6 minute read
The Rise of Binding Arbitration for HOA Construction Defect Claims
What Community Managers Should Know
By Aaron Ehrlich, Esq.
Over the past several years homeowners’ associations use of binding arbitration to resolve their construction defect claims has risen rapidly. There are two typical ways defect claims are resolved after completing the required SB 800 pre-litigation process: (1) a trial before a jury in the Superior Court; or (2) binding arbitration with an appointed arbitrator (either a retired judge or well-experienced attorney) through a private arbitration facilitation company (e.g., JAMS and AAA.)
It is the common opinion of HOA defect attorneys that jury trials are more favorable for associations than binding arbitration. Before the pandemic, associations could expect to wait around 1 and a half to 2 years for a jury trial after starting a civil action and around 1 year for an arbitration hearing after starting binding arbitration.
Since the pandemic, due to lingering delays and public underfunding of the judiciary, the wait time for a jury trial has increased to 2 to 3 years, whereas the wait time for an arbitration hearing has largely remained the same. Given the progressive nature of most common defects and the financial inability of associations to fund repairs, binding arbitration is now used far more frequently to resolve defect claims. Associations simply cannot wait 3 years for a decision to be made on their defect claims.
Almost all HOA defect claims settle before trial or arbitration hearing, and the trial or arbitration hearing date often influences when a settlement occurs. Builders/declarants (Builders) and their insurers do not like the unpredictability of a jury’s verdict or arbitrator’s award, so settlements routinely happen close to the start of a trial or the arbitration hearing. Understanding that, associations are motivated to select a forum that will pressure the other side to promptly settle. That is now binding arbitration. Since arbitration hearings tend to occur sooner than jury trials, more cases will have the arbitration hearing completed versus a jury trial, though that continues to be a small, singledigit percentage of HOA defect cases.
When Can It Be Used
Binding arbitration is a private alternative dispute resolution method where the parties pay an arbitrator to resolve all disputed factual and legal issues. Binding arbitration can only be compelled when there is an agreement (usually in a written contract) between the parties to resolve their disputes through that process—there is no statutory right to binding arbitration. The modern trend is for builders to include a binding arbitration requirement in the HOA’s governing documents. That provision may be found either in the HOA’s CC&Rs or a separately recorded declaration (often called a “Title 7 Master Declaration”).
Almost all governing documents these days contain a binding arbitration requirement, though that provision is not self-executing. Rather, it is up to either the HOA or the builder to enforce the parties’ agreement to resolve their disputes by binding arbitration. Since the right to binding arbitration can be waived by inconsistent conduct, it is important that the HOA take appropriate action to timely enforce arbitration if it is desired—which is achieved through the service of a demand for arbitration on the builder and the arbitration company.
What Can Be Expected
The procedure and substance of binding arbitration is largely left to the parties’ contract so there may not be great consistency from one case to another. Associations can expect their governing documents to set forth the parameters for the binding arbitration process, including what arbitration company will be used, the number of arbitrators to be appointed and the selection process, the pre-arbitration hearing rights of the parties (including written discovery, depositions, witness and exhibit lists, and other information exchange), the conduct of the arbitration hearing, etc. Ordinarily, binding arbitration involves a more expedited process with fewer discovery rights than a typical civil action in Superior Court. Gaps in the contracted parameters are filled either by statute (California Code of Civil Procedure Section 1282 et seq.) or more frequently, by the rules adopted by the arbitration company (e.g., JAMS Construction Arbitration Rules and AAA Construction Industry Arbitration Rules).
If the case proceeds to an arbitration hearing, the HOA can expect a quicker (often half the time of a jury trial), less formal, and more malleable hearing process than a jury trial, though extensive oral testimony by fact witnesses (including the community manager) and experts will be needed. Since broad discretion is given to the arbitrator and there are very limited rights to challenge an arbitrator’s award, arbitrators tend to more loosely conduct the arbitration hearing in terms of evidence and formality, to facilitate remote appearances by the attorneys and witnesses and other flexibilities for everyone’s convenience, and to ask many questions of the witnesses, all of which is in stark contrast to the routine rigidity of a jury trial.
Community Manager’s Role
A community manager’s role in binding arbitration is virtually the same as a jury trial and equally important. You can expect to assist the HOA’s attorney in gathering relevant HOA records (governing documents, board minutes, reserve studies, repair invoices, maintenance records etc.) to support the defect claim, to have your deposition taken by the builder’s defense attorney before the arbitration hearing, and then to provide fact witness testimony during the arbitration hearing (usually about the governing documents and various HOA records, the history of reported defects in the community, prior repairs completed to address the defects, maintenance of the HOA’s common area, investigative costs, and similar management and operational topics).
Looking Ahead
Binding arbitration will assuredly continue to be used more often as the funding crisis and delays in the Superior Court system persist. Associations are fortunate to have an alternative to the long wait for a jury trial, and your communities should strongly consider whether binding arbitration presents a better option for resolving their defect claims. This introduction to binding arbitration gives you a preview of the topics your communities and their defect attorney will need to discuss in evaluating and understanding the binding arbitration process.
