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Supreme Court reverses CC&R trend; compels arbitration of construction defect claim

Timothy Hutter

Valentine Hoy

California courts may be turning a corner in their attitudes toward alternative dispute resolution. At the very least, the recent decision from the state Supreme Court in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, et al., S186149 (Cal. Aug. 16, 2012) will provide for enforcement of arbitration clauses contained in declarations of covenants, conditions and restrictions (CC&Rs). Previously, California courts held that such provisions could not be enforced by developers who no longer owned property in a common interest development. In Pinnacle, the Supreme Court held that because section 1353(b) of the Davis-Stirling Act authorizes the inclusion of "any other matters the original signatory of the declaration [e.g. the developer] or the owners consider appropriate" in CC&Rs, the statutory authorization overrides potential concerns based on the law of contracts or equitable servitudes.

Lower courts had wrestled with the issue of consent, repeatedly finding that consent to an arbitration agreement implied an ability to negotiate at arms-length. As CC&Rs are drafted and recorded by developers prior to the sale of the first unit, there was no opportunity for the homeowners association to negotiate the terms by which it would be bound. The Pinnacle majority based its decision on the doctrine of delegated consent, finding that the statutory framework includes extensive review by the Department of Real Estate of every set of CC&Rs before they are recorded. Purchasers of property in common interest developments are repeatedly warned to read their purchase documents carefully, and that includes the CC&Rs for their new neighborhood or building. Since a homeowners association can only be made up of members who have therefore consented to the provisions of the CC&Rs, the consent requirement of consent is satisfied. For guidance, the court looked to Ruiz v. Padolsky, 50 Cal. 4th 838 (Cal. 2010), a case where the court held that patients could consent to arbitration of wrongful death claims on behalf of their heirs. Justice Joyce Kennard dissented in Ruiz and disagreed with its application in Pinnacle, but the remaining six justices subscribed to this theory.

Notwithstanding the abstract enforceability of arbitration provisions in CC&Rs, the majority did embrace the application of unconscionability analysis to determine where particular provisions are acceptable. Despite granting that the provisions of CC&Rs should come as no surprise, lower courts had been stymied by the lack of consent by the association, and therefore routinely found CC&Rs procedurally unconscionable on the basis of oppression. Addressing that argument, the majority struck a decisive blow in holding that "a developer's procedural compliance with the Davis-Stirling Act provides a sufficient basis for rejecting an association's claim of procedural unconscionability." Though unconscionability is judged on a sliding scale of procedural and substantive elements, the association's remaining argument came up short.

After several years of uncertainty about the enforceability of ADR provisions in CC&Rs, the development community can draw comfort from Pinnacle. Although litigators increasingly find that arbitration may not be as quick and cost-efficient as advertised, developers will now have the option to enforce arbitration provisions in CC&Rs. Complex construction defect cases that frequently involve neutral mediators and discovery referees may now be heard by arbitrators. With budget cuts troubling the judiciary branch, Pinnacle may be welcomed by clients, counsel and superior court judges alike.

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Valentine S. Hoy is a partner in Allen Matkins Leck Gamble Mallory & Natsis LLP's San Diego office, where he practices in the firm's litigation group. He represents businesses, private investors, real estate developers, licensed professionals and builders before courts juries and arbitrators. He can be reached at vhoy@allenmatkins.com.

Timothy M. Hutter is an associate in Allen Matkins Leck Gamble Mallory & Natsis LLP's San Diego office, where he practices in the firm's litigation group. His practice includes construction, real estate and landlord/tenant litigation, as well as business and shareholder derivative litigation. He can be reached at thutter@allenmatkins.com.

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