Archives: November 2006
Thu Nov 30, 2006
Real Estate Transacations & Emotional Distress
Residential real estate sales agreements routinely include an arbitration clause informing buyer and seller of their option to arbitrate any dispute in the sale of a house. In Gravillis v. Coldwell Banker Residential Brokerage Co., 143 Cal.App.4th 761 (2006) the buyers retained their brokers, purchased a house from the seller, and signed purchase and sale documents which included an arbitration clause. The house passed inspection and the buyers hired a contractor to cosmetically remodel, but on returning from a cruise they found a “pile of lumber” (according to plaintiff) instead of a house. The contractor informed them extensive termite infestation had caused major damage to the house.
The buyers sued their brokers, who had also signed the arbitration clause, for emotional distress (and other causes of action). The brokers alleged CCP 1298.7 eliminated litigation and the dispute warranted arbitration. In real estate contracts, CCP 1298.7 excludes from arbitration “any right of action for bodily injury or wrongful death, or any right of action to which CCP 337.1 or 337.15 is applicable.” (These latter two sections are applicable to construction defect cases.). The brokers argued that emotional distress in the conveyance of real property is not “bodily injury.”
The plaintiff alleged emotional distress from observing the demolished house. Her counsel argued this cause of action constituted “bodily injury” within the meaning of CCP 1298.7 and her lawsuit not subject to arbitration.
The court discussed the term “bodily injury” at great length and held that the interpretation of this term included only physical injury, not mental anguish. The only “injury” suffered by the plaintiff, according to the court, was observing the damaged house. Without evidence of physical injury, and unquestionably the evidence as pled did not involve injury from a construction defect, the court enforced the arbitration clause.
Although the facts are unusual, California courts have been reluctant to enforce non-physical damage in the sale or exchange of residential real estate. But the Gravillis court did not address another issue: FAA preemption of CCP 1298.7. Under well established U.S. Supreme Court rule, states must enforce arbitration clauses in interstate contractual transactions. CCP 1298.7 specifically precludes arbitration of injuries incidental to the conveyance of real property, and, if the buyer and broker engage in an “ interstate commercial” transaction, the court may refuse to enforce the limitations of CCP 1298.7; Hedges v. Carrigan, 117 Cal.App.4th 578 (2004). Neither party raised this issue and arguably the “interstate” element required under the FAA was absent.
The court also noted that the plaintiff had filed suit against other parties, i.e., the sellers, the house inspector and seller’s broker. The record does not reflect whether any of the parties other than the sellers had signed contracts with an arbitration clause. If some parties had not signed contractual arbitration clauses, the court must decide what course of action to take in a dispute when confronted with parties in litigation and parties in arbitration; Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005); CCP 1281.2 (c).
Sun Nov 26, 2006
Mediation & Arbitration of Construction Defect Cases
Mediating Construction Disputes
Disputes between developers, architects, contractors, and subcontractors are routinely resolved in mediation among all parties under the rubric of “construction defect.” The California Legislature has attempted to assure protection to subcontractors against abuses from out-of-state contractors by enacting CCP 410.42. This statute provides that a contract between a contractor and a California based subcontractor for a work of public or private improvement is void and unenforceable if the terms require litigation, arbitration or disputes to be “otherwise determined” outside the state;” CCP 410.42 (a). The statute also prohibits a contractual term precluding a party from commencing a proceeding or obtaining a judgment in a California court; CCP 410.42 (b). Legally translated, the statute is a forum selection clause.
In Templeton Development Corp. v. Sup. Ct., 2006 WL 3034960, a condition precedent in the contract designated Nevada as the forum state to litigate, arbitrate or resolve disputes as “otherwise determined.” The contractor insisted on resolution in Nevada.
The California court held that the phrase “[disputes] otherwise determined” in CCP 410.42 (a) was unambiguous and clearly includes mediation. Accordingly, the court confirmed the sense of the statute and refused to enforce the clause requiring dispute resolution in Nevada..
The court did not refuse to enforce other terms of the contract. The court severed the unenforceable term on grounds the entire contract was not tainted with illegality and the condition precedent was only collateral to the purpose of the construction project. This result is sound as it allows dispute resolution to proceed without voiding the entire contract.
Mediation and Arbitration Practice:
1. Forum non conveniens: CCP 410.42 is a statutory forum selection clause and mandamus is the appropriate procedural mechanism to dismiss on grounds of an inconvenient forum; Valentino & Smith v. Sup. Ct., 17 Cal.3d 491 (1976.
2. Third parties: in construction defect cases, multiple parties are involved. Some parties have executed contracts with an arbitration clause; some have not. The potential for inconsistent decisions between court and arbitrator is obvious. For resolution of this issue, see Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2006).
3. The Respondent in Templeton argued the FAA preempted CCP 410.42 and the court should have enforced the arbitration clause as written. Presumably this contract involved interstate commerce and subject to the FAA. The Templeton court did not address this issue.
4. Severance of arbitration clauses-as distinct from severance in litigation: See, Armendariz
v. Foundation Health Psychcare Services, 24 Cal.4th 83 (2000). As a general rule, the Superior Court will resolve forum selection issues if one party files a petition to compel arbitration and the opposition objects on grounds of an inconvenient forum. But if the parties submit to arbitration without judicial intervention, the resolution of forum selection becomes the responsibility of the arbitrator although mandamus, as noted above, is an option for the party opposing arbitration.