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Construction Defect Cases Hinge on Ruling

Legal experts say a pivotal California Supreme Court decision, involving the Pinnacle Museum Tower condominium development in downtown San Diego, could have far-reaching statewide impact when it comes to deciding certain construction-defect cases.

Deciding a long-disputed matter within the residential development industry, the high court recently ruled that construction defect conflicts with the original builders of common-interest developments — essentially those overseen by homeowner associations — can be resolved by arbitration rather than trial by jury.

Jerry Goldberg, a senior partner in the San Diego law firm HechtSolberg who represented builder Pinnacle Market Development LLC before the Supreme Court as lead counsel, said the 6-1 decision resolved the question of whether arbitration provisions in homeowner association covenants are enforceable.

“It really provides clarity for everybody — the developer, the homeowner association and the consumer — that this is a valid method for resolving these issues,” Goldberg said.

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He said arbitration, where both sides agree to abide by a recognized third party’s decision, is a less costly, less time-consuming legal process for all sides, in a climate where California courts are looking to ease severe case logjams due to limited budget resources.

The court stipulated that arbitration provisions in homeowner association covenants and restrictions are acceptable as long as they are fairly drafted by developers to ensure the rights of owner associations and individual homeowners.

Case-By-Case Basis

Goldberg said the decision will not limit the rights of consumers and home-

owner associations to seek and obtain compensation when building defects arise. On a case-by-case basis, arbitrators will be able to set procedures — agreed upon by all sides — as to how evidence and testimony will be submitted and evaluated.

“There’s been an implication in the past that arbitration somehow favors developers, but that is just not true,” Goldberg said.

Other experts said the Supreme Court ruling could help clear away uncertainties in cases where lingering construction-defect disputes are holding up development, purchases and sales of existing units in housing communities.

Katie Jacobsen, a San Diego partner in the law firm McKenna Long & Aldridge, which represented a La Jolla project developer in a separate but similar case at the appellate level, said the higher-court ruling presents all sides with a cost-effective alternative for resolving disputes that otherwise can drag on for months or years.

In communities like those involving attached homes, she said, faster resolution of construction-defect disputes can help remove an issue clouding the sale or resale of individual properties, even if a unit is not directly involved in a defect lawsuit. In many cases, a change in title cannot be cleared if there is construction litigation pending in a common-interest development.

“It’s one less thing hanging over the property, and one less thing to differ about,” Jacobsen said of the latest court ruling.

“It’s a win for the industry, but it’s also a win for the consumer,” said Paul Barnes, president of the San Diego division of builder Shea Homes, which was not involved in the recent court cases.

Barnes said the state Supreme Court decision helps clarify existing laws, and complements policies that most of the larger builders already have in place for handling disputes that arise over construction issues. “If we have a problem, we take care of it,” he said.

The Supreme Court’s decision stemmed from construction defect issues that arose following the 2005 completion of Pinnacle Museum Tower, a 182-unit high-rise condo development in downtown San Diego.

The court’s ruling nullified an earlier appeals court decision, in which judges said the arbitration provision in a development’s covenants, conditions and restrictions (CC&Rs) could not be enforced.

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