SAN FRANCISCO, Aug. 21, 2012 /PRNewswire/ -- A recent ruling by the California Supreme Court will significantly alter the landscape of how construction defect claims are handled. In Pinnacle Museum Tower Association v. Pinnacle Market Development LCC, the Court eliminated the rights of most homeowners' associations to have their cases brought before a judge and jury. Instead, the Court enforced a commonly found binding arbitration provision in the HOA's governing documents (CC&Rs).
The facts of this case are not unlike many condominium construction defect cases. A developer created a common interest development and hired lawyers to carefully craft CC&Rs containing a provision that the HOA agree to waive their right to a jury trial and have any construction dispute resolved exclusively through binding arbitration. The Supreme Court reversed longstanding case law and held that courts will now enforce mandatory arbitration clauses against HOAs.
According to Thomas E. Miller, a nationally recognized construction defect expert and author of the legal treatise, "Handing Construction Defect Claims: Western States" (Aspen Publishers, 2012), "For years, developers have routinely inserted mandatory arbitration provisions like this in the CC&Rs before the HOAs came into existence and later attempted to enforce them against the HOAs as contracts. Many courts were not enforcing the arbitration clauses because they unfairly benefit the developer and because the HOA never agreed to waive its constitutionally-guaranteed right to trial by jury. Now, if a developer thinks arbitration protects its interests better than a jury trial, it can insert that into the CC&Rs and as long as it's not overreaching, it will be enforced."
Under general contract law, parties must usually consent to terms to be legally bound by them. But when a developer files its CC&Rs the HOA is not yet in existence, and there are no unit owners, so they never have an opportunity to consent. Sometimes, however, courts will imply consent, which the Supreme Court seemed to be reaching for this in its decision. In a nutshell, it reasoned that because the sales contracts between the developer and individual owners waived the owners' right to a jury trial, and since the HOA is comprised exclusively of owners, it would betray owners' desires not to enforce the provision against the HOA. Thus, the Court decided to bind the HOA to a contract it never agreed to in the first place.
According to Rachel Miller, Senior Partner of The Miller Law Firm and co-author of "Handing Construction Defect Claims: Western States," "The bottom line is that arbitration may actually help accelerate the process and provide an Association with the same or better results. There are many private, neutral arbitrators who are experts in construction defect law."
The Miller Law Firm outlines the following practical considerations for HOAs:
California's pre-litigation statutes still apply and Associations must give notice to a builder under SB 800 (CaliforniaCivil Code Sections 895 et seq.) and/or Calderon (CaliforniaCivil Code Section 1375). Arbitration provisions will go into effect if there is no resolution under these pre-litigation statutes.
For Associations facing a potential construction defect claim, seeking the advice of counsel to review the specific provisions of the CC&Rs for enforceability will be key. Just because your CC&Rs contain mandatory arbitration clauses does not mean that courts will blindly enforce them. The California Supreme Court has set a minimum standard of what is enforceable and anything that falls below is still subject to scrutiny.
If your case is already in litigation, you will likely be unaffected and your right to a jury trial will still be preserved, as defense counsel in these cases may have already lost their opportunity to compel arbitration
Thomas E. Miller, Rachel Miller and Matthew Miller of The Miller Law Firm (www.ConstructionDefects.com) have recovered over $500 million on behalf of Condominium Associations with construction defects and are the co-authors of, "Home and Condo Defects: A Consumer Guide to Faulty Construction," (Seven Locks Press, 2012), available at www.amazon.com.