Contractual warranty agreements may preclude future tort recovery

When a buyer purchases a product that is later discovered to be defective, the court offers a remedy to make the buyer whole.  Such remedies can arise either out of a contract, including express and/or implied warranties, or under common law through a tort theory.  However, what happens when a buyer has already received the remedy specified in the contractual warranty, only to discover the product manufacturer misrepresented the quality of its product by failing to disclose a defect?  Can the buyer subsequently recover for the same product under a tort theory of recovery?  The Colorado Court of Appeals analyzed such questions in its December 2021 decision in Dream Finders Homes, LLC v. Weyerhaeuser NR Co., 2021 COA 143.

In Dream Finders, the court examines the rights of sophisticated buyers who purchased defective products and received a warranty from the product manufacturer with purchase. The court specifically determines whether such buyers may recover under the tort theory product misrepresentation and failure to disclose when the buyers have already received the remedy specified and the warranty expressly excludes the type of damage the buyer now seeks.

The case involved two main parties, including Weyerhaeuser, a product manufacturer which designed and sold engineered joists with a fire-resistant coating to be used in residential construction, and Dream Finders, a home builder, which purchased and utilized Weyerhaeuser’s fire-resistant joists in homes it constructed and sold. Upon purchase of the joists, Dream Finders received two warranties, from Weyerhaeuser to wit: a general warranty delivered with all Weyerhaeuser products and a specific warranty relating to the joists providing that Weyerhaeuser would pay reasonable costs for repair or replacement of the covered joists for any delamination, separation, or inadequacy that might occur in the joists. The reasonable costs were to be capped at three times the cost of the joists themselves. The specific warranty also expressly stated that Weyerhaeuser would not be responsible for incidental, indirect, or consequential damages.

Three months after Dream Finders started purchasing and installing the joists into its homes, Weyerhaeuser received third-party reports indicating that the joists, which were coated with a formaldehyde-based resin, emitted a chemical-like odor that caused eye and throat irritation.  In compliance with the specific warranty, Weyerhaeuser offered remediation options to builders which installed the affected joists.  Dream Finders opted for a mechanical removal option. Weyerhaeuser complied with the request and paid for all remediation costs, which ended up being significantly greater than three times the product cost.  After the remediation was completed, Dream Finders sued Weyerhaeuser for breach of express and implied warranty, negligence, negligent failure to warn, negligence per se, strict product liability, violation of Colorado’s Consumer Protection Act (the “CCPA”), negligent misrepresentation, and fraudulent concealment.  In its claims, Dream Finders alleged that Weyerhaeuser knew that its products contained a urea-formaldehyde resin but failed to disclose the known hazardous levels of formaldehyde in the joists.  Dream Finders alleged that it incurred over $20 million in damages, including remediation costs and costs incurred because of delayed home sales.  

In evaluating the case, the Court first considered the economic loss rule, which bars recovery under tort claims for purely economic losses stemming from a breach of contract.  While Colorado law provides that construction professionals owe homeowners independent, common law, duties of care to homeowners, which do form the basis for tort-based negligence claims safe from the reaches of the economic loss rule, the Court refrained from extending this duty to a builder, which only owned the homes briefly before selling them to the ultimate purchasers. The Court held that the economic loss rule limited Dream Finders’ ability to recover damages arising from tort claims because it and Weyerhaeuser already completed the contractually mandated remedy for the defective joists.

The Court determined that the relief sought by Dream Finders was identical under both tort and contract theories.  To come to this conclusion the Court compared both the tort duties and contractual duties owed by Weyerhaeuser.  Generally, a tort duty can be distinguished from a contractually arising duty when the tort duty extends beyond the scope of duty provided for in the contract.  Dream Finders and Weyerhaeuser agreed that Weyerhaeuser complied with the terms and conditions of its warranty and that because of this compliance, Dream Finders received the benefit for the contract-based bargain.

Because Dream Finders had already received the agreed-upon contractual benefit and expressly chose to contract away any other rights to recover, the Court precluded Dream Finders from recovering anything further. Even though only one of Dream Finders’ entities entered into the warranty agreement with Weyerhaeuser, the Court held that the warranty still controlled under Colorado law.  C.R.S. § 4-2-318 provides that a manufacturer’s warranty “extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by breach of warranty.”  The Court maintained that the warranty, therefore, impeded recovery under the economic loss rule because, even though one of the entities did not expressly enter into the warranty agreement, its coverage by the warranty was implied by statute.

The economic loss rule does not bar recovery for damages based on pre-contractual fraud where the fraud induced a plaintiff to enter the contract, as discussed in Van Rees v. Unleaded Software, Inc., 373 P.3d 603 (Colo. 2016).  However, in Dream Finders, the alleged claims arose from post-contractual conduct and did not fraudulently induce Dream Finders to enter the warranty agreement.  Because of this fact, Weyerhaeuser did not owe Dream Finders a separate duty apart from those specified in the warranty contract.  The Court concluded, therefore, that the economic loss rule disqualified Dream Finders from recovering anything under its tort-based claims.

There are limitations to the economic loss rule and the Court affirmed that it does not bar CCPA claims.  However, the Court ruled that Dream Finders failed to prove all elements of its CCPA claim.  Additionally, CCPA claims were created to protect individual consumers who are at a bargaining disadvantage compared to more sophisticated buyers, such as Dream Finders.  

Judge Jaclyn Brown issued a warning at the end of the Court’s decision, stating that the expansion of the economic loss rule has the frightening propensity to encourage a contracting party to act fraudulently during the contractual relationship and then attempt to escape liability by hiding behind the rule. Judge Brown further emphasized that the economic loss rule should not apply to cases where the damages arise from an intentional act as it would be bad policy for courts to shield intentional tortfeasors from liability.  Judge Brown’s fears have not yet come to fruition, but we anticipate future Colorado court decisions will further mold the trajectory of the economic loss rule.

Dream Finders now serves as a reminder of the importance of contracts and warranty clauses and why both product manufacturers and contractors should take a close look at what rights are provided or relinquished when entering into such agreements.

For additional information regarding the Dream Finders case or Colorado construction law, you can reach out to Taylor Ostrowski by telephone at (303) 653-0047 or by e-mail at ostrowski@hhmrlaw.com.

HHMR lawyers recognized by Best Lawyers

For over twenty years, Higgins, Hopkins, McLain & Roswell has embodied and exemplified the principles of service and stewardship. In everything we do, we focus on serving our clients selflessly and to the best of our ability. In doing so, we always have in the forefront of our minds our obligation to act as the stewards of our clients’ trust, confidences, and resources. The firm itself, along with Carin Ramirez (in the area of Litigation - Insurance), and Dave McLain (in the area of Construction) were all recognized in this year's edition of the U.S. News Best Lawyers Journal.  We could not be more proud of the firm we have created, or the service we are able to provide to Colorado's construction industry and its insurers.

 

 

 

About Best Lawyers:

 

Since it was first published in 1983, Best Lawyers has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. More than 113,000 industry leading lawyers are eligible to vote (from around the world), and we have received more than 15 million evaluations on the legal abilities of other lawyers based on their specific practice areas around the world. For the 2022 edition of The Best Lawyers in America, more than 10.8 million votes were analyzed, which resulted in more than 66,000 leading lawyers being included in the new edition. Lawyers are not required or allowed to pay a fee to be listed; therefore, inclusion in Best Lawyers is considered a singular honor.

HHMR Celebrates 20 Years of Service!

 

I remember it (almost) like it was yesterday.  It was September of 2001, and I was a third-year associate at Long & Jaudon, practicing with the construction litigation group. After a long weekend away, I received word that the firm had just announced that it would cease providing legal services.  Long & Jaudon, which formed in 1967, had been a stalwart of Colorado’s defense bar, counting among its number some of the finest and most well-respected defense attorneys in the state.  To learn that the firm would be shutting its doors was devastating.  I would be out of a job.

Soon after L&J’s announcement, Dave Higgins, one of that firm’s senior partners, inquired as to whether I would be interested in starting a new firm focused on supporting Colorado’s construction industry and its insurers.  Instead of riding into the sunset of retirement, Dave wanted to leave a legacy.  That legacy is Higgins, Hopkins, McLain & Roswell.  Shortly after the sprout of the idea, I spent an afternoon at a picnic table in Cheesman Park with Dave Higgins, Steve Hopkins, and Sheri Roswell, sketching out an idea for a new law firm.  Twenty years later, HHMR is still here, still serving Colorado’s construction industry and its insurers, and still embodying the principles of service and stewardship upon which the firm was founded.

In reflecting on the firm, Sheri Roswell stated: 

I am incredibly proud of our firm’s success and am thrilled to be celebrating this twenty-year milestone. I am excited for all that lies ahead.  Our accomplishments would not have been possible without the incredibly talented and dedicated staff and attorneys with whom I am honored to practice every day.  I am tremendously grateful for the trust our clients have placed in us over the last two decades; we strive every day to earn their ongoing confidence.

We don’t know what the next twenty years will bring, but our sincere hope is that HHMR will still be here, as a second or third-generation law firm, continuing to serve Colorado’s construction industry.  

- David M. McLain

About HHMR:

HHMR is highly regarded for its expertise in construction law and the litigation of construction related claims, including the defense of large and complex construction defect matters. In addition to their construction law background, HHMR’s attorneys are well versed and experienced in tort, contract, property, and general casualty litigation ranging from products liability to personal injury and premises liability claims.  

Contacts: 

Dave McLain	Sheri Roswell
(303) 987-9813	(303) 987-9812
mclain@hhmrlaw.com	roswell@hhmrlaw.com

Understanding Colorado's new retainage law

From the Fall 2021 Colorado Builder Magazine:

To find the original version of this article, follow this link.

Keep it Simple with Nunn-Agreements in Colorado

On May 24, 2021, the Colorado Supreme Court published its decision in Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass'n.[1] There, the Colorado Supreme Court was tasked with answering whether an insurer, who is defending its insured under a reservation of rights, is entitled to intervene as of right under C.R.C.P. 24(a)(2) where the insured enters into a Nunn agreement with a third-party claimant, but rather than entering into a stipulated judgment, agrees with the third party to proceed via an uncontested trial to determine liability and damages. Interestingly, however, while the Court ultimately answered the above question in the negative, the real lesson from the Colorado Supreme Court’s decision is that Colorado litigants should not seek a trial court’s blessing as to liability and damages through non-adversarial proceedings when using Nunn-Agreements. Or, as articulated in Justice Carlos Samour’s vociferous dissenting opinion, Colorado litigants desiring to enter into a Nunn-Agreement should not proceed with a non-adversarial hearing, as doing so is “offensive to the dignity of the courts,” constitutes a “bogus,” “faux,” “sham” and “counterfeit” proceeding, and the hearing provides “zero benefit.”

By way of background, the case arrived in front of the Colorado Supreme Court based on the following fact pattern. A homeowner association (Bolt Factory Lofts Owners Association, Inc.) (“Association”) brought construction defect claims against a variety of prime contractors and those contractors subsequently brought third-party construction defect claims against subcontractors. One of the prime contractors assigned their claims against a subcontractor by the name Sierra Glass Co., Inc. (“Sierra”) to the Association. The other claims between the additional parties settled. On the eve of trial involving only the Association’s assigned claims against Sierra, the Association made a settlement demand to Sierra for $1.9 million. Sierra asked its insurance carrier, Auto-Owners Insurance, Co. (“AOIC”), which had been defending Sierra under a reservation of rights letter, to settle the case for that amount, but AOIC refused. This prompted Sierra to enter into a “Nunn-Agreement” with the Association whereby the case would proceed to trial, Sierra would refrain from offering a defense at trial, the Association would not pursue any recovery against Sierra for the judgment, and Sierra would assign any insurance bad faith claims it may have had against AOIC to the Association.

Sierra informed AOIC about the existence of the Nunn-Agreement for the first time the Friday before the trial was set to commence. On the following Monday, AOIC petitioned the trial court to intervene in the lawsuit and continue the trial in the hopes of protecting its rights under its insurance policy pursuant to C.R.C.P. 24(a)(2). The trial court denied AOIC’s motion. The Colorado Court of Appeals upheld the trial court’s decision, AOIC petitioned for certiorari, and the Colorado Supreme Court granted certiorari.

In evaluating the above issues, the Colorado Supreme Court ultimately concluded that AOIC was not entitled to intervene under C.R.C.P. 24(a)(2) because AOIC’s interest was not impaired by the Nunn-Agreement. Namely, AOIC could “sufficiently protect its interests in a subsequent declaratory judgment action regarding coverage.” The Colorado Supreme Court further noted that AOIC could also protect its interest by raising its claims and defenses in any bad faith action that the Association may bring against AOIC pursuant to the assignment of claims under the Nunn-Agreement.

More interesting, though, the Colorado Supreme Court also held that the proceeding in which AOIC had attempted to intervene, in the first instance, was unnecessary. The trial court could have insisted that the parties simply proceed with a stipulated judgment instead of allowing the proceeding to take place. In the words of the Colorado Supreme Court: “It is not clear from the record, why, rather than stipulate to the amount of damages as permitted by Nunn[2], [the parties] chose to have the trial court determine those damages as well as [Sierra’s] liability. Doing so was not required under Nunn. . . Although the district court here agreed to this process, we note that courts are not required to do so. Faced with such an agreement, a court may instead require the parties to enter into a standard Nunn agreement – that is, a court may require the parties to agree to a stipulated judgment, rather than proceed to an uncontested trial. . .”

Considering this holding, Justice Samour noted in his dissenting opinion, that after the Supreme Court’s ruling, he “[could not] imagine that any attorney will be able to do what [Sierra and the Association] insisted upon here. Had the trial court in this case been aware that it didn’t have to agree to the pretend trial, it may have refused to do so. . .” because there is “no reason why [Sierra and the Association] would have opted for a trial to accomplish the same thing a simple signature would have.”

In summary, while the Colorado Supreme Court ultimately clarified the situations in which insurers may seek intervention pursuant  C.R.C.P. 24(a)(2), the real takeaway from the Colorado Supreme Court’s decision is three-fold: (1) it is entirely unnecessary to proceed with a non-adversarial proceeding to prove liability and damages when entering into a Nunn-Agreement; (2) Colorado courts have no obligation to allow such non-adversarial proceedings, and are unlikely to allow such hearings in the future; and (3) non-adversarial proceedings are looked upon by Colorado courts with extreme contempt.

For additional information regarding Nunn-Agreements or about construction defect litigation in Colorado, generally, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at meyer@hhmrlaw.com.

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[1] Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass'n, 2021 CO 32, ¶ 1

[2] Nunn v. Mid-Century Ins. Co., 244 P.3d 116, 117 (Colo. 2010).