Construction Defect Claims

Court of Appeals Ruling Favors Arbitration of Construction Defect Claims

John Mill, Rebecca Fischer and Katie Varholak | Sherman & Howard
May 11, 2015

Finally—there is some good news for developers and general contractors regarding condominium construction defect claims. In a decision issued May 7, 2015, the Colorado Court of Appeals held that construction defect claims by a homeowners’ association must be decided in arbitration—not litigation—where the condominium declaration (i) requires arbitration of construction defect claims, and (ii) requires the developer’s consent to amend the arbitration provision, but consent is not obtained. The decision, Vallagio at Inverness Residential Condominium Ass’n, Inc. v. Metropolitan Homes, Inc., et al., No. 2015COA65 (Colo. Ct. App. May, 7, 2015), will give developers and contractors greater confidence that if the declaration is properly drafted, any construction defect claims will be decided in arbitration instead of litigation.

Facts of the Case

The Vallagio project (“the Project”) is located near the Inverness Hotel in Arapahoe County. Metro Inverness, LLC was the Project’s developer and drafted the declaration for the Project. The declaration included a mandatory arbitration provision that required any construction defect claims be decided in arbitration. The declaration also provided that the arbitration provision could not be amended without the written consent of the developer/ declarant. The developer recorded the declaration and began selling condominium units in 2007.

In 2013, the members of the HOA voted to amend the declaration by deleting the arbitration provision. The developer did not consent to this amendment.

The HOA then filed a lawsuit against the developer, general contractor and others alleging various construction defects and demanded a jury trial. The developer and other defendants moved to compel arbitration and require the claims be decided in arbitration. They argued the amendment deleting the arbitration provision was void because the developer had not consented to it. The HOA opposed the motion to compel arbitration. The district court ruled for the HOA and held the consent provision violated the Colorado Common Interest Ownership Act (“CCIOA”), C.R.S. § 38-33.3-101 et seq. The developer and other defendants immediately appealed pursuant to the Colorado Uniform Arbitration Act, C.R.S. § 13-22-228(1)(a).

Court of Appeals Decision

The Court of Appeals held that the declaration’s consent provision was not ambiguous and the Project’s unit owners were required to obtain the developer’s consent before amending the declaration to remove the arbitration provision. The Court of Appeals also ruled that the consent provision did not violate CCIOA and was enforceable. Therefore, the Court of Appeals reversed the district court and held that the HOA’s claims against the developer/declarant must be decided in arbitration. The Court of Appeals noted that CCIOA endorses the use of alternative dispute resolution and expressly allows declarations to require binding arbitration.

The Court of Appeals remanded the case back to the district court to determine if the arbitration provision may also be enforced by the general contractor. The general contractor was not a party to the declaration, and the declaration did not require the contractor’s consent to amend the arbitration provision. The Vallagio declaration required arbitration of claims against the developer “and any contractor against whom such Construction Defect Claim is targeted.” Decision at 23. The Court of Appeals held that the record before it was unclear on whether the general contractor was an intended third-party beneficiary of the arbitration provision. That determination will be made by the district court based on the language of the declaration and the surrounding circumstances. Given the declaration’s reference to claims against the contractor, we predict that the district court will rule that the general contractor may enforce the arbitration provision.

Impact of the Decision

The decision is good news for developers of already-completed condominium projects where the declaration contains arbitration and consent provisions. The decision’s impact on general contractors that have built condominium projects will depend on the declaration’s specific language and other facts. The Court of Appeals decision also provides a clear roadmap for developers regarding how to draft declarations for future multi-family residential projects to ensure that any potential construction defect claims by a homeowners’ association must be decided by arbitration instead of by jury trial.

The decision’s impact on the insurance industry remains to be seen. It is possible insurers will view the decision favorably to the extent they believe it will reduce the overall cost of construction defect claims. If so, the decision may induce insurers to expand construction coverage operations in Colorado. However, the reaction of the insurance industry to the decision is not yet clear.

The HOA could ask the Colorado Supreme Court to review the Court of Appeals decision. However, the Court of Appeals decision is well-reasoned, and we expect it will remain the law in Colorado.

Sherman & Howard’s construction, real estate and insurance attorneys are experienced in drafting declarations, enforcing arbitration provisions, helping clients avoid and resolve construction defect claims, and assisting clients with insurance coverage issues. We recommend that developers and general contractors considering new for-sale multi-family residential projects consult with experienced counsel to ensure that declarations are carefully drafted to provide maximum protection from construction defect claims and proper insurance coverage is obtained. In addition to arbitration and consent provisions, declarations can include other provisions that reduce the risk of construction defect claims and/or make them easier to resolve. While efforts to pass state legislation to address construction defect claims have failed in the last three legislative sessions, the Court of Appeals decision in Vallagio is great news for developers and contractors and may encourage new condominium construction projects in Colorado.

The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.

SOURCE: shermanhoward.com

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