09 Jun Consider Adding an Arbitration Clause to Your Business Contracts

In the past several weeks, we have discussed ways your business can more effectively (and efficiently) prepare for litigation before it happens, such as legal process improvement, engaging in legal project management, preparing a litigation budget and reviewing your business insurance.  Another important part of preparing for future litigation is reviewing your company’s business contracts with clients and business affiliates.  What kinds of provisions do these contracts contain concerning the manner in which a dispute or breach of the contact can be resolved?  Is dispute resolution limited to arbitration, or does the contract give the parties the option to sue in court?  These provisions could have a huge impact on your business’s bottom line.

Limit Dispute Resolution to Arbitration If Possible

Depending on the size of your company and the industry it is in, it may make sense to limit dispute resolution to arbitration.  As addressed in our prior blog about mediation, it is always more cost-effective to engage in dispute resolution prior to or instead of engaging in litigation.

Arbitration is another form of dispute resolution.  It is the private, judicial determination of a dispute by an independent third party, chosen by the parties to the business contract.  However, it’s different from mediation in that arbitration is an alternative to court action (litigation).  This means, if you and your clients/business partners agree to arbitrate contract disputes, both parties are, generally speaking, giving up the right to file a lawsuit.  The arbitration decision thus becomes final and binding, like a court judgment.  Mediation on the other hand is simply a forum for negotiation and conciliation, and is not binding (meaning you can still get sued or sue on the contract in dispute).

Arbitration has huge advantages, as it allows the parties to choose their decision maker.  Also, an arbitration can usually be heard sooner than it takes for court proceedings to be heard, is shorter in length and easier to prepare for.  This allows your business to better plan for dispute costs.

In addition, arbitration hearings are confidential, and final decisions are not published, nor are they directly accessible.  This is particularly useful if you don’t want your company’s “dirty laundry” out there in public view.  Most important, arbitration decisions are final.  In general, there is no right of appeal in arbitration; although, the court may have limited powers to set aside or remit an award.

The only real downside is costs.  The fees for an arbitrator can be hefty.  For example, for an amount of claims up to $100,000, the minimum fee for a single arbitrator is $2,000, and the maximum fee can reach ten percent of the claim.  But these costs could pale in comparison to a large, contentious litigation in court.  So arbitration might make good sense for a company in the construction industry for example, as this cost is far outweighed by the potential of bad case precedent, or a lingering lawsuit, which could triple costs to the business.

Good News for Condo Developers in Colorado

If your business is condominium development and you do business in Colorado, you are in luck.  On Monday the Colorado Supreme Court upheld the right of condo developers to require disputes to go to binding arbitration, by retaining the right to consent to any homeowners association’s proposed amendments on a contracted declaration regarding arbitration for construction-defect claims.  The Court found nothing in either the Colorado Common Interest Ownership Act or the Colorado Consumer Protection Act prohibiting a developer from using this provision.  See Vallagio at Inverness Residential Condominium Association, Inc. v. Respondents: Metropolitan Homes, Inc., a Colorado corporation; Metro Inverness, LLC, a Colorado limited liability company, — P.3d —-, 2017 CO 69 (June 5, 2017).

This decision protects the condominium developer from protracted litigation brought by a homeowners association, which, collectively, could put a developer out of business with a large construction defect claim brought in court.  The Colorado legislature has taken further protection measures for condominium developers with House Bill 1279, which requires a majority of condo owners to approve any legal action against developers, increasing the current standard that only requires a majority of homeowner association board members to agree to pursue legal action.

Adding a consent-to-amend provision provides condo developers with veto power over the vote of any any percentage of residents when it comes to directing construction defect legal actions to arbitration, rather than the court system.  While contentious, it is not violative of law, and should be implemented if your business plans on starting any extensive condo projects in Colorado.

If you are a condominium developer looking for guidance on how to interpret these new developments, call Edwards Law today to for a complimentary analysis.