Chapter 26 - § 26.2 • PROCEDURAL CLAUSES FOR MANAGEMENT, ALLOCATION, AND TRANSFER OF RISKS
| Jurisdiction | Colorado |
§ 26.2.1-Overview
Procedural clauses are those contract provisions that define the methods and procedures that must be followed should particular situations or problems arise. Although these clauses may seem innocuous, they can dramatically affect the management, allocation, and transfer of risks among the parties on a construction project.
Again the reader must be cautioned: some of these clauses may not be enforced by the court in particular circumstances.
§ 26.2.2-Choice of Law Clauses
Example: This Agreement shall be governed, interpreted and enforced in accordance with the laws of the State of Colorado.
Obviously, the laws of the several states differ. Thus, the laws of one state may be more favorable to one party regarding the distribution of risks. Hence, in a multi-state transaction, the rights and responsibilities of the parties may differ depending upon which state's law is applied to the transaction.
A simple example is the states' differing attitudes towards contractual risk management, allocation, and transfer clauses. Some states are very liberal in enforcing them, while others are very conservative and construe them narrowly. Of course, some states even refuse to enforce certain clauses that other states honor. Thus, the choice of law clause may be the most important risk management and allocation clause in the construction contract.
In general, if the parties make no provision, the applicable law will be chosen for them by the court in accordance with the forum state's often subjective choice-of-law rules.8 Instead of letting the court decide which state's law applies to a dispute, the parties can enhance the predictability of their relationship by choosing which state's substantive law governs their relationship and defines their risks.
For example, if a contractor and subcontractor are both located in Colorado, but the project is located in Wyoming, they may prefer to have their rights and duties defined by more familiar Colorado law. As an alternative, the parties could also choose to have different issues in their contract governed by different laws.9
Enforceability
Traditionally, choice of law provisions were held to be binding and enforceable.10 The key limitation was that the chosen state must bear a reasonably close relationship to either the parties or the transaction.11 Courts consider a number of factors in deciding whether the requisite relationship exists, including the parties' principal place of business, place of incorporation, location of the contracted property, place of execution, place of performance, place of payment, and purpose of the contract.12 In 2007, Colorado joined the growing number of states that have enacted legislation voiding choice of law clauses that require the law of another jurisdiction to be applied to disputes related to a project within that state.13 It is unclear how such statutes would be applied to multi-state projects, such as pipeline or power transmission line projects.
§ 26.2.3-Forum Selection Clauses
Example: The parties hereby agree that any dispute between them will be resolved, if legally possible, in a state court located within the City and County of Denver, State of Colorado.
Example: If any dispute arises with regard to any provision or provisions of this Agreement, jurisdiction shall be solely in the State of Colorado, and venue shall lie solely in the County of El Paso, Colorado.
One of the risks of a construction project is the high cost of litigating a dispute because of the inconveniences of the forum. In addition to choosing the applicable substantive law, parties may select the particular forum for litigating or arbitrating disputes. For example, a project may be located in Arapahoe County, but if the parties are based in Denver County, they might prefer that all disputes be decided by a court located in Denver. Assuming federal jurisdictional requirements are met, parties may even select between a federal or state court located in Denver.14
More commonly, a forum selection clause is used when a party who is participating in an out-of-state project desires that any controversy that arises be litigated in its home state. Similarly, an owner who is subject to the jurisdiction of various states might want all controversies regarding the project to be resolved in the state where the project is located.
Enforceability
Colorado courts have generally found reasonable forum selection clauses binding and enforceable.15 Other states do not enforce such clauses.16
§ 26.2.4-Notice of Claim Clauses
Example: The Owner shall not be liable to the Contractor for damages caused by delay for any reason whatsoever, unless the Contractor gives notice of the delay to the Owner within five business days after the cause of the delay occurs.
Example: The Contractor shall not be entitled to an extension of time or to additional compensation or damages, unless the Contractor submits a written request to the Owner within seventy-two (72) hours after the event giving rise to the request. The request shall set forth all facts upon which the request is based, together with all supporting documents.
Example: Any claim by the parties that arises out of or in connection with this Agreement shall be barred, unless a notice thereof is given to the other party within thirty days after the date of the act or omission that gave rise to such claim.
The essence of a notice clause is that notice of some act or intended action is a condition precedent to enforcing a right under the contract. A common use of such a provision is in insurance policies that require timely notice to the insurer of claims by or against the insured. If timely notice is not given, courts have held that coverage may be lost.17
There are multiple potential benefits of and reasons for notice clauses. First of all, they provide the party who will be liable an opportunity to investigate the facts while the facts are fresh. Prompt investigation of the facts surrounding a potential claim often gives the parties a clearer understanding of their respective position and can aid settlement. Notice clauses also require the claimant to promptly decide whether to assert a claim. Thus, since the progress of a job largely depends upon everyone knowing where everyone else stands, notice of claim requirements provide the parties with a realistic assessment of the status of a project at any given point in time. In other words, the parties know right away if there are problems on a project and what those problems are. Notice also may give the party who will be liable the opportunity to explore options to mitigate the claimed damages related to a claim.
Note that many Colorado construction statutes contain specific notice provisions. See Chapter 24, "Procedural Aspects of Construction Litigation," for details.
Enforceability
Generally, most notice provisions are valid, so long as the time frame for timely notice is reasonable.18 On the other hand, notice provisions may not be strictly enforced if there is no prejudice from the lack of notice, or where a party may have had actual or constructive notice of the claim, despite the lack of formal notice.19 This can be a very fact-intensive inquiry.
§ 26.2.5-Contractual Statutes of Limitations
Example: Any claim arising out of or in connection with this Agreement shall be asserted by a complaint in a civil action commenced within eight months after the claim arose, and, if not, shall thereafter be barred.
All states have statutory time limits within which a party may be sued by another party. The statute of limitations in Colorado for most construction claims is two years, with the statute of repose usually six years.20 Sometimes, however, the parties desire to shorten that period of time in order to ensure that they are safe from the threat of litigation sooner than provided by state law. A construction project, and the claims that arise therein, must eventually come to an end. Thus, unless the party does not know of the claim, there is little benefit to permitting a party to delay asserting a claim.21
Enforceability
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