Arbitration of Construction Defect Claims Against Developer and General Contractor

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Denver District Court orders arbitration of construction defect claims in Glass House Residential Association v. Alta Riverfront LLC et al, no. 2012CV1531.

The Glass House ruling provides direction for developers and general contractors to choose a preferred method of dispute resolution for construction defect claims. The Denver District Courts recently upheld mandatory arbitration in a construction defect lawsuit.

Construction defect litigation has evolved into a mature practice area in Colorado, with several law firms focusing their practice on suing developers and general contractors on behalf of the condominium homeowners associations. Such lawsuits tend to be expensive, involving multiple parties and numerous expert witnesses; and the expense of litigation alone often motivates parties to settle. Frequently, one of the goals of plaintiff's law firms who represent homeowners associations is to ensure that their cases end up in court, rather than in a potentially more streamlined and less expensive dispute resolution procedure like arbitration.

Alternative Dispute Resolution

Developers may choose to include alternative dispute resolution (ADR) procedures in the initial condominium declarations. Once control of the homeowners association passes to a board of directors elected by unit owners, some associations have avoided ADR provisions by amending the declarations or bylaws to eliminate the ADR provisions. Subsequent construction defect litigation is then filed in court. In Eagle Ridge Condominium Ass'n v. Metropolitan, Builders, Inc., 98 P.3d 915, 919 (Colo. App. 2004), the Colorado Court of Appeals held that an amendment removing a mandatory arbitration provision from the condominium declarations was valid because (1) the bylaws were amended before the case was filed, (2) the homeowners association had the power to amend the bylaws, and (3) there were no restrictions on the homeowners association's ability to amend the mandatory arbitration provision for construction defect claims.

The Court's Decision in Glass House

The Denver District Court recently upheld mandatory arbitration in a construction defect lawsuit by ruling that a developer and general contractor had successfully and permissibly restricted the homeowners association from subsequent amendments to the condominium's declarations and bylaws to remove the arbitration requirement. In Glass House Residential Association v. Alta Riverfront LLC et al, no. 2012CV1531, the developer included mandatory arbitration provisions for construction defect claims in the initial condominium declarations. Additionally, the mandatory arbitration provisions stated that it could not be repealed or modified without the consent of the developer and the general contractor – two parties that are typically sued in construction defect cases. As usual, the homeowners association voted to amend the declarations to remove the mandatory arbitration provision before it filed the construction defect lawsuit. The developer and general contractor moved to compel arbitration, arguing that the homeowners association's amendment was ineffective because it was done without their consent.

In its October 2, 2012 order, the district court agreed with the developer and general contractor, and referred the matter for arbitration. The district court distinguished Eagle Ridge because the ADR provision in Glass House declaration contained a restriction requiring the developer's and general contractor's consent.

Importantly, the district court ruled that this restriction did not violate any provision of the Colorado Common Interest Ownership Act (CCIOA). CCIOA is a detailed statute governing the creation and governance of condominiums, and contains several provisions that limit the control a developer can exert over condominium governance. For example, CCIOA requires developers to eventually turn over control of the homeowners association to the unit owners, and prohibits certain restrictions on the homeowners association's ability to amend the condominium declarations. However, CCIOA also encourages dispute resolution through arbitration rather than litigation. Because CCIOA contains no express prohibition on a developers' ability to forbid the repeal of a mandatory arbitration provision, the district court in Glass House enforced the arbitration requirement over the homeowners association's objections.

The developer in Glass House did not overreach by trying to impose any substantive limitations on the homeowners association's ability to sue for construction defects. It just required construction defect claims to be arbitrated and prevented the homeowners association from repealing the arbitration requirement without the developer's consent. Any attempt by a developer to go further and lock in substantive limitations on construction defect claims, like eliminating them or restricting recoverable damages, might not fare as well.

For More Information

If you have any questions regarding the Glass House Arbitration ruling, please contact Roy Bash at rbash@polsinelli.com or Ben Cohen at bcohen@polsinelli.com, or by calling 303.572.9300.