Snell & Wilmer
Legal Alert

Letter from the Editor

Highlights of the AIA 2017 Updates of its Construction and Design Agreements

Arizona Supreme Court Rules in Two Cases Impacting the Construction Industry

Active Negligence or Willful Misconduct Does Not Preclude a General Contractor from Obtaining Indemnification from a Subcontractor

Drop Dead Date for Recording California Mechanic’s Lien is 90 Days from Completion of “Actual” Work, Not “Substantial Completion”

Colorado Construction Defect Action Reform: HB 17-1279 Approved by Colorado Legislature; Governor’s Approval Imminent

Colorado Supreme Court Holds Privity Necessary for Homeowner to Sue Developer

How Contractors Can Maximize the Utility of Insurance in Mediation


James J. Sienicki
James J. Sienicki
602.382.6351
jsienicki@swlaw.com
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Michael J. Baker
Michael J. Baker
714.427.7472
mjbaker@swlaw.com
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Jason Ebe
Jason Ebe
602.382.6240
jebe@swlaw.com
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Mark D. Johnson
Mark D. Johnson
213.929.2532
majohnson@swlaw.com
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Cary D. Jones
Cary D. Jones
213.929.2501
cjones@swlaw.com
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EriK G. Nielsen
Erik G. Nielsen
303.634.2022
egnielsen@swlaw.com
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Cody C. Bourke
Cody C. Bourke
303.634.2114
cbourke@swlaw.com
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Mark O. Morris
Mark O. Morris
801.257.1904
mmorris@swlaw.com
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Snell & Wilmer
Past Issues
Construction Practice

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June 2017

Letter from the Editor

Welcome to the summer 2017 edition of our Under Construction newsletter. In this issue, to accompany the summer heat, we highlight several hot topic items affecting the construction industry, such as the recent revisions to the AIA construction and design agreements. These changes are made every 10 years and this year, a number of substantive and significant changes were made that could affect your bottom line. They are addressed in the first article.

Recently, the Arizona Supreme Court decided two cases that directly impact the construction industry. One pertains to the enforceability of contractual liquidated damages and the other deals with the Statute of Repose and whether it applies to government entities. Both of these cases, and what their decisions mean moving forward, are covered by our next article.

Next, two California articles look at recent California appellate cases, one that significantly expands a subcontractor’s potential indemnification obligations to a general contractor and another that decided a 10-year battle between an owner and general contractor concerning the determination of what constitutes “completion” for purposes of commencement of the 90-day period within which mechanic’s liens must be filed in California.

The following two articles take a look at issues in Colorado. The first examines a recent case where the Colorado Supreme Court held that contractual privity is necessary for a home buyer to assert a claim for breach of the implied warranty of suitability against a developer. The second discusses new legislation, Colorado Construction Defect Action Reform: HB 17-1279, which was recently signed into law by Governor Hickenlooper.

Our newsletter is rounded out with an article that takes a look at how contractors can maximize their available insurance coverage in mediation. Mediating a very significant construction case involving tens of millions of dollars in claimed damages on both sides teaches significant lessons. This article focuses on what could be done by contractors who are being represented by counsel retained by an insurance company and who need to maximize their available insurance coverage in order to obtain resolution in mediation.

We hope you will find these articles informative and enlightening. Please let us know if you want us to address a specific construction issue in a future newsletter. Have a safe and enjoyable Chevy Chase summer vacation!

Regards,
Jim Sienicki

Highlights of the AIA 2017 Updates of its Construction and Design Agreements

by Michael J. Baker

Regularly, every 10 years, the AIA revises particular documents in its AIA suite of construction and design agreements. This year, the A201 General Conditions of the Contract for Construction, the Agreements Between Owner and Contractor (A101, A102 and A103), and Agreement Between Owner and Architect (B101) have been updated. Many of the revisions basically clarify existing provisions. However, a number of changes are more substantive and significant. Below is a succinct summary of the more significant changes to the aforementioned documents. It would be best to take a closer look at the revised sections when using or modifying the updated documents.

General Conditions of the Contract for Construction (A201)

1.1.8 Initial Decision Maker. States the requirement that the Initial Decision Maker (normally the Architect) shall be impartial to both Owner and Contractor and shall not be liable for decisions made in good faith.

1.7 Digital Data Use and Transmission and 1.8 Building Information Models Use and Reliance. Section 1.7 calls for the use of AIA Document E203 – 2013, Building Information Modeling (BIM) and Digital Data Exhibit, to establish the protocols for the development, use, transmission, and exchange of digital data. This is now the default provision. Additionally, Section 1.8 states that in the event parties do not agree on a protocol governing the use of, and reliance on, the information contained in the BIM then the party relying on the BIM information does so at its sole risk and without liability to the other party and its contractors or consultants, the authors of, or the contributors to, the BIM.

2.2 Evidence of the Owner’s Financial Arrangements. Section 2.2.2 expands and strengthens the Contractor’s ability to enforce its right to evidence that the Owner has made financial arrangements to fulfill its payment obligations. If the Owner fails to provide proof of financial assurance within 14 days of the Contractor’s request, the Contractor may stop working until reasonable evidence is provided. Contract Time and Contract Sum may be increased as appropriate to accommodate the time lost due to the shutdown. Recognizing that no contractor expects to work for free, care must be taken to avoid a situation in which a contractor may rely upon this provision to suspend work and as a result, potentially avoid liability for its own unexcused delay in performing the work.

2.3 Information and Services Required of the Owner. Section 2.3.3 states that if the Architect is terminated, the Owner must find a successor to whom the Contractor has no reasonable objection.

3.10 The requirements of Section 3.10 regarding the Contractor’s construction schedule have been supplemented. However, on many significant projects, there is still a need for detailed requirements as to the preparation, updates and revisions to critical path schedules.

7.4 Minor Changes in the Work. Contractors need to be alert to this 2017 modification. If the Contractor performs the Architect’s order for minor changes in the work without prior notice of price or time consequences, those adjustments are waived by Contractor.

Article 9 Payments and Completion contains several changes. 9.3.1 states that releases and waivers of claims from subcontractors and, or, suppliers may be required with pay applications. Section 9.6.4 permits the Owner to contact not only subcontractors but also suppliers to determine if they have been properly paid. Section 9.6.8 now provides that as long as the Owner has fulfilled its payment obligations, the Contractor shall indemnify Owner from liens asserted by subcontractors and suppliers. Section 9.10.4 states that the making of final payment does not waive claims resulting from a subsequent Owner audit.

Article 11 Insurance and Bonds contains several changes. It is important to note that the changes in the 2017 documents reflect a significant change in the approach to insurance. Insurance provisions, previously found in Article 11, are now split between Article 11 and a new Exhibit A. This change is consistent with industry practice to provide for insurance requirements in a contract exhibit. However, by now including insurance requirements in both the A201 and in an exhibit, there is a greater likelihood that changes made to one document and not the other could result in a conflict and a dispute over which governs. Care should be taken to be consistent in using and revising multiple documents intended to be used together to avoid these potential conflicts. Most of the insurance provisions are now contained in an exhibit to the agreement. The exhibit provides for much more detail regarding the specifics of the builder’s risk insurance and other coverages. Article 11; A101 – 2017 Exhibit A. Highlights of changes to Article 11 include 11.1.1 Owner, Architect and Architect’s consultants are to be named as Additional Insured under Contractor’s CGL policy; 11.1.3 Contractor shall provide a copy of any bonds to potential beneficiaries upon request (typically subcontractors or suppliers requesting information and a copy of the Payment Bond); 11.1.4 requires that the Contractor must notify Owner within three business days of cancellation or expiration of insurance; 11.2.2 states that in the event the Owner fails to procure required insurance coverage, Owner waives claims to the extent loss would have been covered by insurance; and, 11.2.3 requires that the Owner must notify Contractor within three business days of cancellation or expiration of insurance. In the event the Owner fails to procure required property insurance coverage, Owner waives claims to the extent loss would have been covered under insurance.

14.4 Termination by the Owner for Convenience. 14.4.3 states that in the event of termination for convenience, costs attributable to termination of subcontracts and termination fee (if any) are recoverable rather than reasonable overhead and profit on unperformed work.

Article 15 Claims and Disputes. The definition of Claims at 15.1.1 now states that the Owner need not file a Claim to impose liquidated damages. 15.1.2 states all claims must be asserted no later than 10 years after substantial completion of work. Changes have also been made to the dispute resolution provisions including 15.2.6.1 which states that if mediation is demanded within 30 days after receipt of a decision from the Initial Decision Maker and a party fails to do so within 30 days of receipt, then mediation and the ability to challenge the decision is waived. Section 15.4.1 now states that the arbitration hearing shall be conducted where the project is located.

Agreements Between Owner and Contractor (A101, A102 and A103)

The A102 requires that assumptions upon which the Guaranteed Maximum is based be incorporated into the Contract Documents by revision, Section 5.2.6. The schedule of values, progress payment calculations and retainage provisions have been expanded to be more consistent with common construction practice as set out in A101, Article 5; A102, Article 12. In A102, Section 14.1.1, Owner Termination, the agreement provides that the Owner pay a termination fee if the Owner terminates for convenience and that cost of damages be deducted from the amount owed the Contractor if the Owner terminates for cause.

Agreement Between Owner and Architect (B101)

Introduction of a new term as well as some modifications to existing provisions are part of the 2017 modifications. The B101 introduces a new term, Supplemental Services, which are services in addition to Basic Services that are identified and authorized in the agreement. Some clarification has been added in that Additional Services are now limited to extra services that arise after the signing of the agreement, Sections 4.1 and 4.2. Additional modifications include a mechanism to provide for Additional Services for modifying the Construction Documents to comply with the budget. If the Architect could not have reasonably anticipated certain market conditions that caused a bid or proposal to exceed the Owner’s budget, the Architect is now entitled to be paid for additional services for modifying the Construction Documents to comply with the budget. Section 6.7. Architects also “catch a break” in that the agreement now provides for a termination fee in the event that the Owner terminates for convenience. Section 9.7. Clarification has been made to payment provisions in terms of calculating compensation based on a percentage of completion with respect to the Architect’s Progress Payments. Sections 11.1, 11.5 and 11.6.

Arizona Supreme Court Rules in Two Cases Impacting the Construction Industry

by Jason Ebe

Recently, the Arizona Supreme Court decided two cases that directly impact the construction industry.

  • 1. Enforceability of Contractual Liquidated Damages

On April 25, 2017, in Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, the Court reviewed the lower courts’ determination on summary judgment regarding whether a contractual liquidated damages provision was enforceable. In this case, the particular contract clause was a flat 5 percent late fee on a balloon payment for a conventional, fixed-interest loan. The trial court ruled that the late fee was enforceable as liquidated damages. The court of appeals reversed, holding that the late fee was not enforceable.

In its decision, the Arizona Supreme Court noted that parties to a contract can agree in advance to the amount of damages for any breach and that liquidated damages provisions serve valuable purposes, providing certainty when actual damages would be difficult to calculate, and alleviating the need for potentially expensive litigation. However, parties do not have free rein in setting liquidated damages. Because the central objective behind the system of contract remedies is compensatory, not punitive, parties cannot provide a penalty for a breach. Thus, a contract term fixing unreasonably large liquidated damages is unenforceable on public policy grounds as a penalty. In such an instance, the contract remains valid, and the non-breaching party can still recover actual damages. (However, in many construction contracts, consequential damages are waived, and actual direct damages may be minimal.)

Evaluating the late fee, the Court adopted the test of the Restatement Second of Contracts, which aligns with Arizona’s adoption of the Uniform Commercial Code (in other words, Arizona courts can apply the same test to both UCC-governed and non-UCC-governed contracts). This test requires courts to consider (1) the anticipated or actual loss caused by the breach and (2) the difficulty of proof of loss. Whether a fixed amount is a penalty turns on the relative strength of these factors. Applying that test to the late fee in the Dobson Bay case, the Court determined that the fee was an unenforceable penalty.

Applying this decision to the construction industry, it is very common for parties to construction contracts to provide for liquidated damages, typically for a contractor’s unexcused delay in achieving substantial completion. In order for the amounts of those liquidated damages to be enforceable, those amounts must be reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. Including language in the contract that the parties agree the amounts satisfy this standard is helpful, but not conclusive. Amounts chosen as a “hammer” to force the contractor’s compliance will likely be challenged as a penalty. The number of cases in which the liquidated damages clause will be challenged is also very likely to increase.

  • 2. Statute of Repose Applies to Governmental Entities

On May 10, 2017, in City of Phoenix v. Glenayre Electronics, Inc., the Arizona Supreme Court decided whether Arizona’s statute of repose governing design, engineering and construction of improvement, A.R.S. § 12-552, applied to the City of Phoenix. Under A.R.S. § 12-510, and the common law doctrine known as “nullum tempus occurit regi” (time does not run against the king), claims by governmental entities generally are not barred by statutes of limitations. For actions involving design, engineering and construction improvements, however, Arizona’s statute of repose does bar contract-based actions, even those brought by the government.

This case involved a personal injury (later wrongful death) action brought by a man who developed mesothelioma allegedly resulting from long-term exposure to asbestos while installing and repairing water piping. The City filed a third-party complaint against 82 developers and eight contractors for defense and indemnity. Those defendants moved to dismiss the City’s claim as being barred by the statute of repose. The trial court granted the motion. The court of appeals affirmed. The Arizona Supreme Court, however, drew a distinction between the contractors who actually had contracts with the City, and the developers whose only relationship with the City was as permittee. The Court agreed with the lower courts that the statute of repose did apply to bar the City’s contractually based indemnity claims against the contractors. However, the Court determined that the City’s indemnity claims against the developers were not based in contract within the meaning of the statute of repose and, therefore, were not barred.

The takeaway from this case is that whether a public entity’s claim against a contractor or design professional brought later than eight years following substantial completion (or the ninth year if the defect was discovered during the eight year) is barred will depend on the relationship between the public entity and the contractor or design professional. If there is a contractual relationship, the statute of repose will likely apply to bar the claim. If there is another relationship upon which the claim arises, for example, as a permittee, the statute of repose likely will not bar the action. In the event of a claim, it is best not to presume one or the other, but rather contract your knowledgeable Arizona construction legal counsel to review the facts, analyze the law and make appropriate recommendations.

Active Negligence or Willful Misconduct Does Not Preclude a General Contractor from Obtaining Indemnification from a Subcontractor

by Mark D. Johnson

A recent California appellate case significantly expands a subcontractor’s potential indemnification obligation to a general contractor. Oltmans Construction Co. v. Bayside Interiors, Inc., 10 Cal.App.5th 355 (March 30, 2017). Oltmans interpreted an indemnity provision in a construction contract between a general contractor and a subcontractor providing indemnity for injury claims arising out of the scope of the subcontractor’s work “except to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct” of the general contractor. Oltmans analyzed whether this provision precludes the general contractor from recovering any indemnity if its active negligence contributed to the injury, or whether the provision allows recovery for the portion of liability attributable to the negligence of others. Oltmans also evaluated this same question in light of California Civil Code section 2782.05, which renders void and unenforceable an indemnity provision “to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor.” The trial court found that this provision precluded the general contractor from recovering any indemnity if its active negligence contributed to the injury. However, the Oltmans court found this to be error and found that under such a provision the general contractor is only precluded from recovering indemnity for liability to the extent it results from its own active negligence but may be indemnified for the portion of liability attributable to the fault of others.

Factual Background

Oltmans arose from a jobsite injury suffered by Gerardo Escobar, an employee of O’Donnell Plastering, Inc. (O’Donnell). O’Donnell was a sub-subcontractor of Bayside Interiors, Inc. (Bayside), which was a subcontractor of Oltmans Construction Co. (Oltmans), the general contractor. Escobar brought suit against Oltmans alleging that Oltmans negligently cut and left unsecured a skylight opening in the roof of the building under construction, through which Escobar fell and suffered injuries. Oltmans filed a cross-complaint against Bayside and O’Donnell, including a cause of action asserting a right to express contractual indemnity. The facts were essentially undisputed. On April 13, 2013, an Oltmans employee, Dennis Raia, was cutting an opening for the installation of a skylight on the roof of the building when Oltmans’ project superintendent instructed him to stop work temporarily and secure the opening. Raia placed over the opening, which itself was covered with plywood, a skylight curb, a 25-pound wooden frame with wire mesh over the top. He did not attach the curb to the roof. On April 17, before Raia had returned to complete his job, Escobar came to the jobsite to erect scaffolding. While tying the scaffolding to the building Escobar climbed to the roof, fell through the opening that had been partially cut and covered and suffered injuries. The subcontract between Oltmans and Bayside contained an indemnity provision stating: “[Bayside] shall, to the fullest extent permitted by law, indemnify, defend, protect and hold harmless [Oltmans] ... from and against each and all of the following: [¶] (a) Any claims ... arising out of (i) the scope of the work of [Bayside], or ..., or (iv) any other act or omission arising out of the work of [Bayside or its] sub-subcontractors ... resulting in or alleged to have resulted in ... bodily injury.” The provision further stated it “shall apply in all described matters herein except to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of the contractor parties ..., or to the extent such obligation is inconsistent with the provisions of California Civil Code 2782.05.”

Bayside moved for summary judgment with respect to Oltmans claim for indemnity and argued that Oltmans active negligence precluded it for obtaining indemnification. The trial court granted Bayside's motion. The trial court ruled that “Oltmans’ conduct in leaving a partially cut skylight on the roof of a building for several days, without securing a cover, and failing to advise O’Donnell’s employees of the hazard clearly constitutes active negligence on Oltmans' part. As such, Bayside’s duty to indemnify and hold Oltmans harmless is precluded by Oltmans’ own conduct.”

Analysis

The Oltmans court noted that Hernandez v. Badger Construction Equipment Co. (1994) 28 Cal.App.4th 1791, provided compelling authority for interpreting the indemnity provision to permit indemnification for the portion of Oltmans’ liability attributable to the negligence of others. The Oltmans court found that the indemnity provision makes unmistakably clear that the parties intended to limit Oltmans’ right to indemnification for liability arising out of the scope of Bayside’s work only “to the extent” the claims arose out of Oltmans’ active negligence or willful misconduct. The court stated that had the parties intended to prohibit Oltmans from obtaining any indemnification if it was actively negligent, that prohibition could have been expressly stated. Rather, the provision stated that Oltmans was entitled to indemnification from all liability arising out of the scope of Bayside’s work “except to the extent” the liability arises out of Oltmans’ active negligence or willful misconduct. The apparent intent is to apportion liability as between the indemnitor and the indemnitee based on the proportionate—or comparative—fault of the parties.

The Oltmans court stated that the meaning of the qualification is made clear by the final qualification in the indemnity provision: “or to the extent such obligation is inconsistent with the provisions of [Section] 2782.05.” Section 2782.05(a), with certain exceptions provides, that “provisions ... affecting any construction contract and amendments thereto entered on or after January 1, 2013 that purport to insure or indemnify ... a general contractor ... by a subcontractor against liability for claims of death or bodily injury to persons ... are void and unenforceable to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor....” After reviewing the legislative history of Section 2782.05, the Oltmans court found that its purpose was to apportion liability on an equitable basis in proportion to the fault of the various parties. Therefore, the Oltmans court found that to the extent the negligence of Bayside’s sub-subcontractor contributed to the injury of its employee, even assuming that Oltmans' active negligence was one cause of Escobar’s injury, Oltmans may still be entitled to indemnification from Bayside for the portion of any liability attributable to Bayside's sub-subcontractor or others.

Potential Impact

The holding in Oltmans means that a subcontractor cannot escape a potential indemnity obligation by proving that the active negligence of a general contractor contributed to the injury, unless the active negligence was the sole cause of the injury. If the active negligence of the general contractor is responsible for only a portion of the liability, the general contractor may seek indemnification from any subcontractor for the portion of liability that is attributable to the fault of the subcontractor. To avoid this result, an indemnity provision would need to expressly state that any active negligence by the general contractor precludes it from obtaining any indemnification.

Drop Dead Date for Recording California Mechanic’s Lien is 90 Days from Completion of “Actual” Work, Not “Substantial Completion”

by Cary D. Jones

The California Court of Appeals recently resolved a 10-year battle between an owner and general contractor concerning the determination of what constitutes “completion” for purposes of commencement of the 90-day period within which mechanic’s liens must be filed in California. In Picerne Construction Corp. v. Castellino Villas, et al. 244 Cal.App. 4th 1201 (2016), the court faced a claim by Castellano, the developer of an apartment project comprised of 11 separate buildings, that Picerne, the general contractor, failed to timely file its mechanic’s lien under California Civil Code former § 3115. The City of Elk Grove issued the final certificate of occupancy (of a series) on the Project on July 25, 2006. Castellano did not release its 10 percent retention when the City issued any of its final certificates of occupancy.

Picerne continued to perform work at the Project after July 25, 2006 generally comprised of various punch list items and non-warranty roofing work. Castellano began renting apartments in October 2006, and Picerne recorded a mechanic’s lien on November 28, 2006, filing to foreclose its lien on December 29, 2006.

In holding the Picerne’s lien filing was properly filed within the 90-day period after completion of the work, the Court found as follows:

1. The criterion for completion is “actual” completion of the work. The Legislature, in enacting the statute, intended to require something other than “substantial” completion and instead intended to define completion as “actual” completion.

2. There was substantial evidence that the owner accepted the Project on September 8, 2006, even though the final certificates of occupancy for the Project were issued about two months prior to that date.

3. The mechanic’s lien statute is to be liberally construed for the benefit of laborers and materialmen to give them the maximum time to assert their rights.

Importantly, the court also determined that the 11 separate buildings comprising the Project constituted one residential unit within California Civil Code former § 3131, even though certificates of occupancy were issued separately on several of these buildings. Critical to that determination was the court’s finding that the owner had not shown that there was separate title to each of the 11 buildings, and that the owner had filed only one notice of completion for the Project.

You can access the Picerne case here:

Colorado Construction Defect Action Reform: HB 17-1279 Approved by Colorado Legislature; Governor’s Approval Imminent

by Erik G. Nielsen

Colorado developers frequently cite Colorado’s Construction Defect Action Reform Act (“CDARA”) as an obstacle to building new condominiums in the state. Developers contend that the law makes it too easy for condo boards to sue developers for workmanship issues, however trivial. As a result, Colorado has seen significant growth in the development of rental apartments, while development of new, for-sale, multi-unit housing, has declined in the state. In 10 years, new condo development in Colorado dropped from 20 percent to just 3 percent of total new-housing starts. Recognizing this issue, Governor Hickenlooper and the Colorado Legislature have taken an interest in reforming CDARA by, among other things, making it more difficult for condo boards and associations to sue construction professionals. Well on its way to becoming law, HB 17-1279 does exactly that.

After the enactment of HB 17-1279, the executive boards of homeowners’ associations (“HOA”) in common interest communities will have to satisfy three broad elements before bringing suit against a construction professional on behalf of the community’s individual unit owners.

First, HOAs will have to give notice to all unit owners and the construction professionals against whom the lawsuit is being considered. This notice requirement serves a dual purpose—to put developers on notice of defects being alleged, and to inform residents of the potential consequences of proceeding with a lawsuit against a construction professional. Among other things, the notice must inform residents of the potential costs and attorneys’ fees the HOA may incur, that the market value of the units may be “adversely affected” during the pendency of the action, and that the HOA may be responsible for compensating the construction professional for its attorneys’ fees and costs in the event that the HOA does not prevail in the suit.

Second, before proceeding with a lawsuit, HOAs will have to call a meeting at which both the executive board and construction professional will have an opportunity to present relevant facts and arguments. This meeting must be held no less than 10 days, and no more than 15 days, after mailing of the notice described above. In addition to presenting their position at the meeting, construction professionals who attend the meeting will be allowed to present an offer to remedy any defects alleged by the HOA.

Third, HOAs will have to obtain approval from the majority of unit owners before proceeding with a lawsuit. Prior to obtaining approval, HOAs will have to provide unit owners with detailed disclosures regarding the potential costs and benefits of proceeding with a suit. The voting period begins at the conclusion of the meeting described above. The voting period ends 90 days after the meeting notice was mailed or “when the association determines that the construction defect action is either approved or disapproved, whichever occurs first.”

Finally, it is worth noting that issuing the notice described above to unit owners and construction professionals tolls the statute of limitations for all claims described with “reasonable specificity in the notice,” for either 90 days from mailing the notice, or until the HOA determines that the construction defect action is approved or disapproved, whichever occurs first.

While it is clear that HB 17-1279 will make it more difficult for HOAs and plaintiffs’ attorneys to bring construction defect actions against construction professionals in Colorado, it remains to be seen whether this reform will spur the new condominium development intended by its enactment

HB 17-1279 was passed by the House on April 24, 2017 and by the Senate on May 4, 2017. Governor Hickenlooper signed the bill into law on May 23, 2017.

Colorado Supreme Court Holds Privity Necessary for Homeowner to Sue Developer

by Cody C. Bourke and Cassie Redlingshafer*

While Colorado courts have long recognized a series of implied warranties in construction cases, the Colorado Supreme Court recently held that contractual privity is necessary for a home buyer to assert a claim for breach of the implied warranty of suitability against a developer. Forest City Stapleton Inc., v. Tad S. Rogers, No. 15SC1089 (Colo. 2017).

In this case, developer Forest City Stapleton, Inc. (“Forest City”) was formed to lease and sell the former Stapleton International Airport site. Forest City was responsible for subdividing the land into lots and selling the lots to builders; in turn, these builders sell the lots and homes directly to potential homeowners. Forest City sold the residential lot at issue to Infinity Home Collection at Stapleton LLC (“Infinity”), a professional building company. Subsequently, Tad S. Rogers contracted with Infinity for the purchase of the lot and a home. The contract between Rogers and Infinity stipulated that Infinity would build the home so as to allow the basement to be finished and inhabited at a later date. As a result of this provision, the home included a foundation drain system designed to collect ground water into a sump pit and to pump that water into the yard by way of a sump pump. After Rogers moved in, he noticed that the sump pump discharged unusually frequently, making the basement uninhabitable. Accordingly, Rogers sued developer Forest City alleging breach of the implied warranty of suitability.

In district court, the jury rendered a verdict in favor of Rogers. The court of appeals partially reversed because it held that while Rogers could pursue his breach of the implied warranty of suitability claim against Forest City, the court was unable to determine whether such an implied warranty existed in this case because the trial court did not properly instruct the jury. The Colorado Supreme Court reversed, succinctly holding that “because breach of the implied warranty of suitability is a contract claim, privity of contract is required in such a case.” Accordingly, “because the home buyer did not have contractual privity with the developer, he may not pursue a claim against the developer for breach of the implied warranty of suitability.” The Court supported this syllogism by referencing precedent that clearly established that implied warranties implicate contract claims, and thus contract principles apply. Therefore, in accordance with contract principles, in order for Rogers to bring a breach of the implied warranty of suitability claim against Forest City, the parties needed to be in privity of contract. Since Rogers contracted directly with Infinity, not Forest City, the requisite privity did not exist.

This opinion clarifies standards applicable to future construction defect litigation in Colorado. Developers, builders, contractors, designers and homeowners should all be aware of the robust protection developers receive under Forest City v. Rogers: developers may not be held liable for a breach of an implied warranty of suitability when the homeowner had no contractual relationship with the developer.

*Cassie Redlingshafer is a Summer Associate in Snell & Wilmer’s Denver office and contributed to the development of this article.

How Contractors Can Maximize the Utility of Insurance in Mediation

by Mark O. Morris

Mediating a very significant construction case involving tens of millions of dollars in claimed damages on both sides teaches everyone some lessons. Some lessons are worth sharing. One lesson is what could be done by contractors who are being represented by counsel retained by an insurance company, and who hope to obtain peace in mediation.

1. Figure out your limits.

We all understand that there is a tension between an insurance company, an insured contractor and a plaintiff owner. Insurance companies naturally want to pay out the least possible, but in the meantime are spending significant dollars on defense costs. Many policies have “per occurrence” limits as well as an aggregate limit. We also understand that the insured wants to limit any financial outlay that it must make to resolve things, and if there is exposure to have the insurance company cover that. The owner likely does not care where the money comes from to cover losses from defective or negligent work. The time, however, to determine how many “occurrences” are at issue and what the insurance company’s risk really is, is long before the mediation. An insurer may have a very different idea about how many insurable occurrences have taken place during a construction project. The time to determine how many occurrences were at issue, and thus what the insurance company’s ultimate exposure was, should not be in the middle of mediation.

2. Get coverage counsel.

The attorneys who are being paid by the insurance company and who are defending the contractors in the case are ethically prohibited from offering advice to the insured contractors on the extent to which the insurance policy is going to cover the risks involved in the lawsuit. The time to hire coverage counsel is before the mediation takes place if you learn that there may be a disagreement about total insured exposure. If coverage counsel is retained long before the mediation, has articulated the insured’s position in a coherent way, and has explained the risks the insurance company was going to face if it were wrong about the number of occurrences at issue, much more can then be accomplished in the mediation.

3. Get excess insurance carriers involved early.

When it is clear that the claims against the contractor are greater than even the broadest read on the underlying primary insurance policies, the excess carrier (if there is one) should be brought in far in advance of a mediation, . Otherwise, an excess carrier’s attendance at mediation will be only informational and educational, and the excess carrier may have virtually no opportunity to make an intelligent decision about whether a contribution to a proposed settlement is reasonable or justified.

4. Be careful about the positions you take concerning your own liability.

Of course every defendant contractor is likely to deny any claims of defective or negligent workmanship. Everyone understands that. There is a risk, however, that by passionately and vociferously claiming it did nothing wrong, a contractor may persuade its own insurance company that it should not advance monies toward settlement and simply allow the defense to roll on. Everyone understands this happens and defendants are entitled to disprove the claims against them in absolute terms. But if an insurance company has reserved rights, and is not promising to be there in the event of an adverse judgment, the insured contractor should at least consult with independent coverage counsel about the risks and merits of taking too strong a position in the mediation that may not be reflective of the real risks and exposure.

Conclusion

Mediation is a wonderful tool and an opportunity for parties to come together and, as one former judge mediator told me, leave with a settlement that makes all concerned equally unhappy. A party going into mediation should be prepared to compromise, acknowledge risks, and face the prospect of leaving with a settlement that is short of aspirations, but still within the realm of reasonable resolution. Insured contractors may frustrate the process when insurance companies are involved, however, by the failure of an insured contractor to have adequately analyzed their coverage situation so that the insured can bring all appropriate forces to bear on the companies who are paid premiums to assume risks and resolve claims in a way that protects their insureds. The job of educating the insurance company and bringing all relevant insurers into the fray sufficiently in advance of the mediation to enhance their abilities to make intelligent and rational decisions lies with the insureds and their independent coverage counsel, and not with a mediator. And because insurance-paid lawyers representing the insured in the litigation cannot provide advice concerning insurance issues, involving independent coverage counsel early should be de rigueur. If that work is done prior to mediation, the prospects of a resolution at mediation are greatly enhanced.

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