Legislature Reduces Threat of Construction Defect Lawsuits
New law removes homeowners' automatic entitlement to attorney fees, gives contractors opportunity to resolve defects in advance of a lawsuit.
Homebuilder-friendly amendments to Arizona’s construction defect statute were signed into law by Governor Ducey on March 23.
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.
The new law will go into effect 91 days after the end of the legislative session.
(by permission from Lang & Klain, P.C.)
ROC Abolishes 15-Day Window for Correcting Complaints Under the new procedures, the issuance of an ROC "directive" triggers an immediate blemish on the contractor's record, regardless of the outcome of the complaint. Visit the Construction Advisor archive • Construction Law and ROC Licensing services at Lang Baker & Klain (Reproduced by permission)
Mike Thal, Lang & Klain
Maintaining a complaint-free contractor record with the Arizona Registrar of Contractors has become more difficult, due to recent changes in the way in which the ROC responds to consumer complaints.
Under the new procedures, the ROC's "Corrective Work Order" has been replaced by a "Directive," the issuance of which results in a mark on the contractor's record for public view.
Prior to the procedural change, if an ROC inspector determined that a workmanship complaint was valid, the ROC issued a Corrective Work Order to the contractor. If the contractor remedied the issue within 15 days, the complaint was considered to be resolved and the contractor's record was not affected.
Now, the Directive triggers an immediate two-year blemish on the contractor's record. It is issued without notice and cannot be headed off by the contractor's prompt remedial action. Even if, after a hearing, the complaint is found to be without merit, the fact that a Directive was issued remains part of the contractor record for two years.
See also: "Changes at the ROC: Prosecuting Consumer Complaints" (January 2014)
After the complaint is resolved – whether by appropriate action by the contractor, settlement with the customer, dismissal by a hearing officer, or further action against the contractor – the record will simply be updated to reflect the outcome. That will provide little comfort to contractors who are wrongly forced to serve two years in competitive purgatory for baseless or easily resolved allegations of poor workmanship.
The threats to contractors do not stop there. If an ROC inspector finds no cause to issue a Directive for poor workmanship but, in the process of the investigation, finds that the contractor, for example, failed to comply with any one of several contractual requirements set forth in A.R.S. § 32-1158(B), the inspector may issue a Directive for non-compliance, which inflicts the same two-year damage on the contractor's record as a finding of poor workmanship.
Pay Attention As a result of these changes to the ROC's complaint process, it is more crucial than ever for contractors to ensure that potential complaints are handled with the utmost attention and care. It has also never been more important that a contractor's contracts be in compliance with the governing statutes. For more on that topic, see our May 2013 article, "Compliance Update: Arizona Registrar of Contractors."
Reminder: Contract Omissions Can Trigger ROC License Action
Some warnings are worth delivering three times: Every time a contractor performs work for more than $1,000 for an owner commercial or residential Arizona law requires a signed contract that contains nine specific pieces of information. Failure to do so can result in ROC action against your license.
As we originally discussed in our May 2013 Compliance Update and again in the April 2014 Construction Advisor, 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 Arizonas contracting statutes. Those minimum elements are not mere technicalities; the ROC has made it clear that a contractors 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 meeting of Arizona construction lawyers, an ROC representative reported that, in a couple of recent cases, contractors 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:
1. The contractors name, business address, and license number.
2. The owners name and mailing address, along with the address or legal description of the jobsite.
3. The date the contract was entered into by the parties.
4. The estimated date of completion.
5. A description of the work to be performed.
6. The total amount to be paid to the contractor, including all applicable taxes.
7. The amount of any advance deposit.
8. The amount and timing of progress payments.
9. 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 ROCs 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.
Aiding and Abetting: A New ROC Threat to Subcontractors
The Arizona Registrar of Contractors has begun disciplining subcontractors who perform work for a contractor that is acting outside the scope of its license.
Most contractors assume that the law against “aiding or abetting” an unlicensed contractor — A.R.S. § 32-1154(A)(9) — exists to discourage general contractors from hiring unlicensed subs. To avoid breaking that law, general contractors must make sure that their subcontractors are properly licensed.
But in a recent and surprising move, the Arizona Registrar of Contractors applied the law in reverse: the ROC charged a subcontractor with aiding and abetting, because the subcontractor performed work for a contractor that, by acting as a general contractor, exceeded the scope of its license.
Here is how the ROC’s latest move works: If a subcontractor enters into a contract with another contractor, the ROC expects the subcontractor to first determine whether the upper-tier contract is within the scope of that other contractor’s license. If that other contractor is acting as a general contractor beyond the scope of its license (to quote from a recent ROC citation), then the ROC can charge the subcontractor with aiding and abetting that other contractor.
This can come up when a subcontractor is involved in an ROC complaint for other issues (e.g., allegations of poor workmanship), because the ROC can add the aiding-and-abetting charge if the facts allow it.
Avoiding the Problem
Of course, the ROC’s new approach to “aiding or abetting” ignores the reality that, in many circumstances, a subcontractor has no means to determine the scope of that other contractor’s upper-tier contract. That other contractor has no legal obligation to share that information with the subcontractor.
How can a subcontractor protect itself from the ROC’s new approach to applying the aiding-and-abetting law?
• First, find out who you’re entering into a contract with and check that contractor’s license on the ROC’s website: www.azroc.gov. If the contractor seeking to hire you seems to be functioning outside the scope of its license, you could be charged with aiding or abetting — even if the work for which you are contracting is within the scope of your license.
• Second, if that other contractor is not a licensed general contractor, and if the proposed contract is outside the scope of that contractor’s license, you may be able to avoid liability for aiding and abetting by contracting directly with the owner. That may add a wrinkle to the deal or complicate the negotiations, but it can eliminate a major risk for a subcontractor at the ROC.
(by permission from Lang & Klain, P.C.; written by Mike Thal and James Hanson)
More to come
Check back often for new updates that effect contractors and owners.