The Spearin Doctrine and the Economic Loss Rule in Residential Construction

by Jesse Howard Witt
© 2006 Jesse Howard Witt

In a series of decisions over the past six years, the Colorado Supreme Court has clarified that the Spearin doctrine and the economic loss rule preclude construction professionals from suing one another in tort for breaching contractual duties. Although these holdings reduce the likelihood that a given construction contract will lead to unanticipated liability, their protections will not always apply in cases involving damage to the home of a third-party consumer. Lawyers who represent builders should recognize the limitations of the Spearin doctrine and the economic loss rule to help their clients allocate risk and avoid liability on residential jobs. This article provides an overview of the Spearin doctrine and the economic loss rule, as well as practical recommendations for practitioners advising construction professionals.

A Legacy of Homeowner Rights

Anyone who builds in Colorado should know that its courts have a long history of protecting homeowners from defective construction. In 1964, Colorado became the first American jurisdiction to recognize an implied warranty of habitability for houses that were complete at the time of sale.1 This warranty provides that any new home must comply with the local building code, be built in a workmanlike manner, and be suitable for habitation.2 The courts have likened the implied warranty of habitability to strict liability, insofar as a homeowner need merely offer proof of a construction defect to establish a developer's liability.3 In situations where a contractor and developer are closely affiliated, the courts have ruled that the contractor can be sued for breaching the implied warranty of habitability, as well.4 Although builders routinely attempt to disclaim this warranty in the boilerplate of their sales contracts, such provisions are disfavored, and no reported decision in Colorado has ever upheld such a disclaimer.5

In the decades since the adoption of the implied warranty of habitability, Colorado courts have consistently enforced a policy that the builder-not the homeowner-should bear the risks associated with construction defects, reasoning that professionals who have erected and sold many houses are in a much better position to determine the structural condition of a new home than most buyers.6 Although the protections of the implied warranty of habitability are not available to purchasers of previously owned homes, the Colorado Supreme Court granted relief to such individuals in 1983 with its seminal Cosmopolitan Homes v. Weller7 decision, wherein the Court held that subsequent owners could sue a builder in negligence for latent construction defects that manifest before the statute of limitations expires. The Colorado Court of Appeals, meanwhile, has upheld claims for negligence per se where building code violations have caused actual property damage.8 It also has ruled that homeowners can recover damages under the state's consumer protection act where a developer knew or should have known that his construction techniques fell short of advertised quality.9

As community living has become commonplace, the courts also have liberally interpreted the Colorado Common Interest Ownership Act and ruled that a homeowner association's ability to institute litigation "in its own name on behalf of itself or two or more unit owners on matters affecting the common interest community" comprises the right to recover damages for construction defects in the units and common elements of a community.10 Despite several challenges, the courts have steadfastly held that this act confers standing on homeowner associations to assert warranty, tort, and consumer protection claims on behalf of their members in construction defect disputes.11

Reproduced by permission. ©2006 Colorado Bar Association, 35 The Colorado Lawyer 49 (July 2006). All rights reserved.

Recent Construction Defect Litigation

The 1990s saw Colorado's population increase by more than 30 percent,12 and with the influx of new residents came many new builders eager to profit from the increased demand for housing. Unfortunately, not all of these builders were prepared for Colorado's challenging conditions, which can include expansive clay soils, heavy snowfall, high winds, and other challenges. Because of such factors, the boon in construction quickly was followed by a rash of construction defect lawsuits, as buyers demanded repairs to their new homes.

Against this backdrop, a number of contractors unexpectedly found themselves in litigation with homeowners and homeowner associations. Many of these contractors raised the Spearin doctrine and the economic loss rule as defenses, asserting that they had complied with the applicable designs and contracts and thereby fulfilled all of their obligations. The courts were not always sympathetic to these arguments, however. When the evidence showed that a contractor had been negligent or had violated the building code, many courts ruled that the contractor could be liable to the homeowner, even if the developer had accepted the quality of the contractor's work or consented to deviations from the code.

The Spearin Doctrine

In United States v. Spearin,13 the U.S. Supreme Court ruled that when a developer or owner provides a contractor with a set of plans, the developer impliedly warrants that the plans are adequate for the job.14 The developer's implied warranty is not overcome by general clauses requiring the contractor to examine the site, review the drawings, or assume responsibility for the work until completion and acceptance.15 As a result, the developer remains responsible for the consequences of any defects in the plans or specifications.16

The case arose after the government hired a contractor, George B. Spearin, to build a dry dock at the Brooklyn Navy Yard in 1905.17 The government supplied Spearin with plans and specifications that required diversion of a nearby sewer line as part of the project.18 The plans failed to show a dam in the existing system, however, and the dam caused the diverted section to break under stress.19 The government insisted that the responsibility for remedying problems in the existing conditions rested with Spearin and annulled his contract when he refused to make repairs at his own expense.20 The Court disagreed and awarded Spearin damages and lost profits.21

Many jurisdictions have adopted the "Spearin doctrine" since the Court announced its decision in 1918, expanding it well beyond the realm of government contracts and incorporating it into the common law of many states.22 The doctrine is not limited to developers, and courts have ruled that a general contractor who supplies plans to a subcontractor provides the same warranty.23

In Colorado, litigants often cited Spearin in the trial courts, but the case did not appear in a reported decision until 2004, when the Colorado Supreme Court announced BRW, Inc. v. Dufficy & Sons, Inc.24 There, the Court relied on Spearin for the propositions that (1) a developer impliedly warrants the adequacy of the plans and specifications it provides to a contractor, and (2) a contractor can sue a developer for economic losses that result from defects in the plans and specifications.25

Colorado's Economic Loss Rule

The term "economic loss rule" generally refers to the principle that a party cannot sue in tort to recover purely economic damages caused by the breach of a contractual duty.26 The rule came into being after American courts began to move away from traditional privity requirements in the 1960s and permit third parties to sue manufacturers in tort over personal injuries.27 This precedent prompted litigants in breach of contract disputes to assert tort claims, hoping to impose strict liability on manufacturers who had failed to perform their contracts.28 Although some feared that this evolution would lead to the law of torts swallowing the law of contracts, the California courts formulated a doctrine to maintain the boundary between the two: the economic loss rule.29

In dicta of Seely v. White Motor Co.,30 the California Supreme Court explained that it was proper for the law to protect consumers from physical injury, but that consumers should bear the risk a given product would not match their economic expectations.31 Thus, the Court limited negligence claims to damages for physical injuries and held that there could be no recovery in tort for economic loss alone.32 In subsequent years, numerous other jurisdictions adopted some form of an economic loss rule, many holding that a manufacturer could not be liable for negligence unless a product caused personal injury or damaged some piece of property other than the product itself.33 The rule first surfaced in Colorado in 1988, when the Colorado Court of Appeals concluded that the economic loss rule prevented a developer from suing a foundation contractor in negligence, where the developer sought lost profits but did not allege physical harm to person or property.34

Although many of these early decisions focused on whether the plaintiff had suffered property damage as opposed to economic harm, the Colorado Supreme Court declined to follow this rationale when it formally adopted the economic loss rule in 2000. Instead, the Court adopted a variant of the rule that abandoned this often arbitrary distinction in favor of an analysis of the source of a defendant's duty.35

In Town of Alma v. AZCO Construction, Inc., the Court held that a party suffering only economic losses from the breach of an express or implied contractual duty cannot assert a tort claim for such a breach, absent an independent duty of care.36 The case arose from a contract to build improvements to a town's water distribution system.37 The contract contained a warranty requiring the contractor to remedy any defects in materials or workmanship for one year.38...

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