Arbitration Clauses Binding On HOAs In California (!?)

Courts: The Judicial Branch of California

On August 16, the California Supreme Court issued a ruling in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, et al.  that could affect Idaho HOA cases and others here in the Ninth Circuit as well.  It could effectively strip the right to jury trial from condominium owners and associations.

As the Court summarized:

Petition for review after the Court of Appeal affirmed an order denying a motion to compel arbitration in a civil action. This case presents the following issues: (1) Is a homeowners association bound by an arbitration provision contained in the covenants, conditions and restrictions for a common interest development that were executed and recorded prior to the time the association came into existence? (2) Did the Court of Appeal err by applying the state law doctrine of unconscionability only to the arbitration provision, and not to other provisions in the covenants, conditions and restrictions, in light of federal law prohibiting the application of state law to treat arbitration provisions differently from other provisions of the same agreement? (See Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265.)

Historically, many have argued against the application of arbitration clauses to HOAs.  A developer creates the HOA, after all, and drafts the CC&Rs, representing both his own interests and (to a much lesser extent) those of the future HOA.  The future owners and future association have little or no say in any of the terms that the developer inserts into the CC&Rs.  As a result, many courts have found that it would be unconscionable to enforce arbitration clauses against the party that had no representation in the drafting of the documents.

The Pinnacle opinion held, to the contrary:

…even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association.  We conclude that the arbitration clause binds the association and is not unconscionable.

What is interesting for those of us outside of the Golden State is that the California Supreme Court based its opinion on provisions in the Federal Arbitration Act.  The same federal provisions would apply to any state.  In particular, the Court held:

…the FAA pre-empts state laws which ‘require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration…Likewise, the FAA precludes a court from construing an arbitration agreement “in a manner different from that in which it otherwise construes nonarbitration agreements under state law.  Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what . . . the state legislature cannot.

I will leave it to the courts and legal scholars to analyze the strength of California’s analysis.  However, if the arguments relied on by this Court are seen as persuasive, we may be seeing a major shift in how condominium and association construction defects are handled across the country.

Thanks to California’s Miller Law Firm for summarizing the decision.

Advertisements

Tags: , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: