Mandatory Arbitration Agreements

For anyone considering the purchase of a condominium in California, time can be tantalizing. The time between when a case is argued before the California Supreme Court and when a ruling is issued can also seem like forever for the litigants and other interested parties. And that is just where Pinnacle Museum Tower Association v. Pinnacle Market Development, S186149, hovers right now: waiting for a decision from the Court on whether developers can enforce mandatory arbitration agreements contained in covenants, conditions and restrictions (“CC&Rs”) against condominium associations which bring lawsuits for construction defects.

Generally, when parties enter into a contract that includes an enforceable mandatory arbitration provision, they agree to waive their right to a jury trial. Any dispute between the parties will be resolved before an arbitrator.

Pinnacle v. Pinnacle was argued in San Francisco in late May this year, with Chief Justice Tani Gorre Cantil-Sakauye presiding. The case is the culmination of a number of conflicting holdings on the issues at play. Homeowners associations and consumer attorneys argue that at purchase, when buyers agree to CC&Rs, the HOA does not even exist, and therefore cannot be a party to any contract or binding arbitration agreement. Developers and building industry associations counter that our courts are already facing mandatory reductions due to shrinking budgets, making dispute resolution by arbitration a necessary and desired process.

A ruling in this case is expected in August 2012. At this point, it is anyone’s best educated guess on how the California Supreme Court will resolve the conflicting lower appellate court decisions regarding enforceability of arbitration clauses in construction defect actions brought by condominium homeowners associations. There may be a distinction made between original and subsequent purchasers. Or the Court may go further, expanding its decision to directly or indirectly affect the enforceability of other types of arbitration agreements. Does the Federal Arbitration Act control?

These are all considerations for the California Supreme Court in the next few weeks. If you are considering the purchase of a condominium in California, or need an informed update on the enforceability of arbitration clauses in business, employment and insurance contracts, the experienced attorneys at Kring & Chung are available to answer your questions.