Key Calif. Supreme Court Decision for Developers in Resolving Construction Defect Disputes

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On August 16, 2012, the California Supreme Court in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC held that arbitration provisions in Covenants, Conditions and Restrictions (CC&Rs) are enforceable against an owners association. The state Supreme Court's decision settles an area of common interest development (CID) law that was left in flux for several years because of conflicting opinions in the courts of appeal on this issue.

The real estate project involved is a mixed-use residential and commercial condominium CID project located in San Diego, Calif. The owners association that was formed to own and maintain the common areas of the project brought a construction defect lawsuit against the developer. The developer moved to compel arbitration based on provisions in the CC&Rs recorded for the project that required construction disputes with the developer to be resolved through binding arbitration. Both the trial court and California Court of Appeal for the Fourth Appellate District held the arbitration provisions were unenforceable against the owners association and unconscionable.

In reversing the holdings of the lower courts, the California Supreme Court concluded that covenants in CC&Rs, including a covenant to arbitrate certain disputes, will be "honored and enforced unless proven unreasonable." The court concluded further that the arbitration provisions in the Pinnacle CC&Rs were not unconscionable.

In reaching its decision, the court relied on certain factors:

  1. the structure of and language used in the actual arbitration provisions in the CC&Rs;
  2. the Federal Arbitration Act, which reflects federal policy favoring arbitration as an expeditious way of resolving disputes; and
  3. the Davis-Stirling Act, which is the governing law for the formation and governance of CID projects in California and allows a developer to bind an owners association to an arbitration covenant through recorded CC&Rs, provided it is not unreasonable.

While this decision establishes that the Federal Arbitration Act and the Davis-Stirling Act encourage the use of arbitration as a favored method of dispute resolution, the arbitration provisions in the CC&Rs should still be drafted in a way to satisfy a technical analysis of whether those provisions are reasonable. Legal counsel can be helpful in preparing and structuring CC&Rs so that any arbitration provisions contained in the CC&Rs should be enforceable.

Ultimately, with this recent decision, developers in California may feel confident that construction defect disputes can and will be resolved through binding arbitration if that is their chosen alternative dispute resolution procedure.

About Duane Morris

Duane Morris has real estate attorneys with extensive experience in CID law who assist clients in the preparation and structuring of CC&Rs.

For Further Information

If you have any questions about this Alert, please contact Marianne F. Adriatico, any member of the Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates, Construction Updates, Commercial Real Estate Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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