Colorado Supreme Ct. Says Contractual Exculpatory Clauses that Protect Directors and Agents do Not Protect the Association

Colorado Supreme Court decision (May 1, 2017).

This case involved a dispute between a Property Owners Association (“Association”) and two homeowner members of Association who built a home within the common interest community governed by Association (“Owners”).

After obtaining approval of their plans for the construction of a home and commencing construction pursuant to the plans that had been approved by Association’s Design Review Board, Owners construction activities were halted by Association when it discovered that the planned house exceeded the community’s height restrictions. Owners were forced to redesign the home and build a one-story house instead of the originally planned two-story house. As a result of the required changes, Owners contended that they incurred more than $260,000 in damages that they believed Association was responsible for because the original plans had been approved by Association’s Design Review Board.

Owners filed suit against Association seeking to recover their damages and Association sought dismissal of the case based on exculpatory clauses contained in Association’s governing documents that limit liability of Association’s Executive Board, Design Review Board, and respective agents on claims that arise by reason of the Design Review Board’s decisions. Prior to Owners’ appeal to the Colorado Supreme Court, both a trial court and an appellate court ruled in favor of Association based on a finding that the exculpatory clauses in question barred Owners’ action against Association—even though the exculpatory language did not specifically name Association as a protected party. Dissatisfied with those decisions, Owners appealed to the Supreme Court of Colorado.

Upon review, the Supreme Court commented that, because exculpatory clauses in agreements (clauses that seek to insulate parties from their own negligence) are generally disfavored, they must be closely scrutinized and strictly construed against the party seeking to limit its liability. Applying these standards in reviewing the specific exculpatory language contained in Association’s governing documents, the Supreme Court determined that because the “plain language” contained in the clauses did not specifically name Association, it did not protect Association against claims for liability based on its negligence. The Supreme Court further ruled that, because a corporation is a separate and distinct legal entity from its agents, exculpatory language that protects Association’s directors and other agents does not extend to protection of the Association without specific language which makes that protection of Association clear.

See case decision: McShane_v._Stirling_Ranch_Prop._Owners_Assoc._2017_CO_38_(Colo._2017)1