A new turn in enforcing arbitration clauses?

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.

 

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