Home buyers who waived their right to a jury trial in their purchase contracts must take their dispute with their builder over alleged construction defects to a judicial referee, a California appellate court has held in Trend Homes Inc. v. Superior Court (Azperren).

Home buyers who waived their right to a jury trial in their purchase contracts must take their dispute with their builder over alleged construction defects to a judicial referee, a California appellate court has held in Trend Homes Inc. v. Superior Court (Azperren).

Trend marks the third time California appellate courts have upheld a provision in which home buyers have waived their right to a jury trial in home builders’ contracts; only one appellate court has found such a provision unenforceable.

“Courts are so overburdened that they want to uphold any sort of alternative dispute resolution provision,” said Karleen M. O’Connor, an attorney with Cox Castle Nicholson in San Francisco, which represented the builder, Trend Homes, “and courts will look favorably on the provisions as long as they seem fair. Now that several California appellate courts have upheld contracts that require judicial reference, it appears it’s gaining popularity and will be used more often.”

The dispute in Trend involves 25 homes in a Fresno, Calif., development in which the buyers claim their homes’ roofs, windows and other features are defective. When they brought suit over the alleged defects, the builder sought to enforce the provision in the buyers’ contracts compelling them to submit to judicial reference, a practice in which a case is sent to a referee for a hearing and trial on all issues in dispute.

The referee, who in this case was to be chosen by the parties’ agreement, if possible, then prepares a statement that serves as the court’s decision. Either party can appeal the referee’s decision.

“Judicial reference can be more expensive than litigation because you’re paying for the referee, who is typically a retired judge,” said O’Connor, “but it can also be less, and it’s typically a lot faster because the judge is hearing only your case. It’s like having a private judge dedicated to your case.”

The buyers in Trend argued that the jury-waiver provision was unconscionable and, therefore, not enforceable. California courts determine unconscionability on a case-by-case basis, with the main factor being whether the provision “shocks the conscience” or is “harsh or oppressive.” Trend’s main defense was that the buyers had an opportunity to strike out the provision and didn’t do so.

Specifically, the buyers argued that:

1. Most of the buyers in the dispute were first-time buyers, who didn’t know the effect of the provision requiring judicial reference.

2. The provision was not explained to them, and they were never told it was negotiable.

3. They had no idea they might be required to pay fees for the judicial reference in an undetermined amount; couldn’t afford such fees; and probably wouldn’t pursue the case if they were required to pay.

The court rejected all of the buyers’ arguments. It found that the buyers offered no evidence that they attempted to negotiate the term and were shut down. In fact, both parties were required to initial the provision, which, the court held, “supports the conclusion that the clause was negotiable.”

Rejecting the buyers’ claim that because they were first-time buyers they were less sophisticated, the court held that the buyers “offered no evidence they lacked the education, experience or sophistication necessary to understand the contracts.” It also noted that the buyers didn’t claim they had no opportunity to consult with an attorney before signing the agreement.

Nor was the builder required to specifically sit down with each buyer and explain the impact of the provision. According to the court, the provision “clearly states in bold print above the parties’ initials that ‘each party waives any and all rights to a trial by jury for all civil actions or proceedings involving a dispute arising out of or relating to this agreement.’ Thus, the most important aspect of judicial reference – that it does not involve a jury – was clearly and conspicuously set forth.”

As for the buyers’ argument that they could be stuck with unspecified costs for bringing suit against the builder, the court was unsympathetic. The fact that such a provision doesn’t mention costs doesn’t make it unconscionable, the court held. It also dismissed buyers’ fears that they could be forced to pay the entire cost of the referee, noting that typically the parties agree on how to split costs and, when they can’t, they ask the court to decide. The court often divides fees based on ability to pay and what it considers fair and reasonable.

“If the economic disparity between Trend and [the buyers] is as great as they represent, and [the buyers] do not have the ability to pay the fees, the court will likely require Trend to pay most, if not all, of the fees,” the court stated.

The buyers’ real concern, said the court, was that if they lost, they could be required to pay Trend’s legal fees. Tough luck, said the court, because Trend also faced the same possibility of paying the buyers’ legal fees if it lost.

But the court noted that construction defect cases are “relatively straightforward…Either the roof leaks, or it does not. If it does, the builder is likely to be responsible.” According to the court, “A home buyer who brings a complaint in good faith can feel reasonably confident of prevailing.”

The buyers’ attorney did not immediately return telephone calls for comment.

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