The nationwide boom of residential and commercial construction has continued into 2023. The increase of construction in Arizona is largely due to the increase in population. In 2022, Maricopa County, Arizona gained the most residents in the nation adding 56,831 residents, a gain of 1.3% since 2021.[1] Also contributing to the post-pandemic construction boom in Arizona are last year’s CHIPS and Science Act laws, which provide additional investments in American semiconductor manufacturing. More recently, Arizona announced two new chip-making plants by TSMC and two additional factories from Intel that will cost a combined $60 billion.
While most construction projects are completed without issue, there are instances when a property owner discovers a defect, issue, and/or dangerous construction problem. A key to a successful relationship is the binding agreement between the parties. For a non-experienced party, these agreements can be daunting. While many of the provisions are extremely important, express warranties, implied warranties and indemnification provisions may have the most impact when a dispute arises.
Provisions
Warranties can be express or implied. An expressed warranty will likely be negotiated in the contract, while an implied warranty may not. An expressed warranty is typically a promise, statement, or representation regarding the quality of the work. An implied warranty is created by law, which is read into the contract even though it may not be explicitly stated. An example of an implied warranty is a duty to work in a “workmanlike manner.” The Arizona Supreme Court has clarified that workmanlike manner means: “Ordinarily skilled manner as a skilled workman should do it.” Another example of an implied warranty is the “implied warranty of fitness for habitation.” These implied warranties cannot be disclaimed or avoided by omission in a contract.
Indemnification provisions attempt to shift risk from one party (the “indemnitee”) to another party (the “indemnitor”). When this is done, the parties expressly provide that one party will bear risk for any expenses, including attorneys’ fees and costs, incurred in connection with a claim. A.R.S. §§ 34-226 and 41-2586. Another form of an indemnification provision, also known as an additional insured provision, may require a party to designate the other party as an additional insured on a Commercial General Liability (CGL) policy. In other words, the at fault party’s insurance policy may have to pay to repair the defect. Accordingly, an indemnification provision is a powerful tool that, when utilized correctly, can shift risk and potential expenses to the party at fault.
The contract may contain an alternative dispute resolution provision, which may require the parties to participate in voluntary mediation or binding arbitration to resolve the conflict. If this provision is in the contract, it may limit your opinions to address the construction defect to one of these types of alternative dispute methods.
If an investigation confirms a defect in the construction of residential or commercial property, the contractor may be in breach of the contract. A party typically has eight years from the date of a project’s substantial completion to file a lawsuit based on breach of contract with a contractor or other person involved in the improvement of real property. A project is substantially completed for purposes of the statute when either it is first used by the occupant or owner, it is first available for use after completion according to the contract, or after final inspection by the governing body which issued the relevant building permit. A.R.S. §12-552. The two exceptions to the eight-year statute of limitations period, are if the latent defect is not discovered until the eighth-year or if an injury to the real property occurred during the eight-year-period.
Filing a Complaint
The Arizona Registrar of Contractors (ROC) licenses and regulates residential and commercial contractors in the State of Arizona. ROC has established Workmanship Standards for Licensed Contractor, which all contractors must meet. In the event your contractor fails to meet the established standards, you may file a complaint with the ROC to force your contractor to correct the defect.
Retention of legal counsel is often necessary to resolve construction disputes, which may include mediation, arbitration, and/or a lawsuit. The point at which legal counsel is retained is often of significant during the contract negotiation and resolution period. For claims arising from the contract, the successful party may be entitled to recover attorneys’ fees and costs. A.R.S. §12-341.01. The law firm of Gallagher & Kennedy is available to assist all construction professional in all legal matters.
[1] U.S. Census Bureau dated March 30, 2023.
Click here to read the article published in the July 2023 Issue of InBusiness Magazine.