Category Archives: Construction Law

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.

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.

It’s a Duck, or Is It? Perfecting Non-Payment Claims on Quasi-Public Property

Contractors and suppliers face legal ambiguity when they encounter non-payment on a project that includes both public and private components. Under Colorado law, the mechanisms for securing payment differ for private and public projects—but what about projects that include some of both? What if it quacks like a duck and walks like chicken?

For construction work on private property, the Colorado Mechanic’s Lien Statute provides that a claimant may record a mechanics lien and foreclose on the lien, if necessary.  C.R.S. §§ 38-22-101, et seq.  But mechanic’s liens on public property are prohibited, in order  “to preserve essential public services and functions while protecting those who benefit from public services and facilities.”  City of Westminster v. Brannan Sand & Gravel Co., Inc., 940 P.2d 393, 395 (Colo. 1997).

For construction work on public property, the Colorado Public Works statute provides a different means for a claimant: a lien against dispersed construction funds. See Fladung v. City of Boulder, 165 Colo. 244, 252, 438 P.2d, 688, 692-93 (1968). Principal contractors on public projects must provide bonds to ensure payment to subcontractors and suppliers. Unpaid claimants are entitled to file a verified statement of claim directly with the owner, creating a lien on undisbursed construction funds.  C.R.S. §§ 38-26-101, et seq.

However, in some situations, it is not clear whether a project is private or public, and a claimant may be unsure whether to file a mechanic’s lien or a verified statement of claim. Under these circumstances, the claimant must sometimes look beyond the status of the underlying real property and even behind the contractual relationships on the project, to determine how to perfect security for a claim.

For example, a project might be owned by a private, non-profit organization, but the underlying property may be owned by a public entity, or the project may be funded, in whole or in part, by public funds.  In such situations, it becomes a dispute over fact—which must be determined by a trial—as to which statutory scheme applies. By the time this disputed fact is revealed in a lawsuit for non-payment, it may be too late to perfect a statutory claim.

In situations where both private and public entities might be involved, it is necessary to analyze the specifics to determine whether to perfect a mechanic’s lien against the property and/or the improvements; or to file a verified statement of claim with the owner; or, potentially, both.  And there may be other steps possible to protect a claimant’s rights.

 

Mediating Residential Construction Disputes

by John Tweedy[1]

            There are many variations on the stormy topic of residential contracting gone wrong.  But the common theme for lawyers, whether representing homeowners or construction professionals, is a case that is factually dense, procedurally complex, and emotionally charged.  As a result, these disputes can sometimes cost as much – or more – to litigate as the amount in controversy.    It’s the kind of case that lawyers and clients would love to see resolved in mediation, before the dispute sinks into a welter of fees and frustration.

And yet, early mediation often fails to resolve homeowner construction disputes – precisely because of that same mix of factual density, procedural complexity, and emotional voltage.  Lawyers hoping to succeed in mediation can maximize their odds of getting to resolution by bringing five things to the mediation table: 1) a clear project accounting; 2) a reasonable expert report; 3) a handle on the relevant legal procedure; and 4) an aggressive approach to insurance; and 5) an appraisal of the client’s emotional needs.

1.         Project Accounting.  Any well-run residential construction project involves a system for budgeting project costs and tracking expenditures.  Conversely, a common denominator for projects gone wrong is that the project accounting has either run off the rails or never existed to begin with.  Thus, the lawyer who assembles the clearest, most accurate project accounting will command the high ground in any mediation where project dollars are at stake.   Such an accounting will necessarily identify areas where owner and contractor disagree, where payments may have been misapplied, and where cost overruns occurred.  In essence, a good project accounting serves as a “reality principle” on which meaningful settlement conversations can be based.   Without it, the mediation will likely be frustrated by the parties’ inability to find a common financial frame of reference.

In practice, however, this advice is easier given than taken, because the parties may lack sufficient information to compile such an accounting without access to the files of the adversary.  There are two ways to address this problem.  First, counsel can insist on an exchange of project information ten days prior to mediation.  Owner and Contractor can agree to exchange emails, bank statements, timecards, materials receipts and other job records that will allow the parties and counsel to create an accounting.  If a Contractor refuses, the Owner can point out that a Contractor is required to maintain a separate accounting for every construction project, pursuant to § 38-22-127(4), C.R.S.  If an Owner is the recalcitrant party, the Contractor can rely on provisions in the construction contract requiring the Owner to furnish project-related information on request (if the contract has such language).

2.         Expert Reports.  The other basic “reality principle” in construction defect cases is the expert report.  Parties without experts are likely to disagree fundamentally over whether certain workmanship is defective at all.  Even with experts involved, there is likely to be disagreement over the extent, severity, and cost to repair a claimed defect.  However, the differences between the competing expert reports will at least provide a basis for identifying specific disagreements, and a dollar figure in dispute, as to the defects.  These parameters create the basis for a bargaining range, and for the evaluation of possible compromise.

In small disputes, it may not be cost-effective to obtain a full-blown expert report.  However, at a minimum, an estimate from an independent contractor, engineer, or other construction professional will nevertheless be important to substantiate any claims of defective construction – or to rebut such claims – and to provide evidence of costs.

3.         Procedural Context.   Construction defects are subject to early notice and inspection requirements under the Construction Defect Action Reform Act (“CDARA”), § 13-20-801 et seq., C.R.S.[2]  Unpaid contractors and subcontractors’ lien and disburser rights are subject to early notice and recording requirements of the Mechanics Lien Law, § 38-22-101, et seq., C.R.S., and the Disburser’s Statute, § 38-22-126, C.R.S.  Claims against architects and other licensed professionals are subject to a Certificate of Review, pursuant to §13-20-602, C.R.S.  If these procedures and deadlines are not attended to before mediation, a party may find itself unable to bargain effectively, even if a case is well shy of any statute of limitation.

4.         Insurance Issues.  The law of insurance coverage for residential construction defects is contested and evolving.  See, e.g.,  TCD, Inc. v. American Family Mutual Insurance Co., 2012 WL 1231964 (Colo. App. 2012).  Both homeowners and contractors have an interest in making sure that insurers are notified, that adjusters have an opportunity to inspect claimed defects, and that policy periods and possible exclusions are identified before mediation occurs.   If these issues are not addressed in advance, the mediation is likely to be missing a key participant – the informed insurance adjuster.

5.         The Parties’ Emotional Needs.  Lawyers should be alert to common patterns of emotional distress in residential construction that can derail an otherwise reasonable settlement discussion.  Homeowners, especially those in remodel cases, are likely to have approached the original construction project with excitement and a deep emotional investment in beautifying their personal space.  Contractors, in turn, often invest a sense of craft – indeed, artistry — in their work.  The initially-shared emotional bond between owner and contractor can cause them to neglect formal safeguards, such as complete contracts and other construction documents.   After the project goes awry, personal betrayal and distrust on both sides bites sharply; the Owner may experience shoddy construction as an almost bodily sense of violation, while the Contractor feels attacked in a way that can penetrate to his core sense of self.[3]

Some attorneys do not believe it is their job to venture into such emotional terrain, and some clients may be unable to admit or articulate such emotional needs.  However, an attorney who hopes for an early settlement should at least evaluate the likely role of emotions in the mediation process, and should be aware of a few common strategies to address them.   For example, some clients may have a strong need to “tell the story,” if not to a judge, then to an empathically-attuned mediator, during a separate caucus that is devoted largely to that activity.   Once unburdened of the need to “speak truth,” this person may be psychologically freed-up to focus on the economics of settlement.   Conversely, some parties may need to hear an explanation – if not an apology – from the other side, requiring a joint session in which the emotional need is to “understand how all this happened.”  If a client has this need, then coordination between counsel may be helpful in advance of the mediation, so that the party who is being asked to “explain” can prepare appropriately.  If the need for “explanation” becomes apparent during the mediation itself, the mediator can help the “explaining” party prepare in a caucus (complete with a rehearsal of what the person intends to say) before getting back together in joint session.  These steps can minimize the risk that the “explaining” party may admit too much, or deny too much, or attempt to say the right thing in the wrong way.

In sum, successfully mediating residential construction disputes draws on lawyers’ and mediators’ expertise in the areas of project accounting, building science, and procedural construction law, as well as their familiarity with insurance issues and their ability to attend to emotional issues.  Despite these challenges, clients can reap huge benefits when residential construction cases are settled fairly at an early stage — before the costs of litigation on all sides mount to the point where every participant becomes a loser.



[1] John Tweedy mediates and litigates construction disputes, and other civil matters, with Robinson-Tweedy, P.C.  This article was originally published in the March 2013 Newsletter of the Boulder County Bar Association.

[2] For a fuller discussion of the CDARA requirements, see “Statutory Regulation of Construction Defects,” Boulder County Bar Newsletter (Nov. 2012).

[3] Attorneys often fail to appreciate litigation’s emotional toll on clients.   For an empirical view of “litigation stress” and its affects, see Picou, “When the Solution Becomes the Problem: The Impacts of Adversarial Litigation on Survivors of the Exxon-Valdez Oil Spill,” 7 U. St. Thomas L.J. 68 (2009).

Relying on Federal law, Colorado Court holds that a court may award an equitable adjustment that is less than a contractor’s unexpected increased costs when it finds that the contractor shares responsibility for the increase.

When unanticipated site conditions are discovered during a construction project, who is responsible for the increased costs?  Including an equitable adjustment provision in a contract can be an effective way to distribute the risk of unanticipated site conditions.  In Colorado there is much Federal law addressing the use of equitable adjustment provisions in contracts, but Colorado state courts have been silent until now.

The Colorado Court of Appeals recently addressed the issue of equitable adjustment provisions in Parker Excavating, Inc. v. City and County of Denver (October 2012).  Parker was hired to construct a dam and signed a contract with an equitable adjustment provision.  The provision stated that an adjustment in the contract price would be allowed in the event that an “uncovered” condition caused an increase in cost.

The City paid Parker an additional sum to compensate for the increased cost after muck was discovered at the site, but it was not enough to cover all of Parker’s additional costs, so Parker sued for the remainder.  The district court found that Parker’s costs had increased by $2,373,679, but reduced Parker’s award to $1,650,000 finding that Parker shared some of the responsibility for failing to discover the unanticipated muck.  Parker appealed, contending that the trial court was wrong to award it equitable relief rather than legal damages, and that the court should have awarded Parker the full amount of its increased excavating costs.

The Court of Appeals affirmed, finding that the plain terms of the contract provided for a fair adjustment to the contract price to account for increased costs caused by unanticipated site conditions (thus, the essence of the remedy Parker sought was equitable).  Since no Colorado appellate court had reviewed an award of an equitable adjustment for unanticipated site conditions, the court addressed Parker’s assertion that it should have been awarded the full amount of its increased costs under Federal law.  Federal courts have found that the amount of equitable adjustment may be reduced to account for a contractor’s shared responsibility.  Finding that Parker should have conducted its own core sampling, the court affirmed the reduced award.

The lesson for both owner and contractor is that Colorado courts may now award an equitable adjustment that is less than a contractor’s increased costs in order to account for the contractor’s share of responsibility, and may look to Federal cases in that area for guidance.

A contractor is a “first-party claimant” with respect to a homeowner insurance policy, and is therefore entitled to seek relief for the improper denial of a claim.

There are many unanswered questions at the intersection of construction and insurance law, one of which the Colorado Court of Appeals recently addressed in Kyle W. Larson Enterprises, Inc., Roofing Experts, d/b/a The Roofing Experts v. Allstate Insurance Company (September, 2012): a contractor may sue an insurer as a “first-party claimant,” and may seek punitive damages when the insurer improperly denies a claim.

The contractor in this case (a roofer), contracted with the owners of four homes insured by Allstate Insurance Company to repair their roofs. The contracts provided that the repair costs would be paid from insurance proceeds and granted the roofer full authority to communicate with Allstate regarding all aspects of the insurance claims. Allstate refused to pay claim amounts for additional repairs required under the applicable building code and the roofer filed suit.  The district court dismissed the claim, finding that the roofer was not a “first-party claimant” and thus could not seek relief against Allstate.

Colorado Revised Statute § 10–3–1115 addresses the “[i]mproper denial of [insurance] claims” and states that a person engaged in the business of insurance “shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of any first-party claimant.”  The section goes on to define “first-party claimant” as, among other things, an individual asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy. This definition is important because when unreasonable delay or denial in the payment of an insurance claim occurs, a first-party claimant may sue to recover attorney fees, court costs, and two times the covered benefit. 

The Court of Appeals held that the General Assembly’s intent in passing the sections discussed above was to create a statutory duty for insurers to refrain from unreasonable delay or denial of payment of  insurance claims.  Given this intent, the Court construed the above statutes to include contractors such as the roofer.

The lesson for contractors is this: when a homeowner/insured gives a contractor the authority to communicate directly with their insurance company regarding claims based on work done by the contractor on the insured’s property, the contractor meets the statutory criteria for “first-party claimant” and may assert a claim directly against the insurance company for unreasonable delay or denial of payment of insurance claims.