In April 2019, Arizona Governor Doug Ducey signed a bill which makes a number of substantial changes to the existing law related to residential construction. Portions of this particular bill were sought following an Arizona Court of Appeals Decision in 2017. See Amberwood Development, Inc. v. Swans Grading, Inc., 2017 WL 711269 (App. 2017). In the Amberwood matter, the Arizona Court of Appeals found a subcontractor could be responsible for indemnity broader than its scope of work and without any finding of fault if the contract did not expressly limit its risk in that fashion. The above-referenced bill signed by Governor Ducey creates a new statute, A.R.S. § 32-1159.01. This particular statute will no longer allow the result reached in Amberwood.
The first important portion of the statute voids broad indemnification agreements as against public policy. Specifically, the statute expressly prohibits any provision which “purports to insure, to indemnify, or hold harmless the promisee from or against liability for loss or damage resulting from the negligence of the promisee or the promisee’s indemnitees, employees, subcontractors, consultants or agents other than the promisor.” Based on this section of the statute, a subcontractor’s indemnity is now limited only to the extent of its own negligent workmanship. See A.R.S. § 32-1159.01(A).
Although broad indemnification agreements are now void as against public policy as described in the preceding paragraph, the statute still notes the duty to defend can still apply to claims arising out of or relating to a contracting party’s work. Thus, the duty to defend would still presumably attach to any claims arising out of the subcontractor’s work.
The bill also revised certain components of Arizona’s Purchaser Dwelling Act. Specifically, the legislature reinstated A.R.S. § 12-1364 which allows for the recovery of attorneys’ fees. Under this reinstated provision, the Court may now award reasonable attorneys’ fees to a prevailing party. A homeowner will be deemed to be the prevailing party “if the relief obtained by the purchaser for that contested issue, exclusive of any fees and taxable costs, is more favorable than the repairs or replacements and offers made by the seller” before the purchaser filed the dwelling action.” If the relief obtained is not more favorable, the seller will be considered the prevailing party.
In addition, the legislation will allow for subcontractor participation in a purchaser dwelling action. Specifically, the relevant statute will now require the general contractor to promptly forward any PDA Notice to the subcontractors that worked on the residence. After that, the subcontractor will be provided with the right to inspect, test, and repair the property.
The legislation also modifies the procedure of bringing a third-party claim. Under the new statutory scheme, the statutes of limitation of repose are now tolled from the date the general contractor receives a Purchaser Dwelling Act Notice until nine months after a civil suit or arbitration demand is served upon it. See A.R.S. § 12-1363(G). Once suit is filed, subcontractors must be joined as third-party defendants if feasible and subject to the Rules of Civil Procedure. Should the matter proceed to trial, a judge or jury (finder of fact) must determine: (1) if a construction defect exists; and (2) the amount of damages caused by the defect; and (3) each subcontractor whose conduct, whether by action or omission, may have caused, in whole or in part, any construction defect. See A.R.S. § 12-1362(D).
Subcontractors in Arizona have long sought proportional liability and other remedies related to risk transfer. The new legislation should provide for subcontractors to receive what they were seeking. In essence, contractors and designers higher in the contractual chain will potentially bear more financial responsibility for their role in construction defects, and will no longer be able to look to minimally involved subcontractors for significant contribution when it comes to indemnification.