LandmarkChangesinColoradoConstructionLaw
ConstructionLawForum
by James W. Bain and Alvin M. Cohen
Publishedin:TheColoradoLawyer,June1997,Vol.26,No.6,pages123-126
Overthepast100years,dramaticchangeshaveswepttheconstructionindustry,includingthecurrent widespreaduseoffast-trackconstruction,computerizedcriticalpathscheduling,anddesign-buildand multi-primeprojects.Notsurprisingly,thelawhaschangedasdramatically.Whilespacelimitations precludeadiscussionofallsuchchanges,thisarticleoutlinessomeofthemorefundamental(and landmark)ones.Specifically,itfocuseson:(1)fundamentalchangesingovernmentconstruction contracting,and(2)changesinbuyerandownerprotections.
BuyerandOwnerProtections
Traditionally,buyersofdevelopedrealestatehadlittleornorecourseagainstthebuilderbecauseofthe contractlawdoctrinethat"thecontractforsalemergesintothedeed."Thiscommonlawdoctrine,based onthebuyer'saffirmativedutytoinspectbeforepurchase,oftenservedtodenyredressfordefective buildings.Therelated"mergerdoctrine"furtherlimitedabuyer'sremediesbyprovidingthatacontract forsalemergesintothedeedatclosing,sothatanycontractwarrantiesandrepresentationsexpire.
Courtsgraduallyreduced,andthenended,theharshresultsofthesedoctrinesbasedonsociety's changingperceptionofthemoralsofthemarketplace.Notsurprisingly,thesedoctrinesinitiallyfellinthe homebuildingcontext.First,themergerdoctrinewascurtailedinrulingsthathomebuyerswereentitled tocertainlimitedwarrantiesarisingfromthecontracttosellthatmergedintothedeed Moreimportant, caveatemptorfellin1964in Carpenter v. Donohoe,wheretheColoradoSupremeCourt,forthefirsttime inUnitedStates,ruledthatbuildersofnewhomesimplicitlywarrantthatahomecomplieswiththe buildingcodes,itisbuiltinaworkmanlikemanner,anditissuitableforhabitation.
FraudulentConcealment
Contemporaneouslywiththesedevelopments,courtsexpandedprotectionstobuyersbasedon fraudulentconcealmentbyestablishingtheseller'saffirmativedutytodiscloseknowndefects More recently,in Olmstead v. Herbst,requiringabuilder-vendortodisclosedefectscompletelyobviatescaveat emptor,whichwasbasedondutytoinspectandthebuyer'sobligationtoinspect
ConsumerProtectionAct
In1969,ColoradoadoptedtheColoradoConsumerProtectionAct.Thisstatutespecificallycoversreal propertyandmakesmanyactsandomissionssubjecttoitstrebledamagesandattorneyfeeprovisions. Misrepresentingthequalityorcharacteristicsoftheproperty,orfailingtodiscloseothermaterial information,maysubjectabuilder-vendortotheAct'sprovisions.Whilethisstatuteremainedrelatively quiescentformanyyears,currentlyithasexperiencedaremarkableresurgenceinconstructiondisputes becauseofitsbroadlanguageandsubstantialdamageprovisions.
NegligenceClaims
Traditionally,constructionclaimsexclusivelyresidedwithinthedomainofcontractlaw,andcourts precludednegligenceclaimsbetweencontractingparties.Courtsalsodisallowedsuchclaimsafteran owner'sacceptanceandapprovaloftheworksubjecttothecontract.Thisthird-partynegligenceclaims becauseofthelackofprivity Privityhasgonethewayofcaveatemptor,andcourtsnowallownegligence claimsbetweencontractingparties.Asaresult,negligentclaimshavebecomeanincreasinglycommon andpowerfultoolinthehandsofaggrievedparties,particularlywheretheprimecontractorisinsolvent orotherwiseunabletocomplywithitsobligations.Negligenceallowsdirectactionsagainst subcontractors,suppliers,andengineersandmayavoidcontractuallimitationsanddefenses,suchas failuretogivetimelynoticeofdefects
Thebarriertoassertinganegligenceclaimbetweenthecontractingpartiesfellradicallyin Cosmopolitan Homes,wherethecourtheld"Acontractualobligationgivesrisetoacommonlawdutytoperformthe worksubjecttothecontractwithreasonablecareandskill"Thisbroadlanguagehadfar-reaching implicationsthroughouttheconstructionindustryandcreatedthepossibilitythatvirtuallyanycontractual breachcouldbetransformedintoanegligenceclaim.
TheEconomicLossRule
Inreactiontotheincreasinguseofnegligenceclaimstorecovercontractdamages,courtsincreasingly employtheeconomiclossrule,underwhichlossescannotberecoveredintortwheretheonlydamage consistsofthefailureoftheproducttoperformasexpectedandwherethereisnounreasonableriskof harm.TheuseoftheeconomiclossruletodefeatnegligenceclaimsreceivedgreatimpetusfromtheU.S. SupremeCourt'sdecisionin East River SS Corp v Transamerica Delaval, Inc TheCourtfocusedon"the distinctionthatthelawdrawsbetweenthedisappointedusersoftheproductandthoseforleavinga partytoitscontractualremediesarestrong."Finally,thedevelopmentofacoherentbodyofcommercial law,whichaffordsmoreprotectionfromdefectiveproductsthantortlawyet,raisesthespecterof contractlawbeingallowedto"drowninaseaoftort."
Following East River,theColoradoCourtofAppealsin Jardel Enterprises, Inc v Triconsultants, Inc, specificallyrecognizedtheapplicationoftheeconomiclossruleintheconstructioncontextbyrejecting theCosmopolitanHometest.However,theeconomiclossruledoesnotpreventanegligenceactionto recoverforphysicalinjurytootherpropertyorpersonsbecause,insuchsituations,thedutybreacharises independentofthecontract.Althoughtheinterplaybetweentheeconomiclossdoctrineandthe applicablelanguagein Welder remainsanopenquestioninColorado,themorerecent East River and Jardel decisionshavebeenreliedonwithincreasingfrequency.
StatuteofLimitations
Underthetraditionaldiscoveryrule,constructioncontractorscouldbesubjectedtopotentiallyindefinite liabilitybecauseconstructiondefectsmayremainuncoveredformanyyears.In1969,Coloradoadopteda specialconstructionstatuteoflimitationsthatrequiredconstructioncomplaintstobebroughtwithintwo yearsfromdiscovery Aconstructionstatuteofreposealsowasenactedthatcutoffclaimsafter substantialcompletion.Thelegislaturethenrepeatedlyrevisedthestatutetostrengthenitsprotectionsin reactiontonarrowcourtinterpretations
In Financial Associates, Inc v VB Associates,theColoradoSupremeCourtliterallyconstruedColorado's constructionstatuteoflimitationsinfavorofahomeowner.Thecourtruledthatthestatutedidnotstart torununtilfoundationcracksfirstappearedbecausethemerepresenceofcrackswasnotsufficientto demonstratethata"defect"existed.Thecourtheldthatthestatutewas"triggeredonlywhentheplaintiff discoversorreasonablyshouldhavediscoveredthephysicalmanifestationsofadefect."Thisstatutealso reducesthestatuteofreposefromtentosixyearsaftersubstantialcompletion Thus,underthisstatute ofrepose,ownersmayfindtheirclaimsbarredbeforediscoveringanydefect.
Forstategovernments,thatchangewaseffectedbytheModelProcurementCode("MPC"),whichhas nowbeenadoptedbyfiftystates,includingColorado MPC,whichconsistsofmodelstatutorylanguage, recommendedregulations,andaccompanyingcommentary,wastheyearsofdevelopmentbeforethe AmericanBarAssociationendorseditin1979.
TheMPCrecognizedthatinconstructionandotherpublicprocurement,thegovernmentoftenneeded flexibilitytoachievevaluepurchasing.Asaresult,theMPCallowedcompetitivesealed"proposals,"under whichthestatecouldconsiderfactorsotherthanjustprice.Moreflexiblemethodcalled"competitive sealedbesttovaluebidding,"whichallowsnegotiation,andevenmoreflexiblemethodofcompetitive sealedbidsfromcontractorswithacceptabletechnicalproposals.
ProcurementMethods
Earlythiscentury,obtainingcontractsfromthegovernmentwasfrequentlyamatterofpoliticalfavors andcorruptionratherthancostsavings.Perhapsthemostdramaticchangeingovernmentcontracting
wastherequirementthatpublicadvertisingandcompetitivesealedbids Thisremainsthedominant methodofstateandfederalconstructionprocurement.
Asthecomplexityofconstructionprojectsandcontractingincreased,however,competitivesealedbids becamelesssuitableforproducingthebestqualityforthemoneyforcomplexprojects Moreover,the minimalcriteriafora"responsible"contractordidnotalwaysresultinatechnicallyproficientcontractor. Changesingovernmentlawswereneededtoaccommodatethenewmarketplaceandtechnological changes
Forthefederalgovernment,thechangewaseffectedbytheModelProcurementActof1984,broadly allowstheuseoftheprocurementprocedurethatis"bestsuitedunderthecircumstances."Numerous alternativeinformationprocurement,includingnegotiation Agoodexampleoffederalinnovationis"two stepsealedbidding,"underwhich:(1)thegovernmentpublishesaRequestforTechnicalProposal,and then(2)obtainssealedpricebidsfromcontractorswithacceptabletechnicalproposals
ContractDisputes
Creationofimpartialforumstodecideconstructiondisputesconstitutesanotherimportantdevelopment ingovernmentcontracting.Formanyyears,theonlyavailabletribunalsweretheBoardsofContract Appealsestablishedbyeachagency.AlthoughonlyappealwastotheCourtofClaims,ontherecordand notdenovo.Althoughtheseagencieswereappointedasimpartialforums,aperceptionofconflictof interestexistedbecausetheywereappointedandpaidbytheagencies,whichwerepartiestothedispute
TheContractDisputesActof1978,forthefirsttime,allowedfederalcontractorstobringtheirclaims directlyincourt.ThatActusheredinotherchanges,suchastherecoverabilityofinterestagainstthe government Previously,governmentcontractorshadtolooktotheprimecontractor,andiftheprime wentoutofbusiness,thesubcontractorcouldnotrecover.
ThisproblemwassolvedbytheadoptionoftheFederalMillerAct,whichrequirespaymentbondsto ensurepaymenttosubcontractors Coloradoprovidedanadditional,andhighlyeffective,withholding remedyforsubcontractors.Underthisprovision,oncethesubcontractorfilesaverifiedclaim,the governmentmustwithholdsufficientfundsfromtheprimecontractortoensurepaymentoftheclaim. Theseremediesplacepublicworkssubcontractorsonanequal,orperhapsbetter,footingthan subcontractorsonprivateprojects.
Agents'Authority
Governmentcontractingalsowasliberalizedwithrespecttoauthorityissues Thedoctrinethatthe governmentcannotbeboundbytheunauthorizedactsofitsagentscreatedatreacheroustrapforthe unwary.Typically,onlythecontractingofficerhadthenecessaryauthoritytobindthegovernment,for
example,contractchanges Manycontractorsfoundoutthehardwaythat,whentheycompliedwiththe directionofgovernmentengineersorinspectors,theycouldnotrecoverthecostofthatcompliance.
Overtheyears,therehasbeenasubstantialliberalizationofthisrule.TheColoradocourtshaveheldthat thegovernmentmaybebound"topreventmanifestinjustice"Asimilarresultwasreachedbystatute, underwhichacontractormayrecoverevenif"properproceduresarenotfollowedforachangeorder."In thefederalsector,liberalizationhasproceededmoreslowly.Still,federalcourtshavefoundanincreasing numberofwaystofindtherequisiteauthorityforpersonsotherthanthecontractingofficer
AppropriationsRestrictions
Anotherparticularlyunnervingtrapfortheunwaryarosewhenthegovernmentexceededits appropriationsforaproject InColorado,whereachangeorderincreasedtheprojectcostabovethe amountappropriated,thecontractorhistoricallycouldnotbecompensatedforthework.Fortunately,in 1992,Coloradoenactedlegislationthatallowsrecoveryinmanysuchcircumstances AFederalCircuitstill rulesinthisinstance,butonlywhenthecontractingofficerprovidesnoticethatappropriationswillbe exceeded.
Payment
Finally,subcontractorsnowfareconsiderablybetterintryingtogetpaid Mechanic'slienshavebeen availableonpublicworksprojects,sinceoneobviouslycannotallowtheforcedsaleofgovernment facilitiessuchasmilitarybases,prisons,orschools Accordingly,subcontractorshadtolooktotheprime contractor,andiftheprimewentoutofbusiness,thesubcontractorcouldnotrecover.
ThisproblemwassolvedbytheadoptionoftheFederalMillerAct,whichrequirespaymentbondsto ensurepaymenttosubcontractors Coloradoprovidedanadditional,andhighlyeffective,withholding remedyforsubcontractors.Underthisprovision,oncethesubcontractorfilesaverifiedclaim,the governmentmustwithholdsufficientfundsfromtheprimecontractortoensurepaymentoftheclaim. Theseremediesplacepublicworkssubcontractorsonanequal,orperhapsbetter,footingthan subcontractorsonprivateprojects.
Conclusion
Overthelast100years,theconstructionprocesshasbecomeincreasinglycomplex,whilethelawhas struggledtokeeppace.Constructionlawhasevolvedtoproduceprotectionsforbuildersandprovide moreremediesforbuyers.Evenwherethelawhasnotkeptpacewiththerapidchanges,contractorsand ownerscandosothroughthecarefuldraftingoftheirconstructioncontracts Similarly,government contractinghasbecomemorefairtocontractorsandsubcontractors,whonowhavemanymore protectionsandbenefits
1.SeegenerallyBainandCohen,"LetTheBuilder-VendorBeware,"PartI,16TheColoradoLawyer463 (March1987);PartII,16TheColoradoLawyer629(April1987)
2.388P.2d399,401(Colo.1964).
3.Schnellv.Gustafson,638P.2d850,852(Colo.App.1981).
4 SeegenerallyBainandCohen,"Negligence:TheConstructionClaimPanacea?"15TheColorado Lawyer1992(November1986),andCohen,"NegligenceClaimsinConstructionLitigation,"8The ConstructionLawyer3(April1988)
5.366P.2d673,675(Colo.1961).
6.402P.2d633(Colo.1965).
7 ColumbiaRealty-WoodlandParkCo,590P2d73,75(Colo 1979)
8.663P.2d1041,1043(Colo.1983).
9.476U.S.858,868(1986).
10.Id.
11 770P2d1301(ColoApp 1988) InScottCompanyv MK FergusonCo,832P2d1000(ColoApp 1991),negligenceclaimscouldnot
This column is sponsored by the CBA Construction Law Committee The column editor and the Committee encourage the submission of articles for this column. This month's article was written by the column editor, James W Bain, and Alvin M Cohen, a partner of Roos, Cohen & Long, PC, (303) 571-5200
TheColoradoLawyer/June1997/Vol.26,No.6/125
