Over the past few years, there has been a battle raging on in district
courts and arbitration hearing rooms throughout Colorado regarding when a
subcontractor’s work is to be deemed “substantially complete,” for purposes of
triggering Colorado’s six-year statute of repose. C.R.S. § 13-80-104 states, in pertinent part:
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, except as provided in subsection (2) of this section.
* * *
(2)
In case any such cause of action arises during the fifth or sixth year after
substantial completion of the improvement to real property, said action shall
be brought within two years after the date upon which said cause of action
arises.
C.R.S. § 13-80-104 (emphasis added).
As the battle raged on at the trial court level, subcontractors
and design professionals argued that their work should be deemed “substantially
complete” when they finished their discrete scope of work within a
project. Developers and general
contractors, seeking to maintain third-party claims against the subcontractors
and design professionals, typically argued either that the subcontractors’ and
design professionals’ work should be deemed “substantially complete” upon the
issuance of the final certificate of occupancy on the project, or upon the
issuance of the final certificate of occupancy for the last building within a
project on which the subcontractor or design professional worked. Trial court judges and arbitrators have been
split on this issue, with perhaps a slight majority favoring one or the other
approaches advocated by developers and general contractors, that the
subcontractors’ and design professionals’ work is “substantially complete” upon
the issuance of the last certificate of occupancy in a project (the minority
view) or upon the issuance of the last certificate of occupancy for the last
building within a project on which the subcontractor of design professional
worked (the majority view).
When the Court of Appeals analyzed this issue in 2012, in Shaw Construction,
LLC v. United Builder Services, 296 P.3d 145 (Colo. App.
2012), it held that: “an improvement may be a discrete component of an entire
project, such as the last of multiple residential buildings. Therefore, we need
not resolve subcontractors’ argument that an improvement should be determined
even more narrowly on a trade-by-trade basis.”
Id. at 154. This case did
not fully resolve the issue and the battle raged on at the trial court level, with
more than a few judges and arbiters commenting in their orders on the issue
that the Shaw decision was not
particularly helpful in explaining the applicable law.
At the beginning of September 2016, the Colorado Court of
Appeals again weighed in on the definition of “substantial completion” for work
completed by subcontractors and design professionals in Sierra Pacific Industries, Inc. v. Bradbury, 2016
WL 4699116 (Colo. App. September 8, 2016).
In discussing this issue, the Court of Appeals noted:
Our prior decisions have recognized that, depending upon the
circumstances, “substantial completion” of a project can occur by the time
mechanics’ liens could be filed “after the completion of the building,
structure, or other improvement,” or, in the case of subcontractors
working on the last building in a condominium complex, when a certificate of
occupancy was issued.
But as the division in Shaw pointed out, CDARA does
not define “substantial completion.” In 1986, an amendment removed the prior
definition, “the degree of completion of an improvement to real property at
which the owner can conveniently utilize the improvement for the purpose it was
intended.” The legislative history does
not explain the reason for this deletion.
Id. at *4 (citations omitted).
In settling this dispute, at least
for the time being, the Court of Appeals ruled that “a subcontractor has
substantially completed its role in the improvement at issue when it finishes
working on the improvement.” Id. at
*5.
The obvious impact of this ruling will be that if substantial
completion of a subcontractor’s or design professional’s work is to be
determined under Colorado case law, the claims against the subcontractor or
design professional will become stale before the owner’s claims against the
developer or general contractor. For this
reason, there will be a gap in the risk management program, such that
developers and general contractors will be left holding the bag with respect to
liability to the owner.
In order to combat the risk of this occurrence, it would behoove
developers and general contractors to include clauses in their subcontract
agreements contractually defining “substantial completion” in such a way as to
make it contemporaneous with the substantial completion of the developer’s or
general contractor’s work on the project.
By doing so, developers and general contractors can prevent their claims
against subcontractors and design professionals from becoming stale before an
owner’s claims against them become stale.
To
learn more about the Sierra Pacific
case or to discuss updating your subcontract agreement to define substantial
completion in such a way as to avoid the pitfall of the Sierra Pacific case, you can reach Dave
McLain
by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.
David M. McLain is a
founding Member of Higgins, Hopkins, McLain & Roswell, LLC and is proud to
have received the CLM designation as a Certified Litigation Management
Professional. When not representing Colorado’s construction professionals
in construction defect litigation, Mr. McLain serves as a member of the
Colorado Association of Home Builders’ Board of Directors, Executive Committee,
and Government Affairs Committee, serving as the chairman of its Construction
Defect Task Force. In 2015, Law Week Colorado named Mr. McLain as the
Barrister’s Best Construction Defects Lawyer for Defendants.
