By Mark T. Guithues, Esq. (originally published in Summer 2002)

California Civil Code Section 1354 requires, in certain circumstances, prior to initiating legal action to enforce the governing documents of a homeowners association, the parties to offer some form of Alternative Dispute Resolution (“ADR”). One such form of ADR is arbitration, which can be either binding or non-binding. In the recent California case of Trabuco Highlands Community Association v. Head, a California Appellate Court was faced with the issue of determining whether a Civil Code Section 1354 arbitration was binding or non-binding.

In that case, the Heads and the Association agreed in correspondence to submit their dispute over various issues to non-binding arbitration in accordance with Civil Code Section 1354. The Association alleged that the Heads failed to maintain their lawn or paint their house, and that they kept a trailer and trash cans in front of their house. After the hearing, the arbitrator issued a “binding arbitration award and decision” in the Association’s favor. In essence, the award compelled the Heads to comply with the CC&Rs by remedying their violations. At the Association’s request, the arbitrator later issued a supplemental decision which included the Association’s attorney fees and costs.

The Heads attended a subsequent board meeting and asserted that the arbitrator mistakenly characterized the arbitration as binding. The Association took the position that it was binding and filed a petition in Court to confirm the arbitration award accordingly. In support of its petition, the Association attached a letter from the arbitrator stating that the arbitration was binding. Relying on that letter, the trial court confirmed the award.

The Heads appealed. In the appeal, the Heads raised four issues: (1) that the trial court erroneously found the arbitration binding; (2) that the trial court improperly found that the Heads did not timely file a request for a trial de novo; (3) that attorney fees were wrongly awarded to the Plaintiff under Civil Code Section 1354; and, (4) that the trial court abused is discretion by denying the Defendants’ motion for reconsideration under Code of Civil Procedure Section 473.

On the issue of whether the arbitration was binding or not, the Court of Appeal found in favor of the Heads and indicated that the trial court’s conclusion that the award was binding was not based on sufficient evidence.

The court stated:

  We begin with the general rule that ‘parties to a private arbitration impliedly agree that the arbitrator’s decision will be both binding and final’ [citation omitted]. Any such presumption was rebutted here, however, by the parties’ express written agreement, [citation omitted] through two letters, that the arbitration would not be binding. The question is whether the Heads changed their position at the arbitration hearing.Because that is the crucial question, it deserved a careful factual inquiry at the hearing on the motion to confirm the arbitration award. It appears the trial court did not do so; rather, it relied on the arbitrator’s characterization in his letter. That was wrong.  

The Court made its decision based upon the issue of consent:

  If the trial court had simply decided whether arbitration was binding based on the declarations of the parties concerning what was said at the arbitration hearing, we might simply affirm that ruling by concluding it was a matter of credibility for the trial court to decide. But the trial court apparently did not base the ruling on that.  

The Court of Appeal felt that the trial court had abdicated its function to determine whether the arbitrator had exceeded his powers in a most “fundamental way.” The Court determined that because the trial court’s determination was not based on sufficient evidence, the case was sent back to the trial court to properly consider whether the parties agreed to binding arbitration.

WHAT THIS MEANS TO YOU:

This case clarifies that the decision regarding whether arbitration is binding or not must be made by the parties themselves and cannot be imposed on the parties by the arbitrator. To ensure that associations are not subject to never-ending litigation about whether an arbitration was binding, we recommend that any association agreeing to a binding arbitration ensure that the decision be represented in writing by all parties.

The unfortunate part of this decision was that the Appellate Court did not address the award of Civil Code Section 1354 costs and fees. Civil Code Section 1354 provides that costs and fees incurred in ADR be borne equally by the individual parties, rather than being awarded to the prevailing party, as here. This creates an interesting legal question where this case conflicts with the language of Civil Code Section 1354. Unfortunately, we will all have to wait for a subsequent case to get an answer to this question.