Understanding Colorado's "Net Judgment" Rule in Construction Disputes
What Happens When You Have Construction Defects But Still Owe the Contractor?
Homeowners and property owners frequently find themselves in a difficult situation: their contractor delivered defective work, but the owner still owes a balance under the construction contract. Many construction contracts contain one-sided attorney fee provisions that allow the contractor to recover attorney fees if they prevail in collecting unpaid amounts. However, Colorado’s "net judgment" rule can be an important protection for homeowners facing claims from contractors for outstanding balances.
The "Net Judgment" Rule: Who Is the Prevailing Party?
In Colorado, courts use the net judgment rule to determine which party is the prevailing party in litigation. The prevailing party is the one who recovers more in damages than the other party. This rule plays a critical role in deciding who can recover attorney fees in construction disputes.
For example, in City of Westminster v. Centric-Jones Constructors, the Colorado Court of Appeals recognized that when both parties bring claims against each other, the party with the greater net recovery is deemed the prevailing party. The Colorado Supreme Court also discussed this rule in Dennis I. Spencer Contractor, Inc. v. City of Aurora, though it has not firmly adopted it as a binding rule.
How Does the Net Judgment Rule Apply to Construction Disputes?
Consider this common scenario:
A contractor claims that the property owner owes $20,000 for work performed.
The property owner has a $40,000 repair estimate for defective work caused by the contractor.
The owner asserts a counterclaim for construction defects seeking damages that exceed the contractor’s claim.
Under the net judgment rule, because the owner's damages exceed the contractor’s claim, the owner is the prevailing party in the lawsuit. As a result, the contractor would not be entitled to recover attorney fees, even if the contract contained an attorney fee provision in the contractor’s favor.
This principle was reinforced in cases like Wagonmaster, Inc. v. Parrot and Wheeler v. T.L. Roofing, Inc., where courts held that a contractor could not recover attorney fees if the owner’s damages exceeded the contractor’s claim.
Why Does This Matter for Homeowners Facing Contractor Claims?
Many homeowners are understandably concerned when a contractor threatens legal action over unpaid invoices, especially when the contract contains a one-sided attorney fee provision. The net judgment rule provides an important counterbalance:
If the homeowner’s counterclaims exceed the contractor’s claims, the homeowner is the prevailing party.
The contractor cannot recover attorney fees if they are not the prevailing party.
Homeowners may even recover their own attorney fees if the contract provides for fee-shifting to the prevailing party.
Key Takeaways
The net judgment rule prevents contractors from automatically recovering attorney fees in collection actions when the owner’s damages exceed the contractor’s claim.
Homeowners with valid defect claims should not be discouraged from asserting counterclaims due to fear of attorney fee provisions.
Courts will look at the overall outcome of the case to determine which party truly "prevailed."
If you are dealing with a dispute over a contractor’s defective work and an outstanding balance, consult with an experienced construction attorney to evaluate your options. You may have stronger legal protections than you think.
The information provided on this website is for general informational purposes only and should not be construed as legal advice or legal opinion. You should not act or refrain from acting on the basis of any information provided on this website without seeking legal advice from an attorney.