SAN FRANCISCO — In a broad victory for contractual arbitration that called to mind recent U.S. Supreme Court decisions, the California Supreme Court ruled Thursday that a homeowners association can be forced to arbitrate construction defect suits via land use restrictions recorded by the developer.
Even though the homeowners association did not yet exist when the developer filed its declaration of restrictions, and therefore could not have consented to arbitration in the traditional sense, the individual homeowners who make up the association waived the right to a jury trial by consenting to the restrictions when buying their homes, the court ruled.
“Given these circumstances, an association should not be allowed to frustrate the expectations of the owners (and the developer) by shunning their choice of a speedy and relatively inexpensive means of dispute resolution,” Justice Marvin Baxter wrote for a five-member majority in Pinnacle Museum Tower Association v. Pinnacle Market Development, 12 C.D.O.S. 9387 “Likewise, condominium owners should not be permitted to thwart the expectations of a developer by using an owners association as a shell to avoid an arbitration covenant in a duly recorded declaration.”
The court also rejected a trial court finding that the arbitration provision was both procedurally and substantively unconscionable.
Kathleen Carpenter, a real estate litigator at McKenna Long & Aldridge who filed an amicus curiae brief for the California Building Industry Association, said the decision settles an issue that has vexed California trial courts for some 15 years. She said the ruling will have a major impact on multiparty construction defect cases, which can get bogged down for years in front of special masters before getting sent out to trial.
“I think it has far-reaching implications” beyond construction cases, she added, as the state Supreme Court reaffirmed its “strong public policy of promoting arbitration.”
The Pinnacle Tower project came into being when developer Pinnacle Market Development recorded a declaration of covenants, conditions and restrictions in April 2003. CC&Rs, as they’re known, typically cover matters such as membership and voting rights in the homeowners association, maintenance responsibilities and architectural control, according to the court’s opinion, and each homeowner must agree to them as a condition of purchase.
In this case the developer also included a clause which said that by accepting a deed for any unit of property, “the association and each owner” agree to waive their rights to a jury trial and submit any dispute over construction defects to a JAMS arbitrator.
The association brought suit a few years later over drainage, electrical problems and other alleged defects.
The Supreme Court noted that at the time the declaration was recorded, the homeowners association didn’t yet exist. Under the Davis-Stirling Act, the California law governing common interest developments, the homeowners association is not formed until the first unit is sold. Nevertheless, Baxter wrote, the association could be deemed to have given its consent via the CC&Rs.
“That a declaration operates to bind an association is both logical and sound, for the success of a development would be gravely undermined if the association were allowed to disregard the intent, expectations and wishes of those whose collective interests the association represents,” Baxter wrote. “In light of the foregoing, it is no surprise that courts have described recorded declarations as contracts.”
Baxter analogized to a 2010 California Supreme Court decision, Ruiz v. Podolsky, which held that a woman who agreed to arbitration with a medical care provider waived not only her own jury trial rights but those of her heirs who later sought to bring a wrongful death action.
Baxter also disagreed with San Diego County Superior Court Judge Ronald Styn’s finding that the arbitration agreement was unconscionable because it included, among other things, a provision that required each side to pay its own attorney fees and costs. The provision is facially neutral, Baxter wrote, and the CC&Rs authorize the arbitrator to “provide all recognized remedies available at law or equity,” so it is not unconscionable.
Justice Kathryn Mickle Werdegar wrote a separate concurrence, saying she disagreed that a contract had been formed. “To treat this scenario as involving consent rather than compulsion is to disregard the realities of the situation,” she wrote. “While owners may have agreed to the arbitration clause, they did so only in the context of an adhesive, take-it-or-leave-it transaction.”
But she concluded that the arbitration clause could be upheld under provisions of the Davis-Stirling Act, even in the absence of a contract.
Justice Goodwin Liu concurred separately, saying he agreed with both the majority and Werdegar, who he believed “are not that far apart.”
Justice Joyce Kennard dissented, criticizing in particular the court’s reliance on Ruiz, which expressly limited its holding to wrongful death claimants. In contrast, she wrote, the legislative scheme governing condominium developments bars arbitration absent “the voluntary consent of the parties.” Thus, she wrote, “consent by the developer alone is insufficient.”
Baxter wrote that the phrase “voluntary consent of the parties” simply “adheres to the familiar principle that arbitration is a matter of consent, not coercion.”
Bruce Mayfield of Fenton Grant Mayfield Kaneda & Litt argued the case for the homeowners association. Jerold Goldberg of Hecht Solberg Robinson Goldberg and Bagley argued for Pinnacle Market Development.