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Attorneys Chad Johnson and Andrew King were published in the March 2020 issue of Trial Talk magazine, discussing some of the cutting edge areas of implied warranty law with Colorado contractors. The article is linked below.

You file a lawsuit four days before your statute of limitations runs on your claims. The defendant is served, but the never responds to the suit. You request default judgment from the court. However, the court denies your motion for default judgment saying you failed to follow the default judgment rules. You file another motion for default judgment attempting to correct any perceived error and the court again denies your request, except this time dismisses your case. Your case is over and you have no further recourse on your claims. These facts were at issue in the recent Colorado Court of Appeals decision dated January 16, 2020 entitled Spiremedia, Inc., d/b/a Spire Digital v. Wozniak, Case No. 18CA2098. Prior to Spiremedia, Colorado courts had never determined the issue of whether a trial court is required to tell a party when it denies a motion for default and dismisses a case for failure to comply with the rules. ¶ 2. The Colorado Court of Appeals held a trial court must tell the party what is wrong with a deficient motion for default so the party can take necessary steps to correct the deficiencies, especially when the trial court takes the extraordinary measure of dismissing the case. Id.

In Spiremedia, the trial court denied Spiremedia’s motion for default judgment stating that the motion failed to comply with the applicable motion for default rules, specifically Colorado’s Rules of Civil Procedure 121, § 1-14. However, the trial court did nothing further to explain how the motion failed to comply with that rule. ¶ 5. Spiremedia filed a second motion for default judgment, guessing that the trial court was alluding to Spiremedia’s failure to include an affidavit. Spiremedia attached an “affidavit equivalent” under the Uniform Unsworn Declarations Act, § 13-27-104(1), C.R.S. 2019 to its second motion for default judgment. The trial court again rejected the motion and dismissed the case for failure to comply with the court’s delay reduction order. ¶ 6.

The Court of Appeals found that both of Spiremedia’s motions for default judgment were deficient as determined by the trial court because they lacked necessary information regarding the request for attorney fees. Interestingly however, the Court of Appeals held that an affidavit under the Uniform Unsworn Declarations Act is sufficient and does satisfy the requirement for affidavits under the rules for default judgment. ¶ 27.

Ultimately, the Court of Appeals held that the trial court erred in dismissing the case. The Spiremedia Court relied on the Colorado Rules of Civil Procedure for default judgments stating that “[i]f further documentation, proof or hearing is required, the court shall so notify the moving party.” C.R.C.P. 121, § 1-14(2). Commentary for the adoption of this rule shows that its purpose was to minimize both court and attorney time by streamlining the motion for default process. The rule places obligations on both movants and judges and judges must explain their rationale especially when someone’s interests will be adversely affected without recourse. Thus, the Court of Appeals held that trial courts must “inform the parties of the defect that led it to deny the motion.” ¶ 33. Spiremedia must be permitted a reasonable opportunity to remedy any identified deficiencies before the trial court dismissed the case. Spiremedia represents the importance of knowing the rules defining the playing field before you jump in the game. It also highlights the importance and need for trial courts and parties to work together to prevent guessing games and, ultimately, injustice.

The world as we knew it changed in March 2020, the time many construction projects are gearing up for warmer more favorable weather. According to Colorado’s Public Health Order 20-24, construction was identified as a critical business that could remain open during the Stay at Home Order. However, construction was not immune from the economic fallout from COVID19.

Many construction contracts contain terms addressing unforeseen circumstances such as riots, government shutdowns, labor strikes, inability to obtain materials, etc. These contract clauses are often referred to as “force majeure” provisions. This contract clause becomes essential when the occurrence of an event, which is outside the reasonable control of a party, prevents a party from performing its contractual obligations.

A force majeure clause is interpreted within the context of the entire contract and may or may not expressly identify a global pandemic as a force majeure event. Thus, a construction professional who has experienced hardships due to the COVID19 pandemic is encouraged to review the contract for force majeure clause.

Even if the parties’ contract does not contain the term “pandemic” in the force majeure clause, the party looking for relief may want to argue the pandemic is an event beyond the reasonable control of the affected party preventing, impeding or hindering that party from performing its obligations. The affected party also wants to have taken all reasonable steps to avoid or mitigate the event or its consequences. A contractor may want to use this contract clause to renegotiate increases in contract time and contract price. An owner may argue the pandemic does not qualify as a force majeure event or negotiate an extension of time without increase in the contract sum.

While the full scope of the global pandemic has yet to be fully realized, having the right protections in your construction contract that protect you in unforeseen times may make all the difference for your business. Johnson Law regularly advises construction companies and drafts construction contracts to match company objectives. If you have any questions or concerns about how COVID19 has affected your projects or want to make sure your contract protects your company’s interest, Johnson Law’s attorneys are available for consultation.

Johnson Law assists its homeowner and construction professional clients with construction law, including mechanic’s liens and foreclosure cases. A lien is a legal right to the property of another until a debt is paid. There are many types of liens including those for unpaid taxes, mortgages, promissory notes, and judicial liens resulting from a judgment in a case. A mechanic’s lien is a statutory right that attaches an interest to the property of another for the non-payment of a debt owed to the party who improved the property of another through labor, materials, and equipment. See Johnson Law’s blog post regarding Mechanic’s Liens in Colorado.

While a mechanic’s lien is indeed a great tool in the tool box of every contractor, the mechanic’s lien must be enforced through a foreclosure action or the lien expires. Practically speaking, a contractor with a mechanic’s lien cannot take the mechanic’s lien to the debtor’s bank and get paid. Instead, the contractor must start a foreclosure case on the property identified in the mechanic’s lien to turn the mechanic’s lien into actual funds that will pay the outstanding debt.

A mechanic’s lien foreclosure case must start within six months after the later of the following: (1) the last date that work was performed; (2) the last date that materials were furnished; or (3) the date that the building or improvement on the property was completed. Mountain Ranch Corp. v. Amalgam Enters., Inc., 143 P.3d 1065, 1067 (Colo. App. 2005). The court will strictly apply the timelines for mechanic’s liens, which can get complex depending on the size and scope of each project. A contractor risks forfeiture of its mechanic’s lien rights should the mechanic’s lien or mechanic’s lien foreclosure action be untimely.

In addition to filing a case to foreclose on the real property at issue, the contractor must also record a notice of lis pendens in the real property records in the county where the property is located. The notice of lis pendens is a document that serves as notice to the public that a lawsuit is pending affecting interest in and/or title to the property. The notice of lis pendens must include the name of the court, parties, and a legal description of the real property at issue.

Starting a mechanic’s lien foreclosure action does not necessarily mean the property owner will lose title to his property, and potentially become homeless. The property owner has the ability to defend against a foreclosure action. The best immediate defense the property owner can take is to post a bond with the court in substitution of the mechanic’s lien. Such substitution bonds are typically 150% of the mechanic’s lien amount. The lien claimant then can substitute the bond for the mechanic’s lien that will clear up title to the real property. In other words, the case is no longer to force the sale of the home or property, it is now to get the bond money. If any defenses to the substance of the case still exist, those would still  be presented in a future court trial or arbitration to determine if all or part of the bond money is returned to the person who paid for it.

Substitution bonds are recommended for property owners with mortgages on their property because the terms of the mortgage often require that the property owner not allow any liens to be placed on the property. Some mortgagors go so far as charging the property owner the mortgagor’s attorney fees incurred in defending the mortgagor’s interest in the property against the mechanic’s lien by adding that amount to the mortgage. By substituting a bond for the mechanic’s lien a property owner is safeguarding his interest and the mortgagor’s interest in the real property.

During the foreclosure action, the contractor must prove the mechanic’s lien was perfected, meaning it is valid in notice, time, and amount as required by law. At the end of the foreclosure action, the court must find the mechanic’s lien is valid before sale of the property is authorized. The property subject to the mechanic’s lien is then sold at auction and the funds from the sale go to payment of the lien. Many cases do not reach this part of the legal process, but a contractor’s mechanic’s lien foreclosure action must establish the necessary elements at the beginning of the case should the case reach the point where title to the property is transferred so that a sale can occur and funds be collected in satisfaction of the mechanic’s lien debt.

With the short and strict deadlines as well as making sure anyone who has an interest in the real property is named in the foreclosure action, Johnson Law encourages those with mechanic’s lien rights or defending against a mechanic’s lien to consult with one of Johnson Law’s attorneys to discuss the facts of your case as soon as possible.

In D’Allessandro v. Lennar Hingham Holdings, LLC, 2019 WL 5550629, *6 (D. Mass. Oct. 28, 2019), a Massachusetts court recently held that the improvement to real property for statute of repose purposes was the completion of an entire condominium project versus completion of each individual building.

The project at issue was a multi-phased 150 unit condominium project consisting of twenty-eight different buildings constructed between 2008 and 2015. For six of the buildings, the architect signed certificates of substantial completion and five of the buildings received their certificate of occupancy more than six years before the action commenced. Plaintiffs brought claims of negligence, among others, resulting in damage from deficient design and construction in the common areas of the condominiums.

The Massachusetts statute of repose prohibits actions in tort filed more than six years following substantial completion of the improvement and the taking of possession for occupancy by the owner. The D’Allessandro court considered what constituted an “improvement” that must be “substantially completed” for purposes of the statute of repose. More specifically, the court addressed the issue of whether a portion of a project can constitute completion of an improvement for triggering the repose period even while the project remains under construction. Plaintiffs argued the improvement was the condominium development as a whole and defendants argued each individual unit was the improvement for statute of repose purposes.

The court agreed with plaintiffs finding that the improvement was the condominium project as a whole because the scope of the project remained the same since inception; the same architect and general contractor were used throughout; and the project was defined legally as a single condominium with a single trust controlling the common elements. Thus, the project was not a series of improvements, but one improvement and the statute of repose commenced upon completion of the entire improvement. Partial completion of a project does not trigger the statute of repose when the overall project remains under way.

Colorado’s statute of repose is similar to Massachusetts. Colorado’s statute of repose states that claims shall not be brought more than six years after the substantial completion of the improvement to the real property which ultimately causes injury. Practitioners may consider similar arguments to those made in D’Allessandro when facing statute of repose arguments. Specifically, if a multi-unit project is defined as one whole project without discrete phases, an argument may be made the statute of repose is triggered upon completion of the entire project.

Colorado case law continues to develop regarding when the statute of repose commences and cases like D’Allessandro may provide guidance to Colorado courts in determining limitations issues. Johnson Law specializes in statute of repose and statute of limitations issues as they relate to construction. Contact a Johnson Law attorney today to discuss the facts of your individual circumstances.

In Colorado, prospective homebuyers should be provided a broad range of disclosures concerning their potential home’s present and past condition. The legislature and courts recognize the magnitude of investment an individual or family makes in purchasing a home and, accordingly, require transparency during the purchase process. The underlying rationale is that the seller is much more knowledgeable about the home than the buyer and withholding that knowledge may cause the buyer to purchase a damaged home that he or she did not bargain for.

A seller’s disclosure obligations come from two sources – the purchase contract and the common law.

In most home sales, the buyer and seller enter into a purchase contract approved by the Colorado Real Estate Commission. The typical Contract to Buy and Sell Real Estate (Residential) contains two major disclosure provisions, as well as disclosures related to specific conditions, such as lead-based paint.

First, Section 10.1 requires the seller to complete and provide the potential buyer a Seller’s Property Disclosure (sample form). This is the seller’s opportunity to formerly educate the buyer on the home’s condition. The form contains 146 separate categories of conditions and features that may apply to the home. If a particular condition or feature applies, the seller must select “Yes” on the form and, if necessary, write a short description of the issue or past occurrence of the issue. For example, Section B2 requires the seller to disclose any problems with roof leaking, even if the source of the leak was repaired before the home was listed for sale.

Second, Section 10.2 requires the seller to disclose in writing all adverse material facts known by the seller. This obligation includes information outside the categories listed in the seller’s property disclosure. A fact is “material” if the home buyer’s decision might have been different had the fact been disclosed. In effect, the seller must disclose any adverse fact that the seller is aware of and which might cause the buyer to terminate the purchase contract, negotiate for a lower price, or ask for a seller concession. For example, a seller should disclose that the home was involved in a prior construction defect lawsuit.

Colorado courts also impose disclosure obligations on sellers. In In re Estate of Gattis, the Colorado Court of Appeals defined a seller’s common law disclosure obligations. 318 P.3d 549 (Colo. App. 2013). A seller must disclose all known material defects, including latent defects in the home. A latent defect is one that it not observable upon reasonable inspection. These include issues not discovered during the pre-closing inspection performed by the buyer. For example, damage to a brick or poured concrete wall that is concealed by plaster or other building finishes must be disclosed. While the home buyer cannot discover the damage because it is concealed by the interior finish, the damage may pose a risk to the home’s structure and homeowner’s safety. Material defects are not limited to the physical structure of the home and may include environmental issues or unstable soils under the home.

A seller who fails to make these mandatory disclosures may be liable for nondisclosure, misrepresentation, breach of contract, or fraud. If seller fails to disclose its own negligent construction work or the negligent actions of its subcontractors, it may be subject to liability under the Colorado Construction Defect Action Reform Act.

A seller’s real estate agent is also subject to disclosure obligations. Agents are licensed by the State of Colorado and must undertake actions to protect buyers and sellers. While the seller’s agent is not required to personally investigate the home’s condition, the agent must disclose all adverse material facts of which the agent is actually aware. C.R.S. § 12-10-404(3)(a). This is an affirmative obligation and the Colorado Real Estate Commission endorses broad disclosure by licensed agents, stating that agents should err on the side of disclosing facts. Like the seller, the seller’s agent or buyer’s agent may be subject to liability if they fail to notify a buyer of known adverse material facts.

Home buyers should take reasonable steps to investigate a home before purchasing the home, including by carefully reviewing the seller’s property disclosure and conducting a pre-closing inspection. When that due diligence fails to reveal problems discovered only after the home purchase, a home buyer may consider taking legal action against the seller, seller’s agent, or even buyer’s agent.

Johnson Law regularly handles real estate nondisclosure and real estate broker liability law. If you have any questions about disclosures made by your home’s seller or seller’s agent – or the lack of disclosure – please give Johnson Law a call to speak with one of our attorneys about your legal rights.

The American Judicial System is time-consuming and expensive. Homeowners and small business owners can find themselves in a situation where they have been wronged in some way and are left asking “how can I afford to recover my damages?”

The default answer is that under the “American Rule” each party pays their own attorney fees. Despite the American Rule, there are still a few ways attorney fees can be recovered in Colorado construction and real estate litigation. We have summarized a few common scenarios below.

First, a party may recover attorney fees if a contract exists that permits an award of attorney fees. Contractual attorney fees provisions can be one-sided meaning that one party to the contract is awarded attorney fees. This type of clause can be concerning because one party may be required to pay the other party’s attorney fees. A legal argument can be made, however, that a party should not be rewarded for breaching the contract by recovering attorney fees incurred in defending against a claim.

Another common contractual attorney fees provision is that the prevailing party is entitled to recover their attorney fees. Under this standard, the party seeking attorney fees must establish that it is in fact the “prevailing party.” To be a prevailing party, a claimant (i) must have succeeded upon a significant issue in the litigation and (ii) must have achieved some of the benefits sought in the lawsuit. The difficulty with this type of attorney fees provision is that the party must request the court make a determination that it is the “prevailing party” and thus entitled to recover its attorney fees. Contractual attorney fees provisions can mean a claimant runs the risk of not only paying their own legal fees, but may also be forced to pay the other party’s legal fees effectively doubling the cost of litigation.

A second way a party may be entitled to recover attorney fees is when a statute or law permits recovery. For example, Colorado’s landlord/tenant laws permit recovery of attorney fees to promote access to the legal system and encourage attorneys to assist cases when damages may be in the hundreds of dollars or a few thousands of dollars. Other Colorado statutes such as Colorado’s Mechanic’s Lien Trust Fund, Civil Theft, and Insurance Bad Faith permit recovery of attorney fees as a punitive measure to punish violators of that specific law.

A third way a party may be entitled to recover attorney fees is when the court orders fees awarded as a sanction. This avenue to an award of attorney fees is rarely enforced and difficult to achieve. Essentially, courts follow the presumptive position that each side pays their own attorney fees. Unless the case involves major issues of delay, harassment, frivolousness, substantially groundless claims or substantially vexatious claims, the court is unlikely to award attorney fees. While attorneys and their clients may claim they should be entitled to attorney fees because a claim lacked substantial justification, courts rarely award attorney fees under these circumstances.

Even if a party is entitled to an award of attorney fees, such award is not automatic. First, an award of attorney fees is only considered at the very end of the litigation, after a trial or other determination on the merits. Second, the party seeking an award of attorney fees must request and obtain the court’s permission to receive the attorney fees, which permission may be denied. Third, the party seeking attorney fees has the burden of proving the fees were reasonable under several factors established by the courts. This analysis often results in the opposing party’s objection to the reasonableness of fees and a reduction in the amount awarded by the court.

At Johnson Law we understand the expenses our clients face in dealing with the unfavorable position of correcting a wrong, and we work with our clients to make the best out of bad situation. Johnson Law will not sugarcoat the realities of access to the American Judicial System or the potential risks associated with pursuing claims. Instead, our attorneys pride themselves on cultivating creative partnerships with our clients to achieve the best outcome for each individual client. Contact an attorney on our team to discuss the specific facts of your circumstances.

Some construction contracts contain payment terms on a cost-plus basis, which is the cost of labor and materials plus an agreed upon percent for profit. A recent decision from the Iowa Court of Appeals in Olmstead Constr., Inc. v. Otter Creek Investments, LLC, 2019 WL 4678167 (Iowa Ct. App. 2019) held that contractors have a duty to maintain accurate and detailed expense records under a cost-plus contract. Keeping meticulous and accurate records allows the owner to check the contractor’s expenses. The Iowa court held this type of contract permits an owner to approve and audit the contractor’s accounting. In the event a dispute arises from a charge, the contractor has the burden of justifying and validating the charge.

The Olmstead Court held the owner was not obligated to pay a disputed invoice when the contractor failed to provide backup for the disputed invoice under a cost-plus contract and the owner’s nonpayment was not a default of the parties’ contract. While Colorado courts have not gone as far as Iowa, the Colorado Court of Appeals held an owner may be estopped from disputing charges when the owner continued to make payments until the work was completed. Extreme Constr. Co. v. RCG Glenwood, LLC, 310 P.3d 246 (Colo. App. 2012).

The Extreme Construction court held the defense of equitable estoppel could apply to an ambiguous contract term in the parties’ cost-plus contract. Specifically, the owner was estopped from claiming the contractor was required to charge actual costs for superintendence and labor when the owner paid invoices with full knowledge the invoices included charges for superintendence and labor at rates higher than contractor’s costs. The court reasoned that the owner’s behavior of remaining silent on its interpretation of the cost-plus contract payment terms induced the contractor’s continued performance under the contract. Thus, the owner could not claim the costs it had full knowledge of and paid were in excess of the costs contemplated in the contract after the contractor completed performance of the work.

Whether Colorado courts will interpret cost-plus contracts in a similar manner to the Iowa court in Olmstead remains unknown. If Colorado courts permit an equitable estoppel defense when an owner knowingly pays charges above actual costs and then is estopped from later arguing those charges were in breach of contract, Colorado courts may hold that an owner who disputes charges on an invoice within a reasonable time may be justified in not paying the invoice if the contractor cannot produce justification for the charges.

Practitioners may want to argue Iowa’s Olmstead is persuasive in factually similar cases. Practitioners may argue the reasoning in Colorado’s Extreme Construction suggests an unknowing payment of inflated costs shifts the burden to the contractor to prove its actual costs under a cost-plus contract. Both cases suggest a contractor should keep meticulous records to support charges under a cost-plus contract or the owner may be relieved of payment.

Johnson Law specializes in construction law from drafting and negotiating contracts, such as cost-plus contracts, to bringing claims protecting the interests of contractors and homeowners. If you have questions about construction cost-plus contracts or how they may impact your legal rights and remedies, give Johnson Law a call to speak with one of our attorneys.

Settlement agreements are often meant to stop litigation and resolve outstanding claims. However, a recent Colorado Court of Appeals decision held that a settlement agreement does not relieve one settling party from a contribution claim made by a non-settling party under the joint tortfeasor pro-rata liability statute when the settlement did not cover common liabilities and the non-settling party had satisfied all common liabilities prior to the settlement.

In LB Rose Ranch, LLC v. Hansen Construction, Inc., 2019COA141, LB Rose Ranch and Hansen Construction were each found liable for construction defects in a multi-lot development project. The lot owners claimed LB Rose Ranch and Hansen Construction acted in concert and were jointly and severally liable for the construction defects. Claims against Hansen Construction were decided through arbitration. The arbitrator determined damages to each lot and Hansen Construction paid the arbitration award in full. Claims against LB Rose Ranch were decided at a jury trial. The jury also determined damages to each lot. LB Rose Ranch then entered into a settlement agreement with the lot owners for a lesser amount.

Both the jury and arbitrator apportioned a percentage of fault to each LB Rose Ranch and Hansen Construction. The trial court reviewed both the jury and arbitration awards for each lot and determined the amount of common liability between Hansen Construction and LB Rose Ranch. The trial court determined LB Rose Ranch was only liable for that portion of damages that was not already paid by Hansen Construction. Thus, Hansen Construction’s payment of the arbitration award satisfied LB Rose Ranch’s judgment on many of the lots and LB Rose Ranch was left to pay only a fraction of the total jury award.

Hansen Construction then brought a contribution claim against LB Rose Ranch for the amount of common liability to the lot owners that Hansen Construction had satisfied. The right of contribution exists when a party pays more than his pro rata share of the common liability. C.R.S. § 13-50.5-102(2). LB Rose Ranch argued its settlement and release with the lot owners discharged LB Rose Ranch from contribution liability to Hansen Construction under C.R.S. § 13-50.5-105(1)(b), which discharges a released tortfeasor from liability for contribution to other tortfeasors for the same injury.

The Court of Appeals rejected this argument because Hansen Construction was not a party to the jury trial and could not be bound by the jury’s determination of damages apportioned to LB Rose Ranch. The trial court determined that the amount settled between LB Rose Ranch and the lot owners was not common liability between LB Rose Ranch and Hansen Construction, but was the amount for which LB Rose Ranch was individually liable to the lot owners. Hansen Construction extinguished the shared common liability amount before LB Rose Ranch entered into the settlement agreement with the lot owners. The remaining amount due by LB Rose Ranch under the jury award were not caused by Hansen Construction as determined in the arbitration and could not be considered joint liability for the same injury. Thus, the settlement agreement applied to damages caused individually by LB Rose Ranch and not common damages between LB Rose Ranch and Hansen Construction.

Ultimately, the Court of Appeals determined Hansen Construction no longer had common liability with the lot owners at the time of settlement because it had satisfied the arbitration award in full that included the common liabilities between Hansen Construction and LB Rose Ranch. Therefore, the LB Rose Ranch’s settlement and release applied to damages LB Rose Ranch was individually responsible, and LB Rose Ranch was not relieved of its contribution to Hansen Construction for Hansen Construction’s satisfaction of judgment for the parties’ joint liabilities.

Construction contracts often require disputes to be handled through the arbitration process instead of in court. Under Colorado law, an officer of a corporation is personally liable in tort when the officer actively participates or cooperates, provides specific direction, or sanctions the tortious conduct. Hoang v. Arbess, 80 P.3d 863, 868 (Colo. App. 2003); Hildebrand v. New Vista Homes II, LLC, 252 P.3d 1159, 1167-1168 (Colo. App. 2010). Thus, claims of construction defect are often brought against the person swinging the hammer or supervising the work in addition to the
construction entity they work for or own.

Parties to construction contracts are generally the corporate entity and consumer. The person swinging the hammer or supervising the work or not often a party to the contract or contemplated as benefiting under the contract. Many construction professionals have successfully asserted that an arbitration provision within a construction contract applies to claims made against nonsignatories. This argument was based on the Colorado Court of Appeals decision Meister v. Stout, 353 P.3d 916, ¶¶ 6, 13-18 (Colo. App. 2015), which held when a signatory to the contract containing an arbitration clause asserts a claim arising from that contract against a defendant who was not a party to the contract, he may be estopped from avoiding arbitration and instead be compelled to arbitrate by and with the nonsignatory defendant.

The Colorado Supreme Court recently made clear in Santich v. VCG Holding Corp., 2019 CO 67, that nonsignatories to contracts with arbitration provisions must prove all four elements of equitable estoppel when enforcing the arbitration provision against a signatory. In proving the elements of equitable estoppel, the nonsignatory must prove detrimental reliance on the words or actions of the party against whom estoppel is sought. When no agreement exists between particular litigants, only a few limited circumstances exist where a nonsignatory to an arbitration agreement may compel arbitration, including equitable estoppel.

The Santich court was critical of the Meister decision for breaking precedent creating an alternative theory of estoppel for arbitration-specific cases. The Santich court reasoned: “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.” Quoting Hirsch v. Amper Fin. Services, 71 A.3d 849, 852 (N.J. 2013). Thus, nonsignatories to contracts must prove the element of detrimental reliance when bringing an equitable estoppel claim against a signatory to the contract. The Santich court acknowledged their holding could result in piecemeal litigation, but noted that policy reasons alone should not replace the foundation for application of equitable estoppel. For claimants seeking recovery against signatories and nonsignatories to contracts that contain arbitration clauses, counsel should ensure respondents are proving all the elements of equitable estoppel. When nonsignatories attempt to enforce the contract against signatories, they must prove the fact the nonsignatory detrimentally changed position in reasonable reliance on the other party’s actions through words, conduct, or silence. This is a high bar many nonsignatories to contracts will be unable to establish. Of course, there are additional arguments under contract principles that may apply, but the long-standing exception establishing in Meister is no longer enforceable.

If you have questions regarding your arbitration agreement or construction contract, please contact Johnson Law at 303.586.4829.