Arbitration/Enforceability/Homeowners: Privity, Shmivity, Says The California Supreme Court – A Provision To Arbitrate Construction Disputes In Recorded CC&Rs Will Be Honored If Not Unreasonable

 

Majority Opinion Draws Two Concurrences and One Dissent

     Arbitration is a matter of consent, right? Because there can be no meaningful consent between a developer that drafts covenants, conditions, and restrictions containing a provision requiring arbitration of construction disputes, and a homeowner's association (HOA) that doesn't yet exist, how can the HOA in such circumstances be bound by the arbitration clause? That was the view of the Court of Appeal in San Diego, 4^th District Division 1, which found, by a split vote, that the arbitration clause did not constitute an agreement sufficient to waive the HOA's constitutional right to a jury. But the California Supreme Court, with a five person majority, two concurrences, and one dissent, does not agree. Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, Case No. S186149 (Sup. Ct. August 16, 2012) (Baxter, J., author for the majority).

     Justice Baxter explains, "it is no surprise the courts have described recorded declarations as contracts." (emphasis added). The use of that little word "as" discloses a legal fiction, because while CC&Rs may act "as" contracts, they are not identical to contracts. In particular, they may be binding even where contractual privity is lacking, under the common law of equitable servitudes, and under the Davis-Stirling Act.

     And so the majority opinion concludes:

     "Even when strict privity of contract is lacking, the Davis-Stirling Act ensures that the covenants, conditions, and restrictions of a recorded declaration – which manifest the intent and expectations of the developer and those who take title to property in a community interest development – will be honored and enforced unless proven unreasonable. 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 Werdegar, concurring, points out that "the majority never clearly states whether the grounds for enforcement lie in contract or real property law." She agrees that contract law does not result in enforceability, because there is no meaningful consent between the developer and an HOA that is automatically subject to "whatever the developer has seen fit to insert in the declaration, without any opportunity to reject those terms." But she believes that the arbitration provision may be enforced as an equitable servitude -- even if not an equitable servitude at common law, then under the Davis-Sterling Act.

     Justice Lui joins the opinion of the Court with the proviso "whether or not the arbitration provision is contractual in the strict sense, it is appropriate in this case to use the substantive unconscionability inquiry from contract law to determine whether the arbitration clause is reasonable and hence lawful."

     Finally, Justice Kennard dissents, "because of the association's lack of consent to the arbitration provision." She would affirm the judgment of the Court of Appeal.

     COMMENT: We posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, another 4^th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in CC&Rs was not enforceable between the HOA and the developer, or between the developer and a class of owners on whose behalf the HOA sued. The Supreme Court granted a petition for review on July 25, 2012. Will today's Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?