Claim and Issue Preclusion Arising from Residential Construction and Other Arbitrations—Part 1, 0222 COBJ, Vol. 51, No. 2 Pg. 18

• Author: BY RONALD M. SANDGRUND, JENNIFER A. SEIDMAN, AND LESLIE A. TUFT
• Position: Vol. 51, 2 [Page 18]

51 Colo.Law. 18

Claim and Issue Preclusion Arising from Residential Construction and Other Arbitrations—Part 1

No. Vol. 51, No. 2 [Page 18]

Colorado Lawyer

February, 2022

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 residential construction and other arbitration proceedings. Part 1 focuses on general issue and claim preclusion principles and their application 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. It describes the factors courts consider in determining the preclusive effects of arbitration awards. It also discusses how preclusion principles apply to an arbitrator's purely legal rulings.^[1] And it analyzes how preclusion principles may apply to entities who are related to the parties to an earlier arbitration, and the practical and legal effects of arbitration confidentiality provisions. Finally, the article briefly explores whether an arbitration agreement can effectively provide that some or all arbitration rulings may not be used for preclusion purposes later. 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.

The Role of Preclusion

Claim and issue preclusion aim to avoid unnecessary and duplicative litigation.^[2] The doctrines help ensure that orders and judgments of different tribunals are binding and consistent, and economize legal proceedings by making certain determinations in one proceeding binding on later proceedings involving the same claims or issues. But do these preclusion principles apply equally to arbitration rulings and awards, and to court judgments confirming arbitration awards? Many argue they do or should, based on arbitration's reputation as faster, cheaper, and as fair as litigation.^[3]

Consider a homeowner suing her homebuilder for defectively installed window and skylight flashings resulting in widespread moisture intrusion and resulting damage. The matter is arbitrated and, in a lengthy written ruling, the arbitrator denies the builder's pre-hearing motion for summary judgment on the narrow legal question whether Colorado's Construction Defect Reform Act's damages limitations, CRS § 13-20-802.5(2), bar the homeowner's claim for water damage to her personal property.

After the arbitration hearing, the arbitrator issues an award that includes personal property repair and restoration cost damages caused by the defective flashing. The arbitrator also finds that the builder violated both CRS§ 13-20-806(7) (a) of the Homeowner Protection Act and CRS § 6-1-105(r) of the Colorado Consumer Protection Act by including a liability disclaimer for personal property damage in its standard form purchase contract, misleading the homeowners into believing they could not recover such a loss from the builder. Because the builder immediately pays the award in full, a district court never formally confirms the award.

Several months later, a different homeowner sues the same builder for the same kind of defective flashing installation. The builder moves for summary judgment on that homeowner's personal property damage claim on identical grounds as in the earlier case. The second home-owner seeks summary judgment on his defective flashing claim. Is the earlier arbitration ruling and unconfirmed award binding on the builder?

Nuts and Bolts

Claim and issue preclusion are affirmative defenses that may be waived if not timely invoked.^[4] The burden of establishing the elements of preclusion rests with the party seeking preclusion.^[5]

Claim preclusion, historically called "res judicata," prevents relitigation of the same claim or cause of action.^[6] The doctrine avoids repetitive lawsuits and arbitrations, conserves judicial resources, and encourages reliance on adjudication by preventing inconsistent decisions.^[7] Claim preclusion 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.^[8] The last element is often called the mutuality requirement.^[9]

While some earlier Colorado cases eliminated the mutuality requirement when a defendant sought to preclude a plaintiff from relitigating a claim,^[10] in 2017 the Colorado Supreme Court clarified that mutuality generally is required to establish claim preclusion.^[11] The Court also indicated that it might permit non-mutual claim preclusion asserted by a defendant where (1) indemnity relationships are involved; (2) the defendant in the later action can show that he should have been included as a party in the first action, and the plaintiff cannot establish a good reason for not having included the defendant; or (3) vicarious liability is implicated, such as with employee-employer, principal-agent, or indemnitor-indemnitee relationships.^[12]

In contrast, issue preclusion, historically called "collateral estoppel," prevents relitigation of particular issues rather than claims. Generally, after a specific issue is finally determined in one proceeding, parties to that proceeding cannot relitigate the issue again in a second proceeding, even if the claims in the two proceedings are different.^[13] Issue preclusion is broader than claim preclusion in that it applies to claims different from those litigated in the first action, but narrower in that it applies only to issues actually litigated.^[14] Issue preclusion 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 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 or in privity with a party to the earlier proceeding.^[15]

The third elements necessary to apply claim and issue preclusion differ in that the focus in the claim preclusion analysis is on the nature of the underlying claims that were brought or could have been brought, while the focus in the issue preclusion analysis is on the underlying issue and whether the party resisting preclusion (or the party with which that party is in privity) had a full and fair opportunity to litigate the issue. While often these analyses overlap because a party will have had a full and fair opportunity to litigate various issues embedded in claims that were brought in the prior proceeding, this is not necessarily so, and some of the cases discussed below highlight this distinction. Moreover, an issue preclusion inquiry tends to involve more complications than a claim preclusion inquiry because such analysis frequently involves persons who were not parties to the prior dispute.

Issue preclusion may not apply where a ruling's potential adverse impact on the public interest or the interests of non-parties clearly and convincingly necessitates a new determination of the issue.^[16] However, the Colorado Court of Appeals has observed in dicta that "the continuing viability of violations of public policy and manifest disregard of the law as bases for attacking an arbitration award," at least under the under the FAA, is unclear.^[17]

An appellate court reviews a district court's issue preclusion decision de novo.^[18] But an arbitrator's preclusion decision is usually not reviewable.^[19] Generally, an arbitrator may exercise the same discretion as a trial court in applying preclusion principles.^[20]

Defensive versus Offensive Preclusion

Parties may invoke preclusion defensively or offensively.

Invoked defensively, a defendant seeks to preclude a plaintiff from relitigating a claim or issue for which the plaintiff previously litigated and lost against a. different defendant. Used offensively, a plaintiff seeks to preclude a defendant from defending against a claim or issue the defendant previously litigated and lost against a different plaintiff.^[21]

Union Insurance Co. v. Hottenstein involved defensive preclusion.^[22] There, a homeowner and a construction company arbitrated various construction defect and other claims. The arbitrator's final award attributed specific damages to breach of contract ($67,250) and to negligence ($9,915), and the homeowner did not appeal the judgment confirming the arbitrator's award "delineating which damages were attributable to breach of contract and negligence ... ."^[23]

In a separate district court action, the homeowner sought to satisfy the breach of contract damages judgment from the construction company's liability insurance policy. The Colorado Court of Appeals affirmed the district court's holding that the policy did not cover the breach of contract damages. The Court found that the homeowner and the construction company had a full and fair opportunity to arbitrate liability and damages for all claims. Therefore, the trial court properly relied on the arbitrator's findings of fact and conclusions of law in granting the insurer summary judgment, and issue preclusion prevented the homeowner from "recharacteriz[ing] her contract damages as negligence damages" to obtain coverage.^[24]

Antelope v. Mobil Rocky Mountain, Inc. illustrates offensive issue preclusion.^[25] There, the plaintiff argued that a Wyoming court's finding that a contract was ambiguous under...