Claim and Issue Preclusion Arising from Residential Construction and Other Arbitrations— Part 2
| Publication year | 2022 |
| Pages | 18 |
ALTERNATIVE DISPUTE RESOLUTION
BY RONALD M. SANDGRUND, JENNIFER A. SEIDMAN, AND LESLIE A. TUFT
This two-part article examines when claim and issue preclusion may arise from arbitration proceedings. Part 2 focuses on how preclusion may apply in specific situations and examines the practical pros and cons of giving preclusive effect to arbitration rulings and awards.
Arbitration rulings and awards, and judgments confirming arbitration awards, may result in claim and issue preclusion in later arbitration or court proceedings. This two-part article discusses when claim and issue preclusion may arise from arbitration proceedings, the factors courts consider in determining the preclusive effects of arbitration awards, how preclusion principles apply to an arbitrator's purely legal rulings,[1] and how preclusion principles may apply to entities who are related to parties to an earlier arbitration. This part 2 focuses on the binding effect of unconfirmed arbitration awards, the practical and legal effects of arbitration confidentiality provisions, and whether an arbitration agreement can effectively provide that some or all arbitration rulings may not be used for preclusion purposes later. It concludes with practical pros and cons of giving preclusive effect to arbitration rulings and awards. Because the authors regularly handle residential construction defect arbitrations, this article examines preclusion mainly within this framework, but the underlying principles apply to all arbitrations.
Preclusion Generally
As discussed in part 1, claim preclusion (res judicata) generally bars a claim in a current proceeding if (1) the judgment in the earlier proceeding was final; (2) the earlier and current proceedings involved the same subject matter (i.e., the same evidence would sustain both claims); (3) the earlier and current proceedings involved the same claims for relief; and (4) the parties to both proceedings were the same or in privity with one another.[2]Issue preclusion (collateral estoppel) generally applies if (1) the earlier proceeding was a final judgment on the merits; (2) the issue in the current proceeding is the same as that actually adjudicated in the earlier proceeding; (3) the party resisting issue preclusion, or a party with whom it is in privity, had a full and fair opportunity in the earlier proceeding to litigate the issue; and (4) the party against whom issue preclusion is asserted was a party to, or in privity with a party in, the earlier proceeding.[3]
Arbitration Awards as Tantamount to Final Judgments
In Colorado, a party may assert is suepreclusion based on an arbitration award confirmed as a final judgment by a district court after all avenues and times for appeal, including certiorari to the Colorado and U.S. Supreme Courts, have been exhausted.[4] Two recurring questions concerning issue preclusion based on arbitration rulings are:
1.What is the effect of arbitration rulings and awards that are never reduced to judgment by confirmation?
2. Is a party to an arbitration bound, in a later proceeding brought by or against a different party, by an earlier arbitration ruling resolving an issue of law?
Preclusive Effect of Arbitration Awards not Reduced to Judgment
"An arbitration award is tantamount to a judgment, and the arbitrator is the final judge of both fact and law"[5] unless constrained by statute or contract.[6]One commentator has questioned the continuing viability of this broad pronouncement of arbitral authority, suggesting that some courts may not permit arbitrators to "dispense [their] own brand of justice," at least under the Federal Arbitration Act (FAA).[7]Under the Colorado Revised Uniform Arbitration Act (CRUAA), an arbitration award may be vacated solely on the grounds provided for by the Act.[8]
Nevertheless, after the parties empower an arbitrator to resolve an issue, the arbitrator's decision on the merits, such as contract interpretation, generally is not subject to judicial review.[9] Arguably, if an arbitrator's factual and legal rulings are not subject to judicial review, confirmation of the award may be irrelevant to issue and claim preclusion analysis relating to such rulings.[10]
Parties may elect not to confirm an arbitration award in district court, particularly after they have settled the claims.[11]One Colorado commentator notes that although it is "uncertain" whether an unconfirmed award will give rise to issue preclusion, an unconfirmed award "may prevent one party from pursuing a second action in court or in arbitration on the same claim under the principle of claim preclusion."[12]The same commentator suggests that the parties may be "bound" by an unconfirmed arbitration award, even though "judicial enforcement may not be available."[13]Competing public policies relating to finality and protecting contractual expectations may inform courts' analyses of the preclusive effect of unconfirmed awards.
Current Colorado case law supports the conclusion that when the time to seek review of an unconfirmed arbitration award has passed, the award may give rise to issue preclusion. As noted above, an arbitration award is "tantamount to a judgment."[14] Moreover, the Colorado Supreme Court has observed that a judgment may be deemed final if "there was an opportunity for review," even if such review was not sought.[15]Thus, it has been argued that an unconfirmed arbitration award is entitled to the same preclusive effect as a confirmed award once all potential appeals have been exhausted or time-barred.[16]
Commentators have observed that "'courts have held repeatedly and authoritatively that confirmation is not required to apply preclusion so long as the award is final under the applicable arbitration rules.'"[17]In Wellons v. T.E. Ibberson Co., the Eighth Circuit Court of Appeals held that the unconfirmed nature of an arbitration award and the fact that it was modified by a later settlement did not "vitiate" the award's finality.[18] Similarly, in Jacobson v. Fireman's Fund Insurance Co., the Second Circuit Court of Appeals noted that "res judicata and collateral estoppel apply to issues resolved by arbitration 'where there has been a final determination on the merits, notwithstanding a lack of confirmation of the award,'" and held that under New York law an unconfirmed arbitration award precluded "any further litigation of all issues that were or could have been addressed within the context of that arbitration proceeding."[19]
A California appellate court held that a nonparty to an arbitration agreement and unconfirmed award must be a third-party beneficiary of the award to obtain "issue preclusion" based on the award.[20]The court noted that this requirement "preserves significant policies and incentives of arbitral finality," while considering "both the parties' and nonparties' contractual expectations."[21] Similarly, the Tenth Circuit Court of Appeals has indicated that it may treat an arbitration award as a final judgment for preclusion purposes,[22] depending on the parties' intent.[23]
Preclusive Effect of an Arbitrator's Legal Rulings
In some cases, an arbitrator may rule on a discrete legal issue before an arbitration hearing occurs. As described in the example at the beginning of part 1, one such discrete legal issue maybe whether Colorado's Construction Defect Action Reform Act (CDARA) permits recovery of damages for injury to personal property. Such discrete legal rulings raise the question whether arbitration rulings not reflected in an arbitration award may have preclusive effect.[24]
Generally, issue preclusion applies to mixed questions of fact and law if the issue involves the same legal principles and the same facts.[25]The US Supreme Court has held that "a fact, question or right distinctly adjudged in the original action cannot be disputed in a later subsequent action, even though the determination was reached upon an erroneous view or by an erroneous application of the law."[26] The Colorado Supreme Court has affirmed a trial court order applying issue preclusion to bar a bank's negligent misrepresentation claim as untimely based on a prior judgment applying the three-year statute of limitations for fraud, despite the fact that an intervening appellate ruling held that the six-year limitations period applied to negligent misrepresentation claims.[27]The Court stated, "when a party has a full and fair opportunity to litigate an issue, the mere fact that the judgment was incorrect does not affect its conclusiveness. In such circumstances it is not unfair to apply collateral estoppel simply because the prior judgment may be wrong."[28]
A leading commentary posits that preclusion should typically apply if two cases present the same legal issues, "the same general legal rules govern both cases," and "the facts of both cases are indistinguishable as measured by those rules."[29] This same commentary notes that" [p] reclusion should not apply if there has been a change either in the facts or the governing rules."[30]Moreover, preclusion generally does not apply to "abstract" legal rulings disconnected from particular facts or affected by changes in the "surrounding legal climate."[31]
Consider, for example, Colorado's Homeowner Protection Act,[32]which provides that "any express waiver of, or limitation on, the legal rights, remedies, or damages provided by" CDARA or the Colorado Consumer Protection Act "or on the ability to enforce such legal rights, remedies, or damages within the time provided by applicable statutes of limitation or repose are void as against public policy."[33]What is the preclusive effect, if any, of a Colorado arbitrator's ruling or award finding a homebuilder's standardized contract provision void as...
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