House Bill 21-1167 (5% Private Retention) Set for Second Reading in the Senate

A recent e-mail blast from the American Subcontractors Association Colorado regarding House Bill 21-1167 included a "Fact Sheet" on the bill states:

 

VOTE YES ON HB21-1167 PRIVATE CONSTRUCTION CONTRACT PAYMENTS

Representatives Monica Duran & Perry Will and Senators Julie Gonzales & Ray Scott 

PROTECT SMALL- & MEDIUM- SIZED BUSINESSES VIA CONSTRUCTION RETAINAGE CAPS 

 

BACKGROUND 

 

Retainage is part of a construction contractual arrangement where payment for a percentage of the value of completed work is withheld until completion. Typically, in Colorado, that amount is 10% of the total contract for private work. The practice is commonly perceived to provide a level of financial protection to the party withholding retainage as well as an added incentive for proper and timely performance of the work. However, in an industry where profit margins are thin and cash management is essential, withholding retainage can create a significant financial strain on contractors and subcontractors. 

 

IMPACTS & INFO

 

•    Subcontractors commonly carry hundreds of thousands of dollars in retainage and wait on average more than five months, and often up to a couple years, for payment of retainage. During that time, those tied up funds result in a subcontractor being unable to take on new projects, hire new employees, buy new equipment and more. They must borrow money to make up for delayed capital while expending overhead resources on collection of the owed retainage.

 

•    The subcontractor is responsible for 100% of project costs, including: wages, fringe benefits, health insurance, taxes, fuel, equipment, all materials and supplies, and any other sub labor that must be contracted. 

 

•    Banks and annuities do not count retainage as an asset when calculating receivable assets which results in subcontractors being unable to access alternative cash flow to make up for funds held up in retainage.  

 

•    The warranty under the contract provides assurances that the job is satisfactory, thereby making the practice of retainage withholding obsolete. Subcontractors can only bill for work that has been accepted by the owner and general contractor, if work is unacceptable the subcontractor cannot bill for it. 

 

•    Businesses are required to pay taxes based on the percentage of their completed work, regardless of whether they have been fully compensated due to retainage withholding; effectively paying taxes on money they have not yet been paid. 

 

•    In Colorado, public entities are only allowed to retain up to 5% of contract costs. 

 

•    Reductions in retainage caps in other states have lowered construction costs (about 1-1.5% cost reduction based on a decrease in retainage from a 10% to a 5% cap). 

 

•    Reducing retainage caps will free up funds for subcontractors to pay workers better wages and take on new projects more quickly. 

 

•    13 other states have already instituted similar 5% (or less) caps on retainage for private contracts. 

 

SOLUTION 

 

Align the retainage cap for public and private entities – capping retainage at 5%. This would not require changes to the public retainage statutes and would only affect Title 38 - Real and Private Property (contracts between private entities).

Implied Warranty Claims–Not Just a Seller’s Risk: Builders Beware!

One of the thorns in the side of every construction defect defense litigator is the implied warranty claim.  The “implied warranty” is a promise that Colorado law is “implied” into every contract for a sale of a new home that the home was built in a workmanlike manner and is suitable for habitation. Defense attorneys dislike the implied warranty claim because it is akin to a strict liability standard.  All that is required to provide the claim is that an aspect of construction is found to be defective — i.e., inconsistent with the building code or manufacturer’s installation instructions — regardless of whether the work was performed to the standard of care. The implied warranty claim is therefore easier to prove than a negligence claim, where a claimant must prove that a construction professional’s work fell below a standard of reasonable care. Additionally, it is not a defense to an implied warranty claim that the homeowners or the HOA are, themselves, partially liable for the defects where damage is due in part to insufficient or deferred maintenance, as it is for negligence claims. The only redeeming aspect to the implied warranty claim was that, until recently, it was believed that it could only be asserted by a first purchaser against the seller of an improvement, because the implied warranty arises out of the sale contract.

Recently, the Colorado Court of Appeals opinion in Brooktree Village Homeowners Association v. Brooktree Village, LLC, 19CA1635, decided on November 19, 2020, extended the reach of the implied warranty — though just how far remains to be seen.  Specifically, a division of the Court of Appeals held that an HOA can assert implied warranty claims on behalf of its members for defects in common areas, even where there is no direct contractual relationship between the parties to base the warranty upon.

The facts of the Brooktree case are somewhat unique.  The original developer constructed the grading and 2 of 14 planned buildings at the development before filing for bankruptcy.  After the original developer filed for bankruptcy, the common areas were conveyed to the HOA.  Several years later, Brooktree Village, LLC, the developer defendant in the Brooktree case, acquired the undeveloped areas other than the common areas, and completed the development using a builder that was a related entity. The primary construction defect allegations in the case involved site grading and drainage in the common areas and the HOA sought damages of the cost to repair the common areas. Though the facts of the case are unique, the reasoning and holding of the Brooktree opinion could, nonetheless, significantly broaden the scope of implied warranty claims.

First, the Brooktree court held that the HOA could assert implied warranty claims against the builder, even though the developer, not the builder, was the entity that sold the homes to the owners.  The decision was based, in part, upon the fact that the builder had signed the purchase agreements, had provided express warranties to the purchases, and had created the developer entity primarily to market and sell the homes. The decision could therefore be interpreted to apply only in similar factual circumstances in which the developer and builder are related entities and both sign the purchase agreements.  There is language in the Brooktree opinion that could support a broader interpretation that would apply to nearly any builder of a home. The opinion states that, even if the builder had not been a party to the purchase agreements, it constructed the townhomes and knew they would be sold to individual owners and should not be permitted to “shirk its responsibilities under implied warranties” to the homeowners.  We anticipate this language will be used in the future by plaintiff’s attorneys to support arguments that homeowners can assert implied warranty claims against builders, regardless of whether the builder was also the seller of a home.

The second holding of the Brooktree is that the HOA can assert an implied warranty claim against the builder and second developer arising from defects in the common areas, even though neither the builder nor second developer ever owned the common areas or conveyed the common areas to the HOA.  As above, the fact that there was no contract between the HOA and the builder and developer for conveyance of the common areas for the warranty to be “implied” into did not deter the Court of Appeals from finding a way to allow the HOA to pursue the claim. Rather, the Brooktree court found that, because the sales of the individual homes included rights to use the common areas, and the builder completed the construction of the common areas after they were conveyed to the HOA, construction defects within the common areas fell within the implied warranty to the purchasers.  This holding, as did the first, indicates a willingness on the part of the Colorado Court to bend the rules—or simply create new ones—to permit homeowners to hold developers and builders to a strict liability standard regardless of the contractual relationship between the parties.

Additionally, the court held that, because some of the homes were owned by purchasers that purchased their units directly from the second developer, the HOA could assert implied warranty claims for defects in the common areas and seek the entire amount of repair costs from the builder and second developer — as opposed to a proportion of damages representing the portion of direct purchasers — because the repair of only a portion of the common areas would not provide a meaningful remedy to the direct purchasers.

Just how broadly the implied warranty claim will now apply remains to be seen.  However, we anticipate we will see the implied warranty claim asserted in more circumstances and against more parties, particularly builders, in the future. 

For additional information regarding the Brooktree case or Colorado construction law, you can reach out to Carin Ramirez by telephone at (303) 987-7140 or by e-mail at ramirez@hhmrlaw.com.

 

Attorneys' fee clauses are engraved invitations to sue

As we start another trip around the sun, hopefully you are in the process of updating your form contracts, including purchase and sale agreements and express written warranties. Because the law and litigation landscape continually changes, it is a good practice to periodically update the forms you use in order to give yourself a fighting chance if and when the plaintiffs' attorneys come knocking on your door. As you engage in this process, I hope that you will take a critical look at whether your contracts include a prevailing party attorneys' fees clause and, if so, whether you should leave it in there. 

In Colorado, parties are entitled to recover attorneys' fees only if provided for by statute or by contract. Historically, plaintiffs' attorneys relied on two statutes, the Colorado Consumer Protection Act and Colorado's Statutory Interest statute, to recover attorneys’ fees in construction defect cases. In 2003, the Colorado legislature capped treble damages and attorneys' fees under the Colorado Consumer Protection Act at $250,000, effectively restricting plaintiffs' attorneys from relying on the CCPA to recoup their attorneys' fees, especially in large cases. In 2008, the Colorado Supreme Court issued its decision in Goodyear v. Holmes, stating that plaintiffs can only claim prejudgment interest under Colorado's Statutory Interest statute, in cases where they have already spent money on repairs, not when they are suing for an estimate of what repairs will cost in the future. Without either the CCPA or the prejudgment interest statute to recover attorneys' fees, plaintiffs' attorneys most often now rely on the prevailing party attorney fee clause in contracts between the owner and builder, or in the declaration of covenants, conditions and restrictions in situations where a claim is prosecuted by an HOA.

In speaking with clients in the past, it seems that the conventional wisdom has been that homeowners or HOAs would be less likely to pursue legal action if there was a threat that they may have to pay the builder's attorneys' fees if they lose. While I cannot speak to any specific situation in which this clause has been used to successfully fend off a construction defect case, I can speak to the innumerable times that we have had to fight with plaintiffs' attorneys about the fees they claimed because our own clients' documents provided for prevailing party attorney fees.

Just for a moment, put yourself in the shoes of a homeowner or an HOA board member. Would you be more or less willing to pursue a construction defect action, or to push questionable claims, if you knew that at the end, you would have to pay your own attorneys' fees out of the cost of repair ultimately awarded? If your contracts provide for prevailing party attorneys' fees, this is not a question that your buyers or HOAs will ever have to answer. With the clause in the contracts or CCRs, plaintiffs' attorneys are able to say, truthfully, that they only get paid if they recover a cost of repair for you, by virtue of the contingent fee agreement used. Better yet, because of the prevailing party clause in the contract or CCRs, they will be able to get the builder to pay the attorneys’ fees, such that it will not even come out of the cost of repair awarded. Viewed in this light, the prevailing party attorneys' fees clause is nothing more than an engraved invitation for your owners to sue.

As you start another year, consider whether the time is right to remove the prevailing party attorneys' fees clause from your purchase and sale agreements and CCRs. It remains appropriate to seek attorneys' fees from subcontractors actually performing the work, as part of their duties to defend and indemnify you, but I believe it is time to reconsider whether you want to provide that incentive to your homeowners or HOAs.

For additional information on attorneys' fees, or construction litigation in Colorado, you can reach Dave McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.