Chapter 20 - § 20.2 • THEORIES OF RECOVERY
| Jurisdiction | Colorado |
Although most construction disputes arise out of a contract of one form or another, there are a number of theories upon which recovery may be had, depending upon the parties and their relationship of privity, as well as the circumstances out of which the dispute arises. For example, where an owner has acted to mislead or defraud a subcontractor, the subcontractor may be able to recover under a theory of unjust enrichment, even though there is no privity of contract.41 Similarly, an owner may sue a subcontractor in negligence absent a contract between the two parties.42 However, where a contract exists, a party may not be able to sue in negligence, unless there has been a violation of an independent duty of care outside of the contract.43
§ 20.2.1-Breach of Contract
The general measure of damages for breach of contract in a construction dispute is the sum that will place the injured, nondefaulting party in as good a position as it would have had if the contract had been fully performed.44
Generally, the measure of damages for a breach of contract is the loss in value to the injured party of the other party's performance caused by its failure or deficiency, plus any other incidental or consequential loss caused by the breach, less any cost or other loss that the injured party has avoided by not having to perform.45
The Colorado Jury Instructions provide that the general damages for an owner upon a claim for breach of a construction contract by a builder is the reasonable cost to the plaintiff owner of completing the project according to the contract, minus any unpaid balance of the contract price.46 The Restatement (First) of Contracts47 states a general formulation of damages recoverable for breach of a construction contract that was cited by the Colorado Court of Appeals in Comfort Homes, Inc. v. Peterson.48
Remedy Granting Clauses
Often, the construction contract itself will specify remedies for certain events such as delays or differing site conditions. Such contractual provisions are generally enforceable.49 Many contracts establish specific time requirements for notice or claim procedures that must be followed to assert default reme-dies.50 Principles of waiver, estoppel, and substantial performance may apply to allow claims where claim procedures have not been followed to the letter.51 Contracts can determine or affect how damages are to be computed for particular types of claims. Many contracts include specified unit prices, labor rates, or equipment rates that will apply to all claims for additional compensation.52 Profit and overhead rates may be specified or limited. More common are contractual provisions that limit the recovery that can be ob-tained.53 These include restrictions on consequential damages, "no damages for delay" clauses, liquidated damages, pay-when-paid clauses, and limitations on profit and overhead. See §§ 20.3.8 and 20.3.11.
Damages Recoverable by Owners
A construction contract describes the scope of work, which defines the contractor's obligations to perform. If the contractor fully performs, it is entitled to payment of the full contract sum, and the owner may not withhold such payment. Where the contractor has substantially performed, but has violated the strict terms of the contract, the owner is entitled to damages for the costs to correct the deficiencies. Where a breach results in unfinished construction and the loss in value to the injured party (owner) is not proved with sufficient certainty, the injured party may, nevertheless, recover damages based on "(a) the diminution in the market price of the property caused by the breach, or (b) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him."54
An owner can recover contract damages based upon one of two measures of recovery, depending upon the circumstances: the so-called "cost rule" and the "value rule."
Cost Rule
Under the cost rule, the measure of contract damages is the cost to the owner of having the correction work performed by another contractor, less the unpaid balance of the contract sum.55 Where the damages and payment for repairs are established, it becomes a rebuttable presumption that such repairs are necessary and reasonable, and the burden shifts to the contractor to establish that the repairs are unnecessary or excessive in cost.56 Not all deviations from the project plans are unreasonable, and the owner cannot be compensated for each and every deviation.57
Value Rule
Under the value rule, an owner can recover the difference between the market value of the defective work and the market value of the work if it had been constructed as contemplated by the parties. This measure of damages applies only where the cost of completion substantially exceeds the benefit received.58
Although a party is not entitled to double recovery, where a contractor's defective work causes an owner to reduce rent on the property, the owner's recovery of future lease payments and diminution of market value will not constitute double recovery.59 And, an owner may recover both the cost of repairing the construction defects, as well as a diminution in property value where the property, even though repaired, may still have a reduced market value.60 In Vista Resorts, Inc. v. Goodyear Tire & Rubber Co., the Colorado Court of Appeals held that a property owner can testify to the value of his property, including diminution in value after repair, without being qualified as an expert witness.61
An owner cannot be compensated for a "betterment" that results in an increase in value received over that obligated under the contract. Stated another way, an owner cannot recover for more and different kinds of materials than those included in the contract.62 For example, where a leaking pool had to be removed and replaced as a result of bad soils and defective construction, an owner could not charge the contractor for the additional costs of a more expensive pool.63
An owner may not assert that a contractor has breached its contract for non-payment of subcontractors as a defense to a claim for substantial performance where the owner wrongfully withholds payment from the contractor.64
Delay
An owner may be entitled to recovery of its damages as a result of the contractor's failure to complete performance within the time allowed by the contract. This may include recovery of lost profits and other consequential damages.65 If the contract contains a liquidated damages clause, the measure of damages is that provided by the contract, provided that that measure, when viewed from the time of the contracting, is a reasonable estimate of the presumed actual damages that a breach would cause.66 Otherwise, an owner is entitled to recover its actual damages caused by the delay, such as the value of the loss of use of the improvement,67 which may include the cost of renting a substitute facility.68
Depending on the circumstances, liquidated damages may be a maximum as well as a minimum sum that can be collected.69
The Colorado Jury Instructions provide a measure of damages to an owner by reason of the inability to occupy the premises due to delay in completion of a construction contract:
The reasonable net rental value, that is, the gross rental value of the [premises] minus all reasonable expenses that normally would be incurred in connection with the occupancy of the [premises] during the period for which the completion was delayed.70
See § 20.3.8.
If, in addition to the kind of breach for which the defendant has agreed to pay liquidated damages, the defendant has committed another breach not covered by a liquidated damages clause, the plaintiff may also be entitled to recover general damages sustained as a result of such breach.71
Damages Recoverable by an Architect or Engineer
Like other parties to a contract, an architect or engineer is entitled to the contract price for its services, or the reasonable value thereof, plus any other incidental or consequential loss caused by the client's breach of the professional services contract, less any cost or other loss that it has avoided by not having to perform.72 Where the contract specifies the fee of the design professional, that provision controls. Where there is no fee specified, an architect or engineer may recover the reasonable value for his or her time and services, together with anticipated profits.73 The value of the design services may be proved by expert testimony.74 A design professional may also recover for consequential damages such as an increase in professional liability insurance premiums occasioned by a frivolous lawsuit brought by a contractor.75
Damages Recoverable by Contractor
Where a contractor has substantially complied with the requirements of a construction contract, and any defects in that performance are trifling, the contractor is entitled to the contract sum, less any costs to the owner for remedying the defects.76 While there is no mathematical formula for determining substantial performance by a contractor, it generally means a good faith attempt to strictly and fully perform the contract, with only slight or inadvertent omissions or departures not affecting the value of the improvements, and which are capable of being remedied with a commensurate reduction in the contract price.77 Where a contractor breaches its contract by failing to substantially perform, it is not entitled to recover the unpaid balance on the contract.78
Where a construction contract does not provide for a fixed price, a contractor is entitled to recover its actual costs.79 Absent specific pricing, a contractor is entitled to recover the reasonable value of its services and materials for extra work, including overhead and profit.80 The markup for changed work customarily includes overhead and profit, as well as supervision time.81 Where a contractor constructed...
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