Homeowners Association Not Bound by Arbitration Provision Contained in Contract Between Buyer and Developer

The New Jersey Appellate Division’s decision in Greenbriar Oceanaire Community Association, Inc. v. U.S. Home Corporation, issued on November 16, 2017, determined that a Homeowners Association was not required to arbitrate any disputes with a developer, and, when faced with a motion to compel arbitration, was permitted to file an amended complaint separating out those claims that are not subject to the arbitration agreement.

The association involved in the dispute is responsible for the common areas, administration, and management of a 1425-unit residential community in Waretown, New Jersey. The defendant, U.S. Home Corporation d/b/a Lennar Corporation, was the sponsor and developer of the project, who ultimately transferred management to the association. In its June 2015 complaint, which was twice amended, the association, on behalf of itself and its members, being the homeowners bound to arbitration clauses, asserted numerous causes of action, including: design and manufacturing defects that the association claims constituted violations of applicable building codes and warranties, as well as various violations of the Planned Real Estate Development Full Disclosure Act (PREDFDA), and the developer’s breach of its fiduciary duties.

In light of the arbitration agreement contained in the developer’s contracts with the association’s homeowners, the developer moved to compel arbitration. By the time the motion was considered, the parties settled the design and construction claims. As a result, the question for the motion judge was whether the remaining claims, including those arising under the PREDFDA, and the fiduciary duty claims, were asserted on behalf of the homeowners and therefore subject to the homeowners’ promise to arbitrate with the developer, or whether the claims should be viewed as belonging only to the association, which never agreed to arbitrate any disputes with the developer. By way of his oral decision, the motion judge agreed with the developer’s view and entered an order compelling arbitration, and later denied a motion to vacate the order compelling arbitration.

On appeal, the court determined that the issue of whether the association’s pleaded claims should be subject to the homeowners’ agreements to arbitrate must turn on the allegations contained in the pleadings. In so finding, court found it necessary to remand the case for clarification through the filing of an amended complaint, because the original complaint and its later amendments conflated the claims asserted by the association on its own behalf with those asserted on behalf of the homeowners.

The foundation for the court’s determination is that although arbitration is a favored form of relief, it should not be compelled when it cannot be shown that a plaintiff consented to arbitrate its claims. Specifically, Presiding Judge Clarkson Fisher Jr., wrote, “When faced with such a quandary as presented by the association’s complaint here, a court need not be left lost in the confusion created, intentionally or otherwise, by the pleadings. A court should ensure a correct resolution of the arbitrability controversy by compelling the pleader to express its claims with greater specificity.”

Judge Fischer instructed, “if, after review of the amended complaint, the motion judge determines there are not only arbitrable claims but nonarbitrable claims as well, he should determine whether both the arbitrable and nonarbitrable claims may simultaneously proceed in their separate forums, or whether arbitration should precede any further litigation in the trial court, or vice versa.”

Based on this decision, any community association that finds itself in the initial stages of any construction defect suit, or other contract-based litigation involving homeowners who have consented to arbitration, would be wise to tailor its complaint accordingly if it wishes to take advantage of any perceived advantage to litigation.


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