Chapter 18 - § 18.2 • CONTRACT

• Jurisdiction: Colorado

§ 18.2 • CONTRACT

The seeds of almost all construction disputes are sown in the contracts entered into by and between owners and contractors, contractors and subcontractors, and subcontractors and subsubcontractors/ suppliers.¹¹ The contracts may be written or oral, with some limited exceptions,¹² or both written and oral.¹³ The contract may be a form contract developed by a professional organization such as the American Institute of Architects or the Associated General Contractors; a government contract that addresses almost any conceivable contingency; a "custom" contract developed by an owner, contractor, or subcontractor; or a purchase order, among other things. The contract provides the basic framework within which a certain performance will be exchanged for an agreed compensation. If the contract is oral and issues arise, the parties' recollection with respect to both the scope of anticipated performance and the agreed-to compensation will inevitably differ, making resolution of the dispute that much more difficult since reference cannot be made to any particular document. In such cases, the finder of fact, be they judge, jury, or arbitrator, will have to determine, in the first instance, what the terms of the contract were before determining whether there has been a breach, who committed the breach, and the damages that resulted from the breach.¹⁴

Not surprisingly then, when a dispute arises, the most frequent claim asserted is for breach of contract.¹⁵ This section addresses breach of contract claims by owners, contractors, and subcontractors; third-party beneficiary liability; the doctrine of substantial performance; conditions precedent; specific performance; and contracts implied by operation of law.

§ 18.2.1-Breach by Contractor

The most common claim by an owner against a contractor is that the contractor breached its contract by defectively performing its work. For instance, in Gold Rush Investments, Inc. v. G.E. Johnson Construction Co.,¹⁶ the developer sued a contractor for defective construction of a hotel tower. An award based upon the contractor's breach of contract was entered. While discussing the owner's damages, the court of appeals reiterated the general rule that "[d]amages for defective construction are to be measured by the cost to place the defective structure in its intended condition, unless to do so would cause unreasonable economic waste."¹⁷ This is the same measure of damages as in negligence cases,¹⁸ in spite of Colorado's continued adherence to the economic loss rule.¹⁹ The "cost of repair" measure of damages gives the owner the benefit of his or her bargain - that is, what would have been provided to the owner but for the contractor's defective performance.

An owner is not entitled to profit or receive a windfall as a result of a contractor's bad performance. In Fleming v. Scott,²⁰ a contractor improperly installed two floor furnaces. Rather than repairing the heating system or replacing the defective furnaces, the owner installed a completely different system, which necessitated some additional excavation.²¹ In overturning the jury's verdict for the new system, the court determined that, at most, the owner was entitled to the cost of replacement, or, in the alternative, she was entitled to the amount paid under the contract for the furnaces.²² "[T]he owner cannot charge the contractor for more and different kinds of materials than that embraced in the contract."²³

"Unreasonable economic waste" exists if, in order to complete the improvements in accord with the contract requirements, destruction of usable property would be necessary. The appropriate measure of damages is the difference between what the structure would have been worth had the contractor fully performed and the actual value of the imperfect structure - i.e., the reduction in market value.²⁴ If the contractor's work is totally unsatisfactory and without value to the owner, the owner is entitled to restitution of the total amount it paid under the contract.²⁵

Often, owners assert a breach of contract claim against a contractor in combination with negligence and/or other claims.²⁶ For instance, in Consolidated Hardwoods, Inc. v. Alexander Concrete Construction, Inc.,²⁷ Alexander contracted with Consolidated to pour a concrete floor for its new warehouse. Shortly after the work was completed, the floor began to crack, which worsened over time.²⁸ Consolidated sued Alexander based on alleged breach of contract and negligence, and a jury determined that Alexander had breached its contract and was negligent.²⁹ In affirming the verdict for both breach of contract and negligence, the court reviewed the parties' contract, which did not state that Alexander was required to compact the soil prior to placement of the concrete.³⁰ However, once Alexander actually took steps to compact the soil, "it had a duty to perform the work in a reasonable manner."³¹ Therefore, the court concluded that because soil compaction was not required by the contract and because the faulty compaction caused property damage in the form of cracking of the slab, the plaintiff was not limited to contract damages and the economic loss rule did not apply.³² Thus, if a contractor assumes extra-contractual duties and a breach of one of those duties causes damage, an owner is not precluded from proceeding against the contractor in both contract and tort. In fact, had the owner in Consolidated Hardwoods failed to assert a negligence claim against the contractor, it probably would not have been fully compensated for its damages since the damages awarded for the contractor's breach of contract were nominal only.³³

An owner who wrongfully claims that a contractor has breached its contract subjects itself to a claim by the contractor. An example of this is Corcoran v. Sanner,³⁴ In that case, a condominium owner sued its architect and contractor for breach of contract, negligence, and outrageous conduct.³⁵ During the construction process, asbestos was discovered and construction stopped.³⁶ After the asbestos was abated, the owner hired another contractor to complete the work.³⁷ As part of the owner's action, the contractor asserted a counterclaim for breach of contract.³⁸ The court determined that the owner's refusal to allow the contractor to complete the work was wrongful, i.e., that the owner had materially breached the contract, and awarded the contractor the profit it lost as a result of the owner's breach.³⁹ Awarding lost profits to the contractor placed it in the same position it would have been in had the contract been fully performed.⁴⁰

The breach of contract claim most typically asserted by subcontractors against general contractors is that the general contractor failed to pay for its work.⁴¹ In Scott Co. of California v. MK-Ferguson Co.,⁴² a mechanical subcontractor sued a general contractor for breach of contract as a result of the general contractor's alleged failure to pay retainage, for certain additional work, and for other damages. The subcontractor also asserted a laundry list of other claims against the general contractor, seeking the same damages.⁴³ Although a substantial jury verdict was entered in the subcontractor's favor, the verdict was overturned because the verdict did not specify to which claims the damages were allocated.⁴⁴ The trial court erred in allowing the subcontractor to pursue...