Wednesday, August 25, 2010

Lessons learned from a recent trial. Be careful about the evidence you are creating.

I recently had the opportunity to represent a general contractor in a trial, defending against claims both of construction defects and of delay related damages.  Ultimately the case settled during the trial and we were able to achieve a favorable result.  Looking back on the trial, what stayed with me was the troublesome evidence introduced by the claimant, not related to the alleged construction defects, but related to the delay related damages.

Blown up on a 4' by 6' poster board for use during opening statements and throughout the trial was a copy of an article printed in my client's internal newsletter recounting the difficulties on the project and, specifically, how those difficulties resulted in delays and cost overruns.  What made this especially problematic was that the article's author engaged in a certain amount of exaggeration and hyperbole in order to make his points.  This was very compelling evidence and posed an almost insurmountable obstacle when trying to refute the claims for delay related damages.

The purpose of this blog post is not to suggest that companies should not learn from their mistakes, even if that means publishing an article in an internal newsletter.  In the long run, I think that it is of utmost importance that companies learn from their mistakes.  What I am suggesting is that companies should be careful in the manner in which they communicate, even internally, about those mistakes.  The lessons to be learned from an internal newsletter would be no less valid if the article is published after the active or anticipated litigation is resolved.  To the contrary, the lessons may be better received if the article is also able to include a description, not only of the mistakes made, but also of the ensuing dispute and its outcome.  Regardless of when such an article is published, it is of paramount importance that it be absolutely and completely accurate in the description of the facts.  It is exceedingly hard to defend against such evidence at the time of trial by arguing that the author engaged in exaggeration and hyperbole.

Be sure to learn from your mistakes, but do not repeat those reported here.

Saturday, August 14, 2010

Unsigned Arbitration Agreements: Can They Be Enforced?

Most lawyers know that a lack of signature on a written agreement does not necessarily negate the existence of a contract. Following the common law, if both parties mutually assent to an agreement then it may be legally enforced. Also, under the common law, if one party performs under the unsigned contract it may be legally enforceable. Logically then, such unsigned agreements are given the full weight of the law. But, does the common law cover unsigned subcontracts that include provisions for mandatory arbitration? According to the Colorado Court of Appeals in E-21 Engineering, Inc. v. Steve Stock & Assoc., Inc., --- P.3d ----, 2010 WL 3035168 (Colo. App. August 5, 2010), the answer is yes.

In E-21, the Colorado Court of Appeals was faced with a matter of first impression in which E-21 Engineering, Inc. sent Steve Stock & Associates, Inc. a letter of intent to enter into a subcontract which included a clause requiring mandatory arbitration. Neither E-21 nor Stock signed the subcontract and Stock began work according to the subcontract. E-21 subsequently wrote stock, rescinding the letter of intent claiming that neither party executed the subcontract and thus no agreement exists. Stock replied, informing E-21 that such rescinding of the letter constituted a breach of contract. Stock then filed a demand for arbitration, as per the subcontract, with the American Arbitration Association. After a few years and following settlement discussions, E -21 filed a response seeking to stay arbitration primarily arguing that there existed no agreement to arbitrate between the parties. The trial court agreed with E-21 and based its decision on the fact that Colorado case law did not support compelling a party to arbitrate if that party did not sign a written agreement.

The Court of Appeals disagreed. First, the Court of Appeals reviewed the agreement to arbitrate de novo. Lane v. Urgitus, 145 P.3d 672, 677 (Colo. 2006). Next, analyzing the Colorado Uniform Arbitration Act (CUAA), the court found that the act, although requiring that an arbitration agreement must be contained in a record, does not specifically require signatures by the parties. C.R.S. § 13-22-206(1); see C.R.S. § 13-22-201 to -230. Since the CUAA is silent on signature requirements, the court determined that the statute is ambiguous and must be interpreted according to legislative objectives. Cork v. Sentry Ins., 194 P.3d 422, 425-26 (Colo. App. 2008). Finally, the court found that state law principles permit contract formation without signatures and govern the “[determination of] whether parties have agreed to arbitrate.” Lane v. Urgitus, 145 P.3d at 677; see Smith v. Multi-Financial Sec. Corp., 171 P.3d 1267, 1272 (Colo. App. 2007) (holding that arbitration agreements may be binding on parties in some circumstances notwithstanding their lack of signature).

The court further noted that under the Federal Arbitration Act (FAA) 9 U.S.C § 2 other courts have held that a signature is not a necessary requirement for a binding arbitration agreement. See, e.g., Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359, 1369 (11th Cir. 2005); Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 846 (2d Cir. 1987); Med. Dev. Corp. v. Indus. Molding Corp., 479 F.2d 345, 348 (Colo. App. 2007). The court cited these federal cases despite the fact that they are not controlling because the FAA and CUAA share the substantially similar language. Ingold v. AIMCO/Bluffs, LLC Apartments, 159 P.3d 116, 120 (Colo. 2007).

The court concluded that a mere lack of signature does not nullify an otherwise viable, enforceable agreement to arbitrate. Left up for interpretation in the E-21 case is whether the underlying subcontract was enforceable, but for now any forgetful general contractors may retain the ability to compel arbitration should they miss a signature line. Of course, prudence recommends signing all agreements one wishes to enter into, if only to avoid the courtroom.

- Brady Iandiorio is HHMR's newest law clerk.  He recently graduated from the University of Oregon School of Law and sat for the Colorado bar exam.  We expect that Brady will join HHMR as an associate this fall. - D. McLain

Thursday, August 12, 2010

Scope of Arbitration Clauses and Waiver of Rights to Arbitration

In some cases, plaintiffs may be able to force a dispute into a court proceeding even though an arbitration agreement between the parties controls and even though the defendants may argue that an arbitration clause divests the court system of its jurisdiction over the dispute seeking to have the matter resolved through arbitration instead of a trial by jury. The pros and cons for having disputes heard in mediation, arbitration, or judicial proceeding will be the topic of a future Colorado Construction Litigation blog entry. The following discusses the court’s method for determining the scope of an arbitration agreement and whether or not a party has waived its rights to enforce the arbitration clause. These were the issues in the recent U.S. District Court decision, Stone v. Vail Resorts Development Co., 2010 WL 2653314, 5 (D.Colo.).

In that case, the plaintiffs purchased a condominium from defendants and alleged that they were promised assigned parking spaces, but that defendants secretly substituted a document that only provided for valet parking. Plaintiffs’ allegations included breach of contract and violation of the Colorado Consumer Protection Act (“CCPA”) claims, among others. After plaintiffs instituted the lawsuit, defendants filed a motion, arguing that an arbitration clause in the Condominium Declarations governed “all claims arising out of the interpretation, applications or enforcement” of the Declaration. In response, plaintiffs argued that their claims did not arise out of the arbitration agreement, that defendants waived their right to arbitration, and that plaintiffs’ CCPA claims were not subject to arbitration.

In its order, the court discussed the broad support for arbitration agreements, citing prior cases referring to a “strong federal policy encouraging the expeditious and inexpensive resolution of disputes through arbitration.” The order further stated that “Courts must interpret arbitration clauses liberally, and all doubts must be resolved in favor of arbitration.”

In deciding whether [laintiffs’ claims were subject to the arbitration agreement, the court began its analysis as to whether the particular clause was narrow or broad. If the clause is narrow, then only the limited subject is subject to arbitration and other disputed matters would be determined to be outside the arbitration agreement’s purview. If the clause is broad, then a presumption arises of arbitrability, including even collateral issues. The Declaration called for “all Claims arising out of or relating to the interpretation, application, or enforcement of this Declaration. . . .” Plaintiffs argued that their claims did not arise out of the Declaration, but out of promises by defendants related to parking rights. The court disagreed, focusing on the phrase "arising out of or relating to," as evidence of the parties intent to apply the clause broadly, and that plaintiffs’ claims fell within the scope of the arbitration provision.

Plaintiffs argued that defendants waived their rights to compel arbitration because defendants did not assert their right to arbitration as an affirmative defense in their answer to plaintiffs’ complaint. The court cited six factors to consider when determining whether a party has waived such rights:

(1) whether the party's actions are inconsistent with the right to arbitrate;
(2) whether “the litigation machinery has been substantially invoked” and the parties “were well into preparation of a lawsuit” before the party notified the opposing party of an intent to arbitrate;
(3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay;
(4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings;
(5) “whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place”; and
(6) whether the delay “affected, misled, or prejudiced” the opposing party.

The court remarked that defendants filed their motion to compel arbitration approximately 75 days after being served with plaintiffs’ complaint, and that defendants raised the issue of arbitration in initial disclosures and a scheduling conference. Therefore, the court found that defendants acted consistently with their rights to arbitration, that the defendants did not request arbitration as a delay tactic or to mislead or prejudice the plaintiffs.

Although plaintiffs argued without citing any persuasive authority or support that their CCPA claim was not subject to arbitration, the court disagreed. The court stated that plaintiff’s claims were based on promises regarding parking rights set out in the purchase of their condominium and the Declaration, and found that these claims were also subject to arbitration.

Stone v. Vail Resorts Development Co. is a recent example of numerous decisions where arbitration clauses are a favored method of dispute resolution. This is a trial court order only in and is not binding authority, but it is instructional, nonetheless. An earlier Colorado Supreme Court case, City and County of Denver v. District Court In and For City and County of Denver, 939 P.2d 1353 (Colo. 1997), utilized the same six factors in its determination that an alternate dispute resolution provision in a contract had not been waived.

Courts generally will resolve doubts in favor of arbitration. However, when preparing a contract with an arbitration clause, one should take care that the clause is as broad as needed. Further, if named as a defendant in a dispute where an arbitration agreement may govern, the defending party should assert early and often its right to arbitration, in order to enforce and preserve that right.

Disclaimer

The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.