Kelly Smith | Snell & Wilmer
The American Institute of Architects (“AIA”) produces form contract documents widely used in the construction industry. Because of the prevalence of AIA contracts, many parties consider them to be standard and may not fully scrutinize the contract provisions or their future implications. This is especially problematic in Colorado where the use of AIA contracts, specifically their arbitration provisions, may jeopardize a party’s ability to recover punitive damages or cause a party to spend additional time and incur substantial fees litigating what damages are recoverable.
Many AIA contracts include binding arbitration provisions if the parties elect to include them to govern future dispute resolution. They generally also include choice-of-law provisions stating that the contract shall be governed by the law of the place where the project is located. Importantly, Colorado Revised Statute § 13-21-102(5) prohibits exemplary (or punitive) damages from being awarded in arbitration proceedings “[u]nless otherwise provided by law.” Thus, § 13-21-102(5) bars a party from recovering punitive damages if there is a binding arbitration provision in a construction contract and the project is located in Colorado.
Typically, to avoid this prohibition, a party must successfully argue that the Federal Arbitration Act (“FAA”), rather than Colorado law, governs the parties’ arbitration dispute. Colorado courts have acknowledged that when the FAA governs, § 13-201-102(5)’s prohibition on awarding punitive damages does not apply. See Gidding v. Fitz, 2018 WL 480607,*3 (D. Colo. Jan. 19, 2018); Pyle v. Securities USA, Inc., 758 F.Supp. 638, 639 (D. Colo. 1991). The FAA governs arbitration proceedings that arise out of contracts involving interstate commerce—even if those contracts include a Colorado choice-of-law provision. See 1745 Wazee LLC v. Castle Builders Inc., 89 P.3d 422, 425 (Colo. Ct. App. 2003). “Commerce” is construed broadly and includes interstate shipment of goods. Comanche Indian Tribe v. 49 LLC, 391 F.3d 1129, 1132 (10th Cir. 2004). Accordingly, one way a party may be able to invoke the FAA and recover punitive damages in arbitration is to show that the materials utilized for a Colorado construction project came from out of state.
However, a party will not likely be able to invoke the FAA where the actual arbitration provision states that it is governed by Colorado law. Pyle, 758 F.Supp. at 639. Further, it is possible that some Colorado construction projects may involve only materials, equipment and labor sourced from within the state. In those cases, a party who has signed an AIA contract with a binding arbitration provision and Colorado choice-of-law provision may be barred from seeking punitive damages.
In sum, before entering into a seemingly standard AIA contract (or any contract at all), a party involved in a Colorado construction project may want to consider consulting with counsel. Parties may want to pay particular attention to:
- The general choice-of-law provision in the contract;
- Dispute resolution provisions in the contract;
- Whether the dispute resolution provisions contain additional choice-of-law designations;
- Who the other parties to the contract are; and
- To the extent possible, from where project materials, equipment and labor will be sourced.
These factors will typically affect the types of damages that a party can recover in the event of a contract dispute.