In a November 6, 2000, decision, the Fourth Appellate District found that, for public policy reasons, a binding arbitration clause hidden in an association's original CC&Rs is "unconscionable."

Like most homeowners associations in Southern California, the plaintiff in this case, Vill Milano HOA, is governed by their applicable CC&Rs because it was the sole owner of the Villa Milano condominiums when the CC&Rs were recorded.

Hidden within the CC&Rs was a mandatory arbitration clause binding 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 conclusion that this clause was unconscionable, the court noted several aspects of the of the agreement. First, in keeping with prior decisions, individual condominium unit owners are deemed be bound by the terms of recorded CC&Rs when they purchase their units. Thus, the CC&Rs are a contract between the association and the unit owner.

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 they 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 the 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."

What does this mean to your association? First, the decision by this court is limited. Determine whether your developer drafted, signed and recorded the CC&Rs. Second, and most obvious, find out if a mandatory arbitration clause exists in your CC&Rs. Most likely there is such a clause, and based upon the reasoning above, it would be unenforceable.

This decision should not be interpreted as casting doubt upon CC&Rs in general. In fact, this court upholds their validity. What this decision does for each association is reiterate the importance any construction and design defect claim potentially reaching a courtroom.

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