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Contractual Limitations Clauses: Time is On Your Side

Author: KARL A. BERG, JR.

Homebuilders are understandably concerned about their potential liability in the event a dispute arises with any of their customers either prior to or after closing. Rather than relying on the legislature to protect them, homebuilders should rely primarily upon their contracts to reasonably allocate the risks between them and their customers. This article will discuss contractual limitation clauses which reduce the period of time within which claims may be brought.

Generally construction defect claims must be initiated within two years of when they “accrue”. A claim accrues when a homeowner discovers “the physical manifestations of a defect.” The homeowner does not need to know the cause of the defect for a claim to accrue. For example, if a homeowner observes water coming down her wall her claim accrues at that time even though she doesn’t know if the problem was caused by improper roofing, improper flashing or improper construction of the stucco, siding or brick veneer. If she fails to bring the claim within two years of when she first saw the water, it is time-barred.

Colorado also has a six year “statute of repose” which provides that all construction defect claims must be brought within six years of substantial completion unless the claim accrues during the fifth or sixth year. If a claim accrues in the fifth or sixth year, the claimant still has two years to bring a claim. Thus, a homebuilder may be subject to a claim as long as eight years after a home is completed. Based upon personnel changes over the years, as well as the difficulty of maintaining complete files, claims asserted long after a home has been completed are more difficult for homebuilders to effectively defend.

Based upon the lengthy period of exposure to claims, for many years the widely used design contracts developed by the American Institute of Architects (AIA) have included contractual limitation periods which substantially reduce the time within which any claims must be brought. The contracts achieve this by using language which provides that all claims are deemed to accrue at a particular time, either substantial completion of construction for claims arising prior to substantial completion or the date a certificate of final payment is issued for claims arising after substantial completion. Under contracts containing this type of provision, any claim would need to be brought within two years of issuance of a final certificate of payment at the very latest. By this means, the period of exposure to claims by the owner is dramatically reduced. Homebuilders should follow the AIA’s lead to better protect themselves.

A contractual limitations provision in a contract in Colorado is valid and enforceable as long as the period within which to bring a claim is reasonable and the provision hasn’t been waived. Therefore, homebuilders should incorporate a limitations provision in their sales contract in order to reduce their exposure to claims from eight years to a more reasonable duration of two or three years after closing. Although no Colorado decision has considered the validity of such a contract provision in the context of a home sale, that should not dissuade homebuilders from utilizing one. If they do, they might be able to avoid claims being asserted against them many years after a home is sold.

Homebuilders should note however, that, unless their contracts specifically make any subsequent purchasers of their homes intended third-party beneficiaries of the original sales contract, a contractual limitations provision will not bar claims against them by subsequent purchasers who may sue them for negligence. If homebuilders want subsequent purchasers to be bound by a contractual limitations provision (as well as the other terms of the contract) language should be added to the contract providing that subsequent purchasers are intended third-party beneficiaries of the sales contract.

A contractual limitations provision is a powerful tool which all homebuilders should consider including in their contracts. If they do, time will be on their side.

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