Jaramillo v. JH Real Estate Partners, Inc.

In regard to general negligence, the Jaramillos alleged in their complaint that beginning on October 5, 2000 and continuing thereafter, the defendants “negligently inspected, maintained or repaired the subject premises resulting in water incursion and dangerous and unhealthful levels of moisture in walls and ceilings, mold, mold mycotoxins, airborne mold spores, fungus, and bacteria in the rental unit occupied by plaintiffs.” The Jaramillos further alleged that this dangerous condition and its negligent cause was not discovered, and could not have been discovered in the exercise of reasonable diligence, until January 2002.

In regard to intentional tort, the Jaramillos alleged in their complaint that beginning on October 5, 2000 and continuing thereafter, defendants intentionally caused damage to them by failing and refusing to “provide a clean, sanitary and habitable living space for plaintiffs despite defendants’ knowledge that defendants’ negligence as described herein above had caused plaintiff’s [ric] rental unit to be in an unsafe, unsanitary and dangerous condition due to the presence of mold, mold spores, mycotoxins, fungus, and bacteria.” They further alleged that during “about January 2002, defendants improperly caused one or more three-day notices to pay rent or quit to be served on plaintiffs in retaliation for plaintiffs’ filing a report with the Monterey County Health Department concerning the unsanitary living conditions in their unit, intentionally causing plaintiffs severe emotional distress.”

In regard to premises liability, the Jaramillos stated in their complaint that they had “suffered physical injury and severe emotional distress as a result of unhealthful and unsanitary conditions” in their rental unit. They also averred that, about April 2001, Kim Jaramillo slipped and fell on a concrete ramp located on the premises and she injured her knee, and the injury was proximately caused by the defendants’ failure to inspect and to repair or maintain the ramp.

In regard to the breach of the implied warranty of habitability, the Jaramillos alleged that defendants failed to provide and maintain a clean, sanitary and habitable rental unit.

In regard to violation of Business and Professions Code sections 17200 and 17500 et seq., the Jaramillos alleged that defendants’ actions constituted unfair business practices. They further averred that defendants “falsely advertised and represented that rental units at the subject premises were in a clean and sanitary condition, complied with all applicable health, safety and building laws and ordinances, and were safe and were fit for human habitation ...”

On May 14, 2002, defendants moved for an order compelling arbitration based on the arbitration provision contained in the JH Management Rental Agreement between the JH Management Company, LLC, the landlord’s

agent, and the Jaramillos. The arbitration clause provides for binding arbitration of personal injury disputes in a provision titled “Arbitration of Personal Injury Disputes.” Section 22 of the agreement states in small, boldface print: “Any dispute between the parties relating to a claim for personal injury, directly or indirectly relating to, or arising from, the condition of the leased premises, or the apartment community, shall be resolved by arbitration conducted by the American Arbitration Association.” Although the arbitration provision states that the American Arbitration Association rules govern, it also imposes the restriction that any demand for arbitration be made in writing “within 180 days after the claim, dispute or other matter in questions [sic] has arisen.” The section provides in small, nonboldface print that the arbitration shall be conducted before three arbitrators and all administrative fees and costs shared equally by the landlord and resident and “all such fees must be advanced prior to the arbitration ...” The section also states in small, nonboldface print: “Nothing in this section shall be deemed to limit the Landlord’s rights in the event of Resident’s breach or default under this agreement, including without limitation, Landlord’s right to bring an action for Unlawful Detainer under the laws of the State of California.”

In their memorandum of points and authorities in opposition to the motion, the Jaramillos argued that the arbitration clause was unconscionable and should not be enforced. They contended that they were the parties with the weakest bargaining power and the requirement of arbitration before three arbitrators and payment of their half share of the costs in advance constituted “an undue economic burden” and put them at a “gross economic disadvantage relative to the corporate landlord.” They also asserted that the court had authority to deny the motion because there was a possibility of conflicting rulings since not all defendants were parties to the arbitration clause, citing Code of Civil Procedure section 1281.2, subdivision (c). The Jaramillos maintained that their claims for property damage, intentional infliction of emotional distress, and punitive damages were outside the scope of the arbitration clause.

In their reply memorandum, the defendants argued that all of the Jarmillos’ claims arose from the condition of the leased premises and fell within the purview of the arbitration clause. The defendants maintained that the plaintiffs failed to show that the rental agreement was a contract of adhesion or that the arbitration clause was outside the reasonable expectations of the weaker party or unconscionable. They declared that “the arbitration provision was prominent, conspicuous, simple and straightforward” and its terms and burdens applied equally to plaintiffs and defendants.

The motion was heard on June 14, 2002. The Jaramillos’ attorney first asserted that the arbitration clause was unconscionable because the terms of

the lease were nonnegotiable, the clause was buried in the rental agreement, and it required three AAA arbitrators to hear a dispute. Their attorney indicated that, in her experience, one AAA arbitrator cost $2,000 to $3,000 per day. The Jaramillos’ attorney also argued: “[T]he causes of action alleged in the plaintiff’s [sic] complaint do include causes of action for breaches of warranties express and implied in the lease, [f] Some of those happen to have resulted in personal injuries. Others happened to have resulted in property damage, [f] So obviously there isn’t strict mutuality of remedy here, Your Honor.”

The court pointed out that the arbitration clause expressly stated that nothing in the section limited the landlord’s rights in the event of a resident’s breach or default under this agreement, including the landlord’s right to bring an action for unlawful detainer. The court denied the motion, stating that the arbitration clause did not provide mutuality to the tenants.

B. Legal Principles

“Title 9 of the Code of Civil Procedure, as enacted and periodically amended by the Legislature, represents a comprehensive statutory scheme regulating private arbitration in this state. ([Code Civ. Proc.,] § 1280 et seq.) Through this detailed statutory scheme, the Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.’ [Citations.]” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 , 9 [ 10 Cal.Rptr.2d 183 , 832 P.2d 899 ] .) “[A]n award reached by an arbitrator pursuant to a contractual agreement to arbitrate is not subject to judicial review except on the grounds set forth in [Code of Civil Procedure] sections 1286.2 (to vacate) and 1286.6 (for correction). Further, the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.” (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 33.)

“California law, like federal law, favors enforcement of valid arbitration agreements. [Citation.] ... [U]nder both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation [fn. omitted] of any contract. ( 9 U.S.C. § 2 ; see also, Code Civ. Proc., § 1281.) In other words, under California law, as under federal law, an arbitration agreement may only be invalidated for the same reasons as other contracts.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 , 97-98 [ 99 Cal.Rptr.2d 745 , 6 P.3d 669 ].) “Because unconscionability is a reason for refusing to enforce contracts generally, it is also a valid reason for refusing to enforce an arbitration agreement under Code of Civil Procedure section 1281 ....” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 114.)

“Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. ([Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807 ], pp. 817-819 [ 171 Cal.Rptr. 604 , 623 P.2d 165 ].) The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ [Citation.] If the contract is adhesive, the court must then determine whether ‘other factors are present which, under established legal rules—legislative or judicial—operate to render it [unenforceable].’ (Scissor-Tail, supra, at p. 820, fn. omitted.)” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 113.)

“ ‘Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him. [Citations.] The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or “unconscionable.” ’ (Ibid.)” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 113.)

“In 1979, the Legislature enacted Civil Code section 1670.5, which codified the principle that a court can refuse to enforce an unconscionable provision in a contract. (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913 , 925 [ 216 Cal.Rptr. 345 , 702 P.2d 503 ] ....) As section 1670.5, subdivision (a) states: ‘If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.’ ” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 114.)

“ ‘ [U]nconscionability has both a “procedural” and a “substantive” element,’ the former focusing on ‘ “oppression” ’ or ‘ “surprise” ’ due to unequal bargaining power, the latter on ‘ “overly harsh” ’ or ‘ “one-sided” ’ results. [Citation.] The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’ (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th [1519] at p. 1533 [ 60 Cal.Rptr.2d 138 ] (Stirlen).) But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that

An enrolled bill report from the Department of Housing and Community Development on Senate Bill No. 314, dated August 13, 1975, stated that the bill would “declare void any modification or waiver of a tenant’s rights regarding ... procedural rights in litigation.” It recommended that the Governor sign the bill because it “would help prevent the unknowing signing away of valuable rights by a tenant who may not fully understand a lease or rental agreement.”

An enrolled bill report from the Department of Consumer Affairs on Senate Bill No. 314 stated that the bill would “specifically preclude the waiver by a tenant of his rights ... to procedural safeguards in litigation with landlord ....” It indicated that the bill was “necessary to protect tenants who generally find themselves in an inferior bargaining position ....”

C. Effect of Civil Code Section 1953, Subdivision (a)(4)

Rutter Group practice guides have interpreted section 1953, subdivision (a)(4), as generally precluding agreements in residential leases to arbitrate landlord-tenant disputes except as provided by section 1942.1 in regard to “tenantability” disputes. (See Friedman et al., Cal. Practice Guide; Landlord-Tenant (The Rutter Group 2002), ][ 7.91, p. 7-23 [under Civil Code section 1953 “residential rental agreements cannot force tenants to waive a jury trial in favor of binding arbitration.”]; Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2002), ff 5:76.11, 5:76.12, p. 5-40 [“landlord cannot compel tenants to waive a jury trial in favor of binding arbitration”].)

We recognize that, despite the strong public policy favoring arbitration agreements, the California Arbitration Act “does not prevent our Legislature from selectively prohibiting arbitration in certain areas.” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th 83 , 98.) “ ‘The unsuitability of a statutory claim for arbitration turns on [legislative] intent, which can be discovered in the text of the statute in question, its legislative history or in an “ ‘inherent conflict’ between arbitration and the [statute’s] underlying purposes.” ’ [Citation.]” (Ibid.)

Our close review of the statutory language and the legislative history of section 1953 did not disclose any specific legislative intent with regard to arbitration. In fact, the legislative history of section 1953 contains no mention of arbitration and no mention of section 1942.1. However, running throughout the legislative history is a profound concern with the generally weaker bargaining position of tenants as compared to landlords and leverage a landlord may exert by making the availability of rental housing contingent upon the waiver of rights.

We note that section 1953, subdivision (a)(4), precludes a residential lease agreement from including any modification or waiver of a tenant’s

agree as a condition of my employment, that in the event my employment is terminated, and I contend that such termination was wrongful or otherwise in violation of the conditions of employment or was in violation of any express or implied condition, term or covenant of employment, whether founded in fact or in law, including but not limited to the covenant of good faith and fair dealing, or otherwise in violation of any of my rights, I and Employer agree to submit any such matter to binding arbitration pursuant to the provisions of title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280 et seq. or any successor or replacement statutes. I and Employer further expressly agree that in any such arbitration, my exclusive remedies for violation of the terms, conditions or covenants of employment shall be limited to a sum equal to the wages I would have earned from the date of any discharge until the date of the arbitration award. I understand that I shall not be entitled to any other remedy, at law or in equity, including but not limited to reinstatement and/or injunctive relief.” (Id. at p. 92.)

The court concluded, among other things, that a “modicum of bilaterality” was required in an arbitration agreement. (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 117.) It stated: “Although parties are free to contract for asymmetrical remedies and arbitration clauses of varying scope,... the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.” (Id. at p. 118.) One form of unconscionability “is an agreement requiring arbitration only for the claims of the weaker party but a choice of forums for the claims of the stronger party.” (Id. at p. 119.)

The court reasoned: “[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. The arbitration agreement in this case lacks mutuality in this sense because it requires the arbitration of employee—but not employer—claims arising out of a wrongful termination. An employee terminated for stealing trade secrets, for example, must arbitrate his or her wrongful termination claim under the agreement while the employer has no corresponding obligation to arbitrate its trade secrets claim against the employee.” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 120.) The court also noted that the employee’s damages were “limited to the amount of backpay lost up until the time of arbitration” while “[t]he employer, on the other hand, is bound by no comparable limitation should it pursue a claim against its employees. ” (Id. at p. 121.)

Here, the reality is that personal injury claims arising from the condition of the leased premises are largely, if not exclusively, tenant claims. Buried in the small print, the arbitration clause makes those claims subject to

the limitation that the demand for arbitration had to be made in writing within 180 days after the claim arose. In addition, all administrative fees and costs had to “be advanced prior to the arbitration.” There was no opportunity in the printed form lease for the tenants to decline the provision, such as by not initialing it. We conclude that the arbitration clause lacked sufficient “bilaterality” and was unconscionable.

E. Disposition

The judgment is affirmed. Appellants shall bear costs on appeal.

Rushing, P. J., and Premo, J., concurred.