Common Interest Communities and Alternative Dispute Resolution (ADR)

By: Shane Fleener, Partner

Featured in: CAI RMC Common Interest Magazine May 2016 Issue

Alternative dispute resolution, commonly referred to as ADR, is a general term used to describe methods for resolving disputes outside of a traditional courtroom setting. ADR has become an increasingly common way for homeowners and homeowner associations to resolve internal disputes, as well as disputes involving outside parties. Due to recent changes in Colorado law, many of these disputes now require ADR in one form or another. As a result, it is important that homeowners, homeowner associations and community managers have a basic understanding of ADR, including common forms of ADR and those situations where ADR is required or can be avoided.

 

COMMON FORMS OF ADR – MEDIATION AND ARBITRATION

The two most common forms of ADR are (1) mediation; and (2) arbitration. Mediation is simply a settlement discussion facilitated by an independent third-party, called a mediator. Usually lasting one or two days, mediation is non-binding with the mediator holding no legal authority over the parties or the dispute. In almost all cases, mediation is a prerequisite to a traditional courtroom trial or an arbitration hearing.

Arbitration is similar to (and takes the place of) a traditional court proceeding, with the goal of being more time and cost efficient. Arbitration can be defined as a binding proceeding whereby an independent third-party, called an arbitrator, resolves the dispute. Similar to court, an arbitration proceeding contains multiple phases, such as a discovery phase, and can last several months or even years.

There is an arbitration hearing at the end, which is similar to the trial that concludes many court proceedings. The biggest difference between arbitration and a traditional court proceeding is in the role played by the arbiter. In court, the judge decides all issues of law, while the jury decides all issues of disputed fact. In arbitration, there is no jury; the arbiter makes all decisions of fact and law. This distinction can have significant implications depending on the nature of the dispute involved. The arbiter’s rulings are legally binding and rarely subject to successful appeal.

 

COMMON INTEREST COMMUNITIES – WHEN IS ADR REQUIRED?

For disputes involving homeowners or associations, Colorado lawmakers have expressed their support of ADR. Colorado’s Common Interest Ownership Act (or CCIOA) specifically encourages associations, unit owners, managers, declarants, and all other parties to make use of ADR in resolving disputes, and further requires that associations adopt a written policy for resolving disputes between the association and owners. 1According to CCIOA, this endorsement of ADR stems from the cost, complexity, and delay inherent in court proceedings; however, the State’s lack of judicial resources is likely a major contributing factor.

Colorado law may encourage common interest communities to utilize ADR, but that is not the same as requiring ADR. So when is ADR required? The simple answer is that ADR is required when the parties contractually agree to it. As it pertains to homeowners and homeowners’ associations, ADR requirements are most frequently contained in the association’s Declaration, Bylaws and/or the purchase contracts of the individual unit owners. Such ADR provisions should specifically detail: (1) What types of claims and disputes are subject to ADR; (2) What parties are bound by the ADR requirements; (3) What forms of ADR are required; and (4) The procedures that should be followed for each type of ADR required.

1 C.R.S. §38-33.3-124.

 

AMENDMENT OR DELETION OF ADR PROVISIONS IN GOVERNING DOCUMENTS

A common interest community is generally free to amend its governing documents provided the association complies with the amendment procedures contained in the governing documents and CCIOA. This can include the amendment, deletion or addition of ADR provisions in an association’s Declaration. Therefore, even if your association’s governing documents contain ADR provisions, two additional questions that should be considered:  Would the association prefer to avoid ADR for a particular type of dispute and, if so, can the association accomplish this goal through amendment?

The answers to these questions are not always clear and will likely depend on the specific language contained in the governing documents as well as applicable laws that otherwise govern the dispute in question. Perhaps the best example of this is in the area of construction defect litigation, which has seen a myriad of ADR bills, statutes, local ordinances and court decisions in recent years.

 

ADR AMENDMENT EXAMPLE – CONSTRUCTION DEFECT DISPUTES

If you are living in a Colorado common interest community that was constructed within the last 10 years, your association’s Declaration likely contains a provision requiring that any construction defect dispute involving the declarant or developer be resolved through binding arbitration. Declarants include these provisions because there is a perception that juries are more sympathetic to homeowners and homeowners associations than arbitrators. The same perception, however, resulted in many homeowner associations deleting their Declaration’s ADR provisions by amendment prior to asserting a construction defect claim. This allowed many homeowner associations to avoid ADR and present their construction defect claims to a jury.

So long as an association complies with the applicable amendment procedures contained in their governing documents and CCIOA, this amendment practice generally remains permissible under Colorado law. In recent years, however, declarants began inserting additional language in the governing documents to prevent such amendments. Specifically, most Declarations now include language that prohibits the amendment or deletion of ADR provisions absent the written approval of the declarant. Because no declarant will agree to such an amendment, this additional language – if enforceable – effectively makes it impossible for an association to avoid binding arbitration of their construction defect claims. Until recently, it was unclear whether such declarant approval requirements were enforceable.

In May of 2015, the Colorado Court of Appeals specifically addressed this issue. 2Much to the chagrin of many association lawyers and advocates (such as the author), the court held that such provisions are enforceable, even after declarant turnover. In addition to this ruling, eleven municipalities 3have enacted ordinances that similarly prohibit an association from deleting their Declaration’s ADR provisions. Notably, the construction defect bills 4introduced in the state legislature sought to accomplish this same goal, but failed to pass. The Colorado Supreme Court has yet to decide whether it will tackle the issue. Assuming the high court declines to reverse the appellate court’s ruling, arbitration rather than a jury trial will now be the norm for most construction defect disputes involving common interest communities here in Colorado.

2 Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., WL 2342128 (Colo.App.2015)

3 Arvada, Aurora, Centennial, Colorado Springs, Commerce City, Denver, Lakewood, Littleton, Lone Tree, Parker, and Wheat Ridge.

4 SB 14-220 and SB 15-177.

 

CONCLUSION

The governing documents of most Colorado common interest communities contain ADR provisions in one form or another. The contents of these ADR provisions often vary widely between communities. Therefore, it is important that homeowners, associations and community managers carefully review and understand the ADR provisions in their particular governing documents. Special consideration should be given to the specific ADR language used, the parties involved, the nature of the dispute and other laws impacting the dispute in question. Understanding these factors will help determine whether a particular ADR provision is applicable, enforceable or can otherwise be amended.