COURT DEEMS BUILDER'S ARBITRATION CLAUSE UNCONSCIONABLE
In a recent California case, the court decided that a builder's arbitration clause was unconscionable and unenforceable, even though the contract required an arbitrator to make the decision about enforceability. Although this case is a good lesson for REALTORS® on the concept of unconscionability in certain contracts, it is unlikely to impact the arbitration clause in C.A.R.'s standard form agreements, which is vastly different from the arbitration clause at issue in this case.

This case involved various buyers who purchased homes from the builder of two new developments in Yucaipa, California. When entering into the purchase agreements, the builder provided the buyers with a one-page application in small print, drafted by the builder. The buyers' signatures on that application indicated their agreement to a separate 30-page warranty booklet. The buyers were told the warranty "was an added bonus" and "covered any problems," when in reality, the warranty largely limited the builder's liability. The signing process was "pretty quick," about 30 to 45 minutes, with not enough time for the buyers to read the warranty booklet. The sales documents were preprinted and voluminous, full of legalese, and there was no negotiation. The buyers understood the documents were being presented to them on a "take it or leave it" basis.

A few years after close of escrow, the homeowners of 37 homes sued the builder for construction defects. For the homeowners who bought directly from the builder, the builder asked the court to allow the case to be decided by arbitration instead, pursuant to an arbitration clause in the warranty booklet. That arbitration clause not only required any disputes between the parties to be submitted to binding arbitration, but it also required any disputes concerning the interpretation or enforceability of the arbitration clause to be decided by an arbitrator as well.

The trial court refused to require arbitration, and on appeal, the appellate court affirmed the trial court's decision. The appellate court acknowledged that because "the parties are the masters of their collective fate, they can agree to arbitrate almost any dispute -- even a dispute over whether the underlying dispute is subject to arbitration." However, a court must still decide "a claim that the party resisting arbitration never actually agreed to be bound." Accordingly, the court rendered the builder's arbitration clause unconscionable and unenforceable, because there was an absence of meaningful choice and the terms were so harsh and one-sided that they "shocked the conscience."

This case is Bruni v. Didion, 2008 WL 651022 (decided March 12, 2008). Another court recently reached a similar decision in the case of Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, which has a petition of review to the California Supreme Court currently pending.

C.A.R.'s Legal Department provides REALTORS® with many legal articles covering a wide range of topics of interest. Here are some of our new or newly revised legal articles available through C.A.R. Online:

- REO Transactions.
- Private Transfer Fees.
- Deficiency Judgment Chart.