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Colorado Court of Appeals Finds Doctrine of Equitable Estoppel May Apply to Ambiguous Construction Contracts

As a matter of first impression, the Colorado Court of Appeals in Extreme Construction Company v. RCG Glenwood, LLC has found that the Doctrine of Equitable Estoppel may be applied to an ambiguous construction contract. Some of you may be asking “what is the Doctrine of Equitable Estoppel and why should my company care about it?” In plain English, Equitable Estoppel is basically about what is fair. It means that if you have taken certain actions and those actions are relied upon by another party to their detriment, then you cannot deny that you intended the consequences of your actions. Here is an example:

A Contractor hires an electrical Subcontractor. The contract between the Contractor and Subcontractor contains a “pay-if-paid” provision under which the Contractor does not have to pay the Subcontractor if the Contractor is not paid by the Owner. During the project the Owner begins to have difficulties paying the Contractor. The Contractor tells the Subcontractor to continue working and it will make sure the Subcontractor is paid. The Owner ultimately files for bankruptcy and the Contractor cannot pay the Subcontractor for its work. In such an instance, the Doctrine of Equitable Estoppel may prevent the Contractor from using the “pay-if-paid” clause as a defense to payment of Subcontractor.

In the Extreme Construction case, Extreme was a subcontractor to RCG on a remodel project. During the course of the construction, RCG bounced checks to Extreme and Extreme contacted Spradlin, the owner of the project. After receiving assurances from Spradlin, Extreme continued working on the project. RCG again bounced checks to Extreme and Extreme threatened to file a lien on the property. In response, Spradlin sent a letter stating it would execute a promissory note and personal guaranty if Extreme would not file the lien. Extreme never filed its lien, Spradlin never executed the note, and RCG never paid Extreme. All the necessary elements for litigation were present and so Extreme filed a lawsuit to recover its fees.

At the trial court level, Spradlin and RCG argued that the Extreme overbilled on its contract. The key issue was whether Extreme’s rate for superintendence and labor was supported by the contract. The trial court ruled that the contract was ambiguous and that the evidence supported RCG’s position on the labor rates. Extreme appealed the decision and argued that RCG was “equitably estopped” from deny the amounts owed to Extreme because RCG had paid invoices that included the disputed labor rates.

The Court Appeals agreed with Extreme and found that RCG could not deny the labor rates when it had previously paid, without dispute, and even discussed the invoices with Extreme. All the time never disputing the labor rates. In such instances, the Court stated that “it is unreasonable for a contracting party who knows of, but secretly disagrees with, the other side’s contract interpretation to delay challenging that interpretation until the other side has completed its performance.”

Lessons Learned

One take away from this case is that a party should not remain silent if it disagrees with an interpretation of a contract. Try to resolve those disagreements as soon as possible and do not wait until the other party has completely performed before raising those issues. Another take away is to make sure you are not inducing a party to perform by making assurances that are beyond your control. Given the promises of Spradlin in this case concerning Extreme not filing a mechanic’s lien, the Court could very easily have found that Spradlin promised to pay Extreme. In short, the Doctrine of Equitable Estoppel may be applied to your actions and you should be aware that promises made on the jobsite may have far reaching consequences should litigation occur.