Developers May Require That Construction Defect Disputes Be Resolved Through Arbitration

[author: Meredith Jones-McKeown]

The California Supreme Court recently ruled that developers – by including an arbitration provision under the Federal Arbitration Act (FAA) in Homeowners’ Association Covenants, Conditions and Restrictions (“CC&R’s”) – may require that construction defect actions be resolved through arbitration rather than by jury trial. In Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal. 4th 223 (2012), California’s high court ruled that such provisions are consistent with the Davis-Stirling Act and that the homeowners’ associations can be bound by the arbitration provision in the recorded CC&R’s.

The Pinnacle case did not directly address how CC&Rs requiring arbitration will interact with California’s Developer “Fix-It” Law (Civil Code § 895, et seq., commonly referred to as “SB800”). But Pinnacle appears to support a developer’s right under Civil Code §914 to draft an alternative to the detailed SB800 pre-litigation procedures that includes a requirement of binding arbitration. Following Pinnacle, the Court vacated the rulings in several other construction defect cases involving arbitration provisions and gave instructions to the appellate courts to reconsider those cases in light of Pinnacle. Those reconsidered decisions may give further, more concrete guidance to developers seeking to draft enforceable SB800 alternatives.

COMMENT: In the meantime, it makes sense for developers to include provisions in their recorded CC&Rs that require arbitration under the Federal Arbitration Act. Doing so creates significant settlement leverage for developers by avoiding having a jury resolve the disputes. Under Pinnacle, these provisions should be upheld.

Author: Meredith Jones-McKeown is an associate in Sheppard Mullin’s San Francisco Office and a member of its Construction Industry Team.