Enforceability Status
The enforceability of mandatory arbitration clauses in California new construction contracts is uncertain. California has a well-developed unconscionability doctrine that courts have applied to invalidate arbitration provisions in some consumer contracts. However, the Federal Arbitration Act preempts state laws that single out arbitration for disfavored treatment, limiting the scope of California's consumer protections.
Legal Analysis
The Federal Arbitration Act (FAA), 9 U.S.C. sections 1-16, preempts state laws that discriminate against arbitration agreements. The U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion (2011) significantly limited California's ability to invalidate class action waivers in arbitration agreements under the Discover Bank rule. This preemption extends to residential construction contracts involving interstate commerce.
California's approach to arbitration enforcement is governed by the California Arbitration Act (Cal. Code Civ. Proc. sections 1280-1294.2) and a substantial body of case law on unconscionability. Under Armendariz v. Foundation Health Psychcare Services, Inc. (2000), the California Supreme Court established a framework for evaluating arbitration agreements in adhesion contracts, requiring minimum standards of fairness including mutuality of remedies and limits on cost-shifting to the weaker party.
In the residential construction context, California's Right to Repair Act (Cal. Civ. Code sections 895-945.5, also known as SB 800) establishes a statutory framework for construction defect claims in new residential construction. The statute includes its own pre-litigation procedures but does not prohibit contractual arbitration. Courts have generally allowed arbitration clauses to coexist with SB 800 requirements, though specific provisions may be subject to unconscionability review.
California courts continue to scrutinize arbitration provisions for both procedural unconscionability (arising from unequal bargaining power and the adhesive nature of builder contracts) and substantive unconscionability (arising from one-sided terms). Provisions that limit the buyer's ability to recover statutory remedies, impose excessive costs, or restrict discovery may be found unconscionable. However, under FAA preemption, courts cannot invalidate arbitration clauses solely on grounds that apply uniquely to arbitration.
Relevant California Law
Establishes a national policy favoring arbitration and preempts state laws that single out arbitration agreements for disfavored treatment.
Governs the enforcement of arbitration agreements in California, subject to generally applicable contract defenses including unconscionability.
Establishes standards and procedures for residential construction defect claims, including pre-litigation notice and cure requirements.
Codifies the unconscionability defense, allowing courts to refuse to enforce unconscionable contract terms or to limit their application.
Related Cases
The California Supreme Court established minimum requirements for enforceable arbitration agreements in adhesion contracts, including mutuality of obligations and limitations on fee-shifting.
The court addressed the intersection of FAA preemption and California unconscionability doctrine, holding that generally applicable unconscionability analysis survives FAA preemption.
Builders in California Using This Clause
What California Buyers Should Know
- Evaluate the Clause for Unconscionability California courts apply a sliding-scale unconscionability analysis. Review whether the arbitration clause is presented on a take-it-or-leave-it basis (procedural unconscionability) and whether its terms are unreasonably one-sided (substantive unconscionability).
- Understand SB 800 Pre-Litigation Requirements The Right to Repair Act establishes specific notice and cure procedures for construction defect claims. These requirements may need to be satisfied before or in conjunction with arbitration proceedings.
- Review Limitations on Remedies and Discovery Some arbitration clauses restrict the types of damages recoverable or limit the scope of discovery. Under California law, provisions that effectively prevent a party from vindicating statutory rights may be subject to challenge.
- Consider Consulting a Consumer Protection Attorney Given the complexity of the interaction between the FAA, California unconscionability doctrine, and SB 800, buyers with concerns about an arbitration clause may benefit from an attorney's review before signing.