course with a prerequisite for enrollment that requires a student to be a member of a labor organization, a trade organization, or a trade guild or to participate in an industry apprenticeship program."

The amendment resolves a situation, unknown to many contractors and construction industry leaders, in which community college students wishing to take a class related to their vocation or field of study were denied enrollment unless they were a member of a particular union or trade organization.

"I am pleased to see that Arizona is making educational opportunities available to everyone," said Laurin Hendrix, president of the Maricopa County Community College District Board and owner of Accurate Lien, "including citizens that do not wish to support labor union activities in a right-to-work state."

You may wish to notify your employees that, after the new law goes into effect in July, they cannot be denied enrollment in a community college course for lack of membership in a trade union or any other organization.

Potential Criminal Penalties for Contracting Without a License in Arizona

Tue, 17 Apr 2018 00:00:00 GMT

Arizona law requires contractors to be licensed through the Arizona Registrar of Contractors. This article will explore the reason for the licensing requirement; one of the most commonly invoked (and abused) exceptions to it; and the potential criminal penalties for contracting without a license.

THE LICENSING REQUIREMENT

If a construction project goes bad, it can have a huge and detrimental effect on public and personal safety. Imagine an improperly built bridge, or a high-rise built on an unstable foundation. Even the construction of a home or the renovation of a kitchen, if not performed properly, can result in a significant costs and risks to health and safety.

To help protect the public from poor workmanship and shady business practices, A.R.S. § 32-1151 sets forth Arizona’s contractor licensing requirement:

It is unlawful for any person, firm, partnership, corporation association or other organization, or a combination of any of them, to engage in the business of, submit a bid or respond to a request for qualification or a request for proposals for construction services as, act or offer to act in the capacity of or purport to have the capacity of a contractor without having a contractor’s license in good standing in the name of the person, firm, partnership, corporation, association or other organization as provided in this chapter, unless the person, firm, partnership, corporation, association or other organization is exempt as provided in this chapter. Evidence of securing a permit from a governmental agency or the employment of a person on a construction project shall be accepted in any court as prima facie evidence of existence of a contract.

The plain language of the statute forbids someone without a contractor’s license from engaging in any portion of a construction job, beginning with the bidding process and continuing through the completion of the actual work. The licensing requirement is designed to protect the public against “unscrupulous and unqualified persons purporting to have the capacity, knowledge and qualifications of a contractor”[1] and “to regulate the conduct of those engaged in the business of contracting so as to discourage certain bad practices, which might be indulged in to the detriment of the public.”[2]

EXCEPTIONS TO THE REQUIREMENT

Although A.R.S. § 32-1151 appears to provide a blanket prohibition against doing any work without first obtaining a contractor’s license, another statute (A.R.S. § 32-1121) contains several exceptions.

The most commonly invoked exception is contained in § 32-1121(A)(14), which is generally known as the “Handyman Exemption.” Under that exemption, a person who does not hold a contractor’s license may bid for and accept work when the aggregate contract price, including labor and materials, amounts to less than $1,000. The words “aggregate contract price” are key, because they make clear that one cannot take advantage of the exception by breaking a job up into parts so that each part has a contract price of less than $1,000. People have tried, and those who have been caught have been convicted of contracting without a license.

PENALTIES

Contracting without a license in violation of A.R.S. § 32-1151 is a class 1 misdemeanor (A.R.S. § 32-1164). All class 1 misdemeanors carry a maximum term of six months in the county jail and a maximum fine of $2,500 plus an 83% surcharge. The minimum penalty for contracting without a license as a first offense is a fine of $1,000 plus an 83% surcharge. A.R.S. § 32-1164(B). In most cases, an unlicensed contractor will simply face a fine, but jail time is not out of the question if the perpetrator is a repeat offender or the facts are egregious.

Contracting without a license can give rise to more serious charges. For example, if an unlicensed contractor falsely claimed to be licensed in order to obtain a job, he might be charged with Fraudulent Schemes and Artifices, a class 2 felony. Or, assume that, in a kitchen remodel, an unlicensed contractor improperly installed gas lines that caused a fire and led to the death of the home’s occupant. In that situation the unlicensed contractor might face felony charges for negligent homicide or even manslaughter, both of which could result in a lengthy prison term.

In addition to any criminal penalties imposed by the court, an unlicensed contractor will also be required to pay restitution to the extent anyone suffered economic loss as a direct result of the offense. Restitution in contracting without a license cases is typically the contract price minus the economic benefit received by the victim as a result of the work performed.[3]

However, restitution could be much more than that, particularly if the cost of damages caused by the unlicensed contractor’s work exceeds the contract price.

In addition to the criminal penalties and restitution described above, a conviction for contracting without a license will also come with collateral consequences. “Collateral consequences” stem from the conviction but are not imposed directly by the court. Perhaps the most significant collateral consequence associated with a conviction for contracting without a license arises as a result of A.R.S. § 32-1122(D), which prohibits the Registrar of Contractors (ROC) from issuing a contractor’s license to anyone who has been convicted of contracting without a license during the preceding 12 months.

INVESTIGATION

If you find yourself under investigation for contracting without a license, or with the wrong license, you will likely be contacted by an investigator from the ROC.

If that occurs, be aware of your rights: You don’t have to answer questions, you don’t have to provide documents, and you can and should contact an attorney for help immediately. Exercising your rights might not prevent you from being charged criminally ― but then again it might. At a minimum, your silence will prevent you from accidentally making the State’s case against you.

[1] Northern v. Elledge, 72 Ariz. 166, 172 (1951)
[2] Security Ins. Co. of New Haven v. Day, 6 Ariz.App. 403, 406 (1967)
[3] See Town of Gilbert Prosecutor’s Office v. Downie , 218 Ariz. 466 (2008)

Hiring by the book: four essential steps for contractors

Fri, 30 Mar 2018 00:00:00 GMT

In our robust building market, skilled workers are relatively scarce, and the need to fill important jobs seems to increase by the day.

We are seeing signs that, in their haste to put new people to work, some construction employers are short-cutting – or ignoring altogether – important administrative steps in the hiring process. In so doing, they may be setting themselves up for costly (and avoidable) encounters with the U.S. Department of Labor and other government agencies.

Here is a reminder of four critical steps to be followed when hiring a new employee:

Complete a Form I-9 for each new hire.

Use the federal government’s E-Verify program to check the employment eligibility of the new potential worker.

Report a new hire to the Arizona New Hire Reporting Center within 20 days of his/her hire date.

Have the new hire return a completed Form W-4 .

Also, if the new employee is eligible for employee benefits, be sure that he or she is properly enrolled.

Depending on the circumstances, there are other steps not mentioned here that you may need to take when hiring an employee. You should consult with a human resource professional or an employment lawyer to determine what else your company must do when hiring new employees.

ADA lawsuits: Just when you thought it was safe to go back into the parking lot

Fri, 16 Feb 2018 00:00:00 GMT

Over the last few years, a Phoenix lawyer, Peter Strojnik, filed over 1,700 lawsuits in state court against small businesses in Arizona under the Americans with Disabilities Act (ADA) and its Arizona counterpart – almost entirely for alleged problems with handicapped parking spaces and signs. (See our related article, “ ADA Violations: What to Do if You Are Sued. ”)

While those parking lot actions have been stopped for the moment, two recent developments threaten a new form of disability litigation against small local and out-of-state businesses.

The first development is that Mr. Strojnik is filing a flood of new lawsuits – against hotels – alleging a wide range of ADA violations. He has even filed lawsuits against out-of-state hotels, based solely on the content of the hotels’ websites and of third-party websites such as Expedia.com. He does not even allege that his client ever visited the hotel – rather, he claims that his client was “deterred” from doing so by an alleged lack of information on these websites.

The second development is that this lawyer is trying to restart the parking lot cases in state court, based on a 2017 U.S. Ninth Circuit Court of Appeals decision that he believes allows him to set aside the dismissal of those lawsuits.

The renewed litigation resulting from these developments could prove very costly to small businesses.

Prior Parking Lot Lawsuits. The prior lawsuits were filed in state court against over 1,700 businesses on behalf of an individual named David Ritzenthaler and an organization named Advocates for Individuals with Disabilities (AID).

Those suits alleged that parking lot signs and markings did not comply with the ADA and, by extension, Arizona disability laws. Numerous reports indicated that the property owners received a form settlement letter demanding $7,500, much of which supposedly represented attorneys’ fees incurred to investigate the alleged violations and draft the lawsuit. (Attorneys’ fees are often recoverable in disability cases.)

But the lawsuits were copied word for word from the same template, casting doubt on the notion that the plaintiffs could have incurred thousands of dollars in attorneys’ fees merely for filing the same cookie-cutter complaint.

The parking lot ADA cases garnered a great deal of scrutiny in the media and elsewhere, which ultimately led to action by the Arizona legislature and Attorney General’s Office that put a halt to these parking lot cases, for now.

Changes in State Law Affect Parking Lot Cases. The first blow to the serial filings was a change in Arizona law. In response to the wave of parking lot lawsuits, the legislature amended Arizona’s disability laws to require plaintiffs, before filing suit, to give defendants notice and an opportunity to cure any alleged violations of the state law. This seemingly innocuous requirement destroyed the ability to file a disability lawsuit in state court without warning and demanding a large amount of attorneys’ fees. Hence, in lawsuits filed in federal court, Mr. Strojnik characterized this statutory change as “completely neuter[ing]” the state disability statutes.

Arizona Attorney General Takes Action. The second blow was action by the Arizona Attorney General’s Office. The AG’s Office successfully consolidated the 1,700 state court parking lot cases and obtained dismissal of them for lack of standing, because there was no evidence that the plaintiffs actually encountered the alleged barrier to access (e.g., a too-low parking lot sign or a misplaced access ramp).

In late 2017, as part of a deal to avoid sanctions, the plaintiffs and their lawyer in those cases agreed not to file any more lawsuits in state court for violations of state or federal disability laws. But this agreement is in jeopardy.

Parking Lot Plaintiffs Seek to Undo Dismissals. In January 2018, the parking lot plaintiffs filed motions to try to set aside the judgments of dismissal. They argue that an August 2017 U.S. Ninth Circuit Court of Appeals decision changed the law on standing, such that the April 2017 dismissal of their lawsuits should be set aside. The AG’s Office contends that the filing of those motions violated the 2017 settlement by the parking lot plaintiffs.

At the time of this writing, this matter was being litigated. If the parking lot plaintiffs succeed, they not only will be able to set aside prior dismissals but could be free to file more parking lot cases.

New Lawsuits Filed Against Hotels in Federal Court by Two New Plaintiffs. Starting around July 2017, a new batch of disability lawsuits were filed by Mr. Strojnik on behalf of a different plaintiff, Fernando Gastelum. The lawsuits were filed against Phoenix-area hotels, almost all of which are locally owned franchises of national hotel chains. As with the parking lot lawsuits, the complaints in the new actions are cookie-cutter pleadings, employing dozens of identically worded allegations.

Mr. Gastelum’s lawsuits allege that he visited Expedia.com and the hotel chain’s website and that neither website describe the hotel and any handicapped-accessible rooms “in enough detail to reasonably permit Plaintiff to assess independently whether Defendant’s hotel and guest rooms meets his accessibility needs.” (Notably, none of these lawsuits have yet named Expedia as a defendant.)

Although not referenced in the complaint, the quoted phrase is taken from federal regulations that apply to hotels. Specifically, 28 C.F.R. § 36.302(e)(1)(ii) requires that places of lodging “[i]dentify and describe accessible features in the hotels and guest rooms offered through its reservations service in enough detail to reasonably permit individuals with disabilities to assess independently whether a given hotel or guest room meets his or her accessibility needs.”

Mr. Gastelum alleges that this regulation required the websites to provide specific disclosures on 33 separate categories of accessibility features. The list of features is identical in every lawsuit.

Mr. Gastelum then alleges that he visited the hotel to determine whether it met his accessibility needs and found various shortcomings in the parking lot and often inside the hotel as well. He alleges claims under the ADA (but not under its Arizona counterpart), as well as common-law theories such as negligence and fraud. At this time, about one hundred of these suits have been filed. Many have been settled, but some are being actively litigated.

Out-of-State Hotels Sued for Alleged Website Violations. On behalf of a different plaintiff (Angelica Damiano, Mr. Gastelum’s sister), Mr. Strojnik has sued three hotels in Gallup, New Mexico. Those lawsuits allege only that the Expedia and hotel chain websites violate the ADA; no violations at the hotels themselves are alleged. However, from our experience we believe that the intent of the suits is to force the defendants to conduct their own investigations of their hotels and then report their own violations (if any), which would then presumably be added to the lawsuit.

What You Can Do. By far, the most important thing a business can do is immediately bring its parking lot into compliance with the most recent standards, the 2010 ADA Standards for Accessible Design (“2010 Standards”). Depending on what work has been done to the property after the March 15, 2012, effective date of the 2010 Standards, the standards may not technically apply. However, so far, each lawsuit assumes that the property is covered by the 2010 Standards. Therefore, if one of the plaintiffs or their investigators visits your parking lot, you will very likely be sued for any perceived violation of the 2010 Standards.

One quick item you can check is the height of the handicapped parking signs. If the bottom of these signs is not at least 60 inches above the ground, that is a violation of the 2010 Standards and shows that the parking lot was not designed to comply with the 2010 Standards.

Hotels face unique challenges from these lawsuits. Typically, the franchise owner has little if any control over the information presented on third-party websites or on the hotel chain website. But this fact has not prevented the franchise owners from being sued for those websites’ alleged deficiencies.

Many legal defenses exist to these claims, including the requirement that the plaintiff intends to return to the property in question. Out-of-state property owners sued in Arizona can also raise jurisdiction defenses.

You should also check your insurance coverages. Some business owners have had some success in tendering their defense to their insurance company. Coverage will depend on your policy terms as well as on how your particular insurer views these suits.

Our office has defended a property owner sued for alleged ADA violations and has been monitoring the progress of these actions. If your hotel has been sued by one of the serial plaintiffs associated with these disability lawsuits, I invite you to call me, at no charge, to discuss your options. We also can discuss bringing your property into compliance with the ADA requirements, whether or not you have been sued.

ROC Releases New Contractor's License Applications

Thu, 18 Jan 2018 00:00:00 GMT

State government’s new Arizona Management System (AMS) requires state agencies – including the Registrar of Contractors – to improve their processes in meeting the needs of licensees and the public. ROC director Jeff Fleetham is a long-time supporter of that effort, and this month the ROC released new, simplified contractor’s license applications that are consistent with what appears to be a more contractor-friendly licensing process.

The new applications were presented and discussed by ROC licensing staff at the October 2017 meeting of the State Bar’s Construction Law Section. Here are the highlights:

FLAWS IN THE OLD ROC APPLICATION

According to the ROC, 62% of applications using the old form were either missing information or filled out incorrectly, with a large majority of errors occurring in the application’s Project Forms and Experience Forms. Application errors were often attributable to confusion over how to complete the form. Applicants’ information regarding bonds, criminal backgrounds, and the company and its personnel were also significant sources of application deficiencies.

IMPROVEMENTS

The ROC’s new license application forms are intended to be simpler and easier to navigate. Here are some of the key differences between the old application forms and the new application forms:

Financial Statements Not Required. ROC license applicants are no longer required to include financial statements with their application. The ROC supported legislation to eliminate that requirement.

Project Forms. As of December 2017, the ROC no longer requires the qualifying party to submit separate “project forms” for the license being sought. The ROC has not lowered the amount of experience required for a qualifying party, and the ROC still confirms the validity of the experienced claimed. The qualifying party must still pass a trade examination and a business examination to demonstrate the required level of experience for the license.

Entity-Specific Forms. The old license application form covered all types of business entities (i.e., sole proprietorships, partnerships, LLCs, and corporations). The new application offers a specific form for each type of business entity, with the objective of making the application less confusing and more streamlined.

Clarity in Disclosing the Applicant’s History. The new application has separate forms for the various events in an applicant’s past that can make it difficult to get a license: felony convictions, prior license revocations, and engaging in unlicensed activity.

Addressing Felony Convictions Before Denial. The application encourages a person with a felony conviction to explain the circumstances of the felony and to provide evidence of rehabilitation. The old form did not provide that opportunity, resulting in application denials that might be avoided with the new form. If a person listed on an application has a felony conviction, the ROC will also check for misdemeanor convictions, under its interpretation of A.R.S. § 13-904(E) .

HELP WITH THE NEW ROC LICENSE APPLICATION

While the ROC’s new form appears to make completing the application clearer and easier, the license process still poses challenges for many applicants due to unique situations, underlying regulations, and complex statutory requirements.

Here are some of the situations in which you may want to consult with an attorney who is experienced in ROC licensing issues:

Tiered Entities. The ROC’s license application refers to a business entity that is owned by another business entity as a “tiered entity.” The new application does not have specific instructions for a tiered entity and recommends calling the ROC for guidance. If you are a tiered-entity applicant, you may want to seek legal advice about your application before calling the ROC.

Felonies, Revoked Licenses, Unlicensed Activity. Your license application can be denied if anyone on the license has a felony conviction, was named on a revoked license (in Arizona or another state), or was caught engaging in contracting activities without a license. For any of those situations, you would be wise to speak with an experienced attorney before submitting your license application to the ROC.

Joint Ventures. For some large projects, it is not uncommon for two or more companies to form a joint venture. Unfortunately, the ROC’s new license applications do not address the case of a joint venture, and the ROC’s website does not discuss its policy on licensing a joint venture. Any party seeking licensure for a joint-venture contracting project should ask for guidance from an attorney who has experience in complex ROC licensing issues.

ROC Removes a Hurdle to Getting a Contractor's License

Wed, 17 Jan 2018 00:00:00 GMT

Arizona law requires the qualifying party for an Arizona contractor's license to have a certain level of experience. For several years, the Registrar of Contractors has required the qualifying party to demonstrate that experience not only by taking examinations and submitting documentation supporting their work experience, but also by filling out separate "project forms."

On December 21, 2017, the ROC announced that it has removed the requirement to submit projects as part of the experience portion, thus streamlining the application process.

UNNECESSARY BURDEN LIFTED

The Registrar's decision to eliminate the project forms is consistent with legislation passed earlier in 2017. That legislation streamlined the license-application process by removing the financial statement requirement.

By eliminating the separate project forms, the Registrar removed an unnecessary burden to licensure as an Arizona contractor. The project forms were not required by any statute or any regulation, and were added to the license application over time as a bureaucratic hoop through which applicants were forced to jump.

HIGH STANDARDS PRESERVED

It is important to note that the ROC has not lowered the amount of experience required for a qualifying party, and the ROC still confirms the validity of the experience claimed. As before, the qualifying party for most licenses must pass both a trade examination and a business examination to demonstrate the required level of experience for the license. (Certain licenses do not have a trade examination and require only documentation of experience.)

The ROC's decision to remove the project forms is a welcome step toward increased efficiency in the application process while maintaining the high quality of Arizona's licensed contractors.

Protections against public access to Arizona contractors' ROC files

Fri, 15 Dec 2017 00:00:00 GMT

The information contained in a contractor's license file at the Arizona Registrar of Contractors has historically been part of the public record and relatively easy for anyone to access. Under state law, the government is required to disc lose public records in response to a request. This is generally a good thing, because it makes the government transparent.

But it also means that a licensed contractor's personal information has been available to anyone submitting a public-record request. That information has included the contractor's email address, as well as the residential addresses and phone numbers for anyone named on the contractor's license.

New Protections. That changed in August 2017, when A.R.S. § 32-1124.01 went into effect. Now, the ROC is generally barred from disclosing a contractor's residential address, residential telephone number, email address, or social security number.

The statute is consistent with similar statutes that protect the personal information of other licensed professionals, such as real estate agents and brokers.

There are exceptions to the law's protections. It permits the disclosure of a contractor's personal information to another government agency or to a court. And residential addresses and phone numbers may be disclosed when the Registrar determines that "disclosure serves the interests of justice and is in the public interest."

Also, a contractor operating out of a residence should be aware that the statute doesn't protect their personal contact information if that information is also designated as the business's contact information.

The confidentiality provided by the statute also applies to licenses on inactive status.

Support by the ROC. The ROC supported the law's passage, recognizing that list brokers and companies wishing to market to contractors were targeting contractors' email addresses by submitting commercial public-record requests. Those requests were often aimed at entire license classifications. The new law puts an end to that, and all licensed contractors stand to benefit from the new protections.

We applaud the passage of this law; while it still allows consumers to gather pertinent information about their cases, it protects the legitimate interests of contractors.

Prompt Pay Act does not apply to federal projects, court rules

Tue, 12 Dec 2017 00:00:00 GMT

A payment dispute over the quality of road signs installed at the Grand Canyon ends in the Court of Appeals’ finding that a federal agency is not an “owner” under Arizona’s Prompt Payment Act.

In November 2017, the Arizona Court of Appeals ruled that the Arizona Prompt Payment Act does not protect the payment rights of contractors or subcontractors that provide labor or materials on federal projects in Arizona.

The case is Zumar Industries Inc. v. Caymus Corporation , and here is a summary of the issues, outcome and impact.

BACKGROUND

In 2013, the National Park Service hired Caymus Corp. to provide and install road signs at Grand Canyon National Park. Caymus subcontracted with Zumar Industries to supply the sign panels.

After Zumar delivered the sign panels to the job site, the Park Service raised concerns about defective and missing panels. With the quality issue unresolved, Zumar invoiced Caymus in full for the sign panels. Caymus sent a pay application to the Park Service, certifying that the sign panels line item was 100% completed, and the Park Service paid Caymus’s invoice in full. But Caymus made only a partial payment to Zumar, withholding $35,600 because of the outstanding quality issues.

Attempts by Zumar and the Park Service to resolve the quality and payment issues were unsuccessful, and in September 2014 Zumar sued Caymus for breach of contract, seeking payment of the withheld $35,600.

Zumar prevailed in arbitration, and Caymus appealed to Superior Court. Zumar moved for summary judgment, arguing that Caymus’s refusal to make full payment violated the Arizona Prompt Payment Act (among other protections). The Superior Court granted Zumar’s motion, and Caymus appealed to the Arizona Court of Appeals.

During the legal wrangling, Caymus completed the work, and the Park Service withheld from its final payment to Caymus roughly the same amount as Caymus withheld from Zumar.

FEDERAL AGENCY NOT AN "OWNER"

In its November 16, 2017, decision, the Court of Appeals noted that:

“[T]he primary purpose of the Act is to establish a framework for ensuring timely payments from the owner to the contractor and down the line to the subcontractors and suppliers whose work has been approved.” (Emphasis added.)

Caymus argued that the Arizona Prompt Payment Act does not apply to agencies of the federal government, as federal agencies cannot be “owners” under the Act. Caymus cited A.R.S. § 32–1181 , which lists the entities included in the definition of owner: “... person, firm, partnership, corporation, association or other organization.”

Zumar countered that the Act’s prompt pay provisions do not depend on the identity of the owner of the project, and that the Act applies to agreements between a contractor and subcontractor in any context.

To the surprise of many, the Court of Appeals sided with Caymus and ruled that the Arizona Prompt Payment Act does not apply to a contractor-subcontractor dispute on a federal work project, even though the contractor-subcontractor relationship arises from a private contract between private entities. The Court of Appeals reversed the Superior Court's ruling, awarded Caymus its costs and attorneys' fees, and sent the case back to Superior Court.

In its ruling, the Court of Appeals found:

“The Act's payment scheme does not apply to this federal project, and its provisions cannot be read into the contract dispute. ... Zumar contends [the Act] regulates payment from a contractor to a subcontractor or material supplier in any context, even on a federal project. It does not.”

WHAT THIS MEANS FOR CONTRACTORS AND SUBCONTRACTORS

If the Court of Appeals ruling spells the end of this case, contractors and subcontractors on federal projects should assume that the Arizona Prompt Payment Act will not apply to any payment disputes connected to that project.

ROC Rule Changes Appear to Benefit Contractors

Fri, 17 Nov 2017 00:00:00 GMT

The Arizona Registrar of Contractors has released new rules that went into effect November 5, 2017. While some of the changes are intended to make the ROC rules clearer and more user-friendly, others are substantive, including alternatives to dual-licensing and a brand-new rule about disclosing documents and other information in advance of a disciplinary hearing.

UNBUNDLING CONTRACTOR LICENSES

The Registrar's new rules undo changes, made in 2014, that combined many residential and commercial licenses into dual-license scopes. Under the ROC's previous administration, the agency adopted rules that combined many residential and commercial licenses into a single "dual" license.

For example, under the 2014 rules, a drywall contractor would need the CR-10 Drywall license, covering both commercial and residential projects, even if the contractor performed only one kind of project (commercial) and never performed the other (residential).

Many contractors were unhappy with the 2014 license combinations, because of the negative financial impact. Commercial contractors that were forced into the new dual licenses were required to pay into the Residential Contractors' Recovery Fund, even if they never performed any residential work.

On the other side, residential contractors that were forced into the dual licenses were required to increase their bond amounts to cover the commercial scope, even if they never performed any commercial work. (In one public comment, a residential-only contractor stated that his bond premium rose from $100 to $525 premium, adding, "Ouch! Just doesn't seem fair to us little guys.")

Under current Director Jeff Fleetham, the unbundling of the combined license scopes gives contractors more freedom to choose the right scope for their businesses. For example, the drywall contractor that performs only commercial work can now choose the commercial C-10 drywall license, as the new rules do not force him to get the dual-scope CR-10 and pay into the Recovery Fund. Likewise, for the residential-only drywall contractor, the residential R-10 is available. And what about the drywall contractor who performs both residential and commercial work? The dual CR-10 license is still an option.

Opting Out. For contractors that were forced into a dual classification by the 2014 rules, the ROC now offers Rule R4-9-111, "Opting Out of Dual-License Classifications." This new rule allows the holder of a dual license, at renewal time, to keep the dual license or designate it as either commercial-only or residential-only. Choosing to go commercial-only or residential-only is a one-time choice and cannot be reversed: "If a license is designated as either commercial or residential under this Rule, that designation is permanent." Rule R4-9-111(B) (emphasis added).

FAIRER, MORE EFFICIENT ROC HEARINGS?

When facing a license suspension or revocation or a Recovery Fund award or restitution order, the contractor is entitled to a hearing, to tell its side of the story and to defend its license against a complaint.

Unfortunately for contractors, the ROC has never issued a rule that requires the complaining party to disclose information or documents before the hearing. As a result, ROC hearings have often taken on a "Wild West" atmosphere, where surprises pop up and anything can happen - usually to the detriment of the contractor.

To bring more fairness and predictability to the hearings, the ROC has adopted Rule R4-9-118, "Prehearing Disclosure Requirement." The new rule requires each party (the contractor and the complainant) to disclose, in advance of the hearing, their witnesses and the facts to which those witnesses will testify. The rule also requires the parties to exchange any documents or photographs that they intend to use at the hearing.

All disclosures must be made at least a week before the hearing, to give each side a chance to prepare (and to encourage settlement). If a party fails to make a required disclosure, the rule allows the hearing officer to exclude surprise evidence at the hearing and even to dismiss the complaint entirely.

Only time will tell whether the new rule actually makes hearings fairer, but it seems like a step in the right direction. At the very least, contractors should have a better chance to understand and prepare for the case against them; further, requiring complainants to show their cards before a hearing could make it easier to settle complaints before the hearing occurs.

CONCLUSION

In addition to the substantive changes described above, the ROC has made some largely stylistic revisions that make the rules easier to understand and to navigate. (All of the rule changes that went into effect November 5, 2017, are described in the September 22, 2017, edition of the Arizona Administrative Register ).

Overall, the Registrar's recent rule changes appear to be good for Arizona contractors, as they tend to provide for greater clarity in the regulations, more flexibility in licensing, and a fairer disciplinary process.

Attorney Fees in Breach of Implied Warranty Lawsuits

Thu, 07 Sep 2017 00:00:00 GMT

In an August 2017 opinion, the Arizona Supreme Court ruled that attorney fees shall be awarded to the prevailing party in a lawsuit alleging a breach of the implied warranty of workmanship and habitability. The court ruled that the awarding of attorney fees can stem from either the fee provision in the construction contract or in Arizona law ( A.R.S. § 12-341 ).

Background . Mr. and Mrs. Wunderlich contracted with Sirrah Enterprises to build a basement in their home. After Sirrah completed the project, the Wunderlichs, claiming construction defects, refused to pay the full contract.

Sirrah sued the Wunderlichs for the unpaid balance. The Wunderlichs counter-sued for breach of contract, breach of the covenant of good faith and fair dealing, and, most notably, breach of the implied warranty of workmanship and habitability.

After a trial in Superior Court, the jury awarded Sirrah $31,400 on its claim for the unpaid balance. The jury also found in Sirrah's favor for the Wunderlichs' claims of breach of contract and breach of the covenant of good faith.

However, the jury found in the Wunderlichs' favor on their claim for breach of the implied warranty and awarded them $297,800.

In addition, the judge determined that the Wunderlichs were the prevailing party and, under the fee provision in their construction contract, awarded them attorney fees.

Sirrah appealed the award of attorney fees. The award was upheld by the Arizona Court of Appeals and by the Arizona Supreme Court. In its opinion, the Supreme Court stated: "Because the warranty is imputed into the construction contract, it is a term of the contract. Any claim for breach of that term arises from the contract. The successful party therefore qualifies for fees under a controlling contractual fee provision or, barring that, [A.R.S.] § 12-341." (Emphasis added.)

Important for Contractors. The Sirrah decision is a case of good-news-bad-news for contractors.

The bad news: If you come out on the short end of a breach of implied warranty lawsuit, you can expect to be on the hook for the winner's attorney fees. Also, because the implied warranty allows you to be sued on workmanship issues not only by the party with whom you contracted but also any subsequent owners (within the applicable statute of limitations), you could be liable for the attorney fees of plaintiffs with whom you have never done business.

The good news: The decision also raises the stakes for would-be plaintiffs. Knowing that an unsuccessful lawsuit will obligate them to pay your attorney fees might make them think twice about filing a weak lawsuit against you.

Related Article: Duty to Perform Good Workmanship Extends Beyond Parties to Contract

Paid sick leave requirements for Arizona employers

Thu, 06 Jul 2017 00:00:00 GMT

In November 2016, Arizona voters approved Proposition 206, which raised Arizona’s minimum wage in a series of increases and required employers to provide paid sick leave to all employees, full-time and part-time.[1]

Minimum Wage. On January 1, 2021, the minimum wage in Arizona increased to $12.15 per hour (from $12.00), to adjust for inflation.

The minimum wage levels are $3.00/hour less for employees who earn tips (provided the employee is earning at least minimum wage after tips are counted).

Paid Sick Leave. While the minimum wage hikes in Prop. 206 received most of the publicity, the requirement for paid sick leave has proven to be a bigger strain for many private employers, who were not previously required by Arizona law to provide such a benefit.

That changed July 1, 2017, when Arizona workers began to accrue one hour of paid sick time for every 30 hours worked. Accrual began on the employee’s first day of employment or July 1, 2017, whichever was later.

Although an employee may begin to use his/her paid sick time as it is accrued, the employer can require an employee hired after July 1, 2017, to wait until the 90th calendar day after they began working before using their accrued paid sick time.

The paid sick leave requirement applies to all employers, but the amount of the requirement depends on the size of an employer’s work force:

Employers with fewer than 15 employees are required to allow employees to accrue and use a minimum of 1 hour of paid sick leave for every 30 hours worked for up to 24 hours per year.

Employers with 15 or more employees must allow employees to use and accrue a minimum of 1 hour of paid sick leave for every 30 hours worked for up to 40 hours per year.

Everyone, including an owner, who performs work for the employer for compensation — whether salary, wages or commissions — is considered an employee for purposes of determining the size of the company’s work force.

For purposes of paid sick leave accrual, employees who are exempt from receiving overtime pay are assumed to work 40 hours per week. If their normal work week is less than 40 hours, paid sick leave accrues based on their normal work week.

Employees who have unused paid sick leave at the end of a year may carry over the unused accrual to the next year, unless their employer chooses to pay them for their unused sick time.

For some employers, there may be one glimmer of good news: Under the new statute (A.R.S. § 23-372), if the employer is providing enough paid time off to cover the minimum amount of paid sick time, and if the employer allows its workers to use that time off in the same way and for the same purposes as paid sick leave, then the employer does not need to provide additional paid sick time.

Compliance and Penalties. The Industrial Commission of Arizona enforces the minimum wage and paid sick leave requirements. Failure to comply carries a minimum $250 fine for the first violation and at least $1,000 for a subsequent violation.

Employers are required to retain, for four years, payroll records showing compliance. Failure to do so will raise a rebuttable presumption that the employer did not comply with the minimum wage and paid sick leave requirements.

Employers who fail to pay the proper wages or earned paid sick leave will be required to pay the employee the unpaid balance of the wages or earned paid sick leave owed, including interest, plus an additional amount equal to twice the underpaid wages or earned paid sick leave.

[1] For employers with more than 15 employees, the paid sick leave requirements apply to salaried and hourly employees.

ADA violations: What to do if you are sued

Fri, 17 Feb 2017 00:00:00 GMT

UPDATE: On February 17, 2017, a Maricopa County Superior Court judge dismissed as "frivolous" over 1,000 lawsuits filed against Phoenix-area businesses for alleged ADA violations.

Our original August 2016 article follows:

As though making a profit is not difficult enough in normal circumstances, many businesses are seeing a relatively new and growing threat in the form of serial lawsuits alleging violations of the Americans with Disabilities Act (ADA). News reports and public records in Maricopa County show hundreds of lawsuits filed in 2016 alleging that the defendant (usually a property owner) has violated the ADA by failing to have ADA-compliant signs for handicapped parking spaces.

These lawsuits are almost identically worded and are filed by various similarly named “advocacy” groups.[1] (View a typical suit, together with discovery that is also usually served with the suit.) Even though the Arizona Attorney General has moved to intervene in these suits, in order to have them dismissed as groundless and abusive, there is no indication that the suits will abate in the near future.[2]

If you are a property owner, you may ask:

Is there anything I can do to avoid being targeted by one of these suits?

If I receive a demand letter, should I simply pay the $7,500 typically demanded in these lawsuits, or should I fight it?

In general, the answers are these:

Yes, you can take steps now to reduce the chances of falling victim to one of these lawsuits.

If you are sued by one of the ADA advocacy groups, you should probably fight it.

See related article: " ADA Lawsuits: Just When You Thought It was Safe to Go Back into the Parking Lot "

BACKGROUND

Typically, the property owner is sued for technical violations of ADA standards for handicapped parking signs. These signs were often compliant when installed, but are now non-compliant because the standards were changed in 2010.

Specifically, these recent lawsuits allege that the property owner violated the ADA (as well as a similar state statute) by (a) not placing its handicapped parking signs at a sufficient height and (b) not indicating that certain spaces are “van accessible.” These specific ADA standards come from a government document, 2010 ADA Standards for Accessible Design .

These lawsuits take advantage of an apparently little-noticed change in the 2002 ADA Accessibility Guidelines that the 2010 Standards replaced. Under the 2002 guidelines, there was no fixed height for handicapped parking signs. Instead, the signs were required to “be located so they cannot be obscured by a vehicle parked in the space.”[3] The same section of the 2002 guidelines also required that the signs be visible to drivers: “Signs designating parking places for disabled people can be seen from a driver's seat if the signs are mounted high enough above the ground and located at the front of a parking space.”

The 2010 ADA Standards, which became mandatory on March 15, 2012, require that handicapped parking spaces be at least 60 inches above the finish floor or ground surface, measured from the bottom of the sign.[4] This change meant that many handicapped parking signs that met the 2002 ADA Guidelines were now in violation of the 2010 ADA Standards. Although property owners can often take advantage of a “grandfather” provision that protects previously compliant signs, such protection evaporates as soon as a property owner re-stripes its parking lot.

NON-COMPLIANCE LAWSUITS

Given this little-noticed technical change, it has been easy for the advocacy groups to find non-compliant signs. Once the signs are identified, a lawsuit is filed (apparently without warning or notice), demanding compliance and seeking attorneys’ fees and costs. The plaintiff group also typically serves discovery, demanding answers to a host of questions about the property owner’s business and practices relating to parking and other accessibility issues.

If the property owner contacts the plaintiff, the typical response is to demand compliance and payment of a significant sum, such as $7,500, as contained in sample complaint linked above. Practical business owners, faced with the choice of litigation or a quick – though pricey – settlement, might opt for settlement, which of course is the likely goal of this batch of lawsuits.

LAWSUIT AVOIDANCE

If you own property with handicapped parking spaces, go to your parking lot and measure the distance between the bottom of the handicapped sign and the ground or floor. Also check to make sure you have at least one van-accessible handicapped space, with a sign to that effect. If the bottom of your sign is less than 60 inches from the floor or ground, or if you do not have a “Van Accessible” sign, you are at great risk of becoming the victim of this recent wave of lawsuits.

FIGHTING THE LAWSUIT

The fact that you might have a non-compliant sign does not mean that you are automatically liable, or that, even if your business is liable, an advocacy group plaintiff actually has a valid claim against you.

Even if you raced out to your parking lot and hired a licensed contractor to bring your signs into compliance, your business may have already been sued. Do not despair, however, because there are a number of defenses to these recent lawsuits.

Fixing the Problem. Your first line of defense is to fix any legitimately identified ADA compliance issues. As noted above, it would not be surprising that your handicapped parking signs are too low. The plaintiff has argued (and will continue to argue) that merely fixing the problems will not make the lawsuit “moot” and therefore subject to dismissal. However, even if not entirely successful, your prompt, good-faith effort at compliance should dramatically reduce your company’s exposure to an award of costs or attorneys’ fees. (The entity plaintiff apparently does not claim actual damages, and the typical individual plaintiff – if one is named – may never have visited your property).

Legal Standing. The second line of defense is to challenge the plaintiff’s standing. Although these plaintiff groups’ strategies are constantly evolving, typically they allege that one of their members is handicapped, visited the property, and intends to visit the property again. If challenged, the plaintiff may have a hard time making that argument stick, especially in light of recent news reports suggesting that the supposedly handicapped individual did not actually have a disability.

Right to Attorneys’ Fees. A third line of defense is to challenge the plaintiff’s right to recover attorneys’ fees. In the current wave of lawsuits, sometimes the plaintiff claims that it is entitled to fees under a state statute that does not apply to cases filed by private individuals.

Insurance Coverage. There is hope that certain insurance policies may cover these ADA claims, both to provide a defense and potentially to cover some or all of any ultimate award. The most promising avenue for coverage appears to be Third Party Coverage under an Employment Practices Liability policy; however, little case law exists on this very new coverage issue, so it is impossible to predict with certainty whether coverage exists.

In any event, if you decide to fight the suit, and if your business is a corporation or an LLC, you must have a lawyer represent the entity in Superior Court. Unless you are an attorney, you cannot represent the company, and, if you try, you are likely to face a default judgment.

CONCLUSION

ADA compliance is important legally, and important to a decent and inclusive society. But laws passed with the best of intentions can be misused, which is what is happening now with these serial lawsuits aimed at unknown and easily corrected violations.

Avoid being a victim of an abusive lawsuit by bringing your parking lot, and the rest of your facility, into ADA compliance as soon as possible. If, despite your best efforts, you are sued by one of these plaintiff groups, do not assume that your only option is to pay an extortionate sum to avoid litigation. Consult a lawyer right away to see what defenses you have, and also to see what options are currently (and may become) available given the recent actions of the Arizona Attorney General’s Office. Finally, notify your insurance carrier immediately after receiving a demand or a lawsuit.

[1] These groups include: “Advocates for Individuals with Disabilities Foundation, Inc.,” “Advocates for Individuals with Disabilities, LLC,” and “Advocates for American Disabled Individuals, LLC.” As of this date, only the first two of these entities are authorized to do business in Arizona, and it is not clear that the third entity even exists, in Arizona or elsewhere.

[2] At the time this article was written, the Attorney General’s motion to intervene had not yet been decided.

[3] ADA Accessibility Guidelines § 4.6.4.

[4] 2010 ADA Standards § 502.6.

The "your work" exclusion in a general commercial liability policy

Tue, 07 Feb 2017 00:00:00 GMT

In seeking indemnification for damages caused by a subcontractor’s work, a general contractor or upstream subcontractor should understand the “your work” exclusion typically contained in commercial general liability (CGL) insurance policies, as well as the “subcontractor exception” to that exclusion. For all contractors, understanding those two concepts can be a key part of the company’s risk management.

Simply put, the “your work” exclusion in a CGL policy generally bars coverage when the only damages claimed are repairs to the work performed by the named insured. The exclusion, as it appears in the policy, may use wording such as this:

"This insurance does not apply to property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith." [Emphasis added.]

Thus, if a new roof leaks because of a workmanship defect, and the roofer submits a claim under their CGL policy, repairs to the roof are probably not covered due to the “your work” exclusion, but the flatscreen TV and oriental rug damaged by the leak would be covered.

However, many policies include a “subcontractor exception,” which states that the “your work” exclusion “does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” But, as discussed below, if a subcontractor’s work causes damage, and the GC makes a claim as an “additional insured” on that sub’s CGL policy, the GC cannot rely on the “subcontractor exception” to force the sub’s carrier to cover the loss.

The "Your Work" Exclusion in an Arizona Case

A 2016 Arizona Court of Appeals opinion, Double AA Builders v. Preferred Contractors Insurance , provides the most recent Arizona case law specific to the “your work” exclusion.

The dispute dates back to 2007, when Harkins Theatres hired Double AA Builders as general contractor on the construction of a theater complex. Double AA subcontracted with Anchor Roofing to install the roof, and Anchor added Double AA as an “additional insured” to its CGL policy issued by Preferred Contractors Insurance.

After construction was completed, a leak in the theater’s roof resulted in damage to work performed by other subcontractors. The leak also caused Harkins to lose business, and Harkins asked Double AA to replace the roof, which it did.

Double AA then filed a lawsuit seeking indemnification from Anchor Roofing, Preferred Contractors Insurance, and Westfield Insurance (Double AA’s insurance company). In its suit, Double AA sought to recover the cost of replacing the roof but, significantly, not to recover the cost of repairing other leak-related damage to the theater.

Double AA settled with Westfield and obtained a default judgment against Anchor Roofing. That left Double AA to do battle with Preferred over whether replacing the roof was a covered loss under Anchor’s policy.

At trial, the judge ruled in favor of Double AA and against the insurance company, finding that the leak constituted an occurrence that resulted in covered property damage and that the “subcontractor exception” clause removed the claim from the policy’s “your work” exclusion.

Preferred appealed the trial court’s ruling to the Arizona Court of Appeals, which interpreted the “your work” exclusion differently. In its opinion, the Court of Appeals found that, because Double AA’s lawsuit was limited to recovering only the cost of replacing the roof and did not include other damages caused by the leak, the work performed by Anchor Roofing did in fact qualify for the “your work” exclusion.

More important, the Court held that Double AA could not rely on the “subcontractor exception” to the “your work” exclusion because the work was not performed by a subcontractor to the named insured, Anchor. In other words, only first-party claims trigger the “subcontractor exception,” leaving GCs and upstream subcontractors who make claims as “additional insured” with no way around the “your work” exclusion.

Takeaway

While GCs and upstream subcontractors should always require their subcontractors to name them as additional insured on the sub’s CGL policy, that offers only limited risk management. If a subcontractor whose work is defective will not submit a first-party claim to its carrier, thus forcing the GC or upstream subcontractor to make a claim as “additional insured,” any repairs to the subcontractor’s work are probably not covered.

OSHA rule creates additional drug-testing risks for employers

Fri, 09 Dec 2016 00:00:00 GMT

On December 1, 2016, the Occupational Safety and Health Administration (OSHA) began enforcing a new rule, contained in 29 CFR 1904, that requires many employers to record and report information to OSHA on work-related injuries and illnesses.

While for many employers the new rule may appear as little more than another regulatory requirement, companies that drug-test their workers must be alert to potentially serious and costly consequences.

Exempt and Non-Exempt Employers. Before we discuss the particulars of the new OSHA rule, here are the general parameters for whether it applies to your company:

If your company had more than 10 employees at any time during the last calendar year, you are likely required to keep OSHA injury and illness records, and the drug-testing limitations will apply (certain low-risk industries are partially exempt from this requirement, but construction is not among them).

If your company had 10 or fewer employees at all times during the last calendar year, you do not need to keep OSHA injury and illness records, unless OSHA or the Bureau of Labor Statistics informs you in writing that you are required to keep such records. Note that, regardless of how many people you employ, you must report to OSHA any workplace incident that results in a fatality or the hospitalization of three or more employees.

Reports by Employees. Employer compliance with the new rule depends in part on employees’ willingness to report workplace injuries and illnesses. OSHA has identified the following factors that can discourage employees from reporting:

fear of employer retaliation for reporting an incident; and

fear of testing positive for drug use.

Retaliation. To encourage employees to report workplace injuries and protect them from retaliation, the new rule:

requires employers to inform employees of their right to report work-related injuries and illnesses, free from retaliation;

requires that an employer’s procedure for reporting work-related injuries and illnesses be reasonable and not deter or discourage employees from reporting; and

incorporates the existing statutory prohibition on retaliating against employees for reporting work-related injuries or illnesses.

Drug Testing. The “ Employee Involvement ” section of the new rule states that an employer’s reporting procedure is unreasonable if it would discourage a reasonable employee from accurately reporting a workplace injury or illness.

One example of an unreasonable procedure, according to OSHA, is automatic post-accident drug testing. By OSHA’s reasoning, if an employee expects to be drug-tested after making an injury/illness report, and they fear what the drug test will reveal, they will be less willing to make the report, thus undermining the employer’s ability to collect, record and report injury and illness information to OSHA.

Consequently, employer policies that require blanket post-accident drug testing violate the new rule.

Penalties. Employers who violate the new rule may be required to pay monetary penalties, reinstate employees, and pay terminated employees back pay. Effective August 2, 2016, OSHA has increased the maximum penalties as follows:

Serious violation: $12,600 (increased from $7,000)

Willful or repeat violation: $126,000 (increased from $70,000)

Permissible Drug Testing. Employers are allowed to drug-test in connection with a workplace injury or illness if the following conditions are met:

There is a reasonable possibility that drug use was a contributing factor to the reported injury or illness;

the drug test can accurately identify impairment caused by drug use; and

the drug test is not designed in a way that may be perceived by the employee as punitive or embarrassing.

The commentary to the new rule provides that drug testing would be considered unreasonable in response to the reporting of, for example, a bee sting, a repetitive strain injury, or an injury caused by a lack of machine guarding or a machine or tool malfunction.

Catch-22. Some employers are required to drug-test in order to comply with other laws or requirements, creating what may appear to be a damned-if-you-do-damned-if-you-don’t situation.

The new rule does allow an employer to continue to conduct drug testing in order to comply with a state or federal law or regulation or to meet insurance investigation and workers’ compensation requirements. In such instances, the employer’s motive would not be considered retaliatory . Left unaddressed is the issue of employee fear of a positive drug test.

By this point you may have gathered that complying with non-OSHA requirements on one hand, without tripping an OSHA wire on the other, is risky business that will probably call for professional guidance.

Employer Action. To make sure you are complying with the new rule and state law, you and your employment lawyer should review your drug-testing policy and determine whether any modifications are in order. If necessary, you should begin contemplating appropriate procedures for reporting injuries and illnesses. You should also be vigilant in enforcing consistent application of your drug-testing policies.

You should also review your employee training practices to ensure that you are properly informing employees of their right to report injuries and illnesses as required under the new rule.

Taking steps to comply with the new rule will help you avoid steep penalties and costly litigation in the future. You should also take time to identify the causes of workplace injuries and illnesses and strive to implement policies and procedures aimed at prevention.

On a Little Miller Act Payment Bond, the Surety Cannot Be Sued for Bad Faith

Thu, 28 Jul 2016 00:00:00 GMT

Arizona’s “Little Miller Act,” which is modeled after the federal Miller Act, protects the payment rights of people and companies that supply labor or materials on public projects. Because mechanics’ and materialmen’s liens cannot attach to public property, the Act requires contractors on public works projects to furnish payment bonds on which a claimant who is not paid in full can sue.

The case discussed in this article, S&S Paving v. Berkley , raises practical issues that stem from the Little Miller Act and the payment remedies it provides.

Background. S&S Paving and Construction performed paving work on a City of Prescott project under a contract with the general contractor, Spire Engineering. Berkley Regional Insurance Company issued a payment bond for the project.

When Spire failed to pay $23,763 that S&S claimed was owed, S&S sent a demand letter to the surety, Berkley. In acknowledging S&S’s claim, Berkley requested additional information that S&S provided along with a proof of claim. Two months later, Berkley acknowledged receipt of the documentation and advised S&S that Berkley would be back in touch after checking with Spire.

That was the extent of the communication between S&S and Berkley until May 2013, when S&S sent another demand letter to Berkley in connection with its breach of contract suit against Spire. When Berkley denied S&S’s claim, for failure to meet the one-year statute of limitations for claims against public works payment bonds, S&S sued Berkley for breach of contract and bad faith.

The trial court dismissed both of S&S’s claims against Berkley, noting the expiration of the statute of limitations and, further, the absence of a contract between S&S and Berkley.

Appeal. S&S appealed the dismissal of its bad faith claim, arguing before the Arizona Court of Appeals that sureties issuing payment bonds have a duty to “undertake an investigation adequate to determine whether a claimant’s claim is tenable or valid” and that sureties owe the same duty of good faith to claimants as insurance companies owe to insureds.

The Court rejected S&S’s argument and upheld the dismissal of the bad faith claim, noting that the Little Miller Act “dictates the procedures that claimants must follow in order to recover against payment bonds.”

“But for its failure to timely file suit, S&S had a ‘complete and valid remedy’ under the Act,” the Court found. By failing to take legal action within the statute of limitations, S&S forfeited its recovery rights granted by the Act.

The Court also rejected S&S’s argument that Berkley had a duty to investigate the validity of S&S’s claim, finding that such a duty does not exist in statute.

Practical Lessons. It is standard practice, after a claim has been presented, for a surety company to request information from both the claimant and the contractor. However, this standard practice will not excuse a claimant from filing a lawsuit in a timely fashion to preserve its collection rights under the Little Miller Act.

Beware of “No Damages for Delay” Clauses

Thu, 30 Jun 2016 00:00:00 GMT

The law, consistent with typical notions of fairness, generally allows contractors to recover monetary damages arising out of delays caused by the project owner (or the general contractor, if the damaged party is a subcontractor). Owners and general contractors are, however, seeking to avoid these types of damages with increasing regularity by adding “no damages for delay” clauses to their respective contracts and subcontracts.

These clauses (which can come in all different shapes and sizes) typically attempt to eliminate or curtail a contractor’s right to recover monetary damages stemming from all or certain types of delays caused by the “upstream” party or parties on a project. Given the potentially severe financial impact these provisions can have on the parties who are asked to accept them, the provisions should be fully understood and carefully considered before signing a contract.

See Related Article: Construction Delays and Liquidated Damages

The Enforceability of No-Damages-For-Delay Clauses Generally

While the enforceability of no-damages-for-delay clauses is entirely dependent on the state law governing the contract, they are, as a general rule, enforced in most jurisdictions if the language of the clause is clear and unambiguous.[1] This general rule is grounded in public policy, that contracts between sophisticated parties should be enforced as drafted.[2] Yet this rule is not without its exceptions. Some states have legislatively barred or restricted the use of no-damages-for-delay clauses, and others have created common law exceptions to their enforceability.

For instance, in some jurisdictions where no-damages-for-delay clauses are generally enforced, the clause will not preclude a contractor’s right to recover for: “(1) delays caused by the contractee’s bad faith or its willful, malicious or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract.”[3]

Similarly, in other jurisdictions, “a contractor may recover for unreasonable delays in the construction process notwithstanding the presence of ‘no damage’ clauses, if the delay: (1) was of a kind not contemplated by the parties, (2) amounted to an abandonment of the contract, (3) was caused by bad faith, or (4) was caused by active interference.”[4]

The Enforceability of No-Damages-For-Delay Clauses in Arizona

In Arizona, the enforceability of a no-damages-for-delay provision generally depends on whether the contract pertains to a public or private project. As an initial matter, the Arizona Legislature has rendered these clauses unenforceable in connection with public construction contracts. Specifically, A.R.S. §§ 34-221(F) and 41-2617 provide that public construction contracts " shall include a provision that provides for negotiations between the agent and the contractor for the recovery of damages related to expenses incurred by the contractor for a delay for which the agent is responsible, which is unreasonable under the circumstances and which was not within the contemplation of the parties to the contract. This section shall not be construed to void any provision in the contract that requires notice of delays or provides for arbitration or other procedure for settlement or provides for liquidated damages." (Emphasis added).

In fact, A.R.S. § 34-221(F) was directly at issue in Technology Const., Inc. v. City of Kingman, [5] which is the first and only Arizona case interpreting a no-damage-for-delay clause in a construction contract. In Technology Const. , the City of Kingman argued that the following clause insulated the City from liability for its delays in connection with a railroad crossing improvement district:

IT IS EXPRESSLY UNDERSTOOD AND AGREED by the parties to this agreement, that in no case (except where it is otherwise provided for in Arizona Revised Statutes, §§ 48-571 to 8-619 inclusive) will the City or any officer thereof, be liable for any portion of the expenses of the work aforesaid, nor for any delinquency persons owning property assessed, nor for the failure of the City to sell its improvement bonds to finance this contract.

229 Ariz. at 567 (emphasis in original).

But the Arizona Court of Appeals rejected this argument. Instead, the Court of Appeals affirmed the trial court’s decision that the City was liable for the delays it caused pursuant to A.R.S. § 34-221(F) and Section 109.8 of the MAG Specs (which incorporated § 34-221(F)), regardless of the “no liability” provision in the parties’ contract.[6]

Arizona’s legislative ban on no-damages-for-delay clauses does not extend to contracts relating to private construction projects. There are also no Arizona cases interpreting the enforceability of these clauses in a private setting. Arizona law does, however, place a premium on upholding parties’ freedom to contract.[7] In fact, it is well established that “absent legislation specifying that a contractual term is unenforceable, courts should rely on public policy to displace the private ordering of relationships only when the term is contrary to an otherwise identifiable public policy that clearly outweighs any interests in the term’s enforcement.”[8]

Accordingly, and consistent with the prevailing rule in most jurisdictions, no-damages-for-delay clauses in private construction contracts are likely generally enforceable in Arizona. But in evaluating such provisions, it stands to reason that Arizona courts would look at the various exceptions developed in other jurisdictions for guidance.

Conclusion

In sum, no-damages-for-delay clauses shift the risk of financial liability for delays caused by the contractee (i.e., the owner or general contractor) to the contractor (or subcontractor, as the case may be). Moreover, while unenforceable in connection with Arizona public construction contracts, these provisions are likely enforceable in Arizona in contracts pertaining to private projects. It is, therefore, critical for contractors and subcontractors to identify and carefully consider these provisions before signing a contract. Failure to do so could be financially disastrous.

[1] Maurice T. Brunner, Validity and Construction of “No Damage” Clause with Respect to Delay in Building or Construction Contract, 74 A.L.R. 3d 187 at § 3 (1976).
[2] See Green Intern., Inc. v. Solis , 951 S.W.2d 384, 387 (Tex. 1997).
[3] Corinno Civetta Construction Corp. v. City of New York , 493 N.E.2d 905, 909-10 (N.Y. 1986).
[4] Peter Kiewit Sons’ Co. v. Iowa S. Utilities Co., 355 F. Supp. 376, 397 (S.D. Iowa 1973).
[5] 229 Ariz. 564 (App. 2012)
[6] Id. at 567, 569.
[7] See 1800 Ocotillo, LLC v. WLB Grp., Inc., 219 Ariz. 200, 202 (2008) (holding “[o]ur law generally presumes, especially in commercial contexts, that private parties are best able to determine if particular contractual terms serve their interests ... [s]ociety also broadly benefits from the prospect that bargains struck between competent parties will be enforced” (internal citations omitted)).
[8] Id.

Employer's nightmare: back wages, penalties for unpaid overtime

Thu, 16 Jun 2016 00:00:00 GMT

As one more Arizona contractor learned the hard way, paying employees for piece work does not trump overtime and minimum wage requirements.

In March 2018, a Tucson framing contractor that failed to pay overtime was ordered to pay more than $214,000 in back wages to 145 employees. Because of the "willful and repeated nature" of the violations, the contractor was also hit with more than $25,000 in penalties.

The overtime violations stemmed from the contractor paying its employees on a "piece work" basis (which is legal) but not paying time-and-a-half for hours exceeding 40 in a workweek (which is illegal).

Record Keeping. This case is a good reminder that paying employees on a piece-rate basis does not excuse employers from overtime and minimum wage requirements. Contractors that pay for piece work must still keep time records that:

track all employees' hours;

show that all non-exempt employees who worked over 40 hours in a workweek were paid time-and-a-half for their overtime hours; and

all workers were paid at least the minimum wage.

Record Retention. Keeping track of hours worked and paying the proper wages aren't the only required steps. The Fair Labor Standards Act requires that you preserve:

all payroll records for at least three years, and

wage computations for at least two years (e.g., time cards that comply with FLSA timekeeping requirements, piece work tickets, wage rate tables, work and time schedules, and records of additions to or deductions from wages).

The Bottom Line. A Department of Labor investigation can have devastating financial consequences for employers who violate the FLSA's overtime and record-keeping provisions, including, potentially, personal liability imposed on the company's corporate officers and/or supervisors.

Knowing and obeying complex requirements can be challenging, but it pales in comparison to the consequences for employers that "roll the dice" in ignoring the rules.

See also: " Piece Work: Pay Your Employees by the Task - Legally "

Ex Parte Communications with Former Employees of an Opposing Party

Wed, 15 Jun 2016 16:42:59 GMT

Initiating ex parte contact with a former employee could raise serious ethical concerns if the opposing party is represented by counsel.

This article was published as Chapter 6.5 of the Arizona Construction Law Practice Manual, 3rd Ed. 2016

§ 6.5.2 ETHICAL RULE 4.2

Arizona has adopted Rule 4.2 of the American Bar Association’s Model Rules of Professional Conduct, which prohibits ex parte communications with represented parties in a matter regarding the subject of the immediate litigation.[1] Specifically, Ethical Rule 4.2 provides:

In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized by law to do so.[2]

For purposes of Ethical Rule 4.2, a person being provided limited-scope representation pursuant to Ethical Rule 1.2(c) is considered to be unrepresented unless the opposing party or lawyer is aware of both the existence of the limited-scope representation and the identity of the lawyer providing the limited-scope representation.[3]

In the case of a represented organization, the Comment to Ethical Rule 4.2 explains that a lawyer is prohibited from engaging in ex parte communications with three sets of individuals: (a) employees who have a managerial responsibility on behalf of the organization; (b) employees whose acts or omissions in connection with the matter may be imputed to the organization for purposes of civil or criminal liability; and (c) employees whose statement may constitute an admission on the part of the organization.[4] The Comment, however, does not clarify the applicability of Ethical Rule 4.2 to a represented organization’s former employees.

§ 6.5.3 ARIZONA’S VIEW

As regards ex parte communications with former employees of a represented organization, Arizona has adopted a modified version of the majority view. Under the majority view, ex parte communications with former employees are not prohibited.[5] In Arizona, ex parte communications with former employees of a represented organization are generally permitted under Ethical Rule 4.2, with two exceptions: (a) when the former employee’s acts or omissions gave rise to the subject litigation; and (b) when the former employee has an ongoing relationship with the former employer in connection with the litigation.[6] This rule applies even where the former employee is currently employed by the party whose lawyer wishes to interview him or her.[7]

Whether a former employee’s acts or omissions gave rise to the immediate litigation may be readily ascertained through disclosure and discovery. But whether the former employee has an “ongoing relationship” sufficient to justify a prohibition against ex parte contact is a more complicated inquiry, and the courts have declined to define a bright-line test with respect to this issue.[8] On one hand, mere knowledge of damaging information is insufficient to constitute such an “ongoing relationship.”[9] On the other hand, the former employee having knowledge of confidential information or participating in the former employer’s defense are factors that weigh in favor of finding an “ongoing relationship,” though the exact level to which such knowledge and participation must rise to tip the balance is unclear.[10]

§ 6.5.4 CONCLUSION

As it will not often be immediately apparent whether ex parte contact with a represented organization’s former employee is permitted under Ethical Rule 4.2, it is best to always proceed with caution. The most practical and safe approach, as noted by several commentators, is to secure permission to communicate with the former employee in writing from either the former employer’s lawyer or the court before contacting the former employee.[11] Where the former employee is separately represented in the matter, his or her own counsel’s consent will be sufficient to satisfy Ethical Rule 4.2.[12]

While taking steps to comply with Ethical Rule 4.2, a prudent lawyer must also bear in mind other ethical responsibilities that come into play when performing an informal ex parte interview of a former employee. For instance, Ethical Rule 4.4 mandates that the interviewing lawyer avoid all inquiries into matters that may involve privileged communications between the former employee and his former employer’s attorney.[13] Additionally, pursuant to Ethical Rule 4.3, the interviewing attorney must ensure that his or her role in the matter is made clear to the former employee, which includes informing the former employee of the nature of the case, the identity of the lawyer’s client, and that the employee’s former employer is an adverse party.[14].

[1] Ariz. R. Sup. Ct. 42, ER 4.2 cmt. 1 (“This Rule does not prohibit communication with a party, or an employee or agent of a party, concerning matters outside the representation.”).

[2] Ariz. R. Sup. Ct. 42, ER 4.2.

[3] Ariz. R. Sup. Ct. 42, ER 4.2 cmt. 4 (2013 Amend.).

[4] Ariz. R. Sup. Ct. 42, ER 4.2 cmt. 2; Lang v. Superior Court, 170 Ariz. 602, 604-05, 826 P.2d 1228, 1230-31 (App. 1992).

[5] Benjamin J. Vernia, " Right of Attorney to Conduct Ex Parte Interviews With Former Corporate Employees," 57 A.L.R.5th 633, at § 2[a] (1998); Lang , 170 Ariz. at 605, 826 P.2d at 1231.

[6] Lang , 170 Ariz. at 607, 826 P.2d at 1233.

[7] Arizona Committee on the Rules of Professional Conduct, Formal Op. 2000-05 (Sep. 2000).

[8] See Lang , 170 Ariz. at 608, 826 P.2d at 1234.

[9] Id. at 607, 826 P.2d at 1233.

[10] Id. at 607-08, 826 P.2d at 1233-34.

[11] Jessica J. Berch & Michael A. Berch, "May I Have a Word With You: Oops, Have I Already Violated the No-Contact Rule?" 6 Phoenix L. Rev. 433, 461-62 (2013); David D. Dodge, "Risky Business Practice: When Conversation Can Hurt Your Case," 38 Ariz. Att’y 14, 15 (Nov. 2001); Heidi L. McNeil & Sara R. Roberson, "Ex Parte Communications with Former Employees of an Adversary: When are They Permitted?" 32 Ariz. Att’y, 19, 24 (Jan. 1996).

[12] Ariz. R. Sup. Ct. 42, ER 4.2 cmt. 2.

[13] McNeil & Roberson, supra note 11, at 24.

[14] Id.; Arizona Committee on the Rules of Professional Conduct, Formal Op. 2000-05 (Sep. 2000).

Lender’s Breach of a Construction Loan Results in Awarding of Economic Damages to Builder

Mon, 22 Feb 2016 00:00:00 GMT

The financial distresses of the Great Recession led to a wide variety of conflicts between construction lenders and builders. In many cases, the lender had the upper hand, with few options for builders who lost their financing in mid-project. But in at least one case, a lender’s arbitrary termination of a construction loan agreement backfired.

In early 2007, a predecessor of Great Western Bank¹ made an acquisition and development (A&D) loan to a builder-developer, Cedar Ridge Investments, to purchase Flagstaff-area real estate and develop it as a residential subdivision. Separately, the bank entered into an agreement with Cedar Ridge to make construction loans, on a case-by-case basis, for the homes to be built in the subdivision. Both loans were guaranteed by Cedar Ridge’s parent company and its principals.

Loan Termination. In July 2008, as development of the project was nearing completion and Cedar Ridge was preparing to obtain building permits for the homes, Great Western Bank decided to stop making construction loans in Arizona and told Cedar Ridge that it was pulling out of their agreement.

Cedar Ridge was unable to get alternate financing, could not build and sell homes and, thus, could not generate cash to service its A&D loan. Great Western foreclosed, sold the property to another developer, and sued the guarantors for the remaining $2.6 million loan balance.
At trial, the guarantors argued that the unpaid loan balance should be offset by lost profits caused by Great Western’s breach of their loan agreement, which they further argued constituted “anticipatory repudiation” and breach of the implied covenant of good faith and fair dealing.

Great Western claimed that the construction loan agreement was just a “guidance line,” under which the bank could choose to make – or not make – loans to build the homes at Cedar Ridge.

Win for the Builder. In the end, the trial court rejected the bank’s “guidance line” argument, noting that the agreement (titled “Loan Agreement”) obligated the bank to “make the Loans to Borrower” and required Cedar Ridge to “accept such Loans.” Also, the agreement allowed the bank to withdraw only if the borrower defaulted – a moot point, as the bank never made a loan on which Cedar Ridge could default.

The trial court concluded that:

Great Western breached the loan agreement;

Great Western’s breach prevented Cedar Ridge from building and selling homes and using the proceeds to retire the A&D loan; and

Great Western had no valid reason for terminating the loan agreement, as Cedar Ridge was not in default and was prepared to begin construction.

Further, the trial court found that, if the bank had not breached the agreement, Cedar Ridge would have made a profit of between $2.8 million and $3.5 million. As that figure exceeded the outstanding balance on the A&D loan, the guarantors’ liability under the guaranty would have been reduced to zero.

Great Western Bank appealed, unsuccessfully. The Arizona Court of Appeals upheld the trial court’s ruling in all respects, sending a harsh warning to lenders and providing good news to borrowers who find themselves in a comparable situation:

A lender’s breach of a loan agreement can result in lost profits and other economic damages to the borrower.

Lost profits can be used to offset a loan deficiency and a guarantor’s liability.

Miller Act 90-Day Notice Period Runs from Date of Last Delivery on Open Accounts

Fri, 22 Jan 2016 00:00:00 GMT

In its 2014 ruling in Ramona Equipment Rental, Inc. v. Carolina Casualty Ins. Co., et al. , the U.S. Court of Appeals for the Ninth Circuit addressed for the first time the issue of when a 90-day Miller Act notice needs to be served for materials and/or equipment furnished on an open book account.

The Ninth Circuit held that “if all the goods in a series of deliveries by a supplier on an open book account are used on the same government project, the ninety-day notice is timely as to all deliveries if it is given within ninety days from the last delivery.”

In other words, rather than having to worry about providing notice to general contractors within 90 days of each unpaid delivery, suppliers need only be worried about providing notice within 90 days of the last delivery to the project.

See also: Miller Act in Brief: Bond Claims on Federal Projects

BACKGROUND

In this case, a subcontractor on a federal construction project established an open account with a supplier (Ramona Equipment Rental) to rent equipment for use on the project. Under the terms of the open account, rentals were documented by rental agreements and invoices. The subcontractor and supplier entered into 89 rental agreements, and the subcontractor failed to pay for nearly all the equipment rented.

As required by the Miller Act, the supplier served the general contractor with notice of demand for payment within 90 days of the last day on which equipment was furnished before filing suit on the general contractor’s Miller Act payment bond. The general contractor nevertheless argued at trial that the 90-day notice was “untimely as to all rental equipment furnished to the project more than ninety days before service of the notice.”

The general contractor apparently claimed that each of the individual rental agreements required its own 90-day Miller Act notice. The district court rejected this argument and concluded that, "in light of the open book account, the ninety-day notice covered all rental equipment furnished to the {p]roject.” The general contractor and its surety appealed.

DISCUSSION

The Ninth Circuit began its analysis in Ramona by noting that the Miller Act:

“‘represents a congressional effort to protect persons supplying labor and material for construction of federal public buildings in lieu of the protections they might receive under state statutes with respect to the construction of nonfederal buildings” and

is entitled “to a liberal interpretation” to accomplish its beneficial purpose of protecting laborers and suppliers.

Next, the Court specifically identified the requirements of the Miller Act’s 90-day notice provision – “that laborers and materialmen with no direct relationship to the general contractor furnishing the payment bond, ‘giv[e] written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made’” (quoting 40 U.S.C. § 3133(b)(2)).

Finally, the Court discussed the following “clearly analogous” cases from other Circuits:

United States ex rel. Water Works Supply Corp. v. George Hyman Constr. Co. , 131 F.3d 28 (1st Cir. 1997);

Noland Co. v. Allied Contractors, Inc. , 273 F.2d 917(4th Cir. 1959); and

United States ex rel. A&M Petroleum, Inc. v. Sante Fe Engineers Inc., 822 F.2d 547 (5th Cir. 1987).

In these cases, the First, Fourth, and Fifth Circuits, respectively, held that notice within 90 days of the last delivery on projects involving multiple purchase orders and/or goods purchased on an open account was timely under the Miller Act as to all deliveries.

For each of the foregoing reasons, the Ninth Circuit in Ramona ultimately agreed with this “‘preferred interpretation’” among the circuit courts.

Responding to an ROC Complaint

Tue, 19 Jan 2016 00:00:00 GMT

Responding to a Registrar of Contractors complaint is governed by specific requirements and deadlines set forth in Arizona law. To clarify those requirements, the ROC has issued “Substantive Policy Statement 2015.01: Filing Timely Answers under A.R.S. § 32-1155 .”

Substantive Policy Statements are not designed to impose additional requirements or penalties; rather, they are intended to clarify existing law.

The Policy Statement covers:

how the date of service is calculated when the ROC serves a citation and complaint by mail;

the contractor’s general duty to file a written answer;

specific issues that arise when determining the date on which the licensee’s written answer is due; and

the question of whether mailing a written answer to the ROC has the same legal effect as filing a written answer with the ROC.

Following are the highlights, which we have adapted from the Executive Summary contained in the statement.

Most citations issued by the ROC are served by mail.

Service of a citation and complaint will be considered to have been completed five days after it is mailed to the licensed contractor.

If the ROC issues a citation, the contractor must file a written answer.

From the date of service of the citation (i.e., five days after the mailing date), the contractor has only 10 calendar days – i.e., not business days – to file a written answer.

A phone call does not count as a contractor’s answer. The answer must be in writing.

The written answer must be filed with – i.e., received by – the ROC within the 10-day statutory deadline. Therefore, depositing the written answer in the mail within the 10-day deadline does not, by itself, fulfill the 10-day deadline. (Note: Mailing the answer five days before the deadline does not guarantee that the ROC will actually receive your answer in a timely fashion.)

The ROC is not allowed to extend the statutory 10-day deadline for filing a written answer.

If a mailed answer is not received by the ROC within the 10-day deadline, the answer must be considered late.

If the contractor fails to file a written answer within 10 days after service, that failure shall be deemed as an admission that the contractor committed the act or acts charged in the complaint.

Contractors must understand that the ROC will mail the citation and complaint to the most recent address that the contractor has provided to the ROC. If a contractor has moved, or if the address is incorrect, a contractor may lose its license merely because it did not receive timely notice of the citation and complaint. Visit the ROC website today and check your address.

If you have questions about the Policy Statement or responding to an ROC complaint, please call Kent Lang or Mike Thal at 480-947-1911.

Sullivan v. Pulte: Court Bars Negligence Claim Against Builder by Subsequent Home Buyer

Fri, 06 Nov 2015 00:00:00 GMT

In July 2015, the Court of Appeals made a favorable ruling for contractors in Sullivan v. Pulte when it held that a subsequent (i.e., non-original) homeowner cannot maintain a negligence claim against a homebuilder for construction defects.

The story began in 2003, when Mr. & Mrs. Sullivan bought a three-year-old Pulte home from the original owner. Six years later, in 2009, the Sullivans discovered defects in the retaining wall and asked Pulte to repair them. Pulte declined to make the repairs, claiming that it was not responsible for defects in a home of that age. The Sullivans sued Pulte for damages for fraud and misrepresentation, for breaches of implied warranty, and for negligence.

The trial judge dismissed the Sullivans’ lawsuit, ruling that:

because the Sullivans never had a contract or dealt directly with Pulte, they had no claim for fraud or misrepresentation;

the eight-year limit imposed by Arizona’s statute of repose had expired, depriving the Sullivans of their implied warranty claim; and

Arizona’s economic loss rule barred the Sullivans’ negligence claim.

Appeal. The Sullivans appealed, and the Arizona Court of Appeals upheld the dismissal of their fraud and implied warranty claims.

However, the Court ruled that, because the Sullivans did not have a contract with Pulte, the economic loss rule did not bar the Sullivans’ negligence claim. Pulte appealed that issue to the Arizona Supreme Court, which agreed with the Court of Appeals and remanded the negligence claim to Superior Court.

Back in Superior Court, Pulte again moved to dismiss the Sullivans’ negligence claim, this time arguing that Pulte owed no duty of care to a subsequent home purchaser (such as the Sullivans) to protect them from economic harm. Again the trial court dismissed the Sullivans’ negligence claim, and again they appealed.

In their second appeal, the Sullivans argued that Pulte’s duty of care arose from building codes and from the statutes that empower the Arizona Registrar of Contractors to discipline a contractor for workmanship violations. The Court of Appeals did not buy that argument, holding that those regulations were too broad to impose a specific duty of care on builders, and upheld the trial court’s dismissal of the negligence claim.

In the end, after two trial court proceedings and three appeals over five years, the net result was no different than the trial court’s original dismissal of all of the Sullivans’ claims (although the negligence claim was dismissed, not based on the economic loss rule, but because Pulte owed no duty of care to the Sullivans).

A Win for Contractors. The outcome is good news for builders and other contractors, because negligence claims are governed by the “discovery rule,” which allows a claimant to file suit within two years of discovery of the defect. Had the courts allowed the discovery rule to apply to claims such as the Sullivans’, a non-original homeowner would be able to sue over a defect even if that defect was discovered decades after construction.

Under the Sullivan ruling, subsequent purchasers are now limited to recourse for construction defect claims under an implied warranty theory, which has a limitations period of eight to nine years, regardless of when the alleged defect is discovered. Keep in mind, however, that claims for non-economic injury (i.e., injury to property or person) are not covered by this limitation and can still be the subject of negligence or other tort claims.

Licensed Contractor, Unlicensed Work

Thu, 17 Sep 2015 00:00:00 GMT

On a construction job, it is not unusual for a licensed subcontractor to perform additional services that fall outside the scope of its license. In many instances, the unlicensed work is incidental to the main focus of the services for which the sub is licensed and is requested by the general contractor as a matter of convenience.

However, a recent case involving a general contractor that used the performance of unlicensed services as an excuse not to pay a subcontractor for even his licensed work illustrates the risks of venturing beyond the license’s scope.

DISPUTE

A general contractor, Armor Designs, hired a licensed electrical subcontractor, Antonio Chavira, to disassemble equipment at Armor’s plant in Phoenix. The work was completed, and Armor paid Chavira in full.

Armor then hired Chavira to reinstall the same equipment at Armor’s new plant. After Chavira completed the installation work – some electrical, some not – Armor refused to pay him, claiming that 18 of the 77 invoiced tasks for which he sought payment were outside of his license.

Chavira sued Armor for breach of contract. In Superior Court, Armor argued that A.R.S. § 32-1153 barred Chavira from using the courts to collect because he had performed significant work for which he had no license.

A.R.S. § 32-1153 states: "No contractor [shall] maintain any action in any court of the state for collection of compensation for the performance of any act for which a license is required ... without ... proving that the contracting party ... was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose."

The trial court dismissed Chavira’s lawsuit, and he appealed.

APPEAL

The sole issue in Chavira’s appeal was whether A.R.S. § 32-1153 did indeed bar him from suing to recover any payment for work he performed if some of the work was not covered by his license.

Chavira argued that, because he was a licensed electrical contractor when he entered into the contract with Armor and during the time he did the work, he should be allowed to recover payment for, at least, his electrical work.

Armor countered that, because Chavira was not licensed to perform all of the work he performed, the statute barred him from recovering for any of his work.

The Court did not buy Armor’s argument. While acknowledging that the “plain language of § 32-1153 prohibits an unlicensed contractor from bringing an action to recover payment for unlicensed acts,” the Court of Appeals also cited prior cases in which it found that “the plain language of the statute allows a licensed contractor, or one who has substantially complied with the licensing requirements ... to sue for payment for work performed under the license.”

The Court sent the case back to Superior Court, where Chavira could “pursue his breach of contract claim against Armor for the value of the work that was completed under his license.”

LESSON FOR CONTRACTORS

While the Court’s ruling was a partial victory for Chavira, it sends a clear message to contractors that working outside the confines of your license is risky business.

You can sue a non-payer in an attempt to get your money, but your recovery will not include work for which you are not properly licensed.

Strippers, contractors and employee misclassification

Tue, 15 Sep 2015 00:00:00 GMT

In July 2015, about 120 exotic dancers filed a lawsuit against Christie’s Cabaret, a Phoenix strip club, alleging a variety of unfair labor practices. The suit came on the heels of a $6 million settlement achieved by 4,000 dancers in a similar lawsuit filed in Florida.

At the root of both suits – and other lawsuits filed in several states around the country – is the allegation that clubs illegally classified the dancers as independent contractors, rather than employees, in order to avoid expenses associated with overtime, minimum wage, FICA, unemployment compensation, health insurance, workers’ compensation, sick time, vacation time and other costs and benefits required under the Fair Labor Standards Act (FLSA) and other federal and state laws.

That may sound all too familiar to contractors. Since the FLSA’s passage before World War II, the construction industry – far more than the strip club industry – has consistently attracted U.S. Department of Labor (DOL) scrutiny for dubious employment practices that include employee misclassification (i.e., treating as an independent contractor a worker who should be treated and paid as an employee), abuses of piece work payment, and other violations.

THE SIGNIFICANCE OF WORKER CLASSIFICATION

If a business classifies a worker as an employee, it must pay taxes for Social Security, Medicare, unemployment and payroll. The business must also comply with a whole slew of federal, state and local rules and regulations. And with every additional employee, the business increases its headcount for purposes of complying with the Affordable Care Act (ACA or “Obamacare”), thereby potentially increasing health insurance costs and reporting requirements. The impact of all this is that each employee can cost a business a substantial amount of time and money every year.

However, if a worker is classified as an independent contractor, the business does not have to worry about complying with these burdensome and expensive rules and regulations. Moreover, businesses do not have to provide independent contractors with health insurance, retirement plans, paid vacation and other costly fringe benefits. Thus, there is great incentive to classify workers as independent contractors. The biggest downside is that employers have less control over their day-to-day activities.

EMPLOYEE VS. INDEPENDENT CONTRACTOR: BASIC DISTINCTIONS

To determine whether a worker is an employee or an independent contractor, over the years the DOL and Internal Revenue Service have generally relied on three categories of “control and independence” rules:

Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial. Are the business aspects of the worker’s job controlled by the payer? How is the worker paid? Are expenses reimbursed? Who provides tools, supplies, vehicles, etc.?

Type of Relationship. Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue? Is the work performed a key aspect of the business?

However, as FLSA violations continued to mount, and employers became more creative in dodging the classification rules , the factors described above have proven to be inadequate in ensuring proper classification and payment of employees.

At the very least, an independent contractor relationship is substantiated by an independent contractor agreement between the contractor and the company using his or her services, along with the issuance of a W-9 form by the contractor to the company. However, as strip club operators are learning, the existence of an independent contractor agreement is not a cure-all.

The fact that the worker has signed an agreement stating that he or she is an independent contractor is not the final say, because the reality of the working relationship is far more important than the label given to the relationship in an agreement. In addition, the fact that the worker has incorporated a business or is licensed by a government agency has little bearing on determining the existence of an employment relationship.

If you enter into an independent contractor agreement, include terminology and provisions that affirm the independence of the worker. For example, refer to the worker as a “contractor”; acknowledge that the contractor is free to perform services for other companies; avoid requiring full-time hours or daily presence at the company or job site; make payments due when a project (or a phase of the project) is completed; include a contract expiration date and renewal/extension provision; specify what expenses will be reimbursed and the terms of reimbursement.

ECONOMIC REALITIES TEST

Even if you use an independent contractor agreement, the DOL’s Wage and Hour Division’s new guidance, in connection with an “economic realities test,” could have a big impact on differentiating between employees and independent contractors.

The DOL has stated that “the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor).” [Emphasis added.]

According to the DOL, the following factors are generally considered when determining whether, under the FLSA, a worker is an employee as opposed to an independent contractor:

Whether the work is an integral part of the employer’s business. If a worker’s work is integral to the employer’s business, he or she is more likely to be economically dependent on the employer and less likely to be in business for himself or herself. Work is probably integral to the employer’s business if it is a part of its production process or is a service that the employer is in business to provide.

Whether the worker has a managerial role. This factor focuses on whether the worker has a managerial role, for example, of hiring and supervision of workers, whether the workers managerial skill affects his or her opportunity to advance in the company.

The relative investments in facilities and equipment by the worker and the employer. To be classified as an independent contractor, the worker must make some investment compared to the employer’s investment (and bear some risk for a loss). That may include investment in tools and equipment, so long as a worker’s investment compares favorably enough to the employer’s that they appear to be sharing risk of loss.

The worker’s independence and initiative. Both employees and independent contractors may be skilled workers. The DOL focuses on whether the worker’s skills demonstrate that he or she exercises independent business judgment, and whether he or she has personally invested in training, education or development of skills. The fact that a worker is in open market competition with others would also suggest independent contractor status.

Whether the employer/worker relationship is permanent. A permanent relationship with the employer suggests that the worker is an employee. However, the lack of permanence does not necessarily mean independent contractor status, because the impermanent relationship may be due to industry-specific factors, or the fact that an employer uses staffing agencies.

The employer’s level of control over the worker. This factor focuses on who sets compensation and hours, who determines how the work is performed, and whether the worker is free to work for others and hire helpers. This is a complex analysis that requires careful review, because the employer may have little control in certain situations involving both employees and independent contractors. In those instances, the DOL will look to who has meaningful, substantial control over various aspects of the working relationship. Thus, a worker can be found to be an employee even if the employer exercises less day-to-day control over the worker. Note that this factor does not hold any greater weight than the other factors.

In January 2024, these six factors were modified pursuant to a Labor Department rule that Mickell Summerhays describes in her article, “New Independent Contractor Rule Aims at Paying More Workers as Employees.”

BEWARE FORM SS-8 AND THE DISGRUNTED FORMER WORKER

The IRS allows both businesses and workers to file a Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The filing of an SS-8 will trigger the IRS to issue its opinion on whether the worker is an employee or an independent contractor – and can alert the IRS to any classification problems your business may have. Not surprisingly, disgruntled former workers often file the form in conjunction with a claim that their employer improperly classified him or her as an independent contractor to avoid paying benefits and taxes. If the IRS believes that your business has classification issues, it may initiate an official audit. Thus, if a former worker files a Form SS-8, it is best for businesses to contact their tax and legal advisors before responding to the IRS.

CONCLUSION

According to a recent statement by the DOL, its Wage and Hour Division “continues to receive numerous complaints from workers alleging misclassification, and the Department continues to bring successful enforcement actions against employers who misclassify workers." As detailed above, there are myriad reasons businesses prefer to classify workers as independent contractors, even if it means less control over a worker's day-to-day activities. But employers must be careful not to misclassify their employees. The DOL is cracking down on improper classification, especially as it tries to stamp out attempts to dodge insurance obligations under the ACA.

If caught misclassifying employees, your company could wind up owing unpaid taxes and employee benefits, and could be assessed significant penalties. Thus, it is best to keep in mind the DOL’s own economic realities test when deciding whether your workers are employees or independent contractors. Doing so will go a long way to ensure that your company stays out of the DOL’s crosshairs.

Personal Guaranties: Affected by Same-Sex Marriage?

Tue, 01 Sep 2015 00:00:00 GMT

In the wake of two court rulings legalizing same-sex marriage, businesses that extend credit should be reminded that both spouses must sign a personal guaranty in order to bind the marital community.

It is common in the construction industry for companies to require customers to sign a personal guaranty in order to secure an extension of credit to their business. The personal guaranty is intended to incentivize the customer to satisfy his obligation to the company, and provides recourse to the seller or supplier in the event the customer does not. As the guaranty is intended to protect the company extending credit, it is imperative that companies that rely on credit transactions understand who is required to sign a guaranty to recognize its full benefit.

COMMUNITY PROPERTY

Arizona is a community property state, meaning any property acquired during the marriage by either spouse, with a few exceptions, is presumed to belong not to the individual spouse but to the couple’s marital community. In most instances, either spouse, on his or her own, has the ability to bind the community or otherwise manage, control and dispose of community assets. However, an important exception to this general rule applies to guaranties.

In Arizona, a guaranty of a corporation’s debt is binding on the marital community only if signed by both spouses. Where only one spouse signs a guaranty, only that spouse’s sole and separate property may be recovered by the creditor to satisfy the guaranty; the marital community and the non-signing spouse’s sole and separate property are immune from the creditor.

COURT DECISIONS

Getting the signatures of both spouses took on a new wrinkle after the U.S. Supreme Court (in Obergefell v. Hodges ) legalized same-sex marriage throughout the country, a few months after a federal district court (in Connolly v. Jeanes ) ruled that Arizona laws banning same-sex marriage were unconstitutional.

As a result of the Obergefell and Connolly decisions, Arizona’s community property laws apply with equal force to same-sex marriages. Consequently, businesses that require personal guaranties of a corporation’s debt must be mindful of these decisions when extending credit.

In short, businesses should always ask a potential guarantor whether he or she is married before having him or her sign the guaranty. If the potential guarantor is married, then businesses must be vigilant in obtaining both spouses’ signatures on the guaranty in order to bind the marital community to the corporate debt.

Arizona Extends Prompt Payment Protection to Design Professionals

Mon, 20 Jul 2015 00:00:00 GMT

Since the original enactment of the Arizona Prompt Payment Act in 2000, Arizona licensed contractors and subcontractors and material suppliers have enjoyed prompt payment protection in connection with private construction projects . Other legislation has extended similar protection for work performed on public projects.

Unfortunately for design professionals, Arizona law has not provided similar protection to them. That changed, to a degree, on July 3, 2015, when the Arizona Design Professional Prompt Pay Act went into effect. The Act provides prompt payment for architects and engineers that perform work on public (but not private) construction projects.

The Act amended various statutes that affect payment to design professionals on public projects.

CONTRACTS WITH CONTRACTORS AND SUBS

A.R.S. § 34-221 now provides that, on public projects for entities other than the State of Arizona or the Arizona Department of Transportation (ADOT), a contractor’s prompt payment obligations to subcontractors and suppliers protects design professionals as well. Specifically, payment is due to the design professional within seven days after the contractor (or subcontractor) receives payment. Late payments are subject to interest of 1% per month.

Similar prompt payment protection for design professionals is contained in amendments to A.R.S. § 41-2577 and A.R.S. § 28-411 for work performed for, respectively, the State of Arizona and ADOT.

LIMITATIONS

It is important to note that prompt payment protection still does not apply to amounts owed to design professionals whose contract is directly with the public entity. The new Act applies only to public projects in which the design professional is retained by the contractor.

Nevertheless, many architects and engineers will benefit from the newly enacted statutory provisions that help ensure that they will be paid in a timely fashion.

Arizona legislature reduces threat of construction defect lawuits

Mon, 06 Jul 2015 00:00:00 GMT

Contractor-friendly amendments to Arizona’s Purchaser Dwelling Act were signed into law by Governor Ducey on March 23, 2015, and went into effect July 3.

The main focus of HB 2578 is the repeal of A.R.S. § 12-1364, which requires home sellers and contractors to pay attorney fees and expert witness fees to successful plaintiffs in a construction defect lawsuit (or “contested dwelling action”). Under the new law, the awarding of such costs will be left to the courts on a case-by-case basis and will depend on the language of the dwelling purchase contract.

The new law does not deprive homeowners of the right to sue to force sellers or builders to correct defective construction. However, by making the awarding of attorney fees less certain, the law seeks to curb excessive lawsuits promoted by law firms that represent homeowners in construction defect litigation.

The new law also establishes a seller’s/builder’s right to repair construction defects before a homeowner can file a lawsuit. The process begins with the homeowner sending a certified letter to the seller/builder, which has 60 days to respond. In its response, the seller/builder can either dispute the need for corrective action or, in a “notice of intent to repair or replace,” can agree to make any needed repairs or replacements. The new law provides that, in the latter case:

The homeowner and the seller/builder will coordinate repairs or replacements within 30 days after the seller/builder’s notice of intent to repair or replace was sent.

The repair/replacement will be performed by the seller/builder or, at the request of the homeowner, by another construction professional selected by the seller/builder.

The seller/builder is required to make reasonable efforts to begin repairs/replacements within 35 days after the seller's notice of intent to repair or replace was sent.

All repairs/replacements are to be completed using “reasonable care under the circumstances” and “within a commercially reasonable time frame considering the nature of the repair or replacement, any access issues or unforeseen events” that are not caused by the seller/builder.

At the conclusion of any repairs or replacements, the homeowner may sue the seller/builder, as under the current law. However, as noted above, if the homeowner’s lawsuit is successful, the seller/builder will be liable for attorney fees and expert witness fees only if the court decides to award those fees to the homeowner.

If the homeowner files a suit against the seller/builder before the seller/builder can fulfill its obligations under its notice of intent to repair or replace (per the steps outlined above), the suit may be dismissed.

Misclassifying workers as LLC “members” leads to costly settlements

Wed, 06 May 2015 00:00:00 GMT

The desire to avoid payroll taxes and other employee-related costs by misclassifying workers (as, for example, “independent contractors”) is nothing new. But a relatively recent scheme made the headlines in April when 16 Arizona companies and individuals agreed to pay $700,000 in back wages, employment taxes and penalties to resolve misclassification of more than 1,000 employees as “member/owners” of LLCs that were fronting for various construction companies.

In announcing the settlement on April 2, the U.S. Department of Labor stated that the construction workers were “building houses in Utah and Arizona as employees one day and then the next day were performing the same work on the same job sites for the same companies,” but without minimum wage, overtime, workers compensation, unemployment insurance, and other workplace protections.

The Labor Department’s five-year investigation began in southern Utah and then moved to Arizona after Utah passed a law that required LLCs to provide workers’ compensation and unemployment insurance to their members.

The settlement requires the defendants to:

pay $600,000 in back wages and liquidated damages to employees in Utah and Arizona and an additional $100,000 in civil penalties;

stop using limited liability companies to avoid Fair Labor Standards Act compliance;

treat themselves as “employers” and their current and future workers as “employees” under the FLSA;

comply with the FLSA’s minimum wage, overtime, recordkeeping, and anti-retaliation provisions;

pay all applicable federal, state and local taxes; and

work with the department to identify those workers who were harmed by their misclassification scheme and determine proper individual payment of back wages.

In a separate related investigation, last year the government obtained a consent judgment against a Phoenix drywall contractor that was allegedly a major client of the Arizona defendants in this case. That contractor was required to stop using the Arizona defendants’ unlawful LLC business model and to pay $600,000 in back wages, liquidated damages and civil money penalties.

Lesson for Contractors. While it is easy to differ with the federal government on many issues, there is little disputing that, as a Labor Department spokesperson noted, “the resolution of this case should send a strong message to any other employers, in any industry, contemplating such a scheme."

Nearly every company that has ever found itself in the Labor Department’s cross-hairs can readily attest that there is very little chance of emerging unscathed. In most cases, whatever financial savings a company achieves in the short term will pale in comparison to the devastating financial costs of fighting a misclassification scheme and, at some point, being forced to pay the piper.

Court Reaffirms Contract Requirement in Implied Warranty Breach

Tue, 17 Mar 2015 00:00:00 GMT

Louis Yanni was one of several people who bought homes in the same subdivision. When Mr. Yanni and his neighbors determined that the plumbing in their homes was defective, they sued the two plumbing contractors that, pursuant to subcontracts with the general contractor, performed the plumbing work on the homes as part of the original construction. The homeowners’ suit alleged that the subcontractors had breached the implied warranty of workmanship and habitability by using defective plumbing components.

In seeking to dismiss the suit, the subcontractors argued that:

the homeowners’ contracts were with the general contractor and not the subcontractors;

only parties to contracts can bring claims for breach of the implied warranty; and, thus,

the homeowners did not have standing to sue them.

The trial court agreed with the subcontractors and dismissed the homeowners’ suit. The homeowners appealed, and the Arizona Court of Appeals affirmed the trial court’s dismissal of their lawsuit and the victory by the subcontractors ( see the ruling in Yanni v. Tucker Plumbing ).

Related Articles:

Duty to Perform Good Workmanship Extends Beyond Parties to Contract

Architect's Errors May Create Liability for a Contractor's Damages

Contract Requirement. This case offers an opportunity to review the doctrine of implied warranty of workmanship and habitability, which was first applied to Arizona residential construction in a 1979 case, Columbia Western Corp. v. Vela. In that case, the court held that, in new home construction, the “builder-vendor impliedly warrants that the construction was done in a workmanlike manner and that the structure is habitable.” Because an implied warranty claim “sounds in contract,” the Columbia court held that only the parties to the contract can enforce it.

Five years later, the Arizona Supreme Court created a narrow exception, in Richards v. Powercraft, that allows subsequent homebuyers (not just the first buyer) to sue a homebuilder for breach of implied warranty.

A similar exception came out of a 2008 case, The Lofts at Fillmore v. Reliance Commercial Construction ( see related article ), in which the Arizona Supreme Court ruled that a general contractor was responsible for defects in a condo project in which the buyers contracted with the developer, not the general contractor.

In Yanni , the homeowners raised both exceptions to support their claim against the plumbing subcontractors but were unsuccessful. The Court of Appeals noted that “nothing in Richards or Lofts [allows] a homebuyer to assert a breach of the implied warranty against any subcontractor ... in the absence of a contract between the homebuyer and the subcontractor.”

Subcontractors at Risk. It is worth mentioning that neither the trial court’s dismissal of the homeowners’ suit nor the appellate court’s ruling let the subcontractors entirely off the hook.

The trial court noted that there were other “defendants in line,” such as the general contractor or developer, with which the homeowners did have a contract and against which the homeowners’ could have filed suit.

Similarly, the appellate court included in its opinion that the homeowners could sue the developer or general contractor, which could then seek indemnity against the subs or assign its claim to the homeowners.

Federal projects, worker pay and the Davis-Bacon Act

Wed, 11 Feb 2015 00:00:00 GMT

Contractors and subcontractors on federally funded or assisted construction projects must be alert to wage and record-keeping requirements imposed by an 80-year-old federal law.

The Davis-Bacon Act is one of several federal laws that govern payment of workers on federal projects. The Act covers a significant portion of the projects undertaken by the construction industry. Approximately 20% of all construction projects in the U.S. are covered by Davis-Bacon, affecting more than a quarter of all construction workers in the nation at any given time.

The Act requires contractors and subcontractors on federal projects (i.e., construction, alteration or repair of public buildings or public works) to pay their laborers who work on those projects no less than the "locally prevailing wages" and specific employee benefits for corresponding work on similar projects in the area.

The determination of locally prevailing wages is made by the U.S. Department of Labor and includes the (a) basic hourly rate of pay, (b) hourly rate of contributions and (c) hourly rate of cost that may be reasonably anticipated in providing benefits. The determination is generally based on Davis-Bacon wage surveys and by levels set by local collective bargaining agreements (CBAs), whichever is higher.

The Labor Department's local wage determination applies to all identifiable classifications of work to be performed. An employee who works in more than one classification must be paid for the actual time spent doing work under each classification.

BACKGROUND

Davis-Bacon was passed during the Great Depression and signed into law by President Hoover. At a time when much of the nation's construction activity was federally funded, through the Works Progress Administration (WPA) and other federal initiatives, Davis-Bacon sought to protect the wages of local, largely unionized workers against non-union persons who would migrate to an area in search of jobs and were willing to work for whatever they could get.

Today, as throughout its 80-plus-year history, Davis-Bacon is politically controversial and commercially burdensome. Compliance with Davis-Bacon places greater burdens on contractors than simply paying wages set by the Labor Department. On the front end, the higher wages normally required on federal projects affects estimates and bidding.

On the back end:

Contractors that contract directly with the contracting agency (i.e., "first-tier" contractors) must maintain and submit certified payroll records to that agency (see "Payroll Records" below).

Second-tier contractors that contract with a first-tier contractor must maintain and submit certified payroll records to the first-tier contractor.

First-tier contractors are responsible for ensuring that their second-tier contractors are paying the prevailing wage and keeping required payroll records.

Similarly, second-tier contractors are responsible for compliance by their subcontractors.

Ultimately, it is the first-tier contractor who will be held responsible if a second-tier contractor (or that second-tier subcontractor's sub) fails to pay the prevailing wages and fringe benefits and the Department of Labor determines that the second-tier contractor is unable to pay.

The contracting agency can withhold from payments to first-tier contractors and subs amounts necessary to pay the extra wages imposed by Davis-Bacon.

WHO IS AND IS NOT COVERED

Davis-Bacon applies to employees on the site of the covered work and at any site established specifically for the performance of the contract. That includes job headquarters, batch plants, tool yards, etc., if those sites are dedicated entirely or mostly to the project and are adjacent or very close to the actual site. The Act also applies to operators of vehicles traveling between sites associated with the project.

The Act generally does not apply to work performed at off-site facilities that were in use by the contractor or sub before the opening of bids for the project, or to executive, administrative or clerical work, nor does it normally apply to owner-operators. Apprentices, trainees and helpers are also exempt, under limited circumstances. As for on-site foremen and supervisors, their pay is generally not governed by Davis-Bacon, provided they do not work with tools more than 20% of the time.

The "locally prevailing wages" determination trumps any employment or wage agreements that may exist between the contractor and any employee whose work is subject to the Act.

Contractors must post the scale of wages to be paid in a prominent and easily accessible place at the site of work.

PAYROLL RECORDS

All employers whose workers are covered by Davis-Bacon must maintain weekly payrolls with certifications of compliance. Payroll records must be:

submitted to the contracting agency or, if the project is only federally funded or assisted, to the project owner or "sponsor";

accompanied by a signed "Statement of Compliance" certifying under oath that (a) the payroll contains all of the required information and is correct and complete, (b) each covered employee has been correctly and fully paid, and (c) each employee was paid the prevailing wage for the classification covering the work performed; and

retained for three years after project completion.

ENFORCEMENT

As with all matters concerning the U.S. Department of Labor, compliance is essential, and violations are addressed harshly.

A common ploy by some contractors that try to circumvent the higher wage requirement is to impose payroll deductions or otherwise force workers to repay the extra wages. That is a violation of the Copeland "Anti-Kickback" Act, and punishment includes fines, imprisonment or both.

The DOL's investigative and enforcement powers are massive, agency investigators and staff have no known sense of humor, the presumption of innocence does not apply, and punishment is severe and swift.

OVERVIEW

This discussion of the Davis-Bacon Act is a view from 30,000 feet and barely scratches the surface of a complex and potentially perilous federal law. Any contractor or subcontractor wishing to bid on a federally funded construction project or contract with a first- or second-tier contractor should seek experienced labor counsel before submitting a bid or entering into a contract.

We would be happy to help you assess your opportunity and exposure and, if necessary, introduce you to a local labor attorney who is well-versed in this area of the law.

Employee misuse of confidential information

Mon, 01 Dec 2014 16:12:27 GMT

The Arizona Supreme Court’s ruling in Orca v. Noder opens the door for employers to make claims of unfair competition against employees who misuse the company’s confidential information.

Unpaid Taxes a Reduced Threat to Contractor's License

Tue, 29 Jul 2014 00:00:00 GMT

Under a law that went into effect July 22, 2014, the ROC is no longer required to investigate a licensee's tax obligations.

Thanks to a new law passed during the recently completed legislative session, the Arizona Registrar of Contractors (ROC) will no longer be required to investigate whether contractors and/or their officers are current with their tax obligations. Also, the ROC can no longer suspend or revoke, on its own initiative, a contractor's license for failure to pay income taxes, withholding taxes or transaction privilege (sales) taxes.

Senate Bill 1170 provides for tax-related license suspension or revocation by the ROC only when the Arizona Department of Revenue notifies the ROC that "a tax debt ... incurred in the operation of the licensed business has become final" and the taxpayer neglects or refuses to pay.

The new law removes the ROC's discretion to withhold issuing a license or in suspending or revoking a contractor's license due to issues relating to the payment of taxes. Many believed that the complexities of city, state and federal taxes are outside the expertise of the ROC.

S1160 was sponsored by Senators Gail Griffin, David Farnsworth, David Gowan, Darin Mitchell and David Stevens. It was signed into law by Gov. Brewer on April 23 and went into effect July 22.

Miller Act in Brief: Bond Claims on Federal Projects

Mon, 16 Jun 2014 00:00:00 GMT

On federal government construction projects exceeding $100,000, the Miller Act requires general contractors to post bonds guaranteeing (a) the performance of their contractual duties and (b) payment of their subcontractors and material suppliers. The Miller Act applies to contracts awarded for the construction, alteration or repair of any public building or public work of the federal government.

Parties that may assert a claim under a Miller Act payment bond are limited to:

"first tier" subcontractors and material suppliers (i.e., parties that contract directly with the general contractor) and

"second tier" subcontractors and suppliers (i.e., parties that contract with a first-tier subcontractor).

Architects, engineers, surveyors, etc., who provide professional services on a federal project may also make claims under a payment bond required by the Miller Act.

See also: 90-Day Miller Act Notice Period Runs from Date of Last Delivery on Open Accounts

WAITING PERIOD

If a first-tier subcontractor or material supplier has not been paid in full within 90 days after the date in which it completed its work or ceased performing work on the federal project, it may sue the general contractor in federal court in the district in which the contract was performed.

If a second-tier subcontractor or supplier has not been paid within 90 days, it may also file suit as above, if it gives notice to the general contractor within 90 days after the date in which it completed or ceased its work on the project. The notice must state with “substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed, and include a demand that the prime contractor pay the outstanding balance.” The notice may be served by certified mail, overnight mail, or by personal delivery.

While neither scenario carries a requirement to notify the general contractor’s surety company before taking legal action, such a notification is considered prudent.

Please note that most Arizona public works projects are covered by Arizona’s "Little Miller Act." The procedure to make a claim against a Little Miller Act payment bond is identical to the federal Miller Act, except that second-tier subcontractors and suppliers must send a preliminary 20-day lien notice in addition to the 90-notice required by the federal act.

Contract Omissions Can Trigger ROC Action Against the Contractor's License

Mon, 14 Apr 2014 00:00:00 GMT

As we originally discussed in our May 2013 ROC Compliance Update , if you omit from a contract with an owner just one of the nine "minimum elements of a contract" listed below and set forth in A.R.S. § 32-1158 , you are in violation of Arizona's contracting statutes. Those minimum elements are not mere technicalities; the ROC has made it clear that a contractor's license can and will be disciplined if any of the nine elements are missing from a contract.

Although a failure to comply with the minimum-elements statute does not automatically trigger a specific sanction, the consequences can be serious. At an April 1, 2014, meeting of Arizona construction lawyers, an ROC representative reported that, in a couple of recent cases, contractor's licenses were temporarily suspended for failure to include required contractual provisions.

THE NINE ELEMENTS

The conclusion is simple. To avoid running afoul of the ROC, make sure that your contracts include the following:

The contractor's name, business address, and license number

The owner's name and mailing address, along with the address or legal description of the jobsite

The date the contract was entered into by the parties

The estimated date of completion

A description of the work to be performed

The total amount to be paid to the contractor, including all applicable taxes

The amount of any advance deposit

The amount and timing of progress payments

Notice that the property owner has the right to file a written complaint with the Registrar of Contractors for an alleged violation of A.R.S. § 32-1154(A), along with contact information for the ROC. (Watch out: This notice and contact information needs to be displayed in specific ways.)

Given the ROC's seriousness about enforcing the contract requirements of A.R.S. § 32-1158, you should review your contracts to check for the presence of all nine elements. If need be, consult with a construction attorney to ensure compliance.

The headaches of fighting a Registrar of Contractors complaint

Wed, 12 Mar 2014 00:00:00 GMT

Most residential builders fall into one of two categories: those who have experienced a Registrar of Contractors hearing, and those who believe they never will.

If you are a member of the first group, you know the aggravation, cost and injustice of an ROC complaint. If you are in group two … well, just wait. Any of the following can be the basis of a ROC complaint:

failure to fulfill the terms of a construction contract

poor workmanship

failure to comply with a Corrective Work Order

performing work outside the scope of a license

hiring unlicensed contractors

abandonment

failure to pay subcontractors or suppliers

building code violations or failure to comply with safety or labor laws

deviation from plans or specifications

use of false, misleading, or deceptive advertising.

RESOLUTION WITHOUT A HEARING

After the Registrar notifies you that a complaint has been filed, you will have an opportunity to resolve the problem and notify the inspector assigned to the case.

Treat this as your opportunity to shine. If you do, you will have a better chance of resolving the problem without going to a hearing. In addition, you may convince the inspector that you have made every effort to resolve the problem and that the homeowner won’t be pleased until you build the Taj Mahal.

If the homeowner is not satisfied with your efforts in response to the complaint, they can request a jobsite inspection. In such a case, you should arrive at the inspection with your subcontractors, your calendar and your telephone, so that you can arrange to make any necessary repairs on the spot, with all parties present.

If an ROC "directive" is issued, notify the inspector in writing every time you take corrective action and get the work done in the time required. The inspector has to know that you are doing the work and doing it on time. Be sure to document all attempts to perform corrective work, as denial of access is a valid (and common) defense to a Corrective Work Order. When the homeowner then reports new complaints, your pattern of good behavior will already be known to the inspector.

HEARING

Whether the homeowner is satisfied or not, the inspector will send your file to the ROC’s legal department, which will decide whether to close the case or issue a Citation and Complaint against your license. If a Citation and Complaint is issued, the ROC will send it to you. YOU MUST FILE YOUR WRITTEN RESPONSE WITHIN TEN DAYS. A hearing will then be set to determine if the ROC should take disciplinary actions.

To help you understand the challenges that await you, here are nine things to remember about fighting a Registrar of Contractors complaint:

There is little downside for a homeowner in filing a frivolous complaint. The homeowner does not have to pay a filing fee or hire an attorney. However, if the ROC’s legal department determines that the complaint is frivolous, they may close it.

Favorable contract language often is not recognized by inspectors or enforced against consumers. The appearance of a model home becomes the standard, regardless of contract language to the contrary. Signed waivers of minor plan discrepancies, changes in specification, and square footage disclaimers may not be given any weight.

The hearing officer does not tell you how to rectify the defect. Your license may be at risk if you pick the wrong solution, and it gives the consumer leverage in negotiating a settlement.

The ROC can order you to correct items that you had already agreed to correct. Even if you offered to do the required work and the consumer would not let you, the order to perform the work can be a black mark on your record at the ROC.

Complaints become part of your company’s permanent record, regardless of who prevails in the hearing. If a prospective customer checks your license information online, it will show that you had a complaint filed against your license, even if the complaint was closed or you won at hearing. Your complaint record can be introduced as evidence in future hearings, even if the complaints were about defects that are unrelated to the complaint at hand.

You may encounter problems with complicit subcontractors. If the consumer does not name a potentially liable subcontractor, should you bring in the subcontractor as a party? Doing so may help you avoid an unfair decision. However, the subcontractor may turn the tables and claim that you created the problem (that puts another blemish on your license). Also, dragging the subcontractor into the complaint deprives you of a potentially favorable witness. If you want to keep your options open, put language in your contract that binds the subcontractor to the ROC hearings.

If you control the homeowners association, you have extended responsibility for subdivision or condominium common areas. As a general rule, you are on the hook for acts that occur within two years before an ROC complaint is filed (per A.R.S. § 32-1155 ). By Registrar policy, this time period is extended to two years from the date you cease to control the homeowners association.

An ROC hearing is no place for do-it-yourself representation. Being a successful builder does not mean you will be an equally successful advocate for your case in an administrative hearing. Most contractors are not trained or experienced in hearing preparation (reviewing inspectors’ notes, subpoenaing witnesses, etc.), and they routinely get sandbagged at the hearing when additional complaints surface. That lack of experience can prevent you from recognizing and taking advantage of procedural and evidentiary exceptions that might support an appeal.

Do not take an ROC hearing lightly. The Registrar can revoke or suspend your license for even small matters if they are not handled in a proper and timely fashion.

Worker lawsuit a new threat to employers in wage and hour claims

Mon, 09 Dec 2013 00:00:00 GMT

The August 2012 Construction Advisor (" Piece Work and the Fair Labor Standards Act ") discussed the financial risks of paying wage-earning employees on a "piece rate" basis (i.e., for measurable work completed). While this practice is not uncommon in the construction industry, as it can motivate employees to increase their productivity, it carries a high risk of claims for unpaid overtime and failure to pay minimum wage. The problem, which carries grave consequences, stems from "misclassification" of employees – i.e., employers in the construction and other industries misclassifying their workers as "exempt" (i.e., paid a salary instead of an hourly wage, to avoid overtime) or as independent contractors (to avoid overtime and payroll taxes).

In an effort to force employers to comply with wage-and-hour requirements and to punish employers that do not, the U.S. Department of Labor's Wage & Hour Division has stepped up its enforcement activity regarding suspected minimum wage and overtime violations, publicly targeting certain sectors of the construction industry.

New Threat: Employee Lawsuits. As though the consequences imposed by the government – including business and personal liability for unpaid wages and payroll taxes, tax liens and other non-dischargeable obligations – were not sufficiently severe, a new threat has recently emerged: private lawsuits. We are seeing advertisements by consumer law firms encouraging people to sue their current or former employers for alleged violations of the Fair Labor Standards Act (FLSA). The suits are generally filed in federal court, and they pose a serious threat to businesses and their owners and managers.

If an employee wins an FLSA-based lawsuit against your company, you and the company may be on the hook for:

unpaid compensation;

liquidated damages equal to the unpaid compensation (you read that correctly – if you owe a worker $2,000 in unpaid compensation, you may owe him another $2,000 in damages);

attorneys' fees and other costs incurred in bringing the lawsuit; and

pre- and post-judgment interest on damages, including potential statutory penalties.

Employer exposure is not limited to overtime and minimum wage deficiencies. Claims can also stem from alleged non-payment for work performed, a nebulous charge that employers bear the burden to refute. Common employer responses – "I didn't know they were working" or "they weren't given authorization to work" – while perhaps true, offer little protection (potential defenses are discussed at the end of this article).

On employers' obligations, the FLSA is clear:

Employers must compensate employees for all work that employers permit employees to perform. (29 C.F.R. § 785.11)

It is the responsibility of employers' management to ensure that work is not performed if not desired. (29 C.F.R. § 785.13)

Employers cannot accept the benefits of employees performing work without compensating employees for their work. (29 C.F.R. § 785.13)

While not every employer is subject to the FLSA's requirements, the exceptions are few. You are governed by the FLSA if you are "engaged in commerce" (you can probably stop right there) "or in the production of goods for commerce" or are "engaged in related activities performed through unified operation or common control for a common business purpose."

You must record all of the time employees work, classify employees accurately as to whether they are "exempt," and pay hourly workers overtime wages for all hours worked in excess of 40 hours per week (except for certain conditions). If your records of employees, wages, hours and other conditions and practices of employment are not maintained per federal requirements, they not only provide little in the way of a defense; they may also provide the evidence that allows the employee to prevail in the lawsuit.

If employees are able to demonstrate a pattern of willful and intentional behavior on your part, and your lack of a good faith effort to comply with the FLSA, they have three years within which to sue you and your company. Also, if you discriminate against employees by, for example, threatening retaliation to force employees to work more than 40 hours per week without overtime pay, you expose yourself to a violation of Arizona's " Constructive Discharge Statute " (A.R.S. § 23-1502).

Your liability does not stop with acknowledged employees. If you paid workers as "independent contractors," they may claim that you should have paid them wages (with overtime) and withheld and paid over federal and state taxes. In that case, you are liable not just for overtime and the taxes associated with it, but also the unpaid taxes on the amounts that you did pay them.

Personal liability for unpaid wages and associated liabilities is not limited to the company's owners. Accountants and bookkeepers who process payroll and issue paychecks or have responsibility for depositing FICA and withholding taxes may be liable by virtue of aiding and abetting the employer's unlawful treatment of employees.

This exposure exists if the matter stays between you and the worker in federal court. If the Labor Department gets involved, you face penalties of $1,000 or more for each willful and repeated violation of overtime pay requirements.

The State of Arizona has its own employee-protection laws (A.R.S. §§ 23-351 and -355 ) that largely mirror the federal requirements. Not surprisingly, Arizona's laws also provide a mechanism for the employee to collect unpaid wages, along with attorneys' fees and costs in bringing the lawsuit. Further, A.R.S. § 23-364(C) provides that, if the State gets involved in a minimum wage dispute, perhaps as part of an investigation that initially focused elsewhere, the State may review the internal records regarding all employees in order to protect the identity of any employee identified in the complaint.

Defenses. Depending on the circumstances, you may have certain defenses, stemming from whether the employee had:

supervisory or managerial duties,

authority to hire or fire employees,

employees reporting directly to him or her, or

the ability to use discretion regarding major work-related decisions.

For every one of those circumstances that applies, the stronger your argument that the worker was exempt from overtime and properly treated as a salaried employee.

What to Do. If you believe you are at risk of facing an FLSA-based employee lawsuit, you should:

contact your insurance agent and/or broker to see what types of insurance coverage may exist for some of these violations;

carefully review your record keeping and employment practices to ensure you comply with state and federal requirements; and

consider engaging a human resources consultant with expertise in wage-and-hour record-keeping and compliance.

You should also call your lawyer. If your current law firm has specific experience in wage-and-hour violations, they can guide you through the coming steps. If they do not offer the expertise you need, we invite you to contact us. We can help you evaluate your liability and represent you in defending against the employee's claim or, if the particulars of your case require it, refer you to an attorney who has the specific experience you need.

Customer list not necessarily a trade secret

Thu, 14 Nov 2013 16:26:06 GMT

In a 2013 opinion, the Arizona Court of Appeals reaffirmed that "only those secrets 'affording a demonstrable competitive advantage' will qualify" as a protected trade secret.

APPEAL

Calisi appealed the trial court's order on the trade secret claim, arguing that UFS failed to present any evidence that he had misappropriated a legally enforceable trade secret, i.e., UFS's customer list.

The Court of Appeals agreed with Calisi. In reversing the trial court's ruling on the trade secret issue, and noting that making such a determination "is a mixed question of law and fact," the Court provided a useful set of criteria for determining when and whether the third-party use of a customer list constitutes misappropriation of trade secrets. Here are some of the highlights:

Under the Uniform Trade Secrets Act (UTSA), which Arizona has adopted, a "trade secret" is information that:

"derives economic value … from not being generally known to, and not being readily ascertainable by … other persons who can obtain economic value from its disclosure or use;" and
"is the subject of [reasonable] efforts … to maintain its secrecy."

Stated more simply, the subject matter must be a secret, and the owner must have tried to keep it a secret.

Specific to customer lists, the Court cited several factors to determine whether a customer list qualifies as a trade secret.

A customer list may be entitled to trade secret protection when it represents a "selective accumulation of detailed, valuable information about customers – such as their particular needs, preferences, or characteristics – that naturally 'would not occur to persons in the trade or business.'"
In other words, a qualifying customer list must be something more than a list of names, addresses and phone numbers. It must contain information that a company compiles by virtue of its relationship with the customer, not simply by gathering required contact information or purchasing a commercial list of prospects that meet the profile of the company's customers.
A customer list may also be entitled to trade secret protection if the company that owns the list shows that it compiled the list by "expending substantial efforts to identify and cultivate its customer base, such that it would be difficult for a competitor to acquire or duplicate the same information."
A related factor is whether the information contained in the customer list "derives independent economic value from its secrecy, and gives the holder of the list a demonstrable competitive advantage over others in the industry."

In addition, courts have considered the extent to which the company divulged its customer list externally and internally, i.e., to people outside of its business as well as to its own employees. If the company does not treat the list as confidential, then neither will the courts.

In the Calisi case, UFS's claim for trade secret protection was hamstrung by the fact that, at trial, UFS did not present evidence actually describing the confidential customer information it argued constituted a trade secret. UFS attempted to cross-sell financial products to its tax clients by using information gleaned from their tax returns, but the company failed to show that it had actually acquired any specialized, valuable information about its customers, such as information concerning their financial requirements, tax strategies, investment objectives, and risk and investment preferences, that could give rise to trade secret protection under the law.

The Court noted that the record was "completely silent" about "the cost, time, frequency and success rate" of UFS's advertising and marketing methods. The Court therefore found that, because UFS did not explain what unique and original information it had acquired in the course of its business, or show it had invested substantial time and effort to acquire information unknown to its competitors, it failed to meet its burden of proving its customer lists were a trade secret.

Citing its 1999 ruling in Enterprise Leasing Co. of Phoenix v. Ehmke, the Court reaffirmed that "not every commercial secret will be a trade secret; only those secrets 'affording a demonstrable competitive advantage' will qualify."

Further undermining UFS's position was its failure to demonstrate that it had actually treated its customer lists as a secret. As evidence of the lack of secrecy, Messina had testified at trial that he knew the identity of several UFS clients, in part through the years-long mutual referral arrangement that his company and UFS maintained. Their joint marketing efforts resulted in an overlap in clientele, and he had included these overlapping clients in the mass email he sent out announcing Calisi's association with his company. Further, at trial Calisi testified that Messina had "flagged" customers in his database who were also UFS clients. Thus, Calisi could have readily and independently ascertained UFS clients through Messina.

The Court noted, "although secrecy does not need to be absolute, the claimant must nevertheless show 'it made reasonable efforts to maintain the secrecy of the information such as to ensure that it would be difficult for others to discover the information without using improper means.'"

PROTECTION

To gain trade secret protection for its customer list, a company would be prudent in taking these cues from the Court's Calisi ruling:

Include in the customer list more than mere contact information. Other fields might include types of services provided, notes from client meetings and phone calls, billing histories, reminders about client preferences regarding how they are to be served and communicated with, notes about plans for future products and services to be purchased, etc.
Gathering the additional information should be the result of an intentional process that goes beyond basic, routine information gathering.
Maintain records of the marketing methods used to build a client list as well as the success rate of those methods. By having a record of the expense and effort that goes into building a client list, a company will be in a better position to protect that list as a trade secret.
Communicate to all employees the secret nature of client information and ensure that only those employees requiring the information to perform their functions are granted access. Such communication should be included in the employee manual, new employee training, periodic reminders, and continuing education.
Vendors and consultants should be required to sign an acknowledgement regarding the confidentiality of customer information to which they may be exposed.

Compliance Update 2013: Arizona Registrar of Contractors

Wed, 15 May 2013 00:00:00 GMT

May 2013 — The Arizona Registrar of Contractors (ROC) has implemented a number of important policy changes that affect all Arizona contractors. Because the ROC’s interpretation of its own rules has the force of law, a contractor’s failure to keep informed of how the ROC is enforcing its regulations can have very serious consequences.

Observing the following tips will help you avoid licensing-related problems.

Be prepared for a more demanding ROC license application. The ROC has greatly expanded the information required in its license application and its application to substitute a qualifying party. For example, every individual "named" on the license, including every owner and officer of a corporate licensee, must provide verified copies of their driver’s license. Applicants should also be anticipate criminal background checks.

In addition, the ROC has increased its scrutiny of applicant and qualifying party experience. With respect to substitution of qualifying parties, failure to do so within the allowed time will result in immediate suspension of the license; therefore, begin the application process as soon as possible.

Don’t let a non-employee work under your license. No matter how clever you are, you cannot find a way to "share" your license with an unlicensed contractor in such a way that you can escape the ROC’s scrutiny. "Aiding and abetting" unlicensed persons to contract without a license can result in revocation of a license under A.R.S. § 32-1157 .

Make sure your contracts meet statutory requirements. Every Arizona contract between a contractor and a property owner for services of $1,000 or more must be written and must contain certain information, as set forth in A.R.S. § 32-1158(B) . (Additional requirements apply to contracts for residential swimming pool construction and, under certain circumstances, for repairs of storm-related damage .)

The name of the contractor and the contractor's business address and license number.

The name and mailing address of the owner and the jobsite address or legal description.

The date the parties entered into the contract.

The estimated date of completion of all work to be performed under the contract.

A description of the work to be performed under the contract.

The total dollar amount to be paid to the contractor by the owner for all work to be performed under the contract, including all applicable taxes.

The dollar amount of any advance deposit paid or scheduled to be paid to the contractor by the owner.

The dollar amount of any progress payment and the stage of construction at which the contractor will be entitled to collect progress payments during the course of construction under the contract.

Notice that the property owner has the right to file a written complaint with the registrar for an alleged violation of section 32-1154, subsection A. The contract shall contain the registrar's telephone number and website address and shall state that complaints must be made within the applicable time period as set forth in section 32-1155, subsection A. The information in this paragraph must be prominently displayed in the contract in at least ten point bold type, and the contract shall be signed by the property owner and the contractor or the contractor's designated representative. This paragraph does not apply to a person who is subject to and complies with section 12-1365.

For more on this topic, see our March 2012 article, " Negotiating a Construction Contract: Tips and Reminders ." Also, contractors need to be aware of the consequences for omitting any of the required contract elements listed above; see " ROC Enforcement: Contract Errors Can Trigger Sanctions ."

Keep your ROC contact information up to date. Advise the ROC immediately when your address changes, and make sure that someone in your company is receiving and promptly opening your mail from the ROC. This is not just a good idea; failure to do this can put you out of business.

When a complaint is filed against your license, or when a renewal fee is due, the ROC is required only to mail notice to the address it has on file for you. In the case of a Citation and Complaint, you have 15 days to file a written answer; if you have moved without advising the ROC or are out of the office for an extended period, you can easily miss the notice and fail to answer before the deadline.

If you miss the deadline, you have no recourse; the ROC will not give you a hearing, and you cannot appeal. In addition, if your license is revoked, it cannot be revived; you must apply for a new license.

Put your license number on all business stationery. Anything that has your name on it - except for many forms of advertising - should also include your license number. The ROC will not bring a separate complaint for the omission, but it may use the omission as an aggravating circumstance in disciplinary proceedings that are brought on other grounds.

Maintain a sufficient bond. The amount of the required ROC bond depends on the annual amount of business you anticipate. Although the ROC will not bring a separate disciplinary action for failing to maintain a sufficient bond, it can consider your failure to comply with bond requirements as an aggravating circumstance in disciplinary proceeding on other grounds.

Fall protection: OSHA rejects Arizona standards

Mon, 08 Apr 2013 00:00:00 GMT

On February 6, 2015, the Occupational Safety and Health Administration (OSHA) rejected Arizona’s residential fall protection standards that were enacted in 2012.

As a result of OSHA’s actions, all of the Arizona state-specific residential fall protection standards in A.R.S. §§ 23-492 through -492.09 are automatically repealed. Effective February 7, 2015, Arizona employers in Arizona must comply with the federal residential fall protection standards in 29 CFR 1926.501 et seq., known as Subpart M.

To help contractors comply with Subpart M, the Arizona Division of Occupational Safety and Health (ADOSH) is offering free classes on the first and third Thursday of each month, from 9:00 a.m. to noon at the Industrial Commission of Arizona Auditorium, 800 West Washington Street, Phoenix, Arizona, and through webinars scheduled for the third Wednesday of each month from 10:00 am to noon.

Additional training options can be arranged through ADOSH’s consultation program. For more information, visit the Industrial Commission of Arizona website or call 602-542-1769 (Phoenix) or 520-628-5478 (Tucson).

Background. Central to OSHA’s problems with the State was dissatisfaction with enforcing the use of conventional fall protection in most circumstances where employees are working six to 15 feet above a surface. OSHA requires construction employers to provide fall protection at elevations of six feet and above.

The result for many construction employers included heightened regulatory activity and tighter enforcement. In representing contractors that have received a safety-related citation, we have seen situations in which (a) an employee unilaterally disregarded a safety protocol and (b) regulators “imputed” knowledge of the violation to the employer. This allows regulators to cite the employer for rogue employee misconduct, even though the employer had no actual knowledge.

As a consequence, otherwise compliant contractors were being tagged with the stigma of violations, thus threatening their business relationships with project owners and general contractors that require a clean disciplinary record.

Compliance. In this time of increased enforcement activity, it is more important than ever that roofing contractors and other employers in fall-sensitive construction situations exercise vigilance in complying with OSHA requirements and, in particular, supervising and reprimanding workers who disregard fall protection and other safety standards.

Evidence of an employer being “fully compliant” generally includes company-wide safety policies and procedures, regular employee training, disciplinary action for workers’ non-compliant behavior, providing all necessary safety equipment on the job site, and hiring safety consultants to conduct additional training and unannounced job site inspections.

OSHA Requirements and Resources. Falls are among the most common causes of serious work-related injuries and deaths, particularly in construction. To prevent employees from being injured from falls, OSHA requires employers to, in general:

use safe work procedures;

train workers in the proper selection, use, and maintenance of all protection systems;

use proper construction and installation of safety systems;

select fall protection systems appropriate for given situations; and

supervise employees properly.

To help determine whether there are hazards at their worksites and to work with OSHA on correcting any identified hazards, employers can contact OSHA's free and confidential on-site consultation service or call 800-321-OSHA (6742) and, under call-in options in effect at the time of this article, press number 4. OSHA claims that on-site consultations services are separate from enforcement activities and do not result in penalties or citations.

Wang Electric v. Smoke Tree: Liens and Leasehold Improvements

Tue, 06 Nov 2012 00:00:00 GMT

When a commercial tenant contracts for construction work, it creates a complicated situation for subcontractors and their mechanics’ liens.

It is rare that a construction lawsuit raises multiple useful lessons for contractors in protecting their payment rights, but Wang Electric v. Smoke Tree Resort did just that.

The 2012 Arizona Court of Appeals case, which was complicated and confusing even by a construction lawyer’s standards, can be summarized in part as follows:

Reasonable Time in Serving a Lien. A mechanics’ lien must be served within a reasonable time after it is filed. Surprisingly, in Wang Electric the court considered a 90-day delay to be reasonable but cautioned that “reasonableness” should be determined on a case-by-case basis. Takeaway: Without clear time limits, a subcontractor filing a mechanics’ lien should serve copies on every appropriate party as soon after filing the lien as time permits.

Liens Against the Tenant and Owner. When work is initiated by a tenant, a mechanics’ lien is effective against the property owner only if the tenant is an “agent” of the owner. In this case, the tenant was determined to be the owner’s agent, and the court ruled that service on one was the same as service on the other. Takeaway: Since agency relationships are not necessarily clear, whenever a situation calls for a mechanics’ lien, the lien claimant should serve the pre-lien on both the tenant and the owner and sort out the agency issues later.

Too Many Liens? Subcontractors and suppliers are allowed to “cover their bases” by serving multiple pre-liens. Takeaway: When in doubt as to who to serve your pre-lien on, it is better to serve too many parties than too few.

Liens against Tenant Improvements. A mechanics’ lien that is recorded solely against a tenant’s interest in tenant improvements can survive the lease’s termination under certain circumstances (discussed below). Takeaway: If you are filing a mechanics’ lien against a leasehold improvement, and your contract is with the tenant, you will want the tenant to be considered an “agent” of the owner. A common example of agency is that the tenant is making improvements at the direction of the owner.

Unjust Enrichment. In case your lien fails, you might be able to make an unjust enrichment claim, but only if the owner did not pay the general contractor or engaged in “dishonest conduct” (more below). Takeaway: An unjust enrichment claim is hard to win, and it is no substitute for properly preserving and enforcing your mechanics’ lien rights.

BACKGROUND

This case involves leasehold improvements at a site that long-time Phoenicians will remember as Dale Anderson’s "The Other Place" restaurant at the Smoke Tree Resort on Lincoln Drive. In October 2007, the Smoke Tree leased the vacant restaurant space to REM on Lincoln. The lease required REM to remodel the space, and Smoke Tree agreed to reimburse REM for the first $840,000 in remodeling expenses.

REM hired KAI Designs to be the general contractor, and their contract called for REM to make monthly progress payments to KAI. KAI then directly subcontracted with Wang Electric, Aero Automatic Sprinkler Co., Beecroft LLC, Adobe Paint, Adobe Drywall and other subcontractors.
Even though REM’s contract with Smoke Tree called for REM (the tenant) to pay KAI (the general), and for Smoke Tree (the owner) to reimburse REM, Smoke Tree paid the first $790,000 in construction costs directly to KAI.

In April 2008, the progress payments stopped, and unpaid subcontractors filed mechanics’ liens on Smoke Tree’s property and/or REM’s leasehold interest. Next, subcontractors filed lawsuits against Smoke Tree, REM, KAI and, in some cases, other subcontractors. All six subcontractors sought damages for breach of contract (against the general), sought to foreclose their mechanics’ liens (against the owner and tenant) and, as a Plan B, claimed that the owner and tenant had been unjustly enriched.

The waters were further muddied by the fact that, at some point during the controversy, REM’s lease was terminated, exposing the owner to claims that otherwise would have been focused on the tenant.

The ensuing flurry of claims, cross-claims, motions for summary judgment, etc., defies discussion in this simple article. However, while much of the Court of Appeals’ opinion in this case is devoted to thorny legal questions, the judges did raise some issues that have practical day-to-day importance to owners, contractors, subcontractors and suppliers.

Serving a Mechanics’ Lien on the Owner. Arizona law requires that a copy of a mechanics’ lien be served on a property owner within a reasonable time after filing. Unfortunately, the statute doesn’t define “reasonable time.” In Wang Electric, a mechanics’ lien was served on the owner three months after it was filed, and only as an attachment to a complaint.

In response to the owner’s argument that three months was unreasonably long, the Court of Appeals ruled that, in this case, 90 days was not unreasonable but offered no standard for future notifications, stating that reasonableness should be determined on a case-by-case basis.

As a practical matter, subcontractors should disregard the 90-day lag period that the court allowed here. Rather, in the absence of clear time limits, a subcontractor filing a mechanics’ lien should serve copies on every appropriate party as soon after filing the lien as time permits.

Preliminary 20-Day Notice Requirements. As a general rule, on commercial projects it is wise to serve a preliminary 20-day notice (or “pre-lien”) on all responsible parties, including the property owner or the owner’s agent.

However, when work is initiated by a tenant, a mechanics’ lien typically attaches only to the leasehold interest and tenant improvements. The property itself is subject to the lien only if the tenant is found to be an “agent” of the owner. Since agency relationships are not always clear, it is a good practice to serve the pre-lien on both the tenant and the owner.

In Wang Electric, the owner (Smoke Tree) argued that a mechanics’ lien was invalid because the subcontractor served a pre-lien on the tenant (REM) but not on the owner directly. The court ruled that, in this case, the tenant was an agent of the owner because the lease required the tenant to extensively remodel the property in accordance with plans and specifications approved by the owner. Thus, for lien purposes, service upon the tenant was the same as service upon the owner.

On a related issue, the owner challenged another mechanics’ lien on the grounds that the subcontractor sent too many pre-liens. The sub had sent three pre-liens – to the owner, to the tenant, and to an agent of the two parties. The court rejected the owner’s challenge, noting that “a Laborer may ‘cover its bases’ by serving multiple preliminary 20-day lien notices naming different owners and reputed owners as long as such service is timely.” The moral is, when in doubt as to who to serve your pre-lien on, better to serve too many parties than too few.

Mechanics’ Liens Against a Terminated Leasehold Interest. When a commercial tenant contracts for construction work, it creates a complicated situation with respect to the mechanics’ lien. As mentioned earlier, the termination of REM’s lease exposed Smoke Tree to claims that normally would have been aimed at the tenant.

In Wang Electric, all of the subcontractors except one had lien rights against the owner’s interest because the tenant was ruled to be an “agent” of the owner. The exception, Adobe Drywall, had lien rights only against the leasehold estate. That became a problem when the tenant’s lease was terminated.

Adobe Drywall argued that, despite the lease termination, it still had a right to claim a lien against the improvements that REM left behind. The court found that a mechanics’ lien, recorded solely against a tenant’s interest in improvements made to a leased property, will survive the lease’s termination if:

the landlord does not have an ownership interest in the improvements; or

the landlord does have an ownership interest in the improvements, but the tenant acted as the landlord’s agent in contracting with the party filing the lien.

If you are filing a mechanics’ lien against a leasehold improvement, and your contract is with the tenant, you will want the tenant to be considered an “agent” of the owner. Again, that occurs most often when the owner directs the tenant to make improvements.

Claims of Unjust Enrichment as an Alternative to a Lien Claim. When a mechanics’ lien does not hold up, it is not uncommon for the lien claimant to fall back on an “unjust enrichment” argument. Such was the strategy of some subcontractors in the Wang Electric case. In reviewing those claims, the court noted that unjust enrichment cases “fall into two categories: ones in which the owner has fully paid the general contractor and ones in which the owner has not.” The court went on to affirm that “[R]ecovery under ... unjust enrichment is not available in the former category, because the owner is not unjustly enriched if it fully paid its obligation. But when the owner has failed to fully pay its obligation ... recovery for unjust enrichment is available."

Historically, in Arizona, an unjust enrichment claim had to meet five conditions:

an enrichment,

an impoverishment,

a connection between the enrichment and impoverishment,

the absence of justification for the enrichment and impoverishment, and

the absence of a remedy provided by law.

However, the Wang Electric court considered an additional component: “[F]or a tenant's contractor to attach liability upon an owner of property under an unjust enrichment claim, the contractor must be able to show that the landlord has engaged in some form of improper, deceitful, or misleading conduct.”

It is impossible to tell from the court’s opinion what exactly constitutes “improper, deceitful, or misleading conduct,” and clarification will probably require the arrival of another unjust enrichment claim at the Court of Appeals.

Thus, if your lien fails, an unjust enrichment claim may be your last hope against the owner, but only if (1) the owner has not fully paid the general contractor for the work performed, and (2) you can prove that the owner engaged in dishonest conduct. However, you should assume that such a claim will be dicey at best, and it is no substitute for Plan A (i.e., preserving and enforcing your mechanics’ lien rights).

Personal Liability for Failure to Pay Subcontractors, Suppliers

Thu, 13 Sep 2012 00:00:00 GMT

The owners, officers and directors of a construction company can be personally liable when their company, after receiving payment on a residential project, fails to pay subcontractors or suppliers as required by Arizona law. As construction activity and its inevitable disputes continue to rebound, that conclusion by the Arizona Court of Appeals, in its 2010 ruling in Arizona Tile LLC v. Berger , is worth reviewing.

Background. Designer Surfaces, Inc., was a supplier of residential countertops. Much of its business came via large retailers, such as Costco and Lowe’s. The retailers contracted with customers and then subcontracted the work to Designer Surfaces, which purchased materials on an open account from, among other suppliers, Arizona Tile.

Designer Surfaces became insolvent and stopped paying Arizona Tile, even though the retailers had paid Designer Surfaces for the jobs that Arizona Tile had supplied. Arizona Tile filed a lawsuit and obtained a default judgment against Designer Surfaces.

Arizona Tile also sued Designer Surfaces’ directors personally, claiming a breach of fiduciary duty based on A.R.S. § 33-1005. Arizona Tile argued that the directors had diverted to other uses the $26,800 that Designer Surfaces had collected from the retailers and that should have been “held in trust” for payment to Arizona Tile.

A.R.S. § 33-1005 states in part: "Monies paid by or for an owner-occupant ... to a contractor ... as payment for labor, professional services, materials, machinery, fixtures or tools for which a lien is not provided ... shall be deemed ... to be paid in trust and shall be held by the contractor for the benefit of the person or persons furnishing such labor, professional services, materials, machinery, fixtures or tools. Such monies shall neither be diverted nor used for any purpose other than to satisfy the claims of those for whom the trust is created ... [.]" (Emphasis added.)

It is important to note that this statute does not apply to commercial or other non-residential construction. It applies specifically to residential projects, where lien rights exist only for contractors who have a direct contract with the owner-occupant.

The Superior Court judge ruled that A.R.S. § 33-1005 applied to the facts in this case and issued a summary judgment against Designer Surfaces and its directors personally. The directors appealed the trial court’s ruling.

Personal Liability. In upholding the trial court’s summary judgment, the Arizona Court of Appeals ruled that “... a corporation’s breach of its trust obligation ... can result in the personal liability of a corporate officer or director.”

The Court cited the Ninth Circuit Bankruptcy Appellate Panel (BAP) 1990 In re Baird ruling. In that case, the BAP refused to allow the sole owner of a construction company to discharge, in his personal bankruptcy, a debt created when his company failed to pay a subcontractor on a residential project, despite being paid for that subcontractor’s work. The BAP held that the general contractor breached the trust obligation created by the aforementioned A.R.S. § 33-1005 and thus, was personally liable for the debt.

Why Arizona Tile Matters. The Court of Appeals’ ruling in Arizona Tile provides a point-by-point warning for any contractor whose company, after receiving payment on a residential project, does not pay a subcontractor or supplier as required by law:

“Designer Surfaces was obliged ... to treat as funds held in trust the monies received on behalf of suppliers like Arizona Tile.”

“The corporation breached its trust obligations by failing to hold those funds for the benefit of its suppliers, by failing to pay those funds over to the suppliers when due, and by using those funds ‘for any purpose other than to satisfy the claims of those for whom the trust [was] created.’”

“[The directors] authorized these wrongful actions and ... can be personally liable for the damage caused by the corporation’s breach of trust.”

The bottom line for contractors: When you receive payment on a residential job, the portion of that payment that is owed to suppliers or subcontractors is not your money to be used as you wish. It is money “held in trust” for the benefit of other parties, and your failure to pay over the amounts due can make you personally liable for payment.

For subcontractors, if an upper-tier contractor diverts money owed to you on a residential project, that company’s officers or directors cannot rely on the personal liability protection that a corporation or LLC normally provides.

Piece work, construction, and the Fair Labor Standards Act

Tue, 14 Aug 2012 00:00:00 GMT

Compensating your workers based on piece work and productivity can be good for you and for them – if you are as diligent in recording hours worked as you are in monitoring tasks completed.

Lien Discharge Bonds and Lawsuit Deadlines

Thu, 21 Jun 2012 00:00:00 GMT

Alliance TruTrus v. Carlson Real Estate Company, et al.

In 2007, Carlson Real Estate Company started a commercial construction project. One of the subcontractors on the project set up an open account with Alliance TruTrus to supply trusses and related materials.

On September 10, 2008, holding more than $31,000 in unpaid invoices, Alliance recorded a mechanics’ and materialmen’s lien on the real property. On February 17, 2009, Carlson executed a Discharge of Mechanic’s Lien by posting a discharge bond in the amount of $49,926. The discharge bond was served on Alliance three days later.

(A mechanic's lien discharge bond comes into play when the one of the parties wants to keep the property free of liens. Bonding a mechanic's lien does not extinguish the lien; rather, the lien is removed from the property and attaches to the discharge bond.)

On May 1, 2009, Alliance sued Carlson for payment on the discharge bond. The trial court granted Alliance summary judgment, finding that Alliance timely filed its lawsuit pursuant to A.R.S. § 33-1004. The trial court held that if a “claimant is served with the discharge bond less than ninety days before the expiration of the six-month period prescribed by A.R.S. § 33-998, the claimant has ninety days from the date of service of the discharge bond to commence suit against the surety and its principals.”

Carlson appealed, arguing that the trial court misinterpreted A.R.S. § 33-1004(D). The Arizona Court of Appeals found that Alliance’s lawsuit failed to meet the deadlines set forth in the statute. The Court ruled in favor of Carlson and dismissed Alliance’s suit.

ABOUT THE COURT'S RULING

After a lien is recorded, a lien claimant has six months to file suit, per A.R.S. § 33-998(A) .

The lien-discharge statute, A.R.S. § 33-1004 , allows property owners to discharge a lien against their property by securing a surety bond in an amount equal to 150% of the lien claim (which Carlson did). The bond can be recorded either before or after the claimant files suit to foreclose on the lien. Once the bond is recorded, the lien is discharged, and the claimant must pursue the bond (not foreclosure on the property) for the lien payment.

Alliance recorded its lien on September 10, 2008, but did not file suit until May 1, 2009 – almost two months after the statutory six-month allowance.

At trial, Alliance had argued (and the trial court agreed) that Alliance’s limitation period was extended by A.R.S. § 33-1004(D)(2) in its provision that "If the bond is served upon the claimant within less than ninety days from the date claimant would be required to commence his action pursuant to section 33-998, the claimant shall have ninety days from the date he receives a copy of such bond to add the principal and the sureties as parties to the lien foreclosure suit." (Emphasis added.)

This is where the Court of Appeals took issue with the trial court’s ruling for Alliance. The Court of Appeals found that the statute “does not grant a claimant an additional ninety days to file its lawsuit, but allows an additional ninety days to amend any complaint to add the principal and sureties.” (Emphasis added.)

In other words, starting from September 10, Alliance had six months to file its lawsuit – period – and it failed to meet that deadline.
The Court ruled that the “extension” to which Alliance had pinned its hopes simply allowed time for a claimant to “add the principal and parties” to an existing lawsuit that had been timely filed.

The takeaway: If you are making a claim on a lien discharge bond, you must file your lawsuit within six months from the date you record your lien.

Contracting with an Owner: A Practical Checklist

Wed, 16 May 2012 00:00:00 GMT

This article was revised March 23, 2022.

Since December 31, 2007, Arizona law – specifically, A.R.S. § 32-1158(B) – has required that “any contract in an amount of more than one thousand dollars entered into between a contractor and the owner of a property to be improved shall contain in writing” certain essential information. That information appears below in a checklist format that is faithful to the statutory language.

While a contract that does not include all of these elements may still be enforceable, the presence of these elements should strengthen your position in case of a dispute.

Contract Checklist

Contractor’s name
Contractor's business address
Contractor’s Arizona ROC license number
Owner’s name
Owner’s mailing address
Jobsite address or legal description
Date on which the contractor and owner entered into the contract
Estimated completion date for all work to be performed under the contract
Description of the work to be performed under the contract
Total dollar amount to be paid to the contractor by the owner for all work to be performed under the contract, including all applicable taxes
Dollar amount of any advance deposit paid, or scheduled to be paid, to the contractor by the owner
Dollar amount of any progress payment and the stage of construction at which the contractor will be entitled to collect progress payments during the course of construction under the contract

The contract must also contain a notice to the owner, in at least ten-point bold type:

that the owner has the right to file a written complaint with the Registrar of Contractors (ROC) for an alleged violation of A.R.S. § 32-1154(A)
that complaints must be made within the applicable time period as set forth in A.R.S. § 32-1155(A)
the ROC’s telephone number (602-542-1525, as of the revision date of this article)
the ROC’s website ( https://roc.az.gov , as of the revision date of this article)

This “notice to the owner” requirement does not apply to a person who is subject to and complies with A.R.S. § 12-1365.

The contract must be signed by:

the property owner
the contractor (or the contractor's designated representative)

At the time the contract is signed, the owner must be provided:

a legible copy of all documents signed
a written and signed receipt for (and in the true amount of) any cash paid to the contractor by the owner

Protection for Contractors. Arizona requires this information in contracts between a contractor and a property owner because it reduces the risk of misunderstandings that often lead to avoidable legal disputes and costly litigation. By incorporating this checklist into your contracts with property owners, you enhance the profitability of the job and lessen your exposure in case a dispute occurs.

Negotiating a Construction Contract: Tips and Reminders

Tue, 13 Mar 2012 00:00:00 GMT

Before you contract, be sure you hold the correct license. Unlicensed contractors cannot lien or sue for payment. Also, check the general contractor’s license at www.azroc.gov . Causes for concern include a suspended license, no license, or numerous complaints. Similarly, check out the owner: In Maricopa County, find liens and judgments at the County Recorder's Recorded Document Search page, and find lawsuits at the Superior Court website. Also, ask other trades on the project about payment.

Secure your lien rights by sending a pre-lien before starting work. If a tenant is making the improvements, you typically have lien rights only against the building, not the land. If the property is owner-occupied, you have lien rights only if you contract directly with the owner ( A.R.S. § 33-1002[B] ). If you have change orders , remember to amend your pre-lien.

Determine whether the project is bonded, and ask for a copy of the bond. (More about public project bond claims and private project bond claims .)

AIA STANDARD FORMS VS. PRIVATELY DRAFTED CONTRACTS

There are advantages of using AIA (American Institute of Architects) forms: They are the industry standard and are commonly used. They are also very thorough (and the most litigated), so interpretation is generally not an issue, and you don't have to hire a lawyer to draft it. There are also disadvantages: AIA forms are very long and relatively difficult to understand, and they are copyrighted.

Non-AIA (i.e., privately drafted) contracts are cheaper, shorter and less formal and generally include only essential terms. If you decide to use a privately drafted contract, make sure it contains all of the minimum elements of a contract required by the ROC ( A.R.S. § 32-1158 ) and all of the terms to which you and the other party (owner, general contractor or subcontractor) agreed.

BEWARE OF CERTAIN CONTRACT CLAUSES

Integration or Merger Clause

What It Does. Bars parties to a contract from later claiming that the contract does not reflect their entire understanding, was changed by a subsequent oral agreement, or is inconsistent with prior agreements.

Sample Language. "This Agreement and the exhibits attached hereto contain the entire agreement of the parties with respect to the subject matter of this Agreement, and supersede all prior negotiations, agreements and understandings with respect thereto. This Agreement may only be amended by a written document duly executed by all parties."

What to Do. Make sure that all promises and agreements are actually included in the written contract, as otherwise it may be impossible to enforce those unwritten promises.

"Flow-through" or "Flow-down" Clause

What It Does. Passes through to a subcontractor the risks and obligations assumed by general contractor in the prime contract (i.e., the general contractor’s obligations to the owner under the prime contract "flow down" the contractual chain through the general contractor to its subcontractor).

Sample Language. "The Subcontractor shall be bound to the Contractor by all the terms of the Contract Documents, and to assume toward the Contractor all the obligations and responsibilities, including the responsibility for safety of the Subcontractor’s work, which the Contractor, by these Documents, assumes toward the Owner and Architect."

What to Do. If you are a subcontractor, try to strike this type of clause unless you review the prime contract and you accept all of the general contractor’s obligations to the owner.

Indemnification Clause

What It Does. Requires the subcontractor to indemnify the general contractor against claims arising from the work, sometimes regardless of whether the subcontractor is at fault. Under many prime contracts, the general contractor is required to extend the same indemnity to the owner (another reason that subcontractors should be wary of "flow-through" clauses). In Arizona, clauses requiring a subcontractor to indemnify the general contractor against claims arising from the general contractor’s sole negligence are illegal, pursuant to Pioneer Roofing Co. v. Mardian Const. Co., 152 Ariz. 455, 459, 733 P.2d 652, 656 (Ct. App. 1986).

Sample Language. "The subcontractor agrees to indemnify and hold harmless the contractor against loss or threatened loss or expense by reason of the liability or potential liability of the contractor for or arising from any loss or damage that may be occasioned by or through the acts or omissions of other persons or contractors at the Project site subcontractor’s performance of the work."

What to Do. Subcontractors should seek to strike the clause to the extent it requires them to indemnify the general contractor for anything other than the subcontractor's own acts.

Waiver of Subrogation Clause

What It Means. "Subrogation" means a party has the right to "step into the shoes" of another party for the purposes of bringing a claim for damages. Where an insurer has reimbursed its insured for loss, a "waiver of subrogation" clause prevents the insurer from stepping into the insured’s shoes and suing the party who caused the loss.

Sample Language. "To the extent damages are covered by insurance during construction, the Contractor and the Subcontractor waive all rights against each other and against the contractors, consultants, agents and employees of the other for damages, except such rights as they may have to the proceeds of such insurance."

What to Do. Clear it with your insurance carrier before you agree to it.

"Pay If Paid/Pay When Paid" Clause

What It Does. It conditions a general contractor's payment to a subcontractor on whether the general contractor has been paid by the owner for the subcontractor’s work. In Arizona, the language of a "pay when paid" must be very narrow to be enforceable, per L. Harvey Concrete, Inc. v. Agro Const. & Supply Co. , 189 Ariz. 178, 939 P.2d 811 (Ct. App. 1997).

Sample Language. "The total price paid to Subcontractor shall be [contract price], no part of which shall be paid until five days after payment is received from owner," or "… the Contractor shall pay the Subcontractor each progress payment and final payment ... within three working days after he receives payment from the Owner …"

What to Do. Subcontractors should seek to strike this clause. (More about pay-when-paid, pay-if-paid clauses .)

"Time Is of the Essence" Clause

What It Does. It may support an action for breach of contract where the contract is not completed within a reasonable (or specified) time.

Sample Language. "Time is of the essence for the completion of the work described in this contract. It is anticipated by the parties that all work described herein will be completed within two (2) weeks of the date of execution, and that any delay in the completion of the work described herein shall constitute a material breach of this contract."

What to Do. Be sure you can complete the schedule milestones within the agreed-upon timeframe.

Liquidated Damages Clause

What It Does. A liquidated damages clause specifies damages that the general contractor may claim against the subcontractor for failure to meet schedule milestones. Usually, they are per diem amounts that are assessed for the total number of days the project is delayed.

Sample Language. "If the Subcontractor fails to complete the work within the contract time or fails to achieve any of the contract milestones, the Subcontractor agrees to pay the Contractor $______ per day as liquidated damages to cover losses, expenses and damages of the Contractor for each and every day which the Subcontractor fails to achieve completion of the milestone work or the entire project."

What to Do. Be sure that (a) you can complete the schedule milestones within the agreed-upon timeframe, and (b) the specified damage amount is reasonable.

Dispute Resolution Clause

What It Does. A dispute resolution clause sets forth the procedure for resolving disputes between the parties related to the contract or the project.

Sample Language. "If any disputes arise between the parties, the parties shall submit the dispute to a mutually agreed-upon mediator. If the parties are unable to resolve the claim[s] through mediation, the dispute shall be resolved by litigation in a court of competent jurisdiction in the State of Arizona, unless the parties mutually agree to binding arbitration, in which event such arbitration shall be conducted pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association unless otherwise agreed upon by the parties."

What to Do. Generally, this is a desirable provision for all parties, as it can lead to cheaper and quicker dispute resolution. However, beware of clauses that require the parties to submit disputes to the American Arbitration Association (AAA) or similar organizations, as they can actually be more expensive than litigation. It is better to simply hire a local construction arbitrator and agree to abide by AAA rules.

Termination for Convenience

What It Does. This type of clause allows the general contractor to terminate the subcontract without cause. Typically, the general contractor still must pay the subcontractor for work performed, costs incurred because of termination, and profit and overhead on work not performed.

Sample Language. "Contractor may, at any time, terminate the Contract for Contractor’s convenience and without cause. In case of such termination, the Contractor shall be entitled to receive payment for work performed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the work not performed."

What to Do. This contract provision is generally acceptable for subcontractors, but only if it does not require the subcontractor to waive payment for work performed, costs incurred because of termination, and profit and overhead on work not performed.

Waiver of Consequential Damages

What It Does. It is a waiver, usually by both parties, of claims for any damages that are not directly related to the contract (i.e., cost to repair or complete, rental expenses, loss of use, loss of financing, lost profit, etc.).

Sample Language. "The parties waive claims against each other for consequential damages arising out of or relating to this Contract or Project."

What to Do. If you are a subcontractor, no action is required, as this waiver is generally favorable.

Anti-deficiency protection and the unfinished home

Fri, 17 Feb 2012 00:00:00 GMT

The Arizona Court of Appeals rules that the owner of a foreclosed residence that is still under construction is protected by Arizona’s anti-deficiency statutes – provided that the owner intended to live in the home.

In 2005, Mr. & Mrs. Mueller bought a plot of vacant land in Arizona. In July 2006, the Muellers borrowed $444,000 from M&I Marshall & Ilsley Bank so that they could build a single-family home on that property. To secure the loan, the Muellers gave M&I a deed of trust on the property.

Several months into construction, the Muellers discovered that the contractor’s work was defective and behind schedule. M&I refused the Muellers’ requests for advances to remedy the defects, so the Muellers abandoned the property and defaulted on the note. M&I foreclosed on the property (by means of a trustee’s sale) and thereafter sued the Muellers for a deficiency of $68,200 (the difference between the pre-sale appraised value of the property and the loan balance).

The trial court dismissed M&I’s deficiency claim, finding that the Muellers were entitled to the protection of Arizona’s anti-deficiency statute, A.R.S. § 33-814(G) . M&I appealed, but the Arizona Court of Appeals affirmed the dismissal.

The Court of Appeals examined the anti-deficiency statute, which states (with the emphasis by the Court), "If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.

M&I argued on appeal that this statute did not apply to the Muellers because their home was not completed, and, therefore, according to M&I, the property was not – in the words of the statute – “utilized for” a single-family home. M&I relied on the Arizona Supreme Court’s decision in Mid Kansas, 167 Ariz. 122, 804 P.2d 1310 (1991), which also involved the question of whether the anti-deficiency statute applied when the homes in question were not fully constructed and had not yet been occupied. In that case, the Supreme Court held that the owner of the homes, a developer, was not entitled to anti-deficiency protection.

The Court of Appeals distinguished Mid Kansas by noting that the Muellers intended to occupy their home once it was complete, whereas the builder in Mid Kansas was a corporation that never intended to occupy the homes it was constructing. The Court of Appeals noted that the primary purpose of the anti-deficiency statutes is to protect homeowners from deficiency judgments, not to protect commercial homebuilders. The Court stated that the result in Mid Kansas would have been the same even if the homes there had been completed, because the homes still would hot have been “utilized” as single-family homes, and ultimately decided that the Mid Kansas decision was limited to its specific facts.

The Court of Appeals held that because the Muellers intended to live in the single-family home upon its completion, they were entitled to anti-deficiency protection. The Court went on to explain why M&I’s insistence on actual occupancy of the home was not the appropriate legal test:

"M&I’s argument that a person has to physically inhabit the dwelling would create a blurry and artificial line. An individual facing the possibility of foreclosure may camp out in the unfinished home, claiming to be ‘utilizing’ the dwelling. Additionally, a person who lived in a new home for a day would be entitled to anti-deficiency protection, whereas someone who had not yet moved into a newly constructed home would not be entitled to such protection."

Court Upholds Contractor’s Preliminary 20-Day Notice and Construction Lien

Tue, 13 Dec 2011 00:00:00 GMT

A pro-contractor ruling by the Court of Appeals reinforces the “substantial compliance" requirement and reaffirms the fundamental purposes of Arizona’s lien statutes.

In April 2007, Allstate Utility Company began performing contracted work on property owned by ALC Builders. Two weeks later, Allstate served a preliminary 20-day notice on ALC via first-class mail.

In August 2008, Allstate recorded a construction lien against the property as part of an effort to collect more than $112,000 owed by ALC. Pursuant to A.R.S. § 33-993, Allstate attached to its lien a copy of the April 2007 preliminary 20-day notice. In completing the notice, Allstate typed on the signature line “SIGNATURE AND TITLE ON FILE.” When Allstate served the notice on ALC, Allstate did not include an acknowledgment form.

Eventually, Allstate sued ALC in an effort to foreclose the lien. Also named in Allstate’s suit was Towne Bank of Arizona, which had made a construction loan to ALC that was secured by a deed of trust on the property on which Allstate's work was performed. In Superior Court, Towne Bank moved for summary judgment against Allstate, claiming that Allstate’s construction lien was invalid. Towne Bank argued that the preliminary 20-day notice that Allstate served on ALC was defective because, in part, the notice (a) was not properly signed, and (b) lacked a form that ALC could use to acknowledge receipt of the notice.

The judge granted Towne Bank’s motion and dismissed the bank from the lawsuit.

Allstate appealed that decision to the Arizona Court of Appeals, which reversed the trial court’s ruling and ordered the trial court to enter judgment in favor of Allstate. The Court of Appeals’ opinion , in which it rejected all of Towne Bank’s arguments, contained discussions of two issues that are of interest to contractors.

First, the Court found that the preliminary 20-day notice was properly “signed.” Even though the statutory form of notice contains a signature line, the Court explained that A.R.S. § 33-992.01(C) “does not specify that the notice must be ‘signed’ by the claimant” and that “the act of signing a document ‘is not limited to manual, handwritten signatures.’” Rather, a party “signs” a document by “marking the document with the intention to authenticate it.” Allstate’s notice “plainly named Allstate as the claimant” and “recited Allstate’s address and telephone number.” The Court had no problem with Allstate’s typing “SIGNATURE AND TITLE ON FILE” on the signature line, relying in part on an affidavit by an officer of the lien servicing company in which he attested to the long-standing use of that language to authenticate such notices.

Second, with respect to Allstate’s failure to include an acknowledgment form, the Court found that the “omission of an acknowledgment form does not invalidate the 20-day notice.” The Court noted that a claimant has two options in proving that it served the notice: by recording (1) an acknowledgment of receipt executed by the recipient of the notice or (2) an affidavit of service.

“Section 33-992.01(C), which recites the information that a 20-day notice ‘shall contain,’ makes no reference to an acknowledgment,” the Court stated. “When a properly served … notice contains the other information the law requires, we hold the notice has ‘substantially’ complied with [the statute] even if it fails to include an acknowledgment of receipt form.”

The Bigger Picture. Perhaps as a warning to future parties that wish to challenge the validity of a construction lien, the Court of Appeals cited the Arizona Supreme Court’s 1986 ruling in Columbia Group, Inc. v. Jackson, which stated that “mechanics’ and materialmen’s lien statutes … are to be liberally construed in favor of materialmen. Substantial compliance with the statutes … is sufficient” (emphasis added).

See related article, " Achieving 'Substantial Compliance ' "

In addition, the Court of Appeals reaffirmed that “lien statutes generally have two purposes: To protect laborers and materialmen who have provided goods and services, and to protect the right of property owners to notice of lien claims against them.”

Contractors Beware: Unlicensed Contractors Can Collect Via the ROC

Tue, 15 Nov 2011 00:00:00 GMT

While they may be safe from unlicensed subcontractors’ collection efforts in Arizona courts, licensed contractors remain vulnerable to the dictates of an ROC proceeding.

In 2003, a licensed Arizona contractor, Twin Peaks Construction Inc., contracted with the City of Bisbee to build improvements in a city park. As part of the project, Twin Peaks contracted with Weatherguard Metal Construction to provide a metal ramada.

The City paid Twin Peaks for its services, but Twin Peaks made only a partial payment to Weatherguard.

Weatherguard filed a complaint with the Arizona Registrar of Contractors (ROC), claiming that Twin Peaks’ failure to pay violated A.R.S. § 32-1154(A)(11) , which requires a contractor to pay a subcontractor “when due for materials or services rendered in connection with the licensee's operations as a contractor.”

At the ensuing hearing, Twin Peaks asked the administrative law judge (ALJ) to dismiss Weatherguard’s claim, arguing that Weatherguard was not properly licensed for the Bisbee project and, thus, per A.R.S. § 32-1153 , was not entitled to bring an action to collect for its work. (That statute prohibits unlicensed or improperly licensed contractors from using Arizona courts to collect for work performed.)

The ALJ refused to dismiss Weatherguard’s claim, ruling that § 32-1153 “pertains to actions in civil court, not administrative proceedings” such as an ROC complaint. The ALJ ordered Twin Peaks to pay Weatherguard or risk revocation of its license, and the ROC adopted the ALJ’s order.

Twin Peaks asked for a judicial review in Superior Court, where the order was upheld. Twin Peaks then appealed to the Arizona Court of Appeals, which affirmed the lower court’s ruling and, by extension, the ROC order for Twin Peaks to pay the remaining amount owed to Weatherguard.
(In its ruling, the Arizona Court of Appeals noted that Weatherguard was, in fact, properly licensed at all required times. Nevertheless, the Court took the opportunity to affirm that an unlicensed contractor may utilize the ROC administrative process to enforce collection against a licensed contractor.)

CONCLUSION

The Court of Appeals’ 2007 decision in Twin Peaks Construction v. Weatherguard is a useful reminder to licensed contractors that, while they may be safe from unlicensed subcontractors’ collection efforts in Arizona courts, they remain vulnerable to the dictates of an ROC proceeding.

Operating agreement is a vital document for an Arizona LLC

Fri, 28 Oct 2011 17:03:24 GMT

In the absence of an operating agreement, the LLC will be governed by the rules set forth in Arizona’s statutes, which are silent on what will happen in many situations.

Because of its simplicity and low cost (compared to incorporation) and its ability to protect owners from legal liability, the limited liability company (LLC) is the legal entity of choice for many business owners.

In Arizona, an LLC is formed by filing articles of organization with the Arizona Corporation Commission. While the articles are necessary in the creation of an LLC, when it comes to protecting the company and its owners from expensive litigation, the most important document in an LLC’s legal arsenal is its operating agreement.

An operating agreement governs how the LLC will be run. In the absence of an operating agreement, the LLC will be governed by the rules set forth in Arizona’s statutes. Because the statutes are silent on what will happen in many situations, having an operating agreement from the outset is an important tool for avoiding legal confusion and exposure later on.

Here are some examples of key issues usually governed by an operating agreement:

The Members. An operating agreement should identify the "members" (the LLC equivalent of "shareholders"), what percentage of the company each member owns, and how each member will be paid for his share. It may allow the company to have members with and without voting rights. It governs whether the LLC can call on its members for additional capital contributions. It also defines how profits will be shared, how decisions will be made, and how disputes will be settled.
Changes in Membership. An operating agreement should define whether and how members may be added, whether a member can transfer his interest, and under what circumstances a member can be terminated. The agreement can give the LLC a right of first refusal if a member dies or chooses to sell his share. The agreement can restrict a member's ability to transfer his shares and can protect the business from having to accept someone as a member, even if that person buys an existing member’s share.
Keeping Outsiders Out of Your Business. An operating agreement can provide that, if a member becomes insolvent or is threatened with a divorce action, the member must sell his interest back to the business for a predetermined, reduced price. This protects the company from being forced to open up its records to the courts and other outside parties and keeps creditors and ex-spouses out of the business.
Protecting Your Assets. The main reason for creating an LLC is to protect the members’ assets – home, car, cash, etc. – from the risks of doing business. The LLC can shield individual members from personal liability for the company’s debts. However, if the LLC has not carefully kept its affairs separate from the affairs of its members, a creditor may be able to "pierce the corporate veil” and reach the assets of individual members. A written operating agreement and other written records of actions taken by the LLC go a long way toward proving that the LLC has observed “corporate formalities” in conducting its business, such that the court should respect the shield the LLC provides its members.

SINGLE-MEMBER LLCS

Though many people do not realize it, an operating agreement may be even more important to an LLC with only one member (a "single-member LLC") than it is to an LLC with many members. Because a sole owner may tend to conduct business without using many formal documents, a single-member LLC can look a lot like a sole proprietorship – therefore exposing the owner to possible personal liability. An operating agreement may be important proof that a single-member LLC has observed “corporate formalities” such that the LLC’s separate existence, and the shield it provides its members, should be respected. In addition, a simple operating agreement may allow a sole owner to protect the longevity of his business, by specifying a person authorized to make business decisions in the event of the owner’s incapacity or death. Without a written agreement of this type, the LLC may not have authority to continue business and may terminate after the death or disability of its only member.

CRITICAL SITUATIONS

There are a few situations in which an operating agreement is absolutely critical. For example:

If the company has non-member investors, the business owners will want a clear understanding with the investors as to what their role will be, who will make decisions, how their share of profits will be determined and how profits will be distributed. Having a clear understanding about these sorts of issues from the outset can help avoid lengthy (and costly) disputes in the future. That is why these issues are typically addressed in an operating agreement.
An operating agreement is also essential for employers who plan on rewarding employees by providing them with a small ownership interest in the business. An operating agreement can give the majority owners absolute discretion regarding compensation matters, including distributions to minority owners. On the other hand, the operating agreement can give minority owners a limited right to profits that is not affected by distributions to majority owners.

A good operating agreement can be an extremely useful tool for managing your business affairs. If you think you might benefit from such an agreement, contact your legal advisor.

Lessons for Arizona Contractors: Construction Case Law Roundup

Fri, 16 Sep 2011 00:00:00 GMT

Slaton Bros. SW, LLC v. Bozrah Builders, Inc. (memorandum decision)
April 14, 2011

Important to Contractors: (A) Under the Arizona Prompt Payment Act, late payments to a contractor or subcontractor bear interest at 18%. However, interest does not apply to amounts that are found to be overbilled. (B) A violation of the Prompt Payment Act does not automatically prevent a defendant from seeking completion costs.

Background : Slaton and Bozrah entered into agreement for Slaton to build a retaining wall at a residence owned by Bozrah. Slaton claimed that it completed the project and billed the total contract price ($121,000). Bozrah disputed that the project was complete and paid Slaton $69,000. Slaton walked off the job and submitted five additional invoices. Bozrah did not object in writing to the invoices, claiming it did not need to do so because the invoices contained numerous charges that were not in the contract.

Slaton sued Bozrah under the Arizona Prompt Payment Act, and Bozrah counterclaimed for the cost to complete and repair Slaton’s work. The trial court found that Slaton “grossly overbilled” for its work and that it was entitled only to an additional $38,000. The trial court also found that Bozrah could not recover completion costs because it failed to object in writing to the Slaton’s invoices. (Without a written objection, the invoices were certified as due under the Prompt Payment Act). As a result, Bozrah was also ordered to pay interest on the unpaid balances at the Prompt Payment Act rate of 18% per annum ($68,000). However, Bozrah was awarded $60,000 for repair of defective work performed by Slaton. Both parties appealed.

Discussion : On appeal, Bozrah argued that Slaton was not entitled to 18% interest on amounts that the court found were overbilled. The Court of Appeals agreed, explaining that “if a contractor was permitted to recover prejudgment interest on all amounts invoiced, even those amounts disallowed after trial, there would be an incentive for contractors to overbill…” The Court also reversed the trial court’s refusal to award Bozrah’s completion costs, finding that a violation of the Prompt Payment Act does not automatically prevent a defendant from seeking completion costs. However, because the Court did not have enough information to differentiate between “completion costs” and “repair costs,” it ordered the trial court to recalculate the two as a single offset.

Cook v. Orkin Exterminating Co., Inc.
May 19, 2011

Important to Contractors: (A) A contractor does not have a fiduciary responsibility to a party with which it contracts unless the contractor expressly agrees to act as a fiduciary for the other party. (B) Where there is a contract between the parties, the economic loss rule prohibits one party from suing the other in tort. (For more information on the economic loss rule, see “Economic Loss Rule Applies to Construction Cases, Supreme Court Rules.”

Background : Cook sued Orkin, in tort and in contract, because Orkin’s termite treatment was ineffective. Cook claimed that Orkin breached a fiduciary duty owed to Cook. Orkin argued that Cook’s tort claims were barred by the economic loss rule and that Orkin owed no fiduciary duty. The trial court granted Orkin summary judgment, and Cook appealed.

Discussion : On appeal, Cook first argued that Orkin owed a fiduciary duty because it held itself out as an “expert” in the field of pest control (much like a contractor holds itself out as an “expert” in construction). The Court of Appeals disagreed, holding that the law does not create a fiduciary relation in every business transaction involving one party with greater knowledge, skill or training, but instead requires a unique intimacy or an express agreement to serve as a fiduciary (as with an accountant or lawyer). The Court further found that, because there was a contract between the parties, the economic loss rule prohibited Cook from suing Orkin in tort. Therefore, the trial court’s rulings were upheld.

Continental Lighting & Contracting, Inc. v. Premier Grading & Utilities, LLC
June 1, 2011

Important to Contractors : If a loan that is superior to a mechanics’ lien is refinanced, the new loan generally retains the same priority as the loan that it replaced.

Background : In August 2005, a real estate developer took out a loan to buy 10 acres in Apache Junction and refinanced the loan three times during the following three years. The developer contracted with Premier Grading to serve as the prime contractor. Premier subcontracted with Continental Lighting to perform work on the property. Both contractors liened the property in May and February of 2008, respectively. The developer ultimately defaulted on the loans, and Premier and Continental both filed lien foreclosure actions against the lender. The lender moved for summary judgment, claiming that the refinanced mortgages had priority over the mechanic’s liens under the Doctrine of Equitable Subrogation and the Doctrine of Replacement. The trial court denied the lender’s motion to dismiss, and the lender appealed.

Discussion : Typically, a mechanic’s lien takes priority over encumbrances recorded after the lien. However, under the Doctrine of Equitable Subrogation, a subsequent lender who supplies funds used to pay off a primary and superior loan may be substituted into the position of the primary lender/lienholder, despite the recording of an intervening lien. However, the Court of Appeals held that, because the Doctrine of Equitable Subrogation does not apply in a single-lender transaction (i.e., the lender refinanced its own loan), the Doctrine was not applicable here.

Under the Doctrine of Replacement, if a senior mortgage is actually replaced with a new mortgage (as in a loan modification), the new mortgage retains the same priority as its predecessor. The Court of Appeals found that the Doctrine of Replacement applied in this case, reasoning that it would be impractical to deny a lender and borrower the flexibility to restructure a loan in this ever-changing economic and business landscape. However, the Court limited the lender’s priority to the amount of the original loan.

WB, The Building Company, LLC v. El Destino, LP
June 2, 2011

Important to Contractors : (A) An unlicensed construction company cannot use a license held by its parent company. (B) A contractor who was not properly licensed at the time it entered into a contract cannot use Arizona’s court system to sue for non-payment.

Background : Wright Brothers, an Iowa construction company, formed “WB, The Building Company, LLC” to manage its residential construction division. Wright Brothers maintained control over its commercial projects. In March 2006, El Destino contracted with WB to develop property in southern Arizona. WB eventually sued El Destino for nonpayment, and the lawsuit was stayed so that the parties could go to arbitration, pursuant to the contract. During arbitration, it was discovered that WB did not possess a contractor’s license at the time of the contract, and therefore, it was prohibited from suing. The trial court lifted the stay and granted summary judgment to El Destino. WB appealed.

Discussion : On appeal, WB asserted that it substantially complied with Arizona’s licensing requirements because its parent company, Wright Brothers, had an Arizona contractor’s license during the project. WB argued that, since the two entities shared the same management and employees, Wright Brothers’ license should have satisfied the licensing requirements for WB. The Court of Appeals rejected WB’s argument, stating that the fact that Wright Brothers was licensed confirmed that WB’s directors knew of Arizona’s licensing requirements, and therefore WB had no excuse for contracting without a license.

Williamson v. PVOrbit, Inc.
September 1, 2011

Important to Contractors: (A) A contractor that does not have a contract with a residential owner-occupant cannot place a lien on that residence. (B) If the residence is owned by a trust for which the occupants are trustees, the trust has the same protection as if the trustee-occupants owned the property personally.

Background : In 2000, the Williamsons purchased and moved into a residence and subsequently quit-claimed their interest in the property to themselves as trustees of their family trust. In 2005, the Williamsons contracted with Freedom Architectural Builders to build an addition to the residence, and Freedom subcontracted with PVOrbit to supply prefabricated doors and hinges. In 2007, shortly after PVOrbit completed its work and invoiced Freedom, Freedom went out of business. PVOrbit recorded a mechanics’ lien on the residence and sued the Williamsons to foreclose on its lien. The Williamsons claimed that PVOrbit’s lien was invalid. The trial court held that, because the Williamsons were the owner-occupants of the residence, only companies that contracted directly with the Williamsons had lien rights. Since PVOrbit’s contract was with Freedom, the trial court held that PVOrbit’s lien was invalid. PVOrbit appealed.

Discussion : On appeal, PVOrbit argued that the Williamsons’ trust, and not the Williamsons, held title to the residence, and, therefore, the owner-occupant exception did not apply. The Court of Appeals disagreed, holding that, even though title to the property was transferred to the Williamsons as trustees, the Williamsons were entitled to the protections offered to residential owner-occupants under Arizona’s lien statutes.

"Defective Liens" Valid After All

Tue, 16 Aug 2011 00:00:00 GMT

In 2004, an Arizona real estate developer, Estates at Happy Valley (EHV), purchased a large vacant parcel of land in Peoria, Arizona. EHV contracted with Markham Contracting to improve the property for residential development. EHV divided the parcel into 28 lots and began selling them as site-improved lots.

In June 2005, after performing a substantial amount of work, Markham served EHV with a preliminary 20-day notice. By that time, EHV had sold most of the lots. The notice named EHV as the “owner or reputed owner” of the property and included the legal description of the entire original parcel (“Original Exhibit A”).

The legal description that Markham attached to the notice did not reflect the sale of any lots. Not knowing which lots had been sold, Markham had taken the legal description from a recorded final plat. EHV did not request correction of the 20-day notice and proceeded to sell the remaining lots.

By August 2007, Markham had performed over $3 million of work, and EHV had fallen behind on its payments. EHV signed an acknowledgement of indebtedness.

Defective Lien? Four months later, Markham recorded a mechanics’ lien (“First Lien”) on the development. The legal description (“First Lien Exhibit A”) that accompanied Markham’s lien had been updated to reflect the sold lots, but Markham did not include, with the copy of the preliminary 20-day notice, the original legal description or the correct proof of mailing.

On January 24, 2008, Markham completed striping work and recorded an amended notice and claim of lien, which changed the description of the work performed. Markham again erroneously attached to the amended lien the “First Lien Exhibit A” instead of the “Original Exhibit A.” Markham mailed the amended notice and claim of lien to each of the lot owners, along with the First Lien and First Lien Exhibit A. On February 29, the lot owners sent a letter to Markham stating that the First Lien and Amended Lien were invalid and demanding that Markham release both liens.

On March 20, Markham recorded a Notice of Correction of Replacement to the Amended Lien, attached a retyped version of Original Exhibit A (based on the original copy) and the correct proof of mailing for the preliminary 20-day notice. In April and May, Markham served the lot owners with the documents that were recorded March 20.

Lawsuit. In April, one of the lot owners sued Markham in an effort to remove Markham’s lien. Markham filed a counterclaim against EHV and all of the lot owners to enforce its lien. Markham also recorded a lis pendens on the lots. At trial, the judge found that Markham’s lien was technically defective in six respects:

Markham’s work was not performed at the request of the lot owners, and EHV (which contracted for the work) was not an agent of the lot owners.

The preliminary 20-day notice was not served on the lot owners.

The mechanic’s lien was not timely recorded.

Original Exhibit A was not attached to the First Lien.

The preliminary notice’s proof of mailing was not attached to the First Lien.

The lis pendens was not notarized.

In addition to ruling for the lot owner, the judge sanctioned Markham for filing wrongful lien documents and ordered Markham to pay a total of $252,000 to the lot owners.

Reversal. Markham appealed the trial court’s ruling, and the Arizona Court of Appeals ruled in Markham’s favor on a number of issues.

First, the Court found that EHV was an appropriate party to receive service of Markham’s preliminary 20-day notice for the lot owners. Even though Markham’s work was performed at the request of EHV and not the lot owners, EHV was the agent of the lot owners for purposes of the lien statutes. “[EHV] was … in charge of the work on the parcel that included the lots at issue,” the Court noted. “That is all the statutes require.”

Second, the Court ruled that Markham could claim a lien on the lots for work done at EHV’s request. The Court noted that, in order for a mechanic’s lien to be valid, a contractor must serve “the owner or the reputed owner” with a written preliminary notice. “If a lien claimant names a reputed owner, it must establish that it took reasonable efforts to ascertain the owner or reputed owner of the property.” The Court found that, in trying to ascertain the owners by checking the final plat and otherwise relying on documents prepared by EHV, Markham satisfied the legal requirement.

Third, the Court ruled that Markham’s lien was timely filed. Markham was required by law to record its lien within 120 days after completion of its improvement to the site. (The statute also imposes a deadline of 60 days after the recording of a notice of completion, but, in this case, no such notice was recorded.)

At trial, a lot owner argued that, since Markham’s work on the owner’s specific lot was completed more than 120 days before Markham recorded his lien, the lien was defective with respect to that lot (and, presumably, other lots). However, although there were multiple lots and, in theory, multiple completion dates, the Court did not require Markham to lien each separate lot. The Court determined that, since Markham and EHV from the outset viewed Markham’s work as a single project, there was only one “improvement,” and it was completed only when Markham had fulfilled all of its obligations under the contract.

Fourth, the Court ruled that Markham could correct documents filed with the lien within the time period for perfecting the lien. The Court noted that while Markham was obligated to “strictly comply with the steps for perfection,” it had to “only substantially comply with any particular step.” The Court cited prior rulings in which “the failure to attach a copy of a written contract to the notice and claim of lien … did not invalidate a claim where the general terms of that contract were provided for in the written notice.” In addition, the Court stated that there is no statutory restriction against correcting a mechanic’s lien within the time for perfecting the lien.

Finally, the Court ruled that Markham’s lis pendens did not have to be notarized. “[T]he purpose of a lis pendens is to give constructive notice to interested parties of litigation that may affect title to the property. … Here, the lack of notarization did not prevent the lis pendens from serving its intended purpose.”

In the end, the Court of Appeals reversed the trial court’s ruling, vacated the trial court’s $252,000 sanctions against Markham, and sent the case back to Superior Court for trial.

Recent Changes in Arizona Laws Governing Contractor Licensing and Complaints

Fri, 08 Jul 2011 00:00:00 GMT

Complaint Deadline. An amendment to A.R.S. § 12-1365 changes the timeframe within which a buyer of a new home may file an ROC complaint. It also reduces confusion as to when the clock starts to run. Now, complaints against a licensed contractor must be filed within two years after (a) close of escrow or (b) actual occupancy, which occurred first. (Before this change went into effect, the complaint had to be filed within two years of the date of occupancy or discovery of the defect.)

Notification of the right to file a complaint must be included in the construction contract, in 10-point type.

Display of License Number. A.R.S. § 32-1124 now requires a contractor to include its license number in all broadcast, published, internet or billboard advertising, including letterhead and other documents that the contractor uses to correspond with customers or potential customers. (Previously, the requirement was less broad, applying only to advertising or printed materials.) While the new statutory language does not mention email, contractors would be wise to include their license number in their email signature as well.

Deletion of "Wrongful" Act. In a welcome change to A.R.S. § 32-1154 , which lists the grounds for license suspension or revocation, the word “wrongful” has been removed from subsection (A)(7). The statute now provides that “[t]he doing of a fraudulent act by the licensee as a contractor resulting in another person being substantially injured” is grounds for disciplinary action. The good news for contractors: It is harder to prove that a contractor committed a “fraudulent” act than merely a “wrongful” one.

Exemption from Discipline. Another favorable change, to A.R.S. § 32-1155 , provides that a contractor will not be disciplined for workmanship or for deviation from code, plans or standards if:

the contractor is not given an opportunity to inspect the work within 15 days of the Registrar’s notice (even if a corrective work order has not yet been issued), or

the contractor’s work has been subject to neglect, modification or abnormal use.

Recovery Fund. Due to the slow economy and pressures on the State budget, the Residential Contractors’ Recovery Fund balance is at an all-time low. As a result, the Fund is stingier, and taking longer, in making payouts to homeowners. However, when a payout is made, the Fund and the Attorney General are more likely than before to try to recover the payout from the contractor.

Architect's Errors May Create Liability for Contractor's Damages

Mon, 09 May 2011 00:00:00 GMT

Related Articles:

Duty to Perform Good Workmanship Extends Beyond Parties to Contract

Court Reaffirms Contract Requirement in Breach of Implied Warranty Claims

In the early 2000s, Vern Haugen owned a mountainside residential lot in Scottsdale. He also owned a construction company, North Peak Construction, LLC. Haugen planned to build on the lot a home situated in such a way that its residents could enjoy an attractive view of the city. He hired an architectural firm, Architecture Plus, Ltd., to design the home.

The contract required Architecture Plus, in designing the home, to consider Haugen’s requirements. In addition to discussing with Architecture Plus the importance of properly orienting the home to take advantage of the view, Haugen gave Architecture Plus a topographical map and marked the “limited view corridor” within which the home was to be designed and aligned.

Shortly thereafter, Haugen sold the lot and the preliminary architectural plans, and the buyer separately contracted with Architecture Plus. That contract contained the same terms as the original contract, plus some provisions for design alterations. The final construction plans for the home were signed and sealed by the architect. The buyer contracted with Haugen’s company, North Peak Construction, to the build the home.

In 2006, after construction began, North Peak discovered that the architect’s plans aligned the home so that, rather than overlooking the city, it faced a mountain and a water tank. North Peak demolished the work it had already performed and rebuilt the home, incurring nearly $165,000 in additional expenses.

Lawsuit . In 2009, North Peak sued Architecture Plus and the architect personally for breach of implied warranty and for negligence. In its complaint, North Peak also requested payment of its attorneys’ fees, per A.R.S. § 12-341.01(A), claiming that its implied warranty claim arose out of contract.

In response, Architecture Plus sought to dismiss the breach of implied warranty claim on the basis that North Peak’s real claim was for negligence and that there was “no contractually-based claim for breach of implied warranty insofar as design professionals are concerned.” Architecture Plus argued that, in essence, North Peak’s implied warranty claim was a back-door attempt to “convert an action for which attorneys’ fees are not recoverable into one in which attorneys’ fees are recoverable”

The Superior Court judge agreed with Architecture Plus and dismissed North Peak’s implied warranty claim, noting that North Peak’s professional negligence claim was based in tort, not in contract, and thus not eligible for recovery of attorneys’ fees.

Architecture Plus then asked the court to dismiss North Peak’s negligence claim, arguing that the statute of limitations had run out. The judge granted that motion, too, and dismissed North Peak’s entire claim.

North Peak appealed the dismissal of its claim for breach of implied warranty. The Arizona Court of Appeals found North Peak’s claim against Architecture Plus to be valid and sent the case back for trial in Superior Court. (Read the court's opinion in North Peak Construction, LLC v. Architecture Plus, Ltd. )

Legal Reasoning . In considering North Peak’s appeal, the Court of Appeals agreed with Architecture Plus that North Peak had no contract-based claim for breach of implied warranty.

However, the court relied on the Arizona Supreme Court’s 1984 opinion in Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, which provided that a claim for breach of an implied warranty may be brought against a design professional even in the absence of “privity,” i.e., when there is no written contract between the parties, which was the case with North Peak and Architecture Plus.

In Donnelly , the Supreme Court held that a contractor does not need to be in privity with an architect in order to sue the architect for negligence and breach of implied warranty, and the Court of Appeals applied that conclusion in North Peak.

“Because Donnelly recognizes that breach of an implied warranty is a valid cause of action against a design professional and can be brought in addition to a claim of negligence,” wrote the Court of Appeals in its opinion, “we must conclude that the [trial] court erred in dismissing North Peak’s implied warranty claim.”

The Court of Appeals also cited the Arizona Supreme Court’s 2008 ruling in The Lofts at Fillmore v. Reliance Commercial Construction (see related article ), which concluded that “a claim for breach of an implied warranty of habitability and workmanlike performance sounds in contract rather than tort.”

(NOTE: If it had occurred a decade later, the North Peak case may have had a different outcome. In May 2022, the Arizona Supreme Court ruled that the Donnelly opinion is "no longer good law." See our article, " No Contract? Negligent Architects, Engineers Not Obligated to Reimburse Project Owner for Losses .")

Personal Liability. The Court of Appeals also found that, if North Peak prevailed in Superior Court, the architect could bear personal liability for North Peak’s claim for breach of implied warranty.

“North Peak’s implied warranty is not based on [the buyer’s] contract with Architecture Plus, Ltd.,” wrote the Court. “Rather, the implied warranty is based on (1) North Peak’s alleged reliance on the architectural plans and specifications, (2) Donnelly’s recognition that ‘design professionals’ warrant ‘that they have exercised their skills with care and diligence and in a reasonable, non-negligent manner,’ and (3) the alleged signing and sealing by [the architect] of the plans and specifications.”

Conclusion . For contractors and design professionals, the main lesson in North Peak is this: If a design professional’s error causes a contractor to suffer damages, the contractor may sue the design professional for breach of implied warranty even if there is no contract between the two parties.

Medical Marijuana Law Raises New Challenges for Employers

Thu, 21 Apr 2011 00:00:00 GMT

Drug-testing policies, presumptions of on-the-job impairment, and job-site safety are three of the issues that many employers must address.

The Arizona Medical Marijuana Act, which voters approved in November 2010, allows a qualifying patient to obtain marijuana from a registered medical marijuana dispensary and use it to treat, or ease the pain caused by, a debilitating medical condition. In April 2011, the Arizona Department of Health Services (DHS) began accepting applications for marijuana registry identification cards that allow a cardholder to possess and use marijuana legally.

Predictably, complying with the Act poses new challenges to employers, particularly in the areas of drug-testing and determining whether a worker is impaired while on the job.

In a nutshell, employers are prohibited from discriminating against a prospective or current employee who is a registered cardholder. Further, a worker who has a State-issued card cannot be fired or otherwise disciplined solely for testing positive on a drug test; if a cardholder tests positive for marijuana, the presumption is that the marijuana use was for medical purposes, not recreational. Further, a cardholder will not be considered to be under the influence solely because of the presence of metabolites or components of marijuana at levels that would not cause impairment.

Thus, in the wake of the new law, one of the first things most employers would be wise to do is review their company’s employee manual and other written policies regarding drug and alcohol use, and to make appropriate revisions so that, in response to substance testing, they don’t take employment action that would be considered discriminatory.

EXCEPTIONS

The Act provides two limited exceptions to the anti-discrimination provision:

First, there is an exception for employers that would “lose a monetary or licensing related benefit under federal law or regulations” if a cardholder-employee is not terminated or disciplined.

Second, an employer is not required to hire or continue to employ a cardholder who tests positive for marijuana components or metabolites, if the patient used, possessed or was impaired by marijuana on the premises of the place of employment or during the hours of employment.

The Act does not allow employees to use marijuana at the workplace, nor does the immunity from being discharged apply to a worker who is “impaired.’’ The law does not authorize any person to undertake any task under the influence of marijuana that would constitute negligence or professional malpractice. Further, it does not authorize any person to operate, navigate or be in physical control of any motor vehicle, aircraft or motorboat while under the influence of marijuana. Thus, employers may still take action against employees who use marijuana in the workplace or who work while impaired by marijuana.

PROVING IMPAIRMENT

The problem is this: If you believe a cardholder-employee is impaired by marijuana use while on the job, the burden is on you to show that they are impaired. The testing for that impairment is relatively sophisticated and expensive, and there appears to be no readily available scientific measurement of impairment for marijuana as there is for alcohol.

This creates a Catch-22 of sorts for employers: You don’t want to be sued for wrongful termination, and you don’t want an impaired employee to create a situation in which you cannot fulfill your OSHA-imposed duty to "provide a workplace free of recognized hazards that could cause serious injury."

LEGISLATIVE CLARIFICATION

The Arizona legislature has provided some help to employers, courtesy of H.B. 2541, which was passed in the closing days of the 2011 session. That legislation lets employers remove from a safety-sensitive job, without fear of litigation, an employee who they believe is impaired. (Contracting, because it requires a license granted by the State, is defined as a “safety-sensitive” occupation.) H.B. 2541 also allows employers to use the DHS database to "verify a registry identification card that is provided to the employer by a current employee or by an applicant who has received a conditional offer of employment."

Under H.B. 2541, good-faith efforts to determine impairment include:

observed conduct, behavior or appearance;

information reported by a person reasonably believed to be reliable;

written, electronic or verbal statements;

lawful video surveillance;

records of government agencies, law enforcement or courts;

results of a test for the use of alcohol or drugs; or

other information reasonably believed to be reliable or accurate.

The trick here is that employers may have to get training for supervisors of workers in safety-sensitive jobs, so that they can recognize symptoms of impairment and take appropriate action.

Economic Loss Rule Applies to Construction Cases

Wed, 18 Aug 2010 00:00:00 GMT

In a February 2010 decision, the Arizona Supreme Court found that Arizona’s “economic loss rule” applies to construction claims. In Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc., the Court held that a property owner is limited to only its contractual remedies when the owner has contracted with a design professional, and the professional’s negligence causes economic loss but no “physical injury to a person or other property.”

In certain factual contexts, under Arizona law, the “economic loss rule” prevents one party to a contract from recovering economic damages under a tort theory, such as negligence, for a wrongful act by another party to the contract, unless the act results in physical harm, either in the form of personal injury or damage to property that was not central to the contract. The party that suffers monetary harm can still take legal action by suing for breach of contract, but it is limited to remedies provided under contract law as modified by the contract.

Historically, the Arizona Supreme Court had applied the rule only to products liability claims. Flagstaff Affordable Housing broke new ground in that the Supreme Court applied the economic loss rule to a construction defect case and denied an owner’s claim against an architect for negligent design of a Flagstaff apartment complex.

Background. In 1995, Flagstaff Affordable Housing contracted with an architect, Design Alliance, to design apartments for low-income residents. When the project was completed, it did not comply with the federal Fair Housing Act’s accessibility guidelines, and the U.S. Department of Housing and Urban Development (HUD) filed a complaint against Flagstaff Affordable Housing.

In 2006, Flagstaff Affordable Housing settled with HUD and then sued Design Alliance and the project’s contractor for breach of contract and for negligence (an “extra-contractual” claim). (The contractor was eventually dismissed from the lawsuit.) The only alleged damages consisted of the cost of retrofitting the project to satisfy HUD. There were no claims for damages due to injury to people or property.

Design Alliance moved to dismiss the complaint, arguing that (a) the statute of repose (per A.R.S. § 12-552 ) barred the breach of contract claim and (b) the economic loss rule barred the negligence claim per a 2003 ruling by the Arizona Court of Appeals in Carstens v. City of Phoenix.

Flagstaff Affordable Housing dismissed the contract claim but argued that the economic loss doctrine did not bar the negligence claim, on the grounds that “a claim for ‘professional negligence’ is based on the special relationship between architects and their clients and therefore is excepted from the economic loss doctrine.”

The trial judge agreed with Design Alliance and dismissed the suit.

Flagstaff Affordable Housing appealed the dismissal. The Arizona Court of Appeals reinstated the suit and sent it back to Superior Court for trial. In overturning the trial court’s dismissal, the Court held that the economic loss doctrine does not apply to claims for professional negligence, regardless of the type of case, because claims for professional negligence are based on a common-law duty of care that is independent of any contract.

Design Alliance appealed the Court of Appeals’ ruling. The Arizona Supreme Court concluded that, where the parties have entered into a contractual relationship, the economic loss doctrine does apply to construction defect cases because construction contracts typically are negotiated on a project-specific basis. The Court further concluded that, as part of the negotiation, the parties should allocate risk and identify remedies in the negotiated contract, which may include tort remedies if the parties agree in their contract. The Court determined that, in construction contract disputes, the policies of the law will be best served by leaving the parties to their contractual remedies when, as in this case, a contracting party has incurred only economic loss (e.g., repair costs, diminished value or lost profits).

In the end, the Supreme Court agreed with Design Alliance, finding that the economic loss rule barred Flagstaff Affordable Housing’s negligent design claim.

What the Decision Means. Obviously, the ruling in Flagstaff Affordable Housing is a welcome one for architects and other design professionals. The Supreme Court’s decision affirms that, in the construction defect setting, the economic loss rule continues to restrict the contracting party from pursuing tort claims (such as negligence) or seeking remedies other than those allowed by the contract. In addition, the remedies that are allowed for breach of contract claims may be more limited than those allowed for tort claims, and may be further restricted if so provided for in the contract.

For construction project owners, the Flagstaff Affordable Housing decision illustrates the importance of protecting the owner’s interests in its contract with a design professional.

Finally, even though in this case the contractor was dismissed from the lawsuit, an argument can be made that the economic loss rule’s protection applies to contractors as well as design professionals. The decision suggests that claims against contractors (who have a direct contractual relationship with the owner) for economic losses may be asserted only through contract claims. Again, the damages available for those claims may be more limited, and express contract terms can further reduce a contractor’s exposure.

Do Arizona Contractors Need an Arizona License to Work in Mexico?

Mon, 12 Jul 2010 00:00:00 GMT

The answer, in a recent Court of Appeals ruling, is good news for contractors and a warning for owners contemplating a breach of contract.

Construction in Mexico has generated business for many Arizona contractors. If you have done work south of the border or are contemplating it, have you considered what licensing requirements the State of Arizona places on you? The Arizona Court of Appeals’ recent ruling in Baker v. Dolphin Beach may be useful.

BACKGROUND

In August 2007, an unlicensed Arizona contractor, Scott Baker, entered into a written contract with an Arizona property management company, Dolphin Beach Rental & Management, to service A/C units on condos in Puerto Peñasco, Sonora.

All discussions between Baker and Dolphin Beach took place in Arizona, and the contract was signed in Arizona. Baker was not a licensed Arizona contractor when he signed the contract, nor was he licensed during the time he performed work under the contract.

Dolphin Beach utilized Baker for a few months and paid him for his work, but in January 2008 the company stopped using him, and Baker sued Dolphin Beach in Arizona Superior Court for breach of contract.

LAWSUIT

Dolphin Beach asked the trial court to dismiss Baker’s suit, arguing that, since Baker was not a licensed contractor, A.R.S. § 32-1153 barred him from suing to enforce the contract. (The statute prohibits contractors from taking legal action in state courts to enforce a contract for work that they were not licensed to perform when they entered into the contract or when the cause of action arose.) The trial court agreed with Dolphin Beach and dismissed Baker’s suit. Baker appealed the dismissal.

APPEAL

The Court of Appeals saw things differently than the trial court. In its ruling, the Court noted that the state’s power to require licenses is generally limited to activities inside state borders. The Court went on to state that “A.R.S. § 32-1153 applies to prevent unlicensed contractors from suing in state court in Arizona to recover ‘compensation for the performance of any act for which [the statute] requires a license ’” [Court’s emphasis added].

Did the statute require a license? No. The Court, reasoning that the statute does not govern construction activity outside of Arizona, ruled that (a) Baker did not need an Arizona contractor’s license to perform contracting work in Mexico, and (b) A.R.S. § 32-1153 did not bar Baker from trying to enforce his contract in state court.

(The Court acknowledged that Baker was an Arizona resident, Dolphin Beach was an Arizona LLC, and the contract was negotiated and signed in Arizona, but that was not a factor in the decision.)

The Court reversed the dismissal of Baker’s lawsuit and sent the case back to Superior Court for trial to determine whether Dolphin Beach actually breached the contract and, if it did, the extent of any damages to which Baker might be entitled.

LESSONS

The lessons in Baker v. Dolphin Beach for owners and contractors appear to be pretty straightforward:

Work performed outside of Arizona does not require an Arizona contractor’s license.

In the event of an alleged breach of an Arizona contract for work performed outside the state’s borders, Arizona’s court system is available to unlicensed or improperly licensed contractors.

Construction Delays and Liquidated Damages

Thu, 22 Apr 2010 00:00:00 GMT

When a project isn’t finished on time, justifiable delays in one phase may not excuse the contractor from timely completion of the other phases.

For contractors and property owners, a construction delay is a serious matter, especially when it pushes overall project completion past the contracted deadline. A December 2009 Arizona Court of Appeals ruling, in Richard E. Lambert, Ltd. v. City of Tucson, illustrates the importance of finishing a project on time – and the consequences for failing to do so.

See Related Article: Beware of "No Damages for Delay" Clauses

Background. In 2003, Richard E. Lambert, Ltd. (“REL”) contracted with the City of Tucson to make improvements to a neighborhood center. The project included improving a gymnasium and adding irrigation and landscaping to the sports fields that surround the center.

The contract required REL to begin work by January 5, 2004, and to complete the project by February 3, 2005. It also provided that, if any part of the project was delayed, REL would move forward with other parts of the project that were unaffected by the delay.

REL completed the project on December 19, 2005 – 319 days after the agreed completion date. The City assessed $500 per day in liquidated damages against REL and retained the final $108,300 due on the project.

REL appealed to the City Contract Officer, who upheld the assessment and retention. REL then appealed to the Director of Procurement, resulting in an evidentiary hearing. At that hearing, the administrative officer heard arguments regarding the causes of REL’s delays and ultimately upheld the Contract Officer’s ruling.

REL filed a special action in Pima County Superior Court, relying on a contract provision that granted REL a time extension in the event of delays that were beyond REL’s control.

Both sides filed motions for summary judgment. Without holding an evidentiary hearing, the Superior Court judge ruled in REL’s favor, concluding that the Procurement Director’s factual findings were arbitrary, capricious and unsupported by facts. The judge also reduced the liquidated damages to $13,500 and awarded REL its attorney fees.

Appeal. The City appealed the dismissal to the Arizona Court of Appeals, which ruled that the judge erred in granting REL’s motion for summary judgment.

The Court’s ruling contains two conclusions that are more valuable to lawyers and judges than to contractors:

First, with respect to motions for summary judgment, the Court of Appeals reaffirmed that summary judgment is appropriate if “no genuine issues of material disputed facts remain, and the moving party is entitled to judgment as a matter of law.” In this case, there were a number of disputed facts.

Second, the Court noted that, in determining whether an administrative decision is arbitrary or capricious, the Superior Court “may not weigh the evidence on which the decision was based” [emphasis added]. Rather, the decision is not arbitrary or capricious if it is supported by evidence. As for the quality of the evidence, the trial court may not substitute its own judgment for that of the administrative officer.

Delay in Completion. Of specific interest to contractors is the issue of construction delays. While REL was required to complete the entire project by a certain date, the contract also entitled REL to an extension if the project was delayed because of “unforeseeable causes beyond [REL’s] control.” The Court noted that REL, in justifying the delay, bore the burden of proof on two issues:

that the delay was excusable, and

that the excusable event caused a delay to the overall completion of the contract.

The latter burden was consistent with the contract’s requirement that, if one portion of the project was delayed, REL was to continue work on other portions. The Court noted that “an interruption in one phase of the work … does not always result in an increase in the time necessary for total performance” or overall completion.

The City of Tucson conceded that three significant events beyond REL’s control contributed to the delays in completing certain phases of the project. However, the City argued – and had substantial evidence – that the overall completion of the work had been delayed not by these events but rather by inadequate staffing, poor supervision and other causes that were within REL’s control. In addition, one of the delaying events – an arson fire in the gymnasium – occurred more than a month after REL’s completion deadline, when REL was already six months behind schedule, and should not have impeded REL’s progress in the other phases of the project (e.g., playground construction, extensive concrete and stucco work, demolition, etc.).

The Court determined that REL’s failure to “progress onward” with the remainder of the project constituted substantial evidence for a reasonable Procurement Director to conclude that the arson fire “had no impact on [REL’s] ability to complete building and site work that was incomplete on the date of the fire.” The Court found that other significant events that excused delays in certain phases of the project similarly failed to excuse REL’s delays in phases unaffected by those events.

In the end, the Court ruled that, the Procurement Director’s findings against REL were based in fact and were not arbitrary or capricious. The Court vacated the Superior Court’s grant of summary judgment and sent the case back to Superior Court.

Lessons Learned. For contractors, the lessons in REL v. City of Tucson are clear. First, finish your jobs on time. Second, don’t think that justifiable delays in one phase of a project are going to excuse you from timely completion of the other phases.

No Time Limit on Arizona ROC Collection Efforts

Fri, 16 Oct 2009 00:00:00 GMT

When a licensed contractor fails to pay a residential property owner as ordered by the Arizona Registrar of Contractors (ROC), the ROC makes the payment on the contractor’s behalf from the Registrar’s Residential Recovery Fund. The ROC may then sue the contractor to force the contractor to reimburse the Fund.

How promptly the ROC must take legal action, and whether there is a time limit on the ROC’s right to seek reimbursement, was the issue that the Arizona Court of Appeals addressed in its August 2009 ruling in State of Arizona v. Johnston .

Background. In 2004, Edward and Joy Kufahl filed an ROC complaint against Frederico and Mary Johnston, doing business as Ace Aluminum and Products (“Ace”). The ROC issued an administrative order requiring Ace to remedy the violations. Ace failed to do so.

In April 2005, the ROC issued a final judgment against Ace and awarded the Kufahls $16,900 in damages. That amount was paid from the Residential Recovery Fund and charged against Ace. On June 16, 2005, the Kufahls assigned to the ROC their judgment against Ace. The next day the ROC sent a demand letter to Ace’s surety, seeking reimbursement from Ace’s license bond. The surety paid $1,000.

On October 22, 2007, two years and four months after the date of the demand letter, the Attorney General sued Ace in Superior Court to enforce the ROC’s subrogation rights, pursuant to A.R.S. § 32-1138 . (“Subrogation” refers to the substitution of one party in the place of another with reference to a lawful claim, demand or right.)

Ace asked the trial court to dismiss the State’s lawsuit, arguing that the time had expired for the ROC to enforce its subrogated judgment against Ace. In making that argument, Ace cited the provision of § 32-1138 that states, “The registrar and the attorney general shall promptly enforce all subrogation claims.” (Emphasis added.)

Ace also based its argument on a 2007 Arizona Court of Appeals decision ( West Valley View, Inc. v. Maricopa County Sheriff’s Office ) in which the Court found that “promptly” means “at once or without delay.” (That case dealt with the failure of a government agency to “promptly” furnish copies of records to a requesting party.)

The ROC countered that the “promptly enforce” requirement in § 32-1138 was not intended to serve as a statute of limitations and that Ace’s interpretation was contrary to Arizona statutes, case law and public policy. (A “statute of limitations” sets maximum time periods during which certain actions can be brought.)

The trial court sided with Ace, noting that “’promptly’ as used in A.R.S. § 32-1138 cannot mean 2½ years,” and granted Ace’s motion to dismiss.

The ROC appealed.

Decision. For the three-judge panel at the Arizona Court of Appeals, the sole issue was whether the statutory phrase “shall promptly enforce all subrogation claims” prohibits the ROC from seeking subrogation against a non-compliant contractor nearly two-and-a-half years after an award was paid from the Residential Recovery Fund.

Ace argued that “shall promptly enforce” constitutes “express language limiting the time period” during which the ROC can enforce its subrogation rights. Ace also argued that the Court should interpret the word “promptly” in its ordinary meaning.

The ROC reiterated its trial-level argument that the legislature did not intend for § 32-1138 to serve as a statute of limitations.

The Court of Appeals agreed with the ROC, noting that the statute does not state a specific time limit for enforcing the ROC’s subrogation rights and, therefore, is not a statute of limitations. In its ruling, the Court found that “neither the language, purpose, nor context of A.R.S. § 32-1138 reflects legislative intent to create a statute of limitations regulating the enforcement of the Registrar’s subrogation right against a non-compliant contractor.”

Further, the Court’s opinion stated that “nothing in the history or context of A.R.S. § 32-1138 suggests that the statute was intended to be a shield to protect non-compliant contractors.” The opinion goes on to state, “[W]e cannot conclude that the legislature [intended to excuse] a non-compliant contractor from accountability, which includes … compensating an injured party for damages caused by his non-compliance with Arizona law. To hold otherwise would effectively require all licensed residential contractors in compliance with the law to bear the burden of paying for a non-compliant contractor’s misdeed .” (Emphasis added.)

As for Ace’s reliance on the West Valley View decision, the Court found the circumstances to be so different from the ROC’s subrogation issue that the meaning of “promptly” in that case was not applicable to this one.

Conclusion . In reversing the trial court’s order dismissing the ROC’s claim, the Court of Appeals sent a clear message that there is no particular expiration date on the ROC’s subrogation rights.

At whatever point the ROC chooses to pursue those rights – whether “promptly” in the ordinary sense of the word or whenever the ROC decides to act – contractors cannot escape liability for failure to reimburse the Registrar’s Residential Recovery Fund.

Attorneys' Fees and Appeals of Registrar of Contractors Rulings

Tue, 08 Sep 2009 00:00:00 GMT

If you have been involved in a lawsuit over a contract dispute, you may be aware that, under Arizona law, the prevailing party in contract litigation may ask the court to order the other side to pay the prevailing party’s attorneys’ fees.

While that may seem simple enough, whether a legal action truly “arises out of a contract” is not always clear. In a 2009 Arizona Court of Appeals case, Keystone Floor & More LLC v. Arizona Registrar of Contractors , a licensed contractor avoided liability for an owner’s attorneys’ fees by successfully arguing that the action did not arise out of the parties’ contract for tile flooring, but instead arose out of its statutory obligation as a licensed contractor to perform its work in a workmanlike manner.

Background. A homeowner, Mr. Kang, contracted with Keystone Floor & More to install floor tile in his residence. Keystone completed the work and, under the terms of their agreement, Kang paid Keystone $30,000.

When some of the tiles cracked, Kang alleged that the cause was “terrible workmanship” by Keystone. Keystone countered that the cracks were the result of an “unsettled foundation.” Kang filed a complaint against Keystone with the Arizona Registrar of Contractors, and an ROC inspector examined the premises and issued a corrective work order.

When Keystone did not comply with the order to the ROC’s satisfaction, the ROC issued a citation to Keystone for violations of various statutes and for its failure to perform work, as required in Arizona Administrative Code R4-9-108, “in a professional and workmanlike manner.” After a hearing, the ROC ordered revocation of Keystone’s license.

Keystone filed a complaint in Superior Court against Kang and the ROC, asking for judicial review of the ROC’s decision under the Administrative Review Act (A.R.S. §§ 12-901 through 12-914). After oral argument, the Superior Court judge affirmed the ROC’s revocation of Keystone’s license.

Kang applied for an award of attorneys’ fees, stating that he met the statutory requirements contained in A.R.S. § 12-341.01(A) – i.e., this was a contested action, he was the successful party, and the action arose out of the contract.

Keystone contested the awarding of attorneys’ fees, arguing that the statute does not apply to fees related to appeals of ROC decisions to Superior Court, since ROC appeals are based in contractor licensing statutes, not in contract.

The Superior Court judge ruled for Kang and ordered Keystone to pay $8,128.50 in attorneys’ fees. Keystone appealed.

Ruling. The sole issue that the Arizona Court of Appeals considered was whether the Superior Court judge ruled properly in awarding attorneys’ fees to Kang. At the heart of the Court of Appeals’ ruling was whether the action for which the attorneys’ fees were awarded – in this case, Keystone’s appeal of its license revocation – arose out of the contract.

Citing its 1983 ruling in ASH, Inc. v. Mesa Unified School Dist. No. 4, the Court noted that fees “may be recovered when a contract is the ‘cause or origin’ of the dispute.”

However, the Court also noted that, per Hanley v. Pearson, “the fee statute does not apply … to ‘purely statutory causes of action’ … nor does it apply ‘if the contract is a factual predicate to the action but not the essential basis of it.’ That is, when the action arises out of a statutory obligation and is ‘based on a statute rather than a contract, the peripheral involvement of a contract does not support the application of the fee statute.’”

In this case, Keystone’s appeal of its license revocation was a statutory cause of action, not a contract-based cause of action.

In the end, the Court of Appeals ruled for Keystone and reversed the Superior Court’s awarding of attorneys’ fees to Kang. In its ruling, the Court wrote: “We find the superior court’s review of the ROC’s decision does not constitute an action ‘arising out of contract’ … because the basis for the action is purely statutory. … Although the appeal to the superior court involved a contract, it was not the ‘cause or origin’ of the appeal – rather, the contract was peripheral to the primary cause of whether the ROC erred in finding Keystone had violated its statutory duties as a licensed contractor. ... At issue … was Keystone’s failure to comply with the Workmanship Rule … not Keystone’s failure to meet its contractual obligations.”

Aftermath. While Keystone prevailed on the issue of attorneys’ fees, it was in large measure a hollow victory for this contractor compared to the loss of its license.

However, the ruling in Keystone v. Kang does provide positive news to other licensed contractors, since it allows them to pursue statutory remedies to unfavorable administrative rulings, generally without fear of having to pay the other party’s attorney.

Arizona subcontractor indemnity exposure clarified

Fri, 13 Mar 2009 00:00:00 GMT

A November 2008 Arizona Court of Appeals decision (in MT Builders v. Fisher Roofing ) provides a guide for writing a narrow indemnity clause that limits the subcontractor’s liability for injuries or defects on a construction job. More important, it reminds subcontractors to have legal and insurance professionals review subcontracts for “land mines” that go off when charges of construction defects are made.

Background. In January 2001, an Arizona condominium association filed a construction defect lawsuit against a number of defendants, including the general contractor (MT Builders), the roofing subcontractor (Fishing Roofing), and other subcontractors.

MT Builders filed a cross-claim against the subcontractors, to force them to indemnify MT against any losses MT may incur in the lawsuit. Its cross-claim was based on the indemnity provision in MT’s standard subcontract agreement that it had used with all of its subs. The “narrow form” indemnity clause provided:

"To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Owner, Architect and the Builder and all their agents and employees from and against all claims, damages, losses and expenses, including but not limited to attorney’s fees and court costs, arising out of or resulting from the performance or non- performance of the Subcontractor’s Work under this Subcontract ... to the extent caused in whole or in part by any negligent act or omission of the Subcontractor or anyone directly or indirectly employed by him or anyone for whose acts he may be liable[.]" (Emphasis added)

In late 2002, MT Builders and most of the subcontractors settled the association’s lawsuit for $1.75 million. Three subcontractors, including Fisher Roofing, refused to participate in the settlement, and the association assigned to MT its claims against them. Thus, the lawsuit continued among MT, Fisher and the other holdout subs.

In 2004, MT filed a motion for summary judgment asking that Fisher be ordered to reimburse MT for Fisher’s share of the $1.75 million settlement and for MT’s attorneys’ fees. MT argued that the $240,500 that the association had spent on roof repairs in 2004 was the best evidence of Fisher’s fair share of the damages, and that Fisher had no right to contest MT’s settlement with the association because Fisher had refused to participate.

Fisher countered that deciding the extent of its negligence, if any, required a trial. Fisher argued that:

MT must prove that Fisher was negligent;

if MT met that burden, MT must then prove how much damage Fisher’s negligence caused; and

because of conflicting evidence, Arizona law did not allow the superior court to enter judgment without hearing all of the evidence at trial.

The court granted MT’s motion, awarding summary judgment against Fisher for $240,500, plus $113,000 of MT’s attorneys’ fees.

Appeal and Remand. Fisher appealed the superior court’s decision and found a more receptive audience at the Arizona Court of Appeals. The appellate court held that, given the language of the indemnity clause, the trial court should not have granted summary judgment and that a trial would be required to determine the extent of Fisher’s fault.

The case was remanded, and the trial court was instructed to resolve conflicting testimony as to (a) whether Fisher’s work was negligent, and (b) to what extent its negligence had caused damage, rather than simply accepting the $240,500 figure that the association spent on repairs. The court could not presume that all roof repairs were Fisher’s responsibility if, for example, there was evidence that the HVAC sub had damaged the roof. In short, MT was entitled to indemnity only “to the extent” of Fisher’s fault, and it was MT’s burden to prove the degree of Fisher’s fault.

In addition, the trial court was instructed to require MT:

as a prerequisite for obtaining indemnity from Fisher, to prove that its overall settlement was reasonable and prudent, given the risk of exposure at trial and the strength of the available defenses; and

to show how much of the settlement amount was attributable to Fisher’s fault and that its settlement of the Fisher claims also met the “reasonable and prudent” test.

On the last point, the court noted, “Even if the overall settlement reached by MT Builders with the Association was reasonable and prudent under the circumstances, to obtain indemnity from Fisher, MT Builders was required to show that its settlement of the Fisher-based claims met this test.”

Lessons Learned. For Arizona subcontractors, the MT Builders decision provides detailed instruction on how a trial court must treat a carefully written, narrow form indemnity clause. The decision holds that the words “to the extent caused by the negligent act of the subcontractor” can significantly reduce a subcontractor’s exposure.

In addition, MT Builders may turn out to influence “additional-insured” endorsements required by form subcontracts. Since November 2008, when the decision was issued, some liability insurers have begun to write the same type of “to the extent of” language into additional-insured endorsements to restrict the insurer’s liability to the extent of subcontractor negligence only. (See your insurance agent for more information.)

MT Builders provides new, useful instruction in crafting an indemnity clause and should remind all contractors and subcontractors to understand the indemnity provisions of their contracts and to be sure that their insurance covers their exposure.

Arizona Mechanics' Lien Foreclosure 101

Tue, 18 Nov 2008 00:00:00 GMT

You provided valuable materials, services or equipment to an Arizona construction project. You weren’t paid on time, so you recorded a mechanics’ and materialmen’s lien. What happens next?

LIEN FORECLOSURE SIX-MONTH DEADLINE

Under Arizona mechanics’ lien law, your mechanics’ lien filing expires six months after the recording date, unless you (the lien holder) file a lawsuit against the property owner to foreclose the lien. The objective of your lawsuit is to seize the owner’s property, sell it at a foreclosure sale conducted by the county sheriff, and apply the proceeds to the amount due you.

If you do not file a lawsuit within the six-month period, your mechanics’ lien automatically expires and is lost. Therefore, it is critical to calendar the foreclosure deadline and file the mechanics’ lien foreclosure action before that date.

BEFORE THE MECHANICS' LIEN FORECLOSURE ACTION IS FILED

First, in order have lien rights, for work considered to be “contracting” by the Arizona Registrar of Contractors, you must be able to prove that you held a valid Arizona contractor’s license when you entered into the contract and when you performed the work. Material suppliers and equipment rental companies do not need a contractor’s license. If “you” are a corporation or limited liability company, that legal entity must be in good standing with the Arizona Corporation Commission in order to file suit.

After you record your mechanics’ lien you should meet with your attorney to discuss what a lien foreclosure action will entail and whether there are other collection methods you should consider.

Before filing a lawsuit to foreclose on a mechanics’ lien, your attorney will order a title report on the property from a title agency. The title report will show the property’s legal description, the current owner, whether there are any large lenders who have priority over your mechanics’ lien, and any other mechanics’ liens against the property. All mechanics’ liens have equal priority with one another, regardless of the date they are recorded. The title report identifies the people and legal entities you must sue in order to successfully foreclose your lien. The title report also should help you determine whether, in light of the debts against the property, there is enough equity in the property to make your lien foreclosure action worthwhile.

AFTER THE LAWSUIT IS BEGUN

A mechanics’ lien foreclosure complaint asks the court to:

enter judgment in your favor for a specific sum of money,

enter judgment that you have a valid lien against the property for that amount, and

order the county sheriff to sell the property and use the proceeds to satisfy your lien.

In addition, the complaint usually alleges a breach of contract by the party (e.g., the general contractor) that failed to pay you.

Finally, the complaint names the other mechanics’ and materialmen’s lien claimants, in order to get everyone with a claim against the property before the court in the same action.

The great majority of mechanics’ lien foreclosure actions are settled by the parties without going to trial. However, if the lien foreclosure action proceeds to conclusion, the court will enter judgment on each mechanics’ lien and will order the property sold to satisfy the valid lien claims.

TRUSTEE'S SALES AND BANKRUPTCY

The owner’s purchase and construction loans on a project are usually recorded before construction begins. The priority of those loans, in comparison to mechanics’ and materialmen’s liens, is determined by the “first in time, first in right” rule, and they usually have priority over mechanics’ and materialmen’s liens. As a result, if the owner defaults on its purchase or construction loan, all of the mechanics’ and materialmen’s liens may be extinguished by a trustee’s sale.

Similarly, if the property owner files for bankruptcy court protection, mechanics’ liens are affected. If you have a lien claim against an owner who files bankruptcy, you should immediately consult your attorney to evaluate the circumstances and discuss your options.

See our special section, Getting Paid , for articles, forms and instructions on mechanics' liens, bond claims, and Arizona's prompt payment law.

Duty to Perform Good Workmanship Extends Beyond Parties to Contract

Thu, 21 Aug 2008 00:00:00 GMT

The Arizona Supreme Court rules that a builder's implied warranty applies to the buyer and to subsequent owners.

On August 19, 2008, the Arizona Supreme Court ruled, in The Lofts at Fillmore v. Reliance Commercial Construction, that a contractor is responsible for defects in a condo project that it built but did not sell. The ruling overturned a Court of Appeals decision that the contractor's implied warranty did not extend to subsequent owners with whom it had not contracted.

That case involved the builder of a Phoenix condo project, the Lofts at Fillmore. The developers contracted with Reliance Commercial Construction to build the project, then sold completed units to individual residents.

The development has a condo association, The Lofts at Fillmore Condominium Association, made up of the owners of the individual condos. At some point, members of the association became unhappy with the quality of the condos’ construction, and the Lofts association sued Reliance for breach of implied warranty, alleging construction defects.

Important to this case is that a breach of implied warranty of good workmanship is a contract claim, and the doctrine of privity provides that only the parties to a contract are bound by its provisions or entitled to its protections.

Thus, when the Lofts condo association hauled Reliance into court for alleged construction defects, the association quickly ran into a legal hurdle, i.e., neither the association nor its members had a contractual relationship with Reliance . Each owner had a contract with the developer, and the developer had a contract with Reliance, but that’s as far as it went.

Reliance asked the trial court for a dismissal. The court, finding that the association and its members had no contract with – and, thus, no claim against – Reliance, granted Reliance’s motion for summary judgment.

The Lofts association appealed. At the Court of Appeals, the association argued that, in its decision in Richards v. Powercraft Homes, the Arizona Supreme Court abolished the privity requirement for an implied warranty claim. In the Richards case, the plaintiffs were owners of homes in a Powercraft subdivision. Some were original owners who bought directly from Powercraft; others had purchased their homes from the original owners.

In Richards , the Supreme Court ruled that the implied warranty of habitability that Powercraft made to original buyers should also extend to subsequent buyers of those homes. Subsequent purchasers should have the same remedies as the original purchasers, even though they had no contract with Powercraft.

In the view of the Court of Appeals, the association’s Richards argument failed because Reliance did not sell the condominiums. The warranty of habitability, the Court found, is implied only when the builder of homes also sells them to owners who intend to live in them.

The Supreme Court ruled disagreed, affirming the applicability of Richards to this case, and remanded the case back to Maricopa County Superior Court for retrial. In its opinion, the Court determined that "absence of contractual privity does not bar such a suit."

The opinion also noted that failure to extend the implied warranty to subsequent buyers "might encourage sham first sales to insulate builders from liability. [...] Innocent buyers of defectively constructed homes should not be denied redress on the implied warranty simply because of the form of the business deal chosen by the builder and vendor."

Unlicensed Contractor Wins Relief from Order to Pay Full Restitution

Mon, 11 Aug 2008 00:00:00 GMT

On August 4, 2008, the Arizona Supreme Court reversed the state Court of Appeals ruling in Town of Gilbert v. Downie , likely reducing the restitution burden that the Court of Appeals had imposed on a man who had been convicted of contracting without a license.

In its July 24, 2007, decision, the Court of Appeals ordered a man convicted of contracting without a license to refund to the property owner all amounts – totaling nearly $53,000 – that the owner had paid to the contractor. What made the ruling particularly devastating was that the unlicensed contractor had already paid substantial sums to subcontractors. He also had to pay a fine.

In its ruling, the Court of Appeals had relied on a 2002 decision in State v. Wilkinson, in which the Arizona Supreme Court determined that the loss suffered by victims of unlicensed contractors is exactly equal to the amount of money the victims paid – regardless of the quality of the work performed.

BACKGROUND

Mitch Matykiewicz, doing business as MLM Construction Services, was hired by a Gilbert couple to build a swimming pool and make other improvements to their home. Matykiewicz performed some of the work, but most of it was done by licensed subcontractors. Over the course of ten months, the homeowners paid him $52,784.22.

When the homeowners became unhappy with the work performed, they contacted the Registrar of Contractors, where they learned that neither Matykiewicz nor his company was licensed.

Matykiewicz was eventually charged with contracting without a license, a class one misdemeanor ( A.R.S. § 32-1151 ). A Gilbert Municipal Court judge found Matykiewicz guilty and ordered him to repay the entire $52,784.22 that the homeowners had paid to him.

Matykiewicz appealed to Maricopa County Superior Court, where Judge Downie vacated the restitution and ordered the Gilbert court to determine the homeowners’ actual economic loss.

The Gilbert Prosecutor’s Office, citing Wilkinson , asked the Court of Appeals to set aside Judge Downie’s order and uphold the Gilbert court’s restitution award.

Citing case law and various Arizona statutes, the Court of Appeals found that the Gilbert court ruled correctly in ordering “restitution equal to the amount the victims paid to Matykiewicz ... because those payments were ‘the fruits of the crime’” (the crime here being the act of contracting without a license).

In other words, even if Matykiewicz had performed flawless work, in a timely manner, for the agreed fee, he would have been forced to give back every penny the homeowners paid him.

SUPREME COURT REVERSAL

In reversing the Court of Appeals ruling, the Supreme Court noted that Wilkinson :

"[did not create] a per se rule that the entire amount of consideration paid by the victim in an unlicensed contractor case is the proper amount of restitution[.] ... Although Wilkinson explored the extent to which 'courts can order restitution for victims of an unlicensed contractor who performs incomplete and faulty work,' ... it never addressed whether losses incurred by victim-homeowners may be reduced by benefits conferred upon them."

The Supreme Court's ruling went on to state that "determining a victim's 'loss' requires consideration of any benefits conferred on the victim[.] ... If value is conferred ... courts must consider such benefits in determining a victim's loss.

Specifically, the ruling instructed the trial court to, first, determine the homeowners' total payments to Matykiewicz and, second, subtract from that total any value that the homeowners received as a result of the work performed by Matykiewicz and/or his subcontractors.

The Supreme Court also instructed the trial court not to compensate the homeowners for expenses they incurred because Matykiewicz "failed to complete the work he contracted to do or did so in a faulty manner."

WRONG LICENSE, NO LICENSE

It is important that licensed contractors understand that they are not immune to the consequences discussed above. A.R.S. § 32-1151 states as follows:

“It is unlawful for a person … to engage in the business, or act or offer to act in the capacity, or purport to have the capacity of a contractor, without having his own license in good standing[.]”

As the Arizona Registrar of Contractors confirms on its website, this means that a contractor must have a current and active license, showing he is qualified to perform the type of work required, before he or she can even bid on a project. Violation of this statute is a class 1 misdemeanor.

If you perform, contract to perform, or offer to perform work that is different than the work for which you are licensed, you may be charged with a misdemeanor. If you are convicted, you may be held liable for the difference between what the owner paid to you and the value that the owner received from your work.

Court Reaffirms Strength of Arizona Prompt Payment Law

Tue, 08 Apr 2008 00:00:00 GMT

Dissatisfaction with a contractor's non-invoiced work does not entitle an owner to withhold payment for other work

A 2007 Arizona Court of Appeals decision in Stonecreek Bldg. Co., Inc. v. Shure provides a refresher course on the state’s prompt payment law and the protections it offers contractors. The case involves property owners – Mavis Shure and her husband, Lanny Hecker – who wished to build a custom home. They hired Stonecreek Building Co. as their general contractor.

More about Arizona's Prompt Payment Law

During construction, the owners complained to Stonecreek about defective workmanship, particularly in the masonry work. When Stonecreek assured the owners that it would not pay the masonry subcontractor until the work was corrected to their satisfaction, the owners continued to make timely progress payments. The quality of the masonry work continued to be an issue, to the point that the owners’ attorney sent a letter to Stonecreek expressing their dissatisfaction. The letter also was critical of the HVAC work that had been done.

A few days later, Stonecreek sent the owners an invoice for $122,447. The invoice, which had been approved by the architect, covered a variety of work, including the HVAC system. The invoice did not include charges for masonry work.

The owners, alleging deficiencies in the masonry and HVAC work, withheld $100,000 from their payment, setting in motion a series of predictable consequences:

Stonecreek stopped its work on the residence.

The owners, claiming that Stonecreek failed to remedy deficiencies in construction, terminated the contract.

Stonecreek sued the owners.

The owners counter-sued Stonecreek.

In its suit, Stonecreek claimed that the owners violated Arizona’s prompt payment law (A.R.S. §§ 32-1181 to -1188) by withholding payment from an invoice because of dissatisfaction with masonry work that was not covered by that invoice. The contractor also claimed that the owners had approved its invoice, either because of the architect’s approval or because it had been “deemed approved” because the owners failed to file a timely written objection to the work that the invoice covered.

The owners, through their attorney’s letter, had disputed the quality of both the HVAC and masonry work. However, of those two issues, only the HVAC work (for which the owners were billed $26,781) was included in the invoice. The masonry work was not.

Stonecreek filed a motion for partial summary judgment, and the trial court granted it. In granting the motion, the court ruled that, while the letter from the owners’ lawyer satisfied the statutory requirement of a timely written objection, the prompt payment law allows an owner to withhold payment only to the extent that the owner disapproves work included in the invoice.

As damages for the owners’ violation of the prompt payment law, the trial court awarded Stonecreek $73,219 – the $100,000 that the owners withheld from their payment, minus the $26,781 for the properly disputed HVAC work.

APPEAL

The owners appealed the trial court’s award. The owners and Stonecreek agreed that the only issue to be determined was whether the prompt payment law allows an owner, when presented with an invoice, to withhold payment related to work that is not included in that invoice.

It is the stated purpose of the prompt payment law “to establish a framework for ensuring timely payments from the owner to the contractor and down the line to the subcontractors and suppliers whose work has been approved.”

According to A.R.S. § 32-1182 , an owner must make progress payments to a contractor “on the basis of a duly certified and approved billing or estimate of the work performed and the materials supplied during the preceding thirty day billing cycle.” Those payments are to be made within seven days after the date the billing or estimate is certified and approved. The statute goes on to state:

“A billing or estimate shall be deemed approved and certified fourteen days after the owner receives the billing or estimate, unless before that time the owner or the owner's agent prepares and issues a written statement detailing those items in the billing or estimate that are not approved and certified.”

In their appeal, the owners argued in part that they were entitled to withhold payments for work other than that billed in the invoice, because some defects in workmanship may become known only after payment has been made.

On that point the Court was sympathetic but unswayed. The Court noted that, when it comes to latent defects, withholding payment is not an owner’s only remedy:

“The owner retains all civil remedies for breach of contract and tort claims against a contractor. Certification of payment given during the course of construction is not regarded as conclusive that the work was properly performed. … [And] progress payments do not constitute acceptance of work that is not in accordance with contract requirements.”

In the end, to the question of whether the prompt payment law allows an owner to withhold payment related to work that is not covered by the invoice, the Court of Appeals offered a resounding “no,” ruling that, in keeping with the purpose of the law, “the trial court correctly held that withholding funds for allegedly defective work not covered in the invoice violated the Act.”

Awarding of Attorneys' Fees in Arizona

Mon, 11 Jun 2007 00:00:00 GMT

In October 2003, a group of homeowners in a Fulton Homes subdivision sued Fulton because, they claimed, their homes were improperly “designed and/or constructed.” They further claimed that the problems with their homes were due, in part, to Fulton’s decision to build the homes on unreinforced slabs instead of on heavily reinforced slabs as recommended by a civil engineer.

In anticipation of having to defend against claims of poor concrete work, Fulton Homes filed a third-party complaint against the two concrete subcontractors, BPP Concrete and Trojan Concrete, that had poured the slabs. The legal action against the subs was based on what Fulton considered the subs’ contractual duty to indemnify Fulton in case the court awarded damages arising from BBP’s or Trojan’s work.

In January 2005, in their response to interrogatories from BPP, the homeowners stated that they were seeking damages resulting from design defects, not from poor workmanship. As this appeared to relieve BPP and Trojan of liability, the subcontractors sought to be dismissed from the suit, and Fulton Homes ultimately agreed.

By that time, the subcontractors had incurred legal expenses, and they asked the trial court to order Fulton Homes to pay their attorneys’ fees (about $6,000 for each subcontractor), pursuant to A.R.S. § 12-341.01. Fulton objected to the request, arguing that BPP and Trojan were proper third-party defendants (under Rule 14 of the Arizona Rules of Civil Procedure). The trial court rejected Fulton’s argument and awarded the requested attorneys’ fees to the two subcontractors. Fulton appealed the awarding of attorneys’ fees.

Factors. Fulton Homes’ arguments on appeal, and the court’s responses to them, offer a useful refresher course on the circumstances under attorneys’ fees may be awarded in Arizona.

First, A.R.S. § 12-341.01(A) provides for the awarding of attorneys’ fees, at the trial court’s discretion, to the “successful party” in a “contested action arising out of a contract ” (emphasis added).

Second, to justify such an award, the parties must actually be “adverse,” and it is up to the trial court to determine which party is successful.

Finally, in exercising its discretion, the trial court should consider certain factors set forth in a 1985 ruling, Associated Indem. Corp. v. Warner . These factors include the following:

the merits of the unsuccessful party’s claim;

whether the claim could have been avoided or settled (this factor proved to be significant in the Fulton Homes decision);

whether the successful party’s efforts were completely superfluous in achieving the result;

whether assessing attorneys’ fees against the unsuccessful party would cause an extreme hardship;

whether the successful party did not prevail with respect to all of the relief sought; and

whether an award to the successful party would discourage other parties with valid claims from litigating a contract dispute for fear of having to pay the other parties’ attorneys’ fees.

Successful Parties. On the question of whether the subcontractors were “successful” parties, Fulton Homes had contended in its appeal that they were not, since the court never ruled in their favor. Fulton further argued that the subs were successful in avoiding indemnity only because the homeowners chose not to seek damages for faulty workmanship, not because Fulton’s claim against the subs lacked merit.

The Court of Appeals rejected both arguments, ruling that, first, “adjudication on the merits is not a prerequisite to recovering attorneys’ fees”; second, a party may be deemed “successful” when a plaintiff (in this case, the group of homeowners) decides not to sue that party; and, finally, calling a party “successful” is within the trial court’s discretion.

Adverse Parties. As part of its argument against the awarding of attorneys’ fees, Fulton Homes contended that the subcontractors and Fulton were not adverse parties in this case. (You read that correctly.) Fulton based its contention on the fact that it had “asserted only contingent claims” (emphasis added) – that is, the subcontractors would have been liable to Fulton only if the homeowners had shown that the subs had performed faulty workmanship. Predictably, the Court of Appeals did not buy into Fulton’s position. The Court noted its 1986 ruling in Pioneer Roofing Co. v. Mardian Constr. Co., in which it determined that “adversity is not determined solely from the parties’ alignment in pleadings, but rather must be ascertained from the opposing positions or interests of the parties.” In short, Fulton and the subs became adverse parties the moment Fulton filed its third-party complaint against them.

Merits. Regarding the merits of Fulton Homes’ claim against the subs and whether it could have been avoided or settled, the Court of Appeals stood by the trial court’s finding that, since the homeowners did not allege faulty workmanship, Fulton should not have taken legal action against the subs. The Court of Appeals acknowledged that “the homeowners’ initial complaint might reasonably have supported Fulton’s filing” of the complaint against the subcontractors but deferred to the trial court’s conclusion that “Fulton should have known very quickly that the homeowners were not asserting faulty concrete workmanship claims.” Thus, Fulton bore responsibility for the legal costs that the subcontractors incurred from that point forward.

Ruling. Fulton challenged the awarding of attorneys’ fees on a variety of other grounds, none of which proved persuasive to the Court of Appeals. In its ruling, the Court found as follows:

Fulton Homes could have protected its rights against BBP and Trojan by methods other than, to use the Court’s term, “dragging” them into a lawsuit:

Fulton should not have filed the third-party complaint against the subs;

Fulton should have dismissed the complaint much sooner than it did;

the subcontractors’ legal efforts to defend themselves against Fulton’s complaint were appropriate;

Fulton provided no evidence that paying a little more than $12,000 to the subcontractors would create a financial hardship; and

ordering Fulton to pay the $12,000 would not have a chilling effect on future potential third-party plaintiffs.

Be Careful. The bottom line for companies that may find themselves in Fulton Homes’ position: If you don’t want to be on the hook for another company’s legal fees, don’t drag them into a lawsuit unless you are on solid legal ground and you have no alternative remedies.

Actual Cash Value and Contractor Fees

Mon, 07 May 2007 00:00:00 GMT

If a general contractor may be needed for repairs or replacement, payments to the insured should include contractor overhead and profit fees – even if no contractor is used.

In the summer of 1998, the home of Mr. & Mrs. Tritschler was damaged by rain. They filed a claim under their homeowners policy from Allstate Insurance, and Allstate hired a general contractor – we’ll call it “XYZ Construction” – to perform the needed repairs. XYZ Construction provided to Allstate a written estimate that totaled about $44,000, an amount that included a 10% profit and 10% overhead charges for XYZ.

The Tritschlers assigned payment of their insurance proceeds to XYZ, and XYZ began work to repair the home. However, before the repairs were completed, the Tritschlers became dissatisfied with the quality of the work. After XYZ left the job, the Tritschlers informed Allstate that they planned to make the remaining repairs themselves.

When Allstate offered to “cash out” the repair claim, the Tritschlers accepted. Without investigating whether XYZ’s work was truly substandard, Allstate paid XYZ $26,200 for the work it had performed. In addition, Allstate paid the Tritschlers $11,500 – an amount equal to the difference between XYZ’s estimate and the amount paid to XYZ, less the overhead and profit charges contained in the estimate. Allstate’s $11,500 payment to the Tritschlers was accompanied by a letter that stated, “If you decide to use a general contractor, please submit signed contract or paid bill and [Allstate] will reimburse the contractor overhead and profit.”

After the house was repaired, the Tritschlers submitted to Allstate an actual cash value proof of loss and a demand for $36,000. That amount included $8,000 for general contractor’s overhead and profit, even though the Tritschlers did not use a general contractor.

In reimbursing the Tritschlers, Allstate paid the entire amount of the claim, plus $5,000 (based on Allstate’s estimate of remaining repairs), but deducted the overhead and profit portion of the claim.

LAWSUIT

The Tritschlers sued Allstate, claiming that Allstate had breached its contract by failing to pay the general contractor’s overhead and profit. There were other allegations as well – concerning alleged bad faith, collaboration with XYZ to make substandard repairs, etc., and a claim for punitive damages – but much of the attention focused on whether the Tritschlers’ decision not to use a general contractor excused Allstate from paying the overhead and profit portion of the claim. (XYZ was also named in the suit, but the claims against the contractor were not pertinent to the central theme of this article.)

In Superior Court, Allstate filed a motion for summary judgment on all elements of the Tritschlers’ complaint. The trial court granted Allstate’s motion, and the Tritschlers appealed.

APPEAL

The Tritschlers argued, in Superior Court and again in their appeal, that the actual cash value coverage (as provided in their policy under a subsection [b]) included the contractor’s overhead and profit, and, thus, they were entitled to receive those amounts regardless of whether they used a general contractor.

Allstate countered that the provision cited by the Tritschlers applied only to insureds who choose not to repair their properties. Allstate repeated its successful trial court argument that, since the Tritschlers did repair their property, Allstate was obliged to pay only for coverage pertaining to the building structure reimbursement provision (a subsection [c]) of the policy, which provided not for contractor overhead and profit but, rather, “the amount actually and necessarily spent” to repair or replace the damaged property.

FINDINGS

The Court of Appeals did not view this issue with the same degree of clarity as did the trial judge in granting Allstate’s motion for summary judgment:

“[T]he trial court erred in finding as a matter of law that Tritschler was not entitled to receive the actual cash value under subsection (b) and that his claim was governed solely by subsection (c). Nevertheless, we may still uphold the trial court’s grant of summary judgment to Allstate on the issue of contractor fees if it is correct for any reason.”

The Court then sought to determine whether the “actual cash value” in the Allstate policy included general contractor overhead and profit when no contractor is used. The Court noted that, while an endorsement attached to the policy defined “actual cash value” as “the current cost to repair or replace covered property with new material of like kind and quality less a deduction for physical deterioration and depreciation, including obsolescence,” the policy did not specify how Allstate calculated the “cost to repair or replace covered property” or whether the value included contractor overhead and profit fees.

Finding no binding judicial precedent in Arizona, the Court looked to other states for persuasive guidance.

A 1987 Kentucky case, Snellen v. State Farm Fire & Casualty Co., supported Allstate’s position. The court in that case determined that “since the goal is to arrive at the actual cash value of the damage, non-damage factors … such as clean-up, profit, overhead, and permits, were properly deducted.”

Conversely, a 1994 Pennsylvania case, Gilderman v. State Farm Insurance Co., favored the Tritschlers’ position. In that case, the court noted that “there are types of property damage where … there is extensive damage to a home requiring the use of more than one trade specialist.” That court found that, in such instances, an insurance company may not deduct contractor fees from the actual cash value when such fees are reasonably expected to occur.

Similarly, in a 1998 Michigan case, Salesin v. State Farm Fire & Casualty Co., the court found that “the expense of a general contractor cannot be deducted … unless such services are not likely to be required.” The homeowner in that case, like the Tritschlers, had made his own repairs and did not incur any contractor fees. That fact did not affect the court’s holding that it was improper for the insurance company to automatically deduct contractor overhead and profit from the actual cash value payment.

The Arizona court noted that “several other jurisdictions have since followed the reasoning in Gilderman and Salesin and ruled that an insurer may not automatically deduct a contractor’s overhead and profit from an actual cash value payment.”

CONCLUSION

In the end, the Court vacated the trial court’s granting of Allstate’s motion for summary judgment and sent the case back to Superior Court. While that ruling does not provide ironclad direction to insurance companies regarding comparable claims, insurers would be wise to note the Court’s holding on the issue of actual cash value and contractor fees:

“Based on the foregoing analysis, we hold that under this policy actual cash value in adjusting a property loss includes any cost that an insured would be reasonably likely to incur in repairing or replacing a covered loss[.] … And, if the cost to repair or replace the damaged property would likely require the services of a general contractor, the contractor’s overhead and profit fees should be included in determining actual cash value, even when an insured ultimately elects to complete personally the needed repairs.”

Breach of Contract: Too Late to Sue

Thu, 22 Jun 2006 00:00:00 GMT

When defective construction by a subcontractor results in a lawsuit against the general contractor, indemnity provisions in the contract normally allow the general to sue the subcontractor. However, as one general contractor learned the hard way, indemnity based in contract has time limits, and a general who fails to meet key deadlines may forfeit its right to indemnification.

Evans Withycombe was the general contractor in the construction of a Scottsdale home that was finished in January 1992. Eight years later, in August 2000, the owners of the home sued Evans Withycombe for defective construction. Two years after that (August 2002), and just before settling with the homeowners, Evans Withycombe filed a third-party complaint against the subcontractors that worked on the home for breach of contract, breach of warranty, negligence, and indemnification.

One of the subs, Western Innovations, responded with a motion for summary judgment, based on A.R.S. § 12-552 , which bars contract-based claims filed more than nine years after substantial completion of a construction project. (By statute, the limit is eight years, but if an injury or latent defect is discovered during the eighth year, the statute extends the deadline for an additional year.) Evans Withycombe’s claim came approximately ten years after the certificate of occupancy was issued.

The trial court granted Western’s motion and dismissed Evans Withycombe’s third-party complaint in its entirety. Evans Withycombe appealed, arguing in part that its claims for negligence and indemnity were not based in contract.

The Arizona Court of Appeals upheld most, but not all, of the trial court’s dismissal of Evans Withycombe’s complaint. The judges affirmed that A.R.S. § 12-552 clearly provides that a breach of warranty claim is based in contract and barred Evans Withycombe’s ten-year-old claim. The court also noted that, if Evans Withycombe had filed its third-party claim against the subcontractors in a timely fashion, its claim would have survived the statutory time limit. (The original lawsuit was filed in August 2000, giving the general contractor a five-month window, to January 2001, during which it could sue its subs in a contract action.)

In one bit of good news for Evans Withycombe, the court ruled that, while A.R.S. § 12-552 barred it from making a claim based in contract, the statute did not bar the company’s common law indemnity claim against its subcontractors. As a consequence, while upholding most provisions of the trial court’s dismissal of Evans Withycombe’s suit, the Court of Appeals reversed the trial court’s dismissal of the company’s common law indemnity claim.

For general contractors, the point of this ruling is a simple one: If an owner sues you, and you believe the true culprit is a subcontractor, be sure that you file your legal action against the subcontractor before the statutory clock stops ticking.

Achieving “Substantial Compliance” in Arizona

Thu, 13 Apr 2006 00:00:00 GMT

In a March 2006 ruling, the Arizona Court of Appeals offered a useful refresher course in, and a tighter interpretation of, the factors that courts and administrative authorities must consider in determining whether a contractor has “substantially complied” with statutory licensing requirements before bidding or contracting.

The case at hand, Arizona Commercial Diving Services, Inc. v. Applied Diving Services, Inc. , involved the awarding of a municipal contract to a contractor that had applied for – but not yet received – the proper license.

Arizona Commercial Diving Services (ACDS) was formed in March 2003. On May 15 of that year, ACDS submitted an application to the Registrar of Contractors (ROC) for a class K-05 license. The license was issued on June 20. On May 23 – after ACDS had applied for its license but before the license was issued – ACDS bid on a City of Phoenix project. ACDS was the low bidder and on June 20 was notified that its bid had been recommended for approval. One of the unsuccessful bidders filed a complaint with the ROC, alleging that ACDS had violated A.R.S. § 32-1151, which states, in part: “It is unlawful for any person … [or] corporation … to engage in the business of, submit a bid or respond to a request for qualification or a request for proposals for construction services as, act or offer to act in the capacity of or purport to have the capacity of a contractor without having a contractor's license in good standing in the name of the person … [or] corporation … unless the person …[or] corporation … is exempt.”

ACDS admitted that it did not hold a contractor’s license when it submitted its bid but argued that it had substantially complied with the ROC’s licensing provisions and, therefore, had not violated the statute. The ROC conducted an administrative hearing, and the administrative law judge ruled that ACDS had indeed violated the statute and recommended suspension of the ACDS’s license. ACDS filed for judicial review in Superior Court and sought a stay of its license suspension, which was granted pending the review. When the Superior Court ruled against ACDS, the contractor appealed.

Of interest to contractors is whether ACDS had “substantially complied” with the statute at the time it bid on the project. In its ruling, the Court of Appeals reviewed the five factors that are to be considered in determining whether substantial compliance has been achieved:

Whether a failure by the ROC contributed to the contractor’s noncompliance.

Whether the contractor was financially responsible while its license was suspended or not yet issued.

Whether the contractor knowingly ignored the registration requirements.

Whether the contractor immediately remedied the statutory violation.

Whether the failure to comply with the statute prejudiced the party the statute seeks to protect.

The third factor was ACDS’s undoing. Like the administrative law judge and Superior Court, the Court of Appeals found that ACDS was indeed aware of the need for a Class K-05 license, as evidenced by the fact that ACDS had applied for one, and had knowingly ignored that requirement by submitting its bid before receiving the license.

ACDS argued that applying for the license should prove that the contractor did not ignore the license requirement, but that argument failed at every level. ACDS further argued that substantial compliance should not be defeated by just one factor but should be considered by balancing all five factors. But the Court of Appeals countered that the Arizona Supreme Court’s 1995 ruling in Aesthetic Property Maintenance clearly stated that a knowing violation of the licensing requirements is “fatal” to a claim of substantial compliance.

In its ruling in this case, the Arizona Court of Appeals expands the holding of its 2002 Crowe v. Hickman’s Egg Ranch decision ( see article ) regarding the necessity for having an appropriate license before negotiating a contract. The Crowe ruling focused on the requirement that a contractor have the proper license before entering into a contract; the more recent case underscores the importance of a contractor having the proper license before bidding on a contract.

Replacement Checks, Preference and the “New Value” Defense in Bankruptcy

Wed, 08 Feb 2006 00:00:00 GMT

An NSF check may be immune to preference claims, but not the cashier’s check that replaces it.

In the early 1990s, Endo Steel subcontracted with JWJ Contracting to supply and install rebar on a runway project at Sky Harbor. In the middle of the project, JWJ gave Endo a bad check in exchange for an unconditional lien release. By accepting the check and simultaneously executing the unconditional release, Endo unwittingly gave up important rights in JWJ’s later bankruptcy. Acceptance of the bad check was the first step in a long and painful lesson to which all subcontractors should pay close attention.

When JWJ fell behind on its payments to subcontractors, the subcontractors threatened to demand payment from Continental Insurance, which had issued a payment bond to JWJ. In response to Endo’s demand, on April 14, 1994, JWJ paid Endo $194,000. In exchange, Endo immediately executed an unconditional lien waiver, giving up its rights to payment from Continental Insurance. JWJ’s check to Endo bounced. Endo stopped work and told JWJ that it would not resume work until it received certified funds. On May 2, JWJ replaced the bad check it had given to Endo with a cashier’s check. Endo resumed its work on the project.

On July 1, 1994, JWJ entered bankruptcy under Chapter 11 and continued to operate for two more months before closing its doors. The Chapter 11 was converted to a Chapter 7, and a Trustee was appointed. Nearly three years later, in February 1997, the Trustee filed a preference action against Endo because Endo had received its payment from JWJ during the 90-day period preceding JWJ’s bankruptcy filing. Endo sought dismissal of the preference claim, arguing that, when it executed the unconditional lien waiver in exchange for JWJ’s payment and waived its rights to make claims against Continental Insurance, new value was created for JWJ. (One of the defenses to a preference claim is that, in exchange for its payment to a creditor, the debtor received “new value,” and the estate was not diminished by the payment to the creditor.) The Bankruptcy Court agreed and dismissed the Trustee’s preference claims against Endo. The Trustee appealed to the U.S. Bankruptcy Appellate Panel (BAP) for the Ninth Circuit.

REVERSAL

In 2002, the BAP reversed the Bankruptcy Court’s decision in favor of Endo and remanded the Trustee’s action for a new hearing. The BAP reversal was based on its reasoning that Endo waived its lien rights, including the right to pursue payment from Continental Insurance at the time it received the bad check. Thus, when Endo received the replacement check, it no longer had any lien rights to release. Therefore, JWJ did not receive any new value in exchange for the cashier’s check.

Endo appealed, without success, to the U.S. Ninth Circuit Court of Appeals. In its 2005 ruling, the Ninth Circuit upheld the BAP’s finding that the unconditional lien waiver that Endo executed in exchange for JWJ’s NSF check did not provide a valid “contemporaneous ‘new value’” defense for the cashier’s check that Endo received a few days later. Joining other circuits that have ruled in comparable cases, the Court went on to conclude that the debtor’s issuance of a bad check “transforms what would have been a contemporaneous exchange … into a credit transaction .” (Emphasis added.)

In other words, if JWJ’s first check to Endo had cleared the bank, Endo could have successfully defended against the preference action based on the “new value” it gave to JWJ in the form of its lien release. In effect, the cashier’s check that Endo received from JWJ was not a payment to Endo in exchange for its delivery of goods and services. According to the BAP and the Ninth Circuit, the cashier’s check satisfied a new obligation to Endo that JWJ created when its first check bounced. Since JWJ received no new value in exchange for its cashier’s check (as it had when Endo waived its right to pursue payment from Continental Insurance), that replacement payment became vulnerable to the Trustee’s preference claim.

Subcontractors should protect themselves from Endo’s fate by requiring the owner or general contractor to make payment in certified funds when unconditional lien releases are used, and by always using conditional releases when the owner or general contractor is paying with anything but certified funds.

Court Broadens Grounds for Stay of License Revocation Pending Appeal

Tue, 24 Jan 2006 00:00:00 GMT

A court ruling in a liquor license case offers some good news for contractors facing ROC license revocation.

An Arizona Court of Appeals ruling in a liquor license case offers good news – and greater access to due process – for contractors facing license revocation at the hands of the Arizona Registrar of Contractors. The court’s ruling in P&P Mehta LLC v. Jones remedies a long-standing problem for Arizona businesses that face losing their licenses issued by state or local governments.

The problem: While a licensee could appeal in Superior Court a revocation order by the licensing agency, the court would grant a stay of the revocation only if the licensee could demonstrate that it was “likely to prevail” in court. A licensee who failed to meet that difficult standard would lose its license – and essentially be out of business – until the court ordered reinstatement.

That situation has been particularly untenable for contractors, whose licenses can be pulled by the Registrar of Contractors in as few as 20 days, and for whom disputes can be especially complicated and meeting the “likely to prevail” standard highly unlikely in a brief hearing.

“Near-Impossible.” Fortunately, in its Mehta ruling, the Court of Appeals found that requiring a licensee “to demonstrate at the inception of the review process a significant probability of success asks the near-impossible. Except in the most egregious instances of agency error, this effort will fail.” Instead, the Court ruled that issuing a stay should be based on the licensee’s showing of “good cause” and “some degree of merit.” The Court also ruled that a licensee need not demonstrate that it would suffer “irreparable harm” if the revocation is not stayed.

New Standards. In defining the new standards for staying a license revocation, the Court cited Oregon’s two-pronged test for substantive merit:

a “colorable claim of error” – i.e., an assertion by the licensee that “is seemingly valid, genuine, or plausible, under the circumstances of the case” – and

a showing by the licensee that revoking its license would pose greater harm to the licensee than the staying of the revocation would pose to the licensing agency.

For contractors, the Mehta ruling means that, upon satisfying the test for substantive merit, they can continue to operate under their existing license until they have their day in court.

Alcohol, drug use no factor in no-fault workers' comp claims

Mon, 17 Oct 2005 00:00:00 GMT

Arizona statutes requiring injured workers to prove cause of injuries violated constitutional right to compensation for job-related accidents.

An Arizona statutory scheme enacted in 2000 required employees to affirmatively prove, before they could receive worker’s compensation benefits, that use of alcohol or drugs did not contribute their injuries. The laws were designed to limit liability for workplace injuries in favor of employers who maintain certified drug testing policies.

Applying the statutes in two separate construction injury cases, Grammatico v. Industrial Commission (where an injured worker-plaintiff tested positive for marijuana, amphetamine and methamphetamine use) and Komalestewa v. Industrial Commission (where the worker-plaintiff’s blood tests indicated the presence of alcohol), resulted in a conflict between two panels of the Arizona Court of Appeals. In both cases, the employers raised the statutory defense, which placed the burden on the injured workers to prove that alcohol or drug use did not contribute to the cause of their injuries. The two panels differed on whether the statutes providing the defense conflicted with Arizona’s constitutional provision that creates worker’s compensation benefits.

UNCONSTITUTIONAL LIMITATION ON BENEFITS

The Arizona Supreme Court resolved the conflict between the two rulings in August 2005. Its decision holds that the application of the statutory scheme is unconstitutional in cases where a necessary risk of employment either caused or contributed to the accident, and that the claims in both cases were compensable. The court explained its decision by reference to the history of workplace injury actions and the policy behind worker’s compensation.

HISTORY

Prior to the enactment of worker’s compensation law, employees were limited to pursuing damage awards in negligence actions against their employers, which were subject a variety of defenses even if the employer was at fault, if third parties or the injured worker contributed to the cause. The result was a scheme that was extremely expensive for both plaintiffs and defendants and made the plaintiff’s success nearly impossible. Article 18, Section 8 of the Arizona Constitution was enacted to provide workers (and employers) in Arizona with an alternative to common law tort actions.

NO-FAULT

Worker’s compensation law is designed to be a “no-fault” scheme: neither the employee’s nor the employer’s negligence affects compensation. The concept of “fault” is the point at which the statues and the Constitution conflict.

According to the Supreme Court, A.R.S. § 23-1021(D) interferes with the “no-fault” scheme by requiring the injured worker to prove that a necessary risk of employment was the sole cause of the accident. Similarly, the Supreme court reasoned that A.R.S. § 23-1021(C), which precludes benefits if the worker cannot prove that alcohol was not more than a “slight contributing cause” of the injury, requires the employee to prove he was not at fault in order to receive benefits. The two statutes, concluded the Court, impermissibly inject concepts of comparative fault into the no-fault worker’s compensation system, regardless of workplace dangers.

In order to recover benefits, a claimant still must prove that the injury was sustained in the course of employment, that the accident arose out of and in the course of the employment, that the accident caused the injury, and that either a necessary or inherent risk of employment caused or contributed to the industrial accident or the employer failed to exercise due care.

DRUG-FREE WORKPLACE

While the ruling is good reason for employers to worry about becoming liable for all alcohol- and drug-related injuries that occur on the job site, the Court’s back-step from the statutory scheme of five years ago is limited, and incentives for maintaining a safe and drug-free workplace remain. Employers will still want to maintain a safe work environment and a drug-free workplace to reduce the risks of employment and on-the job accidents that can give rise to claims.

Bid Acceptance Not a Contract, Court Rules

Wed, 13 Jul 2005 00:00:00 GMT

The September 2004 Construction Advisor reported on an Arizona Court of Appeals decision, in Ry-Tan Construction, Inc. v. Washington Elementary School District No. 6, in which the Court ruled that formal contract execution may not be required to bind the parties in the awarding of a contract.

That decision was vacated in May 2005 by the state Supreme Court, which also reversed the trial court’s ruling for Ry-Tan Construction. The Supreme Court found that the Washington Elementary School District board was free to withdraw its acceptance of Ry-Tan’s bid prior to the signing of the contract, even though Ry-Tan, relying on the award, had begun work on the district’s project.

BACKGROUND

Ry-Tan was the lowest qualified bidder on a public school project. The school board voted to award the contract to Ry-Tan, and a letter documenting the award and a notice to proceed were prepared for delivery to Ry-Tan.

Before the contract documents were formally executed, Ry-Tan moved equipment onto the jobsite and began construction. Ry-Tan was familiar with the jobsite and the location of utility lines and, thus, did not request a “blue stake” inspection of utility lines at the project site before beginning work. When the school board became aware that Ry-Tan began work without a blue stake inspection, it refused to sign the contract that it had awarded to Ry-Tan and ultimately voted to re-bid the project.

Ry-Tan sued for breach of contract, won in Superior Court, and won again in the Court of Appeals.

SUPREME COURT FINDINGS

In its ruling, the state Supreme Court relied on its 1951 Covington decision, which held that a public agency that accepts a bid on a public contract is not bound until a formal contract exists. Attorneys for Ry-Tan argued, unsuccessfully, that Covington did not apply to this case and, alternatively, whether it applied or not, it was a bad decision and should be overturned.

Ry-Tan also contended that, since the Arizona School District Procurement Code required the district to award the contract to “the lowest responsible and responsive bidder whose bid conforms to … the invitation for bids,” the district had no choice but to contract with Ry-Tan and, thus, the signing of the contract was a mere formality. The Court acknowledged that requirement but noted that “nothing in the Code expressly prohibits a public entity from withdrawing a bid after acceptance of the bid but prior to the award of the project.”

CONCLUSION

The moral of the story should come as no surprise: The written contract is not a formality, and a vote to award a contract is not binding until the document is actually signed.

Security Interest Can Survive Commingling of Sale Proceeds

Fri, 10 Dec 2004 00:00:00 GMT

The Arizona Court of Appeals upholds a secured supplier’s right to a claim of “conversion” despite its failure to require segregation of monies.

If a supplier has a security interest in your inventory, does the supplier’s failure to require you to place the sale proceeds in a separate account weaken the security agreement?

One equipment dealer thought so, as did a Superior Court judge. Unfortunately for the dealer – and to the delight of wholesale suppliers – in September 2004 the Arizona Court of Appeals saw it a different way.

Case Corporation v. Gehrke involved a debt owed by Utility Equipment Company (UEC), a dealer of trenching equipment, backhoes and other construction equipment, to one of its suppliers, Case Corporation. In 1990, UEC’s owner, Duane Gehrke, acting on behalf of UEC, signed and personally guaranteed a wholesale financing and security agreement with Case. The agreement gave Case a security interest in all inventory (existing and future) that Case sold to UEC, as well as the proceeds from sale of the secured inventory. Case was to be paid the amounts due it within seven days of sale. The security agreement also gave Case the right to require UEC to deposit sale proceeds into a separate account to avoid commingling with UEC’s other funds. Case did not exercise that right, leaving UEC free to deposit proceeds from the sale of secured inventory into their general account. Case’s decision not to require the segregation of funds would become central to the eventual dispute between the parties.

In December 2000, ten years after Case and UEC executed the security agreement, UEC defaulted on the agreement by failing to remit full payment for ten pieces of equipment that UEC had sold. Case sought to collect, then terminated the security agreement. A week later, UEC filed for Chapter 11 bankruptcy. In an attempt to skirt the protection of the bankruptcy court, Case sued the Gehrkes personally in June 2002, seeking to recover against Gehrke on his guarantee and alleging that Gehrke had “converted” more than $600,000 in proceeds from the sale of equipment in which Case had a security interest.

Conversion. Conversion is defined as “an act of wrongful dominion or control over personal property in denial of or inconsistent with the rights of another.” To maintain an action for conversion, a plaintiff (in this instance, Case Corp.) must have the right to immediate possession of the personal property when the alleged conversion occurs. (A secured party like Case has the right to immediate possession of all of its collateral upon the dealer’s default, and that collateral is identified by serial number in the transactional documents.) If the dealer defaults but refuses to allow return of the remaining collateral, the secured party has a sufficient possessory interest in that collateral to bring an action for its conversion.

It is relatively difficult to sue for conversion of money. A conversion claim cannot be maintained to collect on an ordinary debt. Money can be the subject of a conversion claim only if a specific fund “can be described, identified or segregated, and an obligation to treat it in a specific manner is established.”

Summary Judgment. Gehrke asked for dismissal of the conversion claim, arguing that, before a conversion action could be brought, the proceeds of sale would have to be placed in a separate, segregated account or otherwise subject to an express trust. Citing two Arizona cases, Autoville v. Friedman and Universal Marketing and Entertainment, Inc. v. Bank One of Arizona, Gehrke contended that, since Case had not required the segregation of sale proceeds and allowed UEC to commingle those funds with the other monies in its general account, Case’s conversion claim should be dismissed.

Case responded that, non-segregation aside, its right to an action for conversion was preserved through its ownership interest in both the equipment and the proceeds of sale.

Siding with Gehrke, the trial court dismissed Case’s conversion claim, finding that “title to the inventory was in [UEC], and all proceeds were deposited to the general corporate account of UEC before any demand was made by Plaintiffs to segregate the funds.”

Reversal. Case appealed the dismissal, and the Arizona Court of Appeals reversed the trial court’s ruling and remanded it for trial.

The Court found that, when a secured party holds a security interest in the proceeds of sale, that security interest is sufficient to identify non-segregated funds and preserve a cause of action for conversion of the money. The Court also ruled that neither of the decisions cited by Gehrke applied to this case:

In Autoville , the plaintiff had no security interest in either the vehicles he provided to the defendant or the proceeds of their sale. The plaintiff’s relationship with the defendant was no more than that of creditor and debtor.

In Universal Marketing , the plaintiff put $50,000 in an individual’s bank account to finance purchase of a business. Before the purchase could be completed, however, the defendant garnished the account and seized the plaintiff’s funds. The plaintiff could not maintain an action for conversion because it did not take appropriate steps to identify and maintain a possessory interest in the funds it transferred.

The Court held that, in contrast, Case had perfected a security interest in both the collateral and the proceeds of sale, and a security interest in specific proceeds allows them to be identified even when they are commingled with other funds:

“Case had a security interest in both the equipment and in the proceeds from any sale of the equipment. The agreement between the parties required that the proceeds from any sale be deposited into UEC’s account and electronically transferred to Case within seven days. On the eighth day after the sale, if the funds were not deposited and transferred, UEC had defaulted on the agreement and Case had the right to immediate possession of the equipment or the proceeds.

“We cannot accept the Gehrkes’ argument that a security interest in proceeds is destroyed when the debtor commingles the proceeds with other funds. Such a decision would give the debtor the ability to unilaterally cancel a creditor’s security interest in the proceeds of sale and would controvert Arizona law. A.R.S. § 47-9315(B)(2) [2003]. (“Proceeds [that are not goods] that are commingled with other property are identifiable proceeds . . . to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law[.]”)

Gehrke establishes a precedent for a secured party with a security interest in sale proceeds to sue a business owner individually if that owner fails to see that the company pays the sale proceeds required by the financing or security agreement. This individual right of action is separate from any personal guarantee the owner may have signed, and it cannot be avoided by putting the business into bankruptcy. Every owner of a business that floors vehicles, equipment or any other personal property under a financing agreement should be aware of this potential liability.

Unlicensed Arizona Contractors: No Automatic Refunds

Wed, 17 Mar 2004 00:00:00 GMT

The Arizona Registrar of Contractors' licensing procedures are designed to weed out contractors that have a history of making false representations, abandoning jobs or doing shoddy work. Owners and general contractors can consider a license to be one indicator that a subcontractor will deliver a satisfactory product, particularly if it is coupled with a history of providing service without customer complaints.

In Bentivegna v. Powers Steel & Wire Products, Inc. , the Arizona Court of Appeals clarified one more reason for checking a prospective contractor’s license before hiring or writing checks: If an unlicensed or improperly licensed contractor performs substandard work, and the buyer – assuming that the contractor is properly licensed – pays the contractor anyway, the court will not order a refund based upon lack of a license alone.

BACKGROUND

In 1997, Bentivegna hired a general contractor to prepare a site and build a steel warehouse for his new business. Powers Steel & Wire Products was hired to build the metal portion of the warehouse for a price of $85,000, and it contracted with both Bentivegna and the general contractor.
At the time Powers entered into the contract and during the time it performed the work, Powers was licensed only to perform reinforcing bar and wire mesh work, not to build a steel building. Powers did not tell Bentivegna or the general contractor that it did not have the correct license until after the warehouse was completed.

After Bentivegna paid Powers the full $85,000, Bentivegna discovered material defects in Powers’ work. (Both Powers and the concrete foundation subcontractor had made unauthorized changes to the structural engineer’s plans.) Bentivegna’s expert witness estimated that it would cost more than $97,000, plus engineering fees, to repair the defects in the $85,000 job.

Bentivegna filed complaints with the Registrar of Contractors, and the Registrar in turn issued corrective work orders against both Powers and the general contractor. The general contractor complied with the work order, and he and Bentivegna reached a settlement of Bentivegna’s claim. Powers, on the other hand, did not directly comply.

Instead of going back to the Registrar, Bentivegna sued Powers in Superior Court. Bentivegna’s suit alleged negligence, breach of contract and breach of warranty and sought restitution from Powers for all of the monies that Bentivegna had paid to Powers.

ARGUMENT FOR RESTITUTION

On the restitution issue, Bentivegna argued that, since A.R.S. § 32-1153 prohibits an unlicensed contractor from suing to recover payment for work performed, the same statute should require an unlicensed contractor to refund monies paid for unlicensed work.

In other words, notwithstanding the validity of his claims of breach of contract and negligence, Bentivegna wanted the court to order Powers to refund the monies because, under his interpretation, mandatory refunds are among the statutory risks of being unlicensed.

Powers responded with its own motion for summary judgment to dismiss the suit entirely. In its motion, Powers argued that Bentivegna had elected to pursue an administrative remedy by filing his complaint with the ROC and, having failed to appeal from the ROC’s decision, was barred from suing in court. In addition, Powers contended that Powers was an indispensable party to the settlement between Bentivegna and the general contractor and, since the general contractor had complied with the ROC work order, by extension Powers had complied, also.

The trial court ruled against Bentivegna across the board. The court:

disagreed with Bentivegna’s interpretation of A.R.S. § 32-1153 (i.e., the statute does not require repayment of funds paid to an unlicensed contractor);

found that, Powers had completed the work ordered by the ROC;

denied Bentivegna’s claim for restitution;

concluded that, even if Bentivegna’s claim for restitution was valid, Bentivegna’s failure to exhaust his administrative remedies at the ROC level barred Bentivegna from filing suit; and

granted Powers’ motion to dismiss.

APPEAL

Bentivegna appealed and received a warmer welcome in the Court of Appeals, which ruled that:

the trial court erred in finding that Powers had complied with the ROC’s work order;

a consumer can file a lawsuit before the ROC investigation and remedies run their course; and

Bentivegna’s claims for breach of contract and breach of warranty should be decided in court.

NO AUTOMATIC RESTITUTION

However, the Court of Appeals sided with the trial court in rejecting Bentivegna’s interpretation of A.R.S. § 32-1153, stating:

“[I]f an unlicensed person performs work and is paid for it, the customer then has a choice: if he is happy with the work done, he may allow the unlicensed contractor to keep the funds; if he is unhappy with the work done, he may pursue his legal remedies by suing for damages.”

In other words, Bentivegna was within his rights to file suit, but he could not use the statute as the basis for requiring restitution.
The Court of Appeals sent the case back to Superior Court, where Bentivegna was allowed to resume his pursuit of awards based on breaches of contract and warranty.

WHAT THIS MEANS

There appears to be no reason why the Court of Appeals’ ruling in Bentivegna will not apply to contractors in the same way it applies to project owners. In a nutshell:

An unlicensed contractor has no right to sue for payment for unlicensed work.

However, once the unlicensed contractor is paid, there is no statutory (i.e., quick) way to force him to issue a refund. That obligation is for a court to decide.

It should be noted that the complaint resolution process offered by the Registrar can be extremely helpful. Because a contractor’s license is crucial to the health of its business, a complaint to the Registrar is often the speediest way to get the contractor’s attention and get a problem resolved.

Before you leap into a working relationship with a contractor, and particularly before you make any payment, take a careful look at the contractor’s license. License inquiries can be made at www.azroc.gov .

"Pay When Paid," "Pay If Paid": Use with Caution

Wed, 08 Oct 2003 00:00:00 GMT

One of the greatest concerns of a subcontractor or supplier on a construction project is making sure he is paid for his work. When the contract has been fully performed, everyone wants to be, and should be, fully paid. It is not uncommon for a general contractor to try to shift the risk of nonpayment by the owner. Consequently, “pay when paid” and “pay if paid” provisions are popular with general contractors; however, they are not so popular with the courts.

Public policy, both state and federal, favors protecting a subcontractor’s or materialman’s right to be fairly compensated for labor and materials he puts into a construction project. Mechanics' lien laws protect parties that do work on private projects; payment bonds protect those who work on federal, state or municipal projects. The amount due and the time when it becomes due, however, are usually determined by the terms of the contract.

Typical pay-when-paid clauses go something like this:

“The total price paid to [subcontractor] shall be [contract price], no part of which shall be paid until five days after payment is received from owner,” or “… the Contractor shall pay the Subcontractor each progress payment and final payment ... within three working days after he receives payment form the Owner …”

MAJORITY VIEW

In Thos. J. Dyer v. Bishop International Engineering Co. , the Sixth Circuit U.S. Court of Appeals refused to enforce a pay when paid clause. In that case, Dyer installed plumbing at a race track owned by the Kentucky Jockey Club. Bishop was the general contractor on the job. Their subcontract read:

“The total price to be paid to Subcontractor shall be $119,000 lawful money of the United States, no part of which shall be due until five (5) days after Owner shall have paid Contractor therefore …”

Unfortunately, the Jockey Club filed bankruptcy without paying Bishop for Dyer’s work. Bishop argued that it was obligated to pay Dyer only if it was paid by the Jockey Club. The court disagreed.

In deciding what the subcontract language “meant,” the court reasoned that general contractors ordinarily bear the risk that the owner may become insolvent and thus unable to pay for the work. It interpreted the pay-when-paid clause to be a “reasonable provision” designed to postpone payment for a “reasonable period of time,” during which the general contractor would have an opportunity to collect payment from the owner. It would be “unreasonable” to require the subcontractor to wait an indefinite period of time for payment — i.e., until the general contractor had been paid by the owner — which may never occur.

THE ARIZONA VIEW

Arizona has adopted the Dyer court’s interpretation of pay-when-paid clauses. Arizona courts look unfavorably upon a “pay when paid” or “pay if paid” clause, which must be written very carefully to be enforceable. The contract language must plainly state that the subcontractor agrees to be paid only out of a specific fund, and, if that fund is insufficient or never created, he will forfeit payment for some or all of his work.

For example, in L. Harvey Concrete, Inc. v. Agro Construction & Supply Co. , the Arizona Court of Appeals held that the following clause was plain enough to shift the credit risk to the subcontractor:

[S]ubcontractor agrees as a condition precedent to payment … that the owner shall have first paid the payment … to the contractor, and that payment for either progress payments or final payment is not due and owing to the subcontractor as provided for herein until the owner has made such payment to the contractor.

The court held that this language states plainly that payments from the owner to the general contractor were the sole source of funding for the subcontract, and, until the owner paid the general, no payment to the subcontractor became due.

Subcontractors should understand that, as a practical matter, a pay-when-paid or pay-if-paid clause always creates confusion about when and if payment becomes due. You can bet that the general contractor thinks the clause is binding, and time and money will be required to prove otherwise.

General contractors should understand that, at the present time, a pay-when-paid or pay-if-paid provision can be valid in Arizona, provided it is properly written and plainly shifts the risk of nonpayment to subcontractors. However, courts do not like these provisions and will try very hard to find a reason to invalidate them.

"PAY IF PAID"

How do contractors satisfy the Dyer ruling in shifting the burden of owner nonpayment by the owner? Say it clearly in a contract provision, for example:

“… the subcontractor is paid only if the general contractor is paid, (or the subcontractor will not be paid unless the general contractor receives payment from the owner) …”; or “… the subcontractor assumes the risk of nonpayment by the owner due to insolvency or other inability to pay …”

Such contract language has been held by many courts to sufficiently shift the burden of nonpayment to the subcontractor.

NO GUARANTEES

Even with that apparently safe language, though, a pay-if-paid clause can encounter rough sledding if judges are of the opinion that “risk shifting” violates public policy.

The California Supreme Court ruled, in Wm. R. Clarke Corp. v. Safeco Ins. Co. of Amer. , that pay-if-paid clauses are unenforceable as a violation of California’s public policy. The court noted that a “pay if paid” clause is an indirect forfeiture of a subcontractor’s constitutionally protected lien rights. The New York high court has likewise concluded that “pay if paid” clauses are void as against public policy.

Building and Repairing Without a License

Fri, 18 Jul 2003 00:00:00 GMT

In 2001, a residential landlord sued the Arizona Registrar of Contractors to establish that he was not a contractor and, thus, did not need a contractor’s license to repair his own buildings using his own employees.

The landlord, Barry Levitan, owned two apartment complexes in Flagstaff that needed repairs. His five-unit property needed a new roof, and one of the apartments in his 79-unit complex had a stained toilet that had to be replaced.

The Registrar of Contractors informed Levitan that he could not perform the repairs himself unless he held a contractor’s license. Levitan had been a defendant in 13 different legal actions brought by the Registrar. He prevailed in all 13, but the Registrar continued to insist that Levitan hold a contractor’s license before repairing his property. So Levitan sued the Registrar.

WHAT IS A CONTRACTOR?

The case rested solely on the definition of “contractor” contained in A.R.S. § 32-1101(A)(3) :

“Contractor” is synonymous with the term “builder,” i.e., any person, association, or combination of them that, for compensation, … does himself or by or through others, or directly or indirectly supervises others to: (a) construct, alter, repair, improve, or demolish any building, road, excavation or other structure, project, development or improvement, or to do any part thereof, or (b) connect such structure or improvements to utility service lines, metering devices, and sewer line.

Arizona courts have held that persons who conduct such activities are subject to the Registrar’s jurisdiction and discipline, whether or not they hold a license.

In Levitan’s case, the Arizona Court of Appeals ultimately held that he was not required to hold a contractor’s license because he was not paid for performing repairs and therefore was not doing the work “for compensation.” The court rejected the Registrar’s argument that the rent Levitan received from tenants constituted compensation.

(During the course of the litigation, Levitan agreed that he did not qualify for the owner-builder exemptions contained in A.R.S. § 32-1121 . That statute provides that, as long as an apartment or condominium complex has four units or less, the owner, his management agent, and their employees may do the work necessary to repair and maintain the structures without holding a contractor’s license.)

UNLICENSED CONSTRUCTION

Similarly, a property owner may build on his own property using his own employees if the structures are intended for occupancy solely by the owner — not for use by employees or business visitors, and not for sale or rent to the public.

An owner developing its own property for sale or rent, or for occupancy by employees or business visitors, must hold a valid contractor’s license or must contract the work to a licensed general contractor or licensed specialty contractors. The licensed contractors’ names and license numbers must appear in all sales documents so that anyone injured by poor construction can identify the party responsible.

Do-It-Yourself Collections

Mon, 09 Jun 2003 00:00:00 GMT

General contractors, subcontractors and suppliers have collection options that do not involve hiring an attorney.

If you are a materials supplier, subcontractor or general contractor, there are simple and inexpensive steps you can take yourself to collect your accounts receivable.

SMALL CLAIMS

Where the amount owed is relatively small and all you want the court to do is award to you a money judgment, the Small Claims Division of the Arizona Justice Courts may be a viable alterative. You can file a Small Claims complaint at the Justice Court to collect up to $2,500. File the claim in the precinct where your defendant resides (if an individual) or does business (if a company). Summons and complaint forms are available from the Justice Court.

Filing fees for Small Claims are reasonable. You will also need to hire a process server to deliver the complaint and summons to the defendant. Although the procedures are not complicated in Small Claims court, the court clerks are not authorized to give advice and will not help you complete the forms. If a question arises that the clerk cannot resolve for you, talk to your attorney.

JUSTICE COURT

If your claim is between $2,500 and $5,000, you can file a claim in Justice Court. As with Small Claims, the Justice Court provides forms for these claims, and you will have to hire a process server to serve the defendant with the summons and complaint.

The Justice Court filing fee is a little steeper than in Small Claims, a Justice Court claim is somewhat more complicated. It requires more paperwork and additional court appearances, and attorneys can be involved.

Nonpayment by a licensed contractor is also grounds for disciplinary action by the Registrar of Contractors. Contact the Registrar at www.azroc.gov to obtain a claim form.

KEEPING RECORDS

Whether you file a claim in the Small Claims Division or elsewhere, the burden is on you to prove your case.

Winning your Small Claim or Justice Court claim is going to depend first on the quality of the proof you can show to the court. That means beginning every project with written contracts, keeping your records complete and organized, and documenting the issues that arise in the field.

The attention you give to your project file before problems arise will pay off greatly if you have to file a claim of any kind to collect payment. Having your contract, proposals, bids, proof of costs, purchase orders, and documented changes in good order will be your most valuable asset when you walk through the courtroom door.

STOP NOTICES

If you are not paid in full and on time, even if the amount is small, you can take action immediately by serving a stop notice on the owner or construction lender. Arizona's stop notice law gives contractors, subcontractors and suppliers the ability to demand that the owner or construction lender immediately withhold amounts of the undisbursed construction funds to satisfy your claim.

A lawsuit to enforce the stop notice may be filed as early as 10 days after the notice is served and requires no title search on the real property. You can pursue a stop notice during construction without impeding the project, and you retain your lien rights if enforcement of the stop notice does not satisfy your claim.

In order to file a stop notice, though, you must be eligible to file a lien, and the rights to serve a stop notice and file a lawsuit to enforce the stop notice expire with your lien rights.

More on stop notices and mechanics' liens

The Wrong Bond at the Wrong Time

Fri, 11 Apr 2003 00:00:00 GMT

An Arizona general contractor comes out on the short end of a dispute over its rights to make a claim against a payment bond.

When a general contractor finishes a job that its subcontractor started, the general is not automatically entitled to make a claim against the subcontractor’s payment bond for the extra costs incurred. So ruled the Arizona Court of Appeals in March 2003 in American Casualty Company v. D.L. Withers Construction, L.C.

Background. After being awarded the contract for the construction of Pinnacle High School, D.L. Withers Construction subcontracted with 1st Mechanical of Arizona for HVAC installation. In its contract with Withers, 1st Mechanical agreed to furnish all labor, materials and equipment necessary to complete the job.

Withers required 1st Mechanical to furnish a payment bond. The bond provided payment claim rights to parties “having a direct contract with [1st Mechanical] for labor, material, or both …”

As the project went forward, 1st Mechanical fell behind schedule. At a jobsite meeting to discuss the delays, the two companies agreed that Withers would provide 1st Mechanical with additional manpower. Withers contracted with Midstate Mechanical to finish the job, resulting in extra costs incurred by Withers. Seeking reimbursement for those costs, Withers filed a claim against 1st Mechanical’s payment bond.

The issuer of the bond, American Casualty, rejected Withers’ claim, arguing that Withers was not a proper claimant since it did not have the required “direct contract” with 1st Mechanical for labor, material, etc.

Predictably, a flurry of claims and counterclaims ensued. Withers argued that it was entitled to reimbursement because of the agreement it reached with 1st Mechanical to bring in more labor. That agreement, Withers contended, constituted a direct contract sufficient to satisfy the bond requirement.

The Superior Court judge disagreed and ruled for American Casualty, and Withers appealed.

Ineligible Claimant. The Court of Appeals upheld the trial court’s decision, based in part on a distinction between a payment bond and a performance bond.

A performance bond, wrote the court, “indemnifies the obligee [Withers] for the principal’s [1st Mechanical] failure to fully perform the contracted work.” Unfortunately for Withers, what 1st Mechanical had was a payment bond, which “protects the obligee from claims by the principal’s unpaid laborers or suppliers.” In this case, 1st Mechanical had paid everyone, so there were no unpaid laborers or suppliers to go after Withers.

The court ruled that the payment bond’s definition of “claimant” could not be reasonably interpreted to include Withers, since, according to the court, Withers did not have a direct contract with 1st Mechanical to provide labor, material, etc. Withers’ subcontract agreement with 1st Mechanical provided that, if the subcontractor failed to perform, Withers had several remedies, one of which was to “assist” the subcontractor by “securing any labor” necessary to complete the work.

Withers argued that because the payment bond incorporated the subcontract agreement, Withers had a direct contract with the subcontractor. The court disagreed, and Withers had to eat the extra costs of bringing in Midstate to finish the job.

Dual Purpose. The court did agree with one of Withers’ arguments: that the classification of a bond as either a “performance” or “payment” bond does not, per se, determine who gets to make a claim against it. Unfortunately for Withers, the court found that argument to be inapplicable to this case.

However, the court’s discussion on that point is instructive and could provide valuable guidance to contractors hoping to avoid Withers’ predicament. The court cited Davis Wallbridge, Inc. v. Aetna Cas. & Sur. Co., which provided that “[I]n all events, it is the language employed in the bond which determines the beneficiaries.”

Thus, the court noted, a performance bond “containing language purporting to benefit laborers and materialmen” serves the dual purpose that would have legitimized Withers’ claim.

Recommendation. If you require a subcontractor to furnish a bond — performance or payment — be sure that its language (a) provides you with your desired remedies for subcontractor non-performance and (b) protects you from claims by the subcontractor’s unpaid laborers and suppliers.

Defending Against a Preference Claim

Thu, 20 Mar 2003 00:00:00 GMT

If you think that, in collecting your accounts receivable, there is nothing worse than not being paid, consider this: You could collect the money, spend it, and then be ordered to give it back.

That is what can happen if your customer files for bankruptcy within 90 days after he gives you a full or partial payment on his outstanding balance. Someone will almost surely make a preference claim against you – so called because you would appear to have received “preferential” treatment over other creditors with whom you are otherwise in the same boat.

Fortunately for you, there are defenses that you can raise against a preference claim, namely:

contemporaneous exchange,

subsequent new value, and

ordinary course of business.

These defenses exist not just to help creditors avoid preference claims, but also to encourage creditors to continue doing business with, and extending credit to, financially strapped customers.

The third defense – ordinary course of business – may be the most common but, in some cases, the most difficult to prove. Fortunately, in the federal courts there has evolved a fairly objective test for deciding whether an alleged preference payment was made according to ordinary business terms. That test takes into account not just the credit practices that are appropriate to your industry but also the payment history between you and your customer.

BACKGROUND

The Bankruptcy Code allows a trustee or debtor-in-possession to recover – as preferences – any payments or other transfers of assets by a debtor to a creditor within 90 days of the debtor’s bankruptcy filing.

The preference provision has two main purposes: to prevent a debtor from favoring any of its general unsecured creditors over the others; and to discourage creditors, upon hearing that the debtor is about to file bankruptcy, from storming the courthouse to file eleventh-hour lawsuits to collect the debts owed them.

Proving a preference. To back up his preference claim, a trustee or debtor-in-possession must show that five conditions applied to the payment:

The debtor made a payment or transferred property to, or for the benefit of, the creditor.

The payment or transfer occurred within 90 days of the debtor’s bankruptcy filing (that period grows to a full year for payments to insiders).

The debtor made the payment to reduce an existing debt owed to the creditor.

The debtor was insolvent when the payment occurred.

As a result of the payment or transfer, the creditor received more from the debtor than he would have received in a Chapter 7 liquidation of the debtor.

ORDINARY COURSE OF BUSINESS

To successfully raise the “ordinary course of business” defense, you (the creditor) must prove both of the following: The debt on which you received the payment was incurred in the ordinary course of business between you and the debtor; and the payment was made in the ordinary course of business between you and the debtor, according to ordinary business terms.

Whether the debt was incurred or the payment was made in the ordinary course of business is relatively objective and easy to prove or disprove.
The second consideration in each element is more subjective, as it takes into account the specific, historical billing and payment relationship that existed between you and the debtor prior to the 90-day preference period. If the alleged preference payment was consistent with the manner in which previous payments were made, that strengthens your defense against the preference claim.

Example 1: XYZ Company was a long-time customer that habitually paid its bill, with charges ranging from $1,000 to $7,500, between 45 and 60 days after the due date. A week before filing its bankruptcy petition, XYZ made a $5,000 payment on its account, 55 days past the due date. When a preference claim is made against that payment, you should be able to successfully defend against the claim by showing that the payment was consistent with XYZ’s payment history with your company.

Example 2: For its first three months as a customer, JKL Company paid its bill on or before the due date. However, charges for the fourth month, considerably higher than any of the previous months, went unpaid for 75 days before a check finally arrived. A week after you received that payment, JKL filed for bankruptcy protection. The inevitable preference claim will be much more difficult to defend than in the case of XYZ, because of (a) your relatively short credit experience with JKL and (b) the contrast between the collection periods for the first three payments and the final payment.

COURT DECISIONS

In the last decade, decisions in federal appellate courts have lent some clarity to the ordinary course of business defense, to the benefit of creditors.

In a 1993 ruling in the Tolona Pizza Products case, the court held that “ordinary business terms” encompass practices in which companies similar to the creditor engage. Only dealings that are so “idiosyncratic” as to fall outside the broad range of terms offered by similar companies would be disallowed. The court also noted that it is unnecessary to show strict conformity with industry standards, since no two credit relationships between debtors and creditors are identical. That view was reaffirmed in the 1994 Molded Acoustical Products decision.

In another case, the court held that the greater the length of the parties’ relationship prior to the preference period, the more the creditor could vary its credit terms with the debtor from the industry norm and still satisfy the ordinary course of business test.

CONCLUSION

A preference claim against a payment you received from a now-bankrupt customer is a serious matter, but it is not a slam dunk for the party making the claim. Legitimate and widely accepted defenses are available to you, provided you took a business-as-usual approach to the transaction and the resulting debt and payment.

An experienced bankruptcy attorney can help you analyze the validity of the preference claim and your defenses against it.

Workers' compensation: When is a worker not an employee?

Tue, 08 Oct 2002 00:00:00 GMT

Workers compensation is a double-edged sword: It benefits employees who are hurt on the job, and it protects employers and co-workers from injured employees’ claims. Workers compensation disputes still occur, though, especially when there’s uncertainty over whether the injured person was an employee as defined by the Workers Compensation Act and related case law.

According to A.R.S. § 23-901 , an employee is anyone in the service of an “employer” as defined by the Act, except for someone whose employment is both casual and not in the course of the employer’s trade, business or occupation.

If that definition seems a little murky to you, welcome to the club. The vagueness of the statute has prompted a series of appellate court decisions that offer little certainty or clear guidance, particularly where the alleged “employer” is self-employed and does not normally have employees (see related article below).

Who Is an Employee? Generally speaking, for an injured worker to have standing as an employee, there must be a “contract of hire” to create an employment relationship, which may be either express or implied.

Further, whether a claimant is an “employee” within the meaning of the workers compensation laws depends on several factors, including these:

Which party – the employer or the worker – had control over the method by which the claimant did his work?

Was the claimant engaged in a distinct trade or business and, thus, clearly not intending to serve as an employee?

What was the claimant’s primary occupation?

What skills did the claimant’s primary occupation require?

What standard of performance was expected of the claimant?

Who supplied the tools and place of work?

What was the duration of “employment”?

What was the method of payment, and how was compensation determined?

Was the claimant’s work part of the employer’s regular business?

Did the parties believe they created the relation of master and servant?

Was the “employer” actually engaged in a business activity?

Who had the right to hire and fire the claimant?

(No single factor is in itself conclusive or controlling.)

Some factors have been deemed insufficient to prove employment relationship. In some cases, the courts have determined facts that do not prove employee status:

Workers compensation coverage was obtained after an accident in order to avoid future disputes about coverage.

Payment of medical expenses for the injured worker occurred at the request of a third party that had hired the worker, and the alleged employer had passed on the costs.

The alleged employer exercised actual control over the manner of work performed.

There was sharing of profits gained on projects to which the claimant supplied work.

Are You Self-Employed? Quickly now: If you’re self-employed and have no employees, and you bring in extra help to perform a short-term task for your company, do you have to include them in your workers compensation coverage?

Naturally, the answer is, “It depends.” More to the point, it depends on how regularly and predictably you have a need for day workers.

Under Arizona law ( A.R.S. § 23-902[A] ), with a few exceptions that don’t apply here, “every person who employs any workers or operatives regularly employed in same business or establishment under contract of hire” is on the hook for workers compensation coverage. If anyone knew for sure what that meant, this would be a short article. But interpretations of that statute have been all over the map, and, thus, we write on.

Three court decisions may help you determine whether you are liable for on-the-job injuries suffered by occasional workers.

Donahue v. Industrial Commission. In Donahue , the Arizona Court of Appeals found that liability depends on your hiring patterns. The court tried to determine whether the statute’s “regularly employed” phrase meant that the Workers Compensation Act applies to (a) all people who ever bring in extra workers, or (b) only people who routinely and predictably hire workers in the normal or usual course of their business. In a bit of good news, the court decided that a self-employed person is not required to provide coverage for workers hired “occasionally and unpredictably.” Because the employer’s “infrequent and unpredictable” hiring practices in Donahue did “not equate with having workers regularly employed,” Donahue was not subject to the Act. Thus, companies that do not hire workers in the normal or usual course of their business are not subject to the Act, regardless of the type of work performed by the workers. To support this finding, in Marshall v. Industrial Commission the Arizona Supreme Court examined the company’s “established business plan or mode of operation” as evidence of its hiring practices to determine whether hiring was performed in the normal or usual course of business.

Modern Trailer. The Supreme Court’s Marshall decision didn’t specify the type of “established business plan or mode of operation” that would make a company liable for workers compensation coverage. To the rescue came the Court of Appeals in the Modern Traile r case, where the dealer hired short-term labor up to 25% of the time for such tasks as lot maintenance and preparation of newly delivered mobile homes. Though intermittent, the hiring of additional labor was ongoing and predictable, leading the court to conclude that the use of additional labor was a customary or regular practice that constituted an “established mode of operation.” Thus, the company was subject to the Act and required to carry coverage.

Putz v. Industrial Commission. In a recent case, Putz v. Industrial Commission of Arizona, et al., the Arizona Court of Appeals decided that, because Putz did not “regularly employ any workers,” he was therefore not an employer covered by the Act and not liable. The court focused on the fact that Putz’s need for short-term labor arose far less predictably than it had in Modern Trailer because the work itself was varied, unpredictable, and dictated by customers’ demands. The court also found it significant that Putz did not know when he would need to hire extra labor again. In addition, in the year preceding the injury that set the case in motion, Putz had hired extra labor for approximately 32 eight-hour workdays, fewer days than Modern Trailer had. From that record, the Court of Appeals could not detect a hiring plan that was anything but “occasional and unpredictable.” However, the Court of Appeals cautioned that if, in the ordinary progression of its business, Putz’s company would begin to consistently undertake projects requiring the use of other workers on a more regular or predictable basis, then it would become subject to the Act and required to purchase workers compensation insurance.

Determining Your Liability. As the Putz case demonstrates, no bright-line rule exists to notify a self-employed person or group when they become subject to the Act for occasional part-time help. In general, the Court cautions that “there is a risk involved when those who are self employed hire others without purchasing Workers Compensation Insurance.”

Any of the following conditions may make them liable:

Hire extra help 25% of the time or more.

Hire extra help at the occurrence of predictable or regularly recurring events.

Employ laborers on a predictable cycle (e.g. monthly, quarterly or seasonally).

The business plan includes seeking out and obtaining work that requires extra help.

There are regular or long-standing customers whose work normally requires hiring extra help.

Avoiding Breach of Contract When Time Is of the Essence

Mon, 16 Sep 2002 00:00:00 GMT

A time-of-essence provision is a powerful weapon, since it can give an otherwise minor delay the legal effect of a material breach of contract.

The difference between a minor and material breach can be enormous. While the victim of a minor or partial breach can recover whatever loss the minor breach has caused him, he is still obligated to fulfill his part of the contract. But the victim of a material or total breach is excused from further performance, and the party who breached the contract may be booted off of the job and held liable for costly penalties.

WHAT IS "TIME OF THE ESSENCE"?

Whether untimely completion will warrant termination and remedies depends partly on the contract language. But even where time-of-essence language does not appear in the contract, the courts may interpret the conduct and communication of the parties as creating a de facto agreement that, indeed, time was of the essence.

Fortunately for contractors and subs trying to meet a deadline, the Arizona Supreme Court has ruled that a time-of-essence provision is merely one factor to be considered when determining if a breach is material. The mere indication that “time is of the essence” generally will not transform trivial un-timeliness into a material breach.

For example, the Arizona Supreme Court has held, in Foundation Development Corp. v. Loehmann’s, Inc. , that if failure of performance at the exact time will not cause injury, time cannot be absolutely “of the essence,” even though, technically, the delay constitutes a breach of the contract.

Despite these apparent safety nets, you should carefully read the contract for language stating that “time is of the essence” and carefully consider whether you or the owner has treated time as of the essence. Here are some indications that time may be of the essence:

the phrase “time is of the essence” appears somewhere in the contract documents,

the owner has insisted on performance of some element by a specific date,

the owner has requested that you or your subs devote more resources to completion,

the contractor or subcontractor has promised completion by a certain date,

the owner will suffer damages if completion is not made by a specific date, or

the owner intends to make use of the property by a specific date.

AVOIDING DELAY DAMAGES

Where time has been made of the essence to a contract, you will want to monitor changes to the schedule with extra care and at frequent intervals. Always utilize change orders and written extensions to permit delays, and allow for modifications to extend time in the contract documents.

Monitoring will help you readjust scheduling to meet the deadline. If a project should fall irretrievably behind schedule, monitoring will help you predict the delay and bring it to the owner’s attention in time to modify the agreement to extend the time for completion.

In addition, each written change order will give the owner notice that the change will delay the project. That notification may avoid disputes (or strengthen your position in case a dispute arises), serving as a record that the owner agreed to a later completion date.

Before you even begin a project, be sure that the contract provides for extensions of time to complete the project for added work, weather delays and other obstacles beyond your control.

Laborers and the preliminary 20-day notice

Thu, 08 Aug 2002 00:00:00 GMT

As a major player in Arizona construction, you know that a supplier of services or materials to a construction project can protect its payment rights by filing a lien on the property ( A.R.S. § 33-981 ).

To enforce their lien, they must be able to prove that they properly issued a written preliminary 20-day notice to the owner, the contractor, the construction lender, and the party with whom they contracted. The notice must be served within 20 days after the first day on which they provided services or materials. (A.R.S. §§ 33-981[D] and 33-992.01 ) It is this preliminary 20-day notice requirement that, in our experience, most frequently trips up potential lien claimants.

All of that should seem quite familiar, but what you may not know is this: Only one class of “suppliers” is exempt from the preliminary notice requirement: actual laborers on the job. In the words of the statute, “Except for a person performing actual labor for wages, every person ... shall … serve ... a written preliminary twenty day notice as prescribed by this section.” (A.R.S. § 33-992.01[B])

WHO CAN CLAIM TO BE A LABORER?

A recent Arizona Court of Appeals case has clarified who can claim to be a person performing actual labor for wages.

In Performance Funding, LLC, v. Arizona Pipe Trade Trust Funds, a company, Industrial Mechanical, Inc., provided services and equipment to a 1998 construction project at a Motorola site in Mesa. Industrial Mechanical’s employees were union workers, and the company contracted with Phoenix-area pipe trades and metal workers unions to make monthly contributions to the unions’ trust funds for employee benefits.

In November 1998, Industrial Mechanical became insolvent and was unable to complete its contract due to foreclosure by a creditor. The company had paid its employees all of the wages owed up to the point of foreclosure. However, before the foreclosure Industrial Mechanical had stopped making fringe benefit contributions to the union trust funds. The company had posted bonds to secure those contributions, but the amounts owed to the funds exceeded the bonds’ limits.

In January 1999, the union trust funds recorded liens against Motorola’s property for fringe benefit contributions. However, they did not serve preliminary 20-day notices. In the ensuing trial, the union trust funds successfully argued that because they provided laborers for wages, they had the right to file the liens and were exempt from the preliminary 20-day notice requirement.

On appeal, the Court of Appeals agreed that, within the meaning of A.R.S. § 33-981, the trust funds were “persons who labor”– that is, they had a right to file their liens. Arizona has a long tradition of liberally construing the lien statutes to ensure that laborers receive their bargained-for benefits, and the court recognized that the monies owed to the trust funds were part of the compensation owed to individual union members.

NOT IMMUNE TO 20-DAY NOTICE

However, the Court of Appeals ruled that the trust funds were not exempt from the preliminary 20-day notice requirement and that their failure to serve those notices was fatal to their claims.

The court noted the statutory requirement that every person who furnishes labor must issue a written preliminary 20-day notice, “except for a person performing actual labor for wages.” The ruling drew a sharp distinction between a party that merely furnishes labor and a person who actual performs the work.

The court observed that an individual laborer working at a site might not know that a preliminary notice is required or have access to the information required in the notice. By contrast, a trust fund – managed by sophisticated trustees who are expected to be experienced in matters related to construction contracts – can readily obtain the information it needs to protect the interests of the fund and its beneficiaries.

In other words, the trustees should have the knowledge and expertise to protect the fund’s interest, while laborers at a site cannot be expected to have the same knowledge and expertise.

FAR-REACHING IMPLICATIONS

We believe that the Performance Funding ruling – that a laborer’s exemption from the preliminary 20-day notice requirement does not extend to his union trust fund – extends beyond organized labor and may also apply to employee leasing companies and other third-party providers of workers. Actual laborers – the men and women with the strong backs and calloused hands – can lien for wages without first giving preliminary notice but, under our interpretation of this decision, the company that furnishes those laborers cannot.

It’s a subtle bit of information that may prove extremely valuable the next time a company with whom you contract to furnish labor fails to provide a preliminary 20-day notice.

Getting Paid Can Depend on Proper Licensing

Tue, 07 May 2002 00:00:00 GMT

In a split decision, the Arizona Court of Appeals blocks the collection efforts of a contractor who wasn’t licensed at the time he signed the contract.

A 2002 Arizona Court of Appeals ruling in Crowe v. Hickman’s Egg Ranch, Inc. sends a subtle yet stern warning to Arizona contractors: Be properly licensed, or lose your right to payment.

In 1997, Hickman’s Egg Ranch sought the services of a Mississippi contractor, Richard Crowe Construction Company, which specializes in building commercial hen houses.

At the time the two parties entered into the $2.1 million construction contract, and for a time after Crowe commenced work on the project, Crowe was not licensed in Arizona. Hickman’s was aware of Crowe’s lack of license and helped Crowe gather the documentation needed for licensing. (Crowe became licensed and bonded in February 1998.)

Hickman’s paid Crowe more than $2 million for Crowe’s services, but Hickman’s allegedly failed to pay about $105,000 for work performed by Crowe between February 1998 and February 1999, a time during which Crowe was a licensed and bonded Arizona contractor. Crowe sued in Superior Court to collect the unpaid $105,000.

In a dubious decision, the trial court dismissed Crowe’s suit on the grounds that Crowe was not a licensed Arizona contractor when the contract was entered into. The court cited A.R.S. § 32-1153, which states:

“No contractor … shall act as agent or commence or maintain any action in any court of the state for collection of compensation for the performance of any act for which a license is required by this chapter without alleging and proving that the contracting party whose contract gives rise to the claim was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose .” (Emphasis added.)

Crowe appealed, and the Arizona Court of Appeals upheld the dismissal of Crowe’s suit, thus dashing Crowe’s hopes of collecting the final $105,000 on the contract.

In reaching its decision, the majority of the three-judge panel raised some issues of which Arizona contractors and owners should take note.

While the statutory language quoted above seems final, the judges cited the 1995 Aesthetic decision in which the Arizona Supreme Court offered contractors some wiggle room, i.e., that “substantial compliance” with the contractor licensing statute was sufficient to satisfy the licensing prerequisite. Thus, the question that the judges sought to answer was whether Crowe “substantially complied” with A.R.S. § 32-1153 and whether the trial court’s summary judgment against Crowe’s suit was appropriate.

Unfortunately for Crowe, the majority ruled that Crowe failed the “substantial compliance test” contained in Aesthetic. Among their findings were these:

By not maintaining liability insurance, a surety bond, and workers compensation, Crowe did not meet his burden of proof as to financial responsibility.

Crowe was aware of the licensing requirement but did not immediately attempt to comply.

Crowe argued (convincingly, in our view) that, since the work for which he had not been paid was performed after he became licensed, and since he met the licensing and the substantial compliance requirements during that time, he should not be barred from suing to collect.

Crowe also argued that, since Hickman’s knew that Crowe was not licensed, contracted with Crowe anyway, requested services from Crowe, and paid Crowe over $2 million, Hickman’s repeatedly ratified the contract and shouldn’t be allowed to escape responsibility for payment. But the majority said no, essentially telling Crowe that he should have been licensed at the time he entered into the contract.

The dissenting opinion in this case casts Crowe’s and Hickman’s respective positions in, we believe, a more realistic and common sense light:

“The ‘policy or purpose [of the statute] is to protect the public from unscrupulous, unqualified, and financially irresponsible contractors.’ … The public did not need protection from Crowe for any of the above. Indeed, the word unscrupulous only comes to mind when one considers Hickman’s involvement in this matter. Again, Hickman sought out Crowe, entered into a contract with him, although he knew he was not licensed, sent Crowe materials to help him obtain a license, let Crowe on the property to do the work, paid him millions of dollars on the contract, accepted the project, and, if you believe Crowe’s allegation, then refused to pay over $105,000 for work done. The first, and only time Crowe heard about his lack of a license ‘at the time he entered into the contract’ is when Hickman filed his answer and motion to dismiss. “[T]he majority is wrongfully allowing the statute to be used as a sword to punish Crowe for acting in a fashion invited by Hickman.”

WARNING TO CONTRACTORS

The obvious warning here is that an unlicensed contractor had better obtain his license and have it in hand before he contracts for work.

The Crowe case includes a warning for licensed contractors, too: A license to do one specific kind of work does not authorize you to contract for services outside the scope of your license, even if you are competent to do the additional work. In other words, a license to install drywall does not authorize you to paint, even if you get a painting license before you begin painting but after you enter into the contract. You will not be entitled to enforce the painting portion of the contract.

The bottom line: If you want to be able to sue for payment in an Arizona court, you must hold the required license before you enter into the contract.

The Trouble with Change Orders

Tue, 12 Feb 2002 00:00:00 GMT

Major disputes can arise in fixed-price contracts when subcontractors perform work on an unwritten change order, and both sides can lose big. Not having the change order in writing makes it hard to prove that the change is not a defect and even harder to get paid for the work. An owner who doesn’t receive a request for a change order may be increasing his project costs.

THE RULE, NOT THE EXCEPTION

More often than not, a construction contract will be significantly modified before the project is completed. In fact, one recent industry survey found that the typical commercial project involves 56 change orders.

Most construction contracts require that all changes or authorizations for extras be put in writing, generally before the work is performed. In real life, though, the pace of work out in the field is often so fast and furious that, in the interest of completing the project, change orders are approved verbally, with the understanding that someone will put them in writing when time permits.

One reason for contention is that unforeseen difficulties, improvements on the plans or even scheduling hassles can send a project in a new direction. In addition, plans and/or specifications are notorious for leaving the details up to the subcontractor. What looks to the subcontractor like a deviation from or addition to the scope of the work, to the owner or general contractor may appear to be a case of the tradesman failing to read the plans.

A subcontractor in this situation faces a difficult choice: to risk not getting paid for failure to get the change in writing, or to get called on the carpet for not completing work that the owner or contractor believes was included in the bid. The owner and general contractor, too, are on shifting sands. The project could be delayed if the subcontractor refuses to complete work without a change order, or the owner could end up paying double for some work.

The best contracts provide for decision making in these situations, by either the architect or the engineer on the project, who can determine whether the change is new work or within the scope of the original work.

WAIVERS

When everyone agrees that a written change order is not necessary and the subcontractor will get paid for unwritten change orders, the writing requirement is waived. But again, whether the writing requirement was waived is itself at the root of many change-order disputes.

There are two types of waivers:

a written or express statement that change orders don’t need to be written, and

conduct that demonstrates that the writing requirement has been waived.

The first one is relatively clear; the second is considerably murkier and more difficult to prove.

Some contractors and subs have tried to argue that waiving one provision of a contract opens a Pandora’s box that renders the entire contract ineffective. That is not the case. As the Arizona Supreme Court noted in American Continental Life Insurance Company v. Ranier Construction Co., Inc. , “The waiver of one right under a contract does not necessarily waive other rights under the contract.”

FAULTY DOCUMENTATION

As you may have learned the hard way, change orders written after the fact – or not at all – can lead to major disputes, and both sides can lose big money on change orders that lack proper documentation.

In our experience, more change orders are implemented in order to correct faults in the original contract than to achieve an actual change in the plan or design. Generally speaking, many factors can raise the need for change orders, including:

haste or inadequate planning in preparing the initial contract;

a poorly defined scope of work;

compressed project schedules;

unrealistic cost constraints;

time and material changes; and

owner-directed acceleration.

One of the causes of change order conflict is that it isn’t easy for most contractors and subs to say “no” when directed to modify work in the field. As a result, they respond to verbal instruction, thus taking a big risk as to whose side a court will take if the owner decides not to pay.

SOLUTIONS

Fortunately, change order pitfalls can be avoided with precise planning and adherence to sound business practices.

Putting the change order in writing benefits all parties, because proving oral change orders is often difficult. While there may not be time to sit down and draft a written document when change order work is required immediately, major changes to the contract should always be authorized in writing before the work is done. The risk of payment disputes is too great to proceed on an oral change order alone. For material suppliers, a written change order is absolutely essential if the contract price, when modified, is $500 or more.

Here are some other proven, practical methods of avoiding conflicts over change orders and other documentation:

Organize a meeting of key players in advance, including the general contractor and subcontractor.

Conduct an in-house peer review of working drawings, specifications and other key documents.

Scrutinize drawings closely from project concept to the final stage and invite outside review.

Keep communications open with ongoing, on-site project meetings.

Review and revise critical documents several times during the life of a project.

Create and use functional checklists.

Participate in workshops and training related to improving document quality.

Establish accountability for everyone at every stage of document development.

Update any system that obstructs development of quality documents.

Carry out a timely project post mortem to identify problem areas.

Have a strict company policy, that no one but the owner can waive, requiring that directives be in writing before any work will be done that is over and above or different from what is called for in the contract.

Here are some other suggestions:

Address the issue before work is started. An owner or general contractor ordering a subcontractor to do additional work should tell the subcontractor whether the work is within or beyond the scope of the contract. Likewise, the subcontractor should make plain its position that new work will require a change order before new work is performed.

Be specific. To avoid misunderstandings, change orders should spell out in detail the additional work that is requested or necessary, and they should be signed and dated by both parties. They should always include whatever drawings, specifications, cost estimates, new deadlines and payment terms are necessary to complete the additional work.

Don’t agree to open-ended change orders. Also known as “time and materials agreements,” these can blow up your budget and strain contractor/owner relationships since they allow the contractor to charge for work as it proceeds and materials and supplies as they are needed. Instead, owners are wise to ask for a fixed sum agreement that obligates the contractor to perform work for an agreed upon sum. The contractor must absorb costs if they are greater than estimated or, conversely, can make a greater profit if costs are less than budgeted.

Subcontractors should reaffirm the hourly rate they will charge for time and material work. Unfortunately, disagreements occur even with the best estimating, contracts and performance. So before trouble starts, videotape your work at different stages, or photograph it. For financial matters, rely on the written word instead of oral agreements.

Confirm conversations with an email or letter immediately. If you have to see a lawyer, you will be able to explain what happened with more than “he said and I said.”

CONCLUSION

Most contractors and subcontractors have high standards for integrity and quality. Unfortunately, faulty documentation creates an environment of unnecessary finger pointing and charges of dishonesty.

In the construction industry, the day of the handshake deal has passed; more than ever before, ensuring prompt and proper payment requires strict procedures and clear documentation.