ADR for Construction Disputes During COVID-19: How to Manage Dispute Resolution Before and After the Dust Settles

Albert Bates, Jr. and R. Zachary Torres-Fowler | Pepper Hamilton

Days after the World Health Organization declared the COVID-19 outbreak a global pandemic, governments from around the world scrambled to enact measures aimed at mitigating the spread of the virus. In the United States, cities and states have enacted travel restrictions, issued shelter-in-place orders, and directed nonessential businesses to shutter. While all aimed at mitigating the spread of the virus, these measures will have an immense disruptive impact on businesses and industries around the world — the construction sector included.

As notices concerning force majeure, changes in law, and change orders swirl, parties should prepare themselves for how these disputes will be managed and resolved. The COVID-19 outbreak will rapidly reshape how the construction sector does business. This article offers our insight into just once facet of the construction industry: alternative dispute resolution and how the COVID-19 outbreak has and will affect construction disputes going forward.

Before the Dust Settles – How Will the COVID-19 Outbreak Impact Pending Proceedings

For those parties in the midst of a complex construction arbitration or dispute, the COVID-19 outbreak is likely to have thrown a wrench into the proceedings’ carefully choreographed schedules. Below is a summary of the issues we expect that parties to pending disputes will continue to confront over the coming months.

  • Postponements – The most obvious impact of the COVID-19 outbreak on pending construction disputes is that most in-person hearings will likely have to be postponed. This is true not only for hearings scheduled while state and city restrictions remain in effect, but also for hearings scheduled months from now. Indeed, the disruption caused by current measures aimed at slowing the spread of the virus will inhibit parties from accomplishing the long list of tasks needed to prepare for a hearing, including meeting with clients and witnesses and conducting pre-hearing discovery (e.g., depositions).
     
  • Remote Dispute Resolution –In some cases (particularly in cases of less complex construction disputes), it may be possible for parties manage the proceedings remotely. Specifically, in cases where the number of planned depositions is low or where a relatively limited number of hearing days are required, it might be possible for arbitration proceedings to continue through the use of remote/online technology. However, many lawyers and their clients are skeptical of written testimonial submissions and truncated remote hearings within the context of binding dispute resolution. Further, while the concept of “online dispute resolution” (ODR) has been batted around for years, it is unclear whether ODR is truly ready for prime time. Indeed, early efforts by the D.C. Circuit to host appellate arguments just by telephone have proven difficult.1 Given that many law firms and parties have been forced to shutter their offices and rely on remote–working environments, the high–resolution cameras and broadband connections often required to effectively execute a remote hearing may not be as readily available in home office settings. This consideration may be especially important in proceedings where the subtleties of verbal and nonverbal communication are absolutely critical to assessing credibility. This is not to suggest that ODR may not have a place during these challenging times. Anecdotal reports in recent days suggest that some arbitrators have completed ongoing hearings via remote means to avoid delays, and that counsel and the parties have expressed satisfaction with the process.2 As a result, there may be opportunities to use ODR to minimize delay in appropriate cases, particularly in cases where legal and/or technical issues predominate and the parties agree to the use of written testimonial submissions.
     
  • Increased Mediation and Settlement Rates –One area that will likely be less affected by the limitations of ODR is mediation or settlement negotiations. Indeed, while mediation and negotiation discussions inevitably require the parties to assess the veracity of the other parties’ positions, commercial considerations are typically the driving factor in reaching an amicable resolution. Given the inevitable pressure on parties to resolve disputes quickly — especially in an environment where deteriorating economic conditions may mean that cash-flow requirements take an increasing priority — expect a rise in remote mediation/settlement proceedings. Parties’ access to mediation and settlement negotiations holds promise and anecdotal reports over the recent days suggest parties and mediators are willing to use remote means, such as Skype and Zoom, to successfully mediate disputes.3
     
  • Alternative Procedures for Existing Arbitrations – As mentioned above, parties and arbitrators considering remote hearings should also consider the use of witness statements in lieu of depositions and direct examinations. For parties that prioritize maintaining scheduled hearing dates or minimizing the length of any postponement of hearing dates, eliminating, or at least minimizing the number of, depositions is of great importance. Written witness statements provide ample disclosure of the witness’s proffered testimony, allowing for fair and effective cross–examination. While many practitioners may be uncomfortable with the prospect of giving up the opportunity to depose a witness or forgoing direct testimony, this process is widely used in international arbitration proceedings. Written witness statements enable parties to gather information concerning a witness’s planned testimony, eliminate or minimize depositions, and shorten the total required hearing time (which, in turn, may enable the parties and panel to hold scheduled hearing dates or reschedule hearings earlier than might otherwise be the case).

After the Dust Settles – How The COVID-19 Outbreak May Affect Future ADR Proceedings

When the COVID-19 outbreak subsides, many arbitrators expect a surge of disputes to press forward toward arbitration. Specifically, arbitrators contemplate an increase in the number of new case filings as a result of the impacts of the COVID-19 pandemic on projects that were under construction at the time of governmental actions, as well as projects that were deferred or cancelled due to the economic impact of the pandemic. In addition, many also anticipate that arbitrations currently scheduled to be conducted in 2020 may be postponed. This expected surge in new and existing arbitrations in the immediate aftermath of the pandemic comes with a host of additional considerations.

  • Conditions Precedent – Given the financial pressures on owners, contractors, subcontractors and suppliers, cash–flow considerations may place pressure on contract managers and in-house counsel to push for swift resolution of the disputes. However, many construction contracts include step-up clauses or conditions precedent to filing a demand for arbitration. Negotiations among principals and/or mediation may lead to the prompt resolution of disputes in many circumstances, and parties are cautioned that the urge to file an arbitration demand without first satisfying the conditions precedent may only result in further delaying the ultimate resolution of the dispute.
     
  • Increased Arbitration Caseloads – While much about COVID-19’s impact on the construction arbitration field remains to be seen, as mentioned above, many expect that arbitrators and arbitral institutions will see a significant increase in new case filings. To further complicate the situation, arbitrators will already have to grapple with the backlog of cases that were postponed as a result of the COVID-19 outbreak in the first and second quarters of 2020. As a result, arbitrator availability could become an issue in the 12 to 18 months following the gradual return to the new normal in aftermath of the pandemic. Thus, it is plausible to expect that, over the coming year, arbitration proceedings may take longer to fully resolve than would otherwise be the case.
     
  • Expanded Use of Mediation and Other Forms of Nonbinding ADR – Given the pressures associated with the need to quickly resolve construction disputes and the complications associated with increased arbitration caseloads, parties may begin to consider utilizing other forms of nonbinding ADR. Mediation and executive–level negotiations are the two most obvious candidates for resolving these disputes, but others forms of nonbinding ADR may also become increasingly attractive alternatives for parties seeking to quickly and efficiently resolve their disputes. For example, the expanded practice by mediators to create customized negotiation plans, including the exchange of just enough information to enable parties to make principled business decisions about settlement, has become a hot topic among practitioners. Indeed, Guided Choice Dispute Resolution was formed several years ago to introduce the best mediation practices to a broader audience and help parties and their counsel to create an efficient settlement process designed for the specific dispute at hand.4

Conclusion

We are all operating in unchartered waters, and how the COVID-19 pandemic will shape our society, businesses and ultimately the construction industry is unknown. Construction disputes stemming from the COVID-19 outbreak are inevitable and will continue to disrupt parties’ ability to quickly and efficiently resolve their disputes. Parties should work carefully with counsel to craft a strategy aimed at navigating these challenges and preparing to manage the complications they are likely to face over the coming months.

Above all else, however, stay safe.

Endnotes

1 Law.com – It’s Kind of a Mess – Phone arguments get rocky debut at DC Circuit during COVID-19 Pandemic, https://www.law.com/nationallawjournal/2020/03/20/its-kind-of-a-mess-phone-arguments-get-rocky-debut-at-dc-circuit-during-covid-19-pandemic/.

2 As an example, a press report indicated that hearings in a scheduled two-week ICC arbitration with 70 participants from around the world began in person in Brazil on March 9, 2020. The first week of hearings was conducted in person. As a result of the COVID-19 pandemic, the hearing could not continue in person, and postponing the remaining hearing dates would have been very disruptive. The second week of hearings was conducted remotely using Zoom. (https://exame.abril.com.br/negocios/a-pandemia-na-maior-arbitragem-societaria-do-pais-a-disputa-pela-eldorado/).

3 See generally A. Schmitz, C. Rule, D. Larson, ODR in the ERA of COVID-19: Experts Answer Your Questions (March 23, 2020), https://www.americanbar.org/groups/dispute_resolution/resources/resources-for-mediating-online/odr-in-the-era-of-covid-19-experts-answer-your-questions/.

4 Additional information and a collection of resources on this topic is provided by the Guided Choice Mediation Interest Group (https://gcdisputeresolution.com/).

AIA Arbitration Provisions May Limit Recoverable Damages on Colorado Projects

Kelly Smith | Snell & Wilmer

The American Institute of Architects (“AIA”) produces form contract documents widely used in the construction industry. Because of the prevalence of AIA contracts, many parties consider them to be standard and may not fully scrutinize the contract provisions or their future implications. This is especially problematic in Colorado where the use of AIA contracts, specifically their arbitration provisions, may jeopardize a party’s ability to recover punitive damages or cause a party to spend additional time and incur substantial fees litigating what damages are recoverable.

Many AIA contracts include binding arbitration provisions if the parties elect to include them to govern future dispute resolution. They generally also include choice-of-law provisions stating that the contract shall be governed by the law of the place where the project is located. Importantly, Colorado Revised Statute § 13-21-102(5) prohibits exemplary (or punitive) damages from being awarded in arbitration proceedings “[u]nless otherwise provided by law.” Thus, § 13-21-102(5) bars a party from recovering punitive damages if there is a binding arbitration provision in a construction contract and the project is located in Colorado.

Typically, to avoid this prohibition, a party must successfully argue that the Federal Arbitration Act (“FAA”), rather than Colorado law, governs the parties’ arbitration dispute. Colorado courts have acknowledged that when the FAA governs, § 13-201-102(5)’s prohibition on awarding punitive damages does not apply. See Gidding v. Fitz, 2018 WL 480607,*3 (D. Colo. Jan. 19, 2018); Pyle v. Securities USA, Inc., 758 F.Supp. 638, 639 (D. Colo. 1991). The FAA governs arbitration proceedings that arise out of contracts involving interstate commerce—even if those contracts include a Colorado choice-of-law provision. See 1745 Wazee LLC v. Castle Builders Inc., 89 P.3d 422, 425 (Colo. Ct. App. 2003). “Commerce” is construed broadly and includes interstate shipment of goods. Comanche Indian Tribe v. 49 LLC, 391 F.3d 1129, 1132 (10th Cir. 2004). Accordingly, one way a party may be able to invoke the FAA and recover punitive damages in arbitration is to show that the materials utilized for a Colorado construction project came from out of state.

However, a party will not likely be able to invoke the FAA where the actual arbitration provision states that it is governed by Colorado law. Pyle, 758 F.Supp. at 639. Further, it is possible that some Colorado construction projects may involve only materials, equipment and labor sourced from within the state. In those cases, a party who has signed an AIA contract with a binding arbitration provision and Colorado choice-of-law provision may be barred from seeking punitive damages.

In sum, before entering into a seemingly standard AIA contract (or any contract at all), a party involved in a Colorado construction project may want to consider consulting with counsel. Parties may want to pay particular attention to:

  • The general choice-of-law provision in the contract;
  • Dispute resolution provisions in the contract;
  • Whether the dispute resolution provisions contain additional choice-of-law designations;
  • Who the other parties to the contract are; and
  • To the extent possible, from where project materials, equipment and labor will be sourced.

These factors will typically affect the types of damages that a party can recover in the event of a contract dispute.

Ensuring Efficient Arbitration of Construction Disputes Involving Mechanic’s Liens

Robert G. Campbell and Trevor B. Potter | Construction Executive

There may be tension between the enforcement of statutory mechanic’s lien claims when a contractual dispute resolution provision calls for arbitration. Once the parties are in arbitration, it may not be clear whether the arbitrator has authority to make factual determinations regarding amount and validity of mechanic’s liens, and whether courts are bound by these determinations. This uncertainty stems from the fact that in most states a mechanic’s lien can only be enforced by a court of competent jurisdiction. Indeed, many mechanic’s liens statutes define foreclosure as a “judicial process,” and courts generally have exclusive jurisdiction to issue orders foreclosing on real property1.  

The risk for contractors and owners is that they will spend time and money re-litigating factual issues related to proving elements of a mechanic’s lien claim, including the proper lien amount, timeliness and other prerequisites. Without a clear understanding of what issues and elements are arbitrable, the parties run the risk that an arbitrator will rule on certain elements only to find out during post-arbitration lien foreclosure proceedings that the arbitrator lacked authority to make determinations on those elements. Questions therefore arise whether a court will enforce the arbitrator’s determinations and whether the parties must relitigate mechanic’s lien issues creating a further risk of inconsistent rulings. 

These risks can be minimized through arbitration provisions which address these issues, express requests in arbitration demands and by ensuring that arbitration awards contain explicit determinations of mechanic’s liens issues.

The resolution of any mechanic’s lien claim requires factual determinations regarding the amount and validity of a lien. The appropriate amount of a mechanic’s lien is generally the same as the contract balance owed2.  Since construction disputes usually involve breach of contract claims for unpaid amounts, arbitrators will necessarily determine the contract balance owed to a lien claimant during arbitration. It is therefore efficient for arbitrators to determine the appropriate amount of mechanic’s lien claims. 

Lien “validity” refers to whether a lien claimant strictly complied with state law requirements to perfect its mechanic’s lien. Some of those prerequisites include:

  • providing timely pre-lien notice (in California this is referred to as a Preliminary Notice) and post-recordation notice of the lien in proper form with all required information;
  • proper service of the pre-lien notice on all required persons;
  • timely recording of the lien; and 
  • timely filing of a lawsuit to foreclose on the lien. 

As with the amount of mechanic’s liens, much of the evidence relevant to lien validity, including the date work commenced, the date of notice, the project completion date and the timing of any lien foreclosure actions, etc. will likely be presented at arbitration. Since arbitrators typically consider significant evidence relevant to the amount and validity of mechanic’s liens in the normal course of a construction arbitration, it is efficient and proper for arbitrators to determine these elements in arbitration. 

In order to reduce the uncertainty regarding the arbitrator’s authority to make factual determinations regarding the amount and validity of mechanic’s liens, parties should first ensure that the arbitration provision in their construction agreements is broadly worded to encompass “all disputes” related to the project. The scope of arbitrator authority in the AIA A201 General Conditions is tied to the resolution of “Claims”, which include “…any demand or assertion by one of the parties seeking, as a matter of right, payment of money, a change in the Contract Time, or other relief with respect to the terms of the Contract…[and] other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.” 

This language arguably empowers the arbitrator to determine the amount and validity of mechanic’s liens, but on its own, it may be insufficient to resolve uncertainty with respect to the arbitrator’s authority. To remedy this, Parties should consider including language in their arbitration provisions which expressly states “To the fullest extent permitted by law, the arbitrator shall determine factual issues concerning the amount and validity of any mechanic’s lien claims asserted by the parties3.”  This language clarifies the parties’ intent for the arbitrator to make factual determinations related to mechanic’s liens in arbitration, and provides courts with a justification to enforce these determinations in a subsequent foreclosure proceeding. 

Addressing uncertainty regarding the arbitrator’s authority to make factual determinations regarding the amount and validity of mechanic’s liens is an important step, but there are other practical steps owners and contractors should take to ensure courts accept and enforce those determinations. 

First, parties should expressly request determinations concerning the validity and amount of mechanic’s liens in their arbitration demands and responsive submissions. If the arbitrator has apparent contractual authority to determine the amount and validity of mechanic’s liens, but the parties do not expressly request these determinations from the arbitrator, the arbitration award may not contain them and issues may later arise in the trial court when proceedings ensue to foreclose on the lien. The parties may be forced to relitigate them in a subsequent lien foreclosure action. 

Second, if the award does not include the requested factual determinations concerning the amount and validity of mechanic’s liens, the parties should move to correct/modify the arbitration award immediately. Courts are very deferential to arbitration awards as a matter of public policy, but the parties must ensure that the award contains all of the mechanic’s lien determinations requested from the arbitrator in order for a court to enforce them. Following these recommendations will minimize the risk of having to relitigate mechanic’s lien issues in post-arbitration lien foreclosure proceedings. 

To be sure, there are aspects of arbitrating mechanic’s lien claims that remain problematic. Since arbitration is a creature of contract, non-parties to the arbitration agreement cannot be compelled to participate in arbitration and may justifiably argue they are not bound by arbitrator determinations. This problem crops up in lien foreclosure proceedings where the priority of the lien vis-à-vis junior liens and other interests in the property will be determined by the court. There is little parties can do to eliminate this phenomenon given that foreclosure of mechanic’s liens and lien priority, as noted above, is typically within the exclusive province of the courts.

Nevertheless, uncertainty regarding the scope of arbitrator authority to determine factual issues concerning the amount and validity of mechanic’s liens and the potential inefficiency associated with that uncertainty can be minimized through express language in arbitration provisions, explicit requests for a determination of these issues in arbitration demands and ensuring that arbitration awards include the requested determinations. Litigating a mechanic’s lien once is painful enough, litigating it twice should be avoided as much as possible.

The Shifting Sands of Alternative Dispute Resolution

Tim Scully | Porter Law Group

In California there are few tools which work to protect the employer, and California employers may have just lost another one. On October 10, 2019, Governor Gavin Newson signed into law AB 51, which bans the use of mandatory arbitration agreements in employment contracts.

More specifically, AB 51 adds Section 432.6 to the California Labor Code, making it unlawful to require a prospective employee, or current employee, to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act  (“FEHA”)(Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code) or the California Labor Code, starting January 1, 2020. Additionally, an employer is also prohibited from threatening, retaliating or discriminating against, or terminating any applicant or employee who may choose not to sign a voluntary arbitration agreement.

Previously, an employer was able to require employees and prospective employees to agree to arbitration to resolve almost any and all disputes between the employee and the employer as a term of their employment. These terms were often the bulk of employers’ written contracts. Employers could have employees waive the right to a jury trial, the right to court costs, and other expenses, provided that the employer paid for the expenses of the alternative dispute resolution. The injured employees right to recover attorney’s fees was always a non-waivable right under the Labor Code. There were only a few actions which could not be arbitrated, the most prominent exception being the right to seek recovery under the Private Attorney’s General Action (PAGA).

It is hard to understate the loss California employers will have under AB 51. The vast majority of employee/employer disputes are centered around alleged Labor Code and FEHA violations. Under AB 51, the few remaining subjects still allowed to be covered by an arbitration agreement will be torts and contract disputes, subjects which are very rarely litigated between these two parties.

This change is important for several reasons; employers will now be liable for more expenses related to dispute resolution, may be subject to additional criminal liability and be subject to more aggressive litigation from employees.

With arbitration agreements in place, employers were allowed to control many of the cost aspects of the dispute resolution. Litigation is very expensive, and the requirement to pay filing fees, jury fees, expert fees, and other court costs, often adds a significant expense to this course of resolution. Cases that are handled in arbitration often get a resolution at a fraction of cost of litigation, as arbitrators are usually more attentive to the immediate case at hand, and the case is not bound by the clutter of an overworked judicial system. As a by-product, cases which are resolved faster, tend to resolve for smaller sums as there is less opportunity for attorneys’ fees to swell as in a stagnating case. While not inexpensive, arbitration generally did not disadvantage employees, but did allow employers to mitigate costs and expenses if they were found to be liable for the employees claims.

It is a little-known fact, but many wage and contracting violations under the Labor Code are misdemeanors. AB 51 inserting Labor Code 432.6 under Article 3, “Contracts and Applications for Employment,” expands criminal liability to employers who violate the terms of Article 3, as described by Labor Code 433. Employers who continue the practice of including arbitration agreements in new, or renewed employment contracts after January 1, 2020 may now find themselves criminally prosecutable. While it is usually the place of the Department of Industrial Relations (DIR) Division of Labor Standards Enforcement (DLSE) or private counsel to prosecute violations of the Labor Code and FEHA, it has been a growing trend in the state for local District Attorneys (DA) to prosecute Labor Code compliance against less desirable employers as the office can collect state mandated fees from non-compliant employers. The additions of AB 51 will provide more liability and leverage against employers in the future.

Finally, it is predicted that employers will face new allegations of discrimination and retaliation. Disgruntled ex-employees will now have new grounds to allege disparate treatment. If the employer treats or is perceived to treat employees who volunteered for an arbitration agreement any differently from employees who did not volunteer for an arbitration agreement, that employer may now be liable under Labor Code 432.6(b). It will be the responsibility of every employer to educate their managing workers about the status of the new protected class, as even off handed comments by supervisors or shift leaders are enough to create liability for the employer in any discrimination or retaliation allegation.

AB51 has a very uncertain future. While the legislature has included language facially to avoid conflict with the Federal Arbitration Act (FAA), which expressly creates and protects an employer’s right to use arbitration clauses, it is believed that AB 51 greatly diminishes an employer’s right under the FAA. In previous years, Governor Brown vetoed nearly identical bills, like AB 3080, because the law was believed to be in direct conflict with, and preempted by, the Federal Arbitration Act, which is created by the supremacy clause of the United States Constitution. The constitutional conflict created by AB51 will likely land the law in years long litigation as it makes its ways through the appellate courts.

Regardless of the future of AB51, employers acting now to safeguard their businesses against future litigation must choose between several underwhelming options. Since, AB51 was signed into law without an explicit retro-active effect like the one described in AB5 (the codification of the Dynamex Operations West, Inc. v. Superior Court of Los Angeles decision), there is a strong legal argument that contracts entered into prior to January 1, 2020 with arbitration clauses should be honored to their full terms and effects, unless the contract is entered into, modified, or extended after the January deadline. Employers who chose to continue their arbitration clause practices may be more protected if AB51 is struck down in the courts, but run the chance of being found in violation of AB51 and criminally liable in the meantime while the courts decide Ab51’s ultimate fate.

While AB51 removes the ability to require arbitration of the most common causes of action for an employee to bring against an employer, i.e. Labor Code and FEHA violations, it still allows employers to have arbitration agreements for causes of action regarding tort, contract, and property disputes. While significantly rarer, there is still a benefit to binding arbitration clauses which resolve these disputes between the parties. Arbitration agreements narrowly tailored to avoid the protected subjects can still provide some protections to an employer. Narrowed agreements will provide the most protection for employers who retain performance-based employees, such as graphic designers, artists, musicians, and sales persons, as these relationships are more likely to regard contract and property disputes.

Employers may also choose to simply stop implementing arbitration clauses in their employment contracts after January 1, 2020. While this option relinquishes the rights previously described above, it may be the safest way to proceed. If AB 51 is struck down in the future, it is still an employer’s right to update and alter an at-will contract as the business requires. This right will allow employers to reinstate arbitration clauses when there is more certainty as to their enforceability and less liability for employers.

Employers who already have written employee contracts are encouraged to audit their contracts in the next two months and determine what is the best course of action for their business. No two employers face the same circumstances, and an assessment of the risks and benefits should be made on an individual level. If you are feeling confused or overwhelmed by the constantly changing burdens of California employers, you should have a conversation with competent employment counsel for guidance and advice on how to best protect your business.

The Registrar of Contractors and the Residential Contractors’ Recovery Fund: One Size Does Not Fit All

Creighton Dixon | Snell & Wilmer

The Arizona Court of Appeals recently published a decision examining the Registrar of Contractor’s (“ROC”) handling of a homeowner’s claim involving the Residential Contractors’ Recovery Fund (the “Fund”). The decision, Gordon v. Arizona Registrar of Contractors, 247 Ariz. 146 (App. 2019), is a helpful reminder that while the ROC and the Fund can be useful to resolve certain disputes, they are not the right solution for every problem.

Though the Homeowner and ROC were the named parties, the dispute with the ROC was rooted in the Homeowner’s relationship with InHouse Home Warranty (“InHouse”). InHouse sold home warranty policies, and it was licensed by the ROC, as well as Arizona’s Department of Insurance. InHouse’s contractor’s license specifically covered air system repair, and InHouse would otherwise coordinate with independent contractors to fix other work.

The Homeowner bought a home warranty policy from InHouse. Under the policy, InHouse was obligated to cover repairs on a variety of household systems. Eventually, InHouse stopped answering the Homeowner’s calls for service, and the Homeowner in turn filed a complaint with the ROC. The Homeowner’s complaint alleged that InHouse worked outside the scope of its contractor’s license, aided and abetted an unlicensed contractor, operated as an insurance company without a license, and failed to respond to new requests for service. Notably, the Homeowner did not include any complaints about the actual workmanship. After InHouse failed to respond, the ROC issued a default decision and order revoking InHouse’s contractor’s license.

This is when the dispute began between the Homeowner and the ROC. After succeeding against InHouse, Homeowner sought to recover from the Fund. For those unfamiliar with the Fund, the Fund is described by the ROC’s website as “a form of financial protection provided by licensed Arizona residential contractors to residential homeowners.” Essentially, it provides money that can be used to complete or repair work, provided the residential homeowner meets the legislative requirements.

However, in this case, the ROC found that the Homeowner could not recover from the Fund because the “home warranty policy” was not a construction contract. The Homeowner appealed the decision first to the Superior Court, and then to the Arizona Court of Appeals. Both courts affirmed the ROC’s decision. The Court of Appeals determined there were three independent reasons to deny the request to recover from the Fund: (1) as the ROC had noted, the “home warranty policy” was not a construction contract; (2) the Homeowner was not a “person injured” as required by the relevant statute because the issues in his complaint (e.g. unnecessary labor and high cost) were not related to the type of damage the Fund is meant to address (e.g. incomplete work); and, (3) the Homeowner did not “suffer damage compensable by the Fund.”

This case is a helpful reminder that the Fund cannot solve every problem parties may face against a contractor. Here, there were at least two reasons the square problems of the Homeowner did not fit into the round solutions the Fund was intended to address. First, the “home warranty policy” was essentially insurance, not a construction contract. Parties should consider this distinction (and the specific contours of their own disputes), as not every “contract” meets the statutory requirements to recover from the Fund. Second, the problems the Homeowner had with InHouse did not meet the requirements to recover from the Fund. In Gordon, there were no workmanship issues to address. Other bars to consider include the statutory prohibition preventing commercial property owners from recovering from the Fund. See A.R.S. § 32-1132.01(A) (“An award from the residential contractors’ recovery fund is limited to residential real properties. The Fund may not issue an award covering damages to commercial property.”). Overall, Gordon is a timely reminder that the ends you are looking for (e.g. money, directive to complete the work), do have an important role in determining your means. Take the time to consider if the Fund can award the remedy you want.