Chapter 14 - § 14.11 • ALTERNATIVE DISPUTE RESOLUTION
| Jurisdiction | Colorado |
Frequently, common interest community declarations of covenants and contracts for the construction, sale, or renovation of homes contain an alternative dispute resolution (ADR) clause. The law favors ADR clauses, such as provisions requiring arbitration or mediation of disputes.2619
In 2004, Colorado repealed and reenacted its Uniform Arbitration Act (CUAA).2620 The new Act applies to agreements to arbitrate made on or after August 4, 2004, and agreements to arbitrate made before August 4, 2004, so long as all parties to the agreement concur.2621 The CUAA adopts much of the Revised Uniform Arbitration Act.2622 Robert E. Benson, Colorado and Federal Arbitration Law and Practice, Third Ed. (CLE in Colo., Inc. 2017), comprehensively discusses Colorado arbitration law.
§ 14.11.1-Basis for Ordering Arbitration
Under the CUAA, the court decides whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate, while the arbitrator decides whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforce-able.2623 If a dispute exists regarding the validity of an arbitration provision itself (versus the validity of the contract as a whole), the trial court must "proceed summarily to decide" the issue, and if material facts are in dispute, the court should expeditiously hold an evidentiary hearing to resolve the challenge.2624 While arbitration is favored, and an ambiguous arbitration provision will be construed broadly, courts determine whether an agreement to arbitrate exists in accord with ordinary contract principles.2625 Some home-rule cities have adopted local ordinances that may, if not preempted by state law, modify the CUAA and case law interpreting it regarding arbitrating parties' rights and remedies. See § 14.2.8, "Construction Defect Municipal Ordinances."
If the dispute is subject to the Federal Arbitration Act (FAA), then that statute, rather than a state arbitration law, governs.2626 For the FAA to apply, the contract containing the arbitration clause must evidence a transaction involving interstate commerce.2627 This is not a rigorous inquiry; "the slightest nexus" with interstate commerce will suffice.2628 Some courts have held that certain kinds of real estate transactions primarily affect intrastate rather than interstate commerce.2629 Under the FAA, like the CUAA, the court decides a challenge directed specifically to the agreement to arbitrate, while the arbitrator decides the enforceability of the contract as a whole.2630
The factual allegations that form the basis of the claim asserted, rather than the legal cause of action pleaded, determine whether a particular dispute falls within an ADR clause.2631 "The scope of an arbitration clause must faithfully reflect the reasonable expectations of the parties," according to its terms their plain and ordinary meaning, and "[a]ny doubts about the scope . . . should be resolved in favor of arbitration."2632
Courts construe arbitration clauses broadly in favor of arbitration.2633 Thus, an arbitration clause in a limited warranty agreement with a builder requiring all disputes arising under or relating to the warranty to be arbitrated requires arbitration of negligence, Consumer Protection Act, and misrepresentation and concealment claims touching on the construction of the home.2634 One court found the typical "all-encompassing" arbitration clause in the home purchase contracts of many production builders inapplicable to personal injury claims arising from construction defects.2635 In an unpublished opinion, Workplace Lofts Condominium Ass'n v. New Providence Co., the Colorado Court of Appeals held, where the declaration required arbitration of claims "related to the interpretation, application, or enforcement of the declaration," that (1) the express language of the arbitration provision established that the parties did not intend the declaration's arbitration provision to govern construction defect actions; (2) the question whether the association's negligent repair claim was based on the declaration-created duty to repair or a separate, independent duty to repair would need to be resolved on remand; and (3) the trial court improperly denied the defendant's motion to compel arbitration of the association's breach of fiduciary duty claims against the declarant and two declarant-appointed association board members.2636
Where parol evidence establishes that a homeowner did not see or sign a purchase contract addendum containing an arbitration provision, and despite the existence of a signed acknowledgment of receipt of the addendum, a trial court's finding that there was no mutual agreement to arbitrate was up-held.2637 One district court held that a secondary purchaser not in privity with the builder, and who has not accepted third-party beneficiary status by seeking the benefits of the original homeowner's written warranty, is not bound by an arbitration agreement between the builder and the original owner.2638 An arbitration clause in a home purchase contract is severable from its one-year warranty agreement, survives closing and the contract's and warranty's expiration, and remains enforceable.2639
A defendant may waive an alleged right to arbitration if its failure to timely assert the clause would later prejudice the homeowner because of incurred expense and time spent litigating the case in the interim.2640
§ 14.11.2-Arbitration Procedure
The CUAA expressly provides, "If the court orders arbitration, the court on just terms shall stay any judicial proceeding that involves a claim subject to the arbitration."2641 The Colorado Supreme Court has held that this provision requires a district court to stay, rather than dismiss, a lawsuit pending arbitration.2642
When parties agree to arbitrate according to the rules of a particular organization, those rules are incorporated by reference into the parties' arbitration agreement.2643 For a detailed discussion of the procedural rules applicable to arbitration proceedings, see Robert E. Benson, Colorado and Federal Arbitration Law and Practice, Third Ed. (CLE in Colo., Inc. 2017).
§ 14.11.3-Issues Affecting Enforcement of Arbitration Clauses
A discussion of some issues that occasionally arise regarding the enforcement of arbitration clauses, such as the use of boilerplate language, lack of privity, the joinder of arbitrable and nonarbitrable claims, and arbitration provision amendment follows.
14.11.3.a-Potential Problems with Boilerplate Arbitration Provisions
A number of legal commentators have identified potential procedural and substantive unfairness associated with boilerplate arbitration clauses in consumer contracts.2644 Their criticisms include the following:
First, the procedural rules applied to arbitration proceedings can be used as a "litigation weapon."2645 Since many arbitration clauses are foisted upon unsophisticated consumers, such as homeowners, through boilerplate and non-negotiable arbitration clauses, the drafter of the agreement will fashion the dispute resolution contract to maximize its profits and minimize its losses.2646
Second, by increasing transaction costs, such as by requiring a consumer-homeowner to pay substantial administrative and arbitrator fees, often up-front, developers and builders may discourage consumer-homeowners from using the arbitration remedy and from attempting to recover any losses from these parties.2647 Similarly, developers and builders may attempt to limit discovery of their extensive records and collective "employee memory," the probing of which may allow consumers to strengthen their claims. Most arbitration rules and agreements greatly circumscribe pre-hearing discovery and dis-closures.2648 Limiting consumers' access to this information and development of their claims will necessarily decrease the amount of "justice" available to them.2649
Third, business interests can overtly "stack the deck" by manipulating the pool of arbitrators2650 or, more subtly, by taking advantage of their economic influence as "repeat players." Thus, business entities can decrease their potential liability by limiting the selection of arbitrators to pre-screened pools comprised of persons who bear actual or unconscious biases that favor business interests. These sorts of arbitrators also may be influenced by the fact that business entities, unlike consumers, are potential repeat customers. An arbitrator who issues a significant compensatory or punitive damage award, or who adopts a cutting-edge theory of legal liability, probably can anticipate no further business from the defendant. Also, while repeat-player business entities may keep track of a particular arbitrator's record, individual consumers and homeowners cannot.2651
Finally, the private nature of arbitral proceedings, and the frequent absence of formal, published arbitrator opinions, means that the deterrent effect that consumer protection and other laws can have is greatly reduced, and any real chance for a thoughtful evolution of these laws is lost.2652 Despite these criticisms, the Colorado Supreme Court has held that CCPA claims may be relegated to arbitration.2653
Practice Pointer: Homeowners' Association Claims Not Founded Upon Individual Unit Owner Purchase Contracts...
Homeowners' association counsel may wish to consider specifying in the homeowners' association's complaint that any implied warranty claims being sued upon are limited to those arising from the creation of the community's common elements under CCIOA and transfer of financial responsibility for those common elements to the association under CCIOA so as to avoid the argument that the claims arise under individual purchase agreements containing arbitration clauses. In an unpublished decision, the Colorado Court of Appeals held that a homeowners' association was not bound by arbitration clauses
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