Chapter 7 - § 7.4 • POTENTIAL LIABILITY OF THE OWNER
| Jurisdiction | Colorado |
§ 7.4.1-To Design Professionals/Consultants
As discussed in § 7.2.1, the owner generally contracts directly with the prime design consultant. The owner may also enter into contracts with additional design professionals, depending upon the delivery system for the project. The prime design consultant may then subcontract with other design professionals with areas of special expertise, such as mechanical or electrical engineering. The owner is obligated to pay for design services according to its contractual obligations and can be liable to a design professional for non-payment. The owner's obligation to pay exists even if the owner does not use the work of the design professional for actual construction.20 If the owner fails to pay a design professional for fees earned under the contract, the design professional may place a lien upon the property.21 Even if the owner does not have a direct contract with a subconsultant, the owner is subject to liens from the subconsultant hired by the prime design consultant if the owner has authorized the hiring to provide services related to the improvement of the owner's property.22
If the design professional is required to provide additional services beyond those required under the contract due to unexpected actions by the owner or a third party, the design professional may be able to recover additional fees from the owner.
Practice Pointer
Clearly identifying the scope of a designer's services, including a list of services specifically excluded, can avoid disputes about whether a design change should entitle the designer to an additional fee. Redesigns necessitated by unforeseen site conditions should usually trigger the right to additional design fees, but correction of mistakes in the plans will not.
The contract between the design professional and the owner may require the design professional to monitor the cost of construction and ensure that the final cost is reasonably close to the originally estimated cost. If the design professional fails to perform the service adequately and the cost of the project substantially exceeds the budgeted amount, the owner may be able to withhold payment for the service and recover the difference between the actual and estimated cost from the design professional. However, the owner's payment obligation is not necessarily completely discharged, and the owner must still pay the design professional the reasonable value of any other services provided.23
§ 7.4.2-To General Contractor
The primary obligation of the owner to the contractor is payment. The general contractor may stop work and consider the contract a nullity if progress payments are not made timely.24 If the owner terminates the contract without justification, the general contractor may recover lost profits for the owner's breach of contract.25 The contractor might be entitled to rescind the contract and recover the reasonable value of materials and labor provided in the event of a material breach by the owner.26
The owner may also be liable to the contractor for defective plans produced by his or her architect or engineer. Where plans and specifications are provided to the contractor by the owner, the owner impliedly warrants suitability of the plans and warrants that if the specifications are followed, the final product will meet contract requirements. Inadequacy of the plans may entitle the contractor to additional payment for additional work or related costs.27 This principle is sometimes referred to as the Spearin doctrine. Under these circumstances, the owner may have recourse against the design professional.
Spearin was a case involving a public owner. Since 1918, when it was decided, however, the Spearin doctrine has been adopted by many states and applied to both public and private contracts. The primary rationale for the doctrine is that the owner and his or her design professionals are presumed to have superior knowledge, which the contractor should be able to rely upon without making costly and time-consuming pre-bid inquiries. A 2004 decision of the Colorado Supreme Court, BRW, Inc. v. Dufficy & Sons, Inc., indicates that the Spearin doctrine applies to cases in Colorado.28
Generally, one bidding for a construction job has a right to rely upon the plans and specifications furnished by the owner or the owner's representative.29 However, it has been held that the rule requiring the owner to provide suitable plans applies unless the contract between the owner and contractor contains a disclaimer requiring the contractor to satisfy himself or herself of the accuracy of plans and specifications.30 Another exception to the general rule may occur if the defect in the plans is patent and should have been recognized by a reasonable bidder, or if the bidder had actual knowledge of the defect.31 However, a bidder does not have to duplicate the owner's work or conduct its own exhaustive investigation.32
The owner may also be liable to the contractor for erroneous factual representations included in plans or specifications.33 In order to recover, the contractor must prove that the information provided was inaccurate and that the contractor would not have discovered the actual facts through a reasonable investigation.34 An exculpatory clause in the contract may protect the owner unless it is shown he or she made factual misrepresentations.35
In the absence of a contract provision shifting risk to the owner for unknown subsurface conditions, the contractor assumes that risk. Common law also puts the risk of subsurface performance costs on the contractor, and the contractor's performance, within the contract price, is not excused, except by impossibility, by misrepresentation, or where the owner prevents performance.36
Practice Pointer
Contractors should attempt to procure contract clauses allowing them to recover the costs of addressing unforeseen site conditions, as such risks should ordinarily be borne by the owner, who is typically in the best position to identify and control such risks.
A contractor who enters into a fixed-price services contract with no differing site conditions (DSC) clause assumes the risk that the cost of performance will be higher than the contract price.37 However, the owner may be responsible for unforeseen site conditions, even if the contractor contractually assumes that risk, if the owner previously knew about the conditions and did not disclose them to the contractor.38 The owner must disclose material information to the contractor due to the owner's superior knowledge of site conditions.
Most contracts between the owner and contractor permit changes in the work only "within the general scope of the contract." If a change to be made at the owner's request is so substantial as to constitute a "cardinal" change in the project, it may constitute a breach and the contractor may refuse to perform the work.39 Although the term "cardinal change" is normally associated with government projects, the concept also holds true in private contracts: the owner cannot insist upon changes that are outside the general scope of work under the contract.
Practice Pointer
Delays are a frequent source of claims on construction projects. Owners should carefully tailor their contracts to narrowly limit the circumstances under which a designer or contractor is entitled to additional fees due to delay. Contractor delay claims are addressed in detail in Chapter 27.
Unless the contract contains a no-damages-for-delay provision, the owner will be responsible to the contractor for delays caused by the owner. A no-damages-for-delay clause in the contract can protect the owner from liability for delay damages.40 However, a no-damages-for-delay clause will not protect the owner from fraud, misrepresentation, bad faith, or other active interference or willful delays.41 In Colorado public projects, a contractual provision waiving liability of the public owner to the contractor for delay damages is unenforceable and against public policy.42
§ 7.4.3-To...
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