Chapter 7 - § 7.5 • POTENTIAL CLAIMS OF THE OWNER

• Jurisdiction: Colorado

§ 7.5 • POTENTIAL CLAIMS OF THE OWNER

Below is a discussion of the claims an owner may bring against architects/engineers (§ 7.5.3), general contractors (§ 7.5.4), construction managers (§ 7.5.5), subcontractors and materialmen (§ 7.5.6), lenders and sureties (§ 7.5.7), and building code enforcement officials. Nevertheless, before the discussion of the claims the owner may have against these parties, an overview of the applicable statute of limitations (§ 7.5.1) and the economic loss rule is necessary (§ 7.5.2), as both have profound effects on almost all of an owner's potential claims.

§ 7.5.1-Limitations Period for Claims by Owner

Claims

Prior to initiating a suit related to a construction project, the owner must be mindful of the statutory limitations of actions brought against architects/engineers and others who are involved in the design and construction of the project. C.R.S. § 13-80-104 is entitled "Limitation of actions against architects, contractors, builders or builder vendors, engineers, inspectors, and others" and states:

(1)(a) Notwithstanding any statutory provision to the contrary, all actions against any architect, contractor, builder or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall be brought within the time provided in section 13-80-102 after the claim for relief arises, and not thereafter, but in no case shall such an action be brought more than six years after the substantial completion of the improvement to the real property . . . .

(b)(I) Except as otherwise provided in subparagraph (II) of this paragraph (b), a claim for relief arises under this section at the time the claimant or the claimant's predecessor in interest discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury.
(II) Notwithstanding the provisions of paragraph (a) of this subsection (1), all claims, including, but not limited to indemnity or contribution, by a claimant against a person who is or may be liable to the claimant for all or part of the claimant's liability to a third person:

(A) Arise at the time the third person's claim against the claimant is settled or at the time final judgment is entered on the third person's claim against the claimant, whichever comes first; and

(B) Shall be brought within ninety days after the claims arise, and not thereafter.

C.R.S. § 13-80-102 requires civil actions to be commenced within two years after the cause of action accrues.

Practice Pointer
A homeowner may file a claim as soon as the defect is noticed. The homeowner does not have to wait until such a defect causes collateral injury to a person or property.⁷³

The statute is intended to apply only to negligence in planning, design, construction, supervision, or inspection that results in a defect in an improvement to real property that causes an injury, and to limit actions against building professionals only to claims of injury arising from defects in the improvements they make.⁷⁴

Application of C.R.S. § 13-80-104 may hinge upon two terms. First is the meaning of the term "improvement to real property." "The meaning of the term 'improvement to real property' is to be determined by reference to the ordinary sense of the term and given its usual and ordinary meaning."⁷⁵ "The principal factor to be considered in making a determination of whether an activity constitutes an improvement to real property is the intention of the owner."⁷⁶ "Also, an activity is an improvement to real property if it is essential and integral to the function of the construction project."⁷⁷

Second is the meaning of "substantial completion." Under C.R.S. § 13-80-104(1)(a), "in no case shall such an action be brought more than six years after the substantial completion of the improvement to the real property." C.R.S. § 13-80-104(1)(a) does not define "substantial completion." The court of appeals has determined "substantial completion," as used in § 13-80-127 (the predecessor to C.R.S. § 13-80-104), to require no greater state of "completion" of an improvement than is required under § 38-22-109(4),⁷⁸ thus meaning "'after the completion of the building, structure, or other improvement'" and that "a 'trivial imperfection in or omission' from the work does not prevent the structure from being 'complete.'"⁷⁹ A solid benchmark, even though not defined in the statute, but which the court of appeals has adopted, is that substantial completion occurs with the issuance of a certificate of occupancy.⁸⁰

The statute of limitations was modified in 2001 to clarify its application to indemnity or contribution claims. It now provides that such claims do not arise until the underlying claim is settled or judgment is entered upon it. The party seeking indemnity or contribution is then given 90 days to assert that claim.⁸¹

§ 7.5.2-Impact of the Economic Loss Rule on Owner Claims

In Colorado, the economic loss rule was first applied by the court of appeals in 1988.⁸² The economic loss rule provides:

As a general rule, no cause of action lies in tort when purely economic damage is caused by negligent breach of a contractual duty. This economic loss rule prevents recovery for negligence when the duty breached is a contractual duty and the harm incurred is the result of failure of the purpose of the contract.⁸³

In subsequent cases, the Colorado Supreme Court clarified the economic loss rule as it applies to those involved in the construction industry.⁸⁴ First, the court applied the rule to prohibit tort claims by one party to a construction contract against another party to that same contract.⁸⁵ To encourage parties to confidently allocate their risks and costs in a bargaining situation, the court noted, "A breach of a duty which arises under the provisions of a contract between the parties must be redressed under contract, and a tort action will not lie."⁸⁶

Later, the supreme court expanded the economic loss rule to bar tort claims by a party who performed work on a project against another party involved with that same project, even when the claiming and defending parties do not have a direct contractual relationship.⁸⁷ In doing so, the court emphasized that any analysis of liability should focus on the contract, not the status of the parties. If the defending party has entered into a written contract for the project that clearly defines that party's duties, a tort claim against that party for a breach of those duties is now likely barred (with certain established and possible exceptions noted herein), and the claiming party will need to seek redress on contract-based theories only. If the claiming party's contract limits the damages available (against the party with whom he or she contracted), or if the contract is not with the party who caused the harm (or someone who has legal responsibility for the party causing the injury), recovery may be incomplete or even foreclosed.

However, the economic loss rule may not be a complete bar to all tort-based claims by an owner of a construction project. In three areas, the courts seem reluctant to bar tort-based recovery as it relates to construction contracts. The first is in the area of residential construction. Colorado courts have consistently afforded substantial protection to homeowners and have imposed independent tort duties upon homebuilders, including their subcontractors, in order to protect homeowners when necessary.⁸⁸ A thorough discussion of residential construction claims can be found in Chapter 14 of this book.

The second area is where a party has an independent duty imposed by law to act or refrain from acting in a certain manner, which duty is unrelated to the duties assumed by that party pursuant to a contract. An example is the general duty to act in a manner that avoids harm to others.⁸⁹ When an independent duty exists under law, an owner will still have a direct tort claim to assert against the breaching party.⁹⁰

The third area concerns the type of damages caused by a wrongful act. If the claimed loss results from injury to a person, or to property other than the property that is the subject of the contract in question, then the economic loss rule will not bar a separate tort claim.⁹¹

Because the economic loss rule may reduce or eliminate many potential common law claims an owner has, it is more important than ever for owners to draft contracts that define the duties of the parties with whom they contract in detail. It is equally important for those contracts to allocate responsibility for foreseeable risks and identify the nature and extent of the remedies available to the owner for breach.

Practice Pointer
The economic loss rule can apply to entities that did not exist at the time the contract containing the duty was formed, if that entity is a party to or third-party beneficiary of the contract (or interrelated contract).⁹²

§ 7.5.3-Against Architect/Engineer

Because of the contractual relationship between the owner and architect/engineer, it is possible for the owner to assert claims for breach of that contract. Breach of contract claims may include failure to perform contract obligations with professional skill and care; failure of design to meet applicable building codes; and failure of design to meet project requirements.⁹³ If the architect's/engineer's services include design and contract administration, the design professional may be subject to breach of contract claims related to project administration services⁹⁴ and contract administration services.⁹⁵

As discussed in §§ 7.3.2 and 7.4.2, the law imposes an implied warranty upon the owner with regard to the sufficiency of the plans and specifications the owner presents to the general contractor for use in the construction project. The implied warranty theory does not apply to...