The Triple Crown of Construction Defect Reform – The Pinnacle Decision

constructiondefectThe California Supreme Court recently held in the Pinnacle Museum Tower Association vs. Pinnacle Market Development decision that a binding arbitration provision contained in an HOA’s CC&R’s is a reasonable contractual provision. Arbitration is now legal between an HOA and its developer.  The decision does not apply to judicial reference provisions contained in CC&Rs.  It’s also noteworthy that Jerry Goldberg of Hecht Solberg, a San Diego law firm argued this case before the court.  Susan Daly drafted the Pinnacle’s CC&R’s research and wrote the briefs.  Kathleen Carpenter at McKenna, Long & Aldridge, also filed an amicus brief in this case.  This decision is important because it reversed a recent trend in lower courts invalidating arbitration provisions in CC&Rs and because of the impact the decision may have for builders to bind subsequent purchasers to alternative prelitigation procedures pursuant to SB 800.  The Pinnacle HOA is located on Market Street in downtown San Diego.  It is unique not only because of this historic legal decision but also because its bottom floor houses a Children’s Museum.  It’s ironic that the city where modern Construction Defect (CD) litigation was born also birthed its possible conclusion.  It was Thomas Miller of The Miller Law Firm who begat modern CD litigation in the late 1980’s.  Shortly thereafter, in the 1990’s, CD litigation was so widespread that there were no insurance companies willing to insure any “attached” condo builders; in 1999 fewer than 1,600 condos were built in the entire state of California, home to 36,000,000 people.  In the late 1990’s builders constructed a new insurance vehicle which united the builder and all of it’s subcontractors, consultants and designers under one insurance policy – called “Wrap Insurance” because it wrapped all the trades and consultants under one defense with one set of attorneys defending the CD litigation.  Developers, their insurers and attorneys then added arbitration provisions into CC&R’s in the hope of further escaping costly CD litigation.  Thereafter, on January 1, 2003 SB 800 (California’s Right to Repair law) was passed in California which gave the builder three main things: 1) the absolute right to make repairs to alleged defects before being sued, 2) lower statutes of limitations on many building components, and 3) for the first time it defined construction defects through 47 functionality standards.   The fuel that fired the engine of SB 800 was its 7 affirmative defenses, chief among them being “documented” maintenance.  No longer could an HOA or a homeowner bring a repair “or defect” to the developer without the developer first determining whether or not the problem was caused by a lack of, untimely or incorrect maintenance.  The key to this affirmative defense was that the homeowner and the HOA needed to not only perform correct maintenance but they also had to provide documentation before bringing a claim for repair.  Thereafter, HOA Operations and Maintenance Manuals became de rigor.  With the Pinnacle decision we have today a veritable“Triple Crown” of barriers against “frivolous” CD litigation:  1) Wrap insurance, 2) SB 800 (HOA Maintenance Manuals) and, 3) binding arbitration.  The underlying question is why would the California Supreme Court rule this way – rule against the powerful plaintiff bar?  The plaintiff bar not only has enormous sway over the legislature but also over much of the political domain.  The answer might be the one offered to by an attorney who seems to have hit the common sense button when he stated that “the California Courts were clogged and the state was broke and needed to clear the courts to save money.  While the complexity (and benefits) of some of SB 800’s other defenses have yet to be ironed out in court it is now clear that Arbitration of defects of HOA common areas is here to stay in California.

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