Court Of Appeals Upholds Validity Of Contractual Prelitigation Procedures Of Builder Represented By JDTP

April 11, 2014

In a case of first impression published on March 24, 2014, the Fifth District Court of Appeal in Fresno agreed with the builder represented by Edward Galloway and Paige Gosney of Jackson DeMarco Tidus & Peckenpaugh that the deadlines and procedures set forth in the right-to-repair and mediation provisions of California’s Right to Repair Act (Civ. Code §895 et seq., sometimes referred to as “SB 800”) do not provide grounds for invalidating a builder’s alternative contractual right-to-repair and mediation procedures in its agreements with homebuyers, or CC&R’s that apply to subsequent purchasers. The Court of Appeal also reversed the trial court’s finding that the builder’s contractual right-to-repair and mediation procedures were unconscionable. The McCaffrey Group, Inc. v. Superior Court of California, County of Fresno, et al., 2014 WL 1153392.

On the first issue of whether the Right to Repair Act provided an independent basis for invalidating a builder’s contractual right-to-repair and mediation procedures, the Court of Appeal stated:

There is nothing in the [Right to Repair] Act that requires the builder who elects to use contractual procedures to provide a particular procedure to comply with the deadlines contained in Chapter 4.  Instead, section 914, subdivision (a) simply provides that “[a] builder may attempt to commence nonadversarial contractual provisions other than the nonadversarial procedures and remedies set forth in this chapter.”  (Emphasis added.)  The statute does not impose any requirement for the contents of those nonadversarial contractual provisions.

The Court held that the common law rules of unconscionability rather than the Right to Repair Act provide the analytical framework for determining whether the enforceability of the builder’s alternative prelitigation procedures.

As to procedural unconscionability, some of the plaintiffs asserted that they “had no bargaining or negotiation power” when purchasing their homes, that they were rushed, and that the provisions were not explained by the builder.  The Court of Appeal disagreed with the trial court’s conclusion that the agreements were procedurally unconscionable.  The Court of Appeal held that even if it was assumed for the sake of argument that the contracts were presented on a “take it or leave it” basis by the builder, such a showing amounts to “only a low level of procedural unconscionability, as the elements of surprise or misrepresentation are not present.”

The homeowners argued that the provisions were substantively unconscionable because (1) they state no meaningful timeline within which the builder must act; (2) the homeowner is required to pay half the cost of the mediation; (3) the notice provision disadvantages homeowners; and (4) the provisions take away other rights enumerated in Chapter 4 of the Right to Repair Act that are not included in the contractual provisions.  The Court of Appeal rejected those arguments, holding that:  (1) the implied covenant of good faith and fair dealing and Civil Code section 1657 require that the builder act reasonably and in good faith in the right-to-repair and mediation process; (2) requiring homebuyers to pay half the costs of a mediation proceeding for a construction defect dispute is not substantively unconscionable; and (3) the contractual requirement that plaintiffs “describe the nature and location of the Claim in reasonable detail” was neither unreasonable nor unfair.

The Court of Appeal held that it was unnecessary for the Court to decide whether the judicial reference clause in the builder’s contracts and CC&R’s was unconscionable because some or all of the homeowners may resolve their complaints during the right-to-repair or mediation processes.

This case is significant for several reasons.  It is the first case in which a Court of Appeal has addressed the issue of whether the procedures and deadlines in the Right to Repair Act provide an independent basis for invalidating the contractual prelitigation procedures of a builder who “opts out” of the Right to Repair Act if the contractual provisions do not match the procedures and deadlines in Chapter 4 of the Right to Repair Act.  The Court of Appeal rejected that contention.  Second, the Court reaffirmed its holding in a previous case that a contractual prelitigation provision is not per se procedurally unconscionable even if it is assumed that it was presented on a “take it or leave it basis.”  Third, this is the first case to address the issue of whether contractual right-to-repair and mediation procedures are substantively unconscionable if they do not explicitly state deadlines for the completion of the processes.  The Court held that such deadlines need not be explicitly stated because under both statutory and common law, reasonable deadlines are implied as a matter of law.  Fourth, the Court held that a contractual requirement that homeowners be responsible for paying half of a mediator’s fees is not per se unconscionable.

For more information, contact Edward Galloway, Esq. at  949.851.7461 and by email at egalloway [at] jdtplaw.com; or Paige Gosney, Esq. at 949.851.7638 and by email at pgosney [at] jdtplaw.com who represented The McCaffrey Group in this case.

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