In a case of first impression, the First Division of the Colorado Court of Appeals recently reviewed whether parties may contractually alter the accrual time established by Colorado’s statute of limitations for construction defect actions, C.R.S. § 13-80-104, in South Conejos Sch. Dist. RE-10 v. Wold Architects, Inc., 2023 COA 85 (2023), decided on September 21, 2023. The Court held that sophisticated parties may contractually alter the accrual time standards, enlarging the accrual time as was the issue in this case. Notably, the Court’s decision was made in the context of commercial construction, not residential.
The issue in South Conejos Sch. Dist. RE-10 arose from the construction of a school in Antonito, Colorado. Prior to construction, the South Conejos School District RE-10 (the “School District”) and Wold Architects, Inc. (“Wold”) entered a contract that provided:
Unless a longer period is provided by law, any action against [Wold] brought to recover damages for deficiency in the design, planning, supervision, inspection, construction or observation of construction or for injury to person or property shall be brought within two years after the claim for relief arises and is discovered by [the District]; … “Discovered” as used herein means detection and knowledge by [the District] of the defect in the improvement that ultimately causes the injury, when such defect is of a substantial or significant nature.
South Conejos Sch. Dist. RE-10, 2023 COA 85, at ¶20 (emphasis in original). This clause enlarged the time for accrual beyond that provided by the statute of limitations for construction defect actions, which provides that “a claim for relief arises . . . at the time the claimant . . . discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury.” C.R.S. § 13-80-104(1)(b)(I) (emphasis added).
Following construction, there was a flood at the school. The post-flood damage led the School District and the Colorado School District Self Insurance Pool (the “Self Insurance Pool”) to believe that there were construction defects present in the school. Accordingly, the School District and the Self Insurance Pool sued the contractor, architects, and others involved in the construction of the school under CDARA. During litigation, the School District and Self Insurance Pool settled with all parties except Wold, the architectural firm that was hired to design the school and provide construction administration and observation services. Wold ultimately filed a motion for summary judgment, arguing that the claims against it were time barred pursuant to Colorado’s statute of limitations for construction defect actions, C.R.S. § 13-80-104. Specifically, Wold argued that the more limited time for accrual provided by Colorado’s statute of limitations should control over the more liberal time for accrual under the contract. In support of its position, Wold asserted that accrual provision in the contract is void as against public policy because it violates the policies’ underlying statutes of limitations in general and Colorado’s accrual provision specifically. The district court denied Wold’s motion in part, declining to “break new ground” on the issue of whether parties can agree to change the accrual standard by contract. Wold then moved for and was granted an interlocutory appeal.
In analyzing the issue of contracting around C.R.S. § 13-80-104’s accrual provision, the Court of Appeals first turned to statutory interpretation. As an initial matter, the Court recognized that the statute’s plain text does not reflect that “the legislature unambiguously intended to prohibit a sophisticated, commercial entity such as Wold from agreeing to a different accrual period.” 2023 COA 85, at ¶25. In fact, the statute of limitations is silent on the issue of whether a modified accrual time is invalid. The Court also cited the Homeowner Protection Act of 2007 as a law where the legislature expressly limited rights by statute, reasoning that it could have done the same in the accrual standard had it intended to prohibit modification of the accrual time. But as the Court noted, the same limitation is not present in C.R.S. § 13-80-104. Having determined that Colorado statutes do not expressly preclude modification of the accrual time by agreement, the Court turned to whether such modification would violate Colorado public policy.
Wold advanced several arguments that accrual modification violated public policy, including that CDARA was enacted to “(1) streamline construction defect litigation; (2) encourage timely resolution of construction disputes; (3) decrease construction defect litigation; and (4) reduce the costs of insuring construction professionals.” 2023 COA 85, at ¶29. Wold further noted that the contractual language tracked the language in an earlier version of C.R.S. § 13-80-104, which the legislature had amended. The Court was not persuaded.
In its analysis of Wold’s arguments, the Court primarily relied on freedom of contract principles, which are deeply embedded in Colorado jurisprudence. As the Court explained, “Wold and the [School] District are sophisticated parties that, by contract, sought to allocate business risks in advance.” Id. at ¶32. The Court would not disturb that risk allocation, ultimately holding that “[t]he public policies Wold touts to support its argument simply do not outweigh Colorado’s significant interest in enforcing the agreement between two sophisticated parties.” Id. at ¶ 34.
Although the Court determined that the accrual modification at issue here was neither prohibited under CDARA nor in violation of public policy, it added the caveat that it “need not decide whether contracting for a different accrual term is permissible under all circumstances. Where, as here, the operative term . . . of the contract does not violate any Colorado statute or public policy, we must respect the parties’ agreement.” Id. at ¶ 34.
The Court’s ruling makes clear that contracts entered by sophisticated parties, at least with respect to non-residential construction, should be respected when C.R.S. § 13-80-104’s accrual time is modified by the agreement. However, considering the caveat the Court added to its decision, parties should consider the merits of modifying the accrual time in their contracts, understanding that there is no bright line rule to evaluate such contractual provisions. A sophisticated party should be especially careful when entering into an agreement with an unsophisticated party where the contract modifies the statute’s accrual time. Still, if the merits outweigh the potential risk, sophisticated parties should have some comfort in reaching an agreement to modify the accrual time based on the Court’s heavy reliance on freedom of contract principles. At bottom, parties should have comfort in entering into an agreement enlarging the accrual time. However, parties should be cautious about limiting the accrual time as the Court of Appeals has only examined the issue in the context of enlarging the accrual time.