Pinnacle Market Development and sister entities (referred to here as "Pinnacle") built and sold units in a San Diego, Calif., condominium development called the Pinnacle Museum Tower Condominiums. Pinnacle drafted and recorded a set of covenants, conditions and restrictions (CC&Rs) creating a homeowners association, the Pinnacle Museum Tower Association, to manage and maintain the development.

Pinnacle conveyed the development’s common areas and facilities to the association, and deeded a fractional ownership interest in the HOA to each unit’s owner at the time they purchased their unit; owners were required to remain members of the HOA and to pay HOA dues and assessments.

A dispute developed between Pinnacle and the HOA, which argued that Pinnacle was responsible for damages to the development’s common areas, common property and some property of individual unit owners/HOA members.

Pinnacle and the HOA mediated the dispute, but were unable to come to an agreement. The HOA filed suit, and Pinnacle petitioned to compel the association to arbitrate the matter, under an arbitration clause and waiver of the right to jury trial which was contained in the CC&Rs.

The HOA also argued that each individual unit owner’s purchase agreement contained a clause mandating arbitration and waiving the owner’s right to jury trial.

The trial court refused to deny the HOA the right to have their claims heard by a jury, on grounds that the CC&R arbitration provision was unconscionable, and that the HOA was not a party to any of the individual unit purchase/sale agreements, and so could not be bound by the arbitration clauses contained therein. Pinnacle appealed to the 4th District of the California Court of Appeals.

The appellate court affirmed the trial court’s denial of Pinnacle’s petition to compel arbitration.

First, the Court of Appeals rejected Pinnacle’s contention that only the Federal Arbitration Act (FAA) should be used to govern the issues at trial, citing comprehensive case law authority for the proposition that the "the FAA does not apply until the existence of an enforceable arbitration agreement is established under state law principles involving formation, revocation and enforcement of contracts generally."

Accordingly, whether an enforceable arbitration agreement actually existed was properly determined under Code of Civil Procedure Section 1280 et seq.

Pinnacle drafted and signed the CC&Rs on behalf of itself and as the creator of the HOA, and inserted a clause prohibiting the HOA from removing the jury trial waiver from the CC&Rs without Pinnacle’s agreement.

However, the court found, there was no evidence showing that the HOA itself agreed to the arbitration clause — especially as no HOA independent of Pinnacle even existed at the time the CC&Rs were recorded.

Further, a mutual exchange was recited in the CC&Rs, under which "by accepting a deed for any portion of the association property, the association agreed to give up its right to a jury trial and have any construction dispute decided by arbitration."

But the mutuality required for a valid contract (and arbitration clause) did not actually exist, as the HOA had no power at the time of the contract to do anything but accept property deeded to it by Pinnacle.

The court also rejected Pinnacle’s argument that the HOA could be bound to the arbitration clause as the third-party beneficiary for whose express benefit the CC&Rs were written.

The court explained that this rationale might make sense if the HOA were seeking to benefit from holding Pinnacle to the arbitration clause, but that this result was not logical since it holding the HOA to the arbitration clause was against the HOA’s express desire.

The fact that the Department of Real Estate approved the CC&Rs and green-lit the development for sale to consumers was in no way relevant to this court’s finding that the jury waiver and arbitration clauses could not be enforced against the HOA, the court also held.

California contract law requires that a party must provide express, knowing and voluntary acceptance of any contract clause waiving a jury trial, for that jury waiver to be enforceable. So a CC&R arbitration and jury waiver clause, executed before the HOA was formed and without providing the HOA the power to unilaterally opt out of that provision, could not later be enforced against the HOA.

Additionally, the HOA was not a party to any of the individual unit’s purchase and sale contracts, said the court; as a result, those contracts’ arbitration and jury waiver clauses could not be enforced against the HOA.

However, the court went on to rule that the arbitration and jury waiver clauses in the individual sale agreements between Pinnacle and the individual owners were also unenforceable because they were unconscionable.

The sale contracts contained in plain (non-bold, non-italicized) print a waiver of the right to jury trial, and a bold print reference incorporating the specific section of the CC&Rs that required arbitration of disputes with Pinnacle.

But this reference was made by paragraph number, not by describing the arbitration clause, and the 50-page CC&R document was not made readily available and easily accessible to buyers at the time they were asked to initial the arbitration clause and jury waiver in their sale agreements.

These clauses were also part of a pre-printed, boilerplate agreement presented to buyers on a "take-it-or-leave-it" basis, rather than giving the appearance of being negotiable, found the court.

Given this, and given that it would be highly "unreasonable to assume that buyers eager to complete their purchase of a condominium will stop the process and travel to the county recorder’s office to locate a copy of the CC&Rs," the arbitration and jury waiver clauses in the individual sales contracts were ruled by the Court of Appeals to be oppressive and invalid as procedurally unconscionable.

As a result, the trial court’s refusal to bind the HOA to the arbitration and jury waiver clauses was affirmed.

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