New Arizona Supreme Court Case Raises Questions About Indemnity Claims

In City of Phoenix v. Glenayre, Inc., et al. (Ariz. 2017) the Arizona Supreme Court recently held that Arizona’s statute of repose, A.R.S. § 12-552, applies to a governmental entity’s contract-based actions (including claims for indemnification) that fall within § 12-552(A), notwithstanding  the “nullum tempus occurit regi” (time does not run against the king) common law doctrine codified at § 12-510. However, the Court held that the statute did not apply to the Developers in the case, whose only relationship with the City of Phoenix (“City”) was as permittees. Glenayre, at ¶ 1 (Ariz. 2017).

The case arose from the City’s Third-Party Complaint, filed well after the eight-year limitation prescribed by the statute, against eighty-two developers (“Developers”) and eight contractors (“Contractors”), alleging that they had agreed to defend and indemnify the City against negligence claims arising from infrastructure construction projects between 1960-2000 on which first-party plaintiff Carlos Tarazon worked and allegedly developed mesothelioma.

The City relied on A.R.S. § 12-510 which codified the nullum tempus doctrine. Enacted after § 12-510, the Court found that the statute of repose’s introductory phrase “[n]otwithstanding any other statute” makes clear “the statute of repose controls over other potentially conflicting state laws.” Id. at ¶ 16. The Court likewise found the legislative history amending § 12-552 to add subsection (G) persuasive to its conclusion. The amendment was enacted to permit the Central Arizona Water Conservation District (a governmental entity) to bring otherwise time-barred claims. Id. The legislature must have known the statute applied to governmental entities, if not, the amendment would be unnecessary. Id. at ¶¶ 20-21.

The crux of the issue was whether the City’s indemnity claims against the Developers are “based in contract” within the meaning of § 12-552(A) & (F).The City argued that its claims for indemnity arose from the indemnification provision of City Code § 31-40. The City’s indemnity claim, however, does not arise out of the Code directly. The Developers undertook the infrastructure projects in question after applying for and obtaining right-of-way and development permits from the City.  Within these permits the permittee agreed to perform all work in accordance with certain agreed plans and specifications, and that the permit is conditioned on the permittee’s performance of every agreement and covenant made. These permits then incorporated the Developers’ project plans and specifications, which included the Maricopa Association of Governments Specifications (“MAGS”).

The MAGS obligated the Developers to “at all times observe and comply with all such laws, ordinances, regulations, codes, orders, and decrees.” Glenayre, at ¶ 6 (Ariz. 2017). Among those ordinances is the indemnification provision of Code § 31-40. The Court found that by incorporating the MAGS, the permits memorialized the Developers’ preexisting obligation to comply with the City’s laws, including Code § 31-40.  Id. The City sued the Developers for indemnification based on the agreements incorporated into those permits, requiring Developers to provide certain services in accordance with the City’s specifications and standards — a claim for indemnification that arguably is “based in contract,” but which the Court found was not.

The Court found that the Code applies solely based on an indemnitor’s status as a permittee and does not constitute a written agreement for the services listed in § 12-552(A).   The Court found that by issuing a permit the City did not create an agreement between the Developers for either party to perform any of the services listed in subsection (A), but instead granted the Developers a license to enter City property to undertake their construction projects.  Thus the City did not offer or accept any of the services prescribed in subsection (A).

Section 12-552(F) defines the types of agreements “based in contract” that fall within the statute. It defines “an action based in contract [as] 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.”  The Court found that a “written agreement . . .  for the services set forth in subsection A” must be construed to refer to the same type of agreement as those enumerated in subsection (F). Glenayre, at ¶¶ 29-31 (Ariz. 2017).  Although it recognized in Albano that § 12-552 was enacted to limit the “time period during which actions may be brought against those engaged in the development or construction of real property and activity related to the construction of real property”  Id. at ¶ 30 (citing Albano v. Shea Homes Ltd. P’ship, 227 Ariz. 121, 126 ¶ 19, 254 P.3d 360, 365 (quoting Ariz. State Senate, Fact Sheet for S.B. 1305, 39th Leg., 1st Reg. Sess. (Mar. 20, 1989)), the Court refused to interpret the word “for” broadly because it would extend the limitations period beyond the claims the statute contemplates. The Court found the indemnification provision under which the City’s claim against the Developers arose was not based on any of the agreements listed in subsection (F). Id. at 29-32. The Court recognized, however, that the City’s Third-Party Complaint could be read as asserting a contractual-based indemnity claim against the Developers, but remanded the case to resolve further questions existing regarding the source of the City’s indemnity claims against the Developers. Based on the narrow reading of the “contract” definition under § 12-552, the types of actions barred have now been limited to “transactional agreements” enumerated in subsection (F). Id.

Although the case has been remanded to the trial court with the finding that any claims arising out of the statutory language of City Code § 31-40 are not based in contract, the Court expressed no view on the merits of the City’s remaining indemnity claims. The basis for the City’s indemnity claims are nebulous and were not clarified by the Court’s ruling, but will require further development on its merits.

The Court’s ruling appears to not fully comprehend the permitting process involved in the construction of the infrastructure projects underlying the Tarazon claim. The projects involved infrastructure the Developers were constructing for the benefit of the City. In order to develop their construction projects, the Developers must construct certain infrastructure associated with those projects for the benefit of the City. Therefore, the City did in fact accept services prescribed in subsection (A). The Court’s ruling therefore went too far. The ruling’s logic potentially renders the Developers as insurers for any similar infrastructure projects, in essence creating indeterminable liability; indeterminable liability, which the legislature sought to prohibit against contractors and developers by enacting the statute of repose § 12-552.  This ruling has unknown ramifications for developers in the future.

Blog by: Alexix Terriquez, Associate, Arizona – New Mexico