Chapter 14 - § 14.4 • CONTRACT CLAIMS ARISING FROM THE CONSTRUCTION AND SALE OF A HOME
| Jurisdiction | Colorado |
Any bargained for and voluntary agreement between the builder-vendor and purchaser of a home gives rise to specified rights and obligations based on the express terms of the home purchase or construction contract. In addition, other rights and obligations are implied as a matter of law. Colorado statutes may shape the interpretation and enforcement of these express and implied rights and obligations. Remember that CDARA II applies only to "actions claiming damages, indemnity, or contribution in connection with alleged construction defects,"819 that is, actions alleging a "defect in the design or construction of an improvement to real property."820 Thus, claims arising from a failure to complete construction, such as when a construction professional walks off of or fails to return to a jobsite, perhaps due to the owner's failure to pay what is required under a contract, or due to an owner refusing a construction professional entry onto a jobsite because of reasons unrelated to defective work, may fall outside CDARA's scope, and be governed solely by the contract and the common law. Other disputes may involve a combination of CDARA and non-CDARA claims.
§ 14.4.1-Breach of Contract
A "contract" is a mutual agreement, a "meeting of the minds," to sufficiently definite terms.821 Most contracts relating to the sale of land or a new home must be reduced to a writing to be effective.822 A complete discussion of the rights and responsibilities of the parties to a construction contract is contained in Chapter 1, "The Construction Process and Parties." Generally, the plaintiff must establish the following to prove breach of contract: (1) the contract's existence; (2) the plaintiff's performance or justifiable non-performance; (3) the defendant's failure to perform; and (4) damages.823
§ 14.4.2-Breach of Express Warranties
A warranty is "an express or implied promise that something in furtherance of the contract is guaranteed by one of the contracting parties."824 An assertion at the time of sale is a warranty by the seller, if so intended.825 Such intention may be inferred from circumstances revealed in the evidence.826 Express warranties are usually written on the face of a contract or created by the overt words or actions of one party.827 Whether a particular statement constitutes an express warranty is generally a question of fact.828 A warranty may be express (oral or in writing)829 or implied (based on the intent or reasonable expectations of the parties, the circumstances, or as a matter of public policy).830
A warranty is a binding promise, enforceable in contract for its breach.831 A representation may or may not rise to the level of a warranty and, thus, become part of a bargained-for agreement, the breach of which is enforceable in contract.832 Depending on the circumstances, where a representation does not become part of a contract, relief for misrepresentations or unfulfilled representations may lie in either tort or equity.
In analyzing the existence of express warranties, one should examine, at a minimum, (1) the parties' course of dealing leading up to the execution of the lot or home purchase contract and the closing; (2) any material oral or written representations accompanying the marketing of the home upon which the home buyer reasonably relied; (3) the home purchase contract; (4) the closing documents; (5) all written warranties; and (6) the nature and subject matter of the transaction, including the features of the lot or the home itself.
Conduct may give rise to an express warranty.833 The owners of over 15,000 Colorado homes have settled class action claims against builder-vendors premised, in part, on the contention that the installation of rough-in plumbing allowing construction of a bathroom, "egress" windows necessary to build out living areas, or a walk-out feature in a basement constitutes an express representation and warranty that the basement is reasonably expected to be suitable for finishing by the homeowner at a later date.834
Many homebuilders provide a limited, express warranty with the sale of a new home. Often, these written warranties apply to defects that arise during a prescribed time and limit the remedy to repair or replacement. Frequently, these written warranties will be bundled with a commercial "home warranty" product that may provide for a third party to act as surety for the builder's performance of its warranty obligation or for the third party to underwrite liability insurance indemnifying the builder against its liability under the warranty. These "hybrid" warranty products are discussed below.
Generally, a builder must substantially perform its contract according to its terms, and it will be excused only by acts of God, impossibility of performance, or acts of the other party to the contract preventing performance. If the builder wishes to protect itself against "the hazards of the soil, the weather, labor, or other uncertain contingencies, he must do so by his contract."835 However, deviation from contract duties in "trifling particulars" that do not materially detract from the benefits the other party would have derived from literal performance does not constitute a material breach.836
14.4.2.a-Home Warranty Contracts
Builder-vendors frequently provide home buyers with express warranties regarding a new home's structure, systems, and finishes. Typically, the warranty will guarantee that defined elements of the home will perform within prescribed criteria for a specific time, most often one or two years, and guarantee the home's structural elements for a longer period, usually 10 years.
Often, express warranties attempt to disclaim or limit implied warranties of habitability, fitness, and workmanship. They also frequently contain arbitration clauses and remedies limitations. In many cases, the limited warranty agreement and its conditions are contained in a writing separate from the purchase contract and are not delivered until long after the purchase contract is signed, usually close to the closing date, and sometimes later. Often, these express warranties provide that they are automatically assigned or otherwise transferred to subsequent purchasers. The Homeowner Protection Act of 2007, discussed more fully in § 14.2.5, expressly excepts from its reach express warranties and related limitations on remedies for their breach.837
14.4.2.b-"True" Warranties
A homeowner may receive express and implied warranties accompanying the sale of a new home. As noted above, express warranties are frequently packaged with a commercial "warranty" product issued by a third party. Such products, and their issuers, have been the subject of litigation and federal and state statutory regulation.838 Several issuers of these products have become insolvent due to improper underwriting and business practices and placed in receivership or under "watch" by various state insurance regulatory agencies.839 Unlike "true" warranties extended by the builder-vendor to the homeowner in writing or implied as a matter of law, these warranty "products" often consist, in part, of promises extended by a third party to the builder-vendor, not to the homeowner. This distinction can have unexpected consequences, as explained more fully below.
14.4.2.c-Federal Liability Risk Retention Act
The federal Liability Risk Retention Act840 (LRRA) was adopted in the 1970s in response to a perceived insurance crisis affecting the availability of liability insurance for manufacturers of products and certain workers such as taxicab drivers and health care providers.841 Under the LRRA, entities and persons sharing a similar liability risk can form "purchasing groups" and, in essence, create a self-insurance pool with the hope of lower premiums due to their special knowledge of the risks being insured.842
Whether such self-insurance pools make economic sense is hotly debated. Commercial liability insurance frequently becomes unavailable when insurers become unable to accurately assess their risk or charge premiums that will return a reasonable profit. The creation of purchasing groups may sometimes be motivated by the need to secure liability insurance as a condition to qualifying for certain types of contracts or loans rather than to ensure that the premium being paid to the risk retention group is reasonably related to the risk being insured. Serious problems may arise when risk retention groups,843 whose obligations typically are not backed by state insurance guaranty funds,844 become insolvent.
14.4.2.d-Risk Retention Companies and the "Hybrid Warranty"
Beginning in the 1970s, homebuilders joined purchasing groups and obtained "insurance" from risk retention companies to insure against the risk of major structural defects in homes. Although under federal law this is a form of liability insurance, insuring the builders against their potential legal liability to homeowners for major structural defects, the insurance was first marketed as a kind of "warranty" obligation running directly to the homeowner.845
This "hybrid" product has been described as follows: During the first and second years, the risk retention group serves as a surety to the builder's obligation to correct qualifying defects under the builder's express warranty. Thereafter, the risk retention group "insures" the builder's liability to the homeowner for major structural defects.846
During the first two decades of the use of such products, builders and risk retention groups regularly marketed them as 10-year major structural defect warranties. Then, however, some risk retention groups, in particular the receiver for the now insolvent Homeowners Warranty Insurance Company (HOW or HOWIC), took the position that this 10-year major structural defect coverage is "secondary" or "excess" to all other liability insurance and any homeowner's or property insurance carried by the...
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