Stonegate Homeowners Association v. Staben

(2006) 144 Cal.App.4th 740

Robertson & Vick, Jonathan S. Vick and Robert Nation for Plaintiff and Appellant.

Horvitz & Levy, Curt Cutting and Daniel J. Gonzalez; Bremer Whyte Brown & O’Meara, Matthew J. Eschenburg, Keith G. Bremer and Raymond Meyer, Jr., for Movant and Appellant and for Cross-complainant and Appellant.

Sabaitis • O’Callaghan, Frank T. Sabaitis and Louis R. Chao for Defendant and Respondent and for Cross-defendant and Respondent.

DOI TODD, J.

Summary by Mary M. Howell, Esq.:

Association, in its construction defects case against subcontractor who located, constructed and sealed walls within association, was entitled to introduce evidence of the subcontractor’s negligence in the form of expert testimony.  The agreement between subcontractor and contractor called for performance of the work in a workmanlike fashion, and expert testimony would have established what “workmanlike” meant.

**End Summary**

In this construction defect case, the general contractor hired a subcontractor to waterproof retaining walls and install back drains in a large residential development. After discovering seepage and drainage problems, the homeowners association sued the general contractor and the subcontractor for negligence. During a jury trial, the subcontractor’s motion for nonsuit was granted and judgment was entered in its favor. On appeal, the homeowners association and the general contractor contend that the trial court erroneously precluded expert testimony on the subcontractor’s standard of care and erred in granting nonsuit. We agree and reverse the judgment in favor of the subcontractor. We also reverse the summary judgment granted in favor of the subcontractor on the general contractor’s cross-complaint for indemnity because we find there are triable issues of material fact as to whether the subcontractor was negligent. In light of our rulings, the costs awarded to the subcontractor must also be set aside.

FACTUAL AND PROCEDURAL BACKGROUND

This action arises out of the construction of a 238-home residential development in the West Hills section of Los Angeles (the Stonegate project). The developer entered into a written contract with appellant R&R Palacios Construction, Inc. (Palacios) for construction of retaining walls. Palacios, by oral agreement, subcontracted the waterproofing and drainage work on the retaining walls to respondent T.A. Staben (Staben), a company with which Palacios had previously worked.

At trial, Ron Palacios testified that he told Tom Staben to “waterproof [the walls] with Thoroseal,” install four-inch subsurface drain lines, backfill the walls with sand and lay “v-ditches.” Mr. Palacios testified that he did not know how to apply Thoroseal and that he told Mr. Staben to apply it according to the manufacturer’s specifications. He later testified that he never had a conversation with Mr. Staben about how the Thoroseal should be applied. He also testified that he did not tell Mr. Staben how to install the drains. Mr. Palacios further testified: “I don’t tell him [Mr. Staben] how to do his job,” explaining that Mr. Staben was a “professional.”

Mr. Staben testified that he was not given any specifications as to how to apply the Thoroseal to the walls at the Stonegate project and that he was only told to apply it “the same way” he had at the “Moorpark project,” which involved the same developer. But Mr. Palacios testified he had not worked on the Moorpark project and that he was unaware of how Staben did the work on the Moorpark project.

In late 1989, Staben completed the waterproofing and drainage installation on the walls Palacios built at the Stonegate project. Palacios paid Staben for its work and did not have any problems with the work. After the work was completed, homeowners in the development began to notice wet soil or boggy conditions in their yards together with dampness on the downhill side of the retaining walls and a white powdery substance on the walls called “efflorescence.” In 1999, appellant TheStonegate Homeowners Association (Stonegate) filed suit against the developer and others for negligence, strict liability and implied warranty, alleging that the retaining walls had been defectively waterproofed and drained. Stonegate later substituted Palacios and Staben in place of fictitiously-named defendants. The trial court dismissed the strict liability and warranty claims, leaving only the negligence cause of action to be tried. Palacios cross-complained against Staben for indemnity, contribution and declaratory relief.

Stonegate eventually settled or disposed of its claims against all defendants exceptStaben. Palacios entered into a sliding scale or “Mary Carter” settlement agreement with Stonegate, whereby Palacios guaranteed a global payment of $3.3 million that would be reduced by the amount recovered by Stonegate from nonsettling parties through settlement or judgment. Prior to trial, Stonegate dismissed Palacios as a defendant, and the court severed Palacios’s indemnity cross-complaint. Trial proceeded only against Staben on Stonegate’s claim for negligence.

During trial, Stonegate attempted to present expert witness testimony on the standard of care in applying Thoroseal and in installing a subsurface back drain and that Staben’s work fell below those standards. The trial court precluded the testimony, ruling that the relevant issue was not the standard of care, but the oral contract between Palacios and Staben and what Staben was told to do under that agreement. The court deemed Palacios to be the “gatekeeper” and stated that Palacios should be responsible for any defects.

At the close of Stonegate’s evidence, Staben orally moved for nonsuit on the grounds that “there is no conflict in the evidence that Mr. Staben’s duty was to do what Mr. Palacios asked him to do pursuant to what he had done for the same . . . developer in the project called Moorpark” and that Staben did not owe a duty toStonegate. The trial court granted the motion for nonsuit, stating: “The court’s basis for the nonsuit is that there was a lack of any testimony by the plaintiff as to the specific duties the defendant had regarding his oral contract with Palacios.” The court further stated: “The bottom line of the situation is that the plaintiff just did not present any evidence of facts with regard to the contract between Palacios and Staben to raise any duty or obligation for Staben to perform other than he did.” The court then entered judgment in favor of Staben. Both Stonegate and Palacios filed motions for a new trial, which the court denied. Stonegate and Palacios have separately appealed from the judgment in favor of Staben. Stonegate also appeals from the trial court’s award of costs to Staben.

Following entry of judgment in its favor, Staben moved for summary judgment on Palacios’s severed cross-complaint for indemnity, arguing that because Staben fulfilled its obligations under the oral agreement with Palacios, the requisite predicate tort to maintain an action for equitable indemnity was absent. The trial court agreed, granting the motion and entering summary judgment in favor of Staben. The court then awarded costs to Staben in the amount of $78,937.52—the same amount the court had awarded against Stonegate. Palacios appeals from both the summary judgment on its cross-complaint and the award of costs. Stonegate’s and Palacios’s appeals have been consolidated.

DISCUSSION

I. THE NONSUIT MOTION

Stonegate and Palacios contend the trial court erred in granting the nonsuit because expert testimony on Staben’s standard of care should have been admitted.^[1]

A. Standard of Review

“A motion for nonsuit allows a defendant to test the sufficiency of the plaintiff’s evidence before presenting his or her case. Because a successful nonsuit motion precludes submission of plaintiff’s case to the jury, courts grant motions for nonsuit only under very limited circumstances.” (Carson v. Facilities Development Co.(1984) 36 Cal.3d 830, 838.) “A defendant is entitled to a nonsuit if the trial court determines that, as a matter of law, the evidence presented by plaintiff is insufficient to permit a jury to find in his favor. [Citation.] `In determining whether plaintiff’s evidence is sufficient, the court may not weigh the evidence or consider the credibility of witnesses. Instead, the evidence most favorable to plaintiff must be accepted as true and conflicting evidence must be disregarded. The court must give “to the plaintiff[‘s] evidence all the value to which it is legally entitled, . . . indulging every legitimate inference which may be drawn from the evidence in plaintiff[‘s] favor.”‘ [Citation.] A mere `scintilla of evidence’ does not create a conflict for the jury’s resolution; `there must be substantial evidence to create the necessary conflict.’ [Citation.]” (Nally v. Grace Community Church (1988) 47 Cal.3d 278, 291.)

In reviewing a grant of nonsuit, we are “guided by the same rule requiring evaluation of the evidence in the light most favorable to the plaintiff.” (Carson v. Facilities Development Co., supra, 36 Cal.3d at p. 839; Pinero v. Specialty Restaurants Corp.(2005) 130 Cal.App.4th 635, 639.) “We will not sustain the judgment `”unless interpreting the evidence most favorably to plaintiff’s case and most strongly against the defendant and resolving all presumptions, inferences and doubts in favor of the plaintiff a judgment for the defendant is required as a matter of law.”‘ [Citations.]” (Nally v. Grace Community Church, supra, 47 Cal.3d at p. 291.) “Although a judgment of nonsuit must not be reversed if plaintiff’s proof raises nothing more than speculation, suspicion, or conjecture, reversal is warranted if there is `some substance to plaintiff’s evidence upon which reasonable minds could differ . . . .'” (Carson v. Facilities Development Co., supra, at p. 839.) As below, we do not weigh the evidence or consider the credibility of witnesses. (Alpert v. Villa Romano Homeowners Assn. (2000) 81 Cal.App.4th 1320, 1327.) “Where there is no evidence to review because the trial court excluded it, we review the trial court’s evidentiary rulings to determine if the evidence was properly excluded. If relevant and material evidence was excluded which would have allowed the plaintiff to overcome a nonsuit, the judgment must be reversed. [Citation.]” (Castaneda v. Bornstein (1995) 36 Cal.App.4th 1818, 1825, disapproved on another point in Bonds v. Roy (1999) 20 Cal.4th 140, 149, fn. 4.)

B. The Trial Court Erred in Precluding Expert Testimony on Staben’s Duty of Care

1. Trial Court Proceedings

It was Stonegate’s position at trial that Staben was responsible for two major defects in construction of the retaining walls: Inadequate waterproofing and improper placement of back drains.

a. Inadequate Waterproofing

Stonegate argued that inadequate waterproofing with Thoroseal permitted hillside drainage to seep into and through the concrete blocks of the walls and caused the formation of sulfate efflorescence that threatened the structural integrity of the walls. Tom Staben acknowledged that the goal in applying Thoroseal was “total coverage,” and that “the more thorough the coverage, the better water deterring effect it would have.” Stonegate’s waterproofing expert, Warren Kelly Roberts, testified that when properly applied, Thoroseal “develops a hard shell that’s impervious to water.” Roberts testified that during his excavation and physical inspection of the retaining walls at several places, he observed areas where the Thoroseal application was too thin and other areas where no Thoroseal had been applied. Of the 11 sites he observed, Roberts found the coverage faulty or inadequate in “all but one,” and the coverage was not effective in preventing water from passing through the Thoroseal barrier.

Roberts tried to explain the standard of care in applying Thoroseal to the walls, and that Staben’s work fell below that standard. But the trial court ruled that standard of care in the industry was not relevant based on its conclusion that the terms of the oral contract between Palacios and Staben established Staben’s responsibilities. The court sustained objections to Roberts’s testimony that would have explained how a contractor would ordinarily go about preparing and applying Thoroseal.

The day following Roberts’s testimony, Stonegate filed a motion for reconsideration, which included an offer of proof that Roberts would testify that Staben failed to meet the manufacturer’s specifications for applying Thoroseal that appeared on every bag of Thoroseal when Staben did his work. Among these specifications was the requirement for application of two coats to assure complete coverage. The court denied the motion, stating that it had no recollection that Ron Palacios had told Tom Staben to apply the Thoroseal according to the manufacturer’s instructions.

b. Improper Placement of Drains

Stonegate sought to establish that Staben installed the subsurface back drains too high above the foundation, which rendered the drains largely useless because water would accumulate behind the walls and flow through “weep” holes or “open head” joints before rising to the level of the back drains. This created wet or boggy soil conditions in the owners’ yards. Mr. Staben admitted that it was his “personal feeling” that the drains should have been placed right on top of the footing. He testified that he believed a city building inspector told him to install the drains at an angle, which he did, though he thought such placement was “incorrect.” Stonegate’s drainage expert, Mohammad Joolezadah, testified that during his inspection of the site he observed drains placed at various heights above the footing, with one drain as high as 22 inches above the footing.

Joolezadah was prepared to testify that the standard of care was to place the drains horizontally along the footing with a two-inch bed of gravel below and that Staben’s placement of the subsurface back drains was too high and fell below the standard of care. But the trial court precluded this testimony, refusing to allow Stonegate’s experts to “go beyond” the oral contract to establish any standard of care on Staben’s part.

2. Subcontractor’s Standard of Care

Appellants contend that the court erred in narrowing its focus on the words of the oral agreement to the exclusion of evidence on the standard of care. We agree. “The subcontractor has a duty to perform work in a good and workmanlike manner. A subcontractor who is careless and negligent in the performance of the work is liable to the general contractor, to the owner, and to third persons for any damages proximately caused. [¶] When the work is performed in a defective manner, the measure of liability is the same as the damages that the owner can recover from the contractor. . . . [¶] The owner ordinarily has a cause of action against the subcontractor arising from the subcontractor’s defective work, even though there is no privity of contract between the owner and the subcontractor. The owner usually has a cause of action in negligence as a party within the area of foreseeable risk.” (11 Miller & Starr, Cal. Real Estate (3d ed. 2001) § 29:18, pp. 29—115 to 29—116, fns. omitted; see also La Jolla Village Homeowners’ Assn. v. Superior Court (1989) 212 Cal.App.3d 1131, 1145, disapproved on another point in Jimenez v. Superior Court (2002) 29 Cal.4th 473, 484 [“imposition of liability is still available against the subcontractor based upon the conventional theories of breach of contract, warranty or negligence”]; 1 C.E.B., Cal. Construction Contracts and Disputes (Cont.Ed.Bar 2d ed. 2005) § 6.8, p. 591 [“subcontractors . . . are held to a standard of due care . . . for their performance”].)

In Stewart v. Cox (1961) 55 Cal.2d 857, homeowners pursued a negligence action against a subcontractor hired to install concrete in their swimming pool. The court stated that the “question is whether a subcontractor such as Cox may be liable to the owner, with whom he was not in privity of contract, for damage occurring after his work had been accepted by the contractor and the owner.” (Id. at pp. 861—862.) The court concluded that the subcontractor “should not be exempted from liability if negligence on his part was the proximate cause of the damage to plaintiffs.” (Id. at p. 863.) “`Accompanying every contract is a common-law duty to perform with care, skill, reasonable expedience, and faithfulness the thing agreed to be done, and a negligent failure to observe any of these conditions is a tort as well as a breach of the contract.'” (Kuitems v. Covell (1951) 104 Cal.App.2d 482, 485 [finding that contract to install roofing material contained an implied warranty that such material would be fit for its intended use].)

Standard of care and its breach in the construction defect context must usually be established through expert testimony, though lay testimony may suffice where construction defects “are of such common knowledge that men of ordinary education could easily recognize them.” (Raven’s Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, 797; Miller v. Los Angeles County Flood Control Dist. (1973) 8 Cal.3d 689, 702—703.)

We conclude that the trial court erred in precluding Stonegate from presenting expert testimony on Staben’s standard of care. Staben agreed to perform the waterproofing and drainage work on the retaining walls built by Palacios and had the duty to perform those tasks in a good and workmanlike manner. As such, the testimony of Stonegate’s experts was relevant to the issue of whether Staben met the standard of care expected within the industry. The trial court’s focus on the terms of the oral agreement to the exclusion of the standard of care evidence puts contractors like Palacios in an untenable position. The evidence showed that Palacios did not know how to do portions of the work subcontracted to Staben and therefore did not tell Staben how to perform its work. But under the trial court’s theory, Staben would only be liable for defects in its work if Palacios had given it detailed instructions on how to do the work. In other words, according to the court, the more the contractor must rely on the subcontractor, the less the subcontractor will be held accountable. This is not sound public policy and is not the law in California. Indeed, that Palacios did not tellStaben how to waterproof the walls or how to install the back drains underscores why Staben was under a duty to adhere to the standard of care in the industry. Without adherence to the standard of care, Staben could not have achieved the desired objective of its work.

Because evidence that Staben’s work fell below the standard of care in the construction industry could have enabled Stonegate to overcome the nonsuit on its negligence claim, the judgment in favor of Staben must be reversed. (Castaneda v. Bornstein, supra, 36 Cal.App.4th at p. 1825.)

II. SUMMARY JUDGMENT MOTION

Palacios also challenges the trial court’s grant of summary judgment in favor of Staben on Palacios’s cross-complaint for indemnity.

A. Standard of Review

“The motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) “To secure summary judgment, a moving defendant may prove an affirmative defense, disprove at least one essential element of the plaintiff’s cause of action [citations] or show that an element of the cause of action cannot be established [citation].” (Sanchez v. Swinerton & Walberg Co. (1996) 47 Cal.App.4th 1461, 1465; Code Civ. Proc., § 437c, subd. (p)(2).) Once the defendant or cross-defendant has made this showing, “the burden shifts to the plaintiff or cross-complainant to show that a triable issue of one or more material facts exists as to that cause of action . . . .” (Code Civ. Proc., § 437c, subd. (p)(2).)

We independently review the trial court’s decision to grant summary judgment, using the same three-step analysis as the trial court: (1) Identifying the issues framed by the pleadings; (2) determining whether the defendant negated the plaintiff’s claims; and (3) deciding whether the plaintiff demonstrated the existence of a triable, material factual issue. (Silva v. Lucky Stores, Inc. (1998) 65 Cal.App.4th 256, 261.)

B. The Cross-Complaint and Motion for Summary Judgment

Palacios filed a cross-complaint against Staben asserting causes of action for indemnity, contribution and declaratory relief. Palacios alleged that if it were found liable to Stonegate or settled with Stonegate, it was entitled to indemnity or contribution from Staben by reason of Staben’s “negligence or other fault” in its work on the Stonegate project.

Following entry of judgment in favor of Staben on its nonsuit, Staben moved for summary judgment on Palacios’s cross-complaint. Staben asserted that its motion was “based on the fact that the evidence in the case has established that in performing its work at the Stonegate project, Staben fulfilled all of its obligations under its oral agreement with R&R Palacios, and therefore the predicate tort necessary for Palacios to maintain these causes of action is absent.” Specifically, Staben relied on the deposition testimony of Tom Staben that Ron Palacios told him the developer “wanted to use Thoroseal like they had used in Moorpark,” “to [his] knowledge” Thoroseal was used on each of the retaining walls built by Palacios and that Palacios had paid Staben for the work, as well as Ron Palacios’s testimony that he had no problems with Staben’s work at the Southgate project.

Palacios opposed the motion by presenting evidence that Staben did not apply the Thoroseal in compliance with the standard of care in the industry. Specifically, Palacios relied on the deposition testimony of its waterproofing expert, Warren Kelly Roberts, that Thoroseal was to be applied in a two-coat uniform manner; Staben did not apply the Thoroseal in a two-coat uniform manner; there were areas where the Thoroseal application was too thin or was missing all together; and Staben either oversaturated the Thoroseal when preparing it or oversaturated the walls before application. Palacios also relied on the deposition testimony of its drainage expert, Mohammad Joolezadah, that improper waterproofing and the absence of waterproofing led to wall deterioration.

The trial court granted the motion for summary judgment, stating: “For equitable indemnity against the indemnitor there must be a basis for tort liability against the proposed indemnitor. [Staben] having performed under the oral contract to the satisfaction of [Palacios], there is no tort liability.”

C. There Were Triable Issues of Material Fact as to Whether Staben Was Negligent

“[T]he doctrine of comparative equitable indemnity is designed to do equity among defendants. Under the equitable indemnity doctrine, defendants are entitled to seek apportionment of loss between the wrongdoers in proportion to their relative culpability so there will be `equitable sharing of loss between multiple tortfeasors.'” (Gem Developers v. Hallcraft Homes of San Diego, Inc. (1989) 213 Cal.App.3d 419, 426.) A condition of equitable indemnity is that “there must be some basis for tort liability against the proposed indemnitor,” usually involving breach of a duty owed to the underlying plaintiff. (BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848, 852.) The doctrine applies only among defendants who are jointly and severally liable to the plaintiff. (Ibid.)

The trial court granted the motion for summary judgment based on its determination that there could be no basis for tort liability on Staben’s part because Palacios was satisfied with the work Staben had performed under the parties’ oral agreement. But Palacios’s satisfaction with Staben’s work does not absolve Staben of liability for the damage Stonegate may have suffered as a result of Staben’s work if it was negligently performed. As Palacios notes, the issue on Palacios’s cross-complaint for indemnity was an equitable sharing of responsibility for the loss that Stonegatesuffered, for which Palacios is obligated to pay compensation as part of its settlement with Stonegate. (Gem Developers v. Hallcraft Homes of San Diego, Inc., supra, 213 Cal.App.3d at p. 429 [a “claim for equitable indemnification derives from the [plaintiff’s] loss and award of damages”].)

In moving for summary judgment, Staben produced no evidence regarding its duty of care or the quality of its work on the Stonegate project. In its separate statement of undisputed material facts, Staben merely asserted that it had performed its work on the Stonegate project “in the same manner” as it did at the prior Moorpark project. But the only “evidence” Staben cited to support this asserted fact was TomStaben’s testimony that Ron Palacios told him the developer “wanted to use Thoroseal like they had used in Moorpark” and that “to [his] knowledge” “Thoroseal [was] used on each and every one of the retaining walls constructed by Mr. Palacios.” But, as Palacios notes, this evidence says nothing about the manner in which Staben performed its work at either location. Because Staben presented no evidence on the quality or manner of its work at the Stonegate project, it failed to meet its initial burden of showing that an element of the negligence claim could not be established (i.e., breach of duty). Staben therefore failed to establish the absence of a predicate tort. The burden of producing evidence never shifted to Palacios to overcome the motion for summary judgment.

But even if it had, Palacios’s evidence in opposition to the motion for summary judgment as to the correct way to apply Thoroseal and Staben’s failure to apply it in a manner necessary to prevent the passage of water through the retaining walls was sufficient to create a triable issue of material fact as to whether Staben’s work on theStonegate project fell below the standard of care in the industry. We have already concluded that a subcontractor like Staben owes a duty of care to homeowners likeStonegate, and that evidence of Staben’s standard of care is relevant to the question of its liability for negligence. The trial court therefore erred in granting the motion for summary judgment on Palacios’s cross-complaint for indemnity.

III. APPEAL OF THE COST AWARDS

Both Stonegate and Palacios filed notices of appeal from the postjudgment orders awarding costs to Staben as the prevailing party. In light of our decision reversing the judgment in favor of Staben following the nonsuit and reversing the summary judgment in favor of Staben on the cross-complaint for indemnity, Staben is no longer the prevailing party. We reverse the postjudgment cost orders. (Peerless Lighting Corp. v. American Motorists Ins. Co. (2000) 82 Cal.App.4th 995, 1017;Kalivas v. Barry Controls Corp. (1996) 49 Cal.App.4th 1152, 1163, fn. 6.)

DISPOSITION

The judgment in favor of Staben following the nonsuit and the summary judgment in favor of Staben, as well as the postjudgment orders regarding costs, are reversed and the matter is remanded for retrial. Appellants Stonegate and Palacios are awarded costs on appeal.

We Concur:

BOREN, P. J.

ASHMANN-GERST, J.

[1] Staben argues that Palacios lacks standing to challenge the nonsuit. We disagree. “`Any party aggrieved’ may appeal from an adverse judgment. (Code Civ. Proc., § 902.) The test is twofold—one must be both a party of record to the action and aggrieved to have standing to appeal. The first requirement, that one be a party of record, is subject to an exception under which a nonparty who moves to vacate the judgment is permitted to appeal as if he were a party. We think the exception should equally encompass a nonparty who moves for judgment notwithstanding the verdict and a new trial, . . . .” (Shaw v. Hughes Aircraft Co. (2000) 83 Cal.App.4th 1336, 1342 [Nonparent corporation had standing to appeal where it filed motions for judgment notwithstanding verdict and for new trial and was aggrieved by adverse judgment against its subsidiary because it had assumed obligation to pay judgment]; Lippman v. City of Los Angeles (1991) 234 Cal.App.3d 1630, 1634 [“[W]e see no reason why, if an aggrieved person can become a party to the record by moving to vacate the judgment, he or she cannot accomplish the same result by moving for a new trial”].)

Here, Palacios filed a motion for new trial, which was denied. Palacios therefore became a party of record. Palacios was also aggrieved by the judgment in favor of Staben because pursuant to Palacios’s sliding scale “Mary Carter” settlement agreement with Stonegate, any recovery by Stonegate against Staben would reduce the amount of Palacios’s liability to Stonegate “dollar for dollar.” The judgment in favor of Staben precluded Palacios from reducing its liability to Stonegate. But even if we were mistaken in finding that Palacios had standing to challenge the nonsuit on appeal, Stonegate has joined in Palacios’s brief on this issue, adopting it by reference. (Cal. Rules of Court, rule 13(a)(5).) Thus, we would be able to address Palacios’s challenge to the nonsuit in any event.

Keywords: Contractors

Pinnacle Museum Tower Association v. Pinnacle Market Development

55 Cal.4th 223 (2012)

231*231 Wood, Smith, Henning & Berman, Daniel A. Berman, Sheila E. Fix, R. Gregory Amundson, Nicholas M. Gedo; Hecht Solberg Robinson Goldberg & Bagley, Jerold H. Goldberg, Richard A. Schulman, Gregory S. Markow and Amanda A. Allen for Defendants and Appellants.

Luce, Forward, Hamilton & Scripps, and Kathleen F. Carpenter for California Building Industry Association as Amicus Curiae on behalf of Defendants and Appellants.

Feinberg Grant Mayfield Kaneda & Litt, Fenton Grant Mayfield Kaneda & Litt, Daniel H. Clifford, Joseph Kaneda, Charles Fenton and Bruce Mayfield for Plaintiff and Respondent.

Berding & Weil, Matt J. Malone, Tyler P. Berding; Epsten, Anne L. Rauch, Jon Epsten, Douglas Grinnell; Niddrie Fish & Addams and David A. Niddrie for Executive Council of Homeowners and Consumer Attorneys of California as Amici Curiae on behalf of Plaintiff and Respondent.

Summary by Mary M. Howell, Esq.:

Mandatory arbitration clause for construction defect disputes, inserted by developer in CC&Rs prior to sale of a unit or creation of an association, held valid and binding on owners.

**End Summary**

OPINION

BAXTER, J. —

An owners association filed the instant construction defect action against a condominium developer, seeking recovery for damage to its property and damage to the separate interests of the condominium owners who compose its membership. In response, the developer filed a motion to compel arbitration, based on a clause in the recorded declaration of covenants, conditions, and restrictions providing that the association and the individual owners agree to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.).

232*232 We granted review to determine whether the arbitration clause is binding on the association, and if so, whether it must be invalidated as unconscionable. As we shall explain, even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association. We conclude that the arbitration clause binds the association and is not unconscionable.

FACTUAL AND PROCEDURAL BACKGROUND

Pinnacle Market Development (US), LLC, and others (collectively Pinnacle) developed a mixed-use residential and commercial common interest community in San Diego known as the Pinnacle Museum Tower Condominium (the Project). Pursuant to the Davis-Stirling Common Interest Development Act (Civ. Code, § 1350 et seq.; the Davis-Stirling Act or the Act), Pinnacle, as the owner and developer of the Project property, drafted and recorded a “Declaration of Restrictions” to govern its use and operation (the Project CC&R’s). The Project CC&R’s contains a number of easements, restrictions and covenants, which it describes as “enforceable equitable servitudes” and “binding on all parties having any right, title or interest” in the property, and their heirs, successors and assigns. The Project CC&R’s also provided for the creation of a nonprofit mutual benefit corporation called the Pinnacle Museum Tower Association (the Association) to serve as the owners association responsible for managing and maintaining the Project property.

In selling the Project units, Pinnacle conveyed to each buyer an airspace condominium in fee and a proportionate undivided interest in the common area as a tenant in common. All other real property (including the property in the tower module, the parking structure, and other appurtenances) was deeded directly to the Association in fee.^[1] Pursuant to the Project CC&R’s, each condominium owner is a member of the Association with certain voting rights, and each agrees to pay assessments for all purposes described in the declaration, including the Association’s maintenance and improvement of the Association’s property and the common areas.

As relevant here, article XVIII of the Project CC&R’s (article XVIII) recites that, by accepting a deed for any portion of the Project property, the Association and each condominium owner agree to waive their right to a jury trial and to have any construction dispute resolved exclusively through 233*233 binding arbitration in accordance with the FAA and the California Arbitration Act (CAA; Code Civ. Proc., § 1280 et seq.).^[2] Article XVIII specifies that it applies only to a construction dispute in which Pinnacle has been named as a party, and provides that no amendment may be made to its terms without Pinnacle’s written consent.

The individual owners bought condominium units in the Project pursuant to a standard purchase agreement. The agreement anticipated creation of the Association and explicitly provided: “By acceptance of the Grant Deed to the Condominium, Buyer shall be deemed to have accepted and agreed to comply” with the recorded Project CC&R’s. Section 8 of the purchase agreement stated that, by agreeing to resolve all disputes as provided in article XVIII, the parties give up their respective rights to have such disputes tried before a jury. Section 8 also required the parties to initial a provision reciting their agreement “TO COMPLY WITH ARTICLE XVIII OF THE DECLARATION WITH RESPECT TO THE DISPUTE REFERENCED THEREIN.”^[3]

The Association filed the instant action against Pinnacle, alleging that construction defects caused damage to the Project. As the sole plaintiff, the Association seeks recovery not only for damage to its own property, but also for damage to the interests held by its individual members. The Association claims standing to represent the owners’ interests pursuant to Civil Code section 1368.3, which grants an owners association the requisite standing to sue a developer in its own name for damage to the common areas and damage to the separate interests the association is obligated to maintain or repair. (See Windham at Carmel Mountain Ranch Assn. v. Superior Court (2003) 109 Cal.App.4th 1162, 1172, 1174-1175 [135 Cal.Rptr.2d 834][addressing predecessor to Civ. Code, § 1368.3]; see also Civ. Code, § 945.)

234*234 Pinnacle filed a motion to compel arbitration, contending the FAA mandates enforcement of article XVIII’s arbitration provisions. The trial court determined that the FAA is applicable and that article XVIII embodies an agreement to arbitrate between Pinnacle and the Association. Nonetheless, the court invalidated the agreement upon finding it marked by slight substantive unconscionability and a high degree of procedural unconscionability.

The Court of Appeal affirmed. Although finding unanimously that the FAA is applicable, the court concluded, by a split vote, that the arbitration clause in the Project CC&R’s does not constitute an agreement sufficient to waive the Association’s constitutional right to jury trial for construction defect claims. The majority additionally held that, even assuming the Association is bound by the jury waivers in the purchase agreements signed by the individual condominium owners, the waivers are unconscionable and unenforceable.

We granted Pinnacle’s petition for review.

DISCUSSION

Article XVIII of the Project CC&R’s provides that Pinnacle and, by accepting a deed to any portion of the Project property, the Association and each individual condominium owner agree to submit any construction dispute to binding arbitration in accordance with the FAA (and with the CAA to the extent it is consistent with the FAA). (See ante, fn. 2.) To determine whether article XVIII is binding upon and enforceable against the Association, we consider the rules governing compelled arbitration of claims, the principles relating to the contractual nature of the covenants and restrictions in a declaration recorded pursuant to the Davis-Stirling Act, and the doctrine of unconscionability.

A. Arbitration Under the FAA

Consistent with the express terms of article XVIII, both the trial court and the Court of Appeal determined that the FAA applies in this case because materials and products incorporated into the Project were manufactured in other states. (9 U.S.C. § 2; seeAllied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281-282 [130 L.Ed.2d 753, 115 S.Ct. 834].) Although the Association currently disputes the FAA’s applicability, we accept the determination of the lower courts because the issue was not preserved for review.

(1) Section 2 of the FAA provides in relevant part: “A written provision in … a contract evidencing a transaction involving commerce to settle by 235*235 arbitration a controversy thereafter arising out of such contract or transaction… shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) This statute stands as “a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” (Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24 [74 L.Ed.2d 765, 103 S.Ct. 927] (Moses H. Cone).)^[4]

To ensure that arbitration agreements are enforced according to their terms, “the FAA pre-empts state laws which `require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.'” (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478 [103 L.Ed.2d 488, 109 S.Ct. 1248] (Volt); see, e.g., Perry v. Thomas (1987) 482 U.S. 483 [96 L.Ed.2d 426, 107 S.Ct. 2520] [FAA preempts Cal. Lab. Code provision allowing maintenance of wage collection actions despite private agreement to arbitrate]; Southland Corp. v. Keating(1984) 465 U.S. 1 [79 L.Ed.2d 1, 104 S.Ct. 852] [FAA preempts Cal. statute rendering agreements to arbitrate franchise claims unenforceable].) Likewise, the FAA precludes a court from construing an arbitration agreement “in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what … the state legislature cannot.” (Perry, at pp. 492-493, fn. 9.)

One of the consequences of the FAA’s applicability is its effect on Code of Civil Procedure section 1298.7, which allows a purchaser to pursue a construction and design defect action against a developer in court, even when the parties have signed a real property purchase and sale agreement containing an arbitration clause.^[5]Even assuming this California statute might otherwise extend to a recorded condominium declaration, the FAA would preempt its application here because it discriminates against arbitration. (See Shepard v. Edward Mackay Enterprises, Inc.(2007) 148 Cal.App.4th 1092, 236*236 1095 [56 Cal.Rptr.3d 326].) The Court of Appeal agreed on this point, and the Association does not rely on this statute to avoid arbitration.

(2) Nonetheless, it is a cardinal principle that arbitration under the FAA “is a matter of consent, not coercion.” (Volt, supra, 489 U.S. at p. 479.) Thus, “`a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.'” (AT&T Technologies v. Communications Workers (1986) 475 U.S. 643, 648 [89 L.Ed.2d 648, 106 S.Ct. 1415]; see Cronus Investments, Inc. v. Concierge Services(2005) 35 Cal.4th 376, 384-385 [25 Cal.Rptr.3d 540, 107 P.3d 217].) In determining the rights of parties to enforce an arbitration agreement within the FAA’s scope, courts apply state contract law while giving due regard to the federal policy favoring arbitration. (Volt, at p. 474; see Moses H. Cone, supra, 460 U.S. at p. 24.)

(3) In California, “[g]eneral principles of contract law determine whether the parties have entered a binding agreement to arbitrate.” (Craig v. Brown & Root, Inc. (2000) 84 Cal.App.4th 416, 420 [100 Cal.Rptr.2d 818]; see Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972-973 [64 Cal.Rptr.2d 843, 938 P.2d 903].) Generally, an arbitration agreement must be memorialized in writing. (Fagelbaum & Heller LLP v. Smylie (2009) 174 Cal.App.4th 1351, 1363 [95 Cal.Rptr.3d 252].) A party’s acceptance of an agreement to arbitrate may be express, as where a party signs the agreement. A signed agreement is not necessary, however, and a party’s acceptance may be implied in fact (e.g., Craig, at p. 420 [employee’s continued employment constitutes acceptance of an arbitration agreement proposed by the employer]) or be effectuated by delegated consent (e.g., Ruiz v. Podolsky (2010) 50 Cal.4th 838, 852-854 [114 Cal.Rptr.3d 263, 237 P.3d 584] (Ruiz).) An arbitration clause within a contract may be binding on a party even if the party never actually read the clause. (24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1215 [78 Cal.Rptr.2d 533].)

(4) The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability. (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 972.) Where, as here, the evidence is not in conflict, we review the trial court’s denial of arbitration de novo. (Service Employees Internat. Union, Local 1021 v. County of San Joaquin (2011) 202 Cal.App.4th 449, 455 [135 Cal.Rptr.3d 844].)

B. Contractual Nature of Terms in a Recorded Declaration

(5) The Davis-Stirling Act governs the creation and operation of common interest developments such as the condominium development here. Pursuant to the Act, a condominium development may be created when a developer of 237*237 land records a declaration and other documents to that effect and thereafter conveys one of the units in the development. (Civ. Code, § 1352.)

As one of the primary documents governing the development’s operation, the declaration must set forth a legal description of the development, the name of the owners association that will own or operate the development’s common areas and facilities, and the covenants and use restrictions that are intended to be enforceable equitable servitudes. (Civ. Code, §§ 1351, 1353.) In addition, the declaration may “contain any other matters the original signator of the declaration [(e.g., the developer)] or the owners consider appropriate.” (Civ. Code, § 1353, subd. (b); see Cal. Code Regs., tit. 10, § 2792.8, subd. (a).)

(6) Terms commonly included in a declaration concern membership and voting rights in the owners association, maintenance responsibilities, procedures for calculating and collecting assessments, accounting and insurance requirements, architectural and/or design control, and enforcement of the declaration. Pursuant to state regulatory law, a declaration may also include provisions for binding or nonbinding arbitration of disputes between a developer and an owners association, so long as the designated process for arbitration satisfies certain regulatory requirements. (Bus. & Prof. Code, §§ 11001, 11004.5, 11018.5; Cal. Code Regs., tit. 10, § 2791.8; seepost, fn. 7.) When terms have been included for the benefit of the declarant (developer), an association’s ability to delete them is limited. That is, although an association may freely amend a declaration to remove certain types of restrictions once the developer has completed its construction and marketing activities (Civ. Code, § 1355.5, subds. (a), (b)), no court may approve an amendment that will “eliminate any special rights, preferences, or privileges designated in the declaration as belonging to the declarant, without the consent of the declarant” (Civ. Code, § 1356, subd. (e)(2)).

(7) Once the first buyer manifests acceptance of the covenants and restrictions in the declaration by purchasing a unit, the common interest development is created (Civ. Code, § 1352), and all such terms become “enforceable equitable servitudes, unless unreasonable” and “inure to the benefit of and bind all owners of separate interests in the development” (Civ. Code, § 1354, subd. (a); see Bus. & Prof. Code, § 11018.5, subd. (c)). For this reason, we have described recorded declarations as “the primary means of achieving the stability and predictability so essential to the success of a shared ownership housing development.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 382 [33 Cal.Rptr.2d 63, 878 P.2d 1275] (Nahrstedt).) Having a single set of recorded covenants and restrictions that applies to an entire common interest development protects the intent, expectations, and wishes of those buying into the development and the 238*238 community as a whole by ensuring that promises concerning the character and operation of the development are kept. (See Citizens for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, 364 [47 Cal.Rptr.2d 898, 906 P.2d 1314] (Citizens for Covenant Compliance); Nahrstedt, at p. 383.)

One important feature contributing to the stability and success of condominium developments is that actual notice is not required for enforcement of a recorded declaration’s terms against subsequent purchasers. (Nahrstedt, supra, 8 Cal.4th at p. 379.) Rather, the recording of a declaration with the county recorder “provides sufficient notice to permit the enforcement” of the covenants and restrictions contained therein (ibid.; see Citizens for Covenant Compliance, supra, 12 Cal.4th at pp. 364-365; Villa Milano Homeowners Assn. v. Il Davorge (2000) 84 Cal.App.4th 819, 825 [102 Cal.Rptr.2d 1] (Villa Milano)), and condominium purchasers are “deemed to agree” to them. (Citizens for Covenant Compliance, at p. 365; see Villa Milano, at p. 825.)

In this regard, the Legislature has provided various protections to help ensure that condominium purchasers know what they are buying into. For example, developers and subsequent sellers must provide copies of the declaration and other governing documents to prospective purchasers. (Bus. & Prof. Code, § 11018.6; Civ. Code, § 1368, subd. (a).) Additionally, developers generally must provide prospective purchasers with a copy of the Department of Real Estate’s public report approving the particular condominium development and a copy of a statutory statement outlining general information regarding common interest developments. (Bus. & Prof. Code, § 11018.1, subds. (a), (c); see Bus. & Prof. Code, § 11018.2.) The statutory statement informs prospective purchasers that their ownership in the development and their rights and remedies as members of its association “`will be controlled by governing instruments'” such as the “`Declaration of Restrictions (also known as CC&R’s),'” and that they should “`[s]tudy these documents carefully before entering into a contract to purchase a subdivision interest.'” (Bus. & Prof. Code, § 11018.1, subd. (c).) Hence, condominium owners should not be surprised by the covenants and restrictions in a recorded declaration, which ordinarily are given binding effect even if they would not fulfill the common law requirements for creation of an equitable servitude or a restrictive covenant (Villa De Las Palmas Homeowners Assn. v. Terifaj (2004) 33 Cal.4th 73, 87 [14 Cal.Rptr.3d 67, 90 P.3d 1223]), or the privity requirements of a contract (Civ. Code, §§ 1350-1378; Nahrstedt, supra, 8 Cal.4th at p. 380).

(8) Another significant way in which the Act promotes stability and predictability is by providing that the “covenants and restrictions in the declaration shall be enforceable equitable servitudes, unless unreasonable, and shall inure to the benefit of and bind all owners of the separate interests 239*239 in the development.” (Civ. Code, § 1354, subd. (a), italics added.) This statutory presumption of reasonableness requires that recorded covenants and restrictions be enforced “`unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit.'” (Villa De Las Palmas Homeowners Assn. v. Terifaj, supra, 33 Cal.4th at p. 88, quoting Nahrstedt, supra, 8 Cal.4th at p. 382.)

(9) In Nahrstedt, supra, 8 Cal.4th 361, we elaborated upon the contractual nature of a declaration and the enforcement of its terms as equitable servitudes under the Davis-Stirling Act. “[E]quitable servitudes permit courts to enforce promises restricting land use when there is no privity of contract between the party seeking to enforce the contract and the party resisting enforcement. Like any promise given in exchange for consideration, an agreement to refrain from a particular use of land is subject to contract principles, under which courts try `to effectuate the legitimate desires of the covenanting parties.’ [Citation.] When landowners express the intention to limit land use, `that intention should be carried out.'” (Nahrstedt, at pp. 380-381.) AlthoughNahrstedt spoke specifically in terms of land use restrictions, its analysis logically extends to all covenants in a declaration, which by statute are also enforceable as equitable servitudes unless unreasonable. (Civ. Code, § 1354, subd. (a); e.g., Arias v. Katella Townhouse Homeowners Assn., Inc. (2005) 127 Cal.App.4th 847 [26 Cal.Rptr.3d 113] [condominium owner who prevailed in enforcement action entitled to recover contractual attorney fees under covenants, conditions, and restrictions].)

Moreover, settled principles of condominium law establish that an owners association, like its constituent members, must act in conformity with the terms of a recorded declaration. (See Civ. Code, § 1354, subd. (a); Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249, 268 [87 Cal.Rptr.2d 237, 980 P.2d 940] [homeowner can sue association to compel enforcement of declaration’s provisions]; Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 124 [82 Cal.Rptr.3d 389].) There is, of course, no question that an owners association functions as an entity distinct and separate from its owner members and may hold title to real property in a condominium development in its own name. However, an association must exercise its property rights and its right of management over the affairs of a development in a manner consistent with the covenants, conditions, and restrictions of the declaration (CC&R’s). That a declaration operates to bind an association is both logical and sound, for the success of a development would be gravely undermined if the association were allowed to disregard the intent, expectations, and wishes of those whose collective interests the association represents. (See Citizens for Covenant Compliance, supra, 12 Cal.4th at p. 364; Nahrstedt, supra, 8 Cal.4th at pp. 382-384.)

240*240 In light of the foregoing, it is no surprise that courts have described recorded declarations as contracts. (E.g., Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 512-513 [229 Cal.Rptr. 456, 723 P.2d 573] [CC&R’s as contract between condominium owners association and unit owner]; Villa Milano, supra, 84 Cal.App.4th at pp. 824-826 [CC&R’s as contract between developer and homeowners association]; see Barrett v. Dawson (1998) 61 Cal.App.4th 1048, 1054 [71 Cal.Rptr.2d 899] [right of neighbors to enforce a recorded restrictive covenant limiting the neighboring property’s use was “clearly contractual”]; Harbor View Hills Community Assn. v. Torley (1992) 5 Cal.App.4th 343, 346-349 [7 Cal.Rptr.2d 96][amendment to Civ. Code, § 1717, which governs contractual attorney fees, was applicable to CC&R’s of homeowners association]; see also Franklin v. Marie Antoinette Condominium Owners Assn. (1993) 19 Cal.App.4th 824, 828, 833 [23 Cal.Rptr.2d 744] [accepting parties’ assumption that CC&R’s formed a contract between condominium owners and owners association].)

In the proceedings below, the Court of Appeal held the arbitration clause in the Project CC&R’s was not binding on the Association. Specifically, the court observed that the Association could not have agreed to arbitrate or waive its constitutional right to a jury trial, because “for all intents and purposes, Pinnacle was the only party to the `agreement,’ and there was no independent homeowners association whenPinnacle recorded the CC&R’s.” This reasoning is not persuasive in light of the statutory and contract principles at play.

(10) “It is true we have emphasized that arbitration derives its legitimacy from the fact that the parties consent to resort to the arbitral forum rather than to litigation, with its possibility of a jury trial. [Citation.] Such consent is generally required.” (Ruiz, supra,50 Cal.4th at p. 852.) As we have previously recognized, however, various legal theories allow for delegated authority to consent. Not only do common law principles such as fiduciary duty and agency permit enforcement of arbitration agreements against nonsignatory third parties, but the Legislature can also provide for the reasonable delegation of authority to consent. (Id. at pp. 852-854.)

In Ruiz, supra, 50 Cal.4th 838, we addressed the operation of Code of Civil Procedure section 1295, which allowed, but did not require, a patient to contract with a health care provider to resolve all medical malpractice claims through binding arbitration. The question presented was whether an arbitration agreement signed by a patient applied to the resolution of wrongful death claims, which are not considered derivative of a patient’s claims, even though the wrongful death claimants were not themselves signatories to the arbitration agreement. (See Ruiz, at p. 841.) After observing that the statute intended to create “a capacity of health care patients to bind their heirs to arbitrate 241*241 wrongful death actions,” we found that binding the heirs “does not in any sense” extinguish or restrict their claims, “but merely requires that the claims `be resolved by a common, expeditious, and judicially favored method.'” (Id. at p. 852.) We firmly rejected the argument that a rule permitting a person to bind his or her adult children to arbitration would violate the state constitutional right to a jury trial. (Cal. Const., art. I, § 16.) As we explained, “the Legislature may devise reasonable rules in civil litigation to permit the delegation to another party of the power to consent to arbitration instead of a jury trial…. In the present case, the Legislature by statute has created the right of certain heirs to a wrongful death action and may also by statute place reasonable conditions on the exercise of that right.” (Ruiz, at p. 853.)

(11) While not directly on point, the principles articulated in Ruiz support a similar result in the context of recorded declarations. As discussed, the Legislature has crafted a statutory scheme providing for the capacity of a developer to create a condominium development subject to covenants and restrictions governing its operation and use. There appears no question that, under the Davis-Stirling Act, each owner of a condominium unit either has expressly consented or is deemed by law to have agreed to the terms in a recorded declaration. As the exclusive members of an owners association, the owners have every right to expect that the association, in representing their collective interests, will abide by the agreed-upon covenants in the declaration, including any covenant to invoke binding arbitration as an expeditious and judicially favored method to resolve a construction dispute, in the absence of unreasonableness. That a developer and condominium owners may bind an association to an arbitration covenant via a recorded declaration is not unreasonable; indeed, such a result appears particularly important because (1) the Davis-Stirling Act confers standing upon an association to prosecute claims for construction damage in its own name without joining the individual condominium owners (Civ. Code, § 1368.3) and (2) as between an association and its members, it is the members who pay the assessments that cover the expenses of resolving construction disputes. Given these circumstances, an association should not be allowed to frustrate the expectations of the owners (and the developer) by shunning their choice of a speedy and relatively inexpensive means of dispute resolution. Likewise, condominium owners should not be permitted to thwart the expectations of a developer by using an owners association as a shell to avoid an arbitration covenant in a duly recorded declaration. (Villa Milano, supra, 84 Cal.App.4th at pp. 825-826, fn. 4.)

Amici curiae in support of the Association point to a portion of Civil Code section 1353, subdivision (a), providing that a declaration shall set forth “the restrictions on the use or enjoyment of any portion of the common interest development that are intended to be enforceable equitable servitudes.” Focusing on this statutory language, amici curiae assert that the Davis-Stirling Act 242*242 limits a developer’s authority to impose on an owners association only provisions commonly understood as equitable servitudes, that is, restrictions relating to the use or maintenance of the property. (Civ. Code, §§ 1353, subd. (a), 1468, subd. (c).) In their view, an arbitration clause pertaining to construction disputes has no relationship to the use of property and therefore no place in a recorded declaration.

(12) Even assuming that a covenant requiring arbitration of construction disputes does not fall within traditional notions of an equitable servitude, the Davis-Stirling Act, considered as a whole, does not support amici curiae’s narrow construction of its provisions. As discussed, the Act specifies that a declaration “may contain any other matters the original signator of the declaration [the developer] or the owners consider appropriate.” (Civ. Code, § 1353, subd. (b).) The Act also bars a court from approving an amendment to a declaration that would “eliminate any special rights, preferences, or privileges designated in the declaration as belonging to the declarant, without the consent of the declarant.” (Civ. Code, § 1356, subd. (e)(2).) Thus, notwithstanding the traditional uses to which equitable servitudes and recorded declarations have been put, the Act grants developers latitude to place in declarations any term they deem appropriate, including provisions that afford them special rights and privileges, so long as such terms are not unreasonable.

It bears emphasis that placement of arbitration covenants in a recorded declaration violates none of the Davis-Stirling Act’s proscriptions.^[6] To the contrary, their inclusion is consistent with the Department of Real Estate’s contemplation that a recorded declaration may feature a provision for binding arbitration between a developer and an owner’s association. (Cal. Code Regs., tit. 10, § 2791.8.)^[7] In short, there is nothing in the Act itself that prohibits a recorded declaration from containing arbitration covenants.

243*243 (13) Moreover, we find the inclusion of article XVIII in the Project CC&R’s is consistent with provisions of the Act that contemplate an alternative dispute resolution process as a prerequisite to construction defect litigation. Civil Code section 1375 provides that before an owners association may file suit against a developer for construction or design defects, the parties must either attempt to settle the dispute or attempt to agree to submit the matter to alternative dispute resolution presided over by a neutral facilitator. One court described these provisions as demonstrating that “the Legislature has chosen to encourage alternative dispute resolution between homeowners associations and developers, but not to require it.” (Villa Milano, supra, 84 Cal.App.4th at p. 831, italics added.) We agree with that specific observation, but see nothing in the language or history of Civil Code section 1375 that purports to prohibit a covenant for binding arbitration of construction defect claims.^[8] Indeed, we perceive no legitimate reason to frustrate the expectations of purchasers who choose to buy into a development where binding arbitration is the designated process for resolving such claims. Like other methods of alternative dispute resolution, binding arbitration benefits both the developer and the entire common interest community by providing a speedy and relatively inexpensive means to address allegations of defect damage to the common areas and other property interests.

(14) In addition to imposing prelitigation procedures for construction disputes, the Davis-Stirling Act requires that an owners association provide “a fair, reasonable, and expeditious procedure” for resolving disputes between an association and a member involving their rights, duties, or liabilities under the governing documents or the applicable statutes. (Civ. Code, § 1363.820, subd. (a); see Civ. Code, §§ 1363.810, 1363.830.^[9]) The Act also requires that the association and its members use a separate alternative dispute resolution 244*244 procedure involving a neutral decision maker as a prerequisite to filing an “enforcement action” seeking declaratory, injunctive, or writ relief, either alone or in conjunction with a claim falling within the jurisdiction of the small claims court. (Civ. Code, § 1369.510 et seq.; see generally 12 Witkin, Summary of Cal. Law (10th ed. 2005) Real Property, § 125, p. 185.) We observe that article XVIII comports with these legislative efforts to encourage resolution of condominium matters out of court.

In holding to the contrary, the Court of Appeal made reference to the foregoing dispute resolution schemes and focused on Civil Code section 1369.510, subdivision (a), which states in part: “The form of alternative dispute resolution chosen pursuant to this article [(governing enforcement actions filed by an owner or an association)] may be binding or nonbinding, with the voluntary consent of the parties.” (Italics added.) According to the Court of Appeal, the italicized clause signifies that “the waiver of the right to a jury requires an actual `agreement'” and that therefore arbitration provisions in a recorded declaration are not binding as an agreement to arbitrate. We disagree.

(15) The language in Civil Code section 1369.510, subdivision (a), simply adheres to the familiar principle that arbitration is a matter of consent, not coercion. The provision does nothing to undermine the conclusion that terms calling for binding arbitration between a developer, condominium owners, and an owners association are properly included in a recorded declaration. (See Cal. Code Regs., tit. 10, § 2791.8.) As explained above, giving force to such terms in a development’s originating declaration protects the expectations of the individual owners and the community as a whole (Citizens for Covenant Compliance, supra, 12 Cal.4th at p. 364), as well as those of the developer (Civ. Code, § 1356, subd. (e)(2)).

Finally, we see nothing in Treo @ Kettner Homeowners Assn. v. Superior Court(2008) 166 Cal.App.4th 1055 [83 Cal.Rptr.3d 318] (Treo) that compels a different result. In Treo, the CC&R’s of a condominium development contained a requirement that all disputes between a developer and a homeowners association be decided by a general judicial reference. The question was whether that requirement was enforceable under Code of Civil Procedure 245*245 section 638, which allows appointment of a referee (and hence waiver of a jury trial) if a reference agreement exists between the parties. Relying on Grafton Partners v. Superior Court (2005) 36 Cal.4th 944 [32 Cal.Rptr.3d 5, 116 P.3d 479] (Grafton), Treo determined that a waiver of the constitutional right to trial by jury requires “actual notice and meaningful reflection.” (Treo, supra, 166 Cal.App.4th at p. 1066.) Because the jury waiver in the subject CC&R’s did not meet those requirements, Treo held it was “not a written contract as the Legislature contemplated the term in the context of [Code of Civil Procedure] section 638.” (Treo, at p. 1067.) The Treo court was particularly troubled that the CC&R’s were lengthy and adhesive in nature, and that the jury waiver was not signed by the parties and could not be modified by the association. (Ibid.) Persuaded by Grafton‘s observation that any statutory ambiguity in permitting a jury waiver must be resolved in favor of affording a jury trial (Grafton, at p. 956), Treoconcluded that, even though CC&R’s “can reasonably be `construed as a contract’ … when the issue involved is the operation or governance of the association or the relationships between owners and between owners and the association,” CC&R’s do not “suffice as a contract when the issue is the waiver pursuant to [Code of Civil Procedure] section 638 of the constitutional right to trial by jury.” (Treo, at p. 1066.)

(16) The Association’s reliance on that decision misplaced for at least two reasons. First, neither Treo nor Grafton concerned an agreement to arbitrate. Notably, Graftonexplicitly distinguished predispute jury waivers from predispute arbitration agreements, observing that arbitration agreements are specifically authorized by Code of Civil Procedure section 1281, and, unlike jury waivers, “represent an agreement to avoid the judicial forum altogether.” (Grafton, supra, 36 Cal.4th at p. 955.) Because public policy strongly favors arbitration as “`”`a speedy and relatively inexpensive means of dispute resolution'”‘” (Schatz v. Allen Matkins Leck Gamble & Mallory LLP, supra, 45 Cal.4th at p. 564), we decline to read additional unwritten procedural requirements, such as actual notice and meaningful reflection, into the arbitration statute.^[10]

(17) Second, whether or not a reference agreement must be evaluated differently from other types of agreements, state laws that discriminate against arbitration are preempted where, as here, the FAA applies. That is, the FAA precludes judicial invalidation of an arbitration clause based on state law requirements that are not generally applicable to other contractual clauses, such as proof of actual notice, meaningful reflection, signature by all parties, and/or a unilateral modification clause favoring the nondrafting party. 246*246 (Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687-688 [134 L.Ed.2d 902, 116 S.Ct. 1652] (Doctor’s Associates)[FAA preempts state’s first-page notice requirement for arbitration agreements].) It stands to reason that the FAA would preempt state decisional law singling out an arbitration clause as the only term in a recorded declaration that may not be regarded as contractual in nature. For this reason, we shall not selectively target article XVIII as containing the only clause of the recorded declaration that does not memorialize an agreement binding the Association.^[11]

(18) In sum, even though the Association did not bargain with Pinnacle over the terms of the Project CC&R’s or participate in their drafting, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration, including those in article XVIII, reflect written promises and agreements that are subject to enforcement against the Association. (Civ. Code, § 1350 et seq.; Nahrstedt, supra, 8 Cal.4th at pp. 378-384.)

C. The Doctrine of Unconscionability

Having determined that article XVIII of the Project CC&R’s is binding on the Association, we next determine whether the article’s provisions for arbitration are unenforceable as unconscionable.

(19) “[G]enerally applicable contract defenses, such as … unconscionability, may be applied to invalidate arbitration agreements without contravening” the FAA. (Doctor’s Associates, supra, 517 U.S. at p. 687; accord, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 [99 Cal.Rptr.2d 745, 6 P.3d 669] (Armendariz).) (20) Unconscionability consists of both procedural and substantive elements. The procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power. (See Armendariz, at p. 114; Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071 [130 Cal.Rptr.2d 892, 63 P.3d 979] [procedural unconscionability “generally takes the form of a contract of adhesion”].) Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided. (Armendariz, at p. 114; Mission Viejo Emergency Medical Associates v. Beta Healthcare Group (2011) 197 Cal.App.4th 1146, 1159 [128 Cal.Rptr.3d 330].) A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, the term must be “so one-sided as to `shock the conscience.'” (24 Hour Fitness, Inc. v. Superior Court, supra, 66 Cal.App.4th at p. 1213.)

247*247 (21) The party resisting arbitration bears the burden of proving unconscionability. (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 972; Mission Viejo Emergency Medical Associates v. Beta Healthcare Group, supra, 197 Cal.App.4th at p. 1158.) Both procedural unconscionability and substantive unconscionability must be shown, but “they need not be present in the same degree” and are evaluated on “`a sliding scale.'” (Armendariz, supra, 24 Cal.4th at p. 114.) “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.)

(22) As indicated, procedural unconscionability requires oppression or surprise. “`Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form.'” (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1317 [27 Cal.Rptr.3d 797].) Here, the trial court found no evidence of surprise.^[12] Nonetheless, the court perceived a high degree of procedural unconscionability, because the Project CC&R’s were drafted and recorded by Pinnacle before any unit was purchased and before the Association was formed. Noting the Association had no opportunity to participate in the drafting of the recorded declaration, the court determined it was oppressive. (See Villa Milano, supra, 84 Cal.App.4th at p. 828[finding procedural unconscionability “obvious” where condominium purchasers had no opportunity to negotiate declaration’s terms].) This analysis is off the mark.

That the Project CC&R’s were drafted and recorded before the sale of any unit and without input from the Association was a circumstance dictated by the legislative policy choices embodied in the Davis-Stirling Act. (Civ. Code, § 1352; see Bus. & Prof. Code, §§ 11018.1, 11018.2, 11018.5, subd. (c).) The intent of the Act is to permit landowners such as Pinnacle to develop and market their properties to purchasers as condominium developments operating under certain CC&R’s. By providing for Pinnacle’s capacity to record a declaration that, when accepted by the first purchaser binds all others who accept deeds to its condominium properties, the Act ensures that the terms 248*248 reflected in the declaration — i.e., the CC&R’s governing the development’s character and operation — will be respected in accordance with the expectations of all property owners and enforced unless proven unreasonable. (Nahrstedt, supra, 8 Cal.4th at pp. 378-384; see Citizens for Covenant Compliance, supra, 12 Cal.4th at p. 365.) Thus, while a condominium declaration may perhaps be viewed as adhesive, a developer’s procedural compliance with the Davis-Stirling Act provides a sufficient basis for rejecting an association’s claim of procedural unconscionability.^[13]

Moreover, the arbitration provisions of article XVIII are not substantively unconscionable. Preliminarily, we observe the Association has not shown that article XVIII fails to conform to the minimum regulatory standards for protection of the public interest. (Cal. Code Regs., tit. 10, § 2791.8; see ante, fn. 7.) Here, in fact, the Department of Real Estate reviewed and approved the Project CC&R’s before issuing the required public report for the Project. (Bus. & Prof. Code, §§ 11004.5, subd. (c), 11018.2, 11018.5.) On this point, the Association correctly asserts that neither the public report’s issuance nor the regulation itself binds us in determining enforceability of the arbitration provisions. Nonetheless, as discussed below, the Association neglects to identify any aspect of article XVIII that is overly harsh or so one-sided that it shocks the conscience. (24 Hour Fitness, Inc. v. Superior Court, supra, 66 Cal.App.4th at p. 1213.)

In arguing that article XVIII is substantively unconscionable, the Association invokes the following passage in Armendariz, supra, 24 Cal.4th 83: “[A]n arbitration agreement imposed in an adhesive context lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences.” (Id. at p. 120.) The Association then posits that article XVIII lacks basic fairness and mutuality because it allows Pinnacle to require arbitration of all construction disputes related to the Project, without requiring Pinnacle to arbitrate any claims it may have against the Association or the owners. This contention fails to persuade.

(23) In the same part of Armendariz, we made clear that arbitration clauses may be limited to a specific subject or subjects and that such clauses are not required to “mandate the arbitration of all claims between [the parties] in order to avoid invalidation on grounds of unconscionability.” (Armendariz, supra, 24 Cal.4th at p. 120.) Here, the challenged clause is limited to construction disputes. To the extentPinnacle wishes to allege the 249*249 Association’s comparative fault as an affirmative defense with respect to damages (Civ. Code, § 1368.4, subd. (a)),^[14] such issue would fall within the scope of article XVIII. Apart from that, the Association fails to identify any potential construction-related claim Pinnacle might assert against it that would not be subject to arbitration. Accordingly, there appears no support for the Association’s claims of unfairness and absence of mutuality.

The Association next complains of a clause in article XVIII that provides: “Each of the parties shall bear its own attorney’s fees and costs (including expert witness costs) in the arbitration.” Notwithstanding the facial neutrality of this costs provision, the Association asserts it is evidence of substantive unconscionability because it effectively limits the Association’s right to full recovery of damages. (SeeArmendariz, supra, 24 Cal.4th at p. 121.)

(24) The costs provision does no such thing. In court proceedings, a prevailing party generally may not recover expert witness fees as an item of costs unless the expert witness was appointed by the court. (Code Civ. Proc., § 1033.5, subd. (b)(1);Carwash of America-PO v. Windswept Ventures No. I (2002) 97 Cal.App.4th 540, 543-544 [118 Cal.Rptr.2d 536]; Stearman v. Centex Homes (2000) 78 Cal.App.4th 611, 623-624 [92 Cal.Rptr.2d 761]; cf. Code Civ. Proc., § 1033.5, subd. (a)(8) [“[f]ees of expert witnesses ordered by the court” are allowable as costs].) By its terms, the costs provision will neutrally benefit whichever party does not prevail in arbitration by barring the prevailing party from recovering such fees as an item of costs. At the same time, article XVIII elsewhere specifies that “[t]he arbitrator is authorized to provide all recognized remedies available at law or in equity for any cause of action.”Pinnacle confirms that the costs provision does not alter the Association’s “potential remedies as a litigant,” and that the Project CC&R’s “were drafted so that the parties’ remedies would not change.” Accordingly, the costs provision does not limit the availability of expert investigation expenses that are otherwise recoverable asdamages. (E.g., Stearman, at pp. 624-625 [even when expert witness fees are not recoverable as costs, expert investigation fees may be recovered as an item of damages under Civ. Code, § 3333].) In light of the foregoing, the costs provision provides little, if any, evidence of substantive unconscionability. (See Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 711 [131 Cal.Rptr. 882, 552 P.2d 1178] [upholding an arbitration provision that did not purport to limit a party’s substantive obligations or liabilities, but “merely substitute[d] one forum for another”]; see also Ruiz, supra, 50 Cal.4th at p. 852.)

250*250 The Association further points out that the Project CC&R’s imposes a requirement that the Association obtain Pinnacle’s written consent before amending the arbitration provisions. Emphasizing that Pinnacle drafted the document before the Association existed as an independent entity, the Association claims the consent provision demonstrates that Pinnacle was “looking after its own self-interests” and playing “unfairly to its unilateral benefit.” The Association also argues the consent provision “virtually eliminates the Association’s right to amend the [Project CC&R’s] pursuant to Civil Code sections 1355 and 1356.”

These arguments lack merit. First, Civil Code section 1355 specifically contemplates that a recorded declaration may restrict or even eliminate the authority of an owners association and owners to amend its terms. (Civ. Code, § 1355, subd. (b) [permitting amendment “[e]xcept to the extent that a declaration provides by its express terms that it is not amendable”].) Second, and more to the point, Civil Code section 1356 flatly prohibits a court from approving any amendment to a declaration that “[w]ould eliminate any special rights, preferences, or privileges designated in the declaration as belonging to the declarant, without the consent of the declarant.” (Civ. Code, § 1356, subd. (e)(2).) Far from evidencing substantive unconscionability, the consent provision reflects a restrictive term that the Legislature, for policy reasons, has determined is reasonably and properly included in a recorded declaration.

We conclude that article XVIII of the Project CC&R’s is consistent with the provisions of the Davis-Stirling Act and is not procedurally or substantively unconscionable. Its terms requiring binding arbitration of construction disputes are therefore enforceable.^[15]

CONCLUSION AND DISPOSITION

Even when strict privity of contract is lacking, the Davis-Stirling Act ensures that the covenants, conditions, and restrictions of a recorded declaration — which manifest the intent and expectations of the developer and those who take title to property in a community interest development — will be 251*251 honored and enforced unless proven unreasonable. Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration.

We hold that article XVIII’s covenant to arbitrate is not unconscionable and is properly enforced against the Association. Accordingly, we reverse the judgment of the Court of Appeal and remand the matter for further proceedings consistent with the views herein.

Cantil-Sakauye, C. J., Chin, J., Corrigan, J., and Liu, J., concurred.

WERDEGAR, J., Concurring. —

Can the developer of a condominium project unilaterally impose arbitration on the condominium’s homeowners association by recording a mandatory arbitration clause for construction-related claims at or before the association’s inception? Because the Legislature has elected to permit developers to do so, I agree with the majority that a developer can and that the arbitration clause at issue here is enforceable. Because I think the clause’s validity rests on narrower grounds than those invoked by the majority, I write separately.

I.

Pinnacle Market Development (US), LLC (Pinnacle Development), built a condominium project. As required under the Davis-Stirling Common Interest Development Act (Civ. Code, § 1350 et seq.; Davis-Stirling Act),^[1] it recorded a declaration containing easements, covenants, and restrictions on use of the property (see §§ 1352, subd. (a), 1353). Included among these covenants and restrictions,Pinnacle Development inserted a clause that compelled arbitration of one specific type of claim — construction disputes — with the homeowners association, thePinnacle Museum Tower Association (the Homeowners Association), and individual homeowners each bound as a condition of accepting an interest in the property.

The Homeowners Association evidently was incorporated around the same time the declaration was recorded. That the Homeowners Association had no meaningful independent existence at the time the declaration and arbitration clause were first recorded, and that the clause was drafted unilaterally by Pinnacle Development, are undisputed.

252*252 The initial question for us is whether the arbitration clause is binding on the Homeowners Association. In concluding that it is, the majority never clearly states whether the grounds for enforcement lie in contract or real property law. In my view, only real property law supports enforcement.

A.

Considered as contracts, the recorded declaration and the arbitration clause are adhesive vis-à-vis individual homeowners, but adhesive contracts can still be enforced. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113 [99 Cal.Rptr.2d 745, 6 P.3d 669].) Individual homeowners can elect to buy property subject to the recorded declaration and the arbitration clause, or not; some semblance of a choice is still present, and courts have properly found such individual owners bound as a matter of contract law. (E.g., Villa Milano Homeowners Assn. v. Il Davorge (2000) 84 Cal.App.4th 819, 824-826 [102 Cal.Rptr.2d 1].)

But the rationale that would make recorded covenants and restrictions contractually enforceable against individual owners does not extend to a homeowners association. Vis-à-vis such an association, the recorded declaration is more than adhesive; no opportunity for meaningful consent exists at all. A homeowners association cannot refuse to accept title to the development’s common areas or the responsibilities of management; once it comes into existence, it is automatically subject to whatever the developer has seen fit to insert in the declaration, without any opportunity to reject those terms. To treat this scenario as involving consent rather than compulsion is to disregard the realities of the situation. I thus agree with the Court of Appeal that the scenario here does not fit within traditional bilateral, or even unilateral, contract formation principles.

The majority states that we have in the past treated covenants in declarations as contractual (see maj. opn., ante, at p. 239, citing Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 380-381 [33 Cal.Rptr.2d 63, 878 P.2d 1275], and Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 512-513 [229 Cal.Rptr. 456, 723 P.2d 573]), thus implying that to do so here is unexceptional. In Nahrstedt, we applied contract interpretation principles to a recorded restriction; inFrances T., we assumed the truth of an individual owner’s allegation that covenants in a recorded declaration were part of a contract between her and her homeowners association. In neither case did we analyze whether contract formation principles, as applied to the terms of a recorded declaration, supported treating those terms as a binding contract between a developer and a homeowners association. Nor do any of the other cases the majority cites, ante, at page 240, articulate a rationale for treating the covenants, conditions, 253*253 and restrictions in a recorded declaration as a binding contract between a developer and a homeowners association. Indeed, the one case most clearly to conclude that the covenants in a declaration form a binding contract between a developer and a homeowners association expressly acknowledged that, unlike for individual owners, who have notice at the time of purchase of a declaration’s terms, the extant case law does “not provide an analytical framework for addressing the issue why the homeowners association, which makes no purchase, is also bound contractually.” (Villa Milano Homeowners Assn. v. Il Davorge, supra, 84 Cal.App.4th at p. 825, fn. 4, italics added.)^[2]

The majority suggests declarations should be enforced as contracts to protect the expectations of the individual owners who buy property in a given development. (E.g., maj. opn., ante, at p. 243 [“[W]e perceive no legitimate reason to frustrate the expectations of purchasers who choose to buy into a development where binding arbitration is the designated process for resolving such claims.”].) This emphasis on the supposed expectations and wishes of homeowners appears disingenuous. While owners may have agreed to the arbitration clause, they did so only in the context of an adhesive, take-it-or-leave-it transaction. That the presence of such a clause would play much, if any, of a favorable role in as momentous a decision as the choice of a home to purchase is not readily apparent.

Accordingly, to the extent the majority rests enforcement of the arbitration clause against the Homeowners Association on contract principles, I part company.

B.

That a covenant in a declaration is unenforceable as a contract is not dispositive if another ground for enforcement exists. Here, one does.

At common law, enforceable equitable servitudes and covenants running with the land were confined to restrictions that benefited or burdened land. (Citizens for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, 352-355 [47 Cal.Rptr.2d 898, 906 P.2d 1314].) The same holds true today; whether described as a covenant running with the land or an equitable servitude, a restriction enforceable under these doctrines and the statutes 254*254 embodying them must involve a restriction governing land use. (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at p. 380 [“[E]quitable servitudes permit courts to enforce promises restricting land use when there is no privity of contract ….”]; Anthony v. Brea Glenbrook Club (1976) 58 Cal.App.3d 506, 510 [130 Cal.Rptr. 32] [“[T]he covenant `… must affect the parties as owners of particular estates in land, or must relate to the use of land.‘”]; § 1461 [only those covenants specified by statute may “run with the land”]; § 1462 [“Every covenant contained in a grant of an estate in real property, which is made for the direct benefit of the property, or some part of it then in existence, runs with the land.”]; § 1468 [covenant enforceable as running with the land is one which is “for the benefit of the land”].)

However, the Legislature is free to abrogate these common law requirements if it sees fit. If the Davis-Stirling Act expands the universe of provisions enforceable as equitable servitudes beyond those that would qualify under the common law, that the arbitration clause might not be enforceable in contract or at common law as a covenant running with the land or an equitable servitude is immaterial: a provision that qualifies under the act may be enforced as a matter of statute.

Under the Davis-Stirling Act, “[t]he covenants and restrictions in [a] declaration shall be enforceable equitable servitudes ….” (§ 1354, subd. (a).) In Villa De Las Palmas Homeowners Assn. v. Terifaj (2004) 33 Cal.4th 73, 87 [14 Cal.Rptr.3d 67, 90 P.3d 1223], we considered and rejected a condominium owner’s argument that recorded covenants and restrictions “must meet the common law requirements of equitable servitudes” in order to be enforceable. We concluded that under section 1354, subdivision (a) recorded covenants and restrictions are either deemed enforceable equitable servitudes, whether or not they satisfy the common law requirements, or are enforceable in the same manner as equitable servitudes. We had no occasion to decide which interpretation was correct because “[e]ither reading precludes the conclusion that the Legislature intended to incorporate the technical requirements of equitable servitudes into the statutes.” (Terifaj, at p. 87.)

Terifaj establishes that the Davis-Stirling Act makes the covenants in a recorded declaration enforceable without regard to whether they satisfy common law requirements for covenants running with the land or equitable servitudes. Accordingly, irrespective of whether the arbitration clause before us does or does not satisfy the traditional requirements for equitable servitudes, the clause is enforceable as an equitable servitude, or in the same manner as an equitable servitude, as a matter of statute. (Villa De Las Palmas Homeowners Assn. v. Terifaj, supra, 33 Cal.4th at p. 87.)

255*255 The majority reaches the same conclusion, but relies in heavy part on section 1353, subdivision (b), which authorizes a developer or homeowners to include in the declaration “any other matters [they] consider appropriate.” (See maj. opn., ante, at p. 242.) In contrast to the restrictions included pursuant to subdivision (a) of section 1353, however, it does not follow that any matter included under subdivision (b) thereby becomes an enforceable equitable servitude. Indeed, subdivision (a) gives examples of just the sort of extra matters a developer might elect to include that would be permitted by subdivision (b) but are nevertheless not equitable servitudes; subdivision (a) mandates inclusion of standard notices for all subdivisions in proximity to an airport or falling within a particular conservation district. (§ 1353, subd. (a)(1)-(3).) A developer might elect to include, under subdivision (b), similar notices of other circumstances that would affect the decision to purchase property, without such notices becoming equitable servitudes. Accordingly, I would rest enforcement of the arbitration clause on section 1353, subdivision (a) and section 1354, not on section 1353, subdivision (b).

II.

The question remains whether the arbitration clause, though facially enforceable against the Homeowners Association, is valid. Because the clause’s enforceability derives from statute, not contract law, I would conclude the limits on its validity also derive from statute, not contract law. I therefore would focus on whether the clause is reasonable as required by statute, not whether it is unconscionable and thus contractually unenforceable. (See § 1354, subd. (a) [“The covenants and restrictions in the declaration shall be enforceable equitable servitudes, unless unreasonable ….].) Under section 1354, covenants or restrictions in a declaration will “be enforced unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit.” (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at p. 382.)

The Homeowners Association bears the burden of establishing unreasonableness under section 1354. (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at p. 380.) It has not sought to do so expressly, instead framing its argument against enforcement in terms of contract principles of procedural and substantive unconscionability. Even treating that argument as applying equally to the reasonableness requirement, i.e., as an argument that the arbitration clause is unconscionable, and thus against public policy and thus unreasonable, the Homeowners Association has not carried its burden.

256*256 To be sure, the adoption of the arbitration clause has elements of procedural unconscionability. Contrary to the majority’s view, that the Davis-Stirling Act contemplates a developer will draft and record covenants and restrictions before a homeowners association has any realistic opportunity to consent does not mean any resulting procedural unconscionability is categorically excused. (See maj. opn., ante,at p. 247.) Nothing is to stop a developer from providing a homeowners association a meaningful opportunity, once it achieves independence, to ratify or reject covenants and restrictions touching on the developer’s interests. In the absence of such an opportunity, we should make clear that provisions inserted unilaterally for the developer’s benefit must receive careful scrutiny under section 1354 to prevent abuse of the unilateral drafting power required by the nature of common interest developments.

That said, the Homeowners Association has not shown in this case that the arbitration clause constitutes such an abuse. The Homeowners Association objects to a provision that each side shall bear its own costs and attorney fees, but I agree with the majority that nothing in that clause evidences substantive unconscionability. (See maj. opn., ante, at p. 249.) The Homeowners Association also raises the clause’s limited scope — construction claims-as proof of the lack of “`a modicum of bilaterality'” we have in the past demanded. (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 119.) An arbitration clause is not, however, required to sweep in every possible claim either of two parties might have against each other; bilaterality is satisfied if, for the particular transaction or transactions covered, each side must submit its possible claims to the arbitral forum. (Id. at p. 120.) As the majority holds (maj. opn., ante, at pp. 248-249), an arbitration clause that covers all claims arising from construction of a development does not, because it excludes nonconstruction claims, offend public policy and become unenforceable under section 1354.

For these reasons, I concur in the judgment of the court.

LIU, J., Concurring. —

I join the court’s opinion. I also find much that is persuasive in Justice Werdegar’s concurrence. In my view, the court’s opinion and Justice Werdegar’s concurrence are not that far apart.

This case requires us to answer two questions. The first is whether a provision of a declaration of restrictions for a common interest development requiring arbitration of any construction defect disputes between a homeowners association and a developer can ever be enforceable against the association. The conceptual difficulty is that this provision defies easy categorization. 257*257 Both the court and Justice Werdegar acknowledge that there was no privity of contract between the homeowners association, Pinnacle Museum Tower Association, and the developer,Pinnacle Market Development, and that the provision is thus not a contractual arbitration agreement in the strict sense. (Maj. opn., ante, at p. 251; conc. opn. of Werdegar, J., ante, at p. 252.) Both appear to recognize that the provision is not one of the typical property restrictions running with the land that are enforceable as equitable servitudes. (Maj. opn., ante, at p. 241; conc. opn. of Werdegar, J., ante, at p. 252.)

Further, both acknowledge that the developer’s authorization to include such a provision arises primarily from the Davis-Stirling Common Interest Development Act (Davis-Stirling Act; Civ. Code, § 1350 et seq.). (Maj. opn., ante, at p. 242; conc. opn. of Werdegar, J., ante, at p. 254.) Justice Werdegar would locate that authorization in Civil Code sections 1353, subdivision (a) and 1354, subdivision (a) (all statutory references are to this code). Section 1353, subdivision (a) pertains to “restrictions on the use or enjoyment of any portion of the common interest development.” Because the arbitration provision in question does not neatly fit into that category, I agree with the court that authorization for the provision is more appropriately located in section 1353, subdivision (b): “The declaration may contain any other matters the original signator of the declaration or the owners consider appropriate.”

The court affirms that arbitration is binding only insofar as both parties consent in some fashion to the waiver of the right to a jury trial. Despite the fact that the homeowners association came into existence already bound by the arbitration provision, the court still finds the arbitration provision to be consensual: “There appears no question that, under the Davis-Stirling Act, each owner of a condominium unit either has expressly consented or is deemed by law to have agreed to the terms in a recorded declaration. As the exclusive members of an owners association, the owners have every right to expect that the association, in representing their collective interests, will abide by the agreed-upon covenants in the declaration, including any covenant to invoke binding arbitration as an expeditious and judicially favored method to resolve a construction dispute, in the absence of unreasonableness.” (Maj. opn., ante, at p. 241.)

I agree with Justice Werdegar that, in reality, it is doubtful that the presence of an arbitration clause was a salient feature of a home purchase transaction. (Conc. opn. of Werdegar, J., ante, at p. 253.) But I agree with the court that in the unique statutory context of the Davis-Stirling Act, the notice 258*258 of the arbitration provision given to homeowners who became the members of the homeowners association rendered the arbitration provision sufficiently consensual to legitimately bind the association.

Because these types of arbitration provisions may lawfully be applied to homeowners associations under the Davis-Stirling Act, the second question we are asked to address is whether the terms of this particular arbitration provision are lawful. I agree with Justice Werdegar that the proper inquiry is whether the terms of the provision are “unreasonable.” (§ 1354, subd. (a).) The inquiry under that statute, however, has been keyed to whether a property restriction has a “rational relationship to the protection, preservation, operation or purpose of the affected land.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 381 [33 Cal.Rptr.2d 63, 878 P.2d 1275].) Because what is at issue here is not a property restriction in the usual sense but rather an arbitration clause for resolving construction defect disputes, the court properly recognizes that the appropriate inquiry is whether the arbitration clause is unreasonably one sided in favor of the party imposing the arbitration — that is, whether the arbitration clause is substantively unconscionable. The court is also correct in stating that “while a condominium declaration may perhaps be viewed as adhesive, a developer’s procedural compliance with the Davis-Stirling Act provides a sufficient basis for rejecting an association’s claim of procedural unconscionability.” (Maj. opn., ante, at p. 248.)

In sum, I understand today’s opinion to hold that whether or not the arbitration provision is contractual in the strict sense, it is appropriate in this case to use the substantive unconscionability inquiry from contract law to determine whether the arbitration clause is reasonable and hence lawful. With that understanding, I join the opinion of the court.

KENNARD, J., Dissenting. —

A condominium owners association sued the project’s developer over construction defects. The developer sought to have the dispute arbitrated.

The majority holds that the owners association is bound by an arbitration provision in the declaration of covenants, conditions, and restrictions (CC&R’s) drafted by the developer before the association came into existence as an independent entity. I disagree, because of the association’s lack of consent to the arbitration provision.

I

Defendant condominium developer drafted and recorded CC&R’s that, among other things, provided for the creation of a nonprofit corporation to be 259*259 called the “Pinnacle Museum Tower Association,” plaintiff here. The CC&R’s also stated that acceptance of any property deed would indicate agreement to have any construction dispute against the developer resolved through binding arbitration. When the developer recorded the CC&R’s, the owners association, as the majority acknowledges, had no existence independent of the developer.

After the developer completed construction and disposed of its interests in the condominium project, and after the association became an independent entity, the association sued the developer over various construction defects, including drainage and electrical problems. Relying on the arbitration provision in the CC&R’s, the developer asked the trial court to compel arbitration. The trial court denied the petition. The Court of Appeal upheld that ruling. This court then granted defendant’s petition for review.

II

Arbitration, which is an alternative to the judicial process (Berglund v. Arthroscopic & Laser Surgery Center of San Diego, L.P. (2008) 44 Cal.4th 528, 539 [79 Cal.Rptr.3d 370, 187 P.3d 86]), “is a matter of consent, not coercion” (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 479 [103 L.Ed.2d 488, 109 S.Ct. 1248]). Thus, an arbitration provision is binding only if the parties have agreed to it. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 [10 Cal.Rptr.2d 183, 832 P.2d 899].)

When defendant developer here recorded the CC&R’s, plaintiff owners association had no independent existence (see ante, at p. 258) and hence no say in the developer’s unilateral decision to have any construction disputes decided by binding arbitration. Lacking therefore is the association’s consent to the arbitration provision in the CC&R’s.

According to the majority, however, the owners association’s consent to the arbitration provision can be inferred from consent to it by the developer and individual condominium owners. (Maj. opn., ante, at pp. 240-241.) In support, the majority cites this court’s decision in Ruiz v. Podolsky (2010) 50 Cal.4th 838 [114 Cal.Rptr.3d 263, 237 P.3d 584] (Ruiz). But that decision is not on point here.

The issue in Ruiz was whether an arbitration agreement between a physician and a patient (who consented to arbitration) applied to wrongful death claims brought by the deceased patient’s heirs against the physician. A majority of this court concluded that the arbitration agreement extended to the patient’s heirs. The majority relied on Code of Civil Procedure section 1295, which states that any arbitration provision in a contract for medical 260*260 services must be mentioned in the contract’s first article. The statute also requires the contract to state that by agreeing to arbitration the parties give up their constitutional right to a jury trial. This statute, the Ruiz majority asserted, was designed “to permit patients who sign arbitration agreements to bind their heirs in wrongful death actions.” (Ruiz, supra, 50 Cal.4th at p. 849.) I dissented, expressing the view that the statute said nothing about a deceased patient’s heirs’ wrongful death claims, which are independent claims of the heirs, rather than being derivative of any claim by the patient. (Id. at pp. 855-858 (dis. opn. of Kennard, J.).)

The majority in Ruiz expressly limited its holding to wrongful death claimants. (Ruiz, supra, 50 Cal.4th at p. 854, fn. 5.) Such claimants are not involved in this case, in which a developer seeks to compel an owners association to arbitrate construction defect claims.

Moreover, Ruiz involved a statute that, as described by the majority, reflected a legislative intent that supported the majority’s holding. (Ruiz, supra, 50 Cal.4th at p. 849.) In contrast, the legislative scheme governing condominium developments, as involved here, indicates that the developer cannot unilaterally bind the owners association to arbitrate its construction defect claims. As expressed in Civil Code section 1369.510, subdivision (a), whether parties in common interest developments are bound by alternative dispute resolution procedures, such as arbitration, requires “the voluntary consent of the parties.” Thus, consent by the developer alone is insufficient.

Also unconvincing is the majority’s assertion that individual owners can consent to arbitration on behalf of the owners association. (Maj. opn., ante, at p. 241.) According to the majority, because the individual owners are the exclusive members of the association, the owners have the right to expect the association to be bound by the binding arbitration provision. (Ibid.) The association and the individual owners are not the same, however. The majority itself acknowledges that: “There is, of course, no question that an owners association functions as an entity distinct and separate from its owner members and may hold title to real property in a condominium development in its own name.” (Maj. opn., ante, at p. 239.) Thus, consent by the owners association itself is necessary before it can be compelled to submit to binding arbitration.

As I have explained, lacking here is the owners association’s consent to an arbitration provision in the CC&R’s drafted and recorded by the developer before the association’s independent existence. In compelling arbitration, which offers no right to a jury, the majority deprives the owners association of its constitutional right to have its construction defect dispute decided by a jury. In the words of our state Constitution: “Trial by jury is an inviolate right 261*261 and shall be secured to all….” (Cal. Const., art. I, § 16.) This constitutional right, this court has said, “may not be abridged by act of the Legislature.” (People v. Collins (1976) 17 Cal.3d 687, 692 [131 Cal.Rptr. 782, 552 P.2d 742].)

I would affirm the judgment of the Court of Appeal.

[1] The condominium owners have easements over the Association’s property.

[2] Section 18.3(j) of article XVIII states in relevant part: “WAIVER OF JURY TRIAL AND RIGHT TO APPEAL. DECLARANT [PINNACLE], AND BY ACCEPTING A DEED FOR ANY PORTION OF THE TOWER ASSOCIATION PROPERTY, THE ASSOCIATION AND EACH OWNER, AGREE (I) TO HAVE ANY CONSTRUCTION DISPUTE DECIDED BY NEUTRAL ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT AND THE CALIFORNIA ARBITRATION ACT, TO THE EXTENT THE CALIFORNIA ARBITRATION ACT IS CONSISTENT WITH THE FEDERAL ARBITRATION ACT; (II) TO GIVE UP ANY RIGHTS THEY MIGHT POSSESS TO HAVE THE CONSTRUCTION DISPUTE LITIGATED IN A COURT OR JURY TRIAL; (III) TO GIVE UP THEIR RESPECTIVE RIGHTS TO APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE APPLICABLE ARBITRATION RULES OR STATUTES. IF ANY PARTY REFUSES TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, SUCH PARTY MAY BE COMPELLED TO ARBITRATE….”

[3] The Association does not dispute that section 8 of the purchase agreement and article XVIII of the Project CC&R’s together constitute an agreement to arbitrate between Pinnacle and the original condominium owners. Likewise, Pinnacle does not challenge the trial court’s determination that section 8 does not bind the Association, which was not a party to the purchase agreements.

[4] The CAA’s comprehensive statutory scheme also expresses a “`”`strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.'”‘” (Schatz v. Allen Matkins Leck Gamble & Mallory LLP (2009) 45 Cal.4th 557, 564 [87 Cal.Rptr.3d 700, 198 P.3d 1109].) In terms similar to the FAA, the CAA provides that “[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (Code Civ. Proc., § 1281.)

[5] Code of Civil Procedure section 1298.7 provides in relevant part: “In the event an arbitration provision is included in a contract or agreement covered by this title it shall not preclude or limit … any right of action to which Section 337.1 [(limitations period for patent design or construction defects)] or 337.15 [(limitations period for latent design or construction defects)] is applicable.”

[6] E.g., Civil Code sections 1352.5 (restrictive covenants may not violate Gov. Code, § 12955), 1353.5 (governing display of the U.S. flag), 1353.6 (governing display of noncommercial signs, posters, flags, or banners on or in an owner’s separate interest), 1353.7 (governing roof installation or repair), 1353.8 (governing low water-using plants and landscaping), 1353.9 (governing installation and use of electric vehicle charging stations), 1376 (governing installation and use of video or television antenna), 1360.2 (governing rental or leasing of separate interests), 1360.5 (governing pets).

[7] One of the primary objectives of the Department of Real Estate is the protection of the public interest with regard to offerings of subdivided lands. (See generally Frisella & Nichols, Department of Real Estate (2001) 17:2 Cal. Reg. L.Rep. 313.) Pursuant to its rulemaking authority (Bus. & Prof. Code, § 11001), the Real Estate Commissioner promulgated section 2791.8 of title 10 of the California Code of Regulations, which provides in relevant part: “(a) … [A] provision in the covenants, conditions and restrictions setting forth terms, conditions and procedures for resolution of a dispute of claim between a homeowners association and a subdivider shall, at a minimum, provide that the dispute or claim resolution process, proceeding, hearing or trial to be conducted in accordance with” specified rules regarding (1) “costs and fees,” (2) timely appointment of a neutral person to administer and preside over the dispute resolution process, (3) venue of the proceeding, (4) “prompt and timely commencement” and “prompt and timely conclusion” of the process, (5) conduct of the process “in accordance with rules and procedures that are reasonable and fair to the parties,” and (6) authority of the presiding neutral person to provide all recognized remedies available in law or equity for any cause of action that is the basis of the proceeding. (Cal. Code Regs., tit. 10, § 2791.8, subd. (a).) Although the regulation contemplates that an arbitration process in a declaration may be binding or nonbinding, a process that “provides or allows for a judicial remedy in accordance with the laws of this state” presumptively satisfies the regulation’s minimum terms. (Cal. Code Regs., tit. 10, § 2791.8, subd. (c).)

[8] In any event, the FAA’s applicability would preempt any statutory provision that specifically discriminates against arbitration. (Perry v. Thomas, supra, 482 U.S. 483; Southland Corp. v. Keating, supra, 465 U.S. 1; Shepard v. Edward Mackay Enterprises, Inc., supra, 148 Cal.App.4th at p. 1095.)

[9] Civil Code section 1363.830 provides in relevant part: “A fair, reasonable, and expeditious dispute resolution procedure shall at a minimum satisfy all of the following requirements: [¶] (a) The procedure may be invoked by either party to the dispute…. [¶] … [¶] (c) If the procedure is invoked by a member, the association shall participate in the procedure. [¶] (d) If the procedure is invoked by the association, the member may elect not to participate in the procedure. If the member participates but the dispute is resolved other than by agreement of the member, the member shall have a right of appeal to the association’s board of directors. [¶] (e) A resolution of a dispute pursuant to the procedure, that is not in conflict with the law or the governing documents, binds the association and is judicially enforceable. An agreement reached pursuant to the procedure, that is not in conflict with the law or the governing documents, binds the parties and is judicially enforceable. [¶] … [¶] (g) A member of the association shall not be charged a fee to participate in the process.” (See Civ. Code, § 1363.840 [setting forth a comparable procedure for “an association that does not otherwise provide a fair, reasonable, and expeditious dispute resolution procedure”].)

[10] Grafton also distinguished predispute jury waivers from the very type of predispute reference agreement at issue in Treo, noting that Code of Civil Procedure section 638 authorizes reference agreements. (Grafton, supra, 36 Cal.4th at p. 959.)

[11] Likewise, we shall not, as the Association urges, target the arbitration clause as the only covenant in the recorded declaration that requires ratification by the Association’s governing board in order to bind the Association and its members.

[12] We agree. The record reflects that the arbitration provisions of the Project CC&R’s appear in a separate article under a bold, capitalized, and underlined caption titled “ARTICLE XVIII CONSTRUCTION DISPUTES,” and within a separate section with the bold and underlined title, “Section 18.3. Resolution of Construction Disputes by Arbitration.” The provision referring to FAA applicability, and the provision describing the waivers of jury trial and right to appeal, are set forth in separate subsections of section 18.3, with the latter appearing in bold and capital letters. (See ante,fn. 2.) Additionally, the recitals on page 2 of the Project CC&R’s state, in capital letters, that article XVIII of the declaration “refers to mandatory procedures for the resolution of construction defect disputes, including the waiver of the right to a jury trial for such disputes.”

[13] Indeed, if an association could avoid an arbitration covenant in a recorded declaration on the ground that it did not negotiate for the covenant, then it would follow that, notwithstanding the Act’s operation, the association would not be bound by any of the covenants, conditions, or restrictions in the declaration. The position is untenable.

[14] Pursuant to Civil Code section 1368.4, subdivision (a), an owners association’s recovery of damages in a construction defect action “shall be reduced by the amount of damages allocated to the association or its managing agents in direct proportion to their percentage of fault based upon principles of comparative fault.”

[15] We are aware that Villa Milano, supra, 84 Cal.App.4th 819, concluded that arbitration provisions in a recorded declaration are categorically unenforceable as unconscionable and against public policy in light of Code of Civil Procedure section 1298.7. (Villa Milano, at pp. 829-833.) Villa Milano,however, preceded Shepard v. Edward Mackay Enterprises, Inc., supra, 148 Cal.App.4th 1092, which held that the FAA, when applicable, preempts operation of that antiarbitration statute. (See ante, pt. A.) Thus, Villa Milano erred in relying on Code of Civil Procedure section 1298.7 as a basis for finding substantive unconscionability. (See Marmet Health Care Center v. Brown (2012) 565 U.S. ___, ___ [182 L.Ed.2d 42, 132 S.Ct. 1201, 1204].) We hereby disapprove Villa Milano Homeowners Assn. v. Il Davorge, supra, 84 Cal.App.4th 819, to the extent it is inconsistent with any of the views expressed herein.

[1] All further statutory references are to the Civil Code.

[2] Although Villa Milano acknowledged that existing precedent did not explain why a homeowners association should be bound as a matter of contract, because the parties did not raise this point the court simply assumed that a homeowners association exclusively represented individual owners’ interests and should not be permitted to avoid what the owners themselves could not avoid. (Villa Milano Homeowners Assn. v. Il Davorge, supra, 84 Cal.App.4th at p. 825, fn. 4.) Not so; the Homeowners Association has its own separate property interests and its own potential claims.

Keywords: Construction Defect

Palm Valley Homeowners Association v. Design MTC

102 Cal.Rptr.2d 350 (2000)

351*351 Edwards, Sooy & Byron and Michael M. Edwards, San Diego, for Objector and Appellant.

Thorsnes, Bartolotta & McGuire, C. Brant Noziska, Neal H. Rockwood and Timothy J. Tatro, San Diego, for Plaintiff and Respondent.

Summary by Mary M. Howell, Esq.:

A suspended corporation is not allowed to defend itself in legal proceedings; its law firm, which continued to litigate after knowledge of the suspension, properly fined by court.

**End Summary**

352*352 OPINION

WARD, J.

Appellant law firm Edwards, Sooy & Byron (the firm) appeals after the trial court imposed sanctions upon it for asserted bad faith acts and Discovery abuses in the underlying construction defect litigation. The basis for the imposition of sanctions was that the firm pursued litigation activities on behalf of its client, even after the firm knew that the client was a suspended corporation.

The firm contends that the trial court abused its discretion in imposing sanctions: The rule is clear that a corporation suspended for nonpayment of taxes may not defend itself in litigation. The firm’s client, however, was suspended for failure to file a required information statement with the Secretary of State, and not for nonpayment of taxes. Whether these two types of corporate suspensions both result in a disqualification from litigation appears to be a question of first impression.

We conclude that, although the statutory provisions suspending a corporation for failure to file a required statement have not yet been so construed in any published California case, those provisions would make clear to any reasonable attorney that a corporation suspended under the Corporations Code, like a corporation suspended under the Revenue and Taxation Code, is also disabled from participating in litigation activities. At the least, the facts before the trial court support the view that the firm did not rely upon any purported distinction between a Corporations Code suspension and a Revenue and Taxation Code suspension in deciding to conceal its knowledge of the client’s suspended status from the court and opposing counsel. Thus, the court did not abuse its discretion in finding that the firm acted in bad faith, and in assessing sanctions accordingly. We therefore affirm the award of sanctions.

FACTS AND PROCEDURAL HISTORY

Plaintiff and respondent, Palm Valley Homeowners Association, Inc. (homeowners), filed a construction defect lawsuit against the developer of their homes. The developer in turn cross-complained against subcontractors and suppliers that had worked on the project. In 1996, homeowners named a company called Design MTC in place of one of the subcontractor Doe defendants. The firm represented Design MTC.

The firm, on behalf of Design MTC, answered both the developer’s cross-complaint and the homeowners’ complaint by June 16, 1997. In March of 1998, the firm learned that its client, Design MTC, was a suspended corporation. Design MTC’s suspension was not for nonpayment of taxes, however, as provided under Revenue and Taxation Code section 23301; rather, Design MTC was suspended after failing to file a required informational statement with the Secretary of State, as provided in Corporations Code section 2205.

The firm did not report the suspension to the court or to any other parties; the firm continued to represent Design MTC in the litigation, filing and responding to pleadings and motions. In July 1998, for example, the firm filed motions for summary judgment on Design MTC’s behalf, against both the homeowners on the complaint and the developer on its cross-complaint.

On August 5, 1998, the homeowners’ investigator discovered that Design MTC was a suspended corporation. The homeowners’ attorneys notified the firm on August 27, 1998, that it had learned of Design MTC’s suspension. At a court hearing on August 28, 1998, the homeowners’ attorneys reported to the court that Design MTC was a suspended corporation, erroneously stating that it had been suspended under the Revenue and Taxation Code. The court granted the homeowners an order shortening time for bringing a motion to strike Design MTC’s answer, and also 353*353took Design MTC’s summary judgment motions off calendar.

Homeowners moved for sanctions against Design MTC and the firm. The firm appeared for Design MTC at the sanctions hearing, and objected to the proceedings. The court ruled that neither Design MTC nor the firm had the right to appear at the hearing on account of Design MTC’s suspended status. The court granted the motion for sanctions and set a further date for a prove-up hearing.

On or about September 25, 1998, homeowners filed their memorandum of costs, and requested $89,490.02 in sanctions. On or about September 29, 1998, the firm filed a petition for writ of mandate in this court. (Edwards, Sooy & Byron v. Superior Court(Sept. 29, 1998, E023496) [nonpub].) On October 5, 1998, this court stayed proceedings on the sanctions. We thereafter issued a writ commanding the trial court to vacate its earlier sanctions order, and to hold a new hearing, affording the firm both notice and an opportunity to appear and defend itself against the request for sanctions. At the firm’s request, we have taken judicial notice of our file in the earlier writ proceeding, Edwards, Sooy & Byron v. Superior Court, supra.

On December 4, 1998, the court again heard the homeowners’ motion for sanctions. The firm opposed the motion, arguing that, because Design MTC was not suspended for nonpayment of taxes, the disabilities applicable to a tax-suspended corporation (Rev. & Tax.Code, § 23301) should not apply. The firm argued that it had believed in good faith that a suspension under the Corporations Code did not impose the same litigation disabilities as a tax suspension.

The court took the matter under submission and, on February 3, 1999, ruled that the firm had violated both Code of Civil Procedure sections 128.5 (frivolous actions taken in bad faith) and 2023 (discovery abuses), and imposed sanctions of $14,241.35.

The firm appeals the sanctions order.

ANALYSIS

I. Standard of Review

“We review the imposition of monetary sanctions for a prejudicial abuse of discretion.” (20th Century Ins. Co. v. Choong (2000) 79 Cal.App.4th 1274, 1277, 94 Cal.Rptr.2d 753.)

II. The Trial Court Did Not Abuse Its Discretion in Imposing Sanctions on the Firm for Continuing to Represent a Suspended Corporation

The firm argues that the trial court abused its discretion in imposing sanctions. There are two prongs to the argument.

First, sanctions were imposed in part under Code of Civil Procedure section 128.5, for alleged bad faith acts, which were frivolous or undertaken for delay. The firm contends that its client was suspended under the Corporations Code, and not under the Revenue and Taxation Code for nonpayment of taxes. The statutory suspension provisions of the Corporations Code have never been interpreted expressly to indicate that a corporation suspended for failure to file the required information statement is legally disabled from acting to the same extent as a corporation suspended under the Revenue and Taxation Code for nonpayment of taxes. The firm argues that the court below erred in (1) finding a Corporations Code suspension the same as a Revenue and Taxation Code suspension, and (2) finding that the firm acted in bad faith in believing the two kinds of suspensions should be treated differently.

A finding of abuse of discretion in imposing sanctions under Code of Civil Procedure section 128.5 thus depends in part upon whether the trial court correctly interpreted the relevant statutes, and in part upon its assessment of the firm’s good faith or bad faith in taking the positions it did.

354*354 The second prong of the firm’s argument is that the court abused its discretion in imposing sanctions under Code of Civil Procedure section 2023, for discovery abuse. That is, the firm contends that its conduct in Representing its client during ongoing discovery is not, in itself, an abuse of the discovery process. Neither the client nor the firm, for example, refused to provide relevant requested discovery, interposed abusive discovery requests, or did anything to harm or delay the regular processes of discovery. The sole bad act claimed was the fact of participating in discovery while the corporation was suspended.

We address each argument in turn.

A. A Corporation Suspended Under Corporations Code Section 2205 for Failure to File a Required Information Statement Is Disabled From Participating in Litigation, As Is a Corporation Suspended Under Revenue and Taxation Code Section 23301 for Nonpayment of Taxes

Corporations Code section 1502 provides that every corporation must file a statement every two years^[1] containing such information as the corporation’s current directors, the number of board vacancies, if any, the current officers, and the name and address of a person in the state, designated to receive service of legal process upon the corporation. Corporations Code section 2204 provides that, if a corporation fails to file its required information statement under section 1502, the Secretary of State shall give notice of the delinquency; 60 days after notice of the delinquency, the Secretary of State must certify the name of the corporation to the Franchise Tax Board, and the Franchise Tax Board imposes a penalty upon the corporation.^[2]

If a corporation fails to file a statement under Corporations Code section 1502, fails to file a statement for 24 months, and has been assessed a penalty under Corporations Code section 2204 during that 24-month period, then the corporation is subject to suspension under Corporations Code section 2205. The Secretary of State must notify the corporation that “its corporate powers, rights, and privileges” will be suspended after an additional 60 days, if it fails to file a statement under section 1502. If the corporation fails to comply within 60 days, the Secretary of State certifies to the Franchise Tax Board that the corporation is suspended, and mails a notice to the suspended corporation. “[T]hereupon, except for the purpose of amending the articles of incorporation to set forth a new name, the corporate powers, rights, and privileges of the corporation are suspended.” (Corp.Code, § 2205, subd. (c).)

Corporations Code section 2205, former subdivision (d), provides that, notwithstanding the suspension, the corporation is empowered to file a statement Under section 1502; if it does so, the Secretary of State “shall certify that fact to the Franchise Tax Board and the corporation may thereupon be relieved from suspension” unless it is also suspended by the Franchise Tax Board for nonpayment of taxes. Before Corporations Code section 2205 was amended in 1999, it provided that the Secretary of State must certify the suspended corporation’s compliance with section 1502 to the Franchise Tax Board, and that the corporation may “thereupon, in accordance with Section 23305a of the Revenue and Taxation Code, be relieved from suspension. . . .” (Italics added. See Stats.1999, ch. 1000, § 23, p. 5976.) The italicized language was in effect at the time of all the events herein.

We think it plain upon a reading of the statutory provisions that a corporation 355*355 suspended for failure to file a required statement under Corporations Code section 1502 is, like a corporation suspended for failure to pay taxes under Revenue and Taxation Code section 23301, disabled from participating in any litigation activities.

The firm concedes that a corporation suspended for nonpayment of taxes is disabled from resort to the courts for any purpose. “The purpose of Revenue and Taxation Code section 23301 is to `prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern’ [citation], and to pressure it to pay its taxes [citation].” (Grell v. Lad Le Beau Corp. (1999) 73 Cal.App.4th 1300, 1306, 87 Cal.Rptr.2d 358.) The firm argues that such a statutory purpose, i.e., collection of taxes, does not apply when a corporation is suspended for failure to file a statement, and not for nonpayment of taxes. Thus, the firm argues, it could reasonably believe that a suspension under the Corporations Code did not disqualify it from access to or use of the courts.

We disagree. Corporations Code section 2205, subdivision (b) expressly states that the failure to file the required statement will result in suspension of a corporation’s “corporate powers, rights, and privileges.” This parallels the language of Revenue and Taxation Code section 23301, which provides that “the corporate powers, rights and privileges of a domestic taxpayer may be suspended” for nonpayment of taxes. (Italics added.)

Corporations Code section 2205, subdivision (c) makes clear that, “except for the purpose of amending the articles of incorporation to set forth a new name,” the suspended corporation may transact no business of any kind. Conducting litigation is not “amending the articles of incorporation to set forth a new name.”

Corporations Code section 2205, subdivision (d), at all times relevant herein, provided that a suspended corporation could be restored Upon filing the required statement “in accordance with Section 23305a of the Revenue and Taxation Code.” Section 23305a of the Revenue and Taxation Code sets forth the prerequisites to issuance of a certificate of revivor by the Franchise Tax Board.

All these statutory provisions should strongly indicate to any reasonable attorney that a corporation suspended for failure to file a statement under Corporations Code section 1502 is indeed disqualified from litigation and all other activities. All its “corporate powers, rights, and privileges” are suspended; the only exceptions provided by statute are to change the name of the corporation, and to cure the default by filing the missing statement.

Cross-references to the Revenue and Taxation Code also clearly indicate that a corporation suspended under the Corporations Code is equally disabled from acting as a corporation suspended under the Revenue and Taxation Code. Indeed, the penalty provided under Corporations Code section 2204 is imposed under Revenue and Taxation Code section 19141; the $250 penalty imposed under that provision is expressly made “a final assessment due and payable at the time of assessment,” and it “shall be collected as other taxes, interest, and penalties are collected by the Franchise Tax Board. . . .”

Just as the state may wish to persuade its corporate citizens to pay their taxes, it also may wish to persuade them to comply with basic filing requirements, requirements that are fundamental to holding a corporation accountable for its actions.

The statutory language of the relevant sections, as well as legislative policy, are more than sufficient to put any reasonable attorney on notice—or at least to entertain a reasonable suspicion—that a corporation suspended under the Corporations Code, like a corporation suspended for nonpayment of taxes, is well and truly suspended, and disabled from participating in any litigation activities.

356*356 The trial court did not err in so construing the statutes, and thus did not abuse its discretion in determining that the firm knew or should have known that Design MTC was disqualified from representing itself in the litigation.

Our conclusion is further buttressed by Signal Data Proc. v. Rex Humbard Found.(Ohio App. 9 Dist.1994) 99 Ohio App.3d 646, 651 N.E.2d 498. There the Ohio Court of Appeals held that a California corporation suspended pursuant to Corporations Code section 2205, for failure to file a statement, lacked authority to register a California judgment in Ohio, or to authorize an attorney to act in Its behalf, and would remain so unless and until it cured the deficiency which had caused its suspension.

B. The Trial Court Did Not Abuse Its Discretion in Determining that the Firm. Had Acted in Bad Faith in Pursuing Litigation Activities While Its Client Was Suspended

The firm argues that, although we now have construed the Corporations Code suspension provisions in the same manner as the Revenue and Taxation Code suspension provisions, it could in good faith have believed that there was a legitimate difference in the effect of the two suspensions, and thus properly continued to represent its client despite its knowledge of the suspension.

The record belies the firm’s assertions of good faith. The firm knew as of March 1998 of Design MTC’s suspended status. Giving the benefit of any doubt to the firm, that it in fact researched the matter at that time and discovered that Design MTC was suspended for failure to file a section 1502 statement, and not for nonpayment of taxes, we think it inescapable that any reasonable attorney reviewing the relevant statutes would entertain a strong suspicion that Design MTC was disqualified from exercising any powers, including the right to resort to the courts in litigation. Nevertheless, the firm chose to conceal its knowledge of the suspension, and probable disability of its client, from both the court and opposing counsel. Knowing concealment of material facts is not the hallmark of good faith.

The firm urges that it could not discharge its ethical duties to represent its client, if it had to reveal the client’s suspended status to the court and counsel. Not so. If the corporation had been suspended for nonpayment of taxes, the client’s disability would have been clear, and the attorney’s duty to report that to the court would also have been clear. The attorney’s obligation to its client would be to advise the client to pay its back taxes. If the client corporation is in such financial straits that it has been unable to pay its taxes, to the degree that it has become suspended, such advice may ring hollow. Where a corporation has been suspended for noncompliance with filing requirements, however, curing the default is simple. All the client corporation must do is file the required statement under Corporations Code section 1502. The firm did not, however, make any such recommendation to its client, Design MTC. This failure supports the inference that the firm in fact made no investigation at the time it discovered its client’s suspended status, and that it therefore likely believed Design MTC was suspended for failure to pay taxes. If so, then the firm’s willful concealment of the suspension militates toward a finding of bad faith.

Other evidence supports this conclusion. Remarks made by the firm’s attorneys at hearings on the sanctions motion indicate that the firm did not consciously decide that Design MTC’s suspension was not of a kind that should disable it from litigation. Rather, it appears that this theory was a post hoc rationalization, and did not occur to the firm’s attorneys until the eve of the sanctions hearing. At the hearing on August 28, 1998, Design MTC’s counsel stated that he had “had no time to look into” the question whether the corporate suspension resulted in the corporation’s 357*357 lack of standing to litigate. At the first sanctions hearing on September 4, 1998, the firm’s representative stated to the court: “When we appeared [on August 28], we were not prepared to address the issue of the suspension with the Court. . . . [¶] After we had the opportunity to look at the documents . . . it was learned that in fact MTC Design was not suspended for failure to pay taxes. [¶] Therefore, it’s our position that the tax and revenue codes that provide that a suspended corporation cannot represent itself in court do not apply.”

The record fully supports the conclusion that the firm did not continue representing Design MTC based on its good-faith belief in the difference between a Corporations Code suspension and a Revenue and Taxation Code suspension; it supports the conclusion, rather, that the firm suspected its client was disabled from litigation, but deliberately concealed this fact from the court and the other parties, and continued to litigate vigorously, even seeking summary proceedings to terminate the case before the corporation’s suspended status was discovered. The firm’s actions on behalf of its client served only to delay and avoid an otherwise inevitable default judgment, in the absence of any acts by Design MTC to cure its suspended status.

The trial court did not abuse its discretion in taking this view of the evidence and record before it; consequently, it did not abuse its discretion in imposing sanctions therefor.

C. The Court Did Not Abuse Its Discretion in Imposing Discovery Sanctions

The firm argues that imposition of sanctions in reliance on Code of Civil Procedure section 2023 was improper, because the firm did not engage in any abuse of the discovery process itself.

The homeowners note, as the firm concedes, that the conduct listed in Code of Civil Procedure section 2023 as sanctionable discovery abuses is not exclusive. In our view, participating in discovery on behalf of a suspended corporation, knowing that the corporation is suspended, and having reason to know or suspect that such suspension disabled the corporation from participating in the litigation, qualifies as conduct abusive of the discovery process, and thus sanctionable. We cannot see any abuse of discretion in so holding, particularly if the sanctions order was also fully justified on other grounds.

DISPOSITION

For the reasons stated, we find no abuse of discretion in imposing the order for sanctions on the firm. The order for sanctions is affirmed.

HOLLENHORST, Acting P.J., and GAUT J., concur.

[1] In 1999, the Legislature amended Corporations Code section 1502 to require biennial instead of annual statements. (Stats. 1999, ch. 1000, § 20, p. 5974.)

[2] The penalty imposed by the Franchise Tax Board is made as provided in section 19141 of the Revenue and Taxation Code, and is currently $250.

Keywords: Construction Defect

Kriegler v. Eichler Homes, Inc.

269 Cal.App.2d 224 (1969)

David Freidenrich, Leonard Ware, Eleanor M. Kraft and Kraft & Kraft for Defendants, Cross-complainants and Appellants.

No appearance for Plaintiff and Respondent.

Hoge, Fenton, Jones & Appel, James B. Eggert, Whitney & Lariviere and John P. Whitney for Cross-defendants and Respondents.

TAYLOR, J.

Summary by Mary M. Howell, Esq.:

Developer of mass-produced home strictly liable for defective construction.  [NOTE: This area of the law has changed substantially since the decision in Kriegler.  It is no longer valid as written, and is included here for historical value.]

**End Summary**

Respondent Kriegler filed this action for physical damage sustained as the result of the failure of a radiant heating system in a home constructed by appellants, Eichler Homes, Inc. and Joseph L. Eichler (hereafter Eichler), who cross-complained against the supplier, respondent, General Motors Corporation (hereafter General Motors) and the heating contractors, respondents, Anderson and Rother, individually and doing business as Arro Company (hereafter collectively referred to as Arro).Eichler appeals from the judgment in favor of Kriegler on the complaint and in favor of General Motors and Arro on the cross-complaint.

The questions presented are: 1) whether Eichler was liable to Kriegler on the theory of strict liability; 2) the sufficiency of the evidence to sustain the judgment in favor of Kriegler on the basis of Eichler’s negligence in installing the radiant heating system; and 3) the propriety of the trial court’s conclusions that General Motors and Arro were not liable to Eichler for breach of any implied warranties and that, in any event, recovery on the cross-complaint was barred by Eichler’s negligence.

The basic facts are not in dispute. In April 1957 Kriegler purchased a home in Palo Alto that had been constructed by Eichler in the last quarter of 1951 and sold to Kriegler’s predecessors, the Resings, in January 1952. Eichler employed Arro as the heating contractor. Because of a copper shortage caused by the Korean war, Arro obtained terne coated steel tubing from General Motors. In the fall of 1951, Arro installed this steel tubing in the Kriegler home and guaranteed the radiant heating system in writing. Arro installed steel 226*226 tubing radiant heating systems in at least 4,000 homes for Eichler.

The method used to install the steel tubing was the same as that used for copper. After Eichler prepared the building site by providing a four-inch fill covered with a vapor-proof membrane of Sisal-Kraft paper and putting a net of steel mesh over the paper, Arro shaped the tubing, laid it on the mesh and tied it to the mesh. Then, Arro pumped the piping up to the hydrostatic pressure of not less than 250 and generally to 300, put a guage on it and left it for the approval of the city and the Federal Housing Administration inspectors (hereafter F.H.A.). After a hydrostatic pressure check by these inspectors, Eichler or its other subcontractors poured the concrete with the pressure gauge still operating, while the workers lifted the wire mesh and tubing up into the concrete with hooks. The objective of this process was to place the tubing into the center of the concrete slab to insure optimum heat distribution.

At this time, F.H.A. required either a double slab or use of a membrane with a single slab, and had approved both the above method of installation and the use of General Motors steel tubing.

In November 1959, as a result of the corrosion of the steel tubing, the radiant heating system of the Kriegler home failed. The emergency and final repairs required removal and storage of furniture, as well as the temporary acquisition by Krieglerand his family of other shelter. When Arro first attempted to repair the system, it discovered that the tubing was corroded from the outside. Arro first attempted to splice in a new pipe but after the system continued to leak, concluded that the tubing was probably corroded throughout and replaced the entire heating system with a new one.

The trial court found on the complaint, so far as pertinent, that: as a result ofEichler’s negligence, Kriegler’s home suffered a diminution in value of $5,073.18; and that regardless of negligence, Eichler was liable to Kriegler in the above amount on the theory of strict liability because the radiant heating system, as installed, was defective.

[1] Eichler first contends that the trial court erred in finding Eichler liable to Krieglerregardless of negligence. The question is one of first impression in this state. Although Kriegler has not filed any brief and we are under no duty to look up the law (Roth v. Keene, 256 Cal.App.2d 725, 727 [64 Cal.Rptr. 399]; Cal. Rules of Court, rule 17 (b)), Eichler still 227*227 has the burden of demonstrating error (Perfection Paint Products v. Johnson, 164 Cal.App.2d 739 [330 P.2d 829]).

Eichler concedes that the doctrine of strict liability in tort applies to physical harm to property (Gherna v. Ford Motor Co., 246 Cal.App.2d 639, 649 [55 Cal.Rptr. 94]) but argues that the doctrine cannot be applied to homes or builders. We do not agree. As set forth in Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57 [27 Cal.Rptr. 697, 377 P.2d 897, 13 A.L.R.3d 1049], and Vandermark v. Ford Motor Co., 61 Cal.2d 256 [37 Cal.Rptr. 896, 391 P.2d 168], the strict liability doctrine applies when the plaintiff proves that he was injured while using the instrumentality in a way it was intended to be used as a result of a defect in design and manufacture of which plaintiff was not aware and which made the instrumentality unsafe for its intended use. So far, it has been applied in this state only to manufacturers, retailers and suppliers of personal property and rejected as to sales of real estate (Conolley v. Bull, 258 Cal.App.2d 183, 195 [65 Cal.Rptr. 689]). We recently pointed out in Barth v. B. F. Goodrich Tire Co., 265 Cal.App.2d 228, at pp. 252-253 [71 Cal.Rptr. 306], that the reasoning behind the doctrine applies to any case of injury resulting from the risk-creating conduct of a seller in any stage of the production and distribution of goods.

We think, in terms of today’s society, there are no meaningful distinctions betweenEichler’s mass production and sale of homes and the mass production and sale of automobiles and that the pertinent overriding policy considerations are the same. Law, as an instrument of justice, has infinite capacity for growth to meet changing needs and mores. Nowhere is this better illustrated than in the recent developments in the field of products liability. The law should be based on current concepts of what is right and just and the judiciary should be alert to the never-ending need for keeping legal principles abreast of the times. Ancient distinctions that make no sense in today’s society and that tend to discredit the law should be readily rejected as they were step by step in Greenman and Vandermark.

We find support in our view in the comments of our most eminent authority in the law of torts (see Prosser, Strict Liability to the Consumer in California, 18 Hastings L.J., 9, 20, and the exceptionally able and well-thought out opinion of the Supreme Court of New Jersey, in a case almost on all fours with the instant one (Schipper v. Levitt & Sons, Inc. (1965) 228*228 44 N.J. 70 [207 A.2d 314]). ^{[fn. 1]} In Schipper, the purchaser of a mass-produced home sued the builder-vendor for injuries sustained by the child of a lessee. The child was injured by excessively hot water drawn from a faucet in a hot water system that had been installed without a mixing valve, a defect as latent as the incorrect positioning of the pipes in the instant case. In reversing a judgment of nonsuit, the Supreme Court held that the builder-vendor was liable to the purchaser on the basis of strict liability. In language equally applicable here, the court said: “When a vendee buys a development house from an advertised model, as in a Levitt or in a comparable project, he clearly relies on the skill of the developer and on its implied representation that the house will be erected in reasonably workmanlike manner and will be reasonably fit for habitation. He has no architect or other professional adviser of his own, he has no real competency to inspect on his own, his actual examination is, in the nature of things, largely superficial, and his opportunity for obtaining meaningful protective changes in the conveyancing documents prepared by the builder vendor is negligible. If there is improper construction such as a defective heating system or a defective ceiling, stairway and the like, the well-being of the vendee and others is seriously endangered and serious injury is foreseeable. The public interest dictates that if such injury does result from the defective construction, its cost should be borne by the responsible developer who created the danger and who is in the better economic position to bear the loss rather than by the injured party who justifiably relied on the developer’s skill and implied representation.” (Pp. 325-326.)

“Buyers of mass produced development homes are not on an equal footing with the builder vendors and are no more able to protect themselvs in the deed than are automobile purchasers in a position to protect themselves in the bill of sale.” (P. 326.) The court then pointed out that the imposition of strict liability principles on builders and developers would not make them insurers of the safety of all who thereafter came on the premises. In determining whether the house was defective, the test would be one of reasonableness rather than perfection.

As it cannot be disputed that Kriegler here relied on the skill of Eichler in producing a home with a heating system 229*229 that was reasonably fit for its intended purpose, the trial court properly concluded that Eichler was liable to Kriegler on the basis of strict liability, and the judgment in favor of Kriegler must be affirmed on that ground alone.

[2] Since we have concluded above that a sufficient basis appears for sustaining the judgment in favor of Kriegler, we will only briefly discuss Eichler’s remaining contention in relation to that judgment. Eichler contends that the evidence does not support the findings concerning its negligence in the installation of the heating system. The detailed findings are set forth in the footnote below. ^{[fn. 2]}

As Kriegler has not seen fit to file a brief in this case, we assume that: 1) the facts as stated in Eichler’s brief are true; 2) the evidence is insufficient to support material findings of the trial court; and 3) Kriegler has abandoned any attempt to support the judgment and the ground urged by Eichler for reversing the judgment is meritorious (Roth v. Keene, supra).

Applying the above rule, we assume that the evidence is insufficient to support the findings concerning Eichler’s negligence in the installation of the heating system. Accordingly, the findings and conclusions declaring Eichler’s negligence are hereby stricken, and the judgment in favor of Kriegler otherwise affirmed.

[3] We turn then to Eichler’s appeal from that portion of the judgment denying relief on its cross-complaint against General Motors and Arro. As indicated above, the trial court found as to General Motors that the steel tubing was suitable for such use if properly installed, that there was no breach of the implied warranties of fitness for intended use or merchantability, and that there were no express warranties. As to Arro, the court found there was an express warranty for five years but that no implied warranties were made. The court also found that Arro did not breach its express warranty but 230*230 that the damages were caused by Eichler’s negligence in positioning the heating system.

Eichler complains only of the findings relating to implied warranty, and the further superfluous finding that in any event, Eichler was barred from any recovery on its cross-complaint because of its negligence. Eichler does not attack the sufficiency of the evidence ^{[fn. 3]} as to the findings that no implied warranties were breached by General Motors or Arro, but only states that the trial court failed to indicate whether General Motors made any implied warranties of fitness as to the tubing. This contention borders on the frivolous, as implied warranties are created by operation of law.

The uncontroverted evidence established that the steel tubing was sold by General Motors to Arro in May 1951. The applicable provision of law at this time was section 1735 of the Civil Code (set forth below). ^{[fn. 4]}

This section imposes an absolute liability regardless of negligence (Vaccarezza v. Sanguinetti, 71 Cal.App.2d 687 [163 P.2d 470]) and in a similar situation has been held to include a prospective warranty that tubing would not, within a reasonable period of time, corrode and leak (Aced v. Hobbs-Sesack Plumbing Co., 55 Cal.2d 573, 583-585 [12 Cal.Rptr. 257, 360 P.2d 897]). We must assume that the trial court was familiar with these rules and based its conclusions of non-liability on the evidence presented. Accordingly, the judgment 231*231 in favor of Arro and General Motors on the cross-complaint is affirmed. As Eichler failed to establish a cause of action on its cross-complaint, we need not discuss the contentions concerning the finding that it was barred from any relief on the cross-complaint by its own negligence.

Affirmed.

Shoemaker, P. J., and Agee, J., concurred.

“(1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, and it appears that the buyer relies on the seller’s skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose.”

“(2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality.”

“(3) If the buyer has examined the goods, there is no implied warranty as regards defects which such examination ought to have revealed.”

“(4) In the case of a contract to sell or a sale of a specified article under its patent or other trade name, there is no implied warranty as to its fitness for any particular purpose.”

“(5) An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade.”

“(6) An express warranty or condition does not negative a warranty or condition implied under this act unless inconsistent therewith.”

[fn. 1] 1. Cited with approval in Connor v. Great Western Sav. & Loan Assn. (1968) 69 Cal.2d 850 [73 Cal.Rptr. 369, 447 P.2d 609], which, although not directly in point, supports our view.

[fn. 2] 2. The court found that at the time of the installation of the heating system in the Kriegler home, the building and construction industry had knowledge of methods whereby steel tubing could be used as a substitute for copper tubing with reasonable protection against corrosion. An essential element in such methods was the control positioning of the tubing well within the cement slab. Because of the susceptibility to the rust and corrosion in such steel tubing, it was good practice in the building and construction industry, both as to custom homes and tract developments, to take precautions to insure controlled and uniform positioning of the tubing well within the concrete slab. This was usually accomplished by other builders of custom and tract homes through the use of (1) double slab construction, (2) concrete blocks, or (3) wire clips. Eichler was negligent in not using any of these methods then known and used in the industry.

[fn. 3] 3. Accordingly, as to the appeal from the judgment on the cross-complaint, the usual assumptions concerning the sufficiency of the evidence to support the findings and judgment apply.

[fn. 4] 4. “Subject to the provisions of this act and of any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract to sell or a sale, except as follows:

Keywords: Construction Defect

Creekridge Townhome Owners Association v. Whitten

177 Cal.App.4th 251 (2009)

253*253 Angius & Terry, Paul P. Terry, Jr., Bradley J. Epstein and Sam Y. Chon for Plaintiff and Appellant.

Klinedinst, G. Dale Britton, Natalie P. Vance and Jason W. Schaff for Defendant and Respondent C. Scott Whitten.

Law Offices of Robles & Castles, William A. Robles and Ranjani Ramakrishna for Defendant and Respondent Monier Inc.

Anwyl, Scoffield & Stepp, Lindy H. Scoffield and Pamela A. Lewis for Defendant and Respondent REO Roofing Company.

Summary by Mary M Howell, Esq.

In a construction defects case pertaining to roofs, the issue was whether moisture intrusion was latent or patent, and therefore which statute of limitations governed plaintiff’s claim.   The appellate court concluded it could not say, as a matter of law, that a water moisture problem inside a window as a result of the tile roofs, in just one unit of a 61-unit complex, along with a report of several broken roof tiles, constituted sufficiently appreciable damage to give the association notice that remedies must be pursued. Further, if the court were to find in favor of defendants, property owner associations would be forced to conduct extensive investigations for possible defects based on any report of a small problem.  Hence, the defect was found to be latent, and further the reports of water intrusion did not constitute notice sufficient to make the defect patent.

**End Summary**

OPINION

BUTZ, J.—

This is a construction defect case involving a reroofing of 11 buildings that house 61 units in a townhome community. The trial court granted summary judgment to the roofing defendants. The trial court found that the plaintiff townhome association did not meet the statute of limitations because the association had notice of a water moisture problem inside the window of one unit as a result of the new roof, and this unit reported several broken roof tiles.

(1) We shall reverse. We conclude there are triable issues of material fact on the two statute of limitations issues: (1) whether the alleged defect was patent (i.e., apparent to an average consumer from a reasonable inspection); 254*254 and (2) whether the defect can be deemed discovered in the latent defect context because the damage was sufficiently appreciable so that plaintiff suspected or reasonably should have suspected that defendants had done something wrong to plaintiff.

FACTUAL AND PROCEDURAL BACKGROUND

On June 18, 2004, plaintiff Creekridge Townhome Owners Association, Inc. (plaintiff), filed a construction defect lawsuit, concerning a reroofing project, against defendants C. Scott Whitten, Inc. (Whitten), REO Roofing Company (REO), and Monier Inc. (Monier). Whitten was the roofing manager and inspector, REO was the roofer, and Monier was the roofing supplier.

The lawsuit involves the reroofing of 11 buildings, comprising 61 units, in plaintiff’s townhome community. The reroofing was completed in early 1997, and replaced the buildings’ old shake roofs with Cedarlite concrete tile roofs.^[1]

In late June 1997, one owner in plaintiff’s community described in a letter to plaintiff’s board that she had a water moisture problem inside her second-story bedroom window as a result of the new tile roof; she also reported several broken roof tiles. The summary judgment record contains no other evidence of any other roof problems until 2003.

In the winter of 2003, plaintiff suffered numerous roof leaks. The following spring, plaintiff hired a roofing consultant, Randy Davis, who found multiple causes for the leaks and multiple types of roof defects.

As noted, on June 18, 2004, plaintiff sued Whitten, REO and Monier for these alleged roof defects. Plaintiff set forth causes of action for breach of warranty (express and implied), breach of contract, and negligence.

Whitten moved for summary judgment on statute of limitations grounds. After tentatively denying this motion, the trial court reversed course and 255*255 granted it, citing an opinion decided during the summary judgment proceedings, Landale-Cameron Court, Inc. v. Ahonen (2007) 155 Cal.App.4th 1401 [66 Cal.Rptr.3d 776](Landale).

REO and Monier in turn obtained a stipulated judgment in their favor on the same grounds as the Whitten summary judgment.^[2] This stipulated judgment resulted in a second appeal by plaintiff, C059458, which we have consolidated with the Whitten appeal, C058300.

DISCUSSION

We uphold a summary judgment if all the evidentiary papers associated with it—which we review independently—show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law. We do not resolve factual issues but ascertain whether there are any to resolve. (Code Civ. Proc., § 437c, subd. (c);^[3] Colores v. Board of Trustees (2003) 105 Cal.App.4th 1293, 1305 [130 Cal.Rptr.2d 347] (Colores); Flait v. North American Watch Corp.(1992) 3 Cal.App.4th 467, 475 [4 Cal.Rptr.2d 522].)

Because a summary judgment denies the losing party its day in court, we liberally construe the evidence in support of that party and resolve doubts concerning the evidence in that party’s favor. (Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142 [12 Cal.Rptr.3d 615, 88 P.3d 517]; Colores, supra, 105 Cal.App.4th at p. 1305.)

Whitten based its summary judgment motion entirely on two interrogatory answers that plaintiff furnished, as read in light of the gravamen of plaintiff’s complaint.

The two interrogatories, propounded by Monier to plaintiff, were:

“No. 14: Identify the date when you first became aware that the Cedarlite tile roof was leaking.

256*256 “No. 15: Referencing your previous response, how did you become aware that the Cedarlite tile roof was leaking[?]”

Plaintiff provided the same answer to both interrogatories:

“Homeowner Heidi Goodman of 7434 Creekridge Lane wrote a letter to the Board that was discussed in open session at the 6/24/97 board meeting minutes describing a water moisture problem inside her second[-]story bedroom window as a result of the tile roofs, in addition to reporting several broken roof tiles.”

The gravamen of plaintiff’s complaint alleges that the reroofing “deficiencies include, among other things, the following: [¶] a. Water infiltration through roofs and roof materials, and within roof systems.”

With this background in mind, we now turn to the two statute of limitations issues of patent defect and latent defect/discovery.

I. Patent Construction Defect

(2) Section 337.1 sets forth a statute of limitations of four years for a “patent” construction defect, which starts running when the construction is substantially completed. (§ 337.1, subd. (a)(1).)

(3) The test to determine whether a construction defect is patent is an objective test that asks “whether the average consumer, during the course of a reasonable inspection, would discover the defect. The test assumes that an inspection takes place.” (Geertz v. Ausonio (1992) 4 Cal.App.4th 1363, 1370 [6 Cal.Rptr.2d 318]; see § 337.1, subd. (e); 3 Witkin, Cal. Procedure (5th ed. 2008) Actions, § 606, pp. 787-788.) This test generally presents a question of fact, unless the defect is obvious in the context of common experience; then a determination of patent defect may be made as a matter of law (including on summary judgment). (Preston v. Goldman(1986) 42 Cal.3d 108, 110-111, 123 [227 Cal.Rptr. 817, 720 P.2d 476] (Preston);Mills v. Forestex Co. (2003) 108 Cal.App.4th 625, 644 [134 Cal.Rptr.2d 273] (Mills);Tomko Woll Group Architects, Inc. v. Superior Court (1996) 46 Cal.App.4th 1326, 1339 [54 Cal.Rptr.2d 300] (Tomko); Geertz, supra, 4 Cal.App.4th at p. 1368.)

Here, the only evidence of defect presented by defendant Whitten in its summary judgment motion regarding the 1997 reroof construction was an interrogatory answer that referenced a letter a homeowner in plaintiff’s community had written to plaintiff’s board. According to the interrogatory answer, this letter “was discussed in open session at the 6/24/97 board 257*257 meeting . . . [and] describ[ed] a water moisture problem inside [the homeowner’s] second[-]story bedroom window as a result of the tile roofs, in addition to reporting several broken roof tiles.”

Plaintiff countered this evidence with a declaration from the roofing consultant whom plaintiff had hired after incurring many roof leaks in 2003. The consultant found multiple defects regarding the 1997 reroofing, and stated that these defects “would not be readily apparent to a lay person.”

Based on this evidence, we cannot say that the reroofing defects alleged here were patent defects as a matter of law. Only one roof-related “water moisture problem” in one unit of a 61-unit, 11-building complex—and that problem was inside a window—coupled with a report of several broken roof tiles from that unit’s owner, were presented. That is it. This evidence pales in comparison to situations involving obvious defects in the context of common experience, in which a patent defect has been found as a matter of law: for example, a backyard pond with only a one-foot-high wall around it, into which a toddler fell (Preston, supra, 42 Cal.3d at pp. 110-111, 121-123); and a visible defect in pedestrian pavement substantial enough to cause a pedestrian to trip and fall (Tomko, supra, 46 Cal.App.4th at p. 1339).

The four-year statute of limitations for a patent construction defect does not provide a basis on which to grant summary judgment here. That leads us to the statute of limitations concerning a latent construction defect and the discovery of such a defect.

II. Latent Construction Defect/Discovery

(4) A “latent” construction defect is one that is “not apparent by reasonable inspection.” (§ 337.15, subd. (b).) As to a latent defect that is alleged in the context of the challenged causes of action here—negligence, breach of warranty, and breach of contract—three statutes of limitations are in play: sections 338, 337 and 337.15. “The interplay between these [three] statutes sets up a two-step process: (1) actions for a latent defect must be filed within three years (§ 338 [injury to real property]) or four years (§ 337 [breach of written contract]) of discovery, but (2) in any event must be filed within ten years (§ 337.15) of substantial completion.” (North Coast Business Park v. Nielsen Construction Co. (1993) 17 Cal.App.4th 22, 27 [21 Cal.Rptr.2d 104] (North Coast); see Regents of University of California v. Hartford Acc. & Indem. Co.(1978) 21 Cal.3d 624, 640-641 [147 Cal.Rptr. 486, 581 P.2d 258*258 197]; Landale, supra, 155 Cal.App.4th at p. 1407; Mills, supra, 108 Cal.App.4th at pp. 643-644.)^[4]

(5) As noted, the limitations periods of sections 337 and 338 start to run upon “discovery.” Discovery occurs when the plaintiff suspects, or reasonably should suspect, that someone has done something wrong to the plaintiff, causing the injury (here, “wrong” is not used in a technical sense, but in a lay one). (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397-398 [87 Cal.Rptr.2d 453, 981 P.2d 79]; Landale, supra, 155 Cal.App.4th at p. 1407; Mills, supra, 108 Cal.App.4th at pp. 643-644.) “A plaintiff has reason to suspect when he has notice or information of circumstances to put a reasonable person on inquiry.” (Landale, supra, 155 Cal.App.4th at pp. 1407-1408; see Norgart, supra, 21 Cal.4th at p. 398.) In other words, “sections 337 and 338 begin to run only after the damage is sufficiently appreciable to give a reasonable man notice that he has a duty to pursue his remedies.” (North Coast, supra, 17 Cal.App.4th at p. 27, italics added; see Mills, supra, 108 Cal.App.4th at p. 646.)

Again, though, we cannot say, as a matter of law, that “a water moisture problem” inside a window as a result of the tile roofs—in just one unit of a complex that comprises 61 units and 11 buildings—along with a report of several broken roof tiles by that unit’s owner, constitutes sufficiently appreciable damage to give a reasonable person notice that remedies must be pursued.

It was the recent decision in Landale that prompted the trial court to change its mind and grant the summary judgment. We are not similarly persuaded.

Landale was a summary judgment construction defect case involving an eight-unit condominium complex that incurred various water leaks during rains. (Landale, supra, 155 Cal.App.4th at p. 1403.) The central issue was whether the three-year statute of limitations for injury to real property (§ 338) had been tolled. (Landale, at p. 1404.) To decide that issue, the court first had to decide whether the statute had run absent tolling. (Id. at pp. 1403-1404, 1407-1410.)

The Landale court concluded that the three-year statute of limitations had run on the complaint filed in January 2001 based on the following evidence: 259*259 The former board president of the plaintiff homeowners association admitted in her deposition (1) that there were heavy rains in 1997, which caused rainwater to collect on the roofs and resulted in leaks where there had not been any leaks before, and that in 1997 a handyman applied some tar to the roof and other areas; and (2) that she received a letter in June 1998 that specifically mentioned leaks in her unit and at least two other units during the 1996-1997 rainy season, as well as a problem with waterproofing of the walls in another unit, roof and deck problems, and stairway leaks. (Landale, supra, 155 Cal.App.4th at pp. 1404-1405, 1408.)

Based on this evidence, Landale concluded: “Here, at some unspecified date in 1997, . . . the . . . president [of the board of the plaintiff homeowners association (HOA)] . . . noticed water intrusion and observed a handyman trying to repair roof leaks. The HOA thus had notice or information that should have prompted further inquiry `through the exercise of reasonable diligence.’ [Citation.] Indeed, the June 1998 letter . . . to [the HOA board president] indicated that during the 1997 heavy El Niño rains several other units had leaks, and there were also `roof and deck problems’ and `stairway leaks.’ Such other damage would no doubt have been revealed to the HOA with the exercise of reasonable diligence. [¶] Thus, in the present case, the [three-year, section 338] statute of limitations began to run at the latest by the end of 1997 . . . and the complaint filed on January 19, 2001, was therefore untimely—unless the statute of limitations was tolled. . . .” (Landale, supra,155 Cal.App.4th at p. 1408.)

In Landale, then, by the end of 1997, there were leaks in at least three of the complex’s eight units, including the unit of the board president of the plaintiff homeowners association. Furthermore, at this point, the president had observed a handyman trying to repair roof leaks, and there was a problem with waterproofing of the walls in another unit as well as roof and deck problems and stairway leaks. In short, at least half of the units in the Landale complex were leaking, and repair attempts had been observed by the homeowners association board president. This stands in stark contrast to the evidence presented here: One of 61 units had a window “water moisture problem” as a result of the tile roofs; the owner of that unit reported several broken concrete roof tiles; and no repairs had been observed.

Finally, the sharp distinction between the Landale facts and the facts here highlights a significant concern raised by plaintiff. If we were to find in favor of defendants, that would force property owner associations across the state to conduct extensive investigations for possible construction defects based on any report of a small problem. This could prove very expensive for the associations, and would often be futile. We decline to impose such a burden.

260*260 DISPOSITION

The judgments (order granting summary judgment in favor of Whitten, No. C058300, and the subsequent stipulated judgment in favor of REO and Monier, No. C059458) are reversed. Plaintiff is awarded its costs on both appeals. (Cal. Rules of Court, rule 8.278(a)(1)-(3).)

Sims, Acting P. J., and Robie, J., concurred.

[1] A different roofer reroofed the remaining six buildings in plaintiff’s townhome community, and is not a party to this appeal. Also, there was another roofer besides REO who worked on some of the 11 buildings at issue here; that roofer went bankrupt and is not part of this appeal.

[2] Plaintiff also sued defendant Monier for strict liability. There is hardly any mention of this cause of action in the briefs. Nevertheless, judgment was granted in favor of Monier based on the statute of limitations grounds on which defendant Whitten obtained summary judgment. We are reversing the summary judgment in favor of Whitten and, consequently, the stipulated judgment in favor of Monier and REO. To the extent the strict liability cause of action against Monier was summarily foreclosed on these statute of limitations grounds, it has been revived with this reversal as well.

[3] Undesignated statutory references are to the Code of Civil Procedure.

[4] Because the motion for summary judgment was brought by defendant Whitten, who was the roofing manager and inspector, the motion focused on defects in construction rather than on defects in the roofing product itself. The decision in Mills notes that “[n]either section [referring to both § 337.1 (patent construction defect) and § 337.15 (latent construction defect)] applies to the manufacturer of a product incorporated into the improvement. . . .” (Mills, supra, 108 Cal.App.4th at p. 643.) (See fn. 2,ante.)

Keywords: Construction Defect