Chapter 26 - § 26.5 • SHOULD YOU INCLUDE RISK MANAGEMENT, ALLOCATION, AND TRANSFER CLAUSES IN THE CONTRACT?
| Jurisdiction | Colorado |
§ 26.5.1-Overview
So, you have reviewed and considered the risk allocation and transfer clauses outlined above, and a lot of others. And you or your client likes some of them, and maybe most of them. Should you incorporate them into your next construction contract? If you do, will a court enforce them?
§ 26.5.2-Are the Clauses Generally Valid and Enforceable?
As discussed above, most of the clauses in particular circumstances probably are valid and enforceable. However, in specific circumstances, any of the clauses may be void/voidable or unenforceable. The following is a brief discussion of some of the basic theories under which risk management and transfer clauses may be held invalid in any particular circumstance.
It is important to note that you should not simply consider each clause separately. The court probably will look at the entire package of risk management, allocation, and transfer clauses contained in the contract to determine their validity. Nonetheless, the following sections discuss general principles of Colorado law with respect to the validity and enforceability of risk allocation clauses.
Duress
Duress is usually easy to understand but difficult to define. Generally, duress is compulsion (such as to execute a contract) caused by threats that destroy freedom of will. One court has described duress as the result of unlawful threats resulting in a contract essentially unjust toward the party seeking relief.130 The elements of a contract entered into under duress are: (1) at the time the party entered into the contract, the party was not acting of his or her own free will; and (2) the party seeking to enforce the contract caused the other party's lack of free will by some wrongful act or threat.131 In some circumstances, improper economic threats may rise to the level of duress and make a contract voidable.132 On the other hand, proper economic threats, meaning threats that a party has a right to make, do not constitute duress.133
Unconscionability
C.R.S. § 4-2-302 covers unconscionable contracts or clauses in sales contracts. Unconscionability has been defined under this section as when the provision defeats the reasonable expectation of the parties.134
Regardless of whether the UCC governs the contract, Colorado courts consider four factors in determining whether a contract provision is unconscionable. The court will ask whether: (1) the contract is a standardized agreement executed by parties of unequal bargaining strength; (2) one party lacked the opportunity to read and become familiar with the document before signing it; (3) the contract used fine print in the portion of the contract containing the provision; and (4) there is an absence of evidence that the provision was commercially reasonable or should reasonably be anticipated to appear in the contract.135 Among commercial parties it is rare for a court to find unconscionability for the simple reason that a commercial party does not have to enter into a deal.136
Impossibility and Impracticability
When unanticipated circumstances have rendered contract performance impossible, the parties are excused from their contractual obligations.137 Similarly, when such anticipated circumstances render contract performance impracticable, the parties are also released from the contract.138 The significant element for impossibility and impracticability is that the arising circumstance was reasonably unanticipated by the parties. Indeed, as Williston said, "[A] [person] may contract to do what is impossible."139 However, market changes, government actions, mere difficulty, expense, or hardship are not sufficient grounds for a successful impracticability defense.140
Mistake of Fact
The Colorado Supreme Court recognizes that a bidder may rescind its bid because of a mistake of fact under certain circumstances.141 Generally, public contract law supports a contractor's bid rescission for several reasons, most notably because a bid based on mistake does not reflect a meeting of the minds.142 The court concluded that a bidder may rescind its bid when (1) the mistake is due to clerical or mathematical error, (2) the mistake was made in good faith, (3) the mistake relates to a material aspect of the bid, and (4) the public entity did not rely on the mistaken bid to its detriment.143
Though most of the courts' attention in this area is focused on public contracts, it may be a good idea for private parties to include a clause indicating that a mistake of fact is indeed contemplated by the parties. Generally, haphazard or mistaken bids indicate impending doom for both parties. A contractor that expects to lose money with a bad bid may attempt to compensate through the change order process. A bad bid may force an owner, on the other hand, into a situation where it either has to deal with additional change orders, a contractor who chooses to walk off, or litigation after the job is complete. Under even the best of circumstances, a bid based on a clerical or mathematical error has the potential to ruin a construction project.
Economic Loss Rule
The Colorado Supreme Court's decision in BRW, Inc. v. Dufficy & Sons, Inc.144 is likely to impact contract enforceability of the duty of care. In BR W, a subcontractor, Dufficy, sought to recover tort damages from the engineer, BRW, based on defective plans. BRW and Dufficy were not bound under contract; like most conventional construction projects, BRW and Dufficy were obligated only by interrelated contracts.145 As established in Town of Alma v. AZCO Construction, Inc.,146 the economic loss rule restricts parties under contract to recovery only under contract theory when suffering economic loss. BRW expanded Town of Alma to include parties connected by "interrelated contracts," or in other words, parties in a construction project who are not in direct privity. This expansion will affect subcontractors, especially when the contract between the general contractor and subcontractor, for example, includes a flow-down clause.
The other important consideration that practitioners should extract from BRW is its suggestion that in order for the economic loss rule to apply and preclude recovery in tort, parties should clearly state the duty of care in the contract.147 Stating the duty of care ensures that the parties will be held to that specific duty.148
Against Public Policy
In Stanley v. Creighton Co.,149 the Colorado Court of Appeals declared void as against public policy an exculpatory clause in a residential rental agreement that relieved the landlord of liability except for gross negligence. The decision was based in part upon the Premises Liability Act, C.R.S. § 13-21-115.150...
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