The Right to a Jury Trial in Disputes with Developers

Published in the ECHO Journal, January 2009

A person’s right to have his or her dispute decided by a jury is fundamental, and our state Supreme Court has said so on many occasions. [See, e.g., Grafton Partners v. Superior Court, 36 Cal. 4th 944 (2005).] Indeed, the right to a jury trial is enshrined in our state Constitution as Article I, section 16, which provides that a jury trial is “an inviolate right.” In fact, in the Grafton decision, the California Supreme Court stated that the right to a trial by jury is so important that is must be “’zealously guarded’ in the face of a claimed waiver.” [Grafton at page 956.]

Nevertheless, it has become increasingly common over the last ten years for developers of community associations (which are considered to be persons under the law), to circumvent this fundamental right by including provisions in the governing documents that eliminate the association’s right to have a jury decide a dispute between the association and its developer. Fortunately, however, this tactic has largely been rejected by the courts, including a recent decision from the Fourth District Court of Appeal in San Diego, Treo @ Kettner Homeowners Assn. v. Superior Court (Intergulf Construction Corp.), 166 Cal. App. 4th 1055 (Sept. 2008) (“Treo”).

State of the Law Prior to Treo

A court decision from 2000, Villa Milano Homeowners Assn. v. Il Davorge, 84 Cal. App. 4th 819 (2000), set the stage for this area of law. In that case, the Court of Appeal, in what it called a "case of first impression," held that a developer of a condominium project could not use a binding arbitration clause that the developer included in the CC&Rs in order to preclude the homeowner association from pursuing a lawsuit for construction defects in court. The developer’s intent was to use the arbitration clause to preclude the association from having the court decide the lawsuit; the clause compelled the parties to use a private arbitrator instead.

But the Court of Appeal in Villa Milano found that the arbitration clause was unconscionable and therefore could not be enforced. The appellate justices emphasized that their finding of unconscionability was strongly supported by the fact that the arbitration clause was presented as a non-negotiable term because the developer drafted and recorded the CC&Rs without any association involvement. In other words, the arbitration provision was unilaterally imposed on the association by the developer, and, as such, the association had no opportunity to negotiate the issue. As it turns out, these themes of fairness and due process would come to light eight years later in the Treo case, which involved another type of developer-drafted provision that was inserted in an association’s governing documents: a judicial reference clause.

The Issue: A Jury Trial or a Judicial Referee?

In the Treo case, a homeowner association of a condominium project in downtown San Diego sued its developer in 2007 for damages that were caused by construction defects in the common areas. In our state, as we know, these types of lawsuits are not uncommon and for good reason: the law provides a remedy to community associations and home buyers who purchase defectively-constructed housing.

But what made this case unique is that the developer included a provision in the association’s CC&Rs that required all disputes between the parties to be decided by a judicial referee instead of a jury. In a judicial reference, the parties to a lawsuit mutually agree that the case can be heard and decided by an outside lawyer instead of a judge or jury. In such a proceeding, the referee is empowered to "hear and determine any or all of the issues in an action or proceeding, whether of fact or of law" and to make a binding decision that "must stand as the decision of the court." In other words, the referee becomes both the judge and jury and, as such, has the power to decide the lawsuit. After a hearing is conducted, the referee submits a statement of decision to the court, and the court accepts the referee’s rulings as binding. Thus, the effect of a judicial reference is to eliminate the parties’ constitutional right to have their case decided by a jury.

A critical aspect of a judicial reference is that both parties must come together and actually agree to use a referee to decide their case instead of a judge or jury. In fact, section 638 of the Code of Civil Procedure prescribes the method by which the parties can submit their dispute to a judicial referee: “A referee may be appointed upon the agreement of the parties filed with the clerk, or judge, or entered in the minutes, or upon the motion of a party to a written contract or lease that provides that any controversy arising therefrom shall be heard by a referee if the court finds a reference agreement exists between the parties . . . .” (Italics added.) Note the italicized language; in order to waive a party’s right to a jury trial there must be an agreement between the parties—a contract—where both parties agree to submit the lawsuit to a judicial referee.

But in Treo, the developer drafted and recorded the CC&Rs in 2001, well before any of the purchase agreements were signed and before the homeowners assumed control of the association’s board of directors. As such, there was no “meeting of the minds” between the developer and the association to submit the association’s lawsuit to an outside referee. To the contrary, the developer unilaterally decided to eliminate the association’s right to a jury trial by including a judicial-reference provision in the CC&Rs and then recording the document (which was 86 pages in length) prior to selling the condominium units. By doing so, the board of homeowners never had the opportunity to see the provision, much less agree to it.

Despite the absence of a true agreement between the parties to waive a jury trial, the developer in Treo filed a motion with the trial court requesting that the court order the parties to resolve their dispute by judicial reference instead of by a jury. The association opposed the motion and argued that the judicial-reference provision in the CC&Rs was not a legitimate contractual waiver of its constitutional right to a jury trial as contemplated by section 638. But unfortunately for the association, the trial court rejected the association’s arguments and granted the developer’s motion. Accordingly, the association was prevented from having its lawsuit decided by a jury; instead, it had no alternative but to submit the dispute to an outside referee. Faced with this reality, the association petitioned the Court of Appeal for relief from the trial court’s order.

The Right to a Jury Trial is More than a Matter of Contract

The Court of Appeal was not impressed with the trial court’s order extinguishing the association’s right to a jury trial. After acknowledging that CC&Rs are similar to contracts and that they “shall be enforceable equitable servitudes, unless unreasonable, and shall . . . bind all owners of separate interests in the development,” the Court of Appeal cited to the Supreme Court’s Grafton opinion and found that the developer’s attempt to waive the association’s right to a jury was improper.

The issue to be decided was succinctly stated by the Court of Appeal: “The question here, as it was in Grafton, is to ascertain the intention of the Legislature with regard to prelitigation contractual waiver of the right to trial by jury. When the Legislature stated in section 638 that the right could be waived by written contract, did it mean the term ‘contract’ to include equitable servitudes created by the CC&Rs of common interest communities? We do not believe that it did.”

A close reading of the Treo opinion reveals that the Court of Appeal had difficulty with the manner in which the purported contract between the developer and the association came about. The problem is that the contract—the CC&Rs—was drafted entirely by the developer and without any input from the association or its members. As we know, this is how developers typically impose CC&Rs on community associations. But because of this dynamic, “later purchasers and their successors, who will make up almost all association members, effectively have no choice but to accept the CC&R's prepared by the developer, including in this case the waiver of the right to trial by jury.” [See Grafton at p. 1067.]

Faced with this reality, the Court of Appeal concluded that, although CC&Rs are to be considered contracts in certain situations (e.g., for deciding disputes regarding assessments between the association and homeowner members), they are not the type of contract that would allow parties to waive the “inviolate” constitutional right to trial by jury—especially when, as in this case, the contract is drafted entirely by the developer and is then imposed on the association that the developer creates. As noted by the Court of Appeal:

Treating CC&Rs as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived. CC&Rs are notoriously lengthy, are adhesive in nature, are written by developers perhaps years before many owners buy, and often, as here with regard to the waiver of trial by jury, cannot be modified by the association. Further, the document is not signed by the parties.

With that, the Court of Appeal reversed the lower trial court and ordered that the association’s right to jury trial was reinstated; there was no waiver, and the developer’s attempt to eliminate the association’s right to jury trial in the CC&Rs was improper. It is also interesting to note that, unlike in Villa Milano, the Treo court never reached the issue of whether the developer’s judicial-reference clause was “unconscionable” and therefore should not be enforced on that basis; there was no need, given the Court of Appeal’s holding that such a CC&R provision violates the association’s constitutional right to jury trial as a matter of law.

Constitutional Balance is Restored

Treo is clearly a favorable decision for homeowner associations involved in disputes with their developers. But the question arises: Why would the developer want to include a judicial-reference provision in the association’s CC&Rs in the first place (or, as in Villa Milano, a contractual arbitration provision)? After all, such clauses have the effect of eliminating a jury trial for the developer as well as for the association. Wouldn’t a developer want its day in court, too? Although the Court of Appeal in Treo did not discuss the developer’s reasoning, the implication is clear: From the developer’s point of view, the absence of a right to a jury trial in a construction defects case substantially decreases the likelihood of a large, unfavorable jury verdict against the developer. Developers in California are well aware that juries, which are typically comprised of homeowners, do not look favorably on developers who build and sell defective housing to unsuspecting home buyers. Thus, by eliminating an association’s right to a jury trial in the CC&Rs, the developer is essentially betting that a judicial referee or arbitrator will be more favorable to the developer than a jury of homeowners would otherwise be.

In essence, then, including such a judicial-reference provision (or a binding arbitration clause) in the association’s governing documents affords the developer a perceived strategic advantage over a community association in a construction defects lawsuit. It is for this reason that the association and developer in the Villa Milano and Treo cases fought so hard over the enforceability of these types of CC&R provisions, which have the effect of denying the association a jury trial. But now that the Court of Appeal has issued a clear directive that such developer-drafted waivers are improper, homeowner associations can have renewed confidence that, when faced with a legal dispute involving their developer, such cases will be heard by an impartial jury, not by an arbitrator or referee who was imposed by the developer without the association’s consent.

Jan Kopczynski is a partner at the law firm of Ram, Olson, Cereghino & Kopczynski, and he specializes in handling complex construction defect cases, business disputes and real estate litigation.