Arbitrator Alert: Awarding of Attorney’s Fees in Implied Warranty Cases

The Arizona Supreme Court’s Sirrah decision is likely to bring a new volume of cases before arbitrators and change the dynamics of arbitrable construction defect cases.

In early August, our Supreme Court upended a long-established and vital feature of construction law, a feature involving lawsuits based on the implied warranty of workmanship and habitability. In so doing, the Court turned away from thirty-year-old precedents and has now allowed the second purchasers of homes (who sue only on an implied warranty theory for construction defects) to be awarded their reasonable attorneys’ fees.

This abrupt change in the law is likely to bring a new volume of cases before arbitrators (advocates, arbitrators and mediators need to take note of the change in the law) and a change in the dynamics of arbitrable construction defect cases.

First, here are the details on Justice Timmer’s eight-page decision in Sirrah Enterprises LLC v. Wunderlich.[1]

In Barmat v. John and Jane Doe Partners A-D[2], the Supreme Court had held that implied contracts based in the existence of a professional relationship are based in tort, not in contract; thus, no attorney’s fees are to be allowed under A.R.S. § 12-341.

In Sullivan v. Pulte Homes Corp.[3], the Court of Appeals (citing Barmat) held that a second purchaser suing on the implied warranty of workmanship and habitability was suing on a “contract implied in law,” not a contract implied in fact. Thus, the Sullivan court refused A.R.S. § 12-341 legal fees for all second purchasers.

However, in Sirrah, Justice Timmer has disapproved Sullivan’s very important holding and stated that the implied warranty inserts (or “imputes”) a covenant into an express and written (construction) contract, which covenant can then be enforced by subsequent purchasers. Justice Timmer then says that A.R.S. § 12-341 “therefore authorizes a fee award for the successful party because the claim ‘arises out of’ that express contract.”

While there is likely much joy in Mudville among second purchasers as a result of the Sirrah decision, the implications are large for owners (and thus for general contractors and their subcontractors).

For the plaintiffs’ attorneys who take on large construction defect cases, it has always been a tough challenge to convince second purchasers to join such cases. After all, a second purchaser can “win” approximately $25,000 or $30,000 for repairs, only to see that sum gobbled up by deducts for their share of the attorneys’ fees for the case awarded to the plaintiffs’ attorneys. Plaintiffs with original contract-based claims (first purchasers) would get fees awarded to them in addition to the cost of repairs, but second purchasers (under Sullivan) would not get their legal fees, and those fees would eat up most of the sum awarded for repairs. By the time plaintiffs’ counsel had subtracted legal fees from the sum awarded to second purchasers on the merits for defects, the second purchaser stood to receive very little (certainly far less than the first purchaser plaintiff). This is now radically changed.

This change in the law will make it easier for second-purchaser plaintiffs to see value in joining in construction defect lawsuits. The construction defect cases will be “bigger” (involving more plaintiffs). That likely means that fewer cases will resolve in mediation. That in turn impacts the number of those cases that will be coming to arbitrators.

Therefore, as an arbitrator, you need to know of this very significant Sirrah opinion, so that you can properly react to the claims and the evidence being put before you. Additionally, you need to know of what may well prove to be a new dynamic in the assembling and processing of large construction defect cases. Certainly, owners will be bulking up insurance coverage, general contractors will be spending more on attorneys, and subs can expect to get hit by general contractors for even larger sums than in past years – all thanks to this change in the law regarding legal fees for second purchasers under implied warranty claims.

The big question also looms in the background: Will the Sirrah reasoning alter other implied contract situations in which legal fees may now be demanded?

[1] CV16-0156 PR (8/9/17), a Division One case appealed from Yavapai County, with attorneys from Tempe, Prescott and Phoenix arguing this important case before all seven justices of our Supreme Court.

[2] 155 Ariz. 519, 747, P.2d 1218 (Ariz. 1987)

[3] 231 Ariz. 53, 62, 63, 290 P.3d 446-456 (Ariz. 2012)