The Colorado Supreme Court recently issued a decision that significantly impacts common interest communities’ need to enforce contracts by filing a lawsuit or an arbitration proceeding. This decision affects the timing considerations of when such proceedings must be filed.
The deadlines measuring when lawsuits must be filed are known as “statutes of limitation”. They vary depending on the particular legal theories or claims to be asserted. For most contracts, the applicable statute of limitations is three years after the claim “accrues”. When a claim accrues, that means the three-year period has started to run. There are several statutory provisions and legal decisions analyzing these accrual rules.
The recent Colorado Supreme Court decision has changed the accrual rules for such contracts. The overall impact means such breach of contract claims will accrue (meaning start the three-year period) sooner. Going forward, there is an earlier starting point for accrual than previously. Generally speaking, prior to this decision, a claim for breach of contract “accrued” when some recognition of damage, adverse conditions, or physical manifestation of damage existed from improper contractual performance. After the new Colorado Supreme Court ruling, the claim accrues when there is a notice of the breach, meaning a failure to follow contractual terms, regardless of whether that breach has yet caused damage or adverse conditions. Here is how the Court summarized its decision:
The supreme court today clarifies when a breach-of-contract claim accrues for purposes of the applicable three-year statute of limitations. The court holds that a breach-of-contract claim accrues at the time the breach is, or in the exercise of reasonable diligence should have been, discovered. Because a division of the court of appeals applied an accrual rule based on when a plaintiff becomes aware of damages and possesses certainty of harm and incentive to sue, it erred.
City and County of Denver v. Board of County Commissioners of Adams County, ___ P.3d ___, 22 SC 250 (Colo. 2024) (01-29-24).
This case is significant for association boards and managers. An association’s awareness of a vendor’s failure to follow a contractual provision, a fact which may be realized long before any resultant damage, starts the three-year time period within which a lawsuit or arbitration must be filed.
For example, if contract specifications require a vendor installing decks to use a particular type of stain to seal the decks and the vendor instead uses a different stain, that constitutes a breach. Any ensuing damage from using the wrong stain may not appear until long afterward. But, even though there is no immediate damage from the different stain, the legal clock has started ticking on the three-year deadline within which to file suit for breach of contract for using improper stain.
This ruling will require greater monitoring of contractual performance and increased vigilance to ensure that vendors are following the correct contractual procedures. How associations accomplish this monitoring and vigilance will depend on each factual circumstance, but the consequences of not doing so could mean the loss of legal remedies for enforcing contracts.
It is also important to recognize that a warranty in a contract for longer periods of time does not extend either the three-year statute of limitations or the accrual rules summarized here.
If you have any questions about this case and its impact on associations, please contact one of our Altitude attorneys at 303-432-9999 or email us at [email protected].