In Pinnacle Museum Tower Association v. Pinnacle Market Development, Case Number S186149, the Supreme Court held that Pinnacle Market Development, the declarant in the applicable Covenants, Conditions and Restrictions (CC&Rs), may enforce an arbitration provision against a homeowners’ association. Prior to this holding, there were conflicting opinions from the Court of Appeal.
This case involved a construction defect lawsuit filed by a condominium homeowner’s association against the developer. Pursuant to the Davis-Stirling Common Interest Development Act (i.e., Civil Code section 1350, et seq.), the developer prepared CC&Rs and included therewith a provision requiring arbitration. The CC&Rs provided that the arbitration would be conducted in accordance with the provisions of the Federal Arbitration Act (the “FAA”). As required, those CC&Rs were recorded thereby giving notice of the provision to the initial and all future purchasers of the condominiums.
In response to a construction defect action filed by the association, the developer filed a motion to compel arbitration that was denied. The developer appealed and the Court of Appeal affirmed, finding that the CC&Rs did not constitute a sufficient agreement to waive the right to a jury. The Court of Appeal also found the arbitration provision was unconscionable. The Supreme Court reversed.
The Supreme Court relied heavily on three factors. The first was that arbitration was to be in accordance with the FAA, and the FAA preempts state laws that discriminate against arbitration. The second was that CC&Rs, required by Davis-Stirling, are contractual in nature and govern the rights and obligations of the parties. The Supreme Court determined that including arbitration within the declaration was not unreasonable and, in fact, was permitted by Department of Real Estate Regulations (Cal. Code Reg., Title 10, section 2791.8). Finally, the Supreme Court determined the arbitration agreement was not unconscionable and since the CC&Rs were recorded in accordance with Davis-Stirling, they could not be considered procedurally unconscionable.
Aside from the importance of resolving an unsettled question in California, questions remain as to whether developers are better served in arbitration or in trial court. Arbitration may no longer be the swift and most economical method of resolving litigation, particularly when arbitrators frequently charge more that $600 per hour. Further, in multi-party litigation, the developer may not be able to involve all necessary parties in the arbitration, leaving it alone in defending the claim while simultaneously pursuing an action in court against other parties. In that regard, if the arbitration clause invokes the FAA, and it is the Association seeking to enforce the provision, the developer may not be able to avoid arbitration.
Ironically, while the Supreme Court has now ruled that arbitration provisions (which are jury trial waivers by nature) in CC&Rs are enforceable, it left undisturbed the holding in Treo @ Kettner Homeowners Assn. v. Superior Court (2008) 166 Cal. App. 4th 1055, which found that a provision requiring judicial reference (also a jury trial waiver) was not enforceable. While the Supreme Court went to great lengths to distinguish between arbitration and judicial reference, the outcome of this case and Treo are somewhat incongruous considering both procedures are the byproduct of jury trial waivers.
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