Alternative Dispute Resolution (ADR): California Statutes, Public Policy, and Agreement --Part II: Enforcement of Recorded Covenant to Arbitrate

February 7, 2011
By Justice Steven Vartabedian (Ret.) on February 7, 2011 6:00 AM |

The second recent ADR case on the meeting of minds concerns arbitration--that is, whether an arbitration will even happen. The Court of Appeal (4th District, Division 1) in Villa Vicenza Homeowners Association v. Nobel Court Development LLC (filed January 11, 2011) 2011 DJDAR 585 found "CC&R's are not an effective means of obtaining an agreement to arbitrate a homeowners association's construction defect claim against a developer." In short, the court reasoned that there may not be a valid agreement constituting a meeting of minds and legal consideration on the subject of waiver of judicial remedies. In the court's view, the legislature did not intend, in stating in California Civil Code section 1354 that Covenants, Conditions, & Restrictions (CC&R's) be treated as equitable servitudes, to provide continuing and irrevocable contractual benefits to the developer.

The Villa Vicenza decision follows a trend of cases that concern themselves with questions of fairness in terms of relative bargaining power in requiring contractual arbitration. There can be little doubt that a CC&R provision that sets forth an easement or limits the size of construction will be enforceable under normal circumstances against a homeowner who purchases a home from an existing homeowner, even though the new homeowner is outside of contractual privity with the original developer who recorded such CC&R's. The enforceability is a matter of notice of the equitable servitude as provided in Civil Code section 1354. The homeowners association in Villa Vicenza appears to be similarly on notice of the equitable servitude that any claims of defect against the developer are to be arbitrated. Those homeowners who constitute members of the homeowners association arguably had a choice in buying their homes and accepting the CC&R's as part of the bargain.

This brings me to a comparison of the two cases I have discussed. There of course is the obvious difference that Cassel is a Supreme Court case. Interestingly, literal interpretation of the statute in question there took precedence in serving the public policy favoring resolution of disputes by means short of litigation in a public court. The court refuses to rewrite the statute even to ensure accountability of attorneys. In Villa Vicenza, the appellate court appears to take considerable license in interpreting the provisions of Civil Code section 1354 to protect the public policy of not forcing parties into arbitration where they may not have knowingly agreed to forgo the public trial process, placing this policy above favoring ADR.

Had someone posed these two opinions to me without identifying which was from a higher court, I would have guessed the opposite.