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Sunday, 19 August 2012

High Court Finds Arbitration Clauses in CC&Rs Enforceable
An arbitration clause in a declaration of covenants, conditions, and restrictions for a condominium process may be binding on a homeowners’ association, even though such an entity did not exist when the CC&Rs were recorded, the state Supreme Court ruled yesterday.

High Court Finds Arbitration Clauses in CC&Rs Enforceable

An arbitration clause in a declaration of covenants, conditions, and restrictions for a condominium process may be binding on a homeowners’ association, even though such an entity did not exist when the CC&Rs were recorded, the state Supreme Court ruled yesterday.

In a 6-1 decision, the court overturned a Court of Appeal ruling in favor of the Pinnacle Museum Tower Association. The lower panel said a clause requiring the association, which represents unit owners at a San Diego condominium complex, to arbitration construction defects claims against developer Pinnacle Market Development (US), LLC was unconscionable.

Justice Marvin Baxter, writing for the court, explained that “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.”

Defect Suit

The association, on behalf of itself and the individual unit owners, sued the developer for damage allegedly caused to the project during construction. The developer moved to compel arbitration under the Federal Arbitration Act, citing the clause in the CC&Rs, but San Diego Superior Court Judge Ronald L. Styn denied the motion on the ground of unconscionability.

The Court of Appeal affirmed, 2-1, saying the association had a constitutional right to a jury trial and that waivers signed by the individual unit owners in their purchase agreements were unconscionable.

Baxter, however, said arbitration clauses contained in CC&Rs are enforceable by a developer unless proven to be unreasonable. He said the detailed provisions of the Davis-Stirling Common Interest Development Act, and the oversight of the California Department of Real Estate provides sufficient protection for purchasers who become members of a homeowners association.

The Davis-Stirling Act, he emphasized, expressly countenances and encourages alternative dispute resolution, and “adheres to the familiar principle that arbitration is a matter of consent, not coercion.” Enforcing arbitration clauses “in a development’s originating declaration protects the expectations of the individual owners and the community as a whole,” he said.

Werdegar Concurrence

The opinion was joined by Chief Justice Tani Cantil-Sakauye and Justices Ming Chin, Carol Corrigan, and Goodwin J. Liu. Justice Kathryn M. Werdegar concurred separately, on the narrower ground that the Legislature has elected to permit developers to “unilaterally impose arbitration on the condominium’s homeowners association by recording a mandatory arbitration clause for construction-related claims at or before the association’s inception” and abrogated the common law to the extent it provides otherwise.

Liu also wrote separately, reasoning:

“I agree with Justice Werdegar that in reality, it is doubtful that the presence of an arbitration clause was a salient feature of a home purchase transaction....But I agree with the court that in the unique statutory context of the Davis-Stirling Act, the notice of the arbitration provision given to homeowners who became the members of the homeowners association rendered the arbitration provision sufficiently consensual to legitimately bind the association.”

Justice Joyce L. Kennard dissented, arguing that a homeowner’s association cannot be bound by a declaration drafted before the association existed, due to lack of consent.

The case is Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 12 S.O.S. 4150.

Metropolitan News-Enterprise


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