Under Construction – May 2024

Letter From the Editor

Welcome to the spring edition of Snell & Wilmer’s Under Construction newsletter. As the warmth of spring spreads across our states, the construction industry is active with energy and anticipation for the projects that lie ahead. 
 
In this newsletter, we explore a variety of topics related to current construction trends and legal news that may be relevant and helpful to you and your business. We have curated an array of articles that include discussion of significant changes to retainage law in Oregon, crucial arbitration updates to the AAA’s Construction Industry Arbitration Rules, California’s recent legislation changes that may affect the construction industry, two bills before the Colorado legislature concerning defect claims, and Texas’ amendment to the Prompt Pay Act that addresses “Excessive Change Orders.” We round out the spring edition with practical tips to help one negotiate effective contractual limitations of liability and how timing plays a key role in Arizona mechanics and materialmen’s liens. 

The Snell & Wilmer construction group is also pleased to have welcomed Conor Bateman to the team. Conor serves clients from our Dallas office and focuses his practice in commercial real estate and commercial construction. He represents corporate and individual clients before federal and state courts, arbitration panels, and administrative and regulatory agencies. Conor also provides transactional counsel including regulatory compliance guidance, contract negotiation and drafting of construction and real estate documents. Previously, Conor was Vice-President and Chief Operating Officer of a title company where he handled legal compliance, federal, and state-mandated audits, accounting procedures, HR, legal opinions, underwriting, and final opinions on title issues.
 
We hope you will find these articles informative and enlightening. Please let us know if we can address a specific construction issue in a future newsletter. We hope 2024 continues to be profitable, busy, and safe for you, your company, and your family!
 
Best Regards,
 
Jim Sienicki, Editor
 

Table of Contents 

1. Significant Changes to Retainage Law in Oregon Will Benefit Contractors and Require Review of Oregon Construction Contract Forms and Payment Procedures

2. Important Arbitration Update: 2024 Amendments to the AAA Construction Industry Arbitration Rules

3. Highlights of Recent California Legislation Affecting the Construction Industry

4. Colorado Legislature Considers Pair of Bills Which May Impact Colorado Construction Defect Claims – What Homebuilders Need to Know

5. Texas Amends Prompt Pay Acts to Address “Excessive Change Orders”

6. Practical Tips for Negotiating an Effective Contractual Limitation of Liability

7. What’s the Key to Arizona Mechanics and Materialmen’s Liens? Timing!

Significant Changes to Retainage Law in Oregon Will Benefit Contractors and Require Review of Oregon Construction Contract Forms and Payment Procedures

By Laurie R. Hager

Under HB 4006, which was effective on March 7, 2024, the Oregon legislature sought to improve retainage law in two ways. First, it allows general contractors and subcontractors to post a retainage surety bond to avoid having retainage deducted from progress payments on large commercial projects and public projects. Second, it eliminates a 2019 retainage escrow account law that had been a thorn in the sides of many owners and contractors. 

It is common for construction contracts on commercial and public construction projects to allow the owner to withhold payment of a certain amount of money from the general contractor’s progress payment applications as “retainage” or “retention.” In Oregon, retainage cannot exceed 5% of the work completed. The general contractor typically includes similar retainage provisions in its contracts with downstream subcontractors. Such retainage provides an incentive to the contractor and subcontractors, respectively, to complete the construction in a timely and satisfactory manner. However, if the contract price is large, retainage of up to 5% can have a significant impact on a contractor’s or subcontractor’s cashflow during construction.

In 2019, the Oregon legislature enacted a law that requires any retainage withheld on a construction contract exceeding $500,000 to be deposited into an “interest-bearing escrow account,” although no interest rate was specified in the statute. While the intent was to benefit contractors and subcontractors by requiring retainage to accrue interest, the law did not solve contractors’ and subcontractors’ cashflow problems during the course of construction. Also, depositing funds into an interest-bearing escrow account requires there to be actual money to deposit. Construction lenders, however, typically do not disburse money withheld as retainage at the time of the progress payment application, but rather wait until the contractor is eligible for payment of retainage before releasing such funds. Even after passage of the 2019 retainage escrow account law, construction lenders were reluctant to change that practice. Thus, often, there were no funds to actually deposit in the required retainage escrow account. Accordingly, compliance with the 2019 law was often difficult at best. 

Fast forward to 2024. HB 4006, which applies to multiple statutes, repeals the 2019 escrow account provision effective March 7, 2024. Additionally, for contracts entered into after March 7, 2024, contractors and subcontractors on large commercial projects (having a ground area over 10,000 square feet or a contract price over $250,000) and on public projects can post a retainage surety bond to avoid having retainage taken out of progress payments. The form of the surety bond is provided in ORS 701.435(4)(2024). Under certain circumstances described in the statute, a contractor can withhold the portion of the surety bond premium applicable to a subcontractor’s work from that subcontractor’s progress payments. 

The posting of the bond triggers release of prior withheld retainage, as well as eliminates withholding of retainage going forward. And the existence of the bond provides essentially the same protection that owners and contractors otherwise intended through retainage.

As an alternative to the surety bond, a contractor can elect to have the project owner (or public contracting agency) withhold retainage and either deposit the funds into an interest-bearing account or be liable to the contractor for interest on the retained amounts at the rate specified in the statute. 

In addition to benefitting construction industry stakeholders, HB4006 will have some practical effects on construction contracts and project administration. Many Oregon construction contract forms were changed to reflect the 2019 law. Now, construction contract forms for applicable projects should be changed again to comply with the new law. Additionally, owners and contractors must make sure that their payment procedures for contracts entered into after March 7, 2024 comply with the new law. Also, contractors and subcontractors will want to review potential retainage surety bond options with their insurance agents. Washington state has had a statutory retainage surety bond option for public projects for some time, and more recently for private projects, so there should be sureties able to provide these types of bonds for Oregon projects, as well. [Back to TOC]

Important Arbitration Update: 2024 Amendments to the AAA Construction Industry Arbitration Rules

By Michael J. Baker and Christian Fernandez 

On March 1, 2024, the American Arbitration Association (the “AAA”) amendments to its Construction Industry Arbitration Rules (the “Rules”) became effective. The newly amended Rules seek to modernize aspects of the arbitration process (e.g., removing references to fax numbers and providing for video conference hearings) and to further streamline the arbitration process as a cost-efficient alternative to litigation. 

Key changes to the Rules include the following: 

R-2. Rule 2 now requires that parties and their representative conduct themselves in accordance with the AAA’s Standards of Conduct for Parties and Representatives. Failure to do so may result in AAA declining to further administer a case. 

R-7. Rule 7 now requires a request for consolidation or joinder be submitted to the AAA before a Merits Arbitrator is appointed. Previously, such a request could be filed within 90 days of the date the AAA determined that all administrative filing requirements were satisfied even if a Merits Arbitrator had been appointed. In addition, after the initial timeframe for consolidation and joinder has passed, a party requesting consolidation or joinder must now show not only that good cause exists to grant the request, which was all that was required under the previous rules, but must also establish that prejudice will result if the request is not granted. 

R-14. Rule 14 now allows the AAA, at its discretion, to limit the number of arbitrator strikes a party is permitted during the arbitrator selection process. 

R-15. Rule 15(a) now requires that all party-appointed arbitrators must be on the AAA’s National Roster of Arbitrators unless the parties agree otherwise or AAA determines in its sole discretion that the AAA National Roster of Arbitrators does not have the requested expertise.

R-23. With the emergence of using video conference in the practice of law, Rule 23(a) now provides for the use of video conference, in addition to in person and by telephone, for preliminary management hearings. 

R-29. Rule 29 now allows for a record of a hearing to be made via transcription, whereas the previous rule denoted the use of a stenographic record. 

R-34. Demonstrating that the AAA seeks to emphasize arbitration as being a cost-effective alternative to litigation, Rule 34 now requires an arbitrator to consider the time and cost associated with dispositive motion practice when deciding whether to allow any such motion—the focus being to achieve an efficient and economical resolution of the dispute. 

R-45. An entirely new rule, Rule 45, titled Confidentiality, establishes that AAA and the arbitrator shall keep all matters relating to the proceeding confidential, and a party may request that the arbitrator issue an order concerning the confidentiality of the proceeding. 

R-52. Rule 52 now provides that a party may request that the arbitrator clarify an award issued. 

R-59. Under Rule 59, if a party joined in the arbitration through Rule 7 fails to provide the required deposit, the party that joined the non-paying party is now responsible for covering such deposit. 

R-61. Rule 61 now allows an arbitrator to order sanctions upon a party’s request and/or the arbitrator’s own initiative, whereas previously sanctions could only be ordered upon a party’s request. 

The Rules were also amended to increase ceiling to qualify for the Fast Track Procedure from $100,000 to $150,000. Under the amended Rules for Large, Complex Construction Cases, when parties cannot agree on the number of arbitrators to hear the case, if a claim or counterclaim has at least $3,000,000 at issue, then three arbitrators is the default number of arbitrators to preside over the arbitration. Previously, cases exceeding $1,000,000 at issue defaulted to a three-arbitrator panel. 

With contracting parties often agreeing to resolve disputes through AAA arbitration conducted in accordance with the Rules, it remains important to evaluate how the Rules will impact the arbitration process. Owners, developers, contractors, subcontractors and other industry professionals should consider the Rules, as well as other factors, when determining what dispute resolution procedures best fit their needs and goals. [Back to TOC]

Highlights of Recent California Legislation Affecting the Construction Industry

By Michael J. Baker

The California Legislature recently passed about 1,300 laws and the Governor signed 893 of them into law. This continues a long run of California enacting approximately 1,000 laws a year. While it can be hard to keep up with the new legislation, below are some of the ones impacting the construction industry. Some notable cases are also referenced. 

SB 150 – PLA on Projects Over $35 Million-Adds section 14017 to Gov. Code, and 2500.5 to Public Contract Code. Requires DOT (Caltrans) to work with CA Workforce Development Board to develop “high road construction jobs.” High Road jobs are jobs that pay family supporting wages, compete based on the quality of their services and products, and engage workers and their representatives in the project. Projects, in the aggregate of $35 million may be required to enter into PLAs if it is determined the project is not meeting community benefits (undefined).

AB 1204 – Adds section 7035 to B&P Code. Limits specialty contractor work. Prohibits specialty contractors from entering into contracts for the performance of work on the same or single project with more than one subcontractor in the same license classification. Exception if subcontractor employs persons who are classified employees to perform work in that license classification on the single project or the specialty contractor is a signatory to a bona fide collective bargaining agreement.

AB 336 Worker’s Compensation – Adds section 7125.6 to Business & Professions Code (“B&P”). Combats worker compensation fraud through worker classification gamesmanship, i.e., misclassifying employees to get a lower premium. Requires Contractor to certify when providing a worker’s comp renewal to list worker classification codes on the certificate. Prohibits renewal if classifications are not identified. Effective July 1, 2024.

SB 706 Progressive Design Build – Adds and repeals 22185 of Public Contract Code (“PCC”). Allows until January 1, 2028, local agencies (city, county, or special district) to use the progressive design build process for up to 10 public works projects in excess of $5 million.

AB 1433 Contractor Prequalification – Amends PCC 20111.6. Extends contractor prequalification requirements to public projects if the governing board of the school district uses state general funds. Imposes the crime of perjury for false statements.

AB 334 Conflicts of Interest – Adds 1097.6 to Gov. Code. Current law prohibits state, county, district, judicial district and city employees or officers that had a financial interest in a contract they participate in from becoming an independent contractor who participates in the project. Now, they are eligible if they meet new criteria to be hired in the later stages of project, i.e., no longer will an officer or employee be barred as long as the person did not engage in or advise on a subsequent contract. Basically, a government employee can work for a company as an officer or employee that its former public employer had a financial interest in under specified conditions, if it was not the same or subsequent contract where the former public employee/officer/independent contractor participated in the selection or evaluation.

SB 423 Streamlined Housing Approvals-Multi Family Housing – Expedites ministerial approval of multi-family housing. Supersedes local housing regulations and local zoning rules. Approvals not subject to Conditional Use Permits (CUP). Coastal Zone permits still required if building in coastal zone. All construction workers to be paid prevailing wage, no skill or trained workforce requirement.

AB 1490 Affordable Housing Developments Priority Funding – Adds sections to Government Code 65913.12 and 65960.1. Applies to affordable housing in urban infill areas. Allows adaptive housing reuse on smaller infill parcels. Goal is to create “extremely affordable housing,” new category of housing. Can be built in or on dedicated industrial sites. Defines “extremely affordable adaptive reuse project.” Requires a local source of funding. Sets out approval time limits local agency must meet. 

2023 Notable Cases

Hernandez v. City of Stockton, 90 Cal. App. 5th 122 (2023), Government Claims Must “Fairly Reflect” Factual Claims Made in the Underlying Government Claim Submitted. Cannot introduce materially different facts or circumstances that vary from the government code claim, even if government entity knows of the underlying facts. 

Suffolk Construction Company, Inc. v. Los Angeles Unified School District, 90 Cal. App. 5th 849 (2023), Public Contract Code 1104 (prohibits bidder to assume responsibility for accuracy and completeness of plans and specs) but does not prohibit public entities from contractually requiring contractors to determine the means and methods of achieving performance standards. Case turned on performance standards vs. design standards regarding concrete mix.

Hendrix v. J-M Manufacturing Company 76 F. 4th 1164 (2023), 9th Circuit Weighs in on False Claims. Failure to comply with industry standards in the manufacture of a pipe could be a false claim, no need to test every piece of the commodity. Court rejected argument that the entire contract price amount paid is the proper measure of damages. In deciding, the court stated the jury may make a just and reasonable estimate of the damages based on relevant data and is allowed to act on probable and inferential as well as (upon) direct proof and positive proof. A jury cannot speculate. Plaintiff failed to prove damages on the lost “value.” Plaintiff was unable to collect contract amount or lost value due to failure of proof.

GRFCO, Inc. v. Superior Court, 89 Cal. App. 5th 1295 (2023), Failure to Comply With Apprenticeship Requirements. Failure to comply can lead to a 3-year debarment, Labor Code 1777.5. Five criteria are laid out that Labor Commissioner is required to consider in debarment length. Debarred contractor raised a number of issues on appeal of the Labor Commission decision re debarment but never addressed adequately the criteria application errors and instead made claims regarding hearing bias, inability to call the Labor Commissioner as a witness, and refusal to open the case. Appellate court rejected each such argument of contractor since there were no facts to support these allegations. [Back to TOC]

Colorado Legislature Considers Pair of Bills Which May Impact Colorado Construction Defect Claims – What Homebuilders Need to Know

By Blake Jackson and Amanda E. McKinlay 

The Colorado General Assembly is considering a pair of bills which would modify the liability and exposure of homebuilders in Colorado. HB24-1230: Protections for Real Property Owners, introduced in the House of Representatives, aims to further protect homeowners by expanding the statute of repose under which a claimant can bring a construction defect claim from six to ten years. Conversely, SB24-106: Right to Remedy Construction Defects, introduced in the Senate, aims to restrict the types of claims that a claimant can bring under the procedures outlined in Colorado’s Construction Defect Action Reform Act (“CDARA”). While neither bill is finalized, both have passed their house of origin and seem to be moving for passage through their respective next chamber. Both should remain on Colorado homebuilders’ radar as the legislative session wraps up this May. The following discusses the most current versions of these bills as of May 2, 2024. 

Currently, property owners who intend to file a construction defect lawsuit against a homebuilder or similar construction professional must do so within the timeframes afforded by Colorado’s statute of limitations and statute of repose, two and six years, respectively. While the clock on the statute of limitations begins to tick when the defect is noticed, the statute of repose period is triggered upon “substantial completion” of the “improvement to real property.” Substantial completion occurs when a construction project is sufficiently complete, and the owner can use the building for its intended purpose. 

HB24-1230 presents increased risk to Colorado homebuilders for potential defect claims. First, it seeks to expand the current statute of repose period from six years to ten years after substantial completion. Second, it makes it a violation of the Colorado Consumer Protection Act (“CCPA”) for homebuilders to obtain or attempt to obtain any express waivers of or limitations on the legal rights or remedies under CDARA or the CCPA. Third, it seeks to void contract provisions that limit a property owner’s right to bring or join a legal action with one or more claimants against a construction professional. This has the practical effect of allowing similarly situated homeowners, e.g., homeowners on the same street experiencing the same construction defect, to bring a claim together even if they are not members of a formal homeowner association. Additionally, for all residential construction defect claims, the bill aims to award prejudgment interest to the prevailing claimant, above and beyond actual damages, at a rate of 6% per annum from the later of the date construction is finished or title is transferred to the owner through the date of mailing of claimant’s first notice of claim under CDARA; and 8% per annual thereafter. Under HB24-1230, any provision in a common interest community’s declaration or governing documents that imposes different or additional requirements than is permitted under Colorado’s construction defect laws, would be void. This bill was approved in the House on April 4, 2024, and is awaiting its second reading before the Senate. 

SB24-106, on the other hand, may limit exposure to liabilities facing Colorado homebuilders, with the hopes to incentivize the construction of condominiums in the state. The bill aims to decrease insurance cost on new condominiums, which is significantly more expensive than insurance costs for multifamily rental home projects, increase the volume of new condominium construction, increase available condominium units in Colorado, and increase access to more affordable for-purchase housing options in Colorado. In furtherance of these goals, the bill: (i) modifies and adds additional procedures under which the executive board of a condominium can bring a construction defect action, including increasing the required number of voting owners in favor of the action from a majority of the owners to at least 60% of the votes in the association; (ii) requires that a unit owner voting in favor of proceeding with a construction defect action must acknowledge in writing that the unit owner has received all required disclosures under CDARA and that the unit owner is aware of the unit owner’s obligation under Colorado law to disclose known defects upon sale of the unit; and (iii) modifies when a claimant is barred from bringing a claim seeking damages for a construction defect where the builder fails to construct an improvement to real property in compliance with the building codes or industry standard. Such a claim can only be asserted where the failure to construct such improvement causes actual damage, actual loss, bodily injury or wrongful death, verifiable danger to the occupants of the residential real property, or an actual failure or lack of capacity of a building component to perform the intended function or purpose of the building component. The bill further states that if an association takes an action in accordance with these previously described procedures, that each claim brought on behalf of a unit owner is subject to each defense that the unit owner would be subject to, if the unit owner had brought the claim themselves. SB24-106 was approved by the Senate on April 11, 2024 and introduced to the House of Representatives’ Transportation, Housing & Local Government Committee on May 1, 2024. The Second Regular Session of the 74th Colorado General Assembly is scheduled to adjourn on May 8, 2024. 

Colorado construction professionals should continue to keep a close eye on these bills and further guidance from the legislature, and in the meantime, they may want to develop strategies with their construction attorney with regard to these proposed changes. [Back to TOC]

Texas Amends Prompt Pay Acts to Address “Excessive Change Orders”

By Conor G. Bateman 

U.S. Supreme Court Justice Louis Brandeis famously referred to states as the “laboratories of democracy.” The Texas legislative process is an unusual laboratory compared to most states. The Texas Legislature only meets once every two years in regular session from January to May. The 88th Regular Session of the Texas Legislature concluded in June 2023 and the next Regular Session commences in January 2025. 

This pattern leads to an influx of new laws every other year, most taking effect on September 1 or January 1. The 87th Regular Session in 2021 enacted several major laws impacting the Texas construction industry, including substantial modifications to the Texas statutory mechanic’s lien system contained in Chapter 53 of the Texas Property Code.

The 88th Regular Session was less impactful but included several new laws and amendments impacting the construction industry. One of these was an amendment to the Texas Prompt Pay Act in Chapter 28 of the Texas Property Code applicable to private projects and Chapter 2251 of the Texas Government Code appliable to public projects.

For private construction projects, the Texas Prompt Pay Act obligates project owners to timely pay all payment applications no more than 35 days from receipt (or five days from receipt of loan funds to be utilized for construction). TEX. PROP. CODE § 28.002. It similarly obligates general contractors and subcontractors to make payments to lower-tier subcontractors and suppliers within seven days from receipt of funds. TEX. PROP. CODE § 28.002. Payments may be withheld in the event of a “good faith dispute,” which is the source of considerable litigation. TEX. PROP. CODE § 28.003. If there is no good faith dispute or other basis for withholding, a party may be liable for one and one-half percent (1.5%) interest per month and 18% interest per year for unpaid amounts. TEX. PROP. CODE § 28.004.

For public contractor projects, Chapter 2251 of the Texas Government Code imposes similar requirements and obligates vendors (those entities contracting with the governmental entity) and subcontractors to pay lower-tier subcontractors and suppliers within 10 days of receipt of funds. TEX. GOV’T CODE §§ 2251.021-23. Interest on overdue payments is calculated based on the prime rate in effect on July 1 of the preceding year plus 1%. TEX. GOV’T CODE §§ 2251.025-29. Payments may be withheld pursuant to certain procedures if a “bona fide dispute” exists. TEX. GOV’T CODE § 2251.051.

In 2023, the Texas Legislature added Section 28.0091 to the Texas Property Code and Section 2251.0521 to the Texas Government Code to address “Unsigned Change Orders.” These new provisions provide express statutory authorization for contractors or subcontractors to refuse to proceed with additional work directed by an owner if:

1. the contractor or subcontractor has not received a written, fully executed change order for the owner-directed additional work; and 
2. the aggregate actual or anticipated value of the additional work plus any previous owner-directed additional work for which the contractor or subcontractor has not received a written, fully executed change order exceeds 10 percent of the contractor’s or subcontractor’s original contract amount.

TEX. PROP. CODE § 28.0091 (a) (emphasis added). See generally TEX. GOV’T CODE § 2251.0521 (the definitions in the Texas Public Prompt Pay Act utilize the phrase “vendor” and contain additional terms applicable to projects for public entities but the statutory defense language is similar).

The new legislation expressly provides that a contractor or subcontractor refusing additional work without a signed change order is not responsible for damages associated with the election not to proceed. TEX. PROP. CODE § 28.0091 (b); TEX. GOV’T CODE § 2251.0521 (d). This creates a strong defense for contractors and subcontractors that did not exist previously under Texas law.

This new provision is designed to encourage parties to more efficiently collaborate on the inevitable change order process throughout projects. This encourages owners to act more swiftly and provides more leverage to contractors and subcontractors during a project with significant design or other issues causing change orders and proposed change orders.

Texas courts have not yet interpreted this new provision but questions already abound about this latest experiment in the democracy lab. The phrase “anticipated value” is subject to interpretation by each party to the project. There is also no guidance on which party is the final decision maker on the “aggregate actual or anticipated value.” As always, the initial decision maker will play a critical role regarding these issues for projects governed by the AIA documents.

The amendments took effect on September 1, 2023 and apply to contracts entered into on, or after that date. [Back to TOC]

Practical Tips for Negotiating an Effective Contractual Limitation of Liability

By Jason Ebe¹ 

In this author’s experience, the most effective contract terms are those that mirror the parties’ business expectations and negotiations and allocate risk in a fair and balanced manner. Some advocates treat contract negotiations as they do litigation, always seeking to gain an advantage over their opponent. However, lopsided risk allocation can increase the risk of litigation, as parties may act or fail to act on their belief, sometimes erroneous, that they are shielded from liability for their conduct. When one party to a transaction belatedly recognizes that it was unreasonably disadvantaged to the unjust benefit of another, the disadvantaged party may be more motivated to bring a claim to attempt to balance the playing field, including, in some cases, asserting additional causes of action for breach of good faith and fair dealing, fraud, and other claims in an attempt to do an end around the contractual provisions. Negotiating a fair and balanced contract in the first instance promotes good behavior by all parties to the contract and enhances the likelihood of project success with minimal or no disputes.

The foregoing applies particularly with respect to contractual limitations of liability. These clauses modify the common law application of liability exposure, in effect providing that even if one party harmed another, the relief to which the party harmed is limited by some artificial cap. In many states, such contractual limitations of liability are enforceable on the grounds of freedom of contract. Some states limit enforcement of a contractual limitation of liability as to the wrongdoer’s sole negligence or intentional wrongful conduct, but contractual limitations of liability for ordinary negligence are generally enforceable.

Note, however, this article is not aimed at negotiating an “enforceable” limitation, but rather an “effective” limitation, which promotes dispute avoidance and mitigation. In this author’s experience, most project participants would prefer to avoid a dispute than position for the paper advantage in litigation.

Common industry templates include enforceable and effective limitations of liability. For example, the American Institute of Architects A201 General Conditions have included a mutual waiver of consequential damages dating back to 1997. The ConsensusDocs 200 includes a similar mutual waiver, though notably the ConsensusDocs waiver carves out losses covered by required insurance. In other words, consequential damages covered by insurance are not waived by contract. Both templates include provisions for liquidated damages, which are themselves limitations of liability as to unexcused contractor delay. And both templates include indemnity clauses to address claims brought by third parties. Other AIA and ConsensusDocs templates for design professionals, subconsultants, design-builders, construction managers and subcontractors included similar provisions. But none include outright total caps on liability, evidencing that such caps have not yet become the industry norm.

Despite this, limitations of liability are common in design agreements and to a slightly lesser extent construction contracts. The concept of the cap itself is not offensive to the notion of balanced risk allocation, after all it is fair for parties to take on contracts and price their fees based on anticipated risk, which should not be unlimited. However, some parties attempt to oversimplify the limitation, for example simply by stating that the design professional’s or contractor’s total liability shall be capped at some dollar value, or fraction or multiple of the total contract price or the fee. For example, does the cap apply equally to first-party and third-party claims? If both, the innocent party could be left with significant residual liability from a third-party claim for which the innocent party would otherwise be entitled to indemnity. What about insurance? What if there is more available insurance than the cap? Requiring high insurance limits may be thwarted by a low liability cap. And how does the cap impact the injured party’s ability to also seek relief against lower tiered subconsultants or subcontractors who may be secondarily if not primarily responsible for the loss? All of the foregoing considerations can be addressed with thoughtful drafting.

In the author’s view, a fair and balanced contractual limitation of liability could include the following:

• For indemnity for third-party claims, no limitation;
• For first-party claims for which there is available insurance, and/or the claims may be flowed down to subconsultants or subcontractors, the limits of available insurance and recovery against such subconsultants or subcontractors; and
• For first-party claims for which recovery from available insurance and against responsible subconsultants and subcontractors has been exhausted, the prime contractor’s (or prime design professional’s) fee.

The foregoing provides for a balancing and allocation of risk that does not leave any party unfairly burdened by risk that it cannot reasonably control. Of course, every project, team and circumstances are unique, and consideration must be given to each. As a general tip, however, consider asking whether the proposed clause still seems fair if you switched sides of the negotiating table mid-negotiation. If the answer is ‘no way would I sign this’, the clause is likely unbalanced, and any short terms satisfaction of papering the contract to your advantage may be quickly erased come the dispute resulting from the inequity of risk. In the event the parties’ mutual aspiration is successful project delivery with minimal or no claims, a fair and balanced limitation of liability is the way to go. [Back to TOC]

Footnote

1. The views expressed are those of the author, and not necessarily the firm or his colleagues. [BACK]

What’s the Key to Arizona Mechanics and Materialmen’s Liens? Timing!

By: Creighton P. Dixon 

In the last edition of Under Construction, we offered a basic introduction to Arizona’s mechanics and materialmen’s liens. This time, we discuss the issues related to timing of such liens. We will review the time requirements related to recording a lien and then separately foreclosing on a lien. This information is important not only for project owners and contractors, but also for lawyers representing such entities who may be able to use the timing as leverage in negotiation, litigation, or arbitration.

Typically, a lien must be recorded within 120 days of “completion.” See Ariz. Rev. Stat. § 33-993. Completion is defined by statute to mean the earliest of “1. Thirty days after final inspection and written final acceptance by the governmental body which issued the building permit for the building, structure or improvement” or “2. Cessation of labor for a period of sixty consecutive days, except when such cessation of labor is due to a strike, shortage of materials or act of God.” Generally, the most common way to determine “completion” is to review the certificate of occupancy issued by the local authority. This means the deadline is 150 days after issuance of such a certificate (30 days + 120 days). However, when there is a payment dispute, it is possible that there was a work stoppage that may trigger the other definition and provide an earlier deadline. It is important to evaluate the deadline to record a lien based on the project’s specific history.

Earlier, we said 120 days is the typical deadline because project owners have another statutory tool to flush out claims. Specifically, owners (or their agents) can record a “notice of completion.” See Ariz. Rev. Stat. § 33-993(E). Doing so limits the time to record from 120 days to 60 days after “completion” of the project. This can be useful for owners who have financed their project and need to assure their lenders that there will be no liens on the project.

Once a lien is recorded, the contractor has six months after recording its lien to file a lawsuit to enforce the lien. See Ariz. Rev. Stat. § 33-998(A). Note that the contractor must also record a notice of pendency of action within five days of filing the action. See Ariz. Rev. Stat. § 12-1191(A). Both of these deadlines are important for contractors because missing one of these deadlines means losing rights to enforce the lien and makes it less likely it will be paid for its work. It is also important for owners because it provides assurance after the deadlines that contractors cannot foreclose on their liens.

As noted in the last article, mechanics and materialmen’s liens are a powerful tool to ensure payment. However, there are many procedural requirements associated with the liens that should be analyzed on a project-by-project basis. The above is meant to introduce the timing issues for contractors and owners working on projects so they keep them in mind when payment dispute inevitably arise. [Back to TOC]