Binding Arbitration vs. Jury Trial after Pinnacle

Published in the ECHO Journal, December 2012

Is there a Clear Preference for Community Association Construction Cases?

This is the second article in a two-part series on the Pinnacle case. In the prior article, attorney Matt J. Malone discussed the nature of arbitration, the details of the Pinnacle ruling and certain questions concerning its application. This article examines the myths about arbitration and explores the reasons why Pinnacle may not result in a significant movement of association defect cases to arbitration.

The recent California Supreme Court case of Pinnacle Museum Towers Association v. Pinnacle Market Development (U.S.) LLC[i] found that binding arbitration provisions inserted into Conditions, Covenants and Restrictions (CCRs) by developers of common interest developments can require that construction defect disputes be submitted to binding arbitration before a paid arbitrator rather than be heard by a sitting judge acting alone or before a jury. This is significant because binding arbitration denies a litigant the right to appeal legal errors to a higher court even if the arbitrator refuses to follow the law. However, just because developers now may invoke binding arbitration doesn’t mean they’ll do so. And, there may be cases where the Association itself may opt for binding arbitration, even knowing the risks inherent in a “one arbitrator decides all” scenario.

The Pinnacle decision may be a case of “be careful what you wish for.” Developers and their insurers may find much to dislike about using private, binding arbitration instead of proceeding in a state court to resolve construction disputes with homeowners. Of course, arbitration –when enforced against the owner of a single- family home – may chill that owner’s desire to proceed because of the fees and costs associated with paid arbitration. But for community associations, cost will be less of a consideration, especially in counties where courtrooms are so congested that it may take a long time to get to trial and there are multiple parties to share the expense. Before any conclusions can be drawn as to when arbitration would best serve developers or associations (or both), there are several myths that should first be explored.

“Arbitration is inexpensive.”

Not true. Arbitrators, especially those working with the established arbitration providers like American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Service (JAMS), earn fees which can exceed $6,000 a day. And those fees apply whether the arbitrator is hearing the case or just reviewing documents at home. Fees charged by the arbitrator in a recent two-party arbitration that required just 13 hearing days (a construction defect arbitration for a typical condominium project would take much more time) and the review of numerous documents and briefs, not unlike what would be encountered in a relatively short, straightforward jury trial, resulted in arbitrator’s fees to each party in excess of $75,000. And that’s not counting legal fees and outside costs. Fees in a superior court are modest by comparison. The taxpayers pay the judge’s salary and the courts don’t charge fees which are anywhere close to what is charged by the arbitration services.

“Arbitration is fast and efficient.”

Sometimes. An arbitration of a small matter with simple facts can be done quickly. But arbitration hearings involving complex fact situations like those found in construction cases require just as much advance preparation and fact investigation as would be encountered in preparing for a jury trial. Scheduling trial dates in Superior Court is difficult with all of the budget cuts these days, but the best arbitrators are also very hard to schedule, and if they reserve a week for the arbitration hearing and it takes longer, the arbitrator will have to find room on his or her calendar and it may be months before it can continue. A superior court judge will finish a trial once it starts, regardless of whether it exceeds time predictions. In addition, a judge is motivated by a caseload that numbers in the hundreds if not thousands, to handle cases efficiently. An arbitrator, paid by the hour, does not have the same incentive to expeditiously dispose of cases.

“An Arbitrator will rule based strictly on the facts and the law.”

Wrong. An arbitrator is just as capable of deciding things “as they should be” or, as lawyers say, by doing “equity” as any jury. By “equity” we mean compromising the ruling to fit the arbitrator’s view of what is fair and reasonable without regard to the applicable law or facts. Why is this bad? Because “arbitrators” are private judges–they are not intended to be “mediators.” By the time the parties reach an actual arbitration hearing or trial, they have undoubtedly tried to settle the matter several times through voluntary mediation without success and what they want then is a clear decision, not what amounts to further, but binding mediation. Also, arbitrators, unlike judges, depend upon the referrals of attorneys and parties for future work. In other words, if they find against a particular lawyer’s client, she and others in her firm might not engage that arbitrator ever again. If that concern exists it can result in a decision which tries to make everyone “happy” but which in fact makes no one happy.

“Arbitrators must apply state Law.”

Not necessarily. Arbitrations are conducted pursuant to the rules set down in the CC&Rs, the contract of the parties that requires arbitration, and/or the rules of the arbitration provider. While the contract might require the application of state law, the arbitrator may very well decide to ignore certain legal principles or statutes if to do so would fit the arbitrator’s view of how the case should be decided. Is there recourse for this failure to apply applicable law? The matter could be taken before a Superior Court in a motion to correct the arbitrator’s decision, but courts tend to favor arbitration and to uphold, rather than review, an arbitrator’s award. The standards of appellate review of decisions by judges and juries are much more expansive, giving the parties comfort that clearly erroneous rulings will be corrected.

“If you don’t agree with the Arbitrator’s decision, you can always appeal it or bring an action in Superior Court to overturn it.”

This is not true in most cases. Contracts which include arbitration clauses usually state that the arbitration is binding on both parties. That means that there is no right of appeal to any court. Unless the parties specifically agree otherwise, only in very narrow circumstances can an arbitrator’s decision be overturned by a court. So the arbitrator’s decision is final on the law and the damages to be assessed.

“If a matter doesn’t settle, it is easy to get a prompt trial date in Superior Court.”

Not generally true. Trial dates are becoming harder to come by with the layoff of court personnel and the closing of trial departments by counties due to the budget crisis. If the Court won’t assign an early trial date, a matter can take longer to settle since most defendants feel no urgency to make their best offer until trial is imminent.

“A jury will usually favor the claim of a homeowner.”

This may be true in some cases. But juries also represent a cross-section of citizens and can be practical when reaching a decision on such things as costs of repair and could decide that the less expensive repair proposed by the defendant will work just fine. They also can be overwhelmed by the technical facts that you find in many complex construction cases. If the facts are not presented clearly and efficiently, or if they are too complex, the jury might be tempted to disregard some important evidence and reach a verdict that doesn’t take into account the key evidence, all of which makes a trial risky to both sides. But jurors are required to follow the judge’s instructions on the law and can deal with complex issues if the case is presented properly. Witness the recent case of Apple vs. Samsung in United States District Court in San Jose. Jurors tend to be fair and independent, and if the jurors don’t follow the judge’s instructions or if the judge issues them improperly, there is always the right to appeal to that judge or to a higher court, unlike in a binding arbitration proceeding.

“Superior Court litigation is expensive and time consuming.”

No more so than a similar complex construction matter heard by an arbitrator. We discussed why arbitration can be just as expensive and time consuming as a court trial. Bringing a claim before a jury will usually mean just several more days spent arguing jury instructions and in jury selection. What might result in unusual delays these days is the lack of available trial courts.

So, assuming there is a choice, where should a lawyer bring a construction defect case? We don’t believe that there will be a major rush to arbitration. First, the lack of the right of appeal is one of the primary downsides to binding arbitration and it will often be seen that way regardless of which side of the case you are on. This can be true even if binding arbitration is required because a developer inserted the arbitration provision into the CCRs. When the reality of a claim finally hits, both parties will want to be able to look beyond the decision of the trier of fact and search for the grounds to support an appeal or a further motion to the judge or arbitrator on issues they feel were incorrectly decided.

Second, the arbitration provisions are inserted by the developer, not its insurers. An insurer defending a major construction defect claim on a condominium or townhome project may be far less willing to put its interests and the interests of its insured in the hands of a single arbitrator with no right of post-trial or appellate review. We predict that many insurers and the attorneys they appoint to defend these matters will choose to ignore binding arbitration provisions in favor of bringing the matter in a state court where the right of appeal can be exercised.

Third, in multi-party cases, an arbitration provision binds only the owners, the association and the developer and does not necessarily require that other parties be joined in the same proceeding. It can be more difficult to join other parties and combine claims than would be the case in an action brought in a court. So where there are contractors, design professionals, material suppliers, and subcontractors whose liability also must be determined to resolve the dispute, the developer may face the daunting prospect of arbitrating with the association first, and then, if the plaintiff receives an award by the arbitrator, engaging in a series of further arbitrations or court trials to collect what it has been ordered to pay, instead of getting it all resolved in one action. It is difficult to assign liability to an empty chair, and it is even more difficult to settle a matter if all the parties are not present in the same proceeding.

Another serious disincentive to arbitrating a complex construction case for the insurer of a builder is that insurance coverage cannot be as easily applied to settling the claim if a series of arbitrations or trials will be necessary to decide the ultimate liability of all of the defendants. It is also unclear how insurance carriers will react to the lack of a right of appeal, although most liability policies cover arbitration awards as well as court judgments, and the existence or lack thereof of a right of appeal will usually not preclude coverage in most cases.

On the other side of the analysis, the growing lack of trial courts makes reaching settlements very difficult because the parties lack the pressure of an imminent trial date. Also, judicial departments may not be able to afford civil cases much priority or give them long trial days once the trial starts. Judges with crowded calendars will have to hear proceedings in other cases on that same day. Many court departments are “dark” (closed) one day a week, or use other days only for other hearings. All of this can radically cut available trial time. An arbitrator, while costly, will hear evidence for a full eight hours on every day that is scheduled for the arbitration, and in such cases that may result in a faster hearing.

Conclusion

Assuming there is a choice, which forum to use will be based on several factors including the court calendar, number of parties, complexity of the case, the developer’s assets and available insurance, and other similar criteria. Some cases will benefit from the ability to schedule matters with more certainty which usually comes with arbitration and assuming its expense is tolerable to the client; others will do better in the traditional court setting preserving the right of appeal, even with its limitations.

But this is a new and evolving situation, and we will keep you posted as the phenomenon of arbitrating complex community association construction cases picks up speed.