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WSHB Colorado Law Update: Colorado’s Home Owner Protection Act Did Not Apply Retroactively to Invalidate a Limitation of Liability Clause in a Construction Contract

February 4, 2014

Taylor Morrison of Colorado, Inc. f/k/a Morrison Homes of Colorado, Inc. v. Bemas Construction, Inc. and Terracon Consultants, Inc.

Holding

On January 30, 2014, the Colorado Court of Appeals issued its decision in Taylor Morrison of Colorado, Inc. f/k/a Morrison Homes of Colorado, Inc. v. Bemas Construction, Inc. and Terracon Consultants, Inc.  The key issue in this opinion was whether the limitation of liability clause in the contract between Morrison Homes and Terracon was unenforceable pursuant to Colorado’s Homeowner Protection Act of 2007 (the “HPA”).  The HPA voids any express waivers, or limitations on, legal rights, remedies or damages provided by Colorado’s Construction Defect Action Reform Act.  The Court of Appeals held that the contract was entered into prior to the enactment of the HPA and that invalidating the limitation of liability through a retroactive application of the HPA would be unconstitutionally retrospective.

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Why This Case is Important

Legislation is applied prospectively when it operates on transactions that occur after its effective date, and retroactively when it operates on transactions that have already occurred or on rights and obligations that existed before its effective date.

Retroactive legislation is proper so long as it is not also retrospective.  A law is retrospective if it takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already passed.

For years, defense attorneys have been arguing that retroactive application of the HPA to fully executed contracts was unconstitutionally retrospective.  This is the first appellate decision to address that issue.  That part of the decision is a huge win for the defense bar.

Facts

Morrison Homes developed a residential subdivision.  It contracted with Terracon for geotechnical services, and it contracted with Bemas for site grading.

After a number of homes were constructed, Morrison Homes received complaints from homeowners about cracking drywall.  Morrison Homes investigated and eventually spent a significant amount of money to remedy construction defects.  Morrison Homes then filed suit against Terracon and Bemas seeking to recover its expenses.

The trial court was asked to determine, as a matter of law, whether the HPA invalidated the limitation of liability clauses in the contracts between Morrison Homes and Terracon.  Terracon argued the HPA only applies to residential property owners, not commercial entities.  In the alternative, Terracon asserted that the HPA does not apply retroactively to contracts executed and performed prior to its enactment and that applying the HPA retroactively to void Terracon’s limitation of liability would be unconstitutionally retrospective.

The trial court agreed with Terracon’s primary argument and concluded that the HPA protects only residential property owners and not commercial entities.  After the ruling, Terracon deposited the maximum amount of its liability under the contracts into the court’s registry and the claims against it were dismissed as moot.  Morrison Homes proceeded to trial against Bemas, but a jury found for Bemas on all counts.  Morrison Homes then filed its appeal on the ruling related to Terracon.

Unfortunately, the Court of Appeals declined to address whether the HPA only applies to residential property owners.  Instead, the Court of Appeals addressed only Terracon’s alternate argument and agreed that retroactive application of the HPA on the present facts would be unconstitutionally retrospective.

Discussion

As mentioned above, a law is retrospective if it takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already passed.

In determining whether a right is vested, courts consider (1) whether the public interest is advanced or retarded, (2) whether the statute at issue gives effect to, or defeats, the bona fide intentions or reasonable expectations of the affected party, and (3) whether the statute surprises those who relied on contrary law.

In the Taylor opinion, the Court of Appeals found the right at issue was vested because it was a fully executed contract and therefore a perfected contract right and was not dependant on the continued existence of a statute or the common law.  The Court reasoned that applying the HPA retroactively would defeat the reasonable expectations of Terracon and Morrison Homes that the limitation of liability in their contracts would be enforced, and that the HPA invalidating the limitation of liability clause would be surprising.

In balancing the public policy considerations, the Court found that the public policy behind the HPA (protecting home purchasers with little or no bargaining power) was not affected under the present facts.  The contracts at issue were the product of arms-length transactions between sophisticated commercial entities.  Therefore, applying the HPA to invalidate the limitation of liability clauses at issue would have, at best, only incidental impact on residential property owners.

For these reasons, the Court of Appeals concluded that applying the HPA to invalidate the limitation of liability clauses in the contracts between Morrison Homes and Terracon would be unconstitutionally retrospective.

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