Real estate laws in California arbitration
The relationship between builders of new homes and buyers of new homes is a multi-faceted one. In many cases there are exemplary stories of customer service and quality performance. Sometimes, though, there can be tensions and disagreements. In even the best of cases, there can be an awareness - as with buyers and sellers of resale homes - that the relationship between the parties may be adversarial. Even if there is no conflict at the time, both parties know that things may change down the road.
It is reasonable, therefore, that both sides may agree to set some ground rules for the resolution of any future disputes. This is not uncommon in the resale arena. The standard purchase contract in California real estate law provides the opportunity for both buyer and seller to agree to arbitration, rather than court action, in the event of any future disputes. Moreover, mediation is indicated prior to either arbitration or court proceedings.
The recent California case of Baker v. Osborne Development (Fourth Appellate District Court of Appeal) makes it clear that alternative dispute resolution agreements between buyers and builders must themselves conform to certain ground rules.
The facts of this case don't paint a particularly pretty picture. The plaintiffs, Thomas Baker and others, filed a complaint against the Osborne Development Corporation in October of 2005. They alleged that the homes they had purchased from Osborne suffered from a variety of construction defects. In response, Osborne filed a motion to compel arbitration. Osborne's motion was supported by evidence regarding a home warranty program in which the company participated. An application for the Home Buyers Warranty program had been signed by both the buyers and the builder. The application form included a statement saying that the buyers had read the Warranty Booklet and that they consented to the binding arbitration provision that was contained therein.
Subsequent testimony showed that the California home warranty application form was provided to the buyers shortly before the close of escrow or at the closing. They did not receive the warranty booklet which contained the arbitration provision until a few weeks after they had moved in. The provision disclaimed any and all other warranties provided by the builder. It stipulated that the buyers waived all rights to seek damages or other legal remedies from either the builder or the subcontractors, and that any and all claims would be subject to arbitration under the rules of Construction Arbitration Services or some other (unnamed) arbitration service of Home Buyers Warranty's choosing.
The trial court denied the motion to compel arbitration. It found that the arbitration provision was unenforceable because it was unconscionable. Osborne appealed, but the appellate court upheld the trial court's denial to compel arbitration.
In its discussion, the appellate court noted that arbitration agreements are generally enforceable, but that they can be invalidated, as can contracts, if they are found to suffer defects such as fraud, duress, and unconscionability. In this case, the appellate court found that the arbitration agreement had both the procedural and substantive elements that are required by California real estate law to determine unconscionability.
The provision was procedurally unconscionable because it involved both "oppression" and "surprise." "Oppression arises when the parties have unequal bargaining power, leading to no real negotiation and lack of meaningful choice. Surprise may arise when challenged terms are hidden in a 'prolix [wordy or long-winded] printed form' drafted by a party in a superior bargaining position."
The substantive element of unconscionability arises when an agreement creates an "overly harsh" or "one-sided" result. Here, the court said that the arbitration provision was one-sided because "Osborne, as the builder and seller of plaintiff's homes, would have no conceivable reason to institute legal proceedings against a homeowner after escrow closed, but virtually every claim the homeowners might raise... would be subject to arbitration."
Arbitration agreements can be beneficial, but they must be crafted with both parties in mind.
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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at [email protected].