by Elias E. Guzman

In Trend Homes v. Superior Court of Fresno County (2005) 131 Cal.App.4th 950, the court of appeal recently held a judicial reference clause in a sale and purchase contract for residential real property was not unconscionable.

Petitioner Trend Homes, Inc. constructed single family homes in Fresno, California. Real parties in interest owned six homes within the development. The sale and purchase agreement between Trend and real parties contained a “judicial reference” provision, which required any civil action involving a dispute arising out of the agreement to be heard by a single judicial referee pursuant to Code of Civil Procedure sections 638 and 645.1. While the provision required each party to use its best efforts to reach an agreement in selecting a referee, if unable to do so, either party could appoint a referee under sections 638 and 640. The parties agreed the referee would decide all issues of fact and law and issue a statement of decision.

Real parties, and 39 other individuals, sued Trend to recover damages suffered due to alleged construction defects within their homes. Trend filed a motion to compel judicial reference of real parties’ claims. Real parties argued the motion should not be granted because the provision was unconscionable and could result in a multiplicity of actions. It was estimated that a five day proceeding could easily result in a total of $20,000 or more in fees for an experienced mediator. The trial court denied Trend’s motion and concluded the sales agreements were adhesion contracts and the judicial reference provision was unconscionable.

At law, the term unconscionable has both a procedural and substantive element. Procedural unconscionability refers to the parties’ relative bargaining strength and the extent to which a provision is hidden or unexpected (i.e., adhesion contract, ‘adhere or reject it’). The substantive element requires terms that shock the conscience or may be described as harsh or oppressive. Both elements must be present, but the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to conclude the provision in unconscionable. The party that prepared and submitted the contract with the harsh terms has the burden of showing that the other party had notice of the terms. Also, a party asserting unconscionability as a defense has the burden of establishing that condition.

In Trend Homes, the court of appeal disagreed with the trial court’s ruling on Trend’s motion. First, it determined that the sales and purchase contract was not procedurally unconscionable, or an adhesion contract. Real parties did not offer any evidence they attempted to negotiate the provision and were rebuffed, or that they lacked education, experience, or sophistication necessary to understand the contract. Further, real parties initialed the judicial reference provision, which evidenced the agreement was negotiated. Accordingly, the judicial reference provision was held to not be procedurally unconscionable and only a high level of substantive unconscionability would make the provision unconscionable.

The court of appeal then determined that the contract was not substantively unconscionable. Real parties argued that because the judicial reference provision did not indicate who was responsible for paying the referee fees rendered it both procedurally and substantively unconscionable. Such an argument was directly in contrast to relevant Supreme Court opinions regarding payment of arbitration fees, which held that an agreement’s silence on the issue of arbitration costs does not render the agreement unenforceable. cf. Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1081-1085; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113. Further, section 645.4, subdivision (a), allows the court to order payment of referee fees “in any manner determined by the court to be fair and reasonable, including an apportionment of the fees among the parties.” While there is case law that the prevailing party could recover referee’s fees as costs, the court held there was no one-sidedness to the provision (since Trend Homes was also exposed to such a possibility). Real parties also failed to produce evidence that the referee fees would exceed what it would cost to litigate in court and concluded real parties’ waiver of their right to a jury trial did not render the agreement substantively unconscionable.

Accordingly, the court held that real parties failed to establish their burden of proving the judicial reference provision was unconscionable and such provision was thus enforceable. The trial court’s ruling was reversed.

Elias E. Guzman is an associate with Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, environmental and planning issues contact Abbott & Kindermann at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.