Chapter 21 - § 21.3 • ARBITRATION OF CONSTRUCTION DISPUTES

• Jurisdiction: Colorado

§ 21.3 • ARBITRATION OF CONSTRUCTION DISPUTES

§ 21.3.1-Introduction

Arbitration has long been utilized in the construction industry as a preferred means of resolution of disputes. The reasons are many, but particularly so as to obtain resolution of disputes by persons having expertise in construction. Thus, architects, engineers, and construction managers are often the preferred background for arbitrators of construction disputes. However, today more and more - perhaps regrettably - construction lawyers are more often the selected arbitrators. Often construction arbitrations involve sophisticated issues of law.

Generally, construction arbitration is no different than any other arbitration. However, recognizing the particular issues that may arise in arbitration of construction disputes, some arbitration organizations (e.g., the AAA) have somewhat different rules for construction disputes. A few of the "different" issues that arise in construction arbitration are discussed in this section.

§ 21.3.2-Conditions Precedent to Construction Arbitration

Design Professional Certification and Certificate of Good Cause

Some construction contracts require issuance of an architect's certification or decision prior to specific action being taken by the owner or contractor. For example, a contract may require the architect to certify that the contractor is in default as a condition precedent to the owner's termination of the contractor for default. An architect's decision on a claim for additional compensation or a time extension may also be a prerequisite to initiation of an arbitration.

In a 1925 decision, where an architect's certificate was issued prior to an owner's default termination of the contractor, but the contract did not make the architect's decision final and binding, the contractor was entitled to proceed with arbitration.³⁸² The same result was reached where a claims provision required an architect's certificate and a statement that the decision was final and binding as a condition to arbitration, and the architect's decision failed to contain the statement.³⁸³

Mediation

Construction contracts commonly provide that mediation is a condition precedent to arbitration/litigation.

§ 21.3.3-Arbitration of Mechanics' Lien and Miller Act Claims

Mechanics' Lien Claims

A mechanics' lien claim involves two steps: (1) determination of the sum, if any, owed by the alleged obligor (owner or contractor) to the claimant (contractor, subcontractor, or materialmen), which is an in personam claim; and (2) creation and enforcement of a lien against the involved property for such amount, which is an in rem claim. Generally, if there is an arbitration agreement between the claimant and respondent, the first issue is for the arbitrator to determine, and most of the second issue is usually for the court to determine.

C.R.S. § 38-22-110 requires that in order to enforce a mechanics' lien, a "civil action" must be commenced within six months after the work or labor is performed or material furnished, or after completion. Commencement of a mechanics' lien civil action is not a waiver of the right to compel arbitration, where it is clear that there was no intentional relinquishment of the right.³⁸⁴ The mechanics' lien is a means of receiving payment, and not a claim upon which the lien is founded, and a civil action must be filed to preserve the remedy upon a favorable arbitration award.³⁸⁵

Thus, notwithstanding an arbitration clause, the Colorado Supreme Court has stated that where a party has filed a mechanics' lien, the claimant still must commence a judicial foreclosure action within the statutory time, which is then stayed pending the arbitration.³⁸⁶ The arbitrator then can determine the issues as between or among the parties to the arbitration. This normally can include the amount owing to the claimant, although when a suit to foreclose the mechanics' lien based upon those findings is filed, the non-parties to the arbitration holding junior interests in the property may thereafter have a right to contest in the civil action the amount of the lien. If the claimant prevails, it then proceeds in the civil action with the determination of the priority of liens and foreclosure of the lien.

Generally, an arbitrator cannot enter and enforce a foreclosure decree - cannot foreclose on property. First, all parties (claiming an interest in the subject property) may not be parties to the arbitration agreement. Second, arbitrators do not normally hold foreclosure sales or otherwise execute upon an award, nor do they have powers to direct a sheriff to sell property.

In Sure-Shock Electric, Inc. v. Dramond Lofts Venture, LLC,³⁸⁷ upon an appeal of the confirmation of the award and denial of the motion to vacate the arbitrator's award, the Colorado Court of Appeals held:

[T]he issue of procedural validity [of a mechanics' lien] may be properly determined by the court. Given that only a court is vested with authority to foreclose a mechanic's lien, it may concurrently determine any procedural validity issues connected with that foreclosure even when the underlying contract includes a broad arbitration clause, at least where, as here, neither party raised the issue in arbitration.³⁸⁸

Thus, we read the arbitrator's award to conclude that Sure-Shock has established the right to a lien or claim under the mechanic's lien statute.³⁸⁹

[W]e conclude that the procedural validity of a lien securing a debt arising from breach of contract may be decided by a court even when the contract requires all disputes to be submitted to binding arbitration.³⁹⁰

The court affirmed the trial court's confirmation of the award in which the arbitrator determined the amount owed to the mechanics' lien claimant and that the claimant established a right to a...