Category Archives: real estate litigation

Fighting Back Against Illegal Arbitration Clauses in Condo Purchase Contracts

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 greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Can The Builder Sue Me To Close? California Law on Specific Performance in Residential New Contraction Contracts

If you have signed a contract to purchase new residential construction in California, such as a spec house or condo unit, but now do not want to actually close on the purchase, you might be wondering if there is a way the developer can force you to complete the purchase.

The answer, generally speaking, is no, the developer cannot force you to close. When a contract is breached (e.g., you don’t show up at closing), there are two types of remedies for the aggrieved party: damages (a court award of money) and specific performance (a court order compelling the breaching party to abide by the contract.)

Here is the rule, excerpted from a California State Court of Appeals case, on when specific performance is allowed:

Specific performance of a contract may be decreed whenever: (1) its terms are sufficiently definite; (2) consideration is adequate; (3) there is substantial similarity of the requested performance to the contractual terms; (4) there is mutuality of remedies; and (5) plaintiff’s legal remedy is inadequate.

Blackburn v. Charnley, 117 Cal. App. 4th 758, 766 (Cal. Ct. App. 2004).

In most cases requirements No. 4 and No. 5 cannot be met, making specific performance unavailable. Requirement No. 4 (“mutuality of remedies”) means the purchase agreement needs to give the buyer an equal remedy of specific performance against the seller in order for the seller to have such a right against the buyer. I have never seen a purchase contract that meets this requirement.

Requirement No. 5 (“plaintiff’s legal remedy is inadequate”) is more commonly phrased “no adequate remedy at law.” This means there has to be some reason why an award of money does not adequately compensate the seller for losses from the real estate buyer’s breach before the seller can compel you through specific performance to close.

The five requirements above are not either/or requirements. All five requirements must be met before a builder might be able to force someone who has contracted to purchase a property to close. While it is possible to think up a hypothetical where all five requirements will be met, in the real world such circumstances will rarely occur. And even if all the requirements are met, the buyer still has a number of other defenses. Remember, the rule is that if the five requirements are met, only then the judge may order specific performance. If the judge doesn’t feel doing so is fair, he or she may still decline decreeing specific performance.

Developers, whose lawyers have already explained the law to them, will often threaten a specific performance when a buyer refuses to close on a residential real estate purchase contract, hoping that buyers will be ignorant of this law.

Defaulting buyers should not be scared of this talk. California’s residential real estate law was specifically designed to shift a large part of the risk of a real estate downturn onto developers and off of home buyers and small scale real estate investors. If you have put down a deposit on a real estate deal, but now don’t want to close because of the drop in the real estate market or your own changed circumstances, it is a good idea to talk to a real estate lawyer to figure out what your options are. It is especially important that when you decide not to follow through on the purchase contract, you consult with a lawyer to take the proper steps to notify the developer and mitigate the developers damages.

Just don’t trust the self-serving statements made by your developer.

My fellow real estate law blogger Jared Beck has his own post on the law in Florida governing specific performance in real estate contracts.

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This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is an experienced business litigator licensed to practice law in California and Florida, and is a graduate of Harvard Law School. Mr. Weston’s frequently represents 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 greg@thewestonfirm.com.

TV coverage of my condo deposit class action lawsuit in Miami

Jim Sutta of CBS 4 Miami broke the story of the class action I filed on behalf of large numbers of Miami condo investors who are owed refunds on their purchase deposits. Watch our client and my co-counsel on the case Jared Beck and Elizabeth Lee Beck being interviewed about the case.