Arbitration Provisions in Colorado Construction Contracts: Implications on Challenges to an Arbitrator’s Jurisdiction

Many construction contracts include provisions requiring the parties to arbitrate disputes relating to the contract or construction project rather than bringing their claims in a court of law. Often times, the arbitration provisions specify which arbitral body will decide the claims and which arbitration rules will govern. The American Arbitration Association (or “the AAA”) is one such arbitral body that is commonly specified and, in fact, is designated in the AIA standard agreement between contractors and subcontractors and other AIA standard agreements. The designation of the AAA as the arbitral body and its accompanying rules may seem standard and innocuous but can have significant implications in Colorado on: (1) extent of judicial review of the arbitrator’s jurisdiction, and (2) timing of judicial challenges to the arbitrator’s jurisdiction.

Judicial Review of an Arbitrator’s Jurisdiction

Generally, Colorado courts determine gateway issues of arbitrability, like an arbitrator’s ability to decide the dispute and jurisdiction over claims. However, where parties incorporate arbitration rules which afford the arbitrator with the power to determine his or her own jurisdiction, Colorado courts find that “the parties authorized the arbitrator to decide arbitrability issues.” See, e.g., Ahluwalia v. QFA Royalties, LLC, 226 P.3d 1093, 1099 (Colo. App. 2009).

Parties can still seek judicial review of an arbitrator’s jurisdiction, but Colorado courts will likely give deference to the arbitrator’s findings on its own jurisdiction if the parties designated arbitration rules authorizing the arbitrator to make determinations regarding jurisdiction. Both the AAA Commercial and Construction Arbitration Rules provide arbitrators with the ability to determine their own jurisdiction. Accordingly, parties should be aware that by designating the AAA’s rules or rules that similarly afford arbitrators the ability to determine their own jurisdiction, they are potentially limiting their ability to seek full judicial review on that topic.

Timing to Seek Judicial Review

A party seeking to challenge an arbitrator’s jurisdiction should carefully analyze the proper time in which to bring such a challenge. Colorado’s Uniform Arbitration Act appears to provide parties with the ability to seek vacation of an arbitration award based on the arbitrator’s lack of jurisdiction after the award is entered. CRS § 13-22-223(1)(d). However, waiting to challenge the arbitrator’s jurisdiction is not without risk. The Colorado Court of Appeals has held that “a commercial entity that objects to the arbitrability of a dispute, but does not seek reasonable judicial remedies and instead participates in the arbitration, waives its argument on appeal that the dispute was not arbitrable.” Harper Hofer & Assocs. v. Northwest Direct Marketing, Inc., 412 P.3d 659, 666 (Colo. App. 2014). This holding was a departure from prior Colorado case law, which had permitted a party to challenge an arbitrator’s jurisdiction post-award so long as the party had reserved the right to object to jurisdiction. Id.

Accordingly, parties entering into construction contract in Colorado should pay close attention to the arbitral body and arbitration rules specified in their contract as these rules will affect the timing and extent to which the party may challenge the arbitrator’s jurisdiction.

Arizona Homebuilders Cannot Disclaim Implied Warranties

In late July 2021, Arizona’s Court of Appeals explained that homebuilders cannot disclaim the implied warranty of workmanship and habitability. Its opinion in Zambrano v. M & RC II, LLC certainly affects homebuilders, and may affect other contractors as it showed there may be limits regarding the ability to contract around certain warranties for public policy reasons.

The case pitted a homeowner against her homebuilder. The homeowner purchased a newly constructed home, including signing a purchase agreement, but ultimately filed suit against the builder. She alleged various construction defects, including with the foundation. While she initially included a claim in contract too, the primary issue in her litigation with the homebuilder became the alleged breach of the implied warranty of habitability and workmanship.

In response to the breach of warranty allegation, the homebuilder filed a motion for summary judgment citing the purchase agreement executed by the homeowner. The purchase agreement included multiple waivers explicitly disclaiming the warranties of habitability and workmanship. Beyond the multiple waivers, the court also noted that the homeowner had specifically initialed the paragraphs with the waivers.

Yet, despite signed waivers, the court weighed “the public policy underlying the implied warranty of habitability and workmanship against the interest in enforcing a freely negotiated waiver,” and found that it could not enforce the waivers. First, the court examined the Arizona policy favoring more protection of homebuyers, specifically referencing Arizona’s elimination of the caveat emptor rule, or buyer beware, for new homes in the 1970s, through more recent decisions bolstering the protections for homebuyers. Second, the court noted that while enforcing contracts is important, it cannot do so “when the [contract] term is contrary to an otherwise identifiable public policy that clearly outweighs any interests in the [contract] term’s enforcement.”

The decision will certainly affect future litigation against homebuilders. However, the baseline assumption should be that even if homebuilders are doing good work, if there is a problem now, clients have an additional cause of action to add to the complaint. That said, the court referenced several other states’ handling of disclaimers of warranties. Litigants on both sides may find interesting arguments in other states’ handling of the issue. Homebuilders may seek help in the legislature or may seek guidance from the Arizona Supreme Court.

But beyond homebuilders, this decision is notable for contractors in any industry as it identified a limit and argument to counter the freedom of contract. If defective work is alleged in the future, and the issue is litigated, depending on the industry, public policy arguments may be raised, and contractors and owners may need to evaluate whether the waivers of warranty obligations will be enforced.

In Utah, Asbestos Take-Home Exposure Equates to Damages Exposure For Premises Operators and Contractors

In its decision Larry Boynton v. Kennecott Utah Copper, LLC, 2021 UT 40, the Utah Supreme Court found that premises operators owed a duty of care to prevent take-home exposure to asbestos dust not only its employees, but also to independent contractors on the premises. The Court found also that by directing a contractor on how to handle asbestos, a premises operator retained control over the contractor’s handling of the asbestos and thus retained the liability.

During the 1960s and 1970s, Larry Boynton was exposed on several job sites to asbestos while working as a laborer/electrician: as an employee of Kennecott Utah Copper, LLC (“Kennecott”) and later as an independent contractor working at Kennecott’s smelter; as an employee of L.E. Myers, an independent contractor at Phillips 66/ ConocoPhillips’s (“Conoco”) oil refinery; and as an employee of Jelco-Jacobsen, general contractor for PacifiCorp to build its Huntington Canyon Power Plant. While working at Kennecott’s and Conoco’s facilities, and while apparently not directly exposed to asbestos, he worked closely with Kennecott and Conoco employees who were working with asbestos-laden material, which allegedly created asbestos dust. While working at the PacifiCorp plant, PacifiCorp did not use its own employees to handle asbestos material, but instead contracted with Jelco-Jacobsen to build the plant and use asbestos-containing material. Larry alleged that during these years, he brought home asbestos dust in his clothes and car, exposing his wife Barbara to asbestos. Barbara was diagnosed with malignant mesothelioma in February of 2016 and died a few weeks thereafter.

Larry filed suit against Kennecott, Conoco, and PacifiCorp for strict premises liability and negligence. The trial court granted summary judgment in favor of two of the operators, finding no duty to protect against “take home” exposure. The Court analyzed the duties owed by Kennecott and Conoco to Barbara based on the take-home exposure of asbestos generated by Kennecott and Conoco employees. The Court then analyzed the duties owed by PacifiCorp to Barbara based on PacifiCorp’s retained control over Jelco-Jacobsen’s work with asbestos.

First, the Supreme Court found that premises operators like Kennecott and Conoco have a duty to exercise reasonable care to prevent take-home expose to asbestos. The Court analyzed the factors to establish a duty of care, concluding that: 1) Kennecott and Conoco caused its employees to handle asbestos, thereby causing asbestos dust to be released, which was an affirmative act; 2) the risk of take-home exposure to asbestos was unambiguously foreseeable at the time; and 3) premises operators are better suited to prevent injury from take-home exposure due to their greater control and knowledge.

Second, the Supreme Court analyzed whether PacifiCorp’s retained control over Jelco-Jacobsen’s work with asbestos would open PacifiCorp to liability for take-home exposure of asbestos. The traditional rule is that the party contracting with an independent contractor is not liable for physical harm caused to another by an act or omission of the contractor or its servants because the party who hires the independent contractor does not participate in the way in which the contractor’s work is performed, and therefore owes no duty of care concerning the safety of the independent contractor’s employees. But the Court found that the “retained control” doctrine is a common exception: for example, if the employers of a general contractor retains control over the operative details of doing the work of the subcontractors, the general contractor retains the liability.

The Court found that PacifiCorp’s contract with Jelco-Jacobsen demonstrated that PacifiCorp retained at least some control over Jelco-Jacobsen. The contract explicitly required Jelco-Jacobsen to use asbestos materials, and even required approval from PacifiCorp for any substitution of materials. The contract also provided PacifiCorp the general right to inspect the job and stop work if the job was deemed unsafe. The contract required certain means and methods of the work; PacifiCorp specified how to cut and install insulation, the thickness of the insulation, how to mix the asbestos cement, and how to lay the cement. Finally, the contract provided that PacifiCorp would direct Jelco-Jacobsen in dust control safety measures. These four contractual provisions demonstrated that PacifiCorp retained at least some control over Jelco-Jacobsen such that the Court reversed and remanded for the district court to define the injury-causing activity to determine whether PacifiCorp retained control over any injury-causing activities.

Some take-aways for owners and contractors: First, premises operators dealing with asbestos cleanup have a duty to exercise reasonable care to prevent take-home exposure of asbestos. Second, the duty is owed not only to their own employees, but to contractors present on the premises. Finally, to minimize exposure to liability, premises operators should not direct how contractors deal with asbestos cleanup.

Construction Cost Impacts Post COVID-19: Cost Escalation and Delay

The current state of the construction industry as it concerns cost escalation and supply issues is one of uncertainty and time of performance problems resulting in increasing costs. There are major disruptions and delays in the supply chain, COVID-19-related labor shortages, clogged shipping ports and shifts in demand. For example, there is an exploding demand for residential projects coupled with a historically low inventory exacerbated by historically low interest rates.

In these unpredictable times, certain considerations should be looked at to address cost escalation and delay. Many are familiar now, due to COVID-19 experience, with force majeure contract provisions having been invoked; and for a while these clauses were the topic of the day to discuss, after being largely dormant. However, today, almost two years into the “pandemic,” mnCOVID-19 impacts are unlikely to be considered a surprise and contractors and owners should expect the unexpected when it comes to COVID-19.

So how should you deal with the reality of cost escalation and supply chain interruption or delay? Step one, as always, is to look at your contract since it may instruct the parties regarding how to deal with such circumstances. Specifically, look for whether the price of work can change and who bears the increased cost. Some key language to look for is the ability to make or claim an “equitable adjustment” in the contract price or time for performance. You should carefully evaluate where the project is located and what new COVID-19-related governmental regulations affect your project in terms of labor issues or time of performance. There may be contract provisions that allow increased cost recovery or time extensions if there is a change in the law or regulation.

You may want to consider an expanded use of contingency funds in your contracts. By contingency, I mean the amount of money set aside to address unforeseen costs. Many contracts have boilerplate contingency language, but this may be insufficient, or worse, create uncertainty. In the current environment, you may want to list contingencies for increased costs for labor, materials, etc. You may also want to tie the contingency to cost indexes and set benchmarks triggering the access to contingency funds when a certain cost escalation threshold is exceeded. Also, to assure a fair apportionment of the use of the contingency between the parties, you may want to consider a cost sharing arrangement mechanism for unused contingency.

Being forewarned is being forearmed. By now, everyone in the construction industry should be aware of COVID-19 impacts, supply chain issues, delays in delivery of materials and general disruption of projects which increase both time and cost. You may want to address the anticipated cost volatility head on in your negotiations, bid or price proposal and ultimately in your contract. To do this you may need to: (i) identify specific items anticipated to be subject to volatility; (ii) choose a pertinent market index that you can use as a benchmark to price a commodity and track its cost of installation; (iii) tie your bid or price proposal amounts to a market index date and price; (iv) agree on the threshold for activation of any price adjustment; (v) adjust prices up or down based upon changes in the index so the risks are shared equitably; and, (vi) fairly allocate risk so that no party is making a big gamble regarding pricing or time of performance.

Owners may want to use limited notices to proceed particularly with respect to the ordering of long lead time items to procure as well as price volatility in certain commodities. At the outset of the project, these elements can be identified and acted upon in an expedited fashion to reduce an adverse impact. Finally, contracts should generally be drafted tight enough not so as to excuse untimely performance in securing orders for performance. While ongoing disruptions from COVID-19 19 are real and legitimate, it would likely be imprudent to enter into a contract where COVID-19 19 simply becomes a “get out of jail free card” to excuse incomplete or negligent performance.

In conclusion, these are challenging times which require review of your contract documents to consider the current environment. Relying on the same old form contract, even if adjusted for certain COVID-19 19 elements, may need another look going forward. These cost escalation, supply chain and timeliness of performance issues and the consequent of COVID-19 19 are probably not going away in the short run.

Employers May Face Higher Damages in NLRB Cases

In a recent Memorandum to the Regional Offices (September 8, 2021), the General Counsel of the National Labor Relations Board (“Board” or “NLRB”) directs the Regions to seek additional remedies from the Board in unfair labor practice litigation. The additional remedies discussed in the Memorandum would significantly increase the financial exposure risks that employers face in those proceedings. In essence, the Memorandum directs the Regions to seek additional and much more burdensome and costly remedies against employers in complaints alleging three types of unfair labor practice: a) unlawful firings of discriminatees; b) unlawful conduct committed during union organizing drives; and c) unlawful failures to bargain.

The cases that most employers are likely to confront are cases involving allegations of unlawful terminations of employees. Therefore, special attention should be given to the remedies sought by the General Counsel in cases involving allegations of discrimination for union or other protected activities. (See prior articles on concerted/protected activities)

Nevertheless, employers are alerted that in cases involving alleged unlawful conduct during union organizing drives, the General Counsel proposes that the Board be asked to issue orders requiring employers to provide unions with employee contact information, equal time to address employees if the employer convenes employee meetings to discuss union representation issues and “reasonable access to employer’s bulletin boards and all places where notices to employees are customarily posted.” Importantly, the General Counsel also proposes that, as part of the remedies in those cases, employers be required to reimburse the unions for the organizational costs that a union incurs in a re-run election, when such elections are required to remedy employer unlawful conduct.

Similarly, in cases alleging employer unlawful failures to bargain in good faith, the General Counsel proposes that, among other remedies, the Board be asked to order employers to reimburse unions for “collective bargaining expenses” and to engage a mediator from the Federal Mediation and Conciliation Service (FMCS) to facilitate bargaining.

With respect to alleged unlawful terminations of employees, the General Counsel instructs the Regions that, in addition to the traditional remedies of backpay and reinstatement, “consequential damages” should be sought in all cases. Such damages may include health care expenses incurred by the alleged discriminatees because of the termination of health insurance, compensation for credit card late fees, and compensation for the loss of a home or car that occurs because of the alleged unlawful termination.

The Memorandum makes clear that a much more aggressive approach will be implemented against employers. The greater financial and other risks that employers will confront in NLRB cases make it critical that a determination be made, as soon as or even before a complaint is issued by an NLRB Regional Office, of the financial remedy that will be sought in the case. Such a determination would facilitate exploration of settlement in the early stages of the case.