Author Archives: Cait McQuade

Anatomy of a Construction Contract

The function of a contract is to reflect the intentions of the parties.  In construction, the shared intention is to build a specific project, within a defined time frame, at an agreed price, and in a prescribed manner.  If the contract is well-drafted, the parties have a good start toward a successful project.

The contract will tell the parties what their respective rights and obligations are, as well as the consequences of not fulfilling their obligations.  Keep in mind, though, that the remedies for non-performance may often be too little too late.  Good contracts can help minimize the need for inadequate remedies.

Healthy construction contracts have an anatomy of eight fundamental categories of clauses.  Understanding the categorical nature of any particular clause can help determine the relation of that clause to the contract as a whole and thus foster better understanding of the clauses negotiating, drafting, and administering.

1. Housekeeping
2. Scope of Work
3. Contract Price
4. Schedule for Performance and Completion
5. Allocation of Risk
6. Contract Administration and Logistics
7. Dispute Resolution
8. Warranties

1.   Housekeeping
Every contract must properly and completely identify the parties, the project, and the contract documents.  This includes full corporate names and addresses, and a formal property description for the project.  If there are other material participants, say for a subcontract, it is useful to include non-parties such as the designers or the owner, as well.

It is imperative that all of the contract documents be specifically identified.  Contract documents include the construction agreement itself, and may also include separate general and special conditions, construction drawings, specifications, addenda, project manuals, soils reports, etc.  If such documents are identified as part of the “contract documents,” they clearly become part of the construction agreement that governs the parties’ respective rights, obligations, and liabilities; and must be reviewed for consistency and applicability.

Contracts should also include a signature section documenting assent to the agreement.  Make sure contracts get signed, preferably before commencement of the work.  The lack of signatures can unduly complicate any future dispute.

2.   Scope of Work

A construction contract is not complete if it doesn’t fully specify the scope of work to be performed by the contractor.  For most projects, the greater part of the scope is described in construction drawings and specifications, and these must be identified in detail in the construction contract.

3.   Contract Price

The contract price must be stated without ambiguity.  If it is not, ultimately a judge,  jury, or arbitrator will be required to decide the reasonable value of the work performed, and at a much later time than completion of the project.  The contract price will, of course, depend on the project delivery method.  The most common forms are fixed price and cost-plus; the latter may be with or without a guaranteed maximum price.  These forms of pricing can, in turn, be affected by whether the contract is for construction only, for design-build, or for some form of construction management.

4.   Schedule for Performance and Completion

A large number of construction disputes arise out of scheduling.  The more clearly the parties can identify the construction schedule in a contract, the lower the risk of protracted disputes later on.  A schedule can be in the simple form of a start date and a completion date or, on more complicated projects, bar charts or full-blown critical-path method (CPM) project schedules.

5.   Allocation of Risk

There is always uncertainty in construction projects and, with that uncertainty, risk.  The risk can, and often does, translate to liability for unforeseen costs.  Good construction contracts provide for those risks by inclusion of clauses addressing matters such as differing site conditions, non-payment, injury to person or property, or warranty and claims by others.  The purpose of such clauses is to reflect the parties’ agreement at the beginning of the project as to who bears the risk of liability in the event that unforeseen events create liability and impose additional costs on the project or the parties.  If such provisions are not included, much later on a court or arbitrator will decide how applicable law distributes that risk.

Insurance is an important tool for risk allocation and a necessary component of every construction contract.  Experience has shown that the best allocation of a particular risk is to the party best situated to manage that risk.

6.   Contract Administration and Logistics

This category of clauses addresses contract and project administration matters, and includes payment procedures and reporting.  To state what might be obvious, in addition to good contracts, good project documentation is essential to optimal project administration, and it is critical to resolving disputes favorably.

7.   Dispute Resolution

If a disagreement arises over performance obligations under a construction contract, and the contract does not provide for any dispute resolution procedures, the claimant’s only recourse is in the courts.  Litigation is expensive and time-consuming, however.  Thus, contracting parties will often call for alternate dispute resolution (“ADR”) procedures which are intended to provide, in theory at least, quicker, more cost-effective resolution of disputes.

A common ADR procedure is mediation in which a trained neutral person conducts a structured settlement conference between or among the parties with the intention of reaching a voluntary and acceptable settlement by the parties.  The mediator has no authority to make decisions that are binding on the parties.  Nevertheless, if the contract calls for “mandatory mediation,” the parties are required to participate in mediation in good faith, even if they don’t agree to settle in mediation.

The major ADR procedure used in the construction industry is arbitration.  Arbitration is binding on the parties, effectively substituting for most of a court’s responsibilities.  In fact, an arbitration proceeding may be similar to a judicial proceeding, without such procedural elements as depositions and written discovery.

In either form of ADR, the parties pay equally for the fees of the mediator and/or the arbitrator, unless the contract provides otherwise.

8.   Warranties

Warranties impose an obligation to repair defective work, and they can be express, that is, stated in the contract, or implied, in which case the law will impose a duty irrespective of the contract.  An express warranty is a legally separate obligation from the duty to perform under the construction contract, even though a warranty may be recited in that contract.  Hersh Companies Inc. v. Highline Village Associates, 30 P.3d 221, 225 (Colo. 2001).  “[Warranty] claims seek recovery for the breach of a subsequent contractual duty to repair or replace rather than recovery for a deficiency in the original work, they do not fall within the class of actions governed by [the limitations of actions statute for construction professionals].”).

Mechanic’s Lien Release Bond

A mechanic’s lien is a creature of statute and provides security for unpaid contractors, subcontractors, or suppliers who have worked on improvements to specific real property.  Colorado Mechanic’s Lien Statute, C.R.S. §§ 38-22-101, et seq.  Perfecting a mechanic’s lien claim is not a simple process.  To fully perfect a mechanic’s lien, the lien claimant must file a mechanic’s lien foreclosure lawsuit, by the statutory deadline, and prevail in the lawsuit.  The claimant must also timely record a “lis pendens” document with the County Clerk and Recorder’s Office.  This creates constructive notice of the lawsuit to the general public.

However, once a mechanic’s lien is recorded with the county Clerk and Recorder’s Office, even before the foreclosure lawsuit, and even if the lien is defective, the recorded lien can improve a claimant’s chances of getting paid, sometimes sooner than if the lien had not been recorded.  This is because a recorded mechanic’s lien creates an “encumbrance” on the property where the improvement was constructed, and the encumbrance might interfere with an owner’s ability to get financing on the property or to sell the property.  If a mechanic’s lien is recorded by a subcontractor, the lien can create conflict between the general contractor and the owner, and the owner might require the contractor to remove the lien, especially if the contract provides for that right.

The Colorado Mechanic’s Lien Statute provides that a mechanic’s lien can be released by the posting of a “mechanic’s lien release bond.”  This statutory procedure allows an owner, or a contractor on the owner’s behalf, to deposit a cash or corporate surety bond with the District Court Registry in the county where the property is located.  The required bond amount is 150% of the lien amount, plus an additional amount to cover costs.  Once the bond is approved, the court will issue a “certificate of release” which can then be recorded with the County Clerk and Recorder’s Office where the lien has been recorded, thus effecting a release of the mechanic’s lien.  C.R.S. § 38-22-131.   The bond statute specifies only that an owner may release a mechanic’s lien in this way, but in practice general contractors are allowed to do so on behalf of owners.  See., e.g., Weize Company, LLC v. Martz Supply Co., 251 P.3d 489 (Colo. App. 2010) (reciting that the trial court judge allowed the contractor in that case to file lien substitution bonds.).

Typically, the liened property’s owner is a “necessary party” to a mechanic’s lien foreclosure lawsuit because title to the owner’s property will be impaired by a judgment of foreclosure of the property.  If a mechanic’s lien is recorded by a subcontractor, and the dispute is only between the general contractor and the subcontractor, an owner will incur not only aggravation, but also attorney fees in defending the lien claims in the foreclosure lawsuit.  Thus, it is in the general contractor’s interest to avoid having the owner joined in a foreclosure lawsuit.

By procuring a mechanic’s lien release bond, and obtaining a certificate of release from the court (which can be accomplished in an “ex parte proceeding,” meaning the subcontractor lien claimant need not be part of the proceeding).  Once the certificate is recorded and the bond is released, the owner may no longer be a necessary party to a foreclosure lawsuit.  The reason is that the need for a lis pendens has been eliminated once the lien is released.  This procedural change was effected by the Colorado legislature in SB 11-264 which was passed in 2011 and which overruled Weize’s holding that a lis pendens was necessary even when a lien has been released by a substitution bond.  In this way, title to the property is completely freed from the lien claim and the owner need not be part of the foreclosure lawsuit.  There is no Colorado case law on this argument as yet, but it is a sound argument and it is likely to prevail if and when it is considered by the appellate courts.

Construction Defects: Why Things Can Go Wrong

Construction defect litigation is a significant part of our practice, and the procedures for prosecuting or defending such claims are complex.  Most construction projects are inherently complicated and present many opportunities for things to go wrong.  Locating defects can be particularly challenging as many of the construction elements are covered over with other parts of the structure, so called “latent defects.”  Finding them and determining a cost-effective repair plan can be difficult.  However, once the defects are identified, the problems are not necessarily over.

The questions remain as to who is going to repair them, and who is going to pay?  This path is not as straightforward as we might like.  Resolution of a construction defect dispute generally begins with procedures prescribed by the Colorado Construction Defect Act (“CDARA”) which prescribes certain notice and inspection sequences.  CDARA also imposes other requirements such as limitations on certain categories of damages.  CDARA is discussed in more detail here.

Below is a video animation that we presented to a jury to demonstrate the complexity of a construction project and, in that case, how latent construction defects caused water leakage problems in a multi-family, residential construction project.  Water leakage sources are particularly elusive as water can enter a structure at almost any opening such as around windows or doors, or though different components of the roof.

The animation depicts the construction details and sequence for a 200-unit apartment building that had long term water infiltration issues.  The video sequence was presented through the testimony of an expert witness which allowed the jury to better understand the complexity of the construction, and the potential sources of water infiltration.

A law without enforcement is just good advice: true for Colorado’s new rule for personnel files?

filesEffective January 1, 2017, most Colorado private sector employers must provide employees access to their personnel file upon request. The new law, to be codified at C.R.S. § 8-2-129 (2017), which passed with bipartisan support, seeks to deter frivolous employee lawsuits by fostering an environment of open communication between employer and employee. In the case of current employees, access must be provided at least once annually, while former employees are allowed one formal inspection post-separation.

Under the law’s definition, “personnel files” include records that can qualify an employee for hiring, promotion, additional compensation, disciplinary action, or employment termination. Foremost among the numerous exclusions from this definition are documents required to be placed or maintained in a separate file by state or federal law.

If your employment agreement attempts to apply law of a jurisdiction not allowing such access, there may be potential conflict of laws implications given the legislative declaration that it is Colorado’s public policy that employees have such access.

Since the general assembly has not authorized any private cause of action, is there an echo of Lincoln’s maxim, that a law without enforcement is just good advice? On the contrary, since employers failing to comply can face an audit from the Colorado Department of Labor or an investigation from the Department of Regulatory Agencies, this law is more than mere advice.

Employment counsel at Robinson Hungate PC are equipped to address any employer compliance issues, including those involving C.R.S. § 8-2-129.

Flood Water Drainage Rights Between Adjacent Landowners

water-11699_1280Everyone knows that water flows downhill, but what are the legal ramifications when the flow is obstructed and property damage results? During flooding, conditions that historically allowed water to pass serenely from one property to another can be overwhelmed. Previously harmless objects in the drainage path become obstacles, and water reroutes without benefit of hydraulic design.  Who is responsible for resulting damage and under what circumstances? The law governing the rights and obligations of the landowners is well-developed, but the wide range of property configurations and varying drainage patterns can still make assessment of the legal relationships challenging.

Such questions often arise after unprecedented flooding, such as occurred in 2013 in and around Boulder and the Front Range of Colorado.  That event demonstrated that we still have a lot to learn about flood risks and how to manage them.  The relevant law can provide guidance as there are well-established legal rights that attend the flow and drainage of water over adjacent properties.

Common Law Drainage Easements

The right to have water drain from one property onto another is in the nature of an easement.  In traditional legal terms, an easement is a form of “servitude” which is defined as “[a] charge or a burden resting upon one estate for the benefit or advantage of another” (Black’s Law Dictionary).  The benefitted property is known as the dominant estate, while the burdened property is known as the servient estate.  Thus a drainage easement benefits the adjacent upstream property, the dominant estate, and burdens the adjacent downstream property, the servient estate.  In some instances, though technically not an easement, the downstream property may have a right to require that the drainage from the upstream property be regulated such that the downstream flow will not be destructive.

Drainage easements can be established in several ways: (1) by an instrument of conveyance such as an easement deed; (2) by a dedication in a subdivision plat or an engineered drainage plan associated with a subdivision; or (3) by common law, that is by appellate court rulings.  It is the latter two types of drainage easements that give rise to most disputes.

Colorado law recognizes the right of the owner of an up-gradient property to have surface water drain onto an immediately adjacent, down-gradient property by way of a “natural easement for drainage.”   When natural and historic drainage conditions are modified or disturbed by construction or development, the law becomes more complex.  Generally, the owner of a down-gradient (servient estate) property is allowed to modify the drainage pattern on that property provided that the modifications do not adversely impact the drainage over the up-gradient (dominant estate) property.

The Colorado Court of Appeals summarized the common law of drainage easements as follows:

Colorado has always followed the ‘civil law rule,’ which provides that the owner of upstream property possesses a natural easement on land downstream for drainage of water flowing in its natural course.  Also, “(n)atural drainage conditions may be altered . . . provided that water is not sent down in manner or quantity to do more harm than formerly.”  Neither the fact that the land concerned is urban rather than rural, nor the fact that the elevation on both properties has been lowered without materially altering the natural drainage flow, affords a rational basis for creating exceptions to the general rule. Colorado cases on water drainage have drawn no such distinctions.  (emphasis added)

Calvaresi v. Brannan Sand & Gravel Company, 534 P. 2d 652, 654-55 (Colo. App. 1975).  Note that, in Calvaresi, the Court of Appeals in the highlighted text indicated that drainage patterns can create drainage easements through the result of “urbanization,” that is the construction of improvements that alter the flow of water over servient estates.

Prescriptive Drainage Easements

The common law of access easements also provides for the creation of an easement by way of uncontested use over the alleged servient estate for a prescribed period of time.   Hankins v. Borland, 163 Colo. 575, 431 P.2d 1007 (1967) (holding that a drainage easement can be created by prescription, with a prescriptive period of 18 years).  Accord, Stoll v. MacPherson Duck Club, Ltd., 607 P.2d 1019, 1022 (Colo. App. 1979).

Repair and Maintenance of Drainage Easements

Though the primary purpose of a drainage easement is to allow water to flow over the dominant estate, there is an attendant, but limited, right of access over the servient estate in order to maintain drainage area such that entry onto the servient estate is not trespass.  In Shrull v. Rapasardi, 517 P.2d 860, 862 (Colo. App. 1973), plaintiffs brought an action for trespass when the defendants entered plaintiff’s property to reopen a ditch.  The trial court held that the defendants were acting lawfully in repairing the ditch.  The Court of Appeals in Shrull affirmed the trial court’s judgment, stating:

If the owner of the dominant estate does not unnecessarily inconvenience the owner of the servient estate and use of the easement is not expanded, the owner of the dominant estate may do whatever is reasonably necessary for the enjoyment of the easement, including repairs, ingress and egress, with space therefor as exigency may show.

Accord, Stoll v. MacPherson Duck Club, Ltd., 607 P.2d 1019, 1022 (Colo. App. 1979).

Liability for Impairment of Drainage Flow

If the owner of a down-gradient property subject to a drainage easement alters the drainage pattern for water flowing from the upstream, servient estate, and those changes substantially alter the flow so as to cause the water to back up onto the dominant estate, the owner of the servient estate may be liable for damages.  It is important to note that a physical alteration to a drainage area may not cause water to back up except during flood conditions, and thus the impairment may go unnoticed for years.  Nevertheless, the servient estate owner may be liable though the flooding may take place long after the alteration.  Also, it is useful to note that, in Colorado, the governmental immunity statute, C.R.S. §§ 24-10-101, et seq., does not apply to drainage easement disputes.  Upper Platte and Beaver Canal Co. v. Riverview Commons General Improvement Dist., 250 P.3d 711, 714-15 (Colo. App. 2010).  Thus, even if the downstream drainage blockage is created by a governmental entity, it could still be required to remove the blockage and even found liable for damages.

Upstream property owners have standing – that is, the right to file suit – to seek recovery of damages for the injury resulting from flood waters backed up by blockage of the downstream drainage.  In Romano v. Village of Glenview, 660 N.E.2d 56 (Ill. App. 1995), homeowners brought an action against the developer of a residential subdivision for injunctive and declarative relief seeking to have the developer replace drainage channels on their properties with underground drainage systems or, in the alternative, to require that the natural flow of surface water be restored so as not to flood the plaintiffs’ land.   In Romano, the city intervened, filing a motion to dismiss—based on governmental immunity and lack of standing—and contending that the plaintiffs had not alleged injury in fact.  The trial court granted the motion.  The Illinois Court of Appeals reversed, holding that the plaintiffs had alleged injury-in-fact that the drainage channels created unreasonably dangerous conditions for their children, deprived them of the use and enjoyment of their yards, and created soil erosion in their yards.

NLRB signals to employers in the gig economy

memo2
Properly classifying employees, or restructuring the job so workers are truly independent contractors, just took on greater importance with a recent NLRB signpost.

The independent federal agency, which is authorized to sue private sector employers for unfair labor practices, released a memo signaling its approach toward employers who misclassify employees as independent contractors. The Board held that by treating workers as employees in virtually every respect while continuing to insist that they are independent contractors, the employer committed unfair labor practice. The Board was persuaded that the employer actually maintained extensive control over the workers’ day-to-day operations, notwithstanding a form agreement stating that workers are independent contractors.

Although this theory currently remains untested in the courts, it is consistent with NLRB precedent and, under the Board’s Non-Acquiescence Policy, likely to be applied until taken up by the Supreme Court.

The NLRB is the latest agency to scrutinize the practice by employers of shoehorning workers into the independent contractor classification, viewed as harmful to workers, law-abiding employers, and the overall competitiveness of the U.S. economy. The Department of Labor issued its memorandum indicating that this practice would be a priority for its enforcement efforts back in July 2015.

For background information on the NLRB, along with summaries of some recent issues it has addressed, see this slideshow, prepared for a legal education seminar by our attorney Dipak Patel.

 

3-D model for use in trial

For a recent client, we created a digital 3D model to use as demonstrative evidence at trial. The case was about water intrusion into a home, the cause of which was defective grading. The model clarified certain details of the home’s construction and illustrated our expert’s conclusions about how the building had flooded.

 

Local Construction Defect Ordinances in Colorado

The Colorado Construction Defect Action Reform Act (“CDARA”) was first enacted in 1999, with various statutory modifications passed every few years.  See C.R.S. §§ 13-20-801, et seq.  Amendments to CDARA broadened the reach of the statute to matters of notice, insurance, waiver of warranties and damages.   CDARA now establishes a procedure to notify construction professionals of possible construction defects, and it provides for an inspection and opportunity to cure or settle defect issues.  Completion of the CDARA process is a condition precedent for initiation of construction defect litigation.

One of the more troubling developments in residential construction disputes in the past several years is the enactment of local construction defect ordinances in a number of Colorado home-rule cities including Denver (Ordinance No. 15-0811), Colorado Springs (Ordinance No. 15-93), and Aurora (Ordinance No. 2015-35), to name a few.   These ordinances sometimes imitate, but don’t faithfully replicate, the CDARA requirements resulting in a patchwork of local laws that sometimes contradict, and otherwise cannot be harmonized with CDARA.

There are very real unanswered questions as to the validity of these ordinances.  The ordinances present compelling legal issues as to constitutionality and preemption, and they create uncertainty as to the rights and obligations of the parties to a construction project.  Thus there are very real challenges for the legal practitioners and potential problems for builders, developers and property insurers.  So far this is uncharted territory as the courts have not yet addressed any of these issues.  The lesson is to beware.  It’s a procedural jungle out there.

Improving Project Outcome with Accurate and Effective Construction Contracting

Construction Law Seminar 2016

Click to view brochure.

Ken Robinson will offer a session on construction contracts at the Construction Law seminar in Denver on Wednesday, June 8, 2016. His session will cover contract terminology, understanding contractual obligations, subcontract formation and administration, performance and payment issues, and breach of contract and default.

Architects, landscape architects, and professional engineers can earn continuing education credits for attending.

The seminar will take place at the Holiday Inn, Cherry Creek. For more information and to register, click here.

 

 

Recovering damages for harm to property due to a neighboring excavation

Let’s say that your neighbor has excavated on their land, and you subsequently find some evidence of subsidence on your property: growing cracks in walls or foundation, for instance. Your neighbor’s excavation might have affected the “lateral support” for your land. As a Colorado landowner, you are entitled to have your land remain in its natural state,[1] and the soil in neighboring property helps to support that state. You could pursue a claim against the next-door excavator based on one of two legal theories: strict liability or negligence.

Strict liability is available to an owner whose property was in a natural and unimproved condition.  Even if improvements have been made, strict liability might apply if the weight of additions to the property cannot be found to have “materially increased the lateral pressure” on the land, thereby acting as the proximate cause of damage.[2]  The rationale is that “a landowner cannot, by placing improvements on its land, increase its neighbor’s duty to support the land laterally.”[3]  To claim strict liability for loss of lateral support, therefore, one must compare the support required by the land in its original, unaltered state with the support required by the same land with its improvements.

If the weight of improvements has materially contributed to the subsidence on the plaintiff’s property, any liability must be based on the theory of negligence.[4]  For an excavator to be found liable for negligent withdrawal of lateral support, four elements must be present: (1) the withdrawal of lateral support; (2) the negligent character of the withdrawal; (3) resulting harm to land or to artificial additions thereon; and (4) absence of any action by the landowner that would undermine the claim.

No Colorado decisions have directly addressed what constitutes a negligent withdrawal under requirement 2, but, fortunately, both the Restatement and case law from other jurisdictions fills in the gaps.  In order to avoid negligence, an excavator must take “reasonable precautions to minimize the risk of causing subsidence,” and provide notice to an adjacent landowner of “excavations which certainly will harm his structures.”[5]  To minimize risk, an excavator must thoroughly investigate soil conditions and exercise reasonable care in all operations.[6]  As to the notice requirement, a failure altogether to notify an adjoining landowner of excavations has been regularly held to constitute negligence[7], while what constitutes “adequate” notice depends on the facts of the case.[8]

Here’s an interesting differentiation between strict liability and negligence theories of lateral support removal: In a strict liability proceeding, “the kind of lateral support withdrawn is material, but the quality of the actor’s conduct is immaterial.”  No matter how cautious the excavator, if the property suffers, he is strictly liable.  Contrarily, in a proceeding based upon negligence, “the kind of lateral support withdrawn is immaterial, and the quality of the actor’s conduct is material.”[9] No matter the type of support required, the excavator has a duty to use reasonable care.

 


[1] Colo. Jury Instr., Civil 12:14.

[2] Gladin v. Von Engeln, 575 P.2d 418, 420 (Colo. 1978).

[3] Vikell Investors Pacific, Inc. v. Hampden, Ltd., 946 P.2d 589, 594 (Colo. App. 1997).

[4] Colo. Jury Instr., Civil 12:14.

[5] Id. at (e).

[6] See St. Joseph Light & Power Co. v. Kaw Valley Tunneling 589 S.W. 29 260, 267-68 (Mo. 1979); New York Central R.R. v. Marinucci Bros., 149 N.E.2d 680, 682 (Mass. 1958).

[7] See Waters v. Biesecker, 298 S.E.2d 746, 748-49 (N.C. Ct. App. 1983) aff’d, 305 S.E.2d 539 (N.C. 1983); Hermanson v. Morrell, 252 N.W.2d 884, 892 (N.D. 1977)

[8] See XI Properties, Inc. v. RaceTrac Petroleum, Inc., 151 S.W.3d 443, 449 (Tenn. 2004) (thirty days was a reasonable notice for planned excavation of sloped embankment); Smith v. Roberts, 370 N.E.2d 271, 274 (Ill. App. Ct. 1977) (notice that did not give the depth of the planned excavation was inadequate under Illinois’s Protection of Adjacent Landowner’s Act).

[9] Restatement (Second) of Torts § 819.