EXCULPATORY CLAUSES AND THE JUDICIAL DEFERENCE AND BUSINESS JUDGEMENT RULES (October 2025)

The Court of Appeals has further defined the rule of judicial deference and the business judgement rule in a very recent case, Ridley v. Rancho Palma Grande Homeowners Association.  As described by the court, the judicial deference rule protects against liability for Board decisions concerning maintenance and repair of common areas if, among other things, the decision is made upon reasonable investigation and in good faith.  Under the business judgment rule, Board business decisions are presumed to be based on sound business judgment and are protected from liability if made in good faith and without a conflict of interests. 

In Ridley v. Rancho Palma Grande, flooding of the common area crawlspace beneath the Plaintiff’s unit caused extensive damage to the unit.  The HOA took more than 19 months to remove the water and begin making meaningful repairs.  The court found that the HOA had a duty under the CC&Rs to timely conduct a reasonable investigation and make repairs in a reasonable time, a duty which the HOA breached.  The court further held that because the HOA failed to conduct a reasonable investigation and acted in bad faith, the protections of the judicial deference and business judgments rules did not protect the HOA from liability.

Another defense asserted by the HOA was an exculpatory clause contained in the CC&Rs, absolving the HOA of liability for damage “caused by the elements” or “resulting from . . . water, rain . . . which may leak or flow from outside or from any parts of the buildings,” unless “caused by gross negligence of the Association.”  The exception for gross negligence led to the HOA’s downfall.  “Gross negligence” means “so slight a degree of care as to raise a presumption of conscious indifference to the consequences” (e.g., simply not caring what happens) or conduct constituting “an extreme departure from what a reasonably careful person would do in the same situation to prevent harm to oneself or to others.”  The court found that the HOA’s handling of the matter constituted gross negligence under both definitions.