Construction Defect Litigation

A discussion of the Arizona statute that went into effect August 2002

David C. Tierney

This article addresses whether the recent pressure toward ADR per the new Rule 16(g)(2) (Exhibit A) might play into the just-passed new statute on residential construction defect litigation providing for a "cooling off" and "negotiation period."

Here is a brief summary of the new construction defect litigation statute (Exhibit B). The Statute is effective as of August 23, 2002.

What is controlled and restricted?

A.R.S. § 12-1361(4)(the definitions section) shows the new statute seeks to control any action [1] (court or arbitration) brought by a purchaser of a "dwelling" (as defined) against the seller related to "the design, construction, condition, or sale [2] of the dwelling." This is called a "dwelling action."

A "dwelling" is any (i) single or (ii) multi-family unit designed for residential use, including any common area improvements owned by an association or members of an association. "Association" is defined as an entity or unincorporated group created under A.R.S. § 33-1243 ("condominium unit owners association") or by a declaration (does not need to be a recorded declaration, apparently), which group can assess dues to carry out the "operations of a planned community."

For this statute to apply, the seller who is being sued has to be a person or entity "engaged in the business of designing, constructing, or selling dwellings."

A purchaser’s "dwelling action" or suit against a seller for misdeeds related to design, construction, condition of the dwelling, or sale of the dwelling can occur only after the purchaser has followed the Statute’s requirements. If the purchaser-litigant fails to leap over the hurdles correctly, he may be stayed [3] under A.R.S. § 12-1362 for up to 90 days so that compliance can be performed.

What are "the hurdles" to be jumped by a purchaser-litigant?

(i ) Under A.R.S. § 12-1632(A), 90 days before filing any suit or arbitration, the purchaser who wants to litigate must give the seller (by certified mail, return receipt requested) a written notice specifying in "reasonable detail" the bases for his dwelling action, which he wants to initiate. If it is a "multi-unit dwelling action" (5 or more owners joining in per A.R.S. § 12-1361(5)), the description may list defects in "sample units."

(ii) The purchaser has to make the unit(s) available in not less than 10 days after the original notice to a seller who sends the purchaser a demand to inspect such. That inspection can only be done after "reasonable" notice, at a "reasonable" time of day, and in a "reasonable" fashion TO DETERMINE: IF DEFECTS EXIST; THEIR CAUSE, i.e., WHO IS RESPONSIBLE; and, WHAT REPAIRS, ETC. CAN BE DONE "TO REMEDY" the situation.

(iii) By 60 days from the purchaser’s notice of defects, the seller has to have sent the to the purchaser (by certified mail, return receipt requested) a "good faith written response" offering repairs or replacement or compensation therefore. The written offer/response has to describe "in reasonable detail" what is to be done AND a "reasonable" estimate of when it will be done. If the seller fails to do this response by 60 days, the purchaser can stop waiting and just file his proceedings. A.R.S. § 12-1632(E).

(iv) If the seller presents a timely offer/response, then the purchaser has to make a good faith written response (sent certified mail, return receipt requested) within 20 days after receipt of the seller’s response. If the purchaser rejects the seller’s response, the purchaser has to explain why and may make a counteroffer.

(v) If there is a rejection or a counteroffer, the seller has to make a "best and final offer" in writing to the purchaser (sent certified mail, return receipt requested).

(vi) In summary, this is an elaborate and choreographed bidding "dance" [4]:

Day 1: purchaser’s notice of defects

Day X: (up to day 60) seller’s offer/response, done with or without inspection.

Day Y: (x plus up to 20 days) reply by purchaser, which can be a rejection or a counteroffer.

Day Z: (Y plus up to 10 days) seller’s acceptance or "best and final offer" to purchaser.

Day 90: purchase can now commence arbitration or the Complaint filed in court.

Miscellaneous Notes

None of the elaborate dance steps, i.e., certified mail notices, offers, rejections, etc., can be later used in litigation or arbitration, unless there is a failure to take part in the dance by someone.

However, the failure of a seller or purchaser to make a response at any stage can be used in the arbitration or court proceedings, so no smart party is going to fail to "perform" all the requirements and do so timely.

When the "dance" commences, that occurrence tolls any applicable statute of limitations period, but not for more than 90 days.

Under A.R.S. § 12-1363(I) and (K), during the "dance," a purchaser can amend his list of defects by adding those discovered "in good faith" after his original notice. If he is in court or arbitration, he can add items he did not get on his original notice of defects if they were "in good faith" discovered after his original notice. I foresee a wealth of litigation when well-meaning homeowners try to do a layman’s original notice and do some sort of a vague or half-baked original notice. The seller will then argue that they are "frozen" in the parameters stated in their original notice when the purchaser’s new lawyer and new expert later try to make the court case into a good one.

The statute says that in any contested dwelling action, "the court" can award the successful party: expert witness fees, attorneys’ fees, and costs. Query: will arbitrators soon see demandants and respondents making this request for attorneys’ fees in arbitration proceedings? Does this Statute (although it expressly mentions a court’s award) really mean an arbitrator can ignore the Cannon case and award fees under this Statute? Did the writers of this Statute mean to restrict fee awards to only court situations?

Incredibly, the entire described "dance" per the statute simply does not apply to a dwelling action at all if the sale contract (or the Association’s "Community Documents," i.e., Bylaws, Rules, CCRs, declaration, Articles of Incorporation) PROVIDE FOR "commercially reasonable" ADR procedures." See A.R.S. § 12-1366 on exclusions.

This is crazy! What developer would fail to write CCRs for the Association that did not co-opt this? It is very likely that the developer’s pre-emptive strike in crafting the Association’s documents will benefit the contractor, broker, and protect such other people.

Exclusion (4) in A.R.S. § 12-1366 says that all consequential damages (damages to rugs, personal property, and appliances) resulting from consequential defects are outside the effect of this Statute. You could sue for your consequential damages to contents while being delayed from suing on the defects.

Anyone looking at this set of hurdles and contemplating the "dance" should look ahead to A.R.S. § 12-2602, Exhibit C hereto, so that when on the 90th day, a "dwelling action" is ready to be filed, the purchaser-litigant complies with that Statute which requires notice at the time of filing a complaint if the complainant thinks expert testimony is necessary in a case against a licensed professional, architect, contractor, broker, etc.

Conclusion

This well-meaning Statute is designed to cut down on litigation, but as shown in my paragraph C(d) above, it may well turn into a trap for homeowners who think they can just "dabble" in this dance without using a claim expert or lawyer. Rule 16(g)(2) still applies and someone having gone through this dance is not likely to escape the requirements of Rule 16(g)(2). There will still be ADR in these "dwelling case" situations. ■

1The word "action" is not expressly defined in the Statute, but the absence of the term "court action" tells me that the new law seeks to control arbitration as well as court proceedings.

2 This is a very broad definition that will result in cases against brokers for selling units with latent or other defects to have to go through these hurdles described in this article.

3 Unless there is a life-safety threat to occupants or visitors, such that no stay should delay actions.

4 The parties, by agreement, can alter the timeline. A.R.S. § 12-1363(N).