Recently, the District Court of Weld County Colorado granted a motion for preliminary injunction regarding the enforceability of an arbitration provision in a purchase and sales agreement. Ms. Sue E. Otteman (the “Plaintiff”) signed a Purchase and Sale Agreement for a residence in Windsor, Colorado with Journey Homes, LLC (the “Defendant”). The agreement contained a provision calling for binding arbitration to resolve any and all claims arising between the two parties. The provision called for arbitration to be conducted by three arbiters from the American Arbitration Association (”AAA”) and for the costs to be divided equally.
Plaintiff filed a demand for arbitration with the AAA and paid the initial filing fee of $2,750 and a deposit of $1,620. Upon receiving an invoice from the AAA totaling $17,280 for her half of the arbitration fees, Plaintiff filed a motion seeking that the Defendant advance Plaintiff’s share, or in the alternative, allowing Plaintiff to commence suit in District Court. The Court granted Plaintiff’s request because Defendant refused to advance payment on behalf of the Plaintiff and Plaintiff provided a Financial Affidavit showing her inability pay for the arbitration bills.
Based on prior decisions from the Tenth Circuit Court of Appeals, the U.S. Supreme Court, and the Colorado Court of Appeals, the Weld County District Court found that Plaintiff adequately proved her inability to financially pursue her claims in arbitration, paving the way for her claims in the District Court. SeeShankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999); see alsoGreen Tree Financial Corp. - Alabama v. Randolph, 531 U.S. 79 (2000); and seeRains v. Foundation Health Systems Life & Health, 23 P.3d 1249 (Colo. App. 2001).
In Shankle, the Tenth Circuit Court of Appeals found that a plaintiff could not afford the cost of arbitration and affirmed the district court’s decision not to compel arbitration. In coming to the decision, the appellate court found compelling arbitration would have put the plaintiff between a rock and a hard place, which would have prohibited plaintiff from being able to resolve his claims. Shankle, 163 F.3d at 1235. The court found persuasive the fact that the arbitration provision, because of its expense to the plaintiff, failed to provide an accessible forum in which plaintiff could resolve his claims. Id.
A year later the United States Supreme Court, in Green Tree, upheld the notion that an arbitration provision could be disregarded where the costs preclude a plaintiff from vindicating his or her rights. Green Tree, 531 US at 90. However, the Supreme Court stated that such determination must be on a case-by-case inquiry and also, the party claiming the arbitration is prohibitively expensive has the burden to prove the likelihood of incurring such expenses. Id. at 92.
The Colorado Court of Appeals' case, Rains, relies on both Shankle and Green Tree in coming to its holding that arbitration provisions may, in some cases, be circumvented. SeeRains, 23 P.3d 1253 – 1254. In Rains the court followed Green Tree finding that a court must, on a case-by-case inquiry, determine whether enforcing the arbitration provision will prohibit a party from pursuing its claims. Id. at 1253. The court eventually found that the Rains plaintiff did not establish the cost of arbitration would prohibit enforcement of her rights when compared to the cost of pursuing those right in court. Id.
In the Otteman v. Journey Homes, LLC case, the court found that Plaintiff met her burden by showing that she would incur at least $17,280 of additional fees in arbitration. Plaintiff also met her burden of showing that such amount was beyond her means to pay and that Defendant was unwilling to advance payment for Plaintiff. Because of all of these factors the court found that arbitration would not allow here to vindicate her rights and that Plaintiff would be allowed to proceed with her claims in District Court.
Defendant immediately appealed the order to argue that Plaintiff did not adequately prove her case regarding prohibitive costs of arbitration. Particular to Defendant's appeal was that Plaintiff’s financial affidavit, standing alone, was not sufficient to support a finding that Plaintiff could not pay the $17,280 up front arbitration costs. Additionally, Defendant argued that Plaintiff did not make any comparison to those costs which she might incur in court as opposed to arbitration. The Court of Appeals agreed with Defendant in part, vacating the order, but remanding the case with instructions for further evidentiary hearings regarding Plaintiff’s financial position.
Upon remand the court again found Plaintiff was not financially able to pay for arbitration.However, soon after that Defendant moved for summary judgment based on the statute of limitations, which was granted.Plaintiff’s claims were dismissed but after she won a reprieve from arbitration to pursue her claims in District Court.The lesson here seems to be, arbitration provisions are as susceptible to judicial tinkering as other contractual provisions.Until someone drafts a better arbitration provision, that is.For more information regarding construction litigation in Colorado, or the enforceability of arbitration provisions in construction contracts, you can reach Brady Iandiorio at (303) 987-9816 or by e-mail at iandiorio@hhmrlaw.com.