Sometimes the Real Fight is Before the Fight

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Movies-Fight-Club-Soap-600x960_edited-1One of the things I learned while lobbying in Washington, D.C. is the importance of the House Rules Committee. The Rules Committee, as its name suggests, sets the rules. Specifically, the scheduling of bills, the allotted time for debate, and the extent of amendments.

And, as they say, “he who makes the rules, rules.” So it’s no wonder they call the House Rules Committee the “arm of the leadership.”

The next case, The McCaffrey Group, Inc. v. Superior Court, Case No. F066080 (March 24, 2014), a residential construction defect case, involved a fight over the rules. Specifically, whether the Right to Repair Act’s (Civil Code sections 895 et seq.statutory pre-litigation procedures or a homebuilder’s alternative pre-litigation procedures, applied to a dispute.

First a Bit of Background

In 2002, the California State Legislature enacted the Right to Repair Act, also known simply by its bill number, SB 800. The Right to Repair Act, which was intended to help curb the then rising tide of residential construction defect litigation, provides mandatory pre-litigation procedures which must be followed in construction defect cases involving new residential construction.  These statutory pre-litigation procedures are intended provide homebuilders with an opportunity to investigate and correct alleged construction defects before a homeowner can file suit.

One of the major exceptions to the statutory pre-litigation procedures under SB 800, however, is that a homebuilder can opt to use its own alternative pre-litigation procedures if disclosed to a homebuyer.  But because the Right to Repair Act does not specify what must be included in a homebuilder’s alternative pre-litigation procedures, homebuyers have often argued that such alternative procedures are unconscionable and therefore unenforceable.

Such was the case in McCaffrey.

The McCaffrey Group Case

The McCaffrey Group (“McCaffrey”) was a homebuilder who built a residential development in Fresno.  In 2011, a number of homeowners filed suit against McCaffrey alleging construction defects.  What complicated the case was that:

  1. Some of the homeowners purchased their homes before the Right to Repair Act went into effect;
  2. Some of the homeowners purchased their homes after the Right to Repair Act went into effect and McCaffrey’s sale documents included alternative pre-litigation procedures under SB 800; and
  3. Some of the homeowners were subsequent purchasers who purchased their homes from homeowners who had purchased their homes from McCaffrey after the Right to Repair Act went into effect.

After the homeowners filed suit, McCaffrey filed a motion to stay the litigation and to compel the parties to follow the statutory pre-litigation procedures under SB 800.  McCaffrey, however, had a difficult argument to make.  The homeowners who purchased their homes before the Right to Repair Act went into effect were clearly not subject to SB 800's statutory pre-litigation procedures since the Right to Repair Act only applies to new residential units sold on or after January 1, 2003.  Moreover, the homeowners and subsequent purchasers who purchased their homes after the Right to Repair Act went into effect were subject to McCaffrey’s alternative pre-litigation procedures not the statutory procedures under SB 800.

Note: Although the homeowners who purchasers their homes prior to January 1, 2003 were not subject to the Right to Repair Act, McCaffrey’s purchase and sale documents included pre-litigation procedures which generally tracked the alternative pre-litigation procedures contained in its purchase and sale documents for those homes sold after January 1, 2003, namely:

  1. The homeowner is required to give notice to McCaffrey;
  2. McCaffrey then has a reasonable period of time, not to exceed 60 days, to meet and confer with the homeowner;
  3. If, after meeting and conferring, the parties are unable to resolve their dispute, the parties are required to submit the claim to mediation;
  4. Within 10 days after a mediator is selected, the parties are required to submit a brief memorandum setting forth their respective positions, followed by a mediation to be conducted within 10 days after each party’s submission and to be concluded within 5 days thereafter; and
  5. If the parties are unable to resolve their dispute through mediation, either party may file suit, and the claims are to resolved through judicial reference to a referee rather than a judge.

In response to McCaffrey’s motion, the homeowners made two arguments: (1) that McCaffrey’s alternative pre-litigation procedures applied, not SB 800; and (2) that the homeowners could nevertheless file suit because McCaffrey’s alternative pre-litigation procedures were unconscionable, and therefore unenforceable, because they varied from the statutory pre-litigation procedures under SB 800.  The trial court agreed and denied McCaffrey’s motion on the ground that contracts containing McCaffrey’s alternative pre-litigation procedures were contracts of adhesion and unconscionable.

McCaffrey appealed.

The Court of Appeals Decision

On appeal, the California Court of Appeals for the Fifth District quickly dismissed the homeowners’ argument that because McCaffrey’s alternative pre-litigation procedures differed from the statutory pre-litigation procedures under SB 800, that they were unconscionable, and thus unenforceable.  Although the Right to Repair Act does not specify what must be included in a homebuilder’s alternative pre-litigation procedures, explained the court, a homebuilder has “an incentive to ensure its alternative procedures are proper and enforceable” because if a court finds them to be unconscionable then the homeowners have a right to proceed directly with litigation.

“Unconscionability,” explained the Court, “consists of both procedural and substantive elements”:

‘The procedural element addresses the circumstances of contract negotiations and formation, focusing on oppression or surprise due to unequal bargaining power. Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one sided. . . . A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, term must be ‘so one-sided as to “shock the conscious.”‘. . . ‘Both procedural and substantive unconscionability must be shown, but “they need not be present in the same degree” and are evaluated on a “sliding scale.”‘  ‘[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’  The party who prepared and submitted the contract has the burden of showing the other party had notice of the contract terms at issue, while the party asserting unconscionability has the burden of establishing it.

Here, the Court held, there was no procedural unconscionability because, while the purchase and sales contracts were prepared by McCaffrey, the homeowners had initialed the alternative pre-litigation procedures, so they could not claim that they were unaware of the procedures nor had they made any claims that any misrepresentation was made to them as to the procedures.  Further, the Court held, as to substantive unconscionability, while McCaffrey’s alternative pre-litigation procedures differed from the statutory procedures under SB 800, both the procedures and deadlines were reasonable and not unconscionable.

Conclusion

For homebuilders, the take away is that, sure you can adopt your own alternative pre-litigation procedures under the Right to Repair, but if you do just know that they may be challenged by homeowners who may contend that they are unconscionable, which kinda defeats the whole idea behind SB 800 which was intended to reduce the amount of litigation the first place.

Topics:  Construction Defects, Construction Litigation, Housing Developers, Mediation, Right to Repair

Published In: Civil Procedure Updates, General Business Updates, Construction Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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