CC&R Provisions Mandating Binding Arbitration of Construction Defect Claims Ruled Unenforceable
"CC&Rs are not an effective means of obtaining an agreement to arbitrate a homeowners association's construction defect claims against a developer." "Treating CC&Rs as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived."  The Villa Vicenza Declaration of CC&Rs was recorded unilaterally by Nobel Court Development, the developer, and was, thus, imposed on the Association and its members. The Association was never given the opportunity to accept or reject the terms of the CC&Rs and did not sign them.

CC&R Provisions Mandating Binding Arbitration of Construction Defect Claims Ruled Unenforceable
CC&R's are not an effective means of obtaining an agreement to arbitrate a homeowners association's construction defect claims against a developer

by James O. Devereaux, Esq.

On January 11, 2011, the California Court of Appeal in Sacramento ruled that:

"CC&Rs are not an effective means of obtaining an agreement to arbitrate a homeowners association's construction defect claims against a developer."¹

In Villa Vicenza Homeowners Association v. Nobel Court Development, LLC, the court explained that neither federal nor state law countenance imposition of arbitration where no agreement to waive judicial remedies exists. No monetary or other consideration was provided by the Association to Nobel, the developer, nor did the Association affirmatively approve the terms of the Declaration of CC&Rs or execute any documents in favor of Nobel in connection with the deed transferring common areas to the Association.

In reaching its conclusion, the court drew on the 2008 opinion of the Fourth District Court of Appeal in San Diego in Treo @ Kettner Homeowners Association v. Superior Court which held that a CC&R provision requiring submission of construction defect claims to judicial reference² procedures was unenforceable.

The appellate courts in both Villa Vicenza and Treo @ Kettner relied on the Supreme Court's 2005 decision in Grafton Partners v. Superior Court in which the Court considered the circumstances in which parties may agree in a contract to waive a jury trial. The Supreme Court held that a pre-dispute agreement between parties to waive a trial by jury in any dispute that may arise between them and have the dispute decided by a judge without a jury is unenforceable. In Grafton Partners the Court noted that the right to a jury trial is an inviolate right guaranteed by the California Constitution and is considered so fundamental and important that it must be zealously guarded in the face of a claimed waiver.

Earlier appellate decisions invalidating mandatory binding arbitration clauses in contracts and association declarations of CC&Rs have done so based on findings that the provisions in question are unconscionable, applying judicially-developed principles of procedural and substantive unconsionability which focus on oppression or surprise resulting from the unequal bargaining power of the parties, or overly harsh or one-sided effects of the arbitration provision. (e.g., Thompson v. Toll Dublin, LLC, a 2008 decision of the First District Court of Appeal in San Francisco in which the successful homeowners were represented by Berding & Weil partner, Scott Barton; Baker v. Osborne Development Corp., a 2008 decision by the appellate district court in San Diego). Significantly, neither Villa Vicenza nor Treo @ Kettner considered principles of unconscionability in concluding that the provisions before those courts were unenforceable. Rather, both based their determinations of unenforceability on the considerations articulated by the Supreme Court in Grafton Partners concerning the circumstances in which the constitutionally protected right to a trial by jury may be waived. In Treo @ Kettner Homeowners Association v. Superior Court the Court of Appeal unequivocally stated with reference to Section 638 of the California Code of Civil Procedure that provides for submission of a particular dispute to judicial reference by means of a written contract between the parties to the dispute:

"When the Legislature stated in section 638 that the right [to a jury trial] could be waived by written contract, did it mean the term contract to include equitable servitudes created by the CC&Rs of common interest communities? We do not believe that it did."

Referring specifically to Grafton Partners, the court reiterated that the right to a trial by jury is anchored in the California Constitution and that the right is a fundamental one. While the right to a jury trial may be waived,

“the circumstances and manner of its waiver are serious matters requiring actual notice and meaningful reflection. . . . Treating CC&Rs as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived.”

These same sentiments underpin the most recent appellate decision in Villa Vicenza Homeowners Association v. Nobel Court Development Company. "We conclude the Legislature did not intend that CC&Rs be sufficient to effectively and permanently waive the constitutional right to trial by jury."

The court noted that both the Federal Arbitration Act and the California Arbitration Act impose arbitration only on those parties who have agreed to forego resorting to judicial remedies. The Villa Vicenza Declaration of CC&Rs was recorded unilaterally by Nobel Court Development, the developer, and was, thus, imposed on the Association and its members. The Association was never given the opportunity to accept or reject the terms of the CC&Rs and did not sign them. Moreover, the court observed, the CC&Rs state an intent to benefit the Association and its members as owners of the separate interests in the Villa Vicenza development and state no purpose whatever to benefit Nobel in its capacity as developer. In that regard, the CC&Rs are entirely consistent with Civil Code section 1354.³ Therefore, under legal principles of contract formation, the CC&Rs do not constitute an agreement to arbitrate between the Association and Nobel.

Villa Vicenza and Treo @ Kettner together constitute the most recent pronouncements of the California Court of Appeal on the effect of CC&R provisions purporting to impose binding arbitration of construction defect claims on associations. At least until such time as the California Supreme Court may say otherwise, these two appellate decisions, one from northern California and the other from southern California, constitute binding legal precedent and ordain that such CC&R provisions are unenforceable.

¹ The court acknowledged that the issue it was deciding is presently pending before the California Supreme Court in a case entitled Pinnacle Museum Tower Association v. Pinnacle Market Development ( US ), LLC which the Supreme Court agreed to hear in November of last year. Presumably the Supreme Court's decision in the Pinnacle Museum Tower case will, when issued, constitute the definitive ruling on the issue in California, but as the Supreme Court only recently granted review in that case and the appeal has not yet been fully briefed, the Court's ruling is not likely to be forthcoming very soon. Meanwhile, the appellate court opinions in Villa Vicenza and Treo @ Kettner constitute the latest judicial decisions in California on their related issues.

² In a judicial reference, a pending court action is sent to a referee for hearing, determination and a report back to the judge.

³ The covenants and restrictions in the declaration . . . shall inure to the benefit of and bind all owners of separate interests in the development . . . and may be enforced by any owner of a separate interest or by the association or by both."
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