Wednesday, December 5, 2012

Reaching the Pinnacle?

California Supreme Court Rules That CC&R Arbitration Provisions Are Enforceable Against HOAs

Matt J. Malone

This is the first in a two-part series on the Pinnacle case.  In this first part, attorney Matt J. Malone describes the nature of arbitration, the details and reasoning behind the ruling, and the issues and questions remaining now that Pinnacle is the law.  In the second part, attorneys Tyler P. Berding and Randolph M. Paul will discuss both the myths concerning arbitration and the reasons why not all developers or insurers will jump at the chance to arbitrate association defect disputes.

For the past several years, the Courts of Appeal in California have struggled with the enforcement of arbitration provisions in homeowner association Conditions, Covenants and Restrictions (“CC&Rs”).  These provisions waive an association’s right to jury trial in construction defect disputes against developers or converters.  And largely, the Courts of Appeal had refused to enforce them on the grounds that associations never consented to them and/or they were unconscionable.  But in August, the issue finally came before the California Supreme Court in the case of Pinnacle Museum Towers Association v.  Pinnacle Market Development (U.S.) LLC.  And the Court spoke clearly:  CC&R arbitration provisions are valid, enforceable and are not unconscionable under California law.

In order to provide a background for why enforcement of arbitration provisions is such a significant issue for associations, this article will begin by briefly discussing the arbitration process and its potential difficulties.  Then we examine the Pinnacle decision itself, to understand why the Court enforced CC&R arbitration provisions even though an independent, owner-controlled association never consented to them.  Finally, we take a look forward to examine the potential effect of Pinnacle on associations with defect claims, as well as what other consequences may arise from the Court’s decision.