1. Single, Uniform, Indemnity Provision.
• Although various sections sprinkled throughout a contract are often
be labeled as addressing such topics as “claims”, “waiver”, or “damages”,
they actually pertain to one umbrella topic: apportionment of liability among the parties. These sections shift risk among the architect,
developer/owner, prime contractor, subcontractors, etc.
• These sections should be combined into one coherent section that
presents a clear liability policy for the given project. Subsections should
more specifically address issues such as indemnity, quality warrantees,
insurance, and the claims limitation period.
• Definition: In an indemnity agreement, one party promises that it will
not hold the other responsible for certain wrongful acts, and that it will
compensate that other party for financial losses caused by defending a
lawsuit initiated by a third party.
• Common Issue: All to often, an agreement contains numerous,
overlapping statements requiring the architect to refrain from suing the
developer, to pay for the developer’s or contractor’s costs should a third
party sue, and to name the developer or the contractor as an additional
insured. These sections should be consolidated for the sake of clarity.
3. Breadth of Indemnity.
• Indemnity agreements can be categorized as broad, intermediate,
limited, or a hybrid approach.
• Broad indemnification agreements are void in Arizona as a matter
of public policy because they purport to protect a party from losses
resulting from its own, sole negligence. For example, a provision would
be null and unconscionable if it asserts that a subcontractor must
indemnify the general from claims arising from the general contractor’s
sole negligence. Similarly, a provision would be overbroad if it purports
that one party (say, the architect) must indemnify another (say, the
owner) “from all claims, arising in any manner, by any person or entity.”
It is a violation of public policy for one party to preemptively transfer the
risks of its own negligence to a fault-free party.
• Intermediate and limited indemnity agreements are enforceable in
Arizona. Intermediate indemnity provides that one party (X) will indemnify
another (Y) if X was at fault, or if X and Y were both partly at fault. In a
limited indemnity agreement, any negligence by Y would bar
indemnification from X, regardless of whether X may have caused or
partially caused Y’s liability.
4. Cross Indemnity: Sometimes, a contract has indemnification running
from the architect to its developer/owner client or to the client’s
contractor, but fails to include any mutual indemnity. Therefore, that
language should be amended to show that the parties will cross
indemnify each other. In the event that both parties are partially
responsible for the damage, indemnification should be limited to each
party’s proportional share.
5. Type of Claim: In Arizona, an indemnity provision applies only to tort
claims, such as personal injury or property damage lawsuits by workers
on the jobsite, unless that provision expressly provides, in clear and
unequivocal terms, that it includes indemnification for breaches of
contract, such as construction defect or design defect lawsuits by
homeowners.
6. Implied Warranty.
• Arizona law implies a warranty into a contract when a builder sells
to a home purchaser. This implied warranty provides home buyers with a
claim that the builder failed to perform construction services in a
workmanlike fashion. This warranty exists automatically, by operation of
law.
• However, Arizona law does not provide builders with a claim for
implied warranty against their architects or subcontractors. Since builders
are sufficiently protected by pursuing other actions and through their
bargaining power as the client, there is no such thing in Arizona as an
implied warranty on the part of an architect to a developer or from a
subcontractor to a general.
• As a result, builders often insist that architects and subs sign
express warranties and indemnification agreements favoring the builder.
7. Express Warranty: Design professionals should insist that this
warranty acknowledges that the standard of care is not perfection, and
that a small number of errors is a realistic expectation. Any breach by
architects of the stated standard of care would then amount to a breach
of the express warranty. This would provide the builder with additional
protection should a construction-defect suit come about. If homeowners
sue the builder for breach of the implied warranty in the sales contract,
the builder could then seek indemnification through breach of the
express warranty in the architectural contract.
8. Limitations Period for Bringing Claims.
• Default: In Arizona, the default limitations period for suing on a
construction contract is eight years. After this time period has elapsed,
the homebuyer cannot bring forth a defect claim against the builder, and
the builder and architect can no longer bring claims against one another
for breach or for indemnity.
• Exception: However, Arizona allows parties the freedom to shorten
this limitation period by contract.
• Example: Some architectural agreements attempt to shorten the
architect’s limitations period to only three years. However, homeowners,
workers, and other third parties are not bound by a contract and
therefore they would be bound only by the statutory period of eight
years. Therefore, homeowners who initiate a lawsuit after three years
would sue the builder, yet the builder would not be able to receive
indemnity from its architect, even if the defect was caused by the
architect’s negligence or breach.
9. Alternative Dispute Resolution
• Litigation is the Default: If a contract does not call for alternative
dispute resolution, by default it assumes that disputes will be formally
litigated in full-fledged court proceedings.
• ADR: Alternative-dispute-resolution methods, such as arbitration
and mediation, can sometimes be more cost-effective and less time-
consuming than litigation. However, ADR methods have become
increasingly more formal and elaborate.
• Step Negotiation: As a result, ADR has become a more costly
endeavor, and many builders are therefore turning to step negotiation as
a more economical and expeditious alternative. Step negotiation is a
process whereby the parties are required to take informal steps toward
resolving their dispute prior to assertion of a claim. Many disputes result
from a lack of communication. If the project representatives in the field,
who are often most familiar with the issue, are required to meet and
discuss it, resolution frequently results. Should the project
representatives fail to reach a consensus, negotiation among senior
executives is the next step. Senior executives are removed from
personality conflicts and emotions that might be hindering their project
representatives. Should a neutral third-party be needed to adjudicate the
dispute, step negotiation calls for mediation prior to arbitration. Even if a
complete resolution of all issues is not achieved, most mediations will
narrow the issues for subsequent arbitration or litigation. As a result, the
cost and effort of step negotiation and mediation is often justified.
• Example: A contractor might claim that the architectural drawings
contain mistakes and omissions, or that the architect wrongfully
approved a subcontractor’s substitute material. The architect might claim
that the developer failed to make timely or sufficient payments. Before
any ground is broken, the written agreement should map out a procedure
for resolving minor-but-inevitable issues, whether via formal and or
informal courses of action. Builders should ensure their contracts
contain a claims-handling process with which they are most comfortable.
10. Choice Of Law
• A choice-of-law provision names the state which will be the
controlling jurisdiction in the event of litigation. Oftentimes, developers
that are headquartered out of state try to include a choice-of-law
provision that designates their state, rather than Arizona, as the forum.
However, Arizona architects should insist that any disputes would be
governed only by Arizona law.
• It would be unusual for a project to be governed by, say, California
law when the construction physically takes place in Arizona, the design work takes place in Arizona, Arizona building codes govern the job site,
Arizona’s Board of Technical Registration licenses the design
professionals, the contractor and subcontractors are Arizona-based
companies, and the buyers are Arizona residents. Were this project to
become the subject of a lawsuit, the parties would probably include more
than one plaintiff and one defendant. Construction litigation often
involves numerous counter-claims and cross-claims among different
actors along the chain. It would be illogical to require the design
professional and the other parties involved, to travel to California and
appear in that state’s courts. The mere fact that the client/owner is a
California company does not override the fact that this is an Arizona
project, and therefore the choice-of-law provision must name Arizona as
the governing jurisdiction.
LIABILITY
1. Arbitration Immunity
• General Rule: When acting as an arbitrator between the owner
and the contractor, an architect performs a quasi judicial function and is
immune from liability arising from her actions as an arbitrator.
• Example A: On account of defective construction work, the
architect refuses to issue the contractor a certificate for final payment,
and the contractor is not paid the balance owed on the project. The
architect wears her “arbitrator hat” when deciding whether to issue a final
certificate of payment. In this role, she is impartial to both sides and acts
in good faith toward both sides, despite the fact that the owner is her
client, and is not wearing her “hat” as the owner’s agent.
• Limits of Rule: Note, however, that the architect is not entitled to
this immunity when performing her other functions, such as a designer,
and she may be liable for the manner in which she performs those other
functions. As a designer, the architect is, indeed, the agent of the owner.
• Example B: A contractor points out errors in the architect’s plans.
The architect, in turn, becomes offended and thereafter deliberately
undermines the relationship between the contractor and owner, issued
contradictory instructions, delayed inspections, and withholds funds. The
judicial immunity does not apply here, since the architect in this case was
not acting as an arbitrartor in resolving a dispute between the owner and
contractor
2. No Privity Required for Negligence Claims:
• General Rule: A design professional is liable to third parties who
are foreseeable victims for foreseeable injuries which proximately result
from the negligent performance of professional design services, including
negligent misrepresentation. This rule applies regardless of whether any
contractual relationship exists between the plaintiff and the architect or
engineer.
• Example A: An owner used the architect’s plans and specs to
solicit bids. A contractor submitted a succesfuul bid based on those plans
and specs, which turned out to be faulty. The contractor was able to
recover from the architect in tort (although not in contract) because a
contractor is a foreseeable victim of defective designs. The negligence
standard applies to the architect’s duties to the contractor.
• Example B: The owner hired an engineer to design a bridge. The
engineer negligently failed to design adequate dikes and culverts with
the bridge. As a result, a nearby landowner suffered property damage
when a flood occurred. The landowner is able to recover directly against
the engineer, despite a lack of contractual privity.
• Breadth of Rule: A design professional is not a public utility.
Design professional are hired to exercise their discretion, rather than to
merely follow the owner’s orders.
• Example C: In the bridge case, above, the owner (Maricopa
County) had actually instructed the engineer to design a bridge that
could withstand a 25-year flood. The engineer did, in fact, successfully
design a bridge that would have withstood a 25-year flood. What actually
occurred was a 100-year flood, and therefore the bridge could not
withstand the flood and the plaintiff's’s property was damaged. The court
still ruled that the engineer’s contractual duties to the owner are distinct
from the engineer’s tort duties to third parties who are foreseeable
victims of design negligence.
3. Liability to Subsequent Purchasers:
• Limitations Period: The statute-of-limitations period is two years for
a subsequent purchaser to bring suit against an architect for negligent
design. The statute begins to run when this subsequent purchaser
sustains some injury from the alleged negligence, and therefore is on
notice that he should bring suit. The time period does not begin to run at
the time of purchasing the property or the time of inspecting the property,
since, in the case of latent defect, there is not necessarily a cause of
action at the time of purchase or initial inspection.
• Negligent Misrepresentation: A developer hired a soils engineer to
design installation of a fill. The engineer advised that she, or another
soils engineer, supervise the actual installation of the fill. However, the
developer did not follow this recommendation and filled the lot without
such supervision. Later, a potential purchaser asked the soils engineer
whether the lot was suitable for residential construction. The soils
engineer replied, “Yes, you can build a house on it if you take certain
steps, but I express no opinion about possible settlement.” The
purchaser bought the property and built a house that was damaged due
to settlement, then sued the engineer for negligent misrepresentation.
The engineer was liable because she should have phrased her answer
as, “Because we cannot tell whether there will be settlement, we cannot
say that you can safely build a house on this lot.”
4. Job Site Injuries to Employees of the Contractor:
• Rule: A design professional must use the ordinary standard of
care while inspecting for quality of workmanship.
• Example: An engineer was hired to determine whether enough
rebar was being used on a job site, and to inspect whether it was spaced
and tied properly. Since there were thousands of ties, the engineer was
not expected to individually check each one of them, but rather to
generally inspect for quality of workmanship. An employee of the
contractor was injured when an improperly tied piece of rebar fell on him.
The engineer was not liable to the injured worker because the engineer
did, in fact, use the ordinary standard of care, which did not involve
checking each tie.
5. License Classifications:
• Engineering, General Commercial, Specialty Commercial, General
Residential, Specialty Residential.
• The Registrar tolerates work which falls outside the limited
description if this work is “incidental and supplemental” to the
performance of the work within the particular classification. For example,
a landscaping contractor (C-21) may lay some sidewalk, even without
also being a cement contractor (C-09), on a road job that primarily
consists of landscaping a walkway.
• Although a general (A) license permits most phases of
construction work involving building structures to be bid and performed
by the general contractor, there are limitations. Work in certain trades
may be bid, but may not be performed, by the general contractor:
Electrical, plumbing, heating & air conditioning, mechanical, boilers, pool
& spa, and certain types of roofing must be subcontracted out if the
general does not hold a license in that particular specialty field.
6. Qualifying Party
• An application for licensure of a company must include an
individual who is the company’s “qualifying party”. This person must pass
an exam and have about four years of relevant experience.
• The qualifying party (John Smith) must be regularly employed by
the licensed entity (XYZ Builders, LLC).
• The qualified party may simultaneously serve for another entity, so
long as there is at least 25% common ownership.
• If the qualifying party dies or quits, the company must replace her
within 60 days or risk suspension of its license.
CLAIMS FOR PAYMENT
1. Arizona’s Prompt Payment Act
• Enacted by legislators who were concerned that generals were
failing to make timely progress payments to their subs and material
suppliers – even after they had received progress payments from the
property owners.
• Contracts that do not set forth a particular billing cycle for progress
payments automatically fall under Arizona’s default monthly cycle for
invoicing. Generals must pay their subs and suppliers within seven days
of receiving payment from the owner.
• The statute imposes an 18% annual interest rate upon contractors
who violate the statute’s payment deadlines.
• The Act also establishes a process for victims of slow payments to
file a claim with the Registrar.
• The Act also includes attorney fee provisions for prevailing parties
in litigation and arbitration.
• Parties are free to contract around the default rules by providing a
different arrangement.
2. Proper Withholding of Funds: An owner may withhold payment
from a general, and a general may withhold payment from its subs and
suppliers, for any of the following bases: unsatisfactory job progress,
unremedied defective work or materials, failure to comply with other
significant provisions of the contract, filing of a claim by a third party,
failure of a party to make payments to its own creditors, damage to the
owner or to another subcontractor.
3. Remedies: Arizona law allows for a number of speedier and less
costly alternatives to breach-of-contract lawsuit (litigation or arbitration)
against a party that is breaching its payment obligations:
• Filing of a complaint with the Registrar of Contractors for violation
of the Prompt Payment Act.
• Payment bond claim – public construction project: Claimant seeks
payment from a national surety on a bond that had been posted by the
general at the outset of the project
• License bond claim – private construction project: Claimant seeks
payment from the Registrar on a bond that had been posted by the
licensee when applying for a contractor’s license.
• Mechanic’s and Materialperson’s Lien– private construction
project: An unpaid creditor may record a lien against the property, even
when the creditor has no direct contractual relationship with the owner of
the property. A lien creates a cloud on the title, making it difficult for the
owner to sell, and thereby encouraging the owner to pay the creditor. If
the owner continues to refuse payment, foreclosure litigation is an
unpleasant next step. Not only is a foreclosure action complicated and
expensive, the winning claimant receives ownership of property that
might be subject to a large mortgage or otherwise be difficult to maintain.
• Stop Notice – private, commercial construction project: A demand
by a sub or a material supplier, asking that the owner or lender stop
paying a general who is failing to pay the sub or supplier.
• Equitable lien against construction lender: A contractor or supplier
may lien against undisbursed loan funds still in the hands of the lender,
but only if the lender had somehow represented that they could look to it
as security for payment.
• Unjust Enrichment Claim: Used as a last resort, for example when
the owner has declared bankruptcy or when you failed to comply with the
technical notice requirements of the above-mentioned remedies. The
claimant must show that the owner received the benefit of the claimant’s
labor or materials, but failed to pay the full contract sum.
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