PINN. MUSEUM TOWER v. PINN. MKT

In Treo, we concluded that a provision in CC R's making all disputes between a developer and a homeowners association subject to judicial reference under Code of Civil Procedure section 638 was not a "written contract as the Legislature contemplated the term in the context of [Code of Civil Procedure] section 638." ( Treo, supra, 166 Cal.App.4th at p. 1067.) Code of Civil Procedure section 638 states that a referee may be appointed if the court finds a reference agreement exists between the parties. We concluded that under Grafton Partners v. Superior Court (2005) 36 Cal.4th 944 [ 32 Cal.Rptr.3d 5, 116 P.3d 479], a jury waiver required actual notice and meaningful reflection, but that a jury waiver in CC R's did not meet those requirements, noting that a homeowners association "essentially springs into existence when there is a conveyance by the developer of a separate interest coupled with an interest in the common area or membership in the association." ( Treo, at p. 1066.) We stated that: "Treating CC R's as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived. CC R's are notoriously lengthy, are adhesive in nature, are written by developers perhaps years before many owners buy, and often, as here with regard to the waiver of trial by jury, cannot be modified by the association. Further, the document is not signed by the parties." ( Id. at p. 1067.)

To avoid a similar result here, Pinnacle contends that the rule in Treo (1) is distinguishable because it involved judicial reference; (2) cannot apply as it would violate the FAA; and (3) should be reconsidered because it creates uncertainty. We reject these arguments.

The general principles discussed in Treo regarding the need for free and voluntary consent before a party can be deprived of its constitutional right to a jury trial are equally applicable to arbitration. Additionally, Treo essentially relied on general California contract law principles to determine whether the requisite "agreement" to waive the right to a jury existed. As discussed above, a determination that the requisite "agreement" is lacking based on application of general state contract law principles regarding the formation of contracts does not violate the FAA. (See, ante, pt. I.) Finally, our adherence to the principles articulated in Treo does not create any uncertainty regarding the circumstances when CC R's will be characterized as contracts and when they will not be characterized as contracts. As Treo clearly stated, "CC R's can reasonably be `construed as a contract' and provide a means for analyzing a controversy arising under the CC R's when the issue involved is the operation or governance of the association or the relationships between owners and between owners and the association. . . ." ( Treo, supra, 166 Cal.App.4th at p. 1066.)

We believe it is critical to note that the Legislature has provided complex alternative dispute resolution procedures that a common interest development association must follow before it can file an action against a builder of a common interest development. (§ 1375.) The Legislature has also enacted statutes providing a simple and efficient internal dispute resolution procedure to resolve disputes between an association and its members. (§ 1363.810 et seq.; see Cal. Law Revision Com. com., 8 West's Ann. Civ. Code (2007 ed.) foil. § 1363.810, p. 259.) If this internal procedure does not resolve a dispute between an association and its members, additional statutes require the association and its members use an alternative dispute resolution procedure as a prerequisite to filing an enforcement action in superior court. (§§ 1369.510, 1369.520, subd. (a).) Significantly, the Legislature stated that "[t]he form of alternative dispute resolution chosen pursuant to this article may be binding or nonbinding, with the voluntary consent of the parties." (§ 1369.510, subd. (a).) This statement comports with the general principles we discussed in Treo, and reiterated here, that the waiver of the right to a jury requires an actual "agreement." ( Treo, supra, 166 Cal.App.4th at p. 1066.)

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 [ 135 Cal.Rptr.2d 834] ( 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, § 3.)

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, associations and others having the 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." ( Windham, supra, 109 Cal.App.4th at p. 1174.) Section 945 makes explicit that former 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. ( Windham, at pp. 1172, 1174-1175, 1176; Cal. Law Revision Com. com., 8 West's Ann. Civ. Code, supra, foil. § 1368.3, p. 334 [former § 383 is the predecessor to former § 1368.3].)

Consequently, we concluded in Windham that section 945 simply clarified existing law. ( Windham, supra, 109 Cal.App.4th at p. 1175.) Thus, our statement that section 945 creates 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 enforceability, if any, of contractual 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. ( PJNR, Inc., v. Department of Real Estate (1991) 230 Cal.App.3d 1176, 1183, [ 281 Cal.Rptr. 673].) 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 Regs., tit. 10, § 2792.1, subd. (a)(2)), and a sample purchase and sale agreement (Cal. Code Regs., tit. 10, § 2792, subd. (a)(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. Code, § 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 [ 33 Cal.Rptr.2d 291].) 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.

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. ( Doctor's Associates, Inc. v. Casarotto, supra, 517 U.S. at p. 687; accord, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 [ 99 Cal.Rptr.2d 745, 6 P.3d 669] ( Armendariz).) (17) The doctrine of unconscionability includes both procedural and substantive elements. ( Armendariz, at p. 114.) These 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: "[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." ( Ibid.) Where, as here, the material facts are undisputed, we independently review the trial court's determination that a contractual provision is unconscionable. ( Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 579 [ 61 Cal.Rptr.3d 344].)

Procedural unconscionability focuses on oppression or surprise. ( Armendariz., supra, 24 Cal.4th at p. 114.) "Oppression arises from an inequality of 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 [ 113 Cal.Rptr.2d 376].) 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."`" ( Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071 [ 130 Cal.Rptr.2d 892, 63 P.3d 979].)

Substantive unconscionability is concerned with contractual terms that produce unfair or one-sided results. ( Armendariz, supra, 24 Cal.4th at p. 114.) "In assessing substantive unconscionability, the paramount consideration is mutuality." ( Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 664, [ 9 Cal.Rptr.3d 422].) 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 [ 116 Cal.Rptr.2d 671].)

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 to 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 [ 223 Cal.Rptr. 838] ( Chan); King v. Larsen Realty, Inc. (1981) 121 Cal.App.3d 349, 353, 357 [ 175 Cal.Rptr. 226].) 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 the 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 L71 Cal.Rptr.3d 854] [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. ( Thompson v. Toll Dublin, LLC (2008) 165 Cal.App.4th 1360, 1372 [ 81 Cal.Rptr.3d 736] [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; Baker v. Osborne Development Corp., supra, 159 Cal.App.4th at p. 896; Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 724-725 [ 13 Cal.Rptr.3d 88]; 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. ( Stearman v. Centex Homes (2000) 78 Cal.App.4th 611, 624 [ 92 Cal.Rptr.2d 761].) Consequently, the arbitration agreement 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.

The judgment is affirmed. Plaintiff is awarded costs on appeal.

Nares, Acting P. J., concurred.