Construction Contracts In Retrospect

The Colorado legislature has spelled out step-by-step how to approach construction defect claims against contractors in the Construction Defect Action Reform Act, C.R.S. §13-20-801 (CDARA). For example, CDARA protects both homeowners and contractors by requiring homeowners to give contractors notice that legal action may be pursued as a result of defects in their construction and offer them an opportunity to cure the problems before a lawsuit is filed.

CDARA offers additional protections for residential property owners through the 2007 enactment of the Homeowners Protection Act, C.R.S. §13-20-806(7) (HPA). One thing that CDARA does through the HPA is render any express waiver or limitation on legal rights, remedies or damages, or waivers on the ability to seek a legal remedy for such limitations, as void against public policy.

But what happens if you signed a contract that waives those rights before the HPA was enacted in 2007? The Colorado Court of Appeals has announced their stance on the issue in Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc. et al., 2014 Colo. App. LEXIS 140. In this case, Taylor, a residential developer, contracted with Terracon, a geotechnical engineering company, to perform soil testing services at the site of a future residential subdivision. Taylor then contracted with Bemas for site grading at the location.

After constructing the homes, Taylor received complaints from the homeowners about cracks which were forming in their drywall. Taylor then spent a lot of money to cure the defects and eventually filed a lawsuit against Terracon and Bemas, asserting that they were the reason for the cracking. This article focusses on Terracon’s role in the lawsuit.

At trial, Terracon pointed out that their contract with Taylor, which was signed prior to HPA’s enactment, limited Taylor’s claims for damages to $550,000. Taylor argued that the limitation violated the HPA and therefore, Taylor was entitled to more money in damages.

Terracon, in an effort to keep their liability at $550,000, argued two points to the trial court. First, Terracon argued that the HPA was enacted for the protection of homeowners only, not commercial entities like Taylor. Second, Terracon argued that applying the HPA to their contract with Taylor violated Article II, §11 of the Colorado Constitution because the contract was signed before the HPA was enacted. The trial court agreed with Terracon that the HPA only applied to homeowners, not commercial entities and ordered that Terracon would only be liable for $550,000 as the contract stated. Taylor then appealed the decision. The appellate court upheld the trial court’s decision, but not for the same reasons. Rather than decide if the HPA only applies to homeowners, the Court of Appeals based their decision solely on Terracon’s second argument, that retroactive application of the HPA to contracts, like the one in this case limiting damages, was unconstitutionally retrospective.

What does that mean and what is the difference between retroactive and retrospective? A law is retroactive when it applies to facts and transactions which have already happened prior to the law’s enactment. A law is retrospective if it creates, eliminates, or modifies vested rights or liabilities. The court considers factors such as public interest, the parties’ intentions and expectations, and the element of surprise due to reliance on contrary law, in determining if a retroactive law is unconstitutionally retrospective.

In this case, the Court of Appeals reached their decision based upon several factors. First, the contract was not dependent upon the existence of a statute or common law rule. Second, case law existing at the time of the contract formation would create a reasonable expectation that the $550,000 provision would be upheld. Third, because of this reasonable expectation, striking the $550,000 provision would come to Terracon as a surprise. Additionally, Terracon had no reason to believe that the HPA would be enacted and affect the contract. Finally, the Court of Appeals balanced Terracon’s rights in the contract against public policy and found that in this case, where it was two sophisticated construction professionals, bargaining power in the formation of the contract existed between both Taylor and Terracon. On this final point, the Court of Appeals noted that the HPA was aimed to protect consumers who had no bargaining power and were forced into signing contracts containing waivers of their rights.

So, does the HPA only protect homeowners? The answer is still unclear because the Colorado Court of Appeals specifically refused to tackle that question. However, it is certain that the level of sophistication of the parties will continue to play a role in determining whether applying HPA to each individual case is retrospective and thus, unconstitutional.

What this means for you. Most importantly, if you have a question about the HPA regarding a pre-2007 contract, call our office as soon as possible so we can help you learn your rights. Construction defect law is a very complex area and cases like this only add more wrinkles to the fabric. Obviously, the further along we get from 2007, the less this case will matter in terms of CDARA and the HPA. However, there has been much talk in reforming CDARA in the last few legislative sessions and this case will have a lasting impact on any reforms that may take place in the coming years.