The California Court of Appeals recently ruled that the arbitration provisions in a recorded Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) were not enforceable against the homeowners’ association or the individual homeowners. Pinnacle Museum Tower Ass’n v. Pinnacle Market Development (US), LLC, 187 Cal. App. 4th 24, 113 Cal. Rptr. 3d 399 (4th Dist. 2010).

While this decision is in California and is based on California law, Arizona courts often look to California decisions for guidance. There are good reasons that the result in such a case should be different in Arizona but there also may be some things a developer can do to reduce the risk of such a decision in particular projects.

A construction defect suit was brought on behalf of the homeowners’ association and its members against a developer claiming damages to the common areas. The developer, relying on the arbitration provisions found in the CC&Rs and on the purchase and sale agreements where purchasers waived their rights to a jury trial, sought to have the case dismissed in favor of arbitration. The California Court of Appeal refused to compel arbitration finding that there was no agreement between the developer and the homeowners association because the arbitration provision was contained in the very same CC&Rs which also created the homeowners association. The court reasoned that the homeowners association did not enter into a knowing and voluntary agreement, did not subsequently ratify the arbitration requirements and did not have the power to amend the requirements without consent of the developer. The court also found the arbitration provisions in the purchase and sale agreements unconscionable because they were offered on an “all or nothing” basis and did not make any express mention of arbitration, merely referring generally to the CC&Rs’ provisions. The court also found that the arbitration provision was substantively unconscionable because it was one-sided in favor of the developer as to the types of claims which were required to be arbitrated.

Arizona has a well established public policy of favoring alternative dispute resolution. Moreover, the Arizona Supreme Court in Powell v. Washburn, 211 Ariz. 553, 125 P.3d 373 (Ariz. 2006) recognized the value of CC&Rs as planning and governance tools and adopted a policy of construing such documents to accomplish the goals of the parties, when ambiguity or dispute about such documents arises. Arizona law requires that purchase and sale agreements for residential property contain an express disclosure if project documents provide for dispute resolution procedures in addition to (or in modification of) the notice and cure provisions for homeowner construction claims that exist in Arizona statutes.

It seems unlikely that Arizona courts will adopt the ruling in this case. However, as a practical matter, it appears that the issue of consent to be bound by an arbitration provision will be less of an issue in Arizona than the question of whether the provisions are evenly balanced and adequately disclosed. The more one-sided an arbitration provision becomes, the more likely consent will become an issue. Additionally, conspicuously and expressly disclosing in the purchase and sale agreement that arbitration is required may be safer than a general reference to dispute resolution provisions in CC&Rs. While there is no bright line method for avoiding the result in the Pinnacle case, the more balanced the arbitration provision, and the more clearly it is disclosed, the more likely that the arbitration provision will be upheld.