Breach of Contract
While mechanic's liens are a powerful mechanism to secure payment, the most common avenue for relief is a standard breach of contract claim. Long after lien rights have expired, parties can often recover fully through a contract claim. It is important for everyone on a construction project to understand how contracts are formed, interpreted, and enforced.
What is Necessary to Form a Contract?
A written document is not necessary to form a contract. Oral agreements are fully enforceable in Colorado (with a few specific exceptions provided by what are known as statutes of frauds, e.g., real estate transactions, contracts lasting longer than one year). The only difference between oral and written contracts is the quality of evidence. It is nice to be able to hold up a piece of paper with a signature to prove the agreement.
In order to form a contract, there must be an offer and an acceptance. There also must be sufficiently definite terms to allow a court to enforce the agreement. If further negotiations are required to work out important and essential terms, the parties may only have an agreement to agree, which is not enforceable.
But if the parties have a verbal agreement on all material terms, the contract is as enforceable as a written document signed by all parties.
How are Written Contracts Interpreted?
Even when the terms of a contract are in writing, parties often fight about what those terms mean. Courts are then asked to interpret the contract. The goal of contract interpretation is to give effect to the intent and reasonable expectations of the parties. Typically, a court will assign terms their "plain and ordinary meaning." If there is no ambiguity, the court will confine its review to the four corners of the contract, only reading the language. If, however, the terms are ambiguous and it is difficult to determine what the parties intended, the court will consider what is known as "parol evidence," evidence of the communications and conduct of the parties during the formation of the contract.
When Should You Assert a Breach of Contract Claim?
Short answer: pretty much always. In most instances where a contractor performs work on a project at the request of an owner, general contractor, or upper tier subcontractor, there is going to be a viable contract claim. Even when foreclosing on a mechanic's lien or bringing a bond claim, it usually makes sense to bring a breach of contract claim in parallel.
The better questions is this: when should you bring only a breach of contract claim? Mechanic's lien foreclosure suits and bond claims are expensive to litigation. It is usually about a year before you can get to trial in district court. If the defendant is solvent and collection is assured, pursuing a breach of contract claim is often a cheaper and quicker path toward resolution.
This is especially true on smaller claims. In 2018, the Colorado legislature passed Senate Bill 18-056 "Concerning amounts in civil actions," which raised the jurisdictional limit for county courts from $15,000 to $25,000. County court is a fraction of the expense and duration of state district court. You can usually get to trial in a few months. There is limited discovery. Mediation is typically mandatory and occurs quickly. It is often beneficial to drop the mechanic's lien and even limit the claim to $25,000 to get a quicker and cheaper resolution. Especially where there is no fee shifting provision (more on that here).
What Happens if There is No Contract?
A contract is not necessary to record a mechanic's lien or submit a bond claim. Additionally, the equitable claim unjust enrichment is available where a party performed work that benefitted another and payment is not received. More on that here.
The bottom line is this: there a number of avenues to obtain payment on a construction project. Contractors and suppliers should consult counsel before deciding to write off a significant receivable.