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Developer Thwarted in Attempt to Force Arbitration on Condo Association

By Mark M. Wiechnik

Rather than focusing on the cause of costly and time consuming construction defect litigation, i.e., poor construction.  Developers of condominiums and townhome associations are more frequently trying to limit the association's (and the unit owners') ability to bring such a lawsuit.  Instead of constructing buildings properly and ensuring quality construction, some Developers of condominiums and townhomes have inserted clauses in the association governing documents that forces condominium to mediate or arbitrate those claims prior to , or even instead of, filing suit.  Given that the Developer drafts the governing documents with no input from the yet-to-be created association or its future unit owners, Developers essentially have free reign to limit the association's access to the court system to resolve its disputes.
 

A court of appeals in California, however, recently prevented a Developer from doing just that.  The association in Villa Vicenza Homeowners Association v. Nobel Court Development, LLC filed suit against the Developer, for failing to provide a sufficient reserve fund and for failing to repair various construction defects.  The Developer then filed a motion to compel arbitration of the claims under the provisions of the master deed that it had drafted.  The trial court denied that motion and the appellate division affirmed that decision.  In doing so, the court found that although arbitration agreements are generally enforceable (and to some degree encouraged), this was not an "agreement" because the association did not exist at the time the terms were contemplated and drafted and never had an opportunity to negotiate any of the terms of the association governing documents.  The court found that although governing documents are enforceable generally against unit owners prohibiting or encouraging certain conduct, treating the governing documents "as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived."   Meaning that enforcing such an agreement in which the unit owners have little or no say whatsoever is not permissible when you are enforcing a term with such importance as waiving the right to a jury trial. This term was clearly meant to severely limit the rights of the association for the sole benefit of the Developer, and thus the court would not enforce the term against the association.  The Association was free to continue it suit against the Developer.

Full post as published by New Jersey Law Blog on March 17, 2011 (boomark / email).