Colorado Construction Defect Litigation: More than You Might Want to Know – But Should! (Part 5: Other Complex or Unresolved CDARA Issues)

On February 24, 2012, Ken Robinson, Esq., and John Tweedy, Esq., of Robinson Tweedy, PC, presented a Continuing Legal Education program through the Boulder County Bar Association focused on the legal and factual contexts of construction defects in relationship to the larger practice of construction litigation.  This is Part 5 of the CLE presentation, addressing complex or unresolved CDARA issues.

Part 1     Part 2     Part 3     Part 4

 

CDARA is an imperfect statute and there are many infirmities that leave the practitioner asking questions for which there are no answers and with, as yet, no appellate guidance as to what to do.  There are a number of “known unknowns” (thank you Mr. Rumsfeld), some of which are mentioned above.  There are others, a couple of which are addressed here.  A caveat, these are just informed ruminations by the authors, and the issues have not yet been addressed by the appellate courts.

A.         Pre-Completion Defects and Damages.

It is not clear if the CDARA Notice of Claim procedure on a commercial project might lead to unintended consequences.  For example: would the general contractor be required to suspend construction until the subcontractor who performed defective work decides what to do?  Or could the general contractor characterize the repairs it undertakes as emergency measures subject to the CDARA exception?  The answer may be that CDARA doesn’t apply to construction defects arising during construction.  Perhaps repair of such defects are merely contractual obligations and the legislature can’t interfere with executory contractual rights.  Arguably CDARA recognizes this in its express warranty exception at §13-20-807.

The warranty exception provides that the CDARA procedures and limitations “. . . do not abrogate or limit the provisions of any express warranty or the obligations of the provider of such warranty.”  The contractual obligation to construct things properly during construction is akin to an express warranty before substantial completion, and what we call an express warranty merely extends this contractual obligation to repair defective work beyond substantial completion for a specified time.  Thus, what are called “punch lists” versus “warranty items” all derive from related contractual obligations to repair, punch list items merely being those defects identified prior to substantial completion, and warranty defects identified after completion.

With this reasoning, any claims for consequential damages arising from pre‑substantial completion defects, and arguably from pre‑express warranty expiration, would not be subject to any aspect of CDARA.  Consider the consequences of the notice requirements of CDARA if they were deemed applicable: a subcontractor’s bad work could shut down an entire commercial project for months while the parties navigated the Notice of Claim process.

This observation segues into other pre-completion issues such as liquidated damages.  That is, do the CDARA damages limitations apply to time-related damages prior to substantial completion?  The same argument obtains as for pre‑warranty defect claims.  The delay damages, then, however they are measured (liquidated or actual) generally arise from pre‑substantial completion cost events so the argument works there.  As to lost profits or other post‑substantial completion cost events, the argument isn’t quite so clear.  That is, can the post‑substantial completion lost profits relate back to the delays occasioned by pre‑substantial completion defects that were repaired (or claimed) during construction?  A mystery yet to be resolved by the courts.

B.         Emergency Repairs/Spoliation.

As noted above, CDARA does not expressly provide for a situation in which the exigencies of the situation arising out of a construction defect requires emergency action to abate the condition or to prevent further damage or injury.  There are the attendant issues of spoliation of evidence.  While there are a few district court opinions that have addressed the question, with differing results, there is, as yet, no appellate guidance for the CDARA claimant.  This is particularly problematic where an operative insurance policy has certain requirements to mitigate damages, or limitations on settlement or assumption of obligations.  Thus the claimant should take certain steps to minimize the impact of CDARA.

Even in an emergency situation, the claimant should provide prompt notice of the defect and the resulting damage or risk of damage, and provide the construction professional with the opportunity to inspect the conditions on an exigent basis advising of the intention to effect repairs and the proposed time frame for the repairs.  The claimant should also ensure that a complete documentation of the repairs, including photographs or videos before, during and after the repairs, to ameliorate any limiting effects of a claim of spoliation.

C.         Mechanic’s Lien Statute of Limitation. 

As discussed above, CDARA includes a tolling provision for statutes of limitation and repose while the notice, inspection and settlement process takes place.  However, there are strict time limits for perfection of mechanic’s liens (see C.R.S. §§ 38-22-101, et seq.), and it is not clear that the CDARA tolling provision enlarges the mechanic’s lien time frames.  It is likely that the time to perfect a mechanic’s lien is not enlarged by the CDARA notice procedure.

C.R.S. § 38‑22‑110 states that no lien claim shall hold the property longer than six months after the last work or labor is performed.   In King v. W. R. Hall Transp. & Storage Co., 641 P.2d 916, 920 (Colo. 1982), the court held that “The absence of a statutory provision for tolling [. . .] leads us to conclude that the six‑month time limit should not be suspended in this case.”  The court’s reasoning in King suggests that even parties may not agree to toll the six‑month period.  The King opinion reasoned that “strict application of the six‑month limit is based on the principle that extending the lifetime of a perfected lien would vest a lien creditor with greater rights than were granted by the statutory provision creating the right.”  Id.

Because an agreement to toll would also vest a lien creditor with “greater rights” than were granted by the statute, such an agreement would be contrary to the principle enunciated in King.  Further, King explained that strictly limiting the time during which property is encumbered renders title to real property and to interests and estates therein “more safe, secure and marketable.”  Id.

Thus, absent an express grant extending that jurisdiction by CDARA, a mechanic’s lien claimant is well-advised to proceed with perfecting mechanic’s lien rights irrespective of the CDARA procedures.  That is, don’t expect the tolling provisions of CDARA to extend the time for filing and foreclosing on a lien.  It is likely that it will not.

D.        Refusal of CDARA Inspection.

Another interesting issue is what does a construction professional do when he or she shows up at a site with counsel and insurance representatives and prearranged access to the site is denied or otherwise impossible, say because no one from the other side showed up with the keys?  CDARA does not provide for this situation.  Certainly if this occurs during litigation, and the visit is concurrent with a Rule 34 entry upon land request, the sanctions of Rule 37 would apply.  However, if the attempted inspection occurs before litigation, the rules of procedure likely wouldn’t apply and there may be no basis for recovery fees and costs incurred.  Moreover, it is likely that, at some point, access will be had, so there would not be any substantive prejudice.  It just may be that the construction professional would have no recourse for the wasted time and money.

VII.     Conclusion

The above discussion reflects that construction defect litigation is inherently complex, due to the number of players typically involved and the multi-dimensional relationships among them.  Recent statutory revisions have increased, rather than resolved, these complexities.    The best defense to these complexities, for both property owners and construction professionals alike, is to have written contracts that are appropriately tailored to the work being performed.  Such contracts should allocate risks according to the ability of the respective parties to manage such risks, meaning that the party with the most control over a particular task should bear the risks associated with that.  Parties should also carry sufficient insurance to protect against the risks that the contract assigns to them.  Finally, construction contracts should include dispute resolution clauses and attorney’s fees provisions that are appropriate to the parties’ wishes and expectations for handling such a dispute.   Experienced construction counsel at the stage of contract formation is the best way to mitigate unnecessary losses and costs after a defect claim arises.  Still, if a construction defect issue does arise, we recommend that you read the statute thoroughly and follow the general guidelines and procedures discussed in this paper.

Good luck!