California Supreme Court Rules Arbitration Provisions In CC&Rs Are Enforceable To Resolve Construction Defects
Ruling Paves the Way for Faster, More Cost-Effective Resolve to Construction Defect Litigation
SAN DIEGO, Aug. 16, 2012 /PRNewswire/ -- The California Supreme Court today announced its much anticipated decision in a case with far-reaching impact on developers, owner associations, owners, and insurers. The ruling in the case of Pinnacle Museum Tower Association v. Pinnacle Market Development (US) LLC paves the way for construction defect conflicts with the original builders of common interest developments in California to be resolved by arbitration rather than trial by jury.
According to Hecht, Solberg, Robinson, Goldberg & Bagley LLP (HechtSolberg), the San Diego law firm that argued the case before the state's highest court and won in a 6-1 decision, the ruling upholds the enforceability of arbitration provisions included in Covenants, Conditions and Restrictions (CC&Rs) by developers of new common interest development projects – as long as such provisions are fairly drafted to ensure the rights of owner associations and individual owners are respected.
"We are very pleased with the Court's decision, which finally provides certainty on how construction defect disputes will be resolved between developers of common interest developments, the associations who manage them, and the owners who live in them," said Jerry Goldberg, principal with HechtSolberg and lead counsel who argued the case on behalf of Pinnacle Market Development, the builder.
The state Supreme Court's decision is consistent with the U.S. Supreme Court's Federal Arbitration Act, which favors arbitration as a preferred way to resolve disputes nationally and at the state level.
"Arbitration is faster and less expensive for all parties than litigation through court. The state Supreme Court's decision recognizes the arbitration clause in this case as a model of what such provisions should include to ensure fairness to associations and owners involved in construction defect conflicts," Goldberg said.
The Pinnacle arbitration provision states that should arbitration occur, the association and individual owners will not pay any more than if they had gone to court. Additionally, the plaintiffs can seek all of the same relief under the arbitration process as they could in a court process.
"Litigation is an arduous process that negatively impacts everyone involved," said Susan Daly, the common interest development specialist with HechtSolberg who prepared the Pinnacle CC&Rs. "Associations and owners suffer when the marketability of their homes declines due to the uncertainty of outcome and cost associated with lengthy litigation. Not only do values decline, but it is difficult, if not impossible, to secure financing or refinancing with a lawsuit pending. Because arbitration is a more expeditious process and binding on both parties, the cloud of uncertainty for the project and its owners is resolved much faster."
The arbitration provision in the Pinnacle Museum Tower case was drafted by HechtSolberg for the developer of the 182-unit high-rise mixed-use condominium tower. After construction defect issues arose, both the trial and appellate courts refused to enforce the arbitration clause. HechtSolberg, which has a highly regarded appellate litigation practice, was then retained and first successfully persuaded all seven justices on the state Supreme Court to take the case (the Supreme Court declines to consider the vast majority of the hundreds of cases brought to it each year). Then the firm persuaded the high Court to reverse the lower courts' decisions.
A key issue in the state Supreme Court's determination was whether or not CC&Rs are a contract. As with all new common interest developments, the developer recorded them prior to the sale of the units. A majority of the Court of Appeal held that the Association could not have consented to arbitration through CC&Rs and published its opinion, making it binding on all trial courts throughout the state. The Court of Appeal's decision was nullified when the state Supreme Court agreed to consider the case.
"The courts in California have held that CC&Rs constitute a contract in a variety of contexts and it is discriminatory against arbitration to disallow one provision while allowing all the others," said Richard Schulman, a land use and appellate attorney with the HechtSolberg firm who authored the brief that persuaded the Court to hear the case. "The more important issue at hand, however, is that arbitration is a favored form of dispute resolution. Given state budget cuts that have put tremendous stress on the court systems adding months and even years to the litigation process, arbitration is a fair and reasonable approach to construction defect conflicts."
According to Daly, "Going forward, if developers want to utilize arbitration to resolve construction defect disputes, the arbitration provisions in their CC&Rs should be carefully drafted to be fair and allow associations and owners to have their disputes resolved and necessary repairs to their homes and communities made."
Hecht, Solberg, Robinson, Goldberg & Bagley LLP (HechtSolberg) is a San Diego-based law firm specializing in business and every area of the law essential to the real estate industry including, but not limited to, land use planning and entitlement, residential and resort development, commercial and retail development, real estate business transactions, and risk management and litigation. Founded in 1972, HechtSolberg celebrates its 40th anniversary this year with 15 highly specialized attorneys who are experts in their respective disciplines, and who implement a team approach to contribute focused and inventive strategies. HechtSolberg is located in One America Plaza, 600 West Broadway, Eighth Floor, San Diego, CA 92101. The website is www.hechtsolberg.com, and the phone number is 619-239-3444.
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