California Code Of Civil Procedure Section 1298, Applying To Real Estate Purchase Agreements, Is Preempted By The FAA In Transactions Involving Interstate Commerce.

     Plaintiff Loeffler appealed from a judgment entered after the trial court confirmed an arbitration award in favor of plaintiff Shea Homes Limited Partnership.  The award resulted in rescission of Loeffler’s purchase of a home and a payment to Loeffler, but the payment was not as large as Loeffler wanted.  Loeffler raised several arguments on appeal.  One of the more creative arguments was that the arbitration agreement was unenforceable because it did not comply with Code of Civil Procedure section 1298.  Shea Homes Limited Partnership v. Loeffler, G049358 (4/3 Nov. 3, 2014) (Thompson, Fybel, Ikola) (unpublished).  This particular argument (together with other arguments) was rejected by the Court of Appeal, resulting in affirmance of the judgment.

     California Code of Civil Procedure section 1298 prescribes certain language, font and typeface requirements for arbitration clauses in real estate contracts.  However, section 1298 has been preempted by the Federal Arbitration Act in transactions involving interstate commerce.  See Hedges v. Carrigan, 117 Cal.App.4th 578, 585 (2004).  In the Shea Homes case, the contract was governed by the FAA.

     COMMENT:  Even if section 1298 requirements are preempted by the FAA, small font and lack of notice could still factor into a procedural unconscionability analysis.  Thus far, standard contract defenses, such as unconscionability, have survived preemption analysis in AT&T Mobility LLC v. Concepcion.  However, unconscionability requires both procedural and substantive unconscionability in California.  Because the Court of Appeal also found an absence of substantive unconscionability in Shea Homes, procedural unconscionability wouldn’t have changed the outcome.