Arbitration: What Is It And How Does It Work?
Posted March 05, 2024 in Litigation
What Is Arbitration In Colorado?
Picture this common scenario: you are a homeowner looking to get some remodeling done on your property. You hire a builder who seems like a great fit, and you sign all the construction contract documents and make a deposit for the work. Over the course of the next month, you realize that the builder violated the contract in more ways than one. Construction delays, poor workmanship, substandard materials, failure to deliver on contractual promises – the list goes on. You are rightfully upset by this, and contact a lawyer to sue the contractor in court for the breaches. You want a jury trial.
The lawyer gets back to you – she says that trial court is not a possibility because of something called a “mandatory arbitration agreement” within the contracts you signed upon retaining the company. The lawyer tells you that, due to the arbitration agreement, the only legal proceeding you can use to recover from the company’s breaches is through arbitration. Confused, you google what “arbitration” is, and how it affects your ability to recover.
This page will discuss the basics of arbitration, how it is different/similar to the standard trial court proceedings, and why companies so frequently include a mandatory arbitration clause within their contracts with individuals/other businesses. For more information, give us a call at 720-770-3457 or complete a consultation request form.
Arbitration Basics
To begin, let’s visualize where arbitration becomes relevant in a dispute. As shown below, the determination of whether or not arbitration clauses are relevant to your dispute occurs very early in the resolution process:
Arbitration is a form of “alternative dispute resolution” (ADR) where the parties agree to resolve their case in front of a qualified arbitrator out of court.[1] The arbitrator acts as a neutral decision-maker, and has the authority to hear evidence, weigh arguments, and render a binding decision.[2] Arbitration is favored by corporations and other business entities that regularly contract with others for services/goods because:
- Arbitration proceedings are entirely private, whereas trial court proceedings and verdicts can be accessed by the public.
- Arbitration can be a less expensive and less time-consuming alternative to trial court litigation because certain aspects of trial court litigation – such as evidentiary rules and extensive pre-litigation discovery – may not be required.
- Arbitration occurs in a private setting, most commonly chosen by the parties involved.
- There is no jury in arbitration.
In other words, “[a]rbitration is often chosen for its efficiency, cost-effectiveness, and privacy.”[3]
Colorado case law is well-settled concerning the validity of arbitration agreements – a valid agreement “divests a trial court of jurisdiction over any power to adjudicate the merits of arbitrable issues once the arbitration clause is properly invoked.” But what is an “arbitrable” issue? And how does one “properly invoke”[4] an arbitration clause?
What Is An “Arbitrable” Issue?
While the determination of whether a dispute is subject to an arbitration agreement is largely subjective (i.e., dependent upon the specific facts of each case), the Colorado Court of Appeals proffers a general guideline:
Arbitration is a favored policy in Colorado. Hence, when presented with an agreement to arbitrate specified disputes, all doubts should be resolved in favor of the claim’s arbitrability. This is particularly true when . . . the arbitration clause extends to disputes that “relate to” the contract in which it is found. . . Ultimately, the parties’ reasonable expectations must determine the reach of the arbitration obligation.
…
[U]nder a broad “relating to” arbitration provision, the focus is not on whether the claim sounds in contract or tort. Rather, the focus must be upon the factual basis of the claim, not upon the legal theory espoused . . . If the factual basis implicates the rights and obligations created by a particular agreement, even a statutory claim may be determined to be one that relates to the agreement.[5]
Reading past the legalese, you may have gathered that arbitration clauses are extremely powerful. As long as a conflict arises from a contract that contains an arbitration clause, it will be subject to the arbitration process.
When Is An Arbitration Clause “Properly Invoked?”
According to Colorado’s Uniform Arbitration Act, “[a] person may initiate an arbitration proceeding by giving notice in a record to the other parties to the agreement to arbitrate in the agreed manner between the parties or, in the absence of an agreement, by certified or registered mail, return receipt requested and obtained, or by service as authorized by law for the commencement of a civil action. The notice shall describe the nature of the controversy and the remedy sought.” [6]
Typically, an arbitration clause will describe in detail how notice should be given, and the process will depend on the terms agreed to by both parties. Take care, however, to understand the meaning of “agreed to” in this context. Colorado lawmakers know that most individuals are not reading every single contract that they sign or otherwise agree to, but nonetheless remain steadfast in enforcing arbitration clauses. In some ways, this makes sense: when one agrees to the terms of a contract, he or she is agreeing to all of its provisions, including a potential arbitration clause. If one seeks to avoid arbitration, then, he or she should take care to read contracts fully before entering into them.
Who Is Bound By An Arbitration Agreement?
While the signing parties named within a contract are bound by an arbitration agreement contained therein, certain circumstances will also implicate other non-signatories. Colorado courts recognize seven instances where an arbitration agreement will bind those who did not sign the arbitration agreement:
- Incorporation of an arbitration provision by reference in another agreement;
- Assumption of the arbitration obligation by the non-signatory;
- Agency;
- Veil-piercing/alter ego;
- Estoppel;
- Successor-in-interest; and
- Third-party beneficiary.[7]
Issues Resolved By The Trial Court
While it is certainly true that Colorado courts favor arbitration as an alternative dispute resolution method, a few legal mechanisms, counterclaims, and affirmative defenses exist that are evaluated by the trial court, rather than an arbiter.
Motion To Compel Arbitration
This type of motion is relevant when, in contravention to an arbitration agreement, a party to the underlying contract decides to file suit in a Colorado trial court rather than through the correct channels of arbitration. A motion to compel arbitration, pursuant to the Colorado Uniform Arbitration Act, grants the trial court authority to compel arbitration under an enforceable arbitration agreement.[8]
If the party who refuses to arbitrate opposes the motion to compel, the court “shall proceed summarily to decide the issue and order the parties to arbitrate unless it finds that there is no enforceable agreement to arbitrate.”[9]
As such, a trial court will first analyze “whether a valid agreement to arbitrate exists between the parties to the action.”[10] Further, “[t]he court may properly refuse to compel arbitration only when there is no valid agreement to arbitrate or when the issue sought to be arbitrated is clearly beyond the scope of the arbitration provision.”[11]
Once a motion to compel arbitration is filed with the trial court, the court must stay (halt) any judicial proceeding that involves a claim allegedly subject to the arbitration until the trial court renders a final decision.[12] Similarly, if the court ends up ordering arbitration pursuant to the motion to compel, the court must stay any judicial proceeding that involves an arbitrable claim.[13]
Equitable Relief Pending Arbitration
While an arbiter has the power to decide the merits of the case (A.K.A. the legal aspects and arguments), trial courts have the authority to retain its equitable powers if the facts necessitate it.
When it comes to a valid, enforceable arbitration agreement, trial courts may issue declaratory or injunctive relief pending resolution through arbitration. In short, declaratory relief comes in the form of a court order which outlines the respective rights of all parties pursuant to an underlying arbitration agreement. On the other hand, injunctive relief is afforded by trial courts in order to “maintain the status quo between the parties pending resolution of their dispute through a binding arbitration agreement.”[14]
Fraudulent Inducement
The deceitful manipulation of another in order to force acceptance of a contract, A.K.A. fraudulent inducement, is an affirmative defense that may be brought straight to a Colorado trial court instead of through arbitration.
The specifics of this affirmative defense are explained by the Colorado Supreme Court:
The scope of the trial court’s authority under section 13-22-204(1) is manifestly narrow. The statute contemplates that the trial court will have the authority to consider one issue: “the existence of the agreement to arbitrate.” §13-22-204(1). All other issues, including challenges to the enforceability of the [contract], implicitly are the province of the arbitrator. Furthermore, the trial court’s authority is limited to specific challenges to “the agreement to arbitrate,” not the broader contract containing the arbitration provision. Id. (emphasis added). A fraudulent inducement claim, if it is to be considered by the trial court, must be directed specifically to fraud inducing the plaintiff to agree to arbitrate. Broader allegations of fraudulent inducement . . . must be resolved in arbitration.[15]
This excerpt makes clear that Colorado courts take the statutory limits of its jurisdictional power very seriously. Only in the specific instance of fraud to induce the agreement to arbitrate will the trial court take over.
Waiver Of Arbitration Clause
When faced with a motion to compel arbitration, a party may counter with the argument that the arbitration clause was waived. In general, “a party will be deemed to have waived an arbitration provision if it takes actions inconsistent with the provision and the enforcement of the arbitration clause would cause prejudice to the other party.” [16]
More specifically, a party “will be deemed to have waived an arbitration provision by engaging in and accepting the benefits of litigation.”[17] Factors considered by the trial court in its assessment of whether a party’s conduct constitutes waiver include:
- Whether the party has actually participated in the lawsuit or has taken other action inconsistent with his rights,
- Whether litigation has substantially progressed by the time the intention to arbitrate was communicated by the party moving to dismiss,
- Whether there has been a long delay seeking a stay and whether the defendant filed counterclaims without asking for a stay,
- Whether a request to compel arbitration was initiated close to trial,
- Whether the party seeking arbitration has taken unfair advantage of discovery proceedings which would have not have available in arbitration, and
- Whether the other party was affected, misled, or prejudiced by the delay.[18]
Motion To Vacate An Arbitration Award
Finally, once arbitration has concluded, an aggrieved party has one last opportunity to get its case heard by a Colorado trial court through filing a motion to vacate the award within ninety days of receiving the decision.[19]
According to the relevant Colorado statute, a trial court must vacate an award made in an arbitration proceeding if it finds any of the following:
- The award was procured due to corruption, fraud, or other deceitful means;
- The arbiter, appointed as a neutral arbitrator, displayed evident partiality;
- There was corruption by the arbiter;
- There was misconduct by the arbiter which prejudiced the rights of a party to the proceeding;
- An arbitrator refused to postpone a hearing upon showing of sufficient cause for postponement;
- An arbitrator refused to consider evidence material to the controversy so as to substantially prejudice the rights of a party to the proceeding;
- An arbitrator exceeded the arbitrator’s powers;
- There was no agreement to arbitrate; or
- The arbitration was conducted without proper notice of the initiation of an arbitration, causing prejudice to a party.[20]
While it may seem like there are many situations where a motion to vacate can succeed, beware! The grounds to vacate listed above are exclusive – “a court may decline to confirm an arbitration award only under circumstances specifically set out in the statute.”[21]
Conclusion
Arbitrations are complex and thus the subject of many disputes between individuals in Colorado. At Volpe Law, our attorneys are ready to help you with your potential claim/defense: give us a call at 720-770-3457 or complete a consultation request form for more information on how we can help!
Disclaimer
The information contained on this website is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter. Laws frequently change and therefore this content is not necessarily up to date, nor comprehensive. Contact us or another attorney with any legal questions specific to your matter. You may request a consultation by completing our consultation request form.
[1] C.R.S. §13-22-201 et seq.
[2] LexisNexis, “Arbitration vs. Litigation: Making the Right Choice,” https://www.lexisnexis.com/community/insights/legal/b/thought-leadership/posts/arbitration-vs-litigation#:~:text=Arbitration%20is%20a%20form%20of,chosen%20by%20the%20parties%20involved, (September 20, 2023).
[3] Id.
[4] 5A Colo. Prac., Handbook on Civil Litigation §1:17 (2023).
[5] Breaker v. Corrosion Control Corp., 23 P.3d 1278, 1283 (Colo. App. 2001).
[6] C.R.S. §13-22-209(1).
[7] Santich v. VCG Holding Corp., 2019 CO 67, ¶6, 443 P.3d 62, 65.
[8] C.R.S. §13-22-207(1).
[9] C.R.S. §13-22-207(1)(b).
[10] Lujan v. Life Care Ctrs. of Am., 222 P.3d 970, 972 (Colo. App. 2009).
[11] Id.
[12] C.R.S. §13-22-207(6).
[13] C.R.S. §13-22-207(7).
[14] 5A Colo. Prac., Handbook on Civil Litigation §1:17 (2023).
[15] Ingold v. AIMCO/Bluffs, L.L.C. Apts., 159 P.3d 116, 120 (Colo. 2007).
[16] 5A Colo. Prac., Handbook on Civil Litigation §1:17 (2023), citing In re Marriage of Popack, 998 P.2d 464 (Colo. App. 2000).
[17] Id.
[18] Id., citing City and Cty. of Denver v. District Court In and For City and Cty. of Denver, 939 P.2d 1353, 1369 (Colo. 1997).
[19] C.R.S. §33-22-223.
[20] C.R.S. §33-22-223(1).
[21] 5A Colo. Prac., Handbook on Civil Litigation §1:17 (2023), citing Treadwell v. Village Homes of Colorado, Inc., 222 P.3d 398 (Colo. App. 2009).