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Enforcing Arbitration Agreements in Colorado Courts

Arbitration is an alternative dispute resolution mechanism designed to resolve legal claims privately and outside of the public court system. At its simplest, arbitration involves submitting legal claims to an arbitrator, allowing the parties to present evidence and argument on those claims, and having the arbitrator render a decision by issuing an arbitration award.

Broadly speaking, the process of arbitration is similar to that of normal court proceedings in that the same due process requirements still apply, mainly the right to by notified of the proceeding, the right to address the asserted claims in a meaningful matter and at a meaningful time, and the right to having the proceeding be conducted in fundamentally fair manner. Outside of those requirements, however, the arbitration process is highly flexible and the parties to arbitration can effectively determine their own process as they see fit. See, e.g., C.R.S. § 13-22-215.

Indeed, the flexibility of arbitration is one of its primary benefits. In particular, while a traditional court proceeding usually takes at least 6 months to a year, if not more, to get past the beginning motion to dismiss and discovery stages of the lawsuit, arbitration is much more streamlined and the process can be tailored to each individual dispute. Thus, arbitration allows the claims in dispute to be resolved significantly more quickly and efficiently than the normal court process.

However, while there are significant benefits to arbitration, there are also detriments as well. Specifically, arbitration agreements are frequently included in contracts for consumer goods and services. Such agreements are generally seen as bad for consumers because, among other things, while the arbitration process is more streamlined and efficient than the court process, fees for filing arbitration claims are frequently more expensive than court fees for filing a lawsuit. Thus, mandatory arbitration terms can result in raising the initial costs of actually pursuing valid claims and, in turn, disincentivize consumers from pursuing them.

Additional downsides to arbitration agreement include a lack of transparency to the public because arbitration is a private proceeding, as opposed to a publicly accessible court proceeding. Further, Colorado statutes provide that punitive or exemplary damages may not be awarded in arbitration proceedings; in contrast, such damages may be available through the normal court process.

Lastly, arbitration awards can be much harder to contest than regular court rulings. Indeed, many arbitration terms provide that the award shall be final, meaning parties have no ability to appeal it to a higher court. Along these same lines, Colorado law holds even a misapplication of law will not serve as a basis to vacate an arbitration award. Thus, if a party ends up with a bad arbitration award it can be difficult if not impossible to contest. See C.R.S. § 13-21-203(5).

 

Contractual Aspects of Arbitration Agreements in Colorado

Arbitration agreements are contractual in nature and are most commonly included as terms in business and consumer contracts. Some examples of contracts which frequently include arbitration clauses are contracts and warranties for the purchase of consumer goods, employment contracts that require arbitration for employment related disputes, and business entity formation agreements that require arbitration to resolve internal business disputes.

Importantly, though, even if not found in an underlying contract, parties are generally still free to agree to arbitrate any claims they want to. That is, even if the initial contract did not contain a mandatory arbitration term, parties are still free to agree at a later date to submit disputes between them to arbitration. Under such circumstances an agreement to arbitrate is, in effect, a subsequent contractual agreement.

Because agreements to arbitrate are contractual in nature, courts use principles of contractual construction to construe and determine the scope of arbitration clauses. Specifically, courts attempt to interpret arbitration clauses in a manner that best effectuates the intent of the parties to the contract. They discern intent by giving the language in the term its plain and ordinary meaning. Courts will enforce the clause as written unless the clause contains an ambiguity. See Digital Landscape Inc. v. Media Kings LLC, 440 P.3d 1205 (Colo. App. 2018).

Notably, in construing arbitration agreements, Colorado courts and, indeed, the Colorado Constitution, enumerate policies that favor the enforceability of arbitration clauses. See, e.g., Colo. Const. art. XVIII § 3; Huizar v. Allstate Ins. Co., 952 P.2d 342, 346 (Colo. 1998). Accordingly, where there is ambiguity in an arbitration term or whether a particular dispute falls within the scope of an arbitration term, Colorado courts generally will construe the term broadly as opposed to narrowly. See In re N.A. Rugby Union, LLC, 2019 CO 56 (Colo. 2019); Lane v. Urgitus, 145 P.3d 672 (Colo. 2006).

 

Enforcing Arbitration Against Non-Parties or Non-Signatories to the Contract

While the enforcement of arbitration agreements can be relatively straightforward where arbitration is sought between direct parties to the contract, it becomes significantly more complex when arbitration is sought by or against a non-signatory or non-party to the contract. More specifically, and because arbitration terms are contractual in nature, in most instances only the parties to the contract can compel arbitration and only with respect to disputes or controversies between themselves that arise under the contract.

However, where certain circumstances are met, non-signatories to a contract that contains an arbitration term may, in fact, be bound by or otherwise able to enforce that arbitration term, even though the non-signatory is not a direct party to the contract. See Digital Landscape Inc. v. Media Kings LLC, 440 P.3d 1200 (Colo. App. 2018). These circumstances include:

Incorporation of an arbitration term by reference. A non-signatory may compel arbitration against a party to an arbitration agreement when that party has entered into a separate contractual relationship with the non-signatory and that separate contract incorporates the existing arbitration clause of the original contract. See Meister v. Stout, 353 P.3d 916 (Colo. App. 2015).

Assumption of the arbitration obligations by the non-signatory. In the absence of being a signatory to a contract with a mandatory arbitration term, a party may be bound by an arbitration clause if that party’s subsequent conduct indicates that the party is assuming the obligation to arbitrate. See In re N.A. Rugby Union, LLC, 2019 CO 56 (Colo. 2019) (citing Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773 (2nd Cir. 1995)).

Agreement to arbitrate through agency. The agency exception is premised on traditional principles of agency law. Under such principles an agent may bind a principal to a contract. Thus, where an agent of a principal enters into a contract with an arbitration term, the principal will be bound to arbitrate even though only the agent signed the contract. See In re N.A. Rugby Union, LLC, 2019 CO 56 (Colo. 2019).

Piercing the corporate veil or alter ego liability. Piercing the corporate veil, also known as alter ego liability, occurs when an owner or parent organization of a business entity is held liable for the entity’s legal obligations. Courts generally will pierce the corporate veil in two broad situations: the first, to prevent fraud and, the second, where a parent organization dominates and controls a subsidiary such that the subsidiary is, in effect, not an independent entity. Where piercing the corporate veil is deemed appropriate, members and parent organizations of the business entity will be bound by the arbitration agreement as well as the business entity that signed agreement. See In re N.A. Rugby Union, LLC, 2019 CO 56 (Colo. 2019) (citing Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773 (2nd Cir. 1995)).

Equitable estoppel.  Estoppel precludes a party from enjoying rights and benefits under a contract while at the same time avoiding its burdens and obligations. In the context of arbitration agreements, equitable estoppel arguments frequently occur where a signatory to an arbitration agreement is asserting claims against a non-signatory and, accordingly, the signatory asserts the arbitration agreement does not govern those claims. Accordingly, the non-signatory asserts that because the signatory knew claims related to the underlying contract would be subject to arbitration, the claims against the non-signatory should be subject to arbitration as well. That is, the non-signatory asserts that the signatory should be equitably estopped from arguing the claims are not subject to arbitration. Under Colorado law, to establish the requirements for estoppel, including as applied to arbitration agreements, the party to be estopped must know the facts and either intend the conduct to be acted on or so act that the party asserting estoppel must be ignorant of the true facts, and the party asserting estoppel must rely on the other party’s conduct with resultant injury. See Santich v. VCG Holding Corp., 2019 CO 67 (Colo. 2019).

Successor in interest. A successor in interest is a party that succeeds or otherwise takes over a contract that contains an arbitration provision. Accordingly, if the contract contains an arbitration term the successor in interest will also be bound by that term. See Allen v. Pacheco, 71 P.3d 375 (Colo. 2003).

Third-party beneficiary. A third-party beneficiary is someone that is not directly a party to a contract but who was clearly intended to benefit from the contract. For example, if somebody entered into a contract to have services rendered to a third-party, such as having their car cleaned, that third-party would be a beneficiary of the contract. The critical element that determines whether a non-signatory is a third-party beneficiary is whether the underlying agreement manifests an intent to confer specific legal rights upon the non-signatory. Non-signatories who are intended beneficiaries of an agreement containing an arbitration clause are also bound by that arbitration clause. See In re N.A. Rugby Union, LLC, 2019 CO 56 (Colo. 2019).

 

Colorado’s Uniform Arbitration Act and the Process of Enforcing Arbitration Agreements in Colorado Courts

The Colorado Constitution mandates that the state legislature adopt laws to provide and govern the conduct of arbitration. See Colo. Const. art. XVIII § 3. Accordingly, the Colorado legislature adopted the Uniform Arbitration Act (“UAA”), C.R.S. § 13-22-201, et seq., which governs arbitration proceedings, including enforcing arbitration terms and confirming arbitration awards through the court system.

For enforcing arbitration, the UAA provides that a person may initiate arbitration by giving notice of a demand for arbitration to the other parties in the manner specified in the agreement or, in the absence of an agreement, by certified or registered mail, or by service as authorized by law for the commencement of a civil action. See C.R.S. § 13-22-209.

After receiving notice of a demand for arbitration, if a party refuses to arbitrate or if there is a dispute as to whether there is a valid agreement to arbitrate, then a party can enlist the help of the courts and file a motion in court seeking to compel arbitration. See C.R.S. §§ 13-22-206, -207. If the court determines there is a binding arbitration agreement and the dispute falls within the scope of that agreement, then the court must order arbitration. If a pending lawsuit had already been initiated, or if arbitration had already been initiated, a court may stay those proceedings while the enforceability of the agreement is resolved. See C.R.S. § 13-22-207.

Notably, when there are multiple claims pending in a lawsuit with some subject to arbitration and others that are not, the presiding court has discretion to stay the non-arbitrable claims pending the results of the arbitrable ones. Conversely, a court may allow the non-arbitrable claims to proceed separate and independently from the arbitrable ones.

In determining whether to stay non-arbitrable claims pending the resolution of arbitrable ones, Colorado courts consider:

(1) whether piecemeal litigation of the non-arbitrable claims could result in inconsistent determinations of factual and legal issues to be determined by the arbitrator;

(2) whether piecemeal litigation will be inefficient because the factual issues to be resolved in litigation overlap with those to be decided by the arbitrator;

(3) whether the arbitrable issues predominate the lawsuit; and

(4) whether the non-arbitrable claims are of questionable merit.

See Ingold v. AIMCO/Bluffs, LLC Apartments, 159 P.3d 116 (Colo. 2007). For the claims that are determined to be subject to an arbitration agreement, the arbitration procedures specified in the contract, to the extent there are any, will govern. Notably, the parties are generally free to determine what rules of arbitration should be applied to the proceeding, with some exceptions. See C.R.S. § 13-22-204(1).

Those exceptions are that the arbitration term in the contract may not waive or otherwise limit access to judicial relief for enforcing or determining the applicability of an arbitration agreement; that arbitrators are immune from civil liability just as state court judges are immune; that once the arbitrator issues an award the prevailing party may seek an order from the court confirming the award and entering it as a judgment; and that a losing party may seek an order from the court vacating the award where it was obtained under improper circumstances, such as the award was procured by corruption, fraud, or other undue means. See C.R.S. § 13-22-204(3)(a).

 

Confirming or Contesting an Arbitration Award in Colorado Courts After the Completion of Arbitration

After arbitration is completed and the arbitrator enters an award, the process the moves toward enforcing the award. In particular, the prevailing party in arbitration may then seek to have a court confirm the award and enter it as an enforceable court judgment. Conversely, for the non-prevailing party, he may contest the award and request a court vacate or modify it. See C.R.S. § 13-22-222. Notably, a party seeking to vacate an award bears a heavy burden as arbitration awards are generally only challengeable under narrow circumstances.

Under Colorado law an arbitrator is considered the final judge of both fact and law and courts may not review the merits of an arbitration award if there are not specific statutory grounds to vacate, modify, or correct the award. See Digital Landscape Inc. v. Media Kings LLC, 440 P.3d 1200 (Colo. 2018).

Accordingly, Colorado courts regularly emphasize that challenges to arbitration awards are confined to the means and manner specified in the UAA. Along these lines, the only permitted defenses to a request for confirmation of an arbitration award are those in C.R.S. § 13-22-223 and C.R.S. § 13-22-224, which govern requests to vacate and modify arbitration awards respectively. See Pacitto v. Prignano, 410 P.3d 787 (Colo. App. 2017).

In particular, pursuant to C.R.S. § 13-22-223, a party may move to vacate an arbitration award if it was:

(1) procured by corruption, fraud, or other undue means;

(2) there was evident partiality or misconduct by the arbitrator prejudicing the rights of a party;

(3) the arbitrator conducted the hearing in a manner so as to substantially prejudice the rights of a party to the proceeding;

(4) there was no agreement to arbitrate and any party asserting there was no agreement raised an objection before the beginning of the arbitration hearing; or

(5) the arbitration was conducted without proper notice so as to substantially prejudice the rights of a party to the arbitration proceeding

Additionally, a party may seek to modify an arbitration award, as opposed to vacate it entirely, pursuant to C.R.S. § 13-22-224. Pursuant to the statute, a court may modify or correct an award where:

(1) there is an evident mathematical miscalculation in the description of a person, thing, or property referred to in the award;

(2) the arbitrator has made an award on a claim not submitted to the arbitrator and the award may be corrected without affecting the merits of the claims that were submitted to arbitration; or

(3) the award is imperfect in a matter of form not affecting the merits of the decision on the arbitrated claims.

Importantly, if a party wishes to vacate or modify an arbitration award, a motion to vacate must be filed in a court of competent jurisdiction within 91 days after the movant receives notice of the award. See C.R.S. § 13-22-223(2). Failure to comply with this requirement bars any defenses to the merits of the arbitration award in a confirmation proceeding. See Pacitto v. Prignano, 410 P.3d 787 (Colo. App. 2017).

© 2019 J.D. Porter, LLC. Author: Jordan Porter. Denver, Colorado.

Disclaimer: The information on this website is intended to be general information only and not legal advice. Laws change frequently and the information on this website may not be up to date, nor is the information intended to be fully comprehensive. For legal advice specific to your case please contact J.D. Porter, LLC or another licensed attorney.