There have been many court cases dealing with this subject.  So then, does it matter whether a breach of contract is a trivial breach or a material breach and if so what difference does it make?  The simple answer is that “Yes”, it does matter a lot whether a breach is a material (substantial) breach or a trivial (small) breach of a contract.    This is particularly true when it comes to real estate transaction because there can be so many dollars at stake.

Almost all real estate sale contracts have language which creates a cancellation option for the seller if the buyer is late in closing, even if the buyer is unavoidably delayed.  You know those provisions as “time of the essence” clauses.  Courts do not like time is of the essence clauses since they attempt to make any infraction grounds for cancellation of the contract.  Perhaps that is the reason the Arizona Association of Realtors altered their form purchase agreement by providing for a three day notice provision in the Arizona purchase contract requiring the non-defaulting party to give a three day written notice to the defaulting party to perform so as to avoid unnecessary lawsuits being filed.

There are many situations that can arise when this distinction between trivial and material breaches become important.  In one Arizona case a couple contracted for a new home.  When the house was completed but before closing the purchasers noticed a small scratch in the bathtub.  The contractor had it repaired but it was still slightly noticeable.  The buyers claimed entitlement to a new tub or in the alternative they were entitled to walk from the contract because of the breach by the contractor.  The court determined that to replace the tub required that the contractor knock out the bathroom wall to the outside to get the old tub out and a new tub in.  The cost would be exceptional given the effect of a minor scratch which was barely visible.
The court resolved that dispute by determining that the scratch did, in fact, create a breach of the contract.  However, the court found it was a trivial breach – not a material breach.  Therefore, the court found the owners were not entitled to a new tub or to walk from the contract but were required to close escrow and purchase the house but the owners retained the right to sue the contractor for damages.  The court noted that the measure of damages was to have the house appraised assuming it had a tub without a scratch and then perform a second appraisal valuing the house with the tub with the barely-visible scratch.  I suspect the owners quickly settled with the contractor.

From that case we see the difference in the effect of a small or trivial breach and a material breach.  With a trivial breach the injured party’s remedy is to sue for damages but is required to perform on the contract.  If the breach is a material breach the injured party would be free to not perform its contractual obligations and may also be entitled to damages as a result of the other party’s breach of the contract.
What about the situation where the seller contracts with a buyer to sell a home to the buyer and then refuses to close escrow?  Assume all the inspections were performed and the buyer is ready, willing and able to close.  Buyer gives seller a three day notice and seller still won’t close.  Perhaps seller has received a much higher offer from another party or simply has seller’s remorse.  No doubt a court would look at that as being a material breach.  However, in a given situation, how do we know if a breach is a substantial breach or not?

A material breach is defined as a violation of a contract that so substantially affects the contract that the injured party can cancel the transaction.  That definition is nice but it does not offer a bright line distinction between a small, trivial breach and a material breach.    For instance, what if a buyer learns, just before close of escrow, that contrary to what the seller represented, there are termites and they have done a thousand dollars’ worth of damage to the house buyer is purchasing.  Is that significant enough to permit buyer to walk from the transaction?  What if it is five thousand dollars’ worth of damage?  At some point it would be clear that it is a material breach of the agreement.  Many cases fall in the “gray” area where it is difficult to say whether it is trivial or material.

When the matter is unclear the court is going to look at a number of matters.  First and foremost, did the parties contract that the particular item was a very important matter?  For instance, some people have a chemical sensitivity handicap.  Those persons are apt to want a clause that there has been no use of certain types of chemicals at or in the home they are acquiring.  If the seller indicates to the negative and the buyer later learns that is untrue and the buyer is experiencing physical reactions to what would not bother any person without such a sensitivity, it could well be a material breach.  In such a case a buyer should put in a specific clause that it is extremely important to the buyer that no such chemicals were used at the residence and that is a matter of extreme importance to the buyer.  Then the court can look at that language and easily find that the breach was material.

Time is another factor.  As mentioned above court view ‘time of the essence’ clauses as mere boilerplate language unless the parties do really consider certain times for performance to be critical and so state in the agreement.  Then a court is apt to view a breach of such a provision as material.

So is there any test to apply?  Courts will look at certain factors to determine whether a breach is material or not.  Some of those factors are:  1)  the extent to which the injured party will be deprived of the benefit which he reasonably expected;  2)  the extent to which the injured party can be adequately compensated for in money for the part of that benefit of which he will be deprived;  3)  the extent to which the party failing to perform or to offer to perform will suffer forfeiture;  4)  the likelihood that the party failing to perform or offer to perform will cure his failure, taking into account all of the circumstances, including any reasonable assurances; and 5)  the extent to which the behavior of the party failing to perform or to offer to perform conforms with standards of good faith and fair dealing.  So, the bottom line is that courts tend to look to what really happened and decide whether certain actions should be penalized or not.  The mere recital that, say, ’time is of the essence’ in a contract, is not likely to transform trivial actions into a material breach.

So, as usual, the law does not provide us with an exact guideline to follow in all cases.  One has to view the situation and analyze all the circumstances and attempt to divine what a judge might say and do under the facts presented.  The one rule we can walk away with here is that if something is very important to you or to your client then spell it out and note in the contract that it is a material provision and but for that matter you or your client would not even have entered into the contract.  That would be a strong signal to a judge, in the event of breach by the other party, that the breach is a material breach.  Good luck!

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Franchisors as Co-Employers?!

The National Labor Relations Board (“NLRB”) announced last week that their General Counsel found merit in charges made by McDonalds’ employees regarding employee protests. The momentous impact of the announcement is that the finding was against both the McDonald’s franchisee and McDonald’s USA, LLC, franchisor, as co-employers.

McDonald’s intends to fight the decision, with the concurrence of the International Franchise Association, emphatically taking the position that franchises are small, independently run businesses and not run by the franchisor. Franchisees typically create their own legal entities, pay taxes, hire and fire their own employees, create their schedules, manage their payroll, pay their own bills and other such business activities. This is the first time the agency is “piercing the corporate veil” to find potential for liability in the franchisor for actions impacting employees.

The General Counsel apparently agreed with the employees’ position that, with the technological advances, the franchisor can monitor and control the franchisees’ operations to such an extent that it goes beyond protecting its brand to being jointly responsible for alleged labor law violations. This decision departs from the long-established legal standard that typically shields franchisors from liability for franchisee action.

One advantage to the franchise business model has been to insulate the franchisees as employers from labor and employment laws affecting employers with a minimum number of employees. For example, the Family and Medical Leave Act applies only to employers with at least 50 employees within a 75 mile radius. Many one-location franchisees do not reach the coverage threshold. Yet, if the franchisees are considered co-employers with the franchisor, the minimums may be reached.

The NLRB decision, if upheld, could have a widespread impact on franchises in a variety of industries beyond restaurants. Real estate franchises, including Re/Max, Century 21, ERA and Keller Williams may have to re-evaluate the manner and extent to which they monitor and control their franchisees.

The NLRB has been quite liberal in recent years, extending their own authority beyond the realm of labor unions. Decisions have involved employees’ rights to gather and discuss working conditions – with or without a union – including decisions on the use of social media and prohibiting employee discipline for certain anti-employer Facebook posts.

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Reverse mortgages are a fairly new financing tool for homeowners. In FHA terms, reverse mortgages are Home Equity Conversion Mortgages (HECM). Owners of single-family homes, 2-4 unit properties, post-1976 manufactured homes, condominiums, and townhouses are eligible for an HECM. Co-ops do not qualify. Basically, HECMs are designed to pay the borrower the remaining equity in his/her home and, if the loan is not repaid when the owner dies or abandons the property, the property is foreclosed to repay the lender.

In order to qualify, the homeowner must be at least 62 and have enough equity in the property. Until this year, these were the only underwriting requirements. Lenders now will conduct financial review of every reverse mortgage borrower to assure that he/she has the financial wherewithal to continue paying mandatory obligations, such as property taxes, insurance and HOA assessments, as required in the Loan Agreement. If a lender determines that a borrower may not be able to keep up with property taxes and insurance premiums, it will be authorized to reserve a portion of the loan proceeds to cover these charges in the future. Generally, none of the reserve funds will be allocated to cover unpaid HOA assessments. (This is in alignment with current practices that exclude HOA assessments from monthly impound payments with home loans.)

A borrower can choose to receive reverse mortgage proceeds all at once as a lump sum, in fixed monthly payments, as a line of credit, or a combination of these. The amount of funds a borrower can receive depends on his/her age (or the age of the youngest spouse when there is a couple), appraised house value, interest rates, and in the case of the government program, the FHA lending limit, which is currently $625,500. In general, the older one is and the more equity in the property, the more money will be loaned.

The proceeds from a reverse mortgage can be used for anything, including additional income for daily living expenses, home repair or modification, health care, debt reduction, etc.

Interest is not paid out of the loan proceeds, but instead compounds over the life of the loan until repayment occurs. A HECM will be in first position, meaning that it is superior to all other liens (including the Association’s lien for unpaid assessments) except governmental liens (e.g., for property taxes or federal taxes).

Many borrowers immediately draw all of the available loan funds after closing, and there will be no further payments from lender to borrower. Thus, unless a reserve fund is established, there may be no proceeds available for property expenses, especially if there are other liens. If the borrower has fully drawn the loan proceeds and does not pay taxes/insurance/ HOA fees, the loan is in default under the HECM security instruments and the lender many times will place insurance on the property and will pay property taxes to avoid a tax lien foreclosure. If there is a delinquent HOA assessment account, the loan servicer should be informed (in writing) and asked to pay the assessments due on the borrower’s account or, at the very least, to pay the full account from the escrow that will occur after the lender takes possession and then sells the property. Such requests are handled on a case-by-case basis. If a lender who is eligible to foreclose delays the foreclosure sale, this should be pointed out since the delay is prejudicing the Association.

If the lender does not voluntarily pay assessments before it finalizes its foreclosure sale (i.e., the trustee’s sale), a homeowners association typically has no legal basis to require the lender to cover the assessments or to hasten the foreclosure sale. The homeowner remains personally liable, however, and a judgment for assessments can be obtained and collected from the borrower’s assets. All too often, there are no assets and, in some cases, the borrower has left Arizona, leaving the association with no affordable recourse to pursue payment of a judgment.

It is always frustrating to a Board of Directors to have an uncollectible assessment account, and I have to take this opportunity to say that our excellent HOA collection team often succeeds where others have failed to get difficult accounts paid.

Note that some of the information for this article is from the National Reverse Mortgage Lenders Association [].

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How You Sign Makes a Difference

In Focus Properties v. Cleo Johnson Division One of the Court of Appeals considered the Appeal of Cleo Johnson, who, in her capacity as Trustee of Oak Acres Trust had hired Kantor of Focus Properties to lease/sell her commercial property in Apache Junction. Kantor had put in many hours to aid Johnson in rehabilitating the property and finding tenants/buyers. After Johnson failed to attend a meeting with a prospective buyer, Johnson entered into a lease without informing Kantor, prompting him to file suit for his commission. A jury found in favor of Kantor and awarded him his commission.

On Appeal, Johnson argued that Kantor had committed acts, which had the Real Estate Department known of the acts, would have lost his license, so he ought to be barred from recovering a commission. The Court of Appeals rejected the argument, ruling that it is up to the Real Estate Commissioner to decide whether or not to suspend or revoke a license, not up to the Superior Court.

However, the Court of Appeals did grant Johnson some relief, agreeing that since she had signed the commission agreement on behalf of the Trust and had not personally guaranteed the Trust’s performance, she could not be held personally liable for the commission.

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As the saying goes; I wish I had a dollar for every client I had over the past many years who came in with a contract seriously asking “How can I get out of this contract”.   If I did get a dollar each time, I might be driving a Lamborghini – they are very nice cars!.  It is a common occurrence for a buyer(s) to sign on for their dream home, time share or whatever he, she or they committed themselves, only to realize that they made a mistake and want “out”.  Perhaps the buyer now believes the house will cost too much, the house is too small or the buyer just got offered a great job in Missoula, Montana and has to leave town right away.  The reasons are endless.

What do you say when a buyer or buyers decides after agreeing to acquire the most expensive purchase in their life that they don’t want to go through with the transaction?  This assumes the seller has performed, contingencies have been met and all requirements of the contract have been met.  Everything is ready to “go” except the buyer.  In a transaction involving the Arizona Association of REALTORS’® contract form if the buyer does not perform the seller must give the buyer a three day written notice to perform or be in default.

The simple answer is that a mere change of one’s perspective or desire to go through with the contract (what is often referred to as buyer’s remorse) is insufficient to get out of a contract.  To not close or go through with the contract would be a breach of the contract leaving the buyer susceptible to losing the down payment, or liable for potentially substantial damages, or susceptible to a suit for specific performance whereby the seller obtains a court order that the buyer must perform on the contract.  Buyer’s remorse is simply not grounds to walk away from a contract.

So, are there defenses which a buyer could rely upon to not perform?  The simple answer is “Yes”.  But, the defenses are very few in number and usually not ones available in the case of true buyer’s remorse.  Those defenses are:

(1) Statute of Frauds – A contract for the sale of real estate must be in writing.   If the contract was not reduced to writing the buyer may be entitled to ignore the agreement to purchase.

(2) Contract is Illegal – Courts will not place themselves in a position to enforce a contract made for an unlawful purpose.  Consequently, if the contract is to pursue an unlawful purpose there are no legal ramifications if a buyer backs out of it.

(3) One of the Parties to the Contract is Incapable of Making the Contract -  Contracts made where one of the parties is incapable of doing so, such as by reason of insanity, will not be enforced by the courts.

(4) Mistake By All Parties – If all parties enter into a contract but the contract does not express what the parties agreed upon then any of the parties may avoid the contract.

(5) Unconscionability/Duress – If the contract was induced by force or may be so one-sided that a court could not in good conscience enforce it, then the victim of the duress or unconscionability could walk from the contract.  Naturally what would constitute unconscionability can be very difficult to define in advance of a judge making that determination after a trial on the issue.

(6) Fraud – If the execution of a contract is obtained through fraud, deceit, or misrepresentation, the contract may be cancelled.

(7) Breach by the Other Party – Where the other party breaches the contract first, the non-breaching party may cancel the contract.  This raises two separate issues which are too long to discuss in detail in this article.  However, what if the other party merely claims they will not perform as agreed upon.  This is called an anticipatory repudiation of the contract.  That requires a separate article to discuss.  The other is what if the other party breaches but it is just a minor breach – like the seller indicating the seller won’t leave the garage clicker on a $400,000.00 sale?  That example is probably not a material breach which would not permit the buyer to cancel.  But the buyer would have a claim for damages.  If it is discovered the seller knew the foundation had structural cracks but covered them up and did not disclose them as required then that could be a material breach.  With a material breach the buyer may walk from the contract.  That is the issue of a minor breach versus a substantial breach of contract.    As one can imagine it may be difficult in a given situation to know which type of breach it is.

As briefly mentioned above, if the buyer does decline to perform and none of the above defenses are available to the buyer, then the seller can sue the buyer for “specific performance” to obtain a court order requiring the buyer to proceed with the contract and pay the contracted for consideration.  This remedy is rarely utilized but, is available.

The seller may demand the earnest money be defaulted to the seller.  This remedy must be provided for in the contract.  If the seller takes the earnest money as damages upon a breach by the buyer, then the seller has agreed to accept the earnest money deposit as its sole remedy and may not also sue for damages.  In some situations the earnest money may be sufficient to cover the seller’s damages and in other situations it may be woefully inadequate.

The other remedy is for the seller to sue for damages which were incurred by reason of buyer’s refusal to perform.  Thus, the seller can sue to recover those losses incurred as a consequence of the buyer’s breach or failure to perform the contract as agreed.

A caveat to real estate agents is that they should be extremely cautious about ever advising a buyer not to perform their contract.  If an agent does so and the seller suffers damages, the seller may sue both the buyer and the buyer’s agent.

Yes, it may be painful in a given situation but once a contract has been finalized a buyer must go through with the contract or there will most likely be financial consequences.  After reading this you may feel that this is elementary advice, but, I again say, Lamborghinis are very nice cars!

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Hoarding – Not just a television show!

Landlords and homeowners associations have long been concerned with health and safety conditions.  So what can they do when a tenant or owner is discovered to be a hoarder?

Hoarding has been defined as including three main characteristics:”(1) the acquisition of, and failure to discard a large number of possessions that appear to be useless or of limited value; (2) living spaces sufficiently cluttered so as to preclude activities for which those spaces were designed; and (3) significant distress or impairment in functioning caused by the hoarding.” This definition distinguished hoarding from the collecting of objects generally considered interesting and valuable. Frost and Hartl (1996).  When the clutter includes excessive numbers of pets without keeping up with cleaning, pest infestations or inability to properly use kitchens or bathrooms, hoarding becomes a health issue.  When the clutter reaches the point that hallways and exits are blocked, hoarding becomes a safety issue.

In May 2013, the American Psychiatric Association declared hoarding a mental disability.  This strengthened the protection for hoarders under the federal Fair Housing Act.  Thus, landlords and homeowners associations must tread delicately when addressing hoarding rather than jumping directly to eviction or assessments.  While the hoarder has the legal obligation to request reasonable accommodation, as many hoarders are secretive about or do not recognize their compulsion, the landlord or homeowners association is encouraged to initiate the discussion of accommodation.  The primary accommodation is a written plan for clean-up with specified reasonable time lines, which the landlord or homeowners association monitors in writing for compliance.  The plan should include future monitoring after the initial clean-up, as hoarders are likely to return to the hoarding behaviors, and may also include the requirement for counseling.   Having the hoarder responsible for his or her own clean-up can result in significant savings for the landlord or association, who otherwise would need to engage HazMat (hazardous materials) teams to clean, as well as the landlord’s costs of eviction and securing a new tenant or the associations costs for assessment and collections.

Despite the recognition of hoarding as a mental disability, Houston City Council passed an ordinance in April 2014, making hoarding illegal in an apartment, townhouse or condominium.  The concept is the initial report that will allow the City to make a welfare check and fine the hoarder per day until clean-up.  Thus the ordinance transfers the responsibility for rectifying the resulting health and safety concerns to the government.  It will only be a matter of time until this law is challenged on the basis of criminalizing a disability.  If the challenge is successful the obligation to deal with the hoarding will remain with the landlords and homeowners associations.

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Recently, the Arizona Court of Appeals ruled that fiduciary duties are not automatically imputed in limited liability company (“LLC”) relationships, i.e. relationships between LLC members and between members and the company itself.  Instead, the Appellate Court determined that LLC members where free to determine and agree to what extent, if any, the members owe specific duties to one another and/or to the company.  TM2008 Investments, Inc. v. Procon Capital Corp., 323 P.3d 704 (20014).

In its ruling, the Appellate Court reiterated that LLCs are “statutorily-created entities, designed primarily to provide the personal liability protection found in a corporate structure, while allowing the LLC members the state and federal tax benefits generally provided in a partnership setting.”  Id. At 707.  LLCs are created and governed by the Arizona Limited Liability Company Act, A.R.S. §29-601, et. seq.  However, unlike other statutorily created entities, the LLC Act does not automatically create or provide any fiduciary duties which the LLC members owe to one another or to the LLC itself.

The issue the Appellate Court was asked to decide was whether or not, in the absence of specific statutory language, fiduciary duties could be imputed into the LLC relationship; rather, should the LLC members be treated like shareholders of a corporation and therefore no fiduciary duties are owed to one another and/or the company; or, should the members be treated like partners in a partnership and therefore fiduciary duties are owed to the other members and the company.  Id.

Ultimately, the Appellate Court found that the LLC Act allows LLC members to create an operating agreement and, in so doing, delineate in that agreement the duties, if any, the members owe to one another and/or to the company.  Id. At 108; A.R.S. §29-682(B) (“An operating agreement governs relations among the members and the managers…and may contain any provision that is not contrary to law and that relates to…duties or powers of its members…”).

What this ruling provides is greater flexibility and control for LLC members who are free to determine the relationship amongst the members and the company.  It also allows LLC members to consider the nature and purpose of the LLC and thereby decide what duties and obligations, if any, the members owe to one another and/or to the company.

In light of the Appellate Court’s ruling, the importance of having an operating agreement cannot be overstated.  All too often, LLCs are formed with multiple members, each having different ideas, experience and abilities, and yet no formal operating agreement is created amongst the members and company.  This ruling also highlights the significance of careful consideration and balancing between the purpose for which the company was formed, the nature of its business operations, as well as the objectives and interests of the company’s members.

The moral of the story:  when forming multiple member LLCs, always prepare and execute an operating agreement.

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The 2014 Arizona Legislative Session (51st Legislature, First Regular Session) adjourned  and left us with seven bills pertaining to planned communities and condominiums that were signed into law by the Governor. This year 17 bills were introduced that would affect HOA governance.  One of the bills included changes to seven statutes.  For a summary of the new Arizona HOA laws CLICK HERE.

This article reviews the changes in the law that pertain to an association’s powers to control rentals.  The new statute applies to rentals in planned communities and in condominiums and becomes effective on July 27, 2014.  You may remember that a law addressing rentals in Arizona community associations was passed last year with many of the same provisions that will be discussed in this article.   Last year’s rental property law was declared invalid and, therefore, went through the legislative process again with a few changes.

As a threshold, the statute states that an association cannot prohibit a dwelling unit owner  from renting his/her unit unless there is a provision in the Declaration of Covenants, Conditions and Restrictions restricting rentals.  In addition, a landlord/owner must abide by any time period restrictions in the Declaration that pertain to rentals.

The statute provides that a landlord/owner may designate in writing a third party (e.g., a residential property manager) to act as the owner’s agent with respect to all Association matters relating to the rental unit, except the owner’s right to vote and to serve on the Board of Directors.    The association is authorized to deal with the owner’s third party agent on all association matters.

There is a wide variety of requirements that different Arizona homeowners associations have imposed on landlord/owners prior to this new legislation.  Now, an association CAN require its receipt of ONLY the following information:

(a)    Tenant’s name.
(b)    Contact information for adult tenants.
(c)    Duration of lease.
(d)    Vehicle(s) description.
(e)    License plate(s).

An association CANNOT require the landlord to produce any of the following:

(a)    Rental application.
(b)    Credit report.
(c)    Lease agreement.
(d)    Personal information (except for above-enumerated information).

In an age-restricted community, the association can require the production of a government-issued identification document that bears a photograph and confirms that the tenant meets the age restriction requirements.

The association or its managing agent may charge a fee of not more than $25.00 to process the owner’s required disclosures for a new tenant.  (This fee does not apply to lease renewals.) Neither the association nor its managing agent can impose any other fee or requirement on a rental unit that is different from those imposed on an owner-occupied unit.  In addition, the association cannot prohibit absentee owners from serving on the Board, regardless of any provision to the contrary in the Bylaws.

The association or its managing agent cannot charge more than $15.00 as a penalty for incomplete or late information from a landlord/owner.  If the association or managing agent charges a fee, assessment, penalty or other charge that is not authorized by this statute, the requirement to pay the $25.00 fee and to provide information to the association is nullified.

Many associations have recommended or required that landlord/owners use a crime free lease addendum or follow other facets of a crime free program.  The new law states that an association cannot require a tenant to sign a waiver or other document limiting the tenant’s due process rights as a condition of the tenant’s occupancy of the rental unit.  However, the law also states that there is no prohibition on the landlord/owner requiring a crime free lease addendum.

In addition, an association is not prohibited from enforcing sex offender occupancy restrictions in CC&Rs if the registered sex offender is classified as Level 2 or Level 3. (Before an association board considers recommending to the members such a restriction, consult with your Association’s attorney.)  And, finally, the new law adds community associations to the list of entities that can bring an action in a County superior court against the owner, owner’s managing agent or any other party responsible for the property to abate and prevent a “nuisance,” which is defined in A.R.S. §12-991 as “residential property that is regularly used in the commission of a crime.”  This gives a homeowners association another tool to deal with a rental unit that may be causing disruption in the community.

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Here is a scenario.  You hire a general contractor to build your dream house.  You move in and are all ready to enjoy chocolate bon bons and drink your margarita while you float on your air mattress in the pool.  Unfortunately, your vision is rudely interrupted with the reality that the plumbing work in your newly constructed home was installed in a defective manner causing a very damaging flood destroying carpets, walls and your wallet.  So, let’s sue the *&^%# plumber – right?  Well, not so fast.  But, you want to sue the plumber for breach of the implied warranty of workmanship and habitability.  He did you wrong.  Such a claim is based on a breach of contract for not doing the job correctly.  So, shouldn’t you have a right to sue the plumber for the shoddy workmanship?  “No”, said the Court of Appeals.

In November 2013 the Arizona Court of Appeals, Division Two, located in Tucson came down with a decision [Yanni v Tucker] that would preclude such a suit The case was decided utilizing the concept of ‘privity’.  Privity can be defined as being a legally recognized relationship between two, or more, parties such as between two persons or entities who have entered into a contract together.  In our example above, you hired a general contractor who was responsible for the oversight of all of the construction of your house.  Your contractor hired a licensed plumber to do the plumbing.  The law recognizes that there is ‘privity’ between you and your general contractor since you directly contracted with the general contractor.  But there is not privity between you and the plumber since the contractor, and not you, entered into a separate contract with the plumber to which you, the home owner, were not a party.

In the case of Yanni v Tucker Plumbing those were essentially the facts.  The homeowner, Yanni, sued the plumber.  The trial court dismissed the plumber and the homeowner appealed.  The Court of Appeals agreed with the trial judge and threw out Yanni’s claim against the plumber.  The rationale of the Court was that there was a lack of contractual privity between the homeowner and the plumber.  The claim was for a breach of implied warranty (a contractual claim) of fitness and habitability.  The court indicated that the homeowner could have sued the general contractor for the faulty work since the general is responsible for the work of the subcontractors she or he hires and there is privity between those parties.  Then, the general contractor can sue the plumber to be reimbursed for the damages paid since there is contractual privity between the general contractor and the plumber.  As you can see the existence (or non- existence) of privity is an important concept in contract law.

There can be a very practical problem with this determination by the Court of Appeals.  What if the general contractor has no funds or assets for the homeowner to collect from?  Worse yet, what if the general contractor goes bankrupt?  One solution for the homeowner in such a situation would be to pursue collection of the homeowner’s damages from the Arizona Registrar of Contractors monetary recovery fund that reimburses persons who are damaged by contractors provided certain criteria have first been met.  However, since, even if the criteria is met to receive damages from the recovery fund there is a monetary limitations on how much the homeowner might be able to collect by making a claim on the Arizona Registrar of Contractor’s recovery fund.  Thus, that may not be a perfect solution.

The Court of Appeals noted that Arizona Courts have made a few exceptions concerning the privity rule.  One exception the courts carved out is that a subsequent homebuyer, despite lacking contractual privity with the general contractor, can sue the homebuilder for breach of implied warranty of fitness.

It is counterintuitive that a homeowner cannot sue the party which actually performed the faulty workmanship.  But now you know – that’s the law.

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Specialty courts in Arizona and elsewhere are nothing new.  At the Superior Court level in Arizona there are specific judges assigned solely to handle family law cases, criminal cases, juvenile offenses, tax matters, and probate related matters.  Soon, Arizona may have a court dedicated solely to handling certain types of business related cases.

Arizona State Supreme Court Chief Justice Rebecca White Berch initiated this idea.  She indicated that commercial cases often consume a lot of a court’s time and can be very expensive for the court and the parties.  Chief Justice Berch appointed a committee to investigate what a business court would look like and what it could accomplish in Arizona.  The current vision for this court would be that it would handle cases where one business is suing another business.  It is possible that the first such court would be in Phoenix and would be experimental in nature.

It was pointed out by the chairman of the new committee investigating the creation of such a court, that often businesses have mutual interests such as minimizing expenses and keeping expenses in proportion to the matters at issue as well as getting all the matters resolved both fairly and expeditiously.

The chairman of the committee pointed out that the court would be familiar with the issues surrounding discovery in business cases where often times the information requested can be massive –terabytes of data, not just file cabinets.

It was pointed out that there is certainly expense involved in creating such a court, such as hiring a judge and staff and providing facilities.  However, it was also noted that the costs of such a court can be outweighed by the net benefit to the public by keeping such cases out of the regular civil system and making the process faster for all concerned.

The recommendations of the committee investigating this type of court are due to the Arizona Supreme Court in December 2014.  This could be the start of a new era for business law in Arizona.  It could help change the old adage that the wheels of justice grind slowly.  We’ll have to wait and see about that.

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