Statutes of Limitations & Construction Litigation

Construction litigation between homeowners and developers/builders is alive and well in Arizona. However, both homeowners and the attorneys practicing construction law must be aware of the differing statutes of limitations that may affect the various causes of action that are common in construction defect lawsuits.

For the most part, the most common causes of actions in construction defect lawsuits are breach of contract, breach of the implied warranty of habitability and workmanship, express and/or implied warranty, express and/or implied indemnity, and negligence. Although each of these claims has different statutes of limitations that apply in non-construction litigation, the Arizona legislature has enacted Arizona Revised Statute (“A.R.S.”) § 12-552, which is commonly referred to as the Statute of Repose. The Statute of Repose applies in all construction litigation and supersedes all other statutes of limitation that may apply to individual claims.

Non-Construction Statutes of Limitation

For the sake of discussion, the typical statutes of limitation for these causes of action will be discussed briefly. The causes of action for breach of contract, breach of the implied warranty of habitability and workmanship, express and/or implied warranty, and express and/or implied indemnity all typically follow the six year statute of limitations set forth in A.R.S. 12-548. A.R.S. § 12-548 states that “[a]n action for debt where indebtedness is evidenced by or founded upon a contract in writing executed within the state shall be commenced and prosecuted within six years after the cause of action accrues, and not afterward.” Because the above-referenced causes of action all derive from or arise out of contract, most courts will impose the six year statute of limitations. However, this is not the case in construction defect litigation.

The Statute of Repose is silent as to its applicability to negligence claims. Therefore, in most cases, the two year statute of limitations for tort claims applies in construction litigation. A.R.S. § 12-542 states that any claims for personal injury or personal property damage shall be brought within two years from the date of accrual. It should be noted that the Arizona Supreme Court has held that A.R.S. § 12-542(2) is unconstitutional because it acts to abrogate claims for wrongful death. Anson v. American Motors Corp., 747 P.2d 581, 155 Ariz. 420 (App.1987).

The Statute of Repose

Arizona has enacted A.R.S. § 12-552 which supersedes all other contract-related statutes of limitation. A.R.S. § 12-552 states:

A. Notwithstanding any other statute, no action or arbitration based in contract may be instituted or maintained against a person who develops or develops and sells real property, or performs or furnishes the design, specifications, surveying, planning, supervision, testing, construction or observation of construction of an improvement to real property more than eight years after substantial completion of the improvement to real property.

B. Notwithstanding subsection A of this section, in the case of injury to real property or an improvement to real property, if the injury occurred during the eighth year after the substantial completion, or, in the case of a latent defect, was not discovered until the eighth year after substantial completion, an action to recover damages for injury to the real property may be brought within one year after the date on which the injury to real property or an improvement to real property occurred or a latent defect was discovered, but in no event may an action be brought more than nine years after the substantial completion of the improvement.

C. The limitations in subsections A and B of this section include any action based on implied warranty arising out of the contract or the construction, including implied warranties of habitability, fitness or workmanship.

D. Nothing in this section applies to actions for personal injury or death nor shall this section operate to shorten the period of warranty provided in an express written warranty.

E. For the purposes of subsections A, B and C of this section, an improvement to real property is considered substantially complete when any of the following first occurs:

1. It is first used by the owner or occupant of the improvement.

2. It is first available for use after having been completed according to the contract or agreement covering the improvement, including agreed changes to the contract or agreement.

3. Final inspection, if required, by the governmental body which issued the building permit for the improvement.

F. In this section an action based in contract is an action based on a written real estate contract, sales agreement, construction agreement, conveyance or written agreement for construction or for the services set forth in subsection A of this section. This section shall not be construed to extend the period prescribed by the laws of this state for bringing any action. If a shorter period of limitation is prescribed for a specific action, the shorter period governs.

G. With respect to an improvement to real property that was substantially complete on or before September 15, 1989, the eight and nine-year periods established in subsections A and B of this section shall begin to run on September 15, 1989. Notwithstanding the provisions of subsection E of this section and § 12-505, subsection A, this subsection applies to claims that accrued before the effective date of this amendment to this section.

Pursuant to the plain language of A.R.S. § 12-552(A), the Statute of Repose extends the time for filing any contract-based claims to eight years after the date of substantial completion. It should be noted that A.R.S. § 12-552(B) does provide that if a latent defect is discovered in the eighth year then the plaintiff has one additional year from the date of discovery to file their complaint. Practically, this means that a plaintiff could file a contract-based construction claim up to nine years after the date of substantial completion.

If one reads the Statute of Repose carefully, there is a blatant dichotomy in the statute itself. Subsection (F) states that “This section shall not be construed to extend the period prescribed by the laws of this state for bringing any action. If a shorter period of limitation is prescribed for a specific action, the shorter period governs.” The literal application of Subsection (F) means that the six year statute of limitations for a breach of contract claim, as set forth in A.R.S. § 12-548, would apply to bar a breach of contract claim. However, the plain language in Subsection (A) states “Notwithstanding any other statute, no action or arbitration based in contract may be instituted or maintained against a person…” Again, the literal application of Subsection (A) would seem to supersede A.R.S. § 12-548. This dichotomy has not yet been directly addressed by any Arizona Court of Appeals or the Arizona Supreme Court.

The current case law on the Statute of Repose ignores Subsection (F) and applies the eight year statute of limitations to breach of contract and contract-based claims. Evans Withycombe, Inc. v. Western Innovations, Inc., 215 Ariz. 237, 159 P.3d 547 (App.2006). In Evans Withycombe, the Arizona Court of Appeals held that a general contractors’ third-party claims of breach of contract and contract-based indemnity were barred by the Statute of Repose because those claims were brought more than eight years after the date of substantial completion. The Court of Appeals did not decide the question of whether Subsection (F) would have required a six year statute of limitations for the breach of contract claim. Further, the Court of Appeals held that because the general contractors’ common law indemnity claim was not based in contract that the common law indemnity claims was not time-barred by the Statute of Repose.

Therefore, the practical application of the Statute of Repose is that all contract-based claims, i.e. breach of contract, breach of the implied warranty of habitability and workmanship, express and/or implied warranty, and express indemnity, are barred after eight years after the date of substantial completion. Until such time as the inconsistencies in the Statute of Repose are interpreted by the Arizona courts, the practicing attorney utilizes this approach.

Common Law Indemnity Claims

As discussed briefly above, the Statute of Repose does not operate to bar common law indemnity claims because these claims are not necessarily based on contract. The question remains as to what the applicable statute of limitations period is for common law indemnity claims. This question has not been definitively decided by Arizona courts.

Most practicing attorneys believe that a common law indemnity claim truly does arise out of the contract between the parties. Otherwise, what is the rule of law or underlying legal principle that imposes a duty on one party to indemnify another? In Arizona, in almost all cases where a duty to indemnify is imposed on a party, the common law duty of indemnity is based on an underlying legal principle. “The obligation to indemnify may grow out of an implied contractual relation or out of a liability imposed by law.” First Natl. Bank of Ariz. v. Otis Elevator Co., 2 Ariz.App. 596, 597, 411 P.2d 34, 35 (1966) (citing 42 C.J.S. Indemnity § 20 and 27 Am. Jur. Indemnity § 16). See also Henderson Realty v. Mesa Paving Co., Inc., 27 Ariz.App. 299, 554 P.2d 895 App.1976) (finding a viable claim for common-law indemnity based upon tort/negligence principles); Herstam v. Deloitte & Touche, LLP, 186 Ariz. 110, 919 P.2d 1381 (App.1996) (examining common-law indemnity theories based on joint tortfeasors, implied contract, and principal/agent theory); Busy Bee Buffet v. Ferrell, 82 Ariz. 192, 310 P.2d 817 (1957) (finding indemnity applicable based upon negligence theory); Schweber Elec. v. Natl. Semiconductor Corp., 174 Ariz. 406, 850 P.2d 119 (App.1992) (allowing common-law indemnity claim based upon implied contract); and INA Ins. Co. of N. Am. v. Valley Forge Ins. Co., 150 Ariz. 248, 722 P.2d 975 (App.1986) (discussing application of express as opposed to implied contractual indemnity).

The disturbing result of Evans Withycombe is that there does not seem to be a defined statute of limitations for common law indemnity claims. Arguably, based upon current case law, a common law indemnity claim could be brought twenty years after the cause of action accrued. However, as discussed above, most attorneys attempt to relate the common law indemnity claim to an underlying legal theory that does have a defined statute of limitations. By utilizing this analysis, one can make the argument that the underpinning cause of action would control the applicable limitations period for any common law indemnity claims arising from that cause of action. Regardless, this point of law is not well-settled in Arizona.

Negligence Claims

As mentioned previously, tort claims are time-barred after two years from the date of accrual in Arizona. A.R.S. § 12-542. The logical extension of this rule is that any claims that derive from a tort claim are also barred after two years from the date of accrual. This distinction is important because a common law indemnity claim that is tort-based should be barred after two years from the date of accrual.

However, in Arizona, almost all negligence claims in construction defect litigation are barred by the Economic Loss Rule. The Economic Loss Rule bars a party from recovering economic damages in tort unless the economic damages are accompanied by physical harm. Woodward v. Chirco Construction Co., Inc., 141 Ariz. 514, 687 P.2d 1269 (1984); Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 690 P.2d 158 (App. 1984); Collberg v. Rellinger, 160 Ariz. 42, 770 P.2d 3465 (App. 1988). (dismissing negligence claim because damage alleged pertained only to structure itself, not personal injuries or personal property). In general, damage to components of a structure itself is not “physical harm” within the meaning of the economic loss rule. Therefore, in Arizona, a plaintiff must specifically allege personal injury or personal property damage to recover under a negligence theory in a construction defect lawsuit.

Conclusion

Although the landscape of legal precedent is not well-settled on a number of issues in Arizona, the current state of the law applies the eight year statute of limitation to contract-based claims in construction litigation. As has been discussed, there are arguments to be made that the six year statute of limitations should apply. Finally, while negligence is almost always alleged, in almost all cases the Economic Loss Rule bars the plaintiff’s negligence claims in construction litigation regardless of the applicable statute of limitations.

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