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Logo Icon Court Enforces Builder's Alternative Pre-litigation Procedure

The California Right to Repair Act allows a builder to provide an alternative pre-litigation procedure in lieu of the procedure set forth within the Act. A common component of current residential construction defect litigation is for the homeowner plaintiff to challenge a builder's alternative procedure to void the procedure and proceed straight to litigation.

Recently, the Fifth Appellate District has enforced a builder's alternative pre-litigation procedure over homeowners' claims that the procedure was unconscionable. In The McCaffery Group, Inc. v. Superior Court (March 24, 2014) California Court of Appeal, Fifth Appellate District, No. F066080, the petitioner builder sought review by means of a writ of mandate of the trial court's denial of the builder's Motion to Compel ADR consistent with the terms of the builder's contractual non-adversarial procedure on the grounds that the procedure was unconscionable.

The builder was sued by homeowners alleging that the 24 homes at issue contained actionable construction defects. Nineteen of the homes were still owned by the original purchasers. All 19 of the contracts for the sale of those homes contained the same procedure for a contractual pre-litigation procedure for the addressing of construction defect claims. However, nine of these homes were purchased prior to the effective date of the Right to Repair Act. The remaining five homes were purchased from the original purchaser who had the contractual procedure in their respective sales contracts.

The California Right to Repair Act (S.B. 800 B Civil Code Sections 895 through 945.5) provides for a non-adversarial pre-litigation procedure to address construction defect claims in residential housing subject to the terms of the Act. The Act provides, in pertinent part, in Civil Code Section 914(a):

A builder may attempt to commence nonadversarial contractual provisions other than the nonadversarial procedures and remedies set forth in this chapter . . ..

At the time the sales agreement is executed, the builder shall notify the homeowner whether the builder intends to engage in the nonadversarial procedure procedure of this section or attempt to enforce alternative nonadversarial contractual provisions. . . .

In response to the initiation of the lawsuit, the builder moved to compel the original owners to comply with the alternative contractual procedure and argued that the subsequent owners should be made to comply with the terms of the Right to Repair Act. The trial court denied that motion, finding that the procedure was unenforceable because it was unconscionable because it did not contain time lines similar to those provided in the Act.

The Fifth Appellate District reviewed the builder's procedure, noting that it contained a two step process B the first step dealing with the notice of claimed defects and the response thereto, including the decision to take corrective action and the second step requiring non-binding mediation of unresolved claims. The court noted that a builder's decision to employ an alternative procedure is not by itself a violation of the Act if the alternative procedure is fair and enforceable. Mere deviation from the Act, the court noted, was not grounds for finding that an alternative procedure was unenforceable.

Rather, the court examined whether the builder's alternative procedure was unconscionable. The court stated that both procedural and substantive unconscionability must be shown, but that these standards are evaluated on a sliding scale so that the more procedural unconscionablity that is shown the less evidence of substantive unconscionability is required. With respect to the issue of procedural unconscionability, the court found that the homeowners had only shown a low level of procedural unconscionability because there was no evidence of surprise or misrepresentation. With respect to the issue of substantive unconscionability, the court found that the homeowners had not met their burden of establishing that the builder's procedure was unconscionable. The court found that mere deviation from the procedure in the Act and requiring the homeowner to pay one-half of the mediation cost was not evidence of substantive unconscionability.

Accordingly, the court granted the petition for mandate, directing the trial court to vacate its order and to enter an order granting the petition and compelling all of the homeowners to comply with the builder's procedure. The court's ruling extended to all of the homeowners because before the appellate court, counsel for the homeowners conceded that the homeowners who purchased their homes from original buyers were to subject the builder's procedure not the Right to Repair Act procedure. Given that the court found that the builder's procedure was enforceable, it enforced it against all of the homeowners.

The McCaffery decision serves as a reminder to residential builders that in the event that they wish to utilize an alternative non-adversarial pre-litigation procedure different from the one set forth in the Act, the builder should employ counsel to verify that the alternative procedure will not be found to be unconscionable and therefore unenforceable.