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The California Court of Appeals found that a reduced limitations period in a homebuilder's arbitration agreement was substantively unconscionable, but instead of invalidating the agreement, the Court severed the offending provision.
In Browning v. Dunmore Development Co., No. C050552, C050945, 2006 WL 3760036, (Cal. Ct. App. Dec. 22, 2006), Browning bought a home from Dunmore and later sued for allegedly defective construction. Dunmore moved to compel arbitration pursuant to an arbitration clause in the warranty agreement. The trial court denied the motion on the basis that the arbitration agreement was unconscionable and therefore unenforceable.
On appeal, the Court found no evidence that Browning was surprised by the inclusion of an arbitration clause but nevertheless assumed "a certain level of procedural unconscionability in the unequal bargaining power of a developer and homebuyer" in light of "the unique nature a parcel of real estate has for a particular buyer." The Court further assumed that inclusion of the arbitration clause was not open to negotiation.
Turning to the issue of substantive unconscionability, the Court rejected most of Browning's arguments but found that a reduced limitations period was "so one-sided" that it was substantively unconscionable. The reduced limitations period required Browning to bring any claim as to defects in materials or the quality of the constructing within one year of closing. As the Court noted, Dunmore offered no explanation for the "drastic limitation on the time limits in which a buyer would have to discover a latent defect."
Instead of invalidating the arbitration agreement, the Court severed the reduced limitations in accordance with a severability clause. The Court thus remanded the case with instructions to order arbitration.
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