In a November 6, 2000 decision (Villa Milano Homeowners Association v. Il Davorge, 2000 Daily Journal D.A.R. 11862), the Fourth Appellate District in Santa Ana found that, for public policy reasons, a binding arbitration clause in an Association's original; CC&Rs is "unconscionable."

Like most homeowner associations in Southern California, the plaintiff in this case, Villa Milano HOA, is governed by its applicable CC&Rs. However, the developer, Il Davorge, was the only party to sign CC&Rs because it was the sole owner of Villa Milano condominiums when the CC&Rs were recorded.

Contained within the CC&Rs was a mandatory arbitration clause biding the homeowners to arbitration any time a dispute arose between the homeowners and the developer. Eventually, the homeowners and the association filed a complaint against the developer for alleged construction and design defects. Subsequently and pursuant to the arbitration clause, the developer filed a petition to compel arbitration.

In reaching its decision, the Villa Milano Court noted several aspects of the agreement. First, in keeping with prior decisions, individual condominium unit owners are deemed to be bound by the terms of recorded CC&Rs when they purchase their units. Thus, the CC&Rs are a contract between the association ant the unit owners.

Second, unless the agreement to arbitrate is valid from a contractual point of view, the clause will be considered unconscionable and unenforceable. In this case, the Court defined this agreement as a classic "adhesion contract." The weaker party, Villa Milano homeowners, lacked any opportunity to bargain for the arbitration clause or look elsewhere for a better opportunity. The condo owners had to take it or leave it when they bought their units.

Furthermore, Villa Milano's CC&Rs carried a provision that could not be amended without the consent of the developer. Ironically, Il Davorge was bankrupt before any of the units were ever sold, leaving the homeowners no opportunity to amend the arbitration provision.

In effect, what Il Davorge was trying to do flew in the face of legislative intent in creating California Code of Civil Procedure section 1298. CCP § 1298 read with CCP §337 precludes any agreement in real property from interfering with a right of action for construction and design defects. As the Court quoted. "It is a blatant attempt to curtail the statutory rights of the home buyers and simply shocks the conscience."

It should be noted that the decision by this Court is limited. It should not be interpreted as casting doubt upon CC&Rs in general. In fact, this Court upholds their validity. Associations should determine whether a mandatory arbitration clause exists in their CC&Rs and then determine whether the developer drafted, signed and recorded the CC&Rs. If so, based upon the reasoning above, it would be unenforceable.

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