SAN FRANCISCO (Legal Newsline) - The California Supreme Court, in a ruling last week, upheld a binding arbitration provision in a homeowners association's governing documents.
One expert says the Court's ruling, which effectively eliminated the rights of most homeowners associations, or HOAs, to have their cases brought before a judge and jury, could "significantly alter" the landscape of how construction defect claims are handled.
In the case at issue, HOA Pinnacle Museum Tower Association sued condominium developer Pinnacle Market Development LLC, seeking recovery for damage to its property and damage to the interests of the condo owners who compose its membership.
In response, the developer filed a motion to compel arbitration, based on a clause in the recorded declaration of Covenants, Conditions and Restrictions, or CCR, providing that the HOA and the individual owners agree to resolve any construction dispute through binding arbitration in accordance with the Federal Arbitration Act.
The state's high court granted review in the case to determine whether the arbitration clause is binding on the HOA and, if so, whether it must be invalidated as unconscionable.
Justice Marvin R. Baxter, writing for the majority, sided with the developer, saying the arbitration clause binds the HOA and is not unconscionable.
"Even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association," he wrote in the Court's 30-page opinion Thursday.
Attorney Thomas E. Miller of San Francisco-based The Miller Law Firm said Tuesday the facts of the case aren't unlike many condo construction defect cases.
A developer created a common interest development and hired lawyers to carefully craft a CCR containing a provision that the HOA agree to waive their right to a jury trial and have any construction dispute resolved exclusively through binding arbitration, he explained.
However, the Supreme Court reversed long-standing case law and held that courts will now enforce mandatory arbitration clauses against HOAs, said Miller, a nationally-recognized construction defect expert.
"For years, developers have routinely inserted mandatory arbitration provisions like this in CCRs before the HOAs came into existence and later attempted to enforce them against the HOAs as contracts," he said. "Many courts were not enforcing the arbitration clauses because they unfairly benefit the developer and because the HOA never agreed to waive its constitutionally-guaranteed right to trial by jury.
"Now, if a developer thinks arbitration protects its interests better than a jury trial, it can insert that into the CCRs and as long as it's not overreaching, it will be enforced."
Miller, author of "Handling Construction Defect Claims: Western States," said under general contract law, parties must usually consent to terms to be legally bound by them.
But when a developer files its CCRs the HOA is not yet in existence, and there are no unit owners, so they never have an opportunity to consent, he said.
"Sometimes, however, courts will imply consent, which the Supreme Court seemed to be reaching for this in its decision," Miller explained.
"In a nutshell, it reasoned that because the sales contracts between the developer and individual owners waived the owners' right to a jury trial, and since the HOA is comprised exclusively of owners, it would betray owners' desires not to enforce the provision against the HOA.
"Thus, the Court decided to bind the HOA to a contract it never agreed to in the first place."
Senior partner Rachel Miller said the bottom line is that arbitration may actually help accelerate the process and provide a HOA with the same or better results.
"There are many private, neutral arbitrators who are experts in construction defect law," she noted.
From Legal Newsline: Reach Jessica Karmasek by email at email@example.com.