June 26, 2019

Colorado Court of Appeals: In Breach of Contract Case, Three-Part Test to Determine Equitable Estoppel Was Satisfied

The Colorado Court of Appeals issued its opinion in Extreme Construction Co. v. RCG Glenwood, LLC  on Thursday, December 27, 2012.

Construction Contract—Equitable Estoppel in a Contract Action.

In this action concerning the interpretation of a payment provision in a construction contract, plaintiff Extreme Construction Co. (Extreme) appealed the amount of the monetary judgment that it obtained against defendant RCG Glenwood, LLC (RCG) and the judgment entered in favor of defendant Mike Spradlin. RCG cross-appealed the trial court’s award of attorney fees, costs, and certain prejudgment interest to Extreme, as well as the court’s denial of RCG’s request for fees and costs. The judgment was affirmed in part and vacated in part, and the case was remanded with directions.

RCG, through Spradlin, its owner, negotiated for Extreme to remodel a portion of a building. Extreme provided a budget that estimated the total price and included amounts for superintendence and labor, which were calculated at $68.50 per hour and $38.50 per hour, respectively. The contract that was entered into did not include these hourly rates. Instead, it was a Guaranteed Maximum Price contract that provided for payment of wages of construction workers employed by Extreme, as well as “Builder’s overhead and construction management fee of 5.5%, and Builder’s profit of 5.5%, for a total of 11%.”

Extreme mailed monthly bills reflecting the hourly wage charges noted above. These invoices were paid without objection, but some of RCG’s checks bounced. Each time Extreme discussed the bounced checks with Spradlin, no issues regarding the hourly rates were raised. Notwithstanding the failure of RCG to pay its bills, Extreme completed the project on time, to Spradlin’s satisfaction, and for about $45,000 less than the Guaranteed Maximum Price.

RCG failed to pay in full, and Spradlin proposed a payment schedule and “a promissory note, personally guaranteed.” Based on his request, Extreme did not file a lien and prepared a promissory note, which was never signed.

Extreme sued, claiming breach of contract against RCG and that Spradlin had breached his personal guarantee. RCG and Spradlin asserted Extreme had overbilled RCG, claiming Extreme was not permitted to bill for superintendence and labor on an hourly basis. Extreme replied that the contract was ambiguous and that extrinsic evidence, including the pre-contractual budget, favored its interpretation. In addition, Extreme claimed RCG was estopped from contesting Extreme’s interpretation of the contract.

The trial court found that the contract was ambiguous but that the extrinsic evidence supported RCG and Spradlin’s argument. It rejected the estoppel argument. The court entered judgment in favor of Extreme and against RCG in the amount of $18,523.65. Because this was significantly less than the amount Extreme had sought at trial, RCG argued it was the prevailing party under a fee-shifting provision in the contract. Also, because the amount of the judgment was less than the offer of settlement made under CRS § 13-17-202, any interest awarded to Extreme had to be abated as of the date of the offer, and RCG was entitled to an award of costs. The trial court rejected all of these arguments. Both parties appealed.

Extreme contended that RCG was equitably estopped from contesting Extreme’s interpretation of the contract, and the Court of Appeals agreed. The Court held, as a matter of first impression, that the equitable estoppel doctrine applies to disputes over contract interpretation, at least in cases involving the construction of an ambiguous contractual provision unrelated to insurance coverage.

The Court also agreed with the trial court that the contractual provision regarding wages was ambiguous. For equitable estoppel to apply, the party asserting the doctrine must establish that (1) the other party had full knowledge of the facts, (2) the other party unreasonably delayed in asserting an available remedy, and (3) the party asserting the doctrine relied on the other party’s delay to its detriment.

The trial court found, and the record supported, that the first element was satisfied. The trial court found the second element was not met because if RCG had sought redress, it would have halted the project. The Court found this was error. It is unreasonable for a contracting party who knows of, but secretly disagrees with, the other side’s contract interpretation to delay challenging the interpretation until the other side has completed its performance. This is even more the case where, as here, RCG’s silence induced Extreme’s continued performance. The trial court also erred in finding the third element wasn’t met, because the facts clearly demonstrated that Extreme relied on RCG’s failure to contest its invoices to its detriment. The award of damages was vacated and the case was remanded to the trial court to recalculate the damages.

Extreme argued it was error for the trial court to determine that Extreme never accepted Spradlin’s offer of a personal guarantee. The Court was not persuaded. It agreed with the trial court that although an offer was made by Spradlin, no action was taken that indicated an acceptance by Extreme.

RCG argued it was error to find that under the fee-shifting provision in the contract, Extreme, and not RCG, was the prevailing party. The Court disagreed. RCG was held liable for breach of the contract; therefore, it was the prevailing party for purposes of awarding attorney fees.

RCG also contended it was error for the trial court to reject its assertion that under CRS § 13-17-202, the interest awarded to Extreme should have abated as of the time of the offer of settlement. The Court disagreed, finding that RCG did not address in its briefs the trial court’s finding that RCG did not make a qualifying offer of settlement.

Summary and full case available here.

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