This case involved a dispute between a condominium homeowners association (Association) and the project developer (Developer) over alleged HOA construction defects.
Associations governing documents, which were drafted by Developer, contained provisions that required arbitration of HOA construction defect disputes and a vote of at least 51 percent of Associations membership in favor of pursuing the construction defect claims prior to the commencement of the arbitration. In disregard of the requirements of the governing documents, Association filed suit against Developer alleging damages of $5.6 million for construction defects in the common areas and individual units. The state court lawsuit was then stayed when the parties agreed to participate in mediation, and if that failed, arbitration.
The parties participated in mediation, but the case was not resolved. In accordance with the stipulation, Association filed a demand for arbitration. Developer responded by raising as a defense the provision in Associations CC&Rs that required Association to get 51% vote of the members, not including Developer, in favor of the arbitration before the arbitration could be commenced. The arbitrator then stayed further arbitration proceedings pending a determination by the trial court on the issue of Associations right to proceed with the arbitration. Before any determination by the trial court, Association obtained the approval of over 99% of its members to continue with the arbitration and then filed a second demand for arbitration. Notwithstanding the membership approval, the trial court ruled that the decision on Associations right to proceed with the arbitration was a matter for the arbitrator to decide. The arbitrator subsequently ruled in favor of Developer on a motion to dismiss Associations claims because it did not have the member consent prior to filing for arbitration. The Developer then petitioned the trial court to confirm the arbitrators award in favor of Developer and the court entered a judgment in favor of Developer and against Association. Association appealed the judgment entered by the trial court.
The appellate court stated that: (i) an arbitration award shall be vacated if the arbitrator(s) exceeded their powers and the award cannot be corrected without affecting the merits of the decision; and (ii) arbitrators exceed their power by issuing an award that violates a partys unwaivable statutory rights or that contravenes an explicit legislative expression of public policy. In applying said law to the facts of the case, the appellate court concluded that the subject provision in the CC&Rs contravened explicit statutory policy by giving Developer the unilateral power to bar actions for construction defects. The court further found that the provision in question, as interpreted by the arbitrator, was unreasonable and unconscionable because it gave Developer veto power over Associations claims in spite of the members more than 99% vote to proceed with the arbitration.
Accordingly, the appellate court ruled that the provision in Associations CC&Rs which required at least 51% member vote in favor of the arbitration before it can be commenced violated explicit legislative expression of public policy. The court further ruled that the arbitrators decision was not on the merits of the case and therefore, the subsequent judicial decision was not final and Association was permitted to proceed with the arbitration based on the second demand for arbitration that was filed after the written approval of the members was obtained.
PUBLISHED California Appellate Court decision (February 6, 2020).
See case decision: Vientos_v._CalAtlantic_Grp