Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Pursuant to Colo. Rev. Stat. Ann. § 4-2-719(3) (West 2022), parties may contractually limit consequential damages in a sales contract unless it is unconscionable. Mere disparity in bargaining strength is not enough to establish unconscionability. See U.S. Fire Ins. Co. v. Sonitrol Mgmt. Corp., 192 P.3d 543, 548 (Colo. App. 2008). Regardless of unconscionability, a party cannot limit its liability for wanton or willful conduct. Id. Colorado courts apply similar standards in reviewing limited liability clauses in service contracts, including those for construction. Univ. Hills Beauty Acad., Inc. v. Mountain States Tel. & Tel. Co., 554 P.2d 723, 725-26 (Colo. App. 1976) (upholding limitation of liability clause in service contract with telephone utility); Taylor Morrison of Colo., Inc. v. Terracon Consultants, Inc., No. 15CA1030, 2017 WL 2180518, at *6 (Colo. Ct. App. May 18, 2017) (holding that contractual provision limiting engineer’s liability precluded developer from recovering statutory costs and pre-judgment interest, although developer could recover post-judgment interest).
However, with respect to residential construction, the Homeowner Protection Act of 2007, amending the Construction Defect Action Reform Act (“CDARA”), protects residential property owners’ legal rights and remedies by prohibiting a limitation on damages. Colo. Rev. Stat. Ann. § 13-20-806(7)(a) (West 2022).
In addition to recognizing contractual limitations of liability, Colorado law also provides a statutory cap for damages for construction professionals by limiting liability to actual damages under certain circumstances. Colo. Rev. Stat. Ann. § 13-20-806 (West 2022). “Actual damages” are the lesser of: “(1) the fair market value of the real property without the alleged construction defect; (2) the replacement cost of the real property; or (3) the reasonable cost to repair the alleged construction defect.” Hubbell v. Carney Bros. Constr., No. 05-CV-00026, 2010 WL 5147567, at *3 (D. Colo. Dec. 13, 2010); see also Colo. Rev. Stat. Ann. § 13-20-802.5(2) (West 2022).
Exculpatory clauses may be valid, but only after considering various factors: (1) whether there is a duty to the public; (2) the nature of the service performed; (3) whether the contract was fairly entered into; and (4) whether the intention of the parties is expressed in clear and unambiguous language. Jones v. Dressel, 623 P.2d 370, 376 (Colo. 1981); Rumpf v. Sunlight, Inc., No. 14-cv-03328, 2016 WL 4275386, at *3-4 (D. Colo. Aug. 3, 2016) (finding summary judgment on the basis that injured plaintiff released claims upon signing both ski rental agreement and lift ticket); see also, 1745 Wazee LLC v. Castle Builders, Inc., 89 P.3d 422, 426 (Colo. App. 2003) (upholding exculpatory provision in building construction contract in which owner waived all rights of action against general contractor). As a general rule, Colorado courts “will uphold an exculpatory provision between two established and sophisticated business entities that have negotiated their agreement at arm’s length.” SOLIDFX, LLC v. Jeppesen Sanderson, Inc., 841 F.3d 827, 837 (10th Cir. 2016). Exculpatory clauses are ineffective against wanton and willful conduct. See U.S. Fire Ins. Co. v. Sonitrol Mgmt. Corp., 192 P.3d 543, 548 (Colo. App. 2008).
Colo. Rev. Stat. Ann. § 13-50.5-102(8) (West 2022) renders unenforceable any provision in public construction contracts intended to indemnify public entities from their own negligence. Section 13-21-111.5 also governs construction agreements and provides that in an action brought as a result of death or an injury to person or property, no defendant shall be liable for an amount greater than the degree or percentage of that defendant’s percentage of fault.
Enforceability of Waiver of Consequential Damages Clauses
Colorado courts enforce contractual waivers of consequential damages in the construction context. See Parker Excavating, Inc. v. Lafarge W., Inc., No. 14-CV-01534-LTB-MJW, 2016 WL 1756440, at *1 (D. Colo. May 3, 2016), aff’d, 863 F.3d 1213 (10th Cir. 2017) (enforcing mutual waiver of consequential damages provision in construction contract to bar recovery of consequential damages); see also 1745 Wazee LLC v. Castle Builders Inc., 89 P.3d 422, 426 (Colo. App. 2003) (reviewing an arbitral award and declining to find that an exculpatory clause waiving “all rights of action against the contractor for lose of use of [Wazee’s] property, including consequential losses due to fire or other hazards however caused” violated public policy); Energy Drilling, LLC v. Overland Res., LLC, No. 12-CV-02882-PAB-MJW, 2015 WL 1258828, at *3 (D. Colo. Mar. 17, 2015) (“The Court finds that the contract unambiguously waives defendant’s rights to consequential damages, and that defendant’s first and third claims for relief therefore fail to state a claim.”).
However, limitation of liability clauses may be subject to challenge where one party is at a significant disadvantage in bargaining power or the provision shields against a claim of willful, wanton, intentional, or reckless conduct. See Core-Mark Midcontinent, Inc. v. Sonitrol Corp., 300 P.3d 963, 968 (Colo. App. 2012) (“A limitation of liability provision is generally enforceable because it represents the parties’ bargained-for agreement regarding allocation of risks…. [a]s with other contract provisions, however, a limitation of liability provision is not enforceable if, for example, it is contrary to public policy or unconscionable.”); Rhino Fund, LLP v. Hutchins, 215 P.3d 1186, 1191 (Colo. App. 2008) (“As a general rule, courts will uphold an exculpatory provision in a contract between two established and sophisticated business entities that have negotiated their agreement at arm’s length[,]” but making clear that “[m]ost courts will not enforce exculpatory and limiting provisions if they are unconscionable, if they result from unreasonable bargaining power, or if they purport to relieve parties from their own willful, wanton, reckless, or intentional conduct.”); Chadwick v. Colt Ross Outfitters, Inc., 100 P.3d 465, 467–69 (Colo. 2004) (en banc) (noting that a broadly-worded contractual clause is construed only as far as would be consistent with public policy in order to prevent releases of a party’s own willful and wanton negligence); see also United States Fire Ins. Co. v. Sonitrol Mgmt. Corp., 192 P.3d 543, 548 (Colo. App. 2008) (discussing how exculpatory clauses insulating a party from its own negligence, though disfavored, are permitted in Colorado if one party is not at a significant bargaining disadvantage).
The Colorado Construction Defect Action Reform Act (the “CCDARA”) (Colo. Rev. Stat. Ann. § 13-20-801 et seq.) restricts the damages that can be recovered against a construction professional for a defect in the design or construction of an improvement to real property to “actual damages” if certain conditions are met. Colo. Rev. Stat. Ann. § 13-20-806(1). For purposes of the act, “actual damages” as:
 the fair market value of the real property without the alleged construction defect,  the replacement cost of the real property, or  the reasonable cost to repair the alleged construction defect, whichever is less, together with relocation costs, and, with respect to residential property, other direct economic costs related to loss of use, if any, interest as provided by law, and such costs of suit and reasonable attorney fees as may be awardable pursuant to contract or applicable law. “Actual damages” as to personal injury means those damages recoverable by law, except as limited by the provisions of section 13-20-806(4).
Colo. Rev. Stat. Ann. § 13-20-802.5. The Act’s limitations do not apply if a claimant prevails on a claim for violation of the Colorado Consumer Protection Act. Colo. Rev. Stat. Ann. § 13-20-806(1).
In the context of transactions for the sale of goods, the Colorado Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Colo. Rev. Stat. §§ 4-2-711 – 4-2-714, 4-2-715(2). However, Colorado code section 4-2-719 permits the buyer and the seller to contract to limit or exclude consequential damages unless the contractually specified limitation or exclusion is unconscionable or where the circumstances cause the contractually specifried limited or exclusive remedy to fail of its essential purpose. See, e.g., Cooley v. Big Horn Harvestore Sys., Inc., 813 P.2d 736, 744–45, 748 (Colo. 1991) (en banc) (applying Colo. Rev. Stat. § 4-2-719(2) and permitting recovery of consequential damages on a contract limiting the remedy to repair or replacement where equipment was found to have never been functional).
Application of Economic Loss Doctrine
Colorado courts recognize the economic loss doctrine, and limit plaintiffs to contractual remedies for economic losses. See Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000) (en banc) (“[A] party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.”); see also BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 74-75 (Colo. 2004) (noting that the economic loss rule applies to commercial parties and barring subcontractor’s claims of negligence and negligent misrepresentation on public works projects against engineering firm and inspector regarding improper plans). The court in Town of Alma expressly extended this principle to apply to third-party beneficiaries “who may have a cause of action for breach of contractual duties.” Town of Alma, 10 P.3d at 1264 n.12.
Extension to Interrelated Contracts
In those cases where Colorado courts have applied the economic loss rule, application of the doctrine is not restricted only to parties in direct privity. In 2004, the Supreme Court of Colorado applied the doctrine to commercial parties involved in “interrelated contracts” even if they are not directly in privity with each other. See BRW, Inc., 99 P.3d at 72. However, the Colorado Court of Appeals has not extended the doctrine to a purely equitable situation and requires that application of the rule be restricted to contractual disputes. See Jorgensen v. Colo. Rural Props., LLC, 226 P.3d 1255, 1259 (Colo. Ct. App. 2010) (doctrine not applied to unjust enrichment claim).
Independent Duty Exception
Prior to 2019, Colorado courts recognized an independent duty of care exception to the economic loss doctrine where duties exist between parties that are independent of any contractual duties. Town of Alma, 10 P.3d at 1263 (“[S]ome torts are expressly designed to remedy pure economic loss (e.g., professional negligence, fraud, and breach of fiduciary duty). It is here that substantial confusion arises from the use of the term ‘economic loss rule.’ This confusion can be avoided, however, by maintaining the focus on the source of the duty alleged to have been violated.”). In a notable case decided by the Supreme Court of Colorado, the court declined to apply the rule in a claim against a residential subcontractor. A.C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005) (en banc) (holding the economic loss doctrine did not bar tort actions against subcontractors who owed an independent duty of care to act without negligence in construction of homes despite other contractual obligations); Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041 (Colo. 1983) (negligence claim is allowed for latent defects); Metropolitan Gas Repair Serv., Inc. v. Kulik, 621 P.2d 313 (Colo. 1981) (repairman working under contract to replace a pump motor had an independent duty of care to inspect safety valve); Jorgensen, 226 P.3d at 1258 (quoting Town of Alma, 10 P.3d at 1262) (“The key to determining whether the economic loss rule bars a tort claim is ‘determining the source of the duty that forms the basis of the action.’”). Rejection of the doctrine is likely in cases where the parties lack privity. See, e.g., Cosmopolitan Homes v. Weller, 663 P.2d 1041, 1043 (Colo. 1983) (claim against builder by subsequent purchasers); A.C. Excavating, 114 P.3d at 867 (claim against subcontractor by homeowner’s association).
When analyzing the economic loss doctrine as applied to fraud claims, Colorado courts previously made the distinction between fraudulent inducement and post-contractual fraud. Fraudulent inducement claims are not barred by the economic loss rule. See, e.g., Van Rees v. Unleaded Software, Inc., 373 P.3d 603, 607–08. However, older Colorado decisions have held that the economic loss rule precludes tort liability for post-contractual fraud claims, because the duty does not exist independently of the contract. See, e.g., Hamon Contractors, Inc. v. Carter & Burgess, Inc., 229 P.3d 282, 291-92 (Colo. Ct. App. 2009).
Bermel v. BlueRadios, Inc.
In 2019, the Supreme Court of Colorado narrowly defined the scope of the economic loss rule in Bermel v. BlueRadios, Inc., 440 P.3d 1150 (Colo. 2019). In that case, the Court determined that the economic loss doctrine did not bar a statutory claim for civil theft. 440 P.3d at 1157–59. In addition, while setting forth the general principles of the doctrine in Colorado, the Bermel court stated that “[notably], … since adopting the economic loss rule, we have applied it only to bar common law tort claims of negligence or negligent misrepresentation.” Id. at 1155. The Court went on to state that “[i]ndeed, even our cases holding that the rule did not bar tort liability dealt only with this narrow set of common law claims.” Id. (citing cases). The Bermel decision calls into question prior applications of the economic loss rule in other contexts.
Dream Finders Homes LLC v. Weyerhaeuser NR Co.
In December 2021, the Colorado Court of Appeals “consider[ed] for the first time whether a sophisticated buyer of a defective product, who received a warranty from the manufacturer of the product, may assert tort claims based on the manufacturer’s alleged negligence and fraud in representing the quality of its product and failing to disclose the defect, even though the buyer received the remedy specified in the warranty and the warranty expressly excluded the very type of damages the buyer seeks to recover through its tort claims.” Dream Finders Homes LLC v. Weyerhaeuser NR Co., No. 20CA0002, 2021 WL 5707117, at *2 (Colo. App. Dec. 2, 2021). The court held the plaintiffs’ claims for negligence and negligent misrepresentation failed because any of the duties owed by the defendant overlapped with the duties created by the parties’ contract, id. at *12-13, and because – under the economic loss rule – a plaintiff cannot assert tort claims to recover damages expressly excluded under its contract. See id. at 13-14.
Enforceability of No Damages for Delay Clauses
A public entity cannot prohibit a contractor from recovering damages for delays caused by or within the control of the public entity or those acting on its behalf. Clauses in public works contracts that purport to waive or release a contractor’s rights to such damages are against public policy, void, and unenforceable. Colo. Rev. Stat. § 24-91-103.5(1)(a).
With regard to private contracts, no damages for delay clauses are generally enforceable; however, Colorado courts strictly construe such clauses because of the “harsh results” that may flow from enforcement. Tricon Kent Co. v. Lafarge N. Am., Inc., 186 P.3d 155, 159 (Colo. Ct. App. 2008). Colorado courts also recognize exceptions including active interference. Id. at 160 (stating that courts in other jurisdictions recognize exceptions such as fraud, misrepresentation, and bad faith, but noting that the only exception “seriously argued” in the trial court was active interference).
Strict Interpretation of Contract
In Colorado, the primary goal of contract interpretation is to determine and give effect to the intent of the parties. USI Properties East, Inc. v. Simpson, 938 P.2d 168, 173 (Colo. 1997). The intent of the parties to a contract is to be determined primarily from the language of the instrument itself. Id. In ascertaining whether certain provisions of an agreement are ambiguous, the instrument’s language must be examined and construed in harmony with the plain and generally accepted meanings of the words employed. Id. Written contracts that are complete and free from ambiguity will be found to express the intention of the parties and will be enforced according to their plaining language. Id. “Extraneous evidence is only admissible to prove intent when there is an ambiguity in the terms of the contract.” Id; Filatov v. Turnage, 451 P.3d 1263, 1265 (Colo. Ct. App. 2019) (quoting USI Properties East, Inc., 938 P.2d at 173). Terms used in a contract are considered ambiguous if they are susceptible to more than one reasonable interpretation. American Family Mut. Ins. Co. v. Hansen, 375 P.3d 115, 120 (Colo. 2016) (citing USAA Cas. Ins. Co. v. Anglum, 119 P.3d 1058, 1059-60 (Colo. 2005)). The mere fact that the parties may have different opinions regarding the interpretation of the contract does not itself create an ambiguity in the contract. Simpson, 938 P.2d at 173. Accordingly, absent ambiguity, Colorado courts will not look beyond the four corners of the agreement itself to determine the intent of the parties. Hansen, 375 P.3d at 121.
Prompt Payment Requirements (Public/Private)
Colorado Public – Colo. Rev. Stat. § 24-91-103 (2022) (for contracts of $150,000 or more, owner to prime “at the end of each calendar month, or as soon thereafter as practicable;” final settlement with contractor within 60 days after contract is completed and finally accepted; prime to sub 7 days after payment; interest on monies due sub at 15% per annum or rate specified in contract, whichever is higher).
Colorado Private – N/A
False Claims Statute
Federal False Claims Act – 31 U.S.C. § 3729-3733 –
Many states have enacted false claims statutes modeled on the federal False Claims Act (referenced as the “FCA” throughout this survey). 31 U.S.C. §§ 3729-3733. State analogues to the FCA aim to address claims involving state and local governments instead of the federal government. This summary identifies the FCA’s state analogues for construction claims. It does not address false claims statutes for other subjects, such as health care claims, applications for public assistance, or insurance claims.
The FCA defines “claim” as any request or demand for money or property where the government will provide or reimburse any portion of that money or property. Id. § 3729(b)(2). The FCA imposes civil liability for any of seven separate acts including: 1) knowingly presenting a false claim for payment; 2) knowingly making a false record or statement to obtain approval of a claim; 3) conspiring to obtain approval of a false claim; 4) knowingly delivering less than the amount of money or property owed to the government; 5) delivering a receipt for government property without knowledge of the receipt’s veracity and with intent to defraud; 6) knowingly purchasing or receiving public property from a government employee or member of the Armed Forces illegally; and 7) knowingly making or using a false record or statement to decrease a payment obligation to the government. Id. § 3729(a)(1).
A person found guilty of any of the above acts is liable to the government for: 1) a civil penalty between $5,000 and $10,000, as adjusted by inflation; 2) three times the amount of damage sustained by the government; and 3) the costs of a civil action brought to recover damages sustained by the government. Id. § 3729(a)(1-3). The FCA, however, allows mitigation of the penalty if the violator cooperates with the government’s investigation. Courts may reduce the violator’s liability to two times the amount of damage sustained by the government when the violator: 1) provides all of the information known about that violation to the investigative team within 30 days of gaining such knowledge; 2) provides the information without actual knowledge of the investigation and before the government files charges; and 3) fully cooperates with the government’s investigation. Id. § 3729(a)(2).
Colorado – N/A
Licensing Requirements for Construction Managers
The State of Colorado does not impose statewide licensing requirements on construction managers or contractors. Construction managers may be subject to licensing requirements at the local level. Local licensing requirements vary by municipality.