Redlich v. Reliance Management Group CA1/1 ( 2015 )

Filed 3/11/15 Redlich v. Reliance Management Group CA1/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
ANNA-BECKY REDLICH,
Plaintiff and Respondent,
A140313
v.
RELIANCE MANAGEMENT GROUP, (San Mateo County
INC. et al., Super. Ct. No. CIV523788)
Defendants and Appellants.
Defendants Reliance Management Group, Inc. (Reliance) and Vox Design Group
(Vox) appeal from the denial of petitions to arbitrate. We agree with the trial court that
the arbitration provisions in their contracts with plaintiff Anna-Becky Redlich did not
sufficiently comply with Business and Professions Code section 7191,1 which regulates
such provisions in contracts for work on small residential properties.
BACKGROUND
Redlich contracted with Vox, a design firm, and Reliance, a construction
management firm, to renovate a Hillsborough, California residence.
Paragraph 15 of the Vox contract, in the same font as used in most of the rest of
the contract, reads:
“15. Arbitration. Any controversy relating to the Contract shall be submitted to
and settled by binding arbitration in accordance with rules of American
Arbitration Association. Arbitrator shall have a minimum of eight years of
1
All further statutory references are to the Business and Professions Code unless
indicated.
1
practical design or construction experience. Legal or forensic experience shall not
be considered practical construction experience. A hearing on the matter to be
arbitrated shall take place in the State and County where the Parties signed the
Contract or in a mutually agreeable location. . . . . If a demand for arbitration is
tendered by either party to the Contract, the demanding party will prepare and
deliver to the other Party or Parties the following: a complete list of alleged
claims, all expert reports, all costs to recover, and all supporting documentation no
later than sixty (60) days prior to the date of arbitration. Failure to provide the
above documentation in a timely way shall waive right to recovery of damages or
other claims. . . .”
The paragraph also states damages in any dispute are limited to the price of the contract
and disputes for amounts at or beneath the threshold for small claims court may be
litigated in that forum at the request of either party.
Beneath paragraph 15 appears a block of text in bold, capital letters. There is a
heading, “ARBITRATION OF DISPUTES,” and a “NOTICE” follows which is taken
nearly verbatim from section 7191, subdivision (b). They read:
“ARBITRATION OF DISPUTES.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING
TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN
THE ‘ARBITRATION OF DISPUTES’ PROVISION DECIDED BY NEUTRAL
ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE
GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE
LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE
BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED
IN THE ‘ARBITRATION OF DISPUTES’ PROVISION. IF YOU REFUSE TO
SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION,
YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY
OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR OTHER
APPLICABLE LAWS. YOUR AGREEMENT TO THIS ARBITRATION
PROVISION IS VOLUNTARY.
“WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE
TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN
THE ‘ARBITRATION OF DISPUTES’ PROVISION TO NEUTRAL
ARBITRATION.” (Compare § 7191, subd. (b) [in which “BUSINESS AND
PROFESSIONS CODE OR OTHER APPLICABLE LAWS” is substituted for
“CALIFORNIA CODE OF CIVIL PROCEDURE”].)
2
After this text, there is a space for both Vox and the client to initial their consent.
Paragraph 16 of the Reliance contract, in the standard font used in the rest of the
agreement, reads:
“16. Arbitration. Any controversy relating to the Contract shall be submitted to
and settled by binding arbitration in accordance with the terms of the Contract
Documents.”
Beneath this paragraph is the same heading and section 7191 language (this time
referring to the Business and Professions Code), all in boldface capitals, similar to the
Vox agreement. Thereafter there is a space for both Reliance and the client to initial.
Included in the Reliance contract papers is an unsigned, 10-page document entitled
“General Conditions.” On page nine, a paragraph 16.15 appears, and, in a standard, un-
emphasized font reads:
“16.15 Arbitration. The following terms shall be used by each party in the
settlement of any dispute by arbitration unless mutually waived. Arbitrator shall
have a minimum of eight years of practical construction experience. Legal or
forensic experience shall not be considered practical construction experience. A
hearing on the matter to be arbitrated shall take place in the State and County
where the Parties signed the Contract. . . . Claims shall be heard in accordance
with the rules of the American Arbitration Association, but may be arbitrated by
any mutually agreeable arbitrator meeting the requirements herein. . . . If a
demand for arbitration is tendered by either party to the Contract, the demanding
party will prepare and deliver to the other Party or Parties the following: a
complete list of alleged claims, all expert reports, all costs to recover, and all
supporting documentation no later than sixty (60) days prior to the date of
arbitration. Failure to provide the above documentation in a timely way shall
waive right to recovery of damages or other claims. . . .”
Paragraph 16.15 of the General Conditions also contains the damages limitation and
small claims court term as Paragraph 15 of the Vox contract.
The renovation project did not end amicably. Redlich sued Vox and Reliance in
San Mateo County Superior Court for approximately $75,000 in damages related to
alleged retention of deposits and unjustified overcharges. 2
2
Apparently, Redlich also sued the owner of Vox and Reliance in Santa Clara
Superior Court. In that case, Vox and Reliance successfully invoked what seem to be the
3
Vox and Reliance, citing the various contract terms just described, petitioned to
compel arbitration. Redlich opposed arbitration, asserting the arbitration provisions did
not comply with section 7191’s requirements, the provisions were unconscionable, and
the agreements to arbitrate was obtained by fraud.
The trial court denied the petitions for lack of compliance with section 7191,
subdivision (a). In particular, the court noted portions of the arbitration provisions were
not in boldface type and the mandated title “ARBITRATION OF DISPUTE” was
misplaced. The trial court did not address Redlich’s other objections to arbitration.
DISCUSSION
As framed by the parties’ briefs on appeal, the only issue is whether the arbitration
provisions sufficiently comply with section 7191. Our interpretation of section 7191 and
“our determination of its applicability to the undisputed facts in this case are questions of
law subject to our independent review.” (Medeiros v. Superior Court (2007)
146 Cal.App.4th 1008, 1014.)
California law favors arbitration, but also recognizes waiver of a judicial forum is
no slight matter. (Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 205 (Woolls).)
Accordingly, the Legislature has acted to regulate the use of arbitration clauses in certain
types of contracts. (Id. at p. 205.) In these contracts, an arbitration clause must contain
specified language and/or adhere to a particular format so the clause is prominent and
readily understood. (Ibid.)3
same contracts at issue here to compel arbitration, although the superior court deemed
several terms in the arbitration clauses to be unenforceable. Vox and Reliance ask us to
take judicial notice of the March 2014 superior court order compelling arbitration. We
deny the request. That superior court order does not establish any relevant fact and is not
authority for any proposition of law (aside from not being precedential, the order does not
even contain legal analysis, but simply orders an outcome). (See Party City Corp. v.
Superior Court (2008) 169 Cal.App.4th 497, 507 [refusing to take judicial notice of
superior court orders in similar cases], disapproved on another ground by Pineda v.
Williams-Sonoma Stores, Inc. (2011) 51 Cal.4th 524, 534.)
3
If a dispute involves interstate commerce and implicates federal arbitration law,
such California laws limiting arbitration are generally preempted. (Pinnacle Museum
Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 250,
4
Section 7191 regulates arbitration clauses in contracts “for work on residential
property with four or fewer units.” (§ 7191, subd. (a); see also Code Civ. Proc., §§ 1295
[contract for medical services and arbitration of malpractice claim]; 1298 [certain real
estate contracts]; Health & Saf. Code, §§ 1363.1 [health care service plan]; 1599.81
[admission contracts for long term health care]; Ins. Code, § 10123.19 [disability
insurance policies].)
Under section 7191, an arbitration provision must be “clearly titled
‘ARBITRATION OF DISPUTES’.” (§ 7191, subd. (a).) In a printed contract, the
provision “shall be set out in at least 10-point roman boldface type or in contrasting red
print in at least 8-point roman boldface type.” (Ibid.) If the provision is included in a
typed contract, it shall be set out in “capital letters.” (Ibid.)
Section 7191 further specifies that immediately following the arbitration
provision, and immediately before a space for the parties to indicate assent or
disagreement to it, a “NOTICE” must appear, as referenced above in the background
section. (§ 7191, subd. (b).) The “NOTICE” explicitly refers back to the
“ARBITRATION OF DISPUTES” provision, which is presumed to have spelled out the
matters subject to and other terms of arbitration. (Ibid.) The “NOTICE” also alerts
consumers they are giving up any right they might possess to have a court or jury trial,
and may be giving up the right to discovery and appeal. (Ibid.) As with the
“ARBITRATION OF DISPUTES” provision, the “NOTICE,” if “in a printed contract,
shall be set out either in at least 10-point roman boldface type or in contrasting red print
in at least 8-point roman boldface type, and if . . . in a typed contract, it shall be set out in
capital letters.” (Ibid.)
When the arbitration provisions in a contract governed by section 7191 fail to
comply with the statutory requirements, they generally “may not be enforceable against
any person other than the licensee” providing the work. (§ 7191, subd. (c).) This means
noncompliant arbitration provisions “cannot be enforced against any person other than
fn.15; Woolls, supra, 127 Cal.App.4th at pp. 211–213.) However, preemption is not
argued here. (See Woolls, at p. 213.)
5
the licensee.” (Woolls, supra, 127 Cal.App.4th at p. 210 [it legislates an outright,
nondiscretionary bar to enforcement].)
There is no question the arbitration provisions in Redlich’s contracts with Vox and
Reliance do not comply with section 7191’s requirements. True, both contracts
essentially include the capitalized “NOTICE” text mandated by subdivision (b), but the
Vox contract’s provision references the Code of Civil Procedure, not the Business and
Professions Code (the code reference the subdivision requires). Meanwhile, neither
contract uses bold, colored, or capitalized text for the other arbitration provisions. These
terms, defining what claims must be arbitrated and in what manner, are located in
paragraph 15 of the Vox contract and paragraphs 16 and 16.15 of the Reliance contract
and General Conditions. While paragraph 15 of the Vox contract and paragraph 16 of the
Reliance contract are located just above the “NOTICE,” paragraph 16.15 of the Reliance
General Conditions, which contains the lion’s share of that contract’s arbitration terms, is
located in a separate document. These paragraphs not only lack the proper formatting for
emphasis, they are not properly titled “ARBITRATION OF DISPUTES” as required by
subdivision (a). Instead, they begin with the word “Arbitration” in a font that appears
indistinguishable from that of surrounding text.4 The title “ARBITRATION OF
DISPUTES” is erroneously placed just before the “NOTICE.” Thus, when the
“NOTICE” refers to the “ARBITRATION OF DISPUTES” provision, it confusingly
appears to refer to the notice itself or nothing at all.
Given these variances from the statutory requirements, Vox and Reliance do not
claim literal compliance with section 7191, but contend they substantially complied with
the statute, and so arbitration should be ordered.
“The rules governing the doctrine of substantial compliance are well settled.
[Citation.] As it is used in the decisions of this state, the doctrine excuses literal
4
Vox and Reliance assert the word “Arbitration” at the start of these paragraphs
appears in boldface type. We see no such emphasis in the copy of the contracts in the
appellate record. Even if the word were emphasized in bold, that would not change our
conclusion. Whatever formatting the word has, it is no different from the formatting
similar words have at the start of the other numbered paragraphs in these contracts.
6
noncompliance only when there has been ‘actual compliance in respect to the substance
essential to every reasonable objective of the statute.’ ” (Robertson v. Health Net of
California, Inc. (2005) 132 Cal.App.4th 1419, 1430 (Robertson).) “ ‘ “Where there is
compliance as to all matters of substance[,] technical deviations are not to be given the
stature of noncompliance. [Citation.] Substance prevails over form.” ’ ” (Malek v. Blue
Cross of California (2004) 121 Cal.App.4th 44, 72 (Malek).) However, the doctrine
“does not allow for an excuse to literal noncompliance in every situation.” (Robertson,
supra, at p. 1430; see generally Costa v. Superior Court (2006) 37 Cal.4th 986, 1024,
1027–1030 (Costa) [substantial compliance with statute requiring submission of
proposed ballot measure to Attorney General for preparation of official title and summary
prior to circulation: version submitted and version circulated had some relatively minor
substantive differences, but summary and title would be identical for each version so
statute’s objective, to inform public, met].)
“[T]here is some doubt whether” statutes regulating arbitration clauses, like
section 7191, whose provisions in fact demand a degree of technical compliance,
“permit[] mere substantial compliance.” (Zembsch v. Superior Court (2006)
146 Cal.App.4th 153, 166 (Zembsch).) But courts have not ruled out the doctrine’s
application in an appropriate case. (Ibid.) Indeed, it would arguably be inequitable to
deny effect to an arbitration provision because of an omission of an immaterial word or
punctuation mark, or a trivial variance in the emphasis used to bring prominence to the
provision, if made inadvertently and in good faith. (See Costa, supra, 37 Cal.4th at
pp. 1027–1030.) The Vox and Reliance arbitration provisions, however, suffer from
different sorts of defects. So even if substantial compliance is available to save
statutorily regulated arbitration provisions in the right case, this is not that case.
The first step in a substantial compliance analysis is examining the objectives of
the statute at issue, here, section 7191. (Zembsch, supra, 146 Cal.App.4th at p. 166.)
Section 7191 has been less often discussed then the other statutes regulating arbitration
provisions, but we can glean the section’s objectives from its text and from cases
interpreting the other statutes.
7
As already set forth, section 7191 mandates that arbitration provisions be
presented to the consumer with emphasis (with a title, and in an emphasized font), be
paired with and spatially adjacent to a specified “notice” (in the same emphasized font),
and contain a space for the consumer to specially consent by initialing. (§ 7191, subds.
(a)–(b).)
This makes section 7191 similar to Health and Safety Code section 1363.1,5
regulating arbitration provisions in health care service plans. This latter statute lacks the
detailed font size requirements of section 7191 and does not mention initialing, but it
does mandate that an arbitration provision be “prominently displayed,” appear in a
separate article in the contract, appear just above the contract signature line, and clearly
state the extent of any jury trial waiver in language akin to that in Code of Civil
5
Health and Safety Code section 1363.1 provides:
“Any health care service plan that includes terms that require binding arbitration to
settle disputes and that restrict, or provide for a waiver of, the right to a jury trial
shall include, in clear and understandable language, a disclosure that meets all of
the following conditions:
“(a) The disclosure shall clearly state whether the plan uses binding arbitration to
settle disputes, including specifically whether the plan uses binding arbitration to
settle claims of medical malpractice.
“(b) The disclosure shall appear as a separate article in the agreement issued to the
employer group or individual subscriber and shall be prominently displayed on the
enrollment form signed by each subscriber or enrollee.
“(c) The disclosure shall clearly state whether the subscriber or enrollee is waiving
his or her right to a jury trial for medical malpractice, other disputes relating to the
delivery of service under the plan, or both, and shall be substantially expressed in
the wording provided in subdivision (a) of Section 1295 of the Code of Civil
Procedure.
“(d) In any contract or enrollment agreement for a health care service plan, the
disclosure required by this section shall be displayed immediately before the
signature line provided for the representative of the group contracting with a
health care service plan and immediately before the signature line provided for the
individual enrolling in the health care service plan.”
(Health & Saf. Code, § 1363.1.)
8
Procedure section 1295, subdivision (a).6 Thus, Health and Safety Code section 1363.1,
like section 7191, can be described as having two broad objectives: to disclose the
arbitration requirement and to ensure a knowing waiver of the judicial forum and its
associated rights. (See Malek, supra, 121 Cal.App.4th at p. 72 [Health and Safety Code
“section 1363.1 is not just a notice statute. The purpose of section 1363.1 is to disclose
the requirement to arbitrate and to ensure a knowing waiver of the right to a jury trial.”].)
Key to implementing these disclosure and knowing waiver objectives in both
sections are the placement and prominence requirements, each of which are, themselves,
“essential to achieving the legislative purpose.” (See Burks v. Kaiser Foundation Health
Plan, Inc. (2008) 160 Cal.App.4th 1021, 1029 (Burks) [Health and Safety Code
section 1363.1 contains prominence and placement requirements, and each must be met
to satisfy the statute].) While section 7191 may address placement and prominence in
somewhat different ways than Health and Safety Code section 1363.1—for instance,
section 7191 requires certain fonts, not mere prominence—the goals are shared
nonetheless.
Courts have breathed life into the prominence and placement requirements by
refusing to enforce arbitration provisions as not substantially compliant if falling short of
even one of these goals. For instance, in Malek, supra, 121 Cal.App.4th 44, 73, the
arbitration provision in an insurer’s enrollment form did not appear directly above or
before the signature block as required by Health and Safety Code section 1363.1. “This
6
Code of Civil Procedure section 1295, subdivision (a) provides: “Any contract
for medical services which contains a provision for arbitration of any dispute as to
professional negligence of a health care provider shall have such provision as the first
article of the contract and shall be expressed in the following language: ‘It is understood
that any dispute as to medical malpractice, that is as to whether any medical services
rendered under this contract were unnecessary or unauthorized or were improperly,
negligently or incompetently rendered, will be determined by submission to arbitration as
provided by California law, and not by a lawsuit or resort to court process except as
California law provides for judicial review of arbitration proceedings. Both parties to this
contract, by entering into it, are giving up their constitutional right to have any such
dispute decided in a court of law before a jury, and instead are accepting the use of
arbitration.’ ” (Code Civ. Proc., § 1295, subd. (a).)
9
placement is not a technical defect of form because it leaves in doubt whether the Maleks
knowingly waived their right to a jury trial. Under these circumstances, the statutory
objectives of section 1363.1 have not been met.” (Malek, at p. 73.) The “prominence
requirement (like the placement requirement) is essential to achieving the legislative
purpose, and therefore anything less than actual compliance with the prominence
requirement is unacceptable.” (Burks, supra, 160 Cal.App.4th at p. 1029.) Moreover, the
prominence requirement is viewed separately and in addition to the placement
requirement. (Id. at p. 1028 [placement of clause near signature block does not relate to
it being prominently displayed].) “An enrollment form that does not have the required
arbitration disclosure prominently displayed on it—in direct contravention of subdivision
(b) of section 1363.1—does not substantially comply with that statute.” (Id. at p. 1029;
see also Zembsch, supra, 146 Cal.App.4th at pp. 166–167 [“the failure of Health Net to
display its disclosure with the prominence required by the statute casts doubt on whether
Zembsch knowingly waived his rights”]; Robertson, supra, 132 Cal.App.4th at p. 1431.)
Thus, appellate courts have rejected substantial compliance arguments when the
required disclosure was “in the same font as the preceding paragraph, . . . ‘not bolded,
underlined or italicized’ ” (Zembsch, supra, 146 Cal.App.4th at p. 165), did not stand out
from the remainder of the form (Burks, supra, 160 Cal.App.4th at pp. 1024–1025), or was
“in the same typeface as the rest of the document with only its two word title in bolded
print” (Robertson, supra, 132 Cal.App.4th at p. 1431).
Turning to the defects in the arbitration provisions here, they suffer from
shortcomings similar to those in the cases just discussed.
To start, the arbitration provisions in the Vox and Reliance contracts have no
prominence whatsoever. While the “NOTICE” explaining the consequences of
arbitration appears in capital letters in both contracts, the “NOTICE” is not the arbitration
provision. Indeed, the “NOTICE,” itself, expressly refers to the separate
“ARBITRATION OF DISPUTES” provision, and section 7191 separately requires an
“ARBITRATION OF DISPUTES” provision in emphasized format and a similarly-
formatted “NOTICE.” (§ 7191, subds. (a)–(b).) In the context of Code of Civil
10
Procedure section 1298, which also requires an emphasized arbitration provision and an
similarly-worded “notice” in certain real estate contracts (Code Civ. Proc., § 1298, subds.
(a), (c)), it has been held the mandatory “NOTICE” is not an enforceable agreement to
arbitrate, but instead explains the consequences of agreeing to arbitrate. It is merely “an
accompaniment to an arbitration provision.” (Villacreses v. Molinari (2005)
132 Cal.App.4th 1223, 1231–1233 (Villacreses).)
Looking at the actual arbitration provision in the Vox and Reliance contracts
(paragraph 15 in the Vox contract and paragraphs 16 and 16.15 in the Reliance contract
and General Conditions), they are not properly titled “ARBITRATION OF DISPUTES,”
but rather are presented in text indistinguishable from that used in the remainder of the
contracts. The text is not bolded or colored or capitalized, as required by section 7191,
subdivision (a). Nor is it made prominent in any other way. Vox and Reliance claim the
text in these various un-emphasized paragraph is merely “incidental” procedural matter.
It is not. These paragraphs contain the core arbitration provisions, defining what would
be arbitrated and how. Section 7191 requires them to be prominent, and Vox and
Reliance did not substantially comply.
Furthermore, there are serious placement issues. In the Reliance contract, the
required “NOTICE” regarding the consequences of arbitration and the actual arbitration
provisions are not even located in the same document—the majority of the arbitration
provisions are in the separate General Conditions—flagrantly (and not technically)
violating section 7191, subdivision (b)’s requirement that the “NOTICE” appear
“immediately following [the] arbitration provision.” Also, in both the Vox and Reliance
contracts, the title “ARBITRATION OF DISPUTES” does not, as required by
subdivision (a), introduce the arbitration provision but rather precedes the generic
“NOTICE,” thus creating confusion about what the “NOTICE” even applies to. (Cf.
Villacreses, supra, 132 Cal.App.4th at pp. 1231–1233 [“NOTICE” refers back to
arbitration provision, and without such a provision, there is no agreement to arbitrate].)
11
We therefore conclude, as did the trial court, the Vox and Reliance arbitration
provisions cannot be said to substantially comply with section 7191 and, as a result,
cannot be enforced.
DISPOSITION
The order denying arbitration is affirmed.
12
_________________________
Banke, J.
We concur:
_________________________
Margulies, Acting P. J.
_________________________
Dondero, J.
13