Monday, October 10, 2016

Colorado Court of Appeals Defines “Substantial Completion” for Subcontractors’ Work so as to Shorten the Period of Time in Which They Can Be Sued

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.

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The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.