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Supreme Court upholds arbitration clauses in CC&Rs

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The California Supreme Court ruled Aug. 16 that arbitration clauses can be used to resolve construction defect claims filed against builders of common interest developments.

In a 6-1 vote, the justices reversed rulings by both the trial and appellate court, marking a significant victory for the building industry.

"We're excited as a firm but also very excited for our client and our industry," said Jerry Goldberg, a partner with Hecht Solberg Robinson Goldberg & Bagley who argued on behalf of Pinnacle Market Development. "I'm very pleased that this long-standing controversy of whether arbitration can be used through CC&Rs has been put to rest."

The homeowners association of Pinnacle Museum Tower, a mixed-use downtown San Diego condominium tower developed by Pinnacle, filed a construction defect claim against the company. Pinnacle tried to resolve the dispute by invoking the arbitration clause included in the covenants, conditions and restrictions (CC&R) declaration of its development agreement.

The HOA, however, felt it was legally allowed to hear its claims before a trial court, arguing the arbitration clause was invalid because the association was not yet formed when the CC&R was written.

The state high court disagreed, saying the legislature intended CC&Rs to be drafted in advance, and the agreements are enforceable as long as they are reasonable.

"Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration," Justice Marvin Baxter wrote in his 30-page opinion.

Goldberg said the ruling is not only a victory for the building industry, but also for everybody who buys into a housing development.

"It's a great day for homeowners and homeowners associations in confirming that this is an appropriate process and a highly favored process to resolving these types of complex issues," he said.

"Arbitration is faster and less expensive for all parties than litigation through court. The state Supreme Court’s decision recognizes the arbitration clause in this case as a model of what such provisions should include to ensure fairness to associations and owners involved in construction defect conflicts.”

However, Anne Rauch, an attorney for the Consumer Attorneys of California and the Executive Council of Homeowners, said the decision will have sweeping consequences for California homeowners who live in communities developed under CC&Rs.

"Arbitration of disputes, while sometimes praised as a faster process, is not necessarily better," said Rauch, a partner with Epsten Grinnell & Howell. "It comes with some significant limitations in terms of the investigation, discovery and evidence a consumer can obtain in preparing its case.

"Arbitration has traditionally been embraced in situations where the parties have consented to that process. Homeowners do not participate in the drafting of these CC&Rs or the arbitration clause held to be enforceable by the court in today’s decision."

The HOA's main argument was that since it wasn't formed when the CC&R was drafted, it had no opportunity to negotiate the declaration's terms.

The court relied on the Davis-Stirling Common Interest Development Act to reject that claim.

San Diego attorney Katie Jacobsen, a real estate partner with McKenna Long & Aldridge, said the faster a construction defect dispute is resolved, the better it is for the homeowners.

"While a project is in the middle of a construction defect dispute, homeowners have a hard time finding financing and refinancing," she said. "Lenders don't like to invest in projects where there's construction defect litigation."

Charles Bird, a fellow McKenna attorney, said the decision puts a premium on personal accountability.

"I think that the decision says when you sign a contract, the words make a difference," he said. "And if you want to buy a home in a project where CC&Rs say everything is going to be arbitrated, pay attention."

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