HOA Construction Defect Claims Case Decision

This case involved a dispute between a condominium homeowners’ association (“Association”) and the project developer (“Developer”) over alleged construction defects.

Association’s governing documents, which were drafted by Developer, contained provisions that required arbitration of construction defect disputes and a vote of at least 51 percent of Association’s membership in favor of pursuing the construction defect claims prior to the commencement of the arbitration. In disregard of the requirements of the governing documents, Association filed suit against Developer alleging damages of $5.6 million for construction defects in the common areas and individual units. The state court lawsuit was then stayed when the parties agreed to participate in mediation, and if that failed, arbitration.

The parties participated in mediation, but the case was not resolved. In accordance with the stipulation, Association filed a demand for arbitration. Developer responded by raising as a defense the provision in Association’s CC&Rs that required Association to get 51% vote of the members, not including Developer, in favor of the arbitration before the arbitration could be commenced. The arbitrator then stayed further arbitration proceedings pending a determination by the trial court on the issue of Association’s right to proceed with the arbitration. Before any determination by the trial court, Association obtained the approval of over 99% of its members to continue with the arbitration and then filed a second demand for arbitration. Notwithstanding the membership approval, the trial court ruled that the decision on Association’s right to proceed with the arbitration was a matter for the arbitrator to decide. The arbitrator subsequently ruled in favor of Developer on a motion to dismiss Association’s claims because it did not have the member consent prior to filing for arbitration. The Developer then petitioned the trial court to confirm the arbitrator’s award in favor of Developer and the court entered a judgment in favor of Developer and against Association. Association appealed the judgment entered by the trial court.

The appellate court stated that: