Legal Update

NEW HOME PURCHASE CONTRACTS OF “ADHESION” ARE NOT ENFORCEABLE

  • August 14th, 2002
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The California Court of Appeal in San Diego ruled on August 2, 2002 that a residential construction company could not enforce a purchase contract which required home buyers to waive their right to a trial of construction defect claims, or waive their right to a jury, or waive their claims for punitive damages.  Pardee Construction Co. v. Superior Court 100 Cal.App.4th 1081 (2002)

FACTS: Plaintiffs were purchasers of new single family residences in San Diego. When purchasing their new homes from the builder, each buyer in the development signed a purchase agreement which contained a paragraph stating that all claims arising out of the purchase would be decided by a single referee (a retired superior court judge), that the right to a jury trial was waived and that all claims for punitive damages were waived.

After purchase their homes, buyers discovered construction defects in their homes and lots, and filed a lawsuit in the superior court against the builder. The builder filed a motion to dismiss the lawsuit and to enforce the purchase agreement which required the dispute to be decided by a referee instead of in court. The buyers opposed the motion contending this portion of the purchase agreement was an unenforceable contract of adhesion.

ISSUES: The issue before the Court of Appeal was whether the builder could enforce the waiver provisions of the purchase agreement or whether the buyers could avoid these terms because it was a contract of adhesion.

DECISION: The Court of Appeal ruled the purchase agreement was a contract of adhesion, unconscionable and against public policy. In its decision the Court of Appeal reviewed the factors to be considered in deciding whether an agreement is an unenforceable contract of adhesion and found them present in this real estate transaction.

A contract of adhesion is one where one party does not have significant bargaining power and has no choice but to either sign the agreement as presented, or not make the purchase. In this case the Court found that the  buyers did not have significant economic bargaining power against the developer of more that 800 homes, and that the purchase agreement was a take it or leave it proposition. The Court also observed that the purchase of a home, was unlike the purchase of sporting equipment, in that the home was a unique purchase which could not reasonably be found elsewhere. On these facts, the Court ruled the purchase agreement was a contract of adhesion.

Where there is a contract of adhesion, the Court will not enforce a provision of the contract which does not fall within the reasonable expectation of the weaker party. The Court found that the waiver paragraph of this purchase agreement was an unenforceable surprise because it was buried in the form contract, was physically difficult to read as printed in dense, single-spaced capital letters, and did not explain the essence of the rights being waived by the buyer. An additional significant element of surprise was the fact that the agreement contained no mention of the referel fees ($200-$300/hr.), which, as these fees accrued over the duration of the dispute, would constitute a heavy burden for the buyers of entry-level homes.

In addition the Court found the waiver paragraph was substantively unconscionable.   An unconscionable provision is one which is so one-sided as to shock the conscience or imposes harsh or oppressive terms. The buyers waiver of their right to a jury trial and their right to assert punitive damage claims were of primary benefit to the builder and were so one-sided as to be substantively unconscionable.

Finally, the Court stated that its ruling was consistent with the legislative statement of public policy against compelling homeowners to submit their construction defect claims to alternative dispute resolution (C.C.P. §1298.7)

ANALYSIS: Fine print boilerplate clauses are frequently found in real estate transaction documents, which many times involve parties with unequal bargaining strength. These factors, when taken together with the unique nature of a home purchase, provide the ingredients necessary for a court to rule that a surprising or oppressive term of the agreement is unenforceable. Drafters of unfair clauses beware. While the result in every case depends on its particular facts, homebuyers may get relief from onerous contract requirements.