Chapter 10 - § 10.2 • THE CONTRACT

• Jurisdiction: Colorado

§ 10.2 • THE CONTRACT

The two types of contracts that a contractor most frequently encounters are the prime contract, between the owner and the contractor, and the subcontract, between the contractor and its subcontractors, who are performing part or all of the work on the project. There are certain key provisions in these contracts that can dramatically affect the contractor's profit or fee on a project, even though the provisions often do not directly relate to the definition of the contract sum or the cost of the work. Most of these provisions apply equally to the prime contract and to the subcontracts, and the contractor must ensure that its rights and obligations with respect to the owner and with respect to its subcontractors are consistent and harmonized. The clauses deserve special attention.¹

§ 10.2.1-Substantial Completion

"Substantial completion" generally determines the point at which delay damages may commence, liquidated damages end (or are reduced substantially), retention must be released, the owner becomes responsible for insuring the project and for utilities for the project, warranty periods start, the limitation period for making claims on bonds begins, and the limitation period during which the contractor may have legal liability for claims relating to the project begins.² This is, therefore, a key provision in the general contract, and careful attention should be paid to the definition of "substantial completion" and any provisions that may impact upon that definition.

Under Colorado law, in the absence of a statute or contract provision defining substantial completion, substantial completion is generally deemed to have occurred at the point that the only deviations from final completion do not materially interfere with use of the premises and can be conveniently remedied.³ Thus, where all the essential elements of the work have been completed and only "trivial imperfections" remain, the project will be considered substantially complete.⁴ For example, the court of appeals has held that substantial completion occurs upon habitability of a building as evidenced by issuance of a certificate of occupancy.⁵ Upon substantial completion, the contractor is entitled to payment of the contract price, less any deductions, including deductions for the work to be remedied.⁶

With respect to public contracts for construction, C.R.S. § 24-91-102(5) defines substantial completion as "the date when the construction is sufficiently complete, in accordance with the contract documents, as modified by any change orders agreed to by the parties, so that the work or designated portion thereof is available for use by the owner." Although Article 91 deals with retention of funds on public contracts, the definition should also be applicable for purposes of commencement of warranty periods and statutes of limitations.

Owners frequently propose contracts that define substantial completion in a manner requiring a final certificate of occupancy, or completing all punch list work, thereby potentially delaying final payment and commencement of warranty periods. Such contract provisions should be avoided, as they give the owner the ability to make it very difficult, if not impossible, for the contractor to attain substantial completion, even though the owner may be able to beneficially occupy the project.⁷

§ 10.2.2-No-Damages-for-Delay

Generally, a contractor is entitled to recover damages for delays in the progress of the work if such delays were caused by the owner, whereas only time extensions are available if the delay is caused by neither party (e.g., unanticipatable weather conditions, acts of God). However, if the prime contract contains a no-damages-for-delay provision, the contractor can only receive a time extension for delays, even if the owner causes those delays.

Such clauses are invalid with respect to any public projects constructed by the State of Colorado or a political subdivision, although public works contracts can prohibit the contractor from recovering damages for delays caused by the contractor or its agents.⁸ On private projects, no-damages-for-delay provisions are enforceable absent fraud, bad faith, coercion, or other inequitable contract by the owner.⁹ Other states have found an additional exception to enforceability of the provision, where the delay is found to be beyond the contemplation of the parties at the time of contracting.¹⁰ Colorado has not yet considered this exception in reported decisions.¹¹ See §§ 11.9.1, 17.5.2 through 17.5.4, and 20.2.1.

In light of the absence of controlling Colorado authority, contractors faced with a potential limitation of damages under a no-damages-for-delay clause should consider numerous judicial exceptions adopted in other jurisdictions.¹²

§ 10.2.3-Liquidated Damages

Liquidated damages constitute a fixed amount of damages set by contract to quantify compensation due the owner for unexcused contract delays, and they are used frequently in construction contracts. A liquidated damages provision in an owner contract is generally intended to preclude the owner from recovering any other type of damages for delay.¹³

In order to be enforceable, a liquidated damages clause must satisfy three conditions:

1) At the time the contract was entered into, the anticipated damages in case of breach were difficult to ascertain;
2) The parties mutually intended to liquidate them in advance; and
3) The amount of liquidated damages, when viewed as of the time the contract was made, was a reasonable estimate of the potential actual damages the breach would cause.¹⁴

There is some authority to the effect that if the amount of liquidated damages is disproportionately in excess of the actual damages incurred, the liquidated damages provision is void.¹⁵ In addition, there is no legal requirement that a liquidated damages clause specify a dollar amount. Instead, liquidated damages may be tied to any readily ascertainable standard.¹⁶ Liquidated damages clauses are enforceable in public construction contracts if the amount is "reasonable."¹⁷ A contract may grant a party the option to pursue either liquidated damages or actual damages so long as the election to pursue one type of damages excludes recourse to the other.¹⁸ However, liquidated damages will not be awarded in favor of a party who was at fault, in whole or in part, in causing the delay.¹⁹

It is important that the contract state that liquidated damages are in lieu of any other damages for the contractor's delay, including actual, incidental, and consequential damages. Since liquidated damages usually stop accruing upon substantial completion,²⁰ the contractor should ensure that there is an acceptable contract definition for substantial completion.²¹ In addition, the contract should provide that time extensions will be granted (thereby extending the date of substantial completion) for everything that is beyond the contractor's control, including delays caused by the owner and its agents, adverse weather, fires, accidents, strikes and other labor unrest, unforeseen site conditions, and changes to the contract. The 2017 version of AIA Document A201 permits time extensions for delays in the commencement of the work, as well as delays in the progress of the work, and this is an important provision to include in all owner contracts.²² See § 26.3.4.

Finally, it should be noted that an unenforceable liquidated damages clause will not preclude recovery for delay damages; instead, the party seeking damages may be able to recover them upon adequate proof of actual (as opposed to liquidated) damages.²³ In fact, the Colorado Supreme Court has held that a contract clause that allows a party to elect between actual and liquidated damages does not per se render the liquidated damage clause void.²⁴

§ 10.2.4-Consequential Damages

Consequential damages - as distinguished from direct damages - are damages that result from the breach, but do not normally result in the ordinary course from the breach.²⁵ These damages must be foreseeable at the time of contracting, and generally include economic loss incurred as an indirect consequence of the breach, such as lost profits and diminution in value.²⁶ A good examination of how the scope of permissible damages is defined by the courts may be found in Denny Construction, Inc. v. City & County of Denver,²⁷ a Colorado Supreme Court case in which the court held that upon proper proof, contractors may recover damages associated with the loss of bonding capacity arising from an owner's breach.

Under the Colorado Uniform Commercial Code (UCC), consequential damages in the context of a sale of goods are defined as "[a]ny loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented."²⁸ The Colorado Supreme Court has held that the UCC applies to construction contracts if the predominate purpose of the transaction is a sale, with labor incidentally involved, as opposed to the situation where the primary purpose is the rendition of services, with goods incidentally involved.²⁹

Section 15.1.7 of the 2017 version of AIA Document A201 provides that both parties waive consequential damages and gives examples of the types of damages included in such waiver. (See Appendix A.) For example, the owner's waiver includes rental expenses; losses of use, income, profit, financing, business, and reputation; and loss of management or employee productivity or of the services of such persons. The contractor's waiver includes principal office expenses (such as the compensation of personnel stationed there); losses of financing, business, and reputation; and loss of profit other than anticipated profits arising directly from the work.

The contractor should be aware that there are circumstances in which the owner may recover consequential damages even if the contract prohibits such damages. For example, in Cooley...