PINNACLE
MUSEUM TOWER ASSOCIATION v. PINNACLE MARKET DEVELOPMENT (US), LLC
Filed 7/30/10
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
PINNACLE MUSEUM TOWER
ASSOCIATION,
Plaintiff and Respondent,
v.
PINNACLE MARKET DEVELOPMENT
(US), LLC et al.,
Defendants and Appellants.
D055422
(Super. Ct.
No.
37-2008-00096678-CU-CD-CTL)
STORY CONTINUE FROM
PART I….
Additionally, we conclude that section 945 and our opinion
in Windham at Carmel Mountain Ranch Assn.
v. Superior Court (2003) 109 Cal.App.4th 1162 (Windham) do not impact the question whether a developer can compel
a homeowners association to arbitrate its claims against the developer by an
arbitration provision placed in the CC&R's or
purchase and sale agreements signed by individual homeowners. Section 945 was part of a comprehensive
codification of residential construction defect law that incorporated many
existing legal principles and created new principles, commonly known as the
Right to Repair Act (§ 895 et seq.). (Windham at p. 1175; see
generally, Stats. 2002, ch. 722 (Sen. Bill 800), § 3,
p. 3407.)
Section 945
provides: "The provisions,
standards, rights, and obligations set forth in this title are binding upon all
original purchasers and their successors-in-interest. For purposes of this title,
rights set forth in Sections 1368.3 and 1368.4 shall be considered to be original purchasers and shall have standing
to enforce the provisions, standards, rights, and obligations set forth in this
title." (Italics added.) As we stated in Windham, "[t]he Legislature's enactment of
. . . section 945 shows an overall legislative scheme and
purpose to allow associations to sue as real parties in interest for damage to
common areas whether for breach of implied warranty or on any other theory of
liability." (
section 383 statutorily granted a homeowners association the requisite privity to sue for breach of implied warranty independent
of any individual homeowner's privity of contract
with the developer. (
Cal. Law Revision Com. com., 8 West's Ann. Civ. Code
(2007) foll. § 1368.3, p. 334 [section 383 is the
predecessor to section 1368.3].)
Consequently,
we concluded in Windham
that section 945 simply clarified existing law.
(Windham,
the requisite privity with a builder to assert a
breach of implied warranty cause of action for damage to common areas cannot be
interpreted to create the necessary privity of
contract for the purpose of creating a binding arbitration agreement in CC&R's. Moreover,
subdivision (b) of section 914 provides:
"Nothing in this title is intended to affect
existing statutory or decisional law pertaining to the applicability,
viability, or enforceability of alternative dispute resolution methods,
alternative remedies, or contractual arbitration, judicial reference, or
similar procedures requiring a binding resolution to enforce the other chapters
of this title or any other disputes between homeowners and builders. Nothing
in this title is intended to affect the applicability, viability, or
arbitration or judicial reference after a nonadversarial
procedure or provision has been completed." (Italics added.)
This section clarifies that the Legislature did not intend
to affect the enforceability of any contractual arbitration or judicial
reference provision when it passed the Right to Repair Act.
We also conclude that the
review and approval of the arbitration provision in the CC&R's
or the purchase and sale agreements by the Department of Real Estate (DRE) does
not impact this appeal. Unless the
transaction is exempted, no person may sell or lease, or offer for sale or
lease, interests in a subdivision regulated by the Subdivided Lands Act (SLA,
Bus. & Prof. Code, § 11000, et seq.) without first obtaining a public report from the Real Estate
Commissioner. (Bus. &
Prof. Code, §§ 11018.2, 11004.5, subd. (c).) The objective of
the SLA is to prevent fraud and sharp practices in real
estate transactions. (
(1991) 230 Cal.App.3d 1176, 1183.)
The SLA gives the Real Estate Commissioner the
authority to adopt necessary rules and regulations. (Bus. & Prof. Code, §
11001.) The application for a
public report must include the proposed governing instruments for the
homeowners association (Cal. Code of Regs., tit. 10,
§ 2792.1, subd. (a)(2)), and a
sample purchase and sale agreement (Cal. Code Regs.,
tit. 10, § 2792, subd. (12)). DRE regulations also allow for dispute
resolution provisions in CC&R's if the provisions
satisfy certain requirements. (Cal.
Code Regs.,
tit. 10, § 2791.8.)
We fail to
see how the issuance of a public report amounts to a ruling on the
enforceability of any arbitration provision.
Significantly, the Real Estate Commissioner can deny a public report
only under limited circumstances, such as the failure to comply with applicable
regulations. (Bus. &
Prof. Code, §§ 11018, 11018.5.)
Moreover, the DRE regulation addressing the insertion of dispute
resolution clauses in CC&R's "merely
indicates that [the] clauses must be fair and meet certain minimum criteria in
order to receive DRE approval." (Villa Milano,
supra, 84 Cal.App.4th at p. 833.) Nothing in the regulation addresses the
enforceability of a binding arbitration clause on homeowners associations. (See Cal.
Code Regs.,
tit. 10, § 2791.8.)
Pinnacle argues that it is required
by law to draft and record CC&R's before any
units are sold. (Bus. &
Prof., § 11018.2; Cal. Code Regs, tit. 10, § 2792.1.) It
contends that if a developer is not allowed to place an arbitration provision
in the CC&R's, it can never do so. First, we are not addressing the threshold
issue of whether a developer can include an arbitration provision in CC&R's. Clearly
it can. Rather, we address the
enforceability of a binding arbitration clause that waives a homeowners
association's right to a jury trial, and can never be changed by the homeowners
association without the written consent of the developer. Second, governing documents can be amended.
(§ 1356.) There is no reason a developer cannot place a
provision in the CC&R's requiring a homeowners
association and its members to decide via the amendment process to ratify a
binding arbitration provision.
Alternatively, the CC&R's could provide
that the failure of the homeowners association to amend the CC&R's
to eliminate a binding arbitration provision amounts to an acceptance of the
provision. Additionally, we fail to see
why a developer should be placed in a better position than other parties that
are required under general contract principles to obtain the knowing and
voluntary agreement of another party to obtain an enforceable waiver of the
right to a jury.
Finally, we
reject Pinnacle's contention that because the Association is suing as a
representative of its members that suffered damages to their individual units,
the Association should be bound by the jury waiver provision contained in the
purchase and sale agreements signed by all original purchasers. The Association is not a party to those
contracts and has no standing to enforce them.
(Jones v. Aetna
Casualty & Surety Co. (1994) 26 Cal.App.4th 1717, 1722.) However, even if we assumed that the
Association is bound by the jury waiver provision contained in the purchase and
sale agreements signed by all original purchasers, as discussed below, we
conclude that the jury waiver provision in the purchase and sale agreements is
not enforceable because it is unconscionable.
III. The Jury Waiver
Provision Contained in the
Unconscionable
The
purchase and sale agreements incorporated the arbitration provision contained
in the CC&R's.
Specifically, the individual owners agreed to waive their right to a
jury trial and comply with Article XVIII of the CC&R's
for certain disputes referenced in the CC&R's. The Association does not dispute that the
jury waiver provision contained in the purchase and sale agreements together
with the arbitration provision in the CC&R's
constitutes an agreement to arbitrate entered into by Pinnacle and original
condominium owners. Again, assuming that
the Association is bound by the jury waiver provision contained in the purchase
and sale agreements signed by all original purchasers, our next task is to
examine whether grounds exist for revocation of the agreement to
arbitrate. (9 U.S.C. § 2; Code Civ. Proc., § 1281.)
"[G]enerally applicable contract defenses, such as . . . unconscionability,
may be applied to invalidate arbitration agreements without contravening"
the FAA. (
517 U.S. at p. 687; accord, Armendariz v.
Foundation Health Psychcare Services, Inc. (2000)
24 Cal.4th 83, 114 (Armendariz).) The doctrine of unconscionability
includes both procedural and substantive elements. (
elements, however, need not be present in the same degree. (Ibid.) Courts use a
sliding scale to assess procedural unconscionability
in proportion to substantive unconscionability: "The 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." (
undisputed, we independently review the trial court's determination that a
contractual provision is unconscionable.
(Gatton
Procedural unconscionability focuses on oppression or surprise. (
bargaining power that results in no real negotiation and an absence of
meaningful choice," while "[s]urprise
involves the extent to which the supposedly agreed-upon terms are hidden in a
prolix printed form drafted by the party seeking to enforce them." (Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 853.) This form of unconscionability
is often found in adhesion contracts, which are standardized contracts imposed
and drafted by the party of superior bargaining strength that " ' "relegates to the subscribing party
only the opportunity to adhere to the contract or reject it." ' " (
Inc. (2003) 29 Cal.4th 1064, 1071)
Substantive unconscionability
is concerned with contractual terms that produce unfair or one-sided
results. (Armendariz,
mutuality." (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 664.) For example, an arbitration agreement is
substantively unconscionable where it compels arbitration of claims employees
are most likely to bring against the employer, but exempts from arbitration
claims the employer is most likely to bring against its employees. (Mercuro v. Superior Court (2002) 96
Cal.App.4th 167, 175-176.)
Page 8 of the purchase and sale
agreements contained a provision, which required the initials of the buyer and
seller that addressed dispute notification, resolution procedures and
waivers. The provision provided that the
buyer and seller agreed to comply with Article XVIII of the CC&R's
with respect to disputes referenced in that article and agreed to give up their
right to a jury trial for such disputes.
That portion of the provision waiving the right a jury was not bolded or
capitalized; rather, only that portion of the provision stating "[w]e have
read and understood the foregoing and agree to comply with Article XVIII of the
[CC&R's] with respect to the dispute referenced
therein," was bolded and capitalized.
The provision in the purchase and sale agreements did not mention
arbitration, nor did it explain to purchasers the type of disputes for which
they have agreed to waive their constitutional right to a jury. To discover this information, purchasers
needed to read the CC&R's.
Courts have
concluded that an agreement need not expressly provide for arbitration, but may
do so in a secondary document which is incorporated by reference. (Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 639
(Chan); King v. Larsen Realty, Inc. (1981) 121 Cal.App.3d 349, 353, 357.) However, for the terms of another document to
be incorporated by reference into a contract, the reference must be clear and
specific, and the terms of the incorporated document must be known or easily
available to the contracting parties. (Chan at pp. 641-642.) Here, the purchase and sale agreements
incorporated the CC&R's, but Pinnacle presented
no evidence showing that purchasers received a copy of the CC&R's,
or that the CC&R's were readily available when
they signed the purchase and sale agreements.
Sellers are
required to make a copy of the CC&R's
"available for examination by a prospective purchaser . . . before
the execution of an offer to purchase . . . and shall give
a copy thereof to each purchaser . . . as soon as
practicable before transfer of the interest being acquired by the
purchaser." (Bus. & Prof. Code, § 11018.6.) The Civil Code similarly provides that
sellers must provide a copy of the CC&R's to
prospective purchasers "as soon as practicable before transfer of title to
the separate interest or execution of
a real property sales contract." (§
1368, italics added.) Assuming Pinnacle
complied with these statutory provisions, prospective purchasers could have: (1) had a copy of the CC&R's
available for examination at some unknown time before the execution of the
offer to purchase; and (2) received a copy of the CC&R's
at some unknown time before transfer of title or execution of the purchase and
sale agreement. The CC&R's
are 50 pages long. Without specific
evidence showing when Pinnacle made the CC&R's
available for examination, and when Pinnacle provided purchasers with a copy of
the CC&R's, we cannot conclude that the CC&R's were readily or easily obtainable so as to be
properly incorporated by reference into the purchase and sale agreements.
Additionally,
the first page of purchase and sale
agreements informed purchasers that the CC&R's
are recorded or will be recorded in the Official Records of San Diego
County. Assuming the CC&R's
had been recorded before the sale of the first condominium, we cannot conclude
that recording a document qualifies as making the document readily or easily
obtainable. It is unreasonable to assume
that buyers eager to complete their purchase of a condominium will stop the
process and travel to the county recorder's office to locate a copy of the CC&R's. Thus,
there is a high degree of surprise because purchasers have no means of
ascertaining the type of dispute for which they have agreed to waive their
right to a jury, or that they will be required to arbitrate those disputes when
they sign the purchase and sale agreements.
(Baker v. Osborne Development
Corp. (2008) 159 Cal.App.4th 884, 896 [substantial evidence supported trial
court's finding of surprise where arbitration provisions were not readily
available to the plaintiffs].)
Oppression
also exists because the jury waiver provision in the purchase and sale
agreements and the arbitration provision in the CC&R's
were part of preprinted materials presented on a take-it-or-leave-it basis to
purchasers without any negotiation. (
Cal.App.4th 1360, 1372 [arbitration provision in condominium purchase and sale
agreements was procedurally unconscionable because agreements were presented on
a take-it-or-leave-it basis]; Villa Milano, supra,
84 Cal.App.4th at p. 828 [arbitration provision in CC&R's
was procedurally unconscionable because CC&R's
were not negotiable, the provision was included near the end of a lengthy
legalistic document, and the homeowners could not amend the arbitration
agreement without the developer's consent].)
Accordingly, the existence of surprise and oppression reveals a high
degree of procedural unconscionability. While Pinnacle correctly argues that it was
required by law to create and record the CC&R's
without input from the Association, nothing in the law required that the
arbitration provision in the CC&R's be binding
and a waiver of the right to a jury.
(See Cal. Code Regs.,
tit. 10, § 2791.8.)
Because the arbitration agreement is
highly procedurally unconscionable, to establish that the agreement should be
invalidated, condominium purchasers may demonstrate that the terms of the
agreement are substantively unconscionable to a lesser degree.
Together,
the CC&R's and the purchase and sale agreements
required that the Association and individual members arbitrate "[c]onstruction [d]ispute[s]." The CC&R's defined
a construction dispute as "any dispute" between Pinnacle, the
Association and the individual owners "relat[ing] to the use or condition of the Project or any
improvements to the Project." We
conclude that the arbitration provision is unfairly one-sided because it
requires virtually every claim condominium purchasers might raise against
Pinnacle to be arbitrated, while Pinnacle would have no conceivable reason to
make a claim against condominium purchasers related to the use or condition of
the Project, particularly after escrow closed.
(Thompson v.
Toll Dublin, LLC, supra, 165
Cal.App.4th at p. 1373.) Numerous
courts have held arbitration agreements to be substantively unconscionable if
they provide for arbitration of those claims most likely to be brought by the
weaker party, but exempt from arbitration those claims most likely to be
brought by the stronger party. (See,
e.g., Armendariz,
supra, 24 Cal.4th at p. 119;
702, 724-725; Ting v. AT&T (9th
cir. 2003) 319 F.3d 1126, 1149 ["In determining whether an arbitration
agreement is sufficiently bilateral, courts assessing California law look
beyond facial neutrality and examine the actual effects of the challenged
provision."].)
We also
conclude that the provision requiring the parties to bear their own costs,
including expert costs, adds to the substantive unconscionability
of the arbitration agreement. Expert
witness fees incurred to investigate defects and repairs are recoverable under
section 3333 as an element of damages in a construction defect claim. (
limits the ability of the Association and condominium purchasers to recover an
important portion of a damage claim in a construction defect action. Thus, although the waiver of costs provision
is facially neutral, the provision lacks mutuality as it disproportionately
impacts the Association and its members, the "weaker" parties. (Armendariz, supra,
24 Cal.4th at p. 121 ["The unconscionable one-sidedness of the arbitration
agreement is compounded in this case by the fact that it does not permit the
full recovery of damages for employees, while placing no such restriction on
the employer."].)
Thus, even assuming the Association
is bound by the jury waiver provision contained in the purchase and sale
agreements signed by the individual condominium owners, we conclude that the
jury waiver provision in the purchase and sale agreements is not enforceable
because it is unconscionable.
DISPOSITION
The
judgment is affirmed. Plaintiff is
awarded costs on appeal.
McINTYRE, J.
I CONCUR:
NARES, Acting P. J.
I respectfully dissent.
The
question presented in this case is whether the homeowners association is bound
by an arbitration provision in the CC&R's. The majority concludes it is not, and relies
on the reasoning in Treo
Assn. v. Superior Court (2008) 166 Cal.App.4th 1055, which declined to
treat a judicial reference provision in CC&R's as
a valid agreement by a homeowners association to waive a jury trial. (
This issue
has been answered differently in Villa Milano Homeowners Assn. v. Il Davorge
(2000) 84 Cal.App.4th 819, 824-825, which reasoned, "Individual
condominium unit owners 'are deemed to intend and agree to be bound by' the
written and recorded CC&R's, inasmuch as they
have constructive notice of the CC&R's when they
purchase their homes. [Citation.] CC&R's have
thus been construed as contracts in various circumstances." Regarding whether a homeowners association is
similarly bound by the arbitration clause in the CC&R's,
the Villa Milano
court stated that "the Association here is representing the collective
interests of the homeowners, per Code of Civil Procedure section 383
[predecessor to Civil Code, section 1368.3].
The individual unit owners cannot be permitted to use the Association as
a shell to avoid the application of the arbitration clause." (Villa Milano, supra, at p. 825, fn. 4.)
I believe this is a better reasoned conclusion.
Having
found a valid arbitration agreement, I would proceed to the unconscionability
analysis and conclude on this record that the CC&R's
was not unconscionable. I agree with the
portion of the trial court's procedural unconscionability
analysis finding, "The court finds no evidence of 'surprise.' " But contrary
to the trial court, I do not find substantive unconscionability
in the provision stating, "[n]o amendment may be made to [the arbitration
agreement] without written consent of [Pinnacle]." In California,
"A contract in writing may be modified by a contract in
writing." (Civ. Code, § 1698, subd. (a); Collins v. Marvel Land
Co. (1970) 13 Cal.App.3d 34, 43.)
"A modification of a contract can be made only with the consent of
all parties to it." (Riverside Rancho Corp. v.
Cowan (1948) 88 Cal.App.2d 197,
208.) The provision requiring Pinnacle's written
consent for modification of the arbitration agreement does nothing more than
apply a general principle of California
contract law.
O'ROURKE, J.
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