The construction of large condominium and multi-home development projects presents a number of challenges for courts in interpreting the applicability of the various necessary agreements, declarations, restrictions, etc. among the competing interests on a project. In Pinnacle Museum Tower Assoc. v. Pinnacle Market Development (US), LLC, the California Supreme Court addressed just such a situation when a condominium developer sought to enforce an arbitration clause contained in its recorded declaration against the third party owners’ association for the condominium.

In that case, the developer constructed a mixed-use residential and commercial common interest community in San Diego, California. Pursuant to the requirements of California law, the developer drafted and recorded a "Declaration of Restrictions" to govern its use and operation of the project. The declaration contained a number of easements, restrictions, and covenants, and established an owners’ association which was responsible for managing and maintaining the project property. The declaration also included an arbitration clause which provided that, by accepting a deed for any portion of the property, the owners’ association and each condominium owner agreed to waive their right to a jury trial and instead agreed to have any construction dispute resolved exclusively through binding arbitration. Further, the individual owners entered into purchase agreements that were signed subject to the terms and conditions of the declaration.

Following completion of the development, the owners’ association filed a construction defect suit against the developer. In response, the developer filed a motion to compel arbitration, citing the arbitration clause in the declaration. Finding against the developer, the lower appellate court held that the arbitration clause could not be binding against the owners’ association. The court reasoned that the agreement to arbitrate did not provide the owners’ association sufficient notice, time to consider the agreement, or an opportunity to consent, because the association was not a party to the declaration and did not even exist when the developer first filed the declaration.

The California Supreme Court overruled and held in favor of the developer on the motion to compel arbitration. The Court reasoned that the authority of the owners’ association to consent to the arbitration agreement was effectively delegated to the individual owners of the condominiums. Via the terms of the purchase agreements, the owners and the developer had an expectation that the terms of the declaration would govern their interactions, and the owners’ association, which represented the interests of the owners, could not frustrate those expectations by claiming an exemption from the provisions of the declaration as a non-party. The Court was further influenced by the judicial and legislative interests that favor arbitration as an efficient and cost-effective alternative means to resolve disputes.

The Court’s application of the arbitration clause to the third party owners’ association demonstrates the lengths to which courts will often go to funnel parties into the use of agreed alternative dispute resolution methods. Planned community developers and owners should pay particular attention to this decision as they draft future declarations and other development-related instruments, but owners and contractors in other complex projects should also take heed when drafting or entering into complex agreements with multiple parties.