Is homebuilder's contractual construction-defect pre-litigation procedure unenforceable due to its variance from statutory procedure, and unenforceable when used with subsequent home purchasers?

April 4, 2014
By Justice Steven Vartabedian (Ret.) on April 4, 2014 6:00 AM |

Homebuilder.jpgIn The McCaffrey Group, Inc. v. Superior Court (filed 3/24/14) F066080, the trial court denied homebuilder McCaffrey's "Motion to Compel ADR" brought in an action filed by real parties in interest who were the owners of 24 homes built by McCaffrey which allegedly contained construction defects. McCaffrey petitioned for writ of mandate to enforce provisions in the home purchase contracts that require the homeowners to submit their construction defect claims to non-adversarial pre-litigation procedures before proceeding with a lawsuit. The trial court had found the contract provisions unenforceable as being unconscionable. The Court of Appeal, Fifth Appellate District, granted the petition.

The appellate court opinion addressed the three categories of suing homeowners: (1) pre-2003 original purchasers, (2) post-2003 original purchasers, and (3) subsequent purchasers who bought an existing McCaffrey-built home from a third party. The distinction in the first two categories derives from the Legislature's passage of the so-called "Right to Repair Act," effective January 1, 2003, found at Civil Code sections 895 through 945. Prior to 2003, there was no statutory procedure; after 2003, the builder has the option of contracting for an alternative non-adversarial procedure in lieu of the statutory procedure. Those contracts that came after this date stated that McCaffrey opted for its own procedure; essentially the same procedure it used before that date.

In short, both statutory and contract procedures provide for the homeowner giving written notice of claimed defects; some written acknowledgment by builder, followed by inspection and the opportunity to propose repairs/compensation; a determination by the homeowner to accept the builder's proposal or have the dispute mediated. If still unresolved, litigation may then follow; the contract procedure has an additional judicial reference procedure.

The trial court refused to enforce any procedure as to any of the categories, finding the contract procedures unconscionable. No homeowner claimed any surprise or misrepresentation; but the trial court found the contracts were adhesive/one-sided nonetheless, substantively unconscionable "for lack of strict deadlines that are integral to the [statute]." Real parties conceded that the contractual procedures (as opposed to statutory procedures) applied to all categories. McCaffrey had argued that subsequent purchasers would alternatively be bound by statutory procedures before being allowed to sue (this position of McCaffrey appearing to have been contrary to Anders v. Superior Court (2011) 192 Cal.App.4th 579, which held that once the builder opts out of the statute in a particular situation, it does not receive the benefit of the statutory procedure--see March 7, 2011 blog.)

The Court of Appeal disagreed with the trial court and found the contract procedure enforceable. Mere deviation from the statute does not make it unenforceable as the statute clearly allows for alternative procedures. Rather the issue becomes one of whether the contracted procedure standing alone reasonably protects the interests identified in the statute. In the absence of express deadlines (the contract procedure does have some time parameters) McCaffrey is required to act in good faith. Nor do the contract provisions requiring more specific notice of defects, and sharing of some of the limited costs of mediation cause unconscionability.

Regarding subsequent purchasers, the appellate court simply accepted the concession of real parties that the contract procedure applied, rather than make any determination of enforceability against a non-contracting party. I do note that the statute would make the statutory provisions binding on "successors in interest" to the original home purchasers. (Civil Code section 945) But if the issue whether the contract provision "runs with the land" were to be determined on the merits, I suggest that one look at the February 7, 2011 blog and Villa Vicenza Homeowners Association v. Nobel Court Development, LLC (2011) 191 Cal.App.4th 963.

The appellate court here also expressly deferred from ruling on whether the judicial reference clause is enforceable, as this case may resolve short of that.

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