In a decision which will impact a significant number of homeowner construction defect cases, the California Court of Appeal, 5th Appellate District, ruled in McCaffrey Group, Inc. v. Superior Court (2014) 224 Cal.App.4th 1330 ("McCaffrey case") that a builder's contractual, non-adversarial procedure (as set forth in its residential purchase agreement) need not adhere to the procedural requirements set forth in the Right to Repair Act in order for the Right to Repair Act to be enforced.
As many are aware, the California legislature enacted what is commonly known as the "Right to Repair Act" or SB 800 in 2002. [California Civil Code § 895–945.5] The Right to Repair Act applies to homeowner construction defect claims where the homeowner signed the new residence purchase agreement after January 1, 2003. [Civil Code § 938]
Under Chapter 4 of the Right to Repair Act, which is found in Civil Code § 910-938, a number of non-adversarial, pre-litigation procedures are prescribed and must be complied with by the homeowner before initiating a civil action against the builder for alleged construction defects. However, Civil Code § 914 provides that a builder may set forth its own contractual, non-adversarial procedures but cannot require those procedures to be complied with in addition to the procedures set forth in the Right to Repair Act. In that regard, one of the questions that has arisen is what constitutes an enforceable, "contractual" non-adversarial provision. And specifically, a question has arisen as to whether a "contractual" non-adversarial provision must adhere to the minimum requirements sets forth in the Right to Repair Act.
That question has been answered, at least in part, in the McCaffrey case. The facts of the McCaffrey case are routine enough. In that case, The McCaffrey Group, Inc. ("McCaffrey Group") constructed single family homes in Fresno. Owners of 24 homes in the development filed suit for construction defects against the developer in 2011. 19 of the 24 residences were owned by original
purchasers (of the 19 residences, 9 were sold prior to January 1, 2003). The other five residences were owned by subsequent purchasers. The purchase agreements for all 24 residences included a contractual two step pre-litigation process: notice of the claim and the opportunity for the builder to repair followed by non-binding mediation if the claim is not resolved via repair. No specific deadlines were set forth for the builder to take corrective action and the contract required the homeowner to set forth his or her claim with a specificity which appears to be more stringent than required by the Right to Repair Act. The contract also required the homeowner to bear one half of the cost of the mediation proceeding.
After answering the First Amended Complaint, the McCaffrey Group filed a "Motion to Compel ADR" and to stay the action citing the residential purchase agreements. The Motion involved all three categories of homeowners: (1) the original purchasers who bought their homes from McCaffrey Group before January 1, 2003; (2) the original purchasers who bought their homes from McCaffrey Group on or after January 1, 2003; and (3) the subsequent purchasers who did not buy their homes from McCaffrey Group.
The homeowners opposed the Motion on various bases. The Trial Court then refused to enforce any of the contractual procedures with respect to all of the categories of homeowners on the ground the procedures are unconscionable, as the contracts are adhesive and the procedures lack strict deadlines that are integral to the Right to Repair Act.
The McCaffrey Group then petitioned for a writ of mandate or prohibition to overturn the Trial Court's order denying its Motion to compel compliance with the contractual procedures and judicial reference. The Court of Appeal accepted the writ in order to address, among other things, the issue as to what constitutes enforceable contractual provisions per Civil Code § 914.
With respect to the original homeowners who purchased their residences after January 1, 2003, the Court of Appeal then ruled that the builder's contractual, non-adversarial procedure did not require a specific deadline for the builder to act as required by the Right to Repair Act. The Court of Appeal also ruled that the failure to include a deadline to act in the builder's contractual, non-adversarial procedure was not itself unconscionable. In that regard, the Court of Appeal commented that "a reasonable time to perform may be implied" and noted that "implied in this contract, as in all contracts, is the covenant of good faith and fair dealing, which prevents one contracting party from unfairly frustrating the other party's right to receive the agreement's benefits." The Court of Appeal likewise ruled that the contractual requirement to pay one half of the cost of mediation to be enforceable even though the Right to Repair Act only
called for the homeowner to split the cost of the mediator if the homeowner agreed to do so. In addition, the Court of Appeal ruled that the contractual notice of claim requirement – while it may be more specific than that required under the Right to Repair act - was also enforceable.
As for the homeowners who purchased their residences prior to January 1, 2003, the Court of Appeal noted that the Right to Repair Act was not in effect at the time of purchase and, consistent with its other rulings, found the contractual procedures to be enforceable. As for the subsequent purchasers, because those homeowners conceded that the builders contractual procedure applied to them, the Court of Appeal ruled that they were bound as well.
The McCaffrey decision is certainly important in that it confirms that a builder's contractual, non-adversarial provision is enforceable, even if it does not comply with the minimum requirements in favor of homeowners as set forth in the Right to Repair Act.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.
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