HOMEOWNER ASSOCIATIONS WIN STANDING AND RIGHT TO SUE SUBCONTRACTORS
In a recent decision, the Colorado Supreme Court has affirmed the authority of Associations to seek damages from subcontractors for defective construction. The HOA filed a lawsuit against the developer, the contractor and various subcontractors for defective construction of the project. The HOA settled with the developer and general contractor before trial. The trial court dismissed the negligence claim against the subcontractors before trial.
The basis for the dismissal, according to the trial judge, was that the Association lacked standing to bring the claim against the subcontractors because it did not suffer the damages, the individual homeowners did. The trial court further held the Association's negligence claim was barred because the court held that the subcontractors' duties to the Association arose out of the contracts between the subcontractors, the developers and the general contractors. Therefore, the Association could not go forward on its claim of negligence against the subcontractors. It barred the claim on the economic loss rule.
In brief, the economic loss rule bars negligence or tort claims against a party if the claim arises out of a contract between the parties. If the claim is based on breach of a contract, than the party damaged has to sue under a contract claim and not a negligence claim. The problem in this situation is that the Association did not sue on a contract claim, and probably did not because there was no contract between the subcontractors and the Association or homeowners. The subcontractors entered into contracts with the general contractor. By pushing this theory, the subcontractors would not have to answer for their construction defects to the Association if they prevailed as they did in the trial court.
The Association appealed to the Colorado Court of Appeals which reversed the trial court. The appellate court said that the economic loss rule did not bar the Association from bringing its tort or negligence claim for defective construction of the project against the subcontractors. The appellate court reasoned that the subcontractors owe homeowners a duty of care, independent of any contract provision in connection with the construction of homes. The subcontractors, the appellate court held, had an independent duty outside the contract to construct homes free from defects which they could have prevented.
The appellate court further stated that the Association has standing to bring a lawsuit on behalf of all the owners under the Colorado Common Interest Ownership Act, ("CCIOA"). CCIOA provides the Association the right to file a lawsuit on behalf or two or more homeowners for damages. This issue was not appealed by the subcontractors.
The subcontractors than petitioned the Colorado Supreme Court to reverse the court of appeals. The Supreme Court accepted the petition on the issue of whether the negligence claim by the Association was barred by the economic loss rule. The Supreme Court in affirming the decision of the appeals court concluded that the Association's negligence or tort claim against the subcontractors was not barred by the economic loss rule.
This case is a victory for Associations. It supports the Association's position under CCIOA that the Association can bring a lawsuit on behalf of its members. Secondly, it allows the Association to seek damages against subcontractors where there are no contract provisions between them.