Can Builders Still Require New Home Purchasers to Participate in Mandatory Binding Arbitration?

by Miller Starr Regalia

Recent judicial decisions in California have demonstrated that it is very difficult for a home or condominium developer or builder to require a home buyer to participate in binding arbitration or judicial reference authorized by Code of Civil Procedure §638 in order to avoid the length and added cost of a jury trial on any homeowner claims, including claims of construction defects. Several recent judicial decisions have refused to enforce binding arbitration clauses contained in home purchase contracts, addenda to home purchase contracts or in recorded declarations of covenants, conditions and restrictions ("CC&Rs"), as discussed in detail below. In addition, although there has been a recent trend toward enforcing judicial reference provisions in residential home purchase and sale agreements, a recent California Supreme Court case calls into question how many trial courts will exercise their discretion under Code of Civil Procedure §638 and actually refer homeowner lawsuits against developers and builders to judicial reference.

The two issues that most concern the courts with respect to binding arbitration clauses are whether or not the home buyers knowingly agreed to the arbitration clause and whether the arbitration clause is unconscionable. Unconscionability typically has two components, procedural unconscionability and substantive unconscionability. Procedural unconscionability relates to the manner in which the parties negotiated the contract, including the relevant circumstances of the parties at the time, and the factors of oppression and surprise. Substantive unconscionability relates to whether the contractual terms produce unfair or one-sided results which should not be enforced.

In a judicial reference, the court appoints a referee, usually based on the written agreement of the parties, who will determine some or all of the issues of fact and law in a lawsuit. A "general" reference under Code of Civil Procedure §638 means all issues of fact and law in the case are determined by the reference. A "special" reference means only specific issues are determined by the referee. Courts may enforce a contractual provision requiring a general judicial reference and will direct the referee to try all of the issues in the case pursuant to a hearing before the referee that is conducted according to the rules of evidence that apply in judicial proceedings. The referee will prepare a statement of decision, which becomes the decision of the trial court which may be reviewed by an appeal. (Treo @ Kettner Homeowners Assn. v. Superior Court (Inter Gulf Construction Corporation), 166 Cal.App.4th 1055, 1061 (2008); Trend Homes, Inc. v. Superior Court, 131 Cal.App.4th 950, 955-956 (2005).)

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Miller Starr Regalia

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