Quick Summary: In this post, Greg shows how arbitration provisions in condo purchase agreements violate California law and cannot be enforced.
In my cases representing real estate investors who want their new construction condo and house deposits back, I often encounter arbitration clauses. I have yet to see one that I think would hold up in court under California law.
One such reason is that the arbitration clauses encompasses not only the buyer’s right to a jury trial, but the buyer’s right to a specific form of statutory relief, such as attorneys’ fees or punitive damages. However, in pre-printed form contracts, both state and federal courts usually rule that arbitration agreements which prevent the plaintiffs from seeking a certain form of statutory relief are unconscionable, therefore unenforceable.
In a 1985 case over an arbitration agreement between a car manufacturer and a car dealership, the U.S. Supreme Court ruled “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). This means that if you are entitled to attorneys’ fees under a specific statute in a jury trial, you are equally entitled to attorneys’ fees under the same statute in an alternative forum.
Consequently, the California Supreme Court ruled that an adhesive arbitration agreement abridging an employee’s right to acceptable discovery, judicial review, cost limitations, and punitive damages in a wrongful termination action against her employer is “substantively unconscionable” and thus unenforceable. In the key California Supreme Court case of Armendariz v. Found. Health Psychcare Servs., ruled that California common law “disallows forms of arbitration that in fact compel claimants to forfeit certain substantive statutory rights.” Armendariz v. Found. Health Psychcare Servs., 24 Cal. 4th 83, 99-100 (Cal. 2000). The same rule was cited in three recent federal cases: Gelow v. Cent. Pac. Mortg. Corp. Circuit City Stores v. Adams. See 279 F.3d 889, 893 (9th Cir. Cal. 2002); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. Cal. 2003); Gelow v. Cent. Pac. Mortg. Corp., 560 F. Supp. 2d 972 (E.D. Cal. 2008).
Besides these common law rulings against arbitration, California’s statutory law also limits the use of arbitration. First, California Civil Code § 1668 states that “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” In other words, a contract cannot give a developer carte blanche to break the law without facing the consequences.
Second, California Civil Code § 3513 says that “Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” Attorneys’ fees, punitive damages, and other statutory remedies often have a public purpose, such as creating a disincentive for committing future wrongdoing. Consequently, the Ninth Circuit Court refused to enforce an arbitration agreement between a petroleum franchiser and a petroleum franchisee that failed to allow for attorneys’ fees and punitive damages, which were available under the Petroleum Marketing Practices Act. In the 1995 case of Graham Oil v. Arco Products Co., the court concluded that these remedies were “important to the effectuation of the PMPA’s policies.” Graham Oil v. ARCO Products Co. (9th Cir. 1995) 43 F.3d 1244.
Finally, the Armendariz court ruled that “[a]rbitration agreements that encompass unwaivable statutory rights must be subject to particular scrutiny.” Armendariz 24 Cal. 4th. This means that if your arbitration agreement limits your right to a specific form of statutory relief, it might not stand up to scrutiny in a court of law.
It is well known that arbitration, while a good alternative to litigation in many contexts, it drastically unfair when the participants are a regular person on one hand, and a giant corporation on the other. If you have a condo deposit and want a refund because you are unable or unwilling to close, do NOT agree to take the case to arbitration. With the assistance of an attorney experienced in condo contract litigation, take the case to court. At that point you can oppose the arbitration clause before a judge, who will hopefully rule in your favor on this issue.
Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or firstname.lastname@example.org. Comments about the blog via e-mail are welcomed.