Chapter 14 - § 14.7 • EQUITABLE CLAIMS ARISING FROM THE CONSTRUCTION AND SALE OF A HOME

• Jurisdiction: Colorado

§ 14.7 • EQUITABLE CLAIMS ARISING FROM THE CONSTRUCTION AND SALE OF A HOME

§ 14.7.1-Rescission

Rescission of a real estate purchase may be granted "if the facts show that there is a substantial breach, that the injury caused is irreparable, or that damages would be inadequate, difficult, or impossible to assess."¹⁷⁷⁴ In Wall v. Foster Petroleum Corp., the court allowed rescission even though the builder-vendor was not negligent and made no knowing misrepresentations, where the water pressures exerted through the underlying soils allowed water to seep into the basement and caused cracks in the basement slab, basement drywall, and upper levels of the home.¹⁷⁷⁵ Rescission may be an appropriate remedy for a vendor's misrepresentation accompanying the sale of a new home, even if the vendor did not knowingly make the misrepresentation.¹⁷⁷⁶ Similarly, rescission may be appropriate when a contractor does not have a required license.¹⁷⁷⁷ Rescission also may be allowed in cases of mutual mistake, fraud, failure of consideration, or impossibility of performance.¹⁷⁷⁸

Where rescission of a home sale is allowed, the buyer may also be entitled to damages such as the value of any home improvements the buyer has made and the amount of any personal property damage resulting from the home's defects,¹⁷⁷⁹ including prejudgment interest from the date of the demand to rescind the transaction.¹⁷⁸⁰ However, the trial court should value the buyer's use of the property from the time the buyer gained possession, i.e., calculate the rental value the buyer has derived from his or her use of the property, and charge that value against the buyer in the damages computation.¹⁷⁸¹ A party breaching a contract resulting in mutual rescission may be required to disgorge to the non-breaching party any benefits received as a result of the breach because it is in the trial court's discretion to determine the method of returning parties to the status ante quo.¹⁷⁸² Following rescission, a party may not recover attorney fees under a contract's attorney fees provision because the remedies of rescission and contract enforcement are inherently inconsistent.¹⁷⁸³ A lost property appreciation award through the rescission date may be proper.¹⁷⁸⁴

A party seeking rescission of a contract must do so within a reasonable time, but what constitutes a reasonable time depends upon the facts of each particular case and must be determined by the trier of

fact.¹⁷⁸⁵

§ 14.7.2-Unjust Enrichment

Unjust enrichment is a legal claim in quasi-contract, for money damages, based upon restitution principles.¹⁷⁸⁶ "In Colorado, contract implied in law, quasi-contract, quantum meruit, and unjust enrichment are essentially equivalent terms for an equitable claim."¹⁷⁸⁷ A person unjustly enriched at the expense of another is required to make restitution to the other. "When restitution is the primary basis of a claim, as opposed to a remedy for bargains gone awry, it invokes a 'contract implied in law.'"¹⁷⁸⁸

"The unjust enrichment claim in the context of a contract implied in law does not depend in any way upon a promise or privity between the parties"; rather, the "claim arises . . . from the law of natural immutable justice and equity."¹⁷⁸⁹ "Thus a 'contract implied in law' is not really a contract at all, and may even be imposed in the face of a clearly expressed contrary intent if justice requires."¹⁷⁹⁰ An unjust enrichment claim is proper when "substantial changes occur [in the scope of construction] that are not covered by the contract and are not within the contemplation of the parties, and when the effect of such changes is to require extra work or cause substantial loss to one party."¹⁷⁹¹

In an unpublished decision, the Colorado Court of Appeals distinguished between a claim for a contract implied in law and a contract implied in fact.¹⁷⁹² The court explained that while a contract implied in law arises from natural justice and equity with no need for consent from the parties, "there is little fundamental difference between an express contract and a contract implied in fact. An express contract is evidenced by the parties' written or oral words, while a contract implied in fact is based on the conduct of the parties, which evidences a mutual intention to enter into a contract and establishes the agree-ment."¹⁷⁹³ The court found that the plaintiff designer/builder would not have prevailed on its breach of implied in fact design services contract claim against the defendant homeowners as a matter of law because, although the parties impliedly agreed that the plaintiff would provide design services in exchange for their fair market value, the plaintiff breached the implied-in-fact contract when it refused to allow the homeowners to use the plans when they decided to hire a different builder to build the house.¹⁷⁹⁴

§ 14.7.3-Restitution

"Restitution" measures its remedy by the defendant's gain and seeks to force disgorgement of that gain in order to prevent the defendant's unjust enrichment.¹⁷⁹⁵ Restitution differs in principle from damages, which latter remedy is measured by the plaintiff's loss and "seeks to provide compensation for that loss."¹⁷⁹⁶ The extraordinary remedy of restitution and disgorgement of profits may be justified due to a defendant's substantial breach of a contract, particularly where the defendant is a serious wrongdoer.¹⁷⁹⁷ In one case, the Colorado Court of Appeals found restitution of a homeowner's entire payment proper where the defendant contractor's garage, patio, and driveway work was incomplete, defective, and unsuitable for the purposes for which it was intended, and thus had no value.¹⁷⁹⁸

§ 14.7.4-Indemnity and Contribution

Typically, common law and contractual indemnity claims relating to defective residential construction will arise on behalf of developers or builder-vendors and against their subcontractors, including design professionals. Where the developer or builder-vendor lacks sufficient assets or insurance to respond to a construction defect judgment, recovery on such third-party claims may be necessary to render the property owner whole and contributions from these third parties may foster settlement. In some circumstances, it may make sense for the homeowner or homeowners' association to obtain an assignment of and pursue these third-party claims directly. Developers and builders face both legal and practical obstacles in realizing monies on these third-party claims, often finding that their indemnity provisions are being read less broadly than they had intended and that juries are unsympathetic to builders who sue "little guy" subcontractors.¹⁷⁹⁹ One Colorado district court held that CDARA's damages limitations do not apply to a developer's indemnity claim against a subcontractor.¹⁸⁰⁰

In Brochner v. Western Insurance Co.,¹⁸⁰¹ the Colorado Supreme Court limited the doctrine of common law indemnity in light of Colorado's adoption of its Contribution Among Joint Tortfeasors Act.¹⁸⁰² However, the court declined to address whether common law indemnity claims might arise from an indemnitee's vicarious liability for the conduct of the indemnitor or where the indemnitee is otherwise liable without fault.¹⁸⁰³ The Colorado Court of Appeals has approved of a common law indemnity claim in the case of a party held vicariously liable for another's negligence.¹⁸⁰⁴

Most construction contracts require downstream contractors or subcontractors to protect upstream contractors by way of express indemnity agreements.¹⁸⁰⁵ Such contractual indemnity provisions will be given a reasonable construction and enforced as written.¹⁸⁰⁶ At common law, an indemnitor can agree to indemnify another against his or her own sole negligence or fault, but such provision will be construed narrowly and in favor of the indemnitor.¹⁸⁰⁷ The enforcement and scope of an indemnity provision will turn on the precise wording of the provision.¹⁸⁰⁸ 2007 amendments to Colorado's Pro Rata Liability Act significantly restrict the scope of indemnity agreements between construction professionals.¹⁸⁰⁹ See "Statutory Limitations on Indemnity Agreements" in this § 14.7.4.

The Colorado Court of Appeals affirmed a trial court's conclusion that allowing information about an indemnitee-developer's settlement with the plaintiff homeowners' association the morning of trial would be unfairly prejudicial to and was not binding on the subcontractors, and also upheld admitting evidence about the fact, but not the amount, of the settlement.¹⁸¹⁰ The court of appeals held that since the indemnification claim was present from the beginning of the case and all parties had time to prepare for it, it was not error for the trial court to refuse to admit evidence of the amount of the settlement and its attribution and apportionment of the settlement payment among the various subcontractors' work.¹⁸¹¹

Generally, if a single indemnitee settles the underlying claims asserted against it after a single indemnitor has refused to assume the indemnitee's defense following tender, the indemnitor is liable for that portion of the settlement that falls within the scope of its indemnity obligation so long as the settlement is reasonable.¹⁸¹² A single indemnitor may be bound by settlement payment allocations among various claims or parties if the settlement agreement was reached in good faith and if the allocation is reasonable and based on the potential damages exposure.¹⁸¹³

Where an indemnitee settles two or more claims of a third party, but the indemnitor's liability extends to only one of those claims, the fact-finder must engage in a two-step process: First, "to give effect to the settlement, the fact finder must . . . determine whether the entire settlement was in good faith and reasonable."¹⁸¹⁴ Second, "if so, the fact finder must then determine the percentage of the damages that should be allocated to the . . . claim and multiply that percentage times the entire settlement amount to determine the damages for which...