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Liu v. SNK Constr.

California Court of Appeals, First District, Third Division
Aug 25, 2023
No. A163730 (Cal. Ct. App. Aug. 25, 2023)

Opinion

A163730

08-25-2023

SALLY LIU, Cross-complainant and Appellant, v. SNK CONSTRUCTION, INC. et al., Cross-defendants and Respondents.


NOT TO BE PUBLISHED

Alameda County Super. Ct. No. RG13686380

Fujisaki, J.

Sally Liu purchased three commercial condominium units from SNK Captec Andante, LLC (Captec). She later brought a cross-action against Captec and others for breach of the implied warranty of fitness for a particular purpose. After a bench trial, the trial court ruled that Liu's claim was barred by a disclaimer of warranty conspicuously set forth in the purchase and sale agreement. On appeal, Liu contends the trial court erred in holding a bifurcated bench trial on the warranty disclaimer defense and in enforcing allegedly illegal, vague, and unconscionable contract terms. We affirm.

Factual and Procedural Background

In November 2007, Liu purchased three commercial condominium units in the Andante Condominiums in Emeryville (the subject properties). The purchase and sale agreement (the agreement) was signed by Liu as the buyer and Donald Peterson, in his capacity as vice-president of Captec's managing member, on behalf of Captec, the seller.

Section 7 of the agreement, entitled "BUYER ACKNOWLEDGMENTS: INDEMNIFICATION AND RELEASE," contains an "As-Is" clause and disclaimer of warranty provision in section 7.1 as follows: "The sale of the Property as provided for herein is made on an 'AS IS' basis and, in consideration of the agreements of Seller herein, Buyer expressly acknowledges that, except as expressly set forth herein, SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, OR ARISING BY OPERATION OF LAW, INCLUDING, BUT IN NO WAY LIMITED TO, ANY WARRANTY OF CONDITION, HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY. Without limiting the foregoing, and except as expressly set forth herein, Seller hereby specifically disclaims any warranty, guaranty or representation, oral or written, past, present or future, concerning . . . the compliance of the Property or Buyer's intended use thereof with the Declaration or any applicable local, state and federal laws, ordinances and regulations, . . . Buyer's ability to convert the commercial condominium Unit to any other use, . . . or . . . any other fact or condition which has or might affect Buyer's intended use of the Property, or any future use of the Property or the value, expense of operation or development or income potential of the Property or any portion thereof."

In 2013, the Andante Owners Association (the Association) filed a lawsuit against Liu seeking payment of unpaid assessments. Liu filed a cross-complaint against the Association, Captec, Peterson, Jon Dickinson, and SNK Development, Inc. (SNK Development) for fraud and other causes of action, claiming Dickinson brokered the sale of the subject properties and failed to make requisite real estate disclosures.

In 2015, Liu filed a first amended cross-complaint (FACC) adding SNK Construction, Inc. (SNK Construction) as a cross-defendant and asserting causes of action for breach of implied warranties, brokers fees paid to nonbrokers, and overstated maintenance fees. According to the FACC, Captec, SNK Development, and SNK Construction were the "developers" of the subject properties, and Dickinson and Peterson were "employees or agents of the developers." Liu alleged that prior to her purchase of the subject properties, she inspected the premises and saw two air vents running to the roof that could be connected to restaurant hoods. Liu further alleged that in marketing the subject properties to her, cross-defendants impliedly warranted that the properties were fit for a restaurant or food service business, but due to defects in the air shafts and cracks in the walls and floor that cross-defendants failed to disclose, the subject properties were not fit for operation of a restaurant.

Cross-defendants filed an answer to the FACC asserting various affirmative defenses, including the defense of waiver in which they alleged that Liu's claims were "barred because [Liu] has waived and released any rights she may have had against" them.

In 2018, the trial court granted cross-defendants' motion for summary judgment, finding in relevant part that the subject properties were purchased in as-is condition, and that cross-defendants did not make any implied or express warranties about the condition of the units or their suitability for any particular purpose. Liu appealed, and in an unpublished opinion, this court reversed as to the breach of implied warranties claim. (Andante Owners Ass'n v. Liu (Oct. 31, 2019, A154606) [nonpub. opn.] (Andante).) We held that under Pollard v. Saxe &Yolles Dev. Co. (1974) 12 Cal.3d 374, 377 (Pollard), in cases involving the sale of new commercial constructions (like the subject properties here), builders and sellers are held to implied warranties of quality and fitness of purpose, and the as-is clause found in section 7.1 of the agreement did not bar Liu's breach of implied warranties claim as a matter of law because Liu submitted evidence raising a triable issue of material fact that Dickinson affirmatively warranted the subject properties' fitness for operation of a restaurant. (Andante, supra (Oct. 31, 2019, A154606) [nonpub. opn.].)

Liu has requested judicial notice of the unpublished Andante decision. We previously deferred ruling on her request, and we now grant it. (Evid. Code, §§ 451, subd. (a), 459.)

On remittitur, the trial court set a bench trial on the bifurcated issue of cross-defendants' affirmative defense of" 'Disclaimer Of Warranty.'" The trial was held in March 2021. Dickinson and Liu were among the witnesses who testified at trial.

In July 2021, the trial court issued its statement of decision finding in favor of cross-defendants. The court began by summarizing the relevant provisions of the agreement, including the as-is clause and warranty disclaimer in section 7.1, as well as the testimony of the witnesses at trial. The court found that the warranty disclaimer was conspicuous in the agreement. The court further concluded that it was "precluded" from reaching Liu's argument that the warranty disclaimer was unconscionable because Liu had "failed to allege ultimate facts demonstrating the unconscionability of the" warranty disclaimer in her FACC.

The trial court recounted in relevant part that Liu "testified that on one occasion when Dickinson was showing her the units, that she told him, 'I'm trying to open up a restaurant' and he said, 'Great, there are two ventilations that were built into this commercial space. Great for restaurant.'" The court also recounted Dickinson's contrary testimony "that he never made any comments to Liu about the viability of a restaurant on her property. Dickinson denies ever having a conversation before the sale of the property to Liu about any issues relating to the vent shafts on Liu's property or Liu asking any questions about the suitability of vent shafts for a restaurant.

At trial, the court found "overwhelming evidence" contradicting Liu's theory that Dickinson and Peterson acted as her brokers and agents in the purchase of the subject properties. Indeed, "Liu made it very clear that she did not have and did not want a broker or agent for this transaction." The court also found that Liu presented no credible evidence suggesting the warranty disclaimer was illegal, and that she did not meet her burden to prove that cross-defendants committed fraud.

The trial court entered judgment in favor of cross-defendants, and Liu timely appealed. Dickinson testified that Construction told him that the vent shafts were for air conditioning."

Liu elected to proceed on appeal using an appellant's appendix, which is subject to various rules on content and form. (See Cal. Rules of Court, rule 8.124.) Chiefly, an appellant's appendix must contain all documents "necessary for proper consideration of the issues, including . . . any item that the appellant should reasonably assume the respondent will rely on." (Cal. Rules of Court, rule 8.124(b)(1)(B).) Liu's appendix is deficient in this regard, as it fails to include the trial court's statement of decision and any of crossdefendants' filings from the proceedings below. As such, Liu has not carried her burden to provide an adequate record on appeal. (See Gee v. American Realty & Construction, Inc. (2002) 99 Cal.App.4th 1412, 1416.) In any event, we will exercise our discretion to reach the merits of the appeal, as the respondents' appendix includes the key missing documents.

Discussion

A. Propriety of Bifurcated Bench Trial

As we understand Liu's first argument, she claims the trial court improperly held a bifurcated bench trial on cross-defendants' warranty disclaimer defense. Citing the proposition that an as-is clause is ineffective to relieve a seller of its own fraud (see, e.g., Lingsch v. Savage (1963) 213 Cal.App.2d 729, 742), Liu posits that "a mere reading of the [as-is] clause should have been sufficient to conclude that no Cross-Defendant could rely on it to assert an as-is defense." We are not persuaded.

Liu does not ascribe any error to the trial court's decisions to bifurcate the warranty disclaimer issue and to hold a bench trial, as opposed to a jury trial.

Liu's authorities do not prohibit trial courts from holding a trial to resolve predicate factual disputes relevant to a warranty disclaimer defense. Here, it appears there were genuine factual disputes regarding (1) the existence of an agency or brokerage relationship between Liu and Dickinson; (2) the substance of their presale discussions; and (3) whether crossdefendants misrepresented the fitness of the subject properties for Liu's intended use. Resolution of these factual disputes plainly required an evaluation of relevant evidence and testimony. Consistent with this conclusion, our decision in Andante held that Liu raised a triable issue of material fact on her breach of implied warranties claim. (Andante, supra (Oct. 31, 2019, A154606) [nonpub. opn.].) In short, the trial court did not err in holding an evidentiary trial to resolve underlying questions of fact relevant to the warranty disclaimer defense.

B. Parties Protected by the Warranty Disclaimer

Liu next emphasizes the fact that she and Captec were the only parties to the agreement. Thus, she contends, the remaining cross-defendants could not benefit from the warranty disclaimer unless they pled and proved their status as third-party beneficiaries under the agreement, which they failed to do. We are not convinced.

In matters of contractual interpretation, the language of the contract governs so long as the language is clear and explicit and does not involve an absurdity. (Civ. Code, § 1638.) Every part of a contract must be given effect if reasonably practicable. (Id., § 1641.) Here, section 7.1 of the agreement sets forth the as-is clause and warranty disclaimer, and section 7.3 explicitly extends the protections of section 7.1 to persons associated with the seller. Section 7.3 states: "The limitations of liability contained in this Agreement shall inure to the benefit of Seller's . . . members, officers, directors, shareholders, agents, managers, consultants and employees and their respective directors, officers, managers, partners, shareholders." Notably, Liu initialed the bottom of section 7.3 as required by the agreement. Read together, sections 7.1 and 7.3 are reasonably construed as extending the protections of the as-is clause and warranty disclaimer to all individuals and entities in partnership, membership, or in agency relationships with Captec.

Liu maintains the agreement had to specifically name the other crossdefendants in order for the warranty disclaimer to be enforceable on their behalf. That is incorrect. A third person "need not be named or identified individually to be an express beneficiary. A third party may enforce a contract if it can be shown that he or she is a member of the class for whose express benefit the contract was made." (Kaiser Eng'rs v. Grinnell Fire Prot. Sys. Co. (1985) 173 Cal.App.3d 1050, 1055.)

Liu also suggests there was insufficient proof regarding the nature of the relationships between Captec and the other cross-defendants to make a third-party beneficiary determination. We disagree.

In reviewing for substantial evidence, we indulge all reasonable inferences that may be deduced from the facts in support of the party who prevailed below. (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1632-1633.) Here there was substantial evidence that SNK Development, SNK Construction, Peterson, and Dickinson were in partnership, membership, and/or agency relationships with Captec for purposes of extending the protections of the warranty disclaimer to them. The evidence showed that the SNK entities were "a vertical integrated company from development, construction to sales"; that the SNK entities were "sister" companies in the development and construction of the subject properties owned by Captec; that Dickinson was employed by SNK Construction as the development manager of the Andante Condominiums project; and that Peterson was not only an officer of SNK Development but also vice-president of Captec's managing member and signed the agreement on behalf of Captec. On this record, the trial court reasonably construed the protections of the warranty disclaimer as extending to all of the crossdefendants.

In a related argument, Liu contends that because section 7.3 is entitled "Condition of Project," "the purported expansion of immunity to unidentified 3rd parties relates only to the condition of the property, and not its fitness for a particular use." Again, we are not persuaded.

Section 7.3 refers broadly to "[t]he limitations of liability contained in this Agreement" without narrowing the scope of the disclaimer to warranties regarding the condition of property. Section 7.3 also expressly states that it applies "[w]ithout limiting the generality of the foregoing or any other provision of the Agreement." Thus, section 7.3 must be read together with the language of section 7.1, which expressly disclaims warranties for "fitness for a particular purpose of the property" and "any other fact or condition which has or might affect Buyer's intended use of the Property." (Some capitalizations omitted.) Accordingly, the warranty disclaimer was properly extended to cross-defendants on Liu's claim for breach of the implied warranty of fitness of purpose.

C. Illegal Contract Terms

Liu contends the agreement's attempt to disclaim warranties "arising by operation of law" is illegal and in violation of public policy. In support, Liu cites Civil Code section 1668, which generally provides that "[a]ll contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." However, Liu cites no authority holding or suggesting that a builder or seller of a newly-constructed commercial property is prohibited from disclaiming implied warranties via written agreement. Moreover, relevant decisional and statutory authorities undermine her argument.

As discussed earlier, Pollard held that implied warranties of quality and fitness of purpose attach to the sale of newly constructed property. (Pollard, supra, 12 Cal.3d at p. 380.) Pollard further explained that "[i]n treating common law warranties, it has been recognized that statutory standards should be utilized where appropriate." (Ibid.) Thus, in evaluating whether a claim for breach of implied warranty was barred by the plaintiffs' delay in giving notice of the breach, Pollard turned to section 2607, subdivision (3), of the California Uniform Commercial Code (UCC) and concluded that, just as in the context of goods, a buyer of newly constructed real property must give notice of any breach of warranty within a reasonable time after discovery of the breach. (Pollard, at p. 380.)

In Andante, we rejected the respondents' contention that Pollard's holding applies only to new residential properties and not commercial ones. (Andante, supra (Oct. 31, 2019, A154606) [nonpub. opn.].)

Taking our cue from Pollard, we likewise look to the UCC and see it expressly provides that "[u]nless the circumstances indicate otherwise, all implied warranties are excluded by expressions like 'as is,' 'with all faults' or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty." (Cal. U. Com. Code, § 2316, subd. (3)(a).) The UCC also provides that parties may "exclude or modify any implied warranty of fitness" so long as the exclusion is in "writing and conspicuous." (Cal. U. Com. Code, § 2316, subd. (2).) In short, a conspicuous written disclaimer of implied warranties in the sale of newly constructed property is legally permissible.

Liu nevertheless contends the as-is clause in question was not sufficiently conspicuous because it was not presented "in large type." We disagree.

Evaluating whether a disclaimer is sufficiently conspicuous for UCC purposes is a question of law for the court. (Harustak v. Wilkins (2000) 84 Cal.App.4th 208, 215; see Cal. U. Com. Code, § 1201, subd. (b)(10).) A" '[c]onspicuous'" term is one that is "so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it," and "include[s] both of the following: [¶] (A) A heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size. [¶] (B) Language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language." (Cal. U. Com. Code, § 1201, subd. (b)(10), italics added.)

Accordingly, an as-is clause may be made conspicuous through type that, despite being the same size as the surrounding text, is sufficiently contrasting or set apart to make it noticeable. We conclude a reasonable person in Liu's position ought to have noticed the underlined words "As-Is" as well as the critical language following it in capital letters, all of which was set forth in a separate section under the capitalized heading "BUYER ACKNOWLEDGMENTS: INDEMNIFICATION AND RELEASE." Because the as-is clause was printed in a contrasting type and set forth in a manner that called attention to it, it was sufficiently conspicuous for purposes of the UCC, and its inclusion in the agreement was therefore not illegal.

D. Vague Contract Terms

Liu argues that section 7.1 of the agreement is impermissibly vague in two respects. First, she claims the language of the as-is clause is inconsistent with section 4.2(b) of the agreement, which refers to the buyer's written acknowledgment to accept the property "AS IS, WITH ALL FAULTS." Second, Liu contends the warranty disclaimer in the second sentence of section 7.1 is inconsistent with section 8.1 because the former purports to disclaim all seller's warranties, while the latter affirmatively sets forth various seller's warranties. We reject both arguments.

The term "AS IS, WITH ALL FAULTS" under section 4.2(b) is not in conflict with the term "as is" in section 7.1. (See, e.g., Cal. U. Com. Code, § 2316, subd. (3)(a) [implied warranties are excluded by expressions like" 'as is'" and" 'with all faults' "].) Indeed, because section 4.2(b) expressly defines" 'AS IS, WITH ALL FAULTS' as more particularly set forth in Section 7.1 below" (italics added), it is reasonably clear that section 7.1 provides the governing definition of what acceptance of the property in "as-is" condition entails.

We likewise see no inconsistency between sections 7.1 and 8.1, as section 7.1 applies, by its terms, "except as expressly set forth herein." In other words, section 7.1 disclaims all express or implied warranties with the exception of those expressly set forth in section 8.1.

The warranties and representations in section 8.1 pertain to the seller's authority to enter into the agreement; the seller's non-foreign status for tax purposes; the seller's lack of actual knowledge of any pending legal actions that would prevent conveyance of the properties; and the lack of any pending notices of violations regarding hazardous materials.

E. Unconscionability

Liu contends the trial court erred by refusing to reach the merits of her unconscionability argument due to her failure to plead unconscionability in the FACC. Though we agree the court should not have held Liu to an unconscionability pleading requirement, Liu has not demonstrated prejudicial error.

"Under California law, the doctrine of unconscionability has a procedural and a substantive element. Both elements must appear in order to invalidate a contract or one of its individual terms. These elements, however, need not be present in the same degree. '[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.'" (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174, fns. omitted (Mercuro).) "The procedural element requires oppression or surprise" (Jones v. Wells Fargo Bank (2003) 112 Cal.App.4th 1527, 1539 (Jones)) and "turns on adhesiveness-a set of circumstances in which the weaker or 'adhering' party is presented a contract drafted by the stronger party on a take it or leave it basis. To put it another way, procedural unconscionability focuses on the oppressiveness of the stronger party's conduct." (Mercuro, at p. 174, fns. omitted.) Substantive unconscionability "concerns whether a contractual provision reallocates risks in an objectively unreasonable or unexpected manner. [Citation.] To be substantively unconscionable, a contractual provision must shock the conscience." (Jones, at pp. 1539-1540.)

In concluding that Liu was subject to an unconscionability pleading requirement, the trial court relied on IMO Development Corp. v. Dow Corning Corp. (1982) 135 Cal.App.3d 451 (IMO). There, a real estate developer purchased unimproved real property from a corporation. (Id. at p. 455.) After financing problems arose, the parties entered into a second purchase agreement containing a provision waiving and holding the corporation harmless against any claims arising from the previous agreement. (Id. at pp. 455-456.) The developer later sued the corporation for breach of contract and declaratory relief, seeking a judicial declaration that the waiver and hold harmless provision was unenforceable because it was obtained under economic duress. (Id. at p. 456.) On appeal from the trial court's grant of judgment on the pleadings, the appellate court rejected the developer's argument that by pleading economic duress, the developer had invoked the trial court's power to declare the provision unconscionable. "Nowhere did [the developer] allege in the pleading that it sought a declaration of the invalidity of paragraph 9(c) as an 'unconscionable' provision, nor did it allege ultimate facts demonstrating its unconscionability. For instance, there are no allegations that the sales agreement constituted a contract of adhesion whereby one party unfairly took advantage of another's weaker bargaining position or that the waiver provision was unduly one-sided, oppressive, or inherently unfair." (IMO, at p. 460.) In sum, the circumstance that the developer sought a judicial declaration that economic duress rendered a contractual provision unenforceable was insufficient to put at issue a claim that a contractual provision was unenforceable due to unconscionability.

Here, application of IMO's reasoning makes little sense. Liu did not seek declaratory relief regarding the unenforceability of the as-is clause or warranty disclaimer. Rather, it was cross-defendants who raised the issue of Liu's waiver of implied warranties as an affirmative defense to the FACC. Liu makes a valid point that a pleading requirement under these circumstances would have required her to anticipate cross-defendants' waiver defense, but we are not aware of any authority, IMO included, that requires such anticipatory pleading in order to state a claim for breach of implied warranties. (See Keith v. Buchanan (1985) 173 Cal.App.3d 13, 25 [elements of breach of implied warranty of fitness for particular purpose].) Nor does Civil Code section 1670.5 impose such a pleading requirement. To the contrary, the statute specifically provides that parties "shall be afforded a reasonable opportunity to present evidence" on unconscionability whenever "it is claimed or appears to the court" that the contract or clause therein "may be unconscionable." (Civ. Code, § 1670.5, subd. (b).)

Civil Code section 1670.5 codified the principle that a court may refuse to enforce an unconscionable contractual provision. (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925.)

Even where error is shown, however," '[p]rejudice is not presumed, and the burden is on the appealing party to demonstrate that a miscarriage of justice has occurred.' [Citation.] To establish prejudice, an appellant must show a reasonable probability exists that, in the absence of the error, he or she would have obtained a more favorable result." (People ex rel. City of Santa Monica v. Gabriel (2010) 186 Cal.App.4th 882, 887.) Here, Liu fails to demonstrate a reasonable probability of a more favorable result absent the error. Significantly, Liu was not prohibited from presenting argument or evidence on her unconscionability claim at trial, and her appellate briefing does not identify what additional evidence she could have introduced. Indeed, her counsel argued during closing that the elements of procedural and substantive unconscionability were established by the evidence at trial, thus suggesting that Liu had presented all the evidence she had on the matter.

But contrary to the argument of Liu's counsel, the record falls short of establishing the elements of either procedural or substantive unconscionability. Though Liu specifically testified she was offered the agreement on a take-it-or-leave-it basis, she undercut her claim of procedural unconscionability by acknowledging she was able to successfully negotiate a lower purchase price for the subject properties. Liu cited no evidence of oppression or surprise during the negotiations, and as discussed above, the as-is clause was sufficiently conspicuous for UCC purposes. (See Cal. U. Com. Code, §§ 1201, subd. (b)(10), 2316, subd. (2).) As for substantive unconscionability, the law permits conspicuous written disclaimers of implied warranties in the sale of newly constructed property. (See Cal. U. Com. Code, §§ 1201, subd. (b)(10), 2316, subd. (2); Pollard, supra, 12 Cal.3d at p. 380.) Moreover, Liu offers no authority suggesting that the agreement's mere inclusion of the as-is clause and warranty disclaimer "shock[s] the conscience" or was objectively unreasonable. (Jones, supra, 112 Cal.App.4th at pp. 1539-1540.) On this record, we conclude as a matter of law that unconscionability was not shown. (See ibid.; see also Mercuro, supra, 96 Cal.App.4th at p. 174 [both procedural and substantive elements must appear to invalidate contract as unconscionable].)

At trial, Liu was asked whether she negotiated the price with Dickinson, and she responded, "Yes, I did. [¶] .... I did negotiate on the asking price. So I think they reduced the price a little bit." Asked if she had the opportunity to negotiate other terms of the agreement, Liu responded "I don't recall asking any other question."

In sum, although we conclude Liu was not required to plead unconscionability in her FACC, she fails to demonstrate a miscarriage of justice resulting from the trial court's error.

Disposition

The judgment is affirmed. Cross-defendants are entitled to their costs on appeal.

WE CONCUR: Tucher, P.J. Rodriguez, J.


Summaries of

Liu v. SNK Constr.

California Court of Appeals, First District, Third Division
Aug 25, 2023
No. A163730 (Cal. Ct. App. Aug. 25, 2023)
Case details for

Liu v. SNK Constr.

Case Details

Full title:SALLY LIU, Cross-complainant and Appellant, v. SNK CONSTRUCTION, INC. et…

Court:California Court of Appeals, First District, Third Division

Date published: Aug 25, 2023

Citations

No. A163730 (Cal. Ct. App. Aug. 25, 2023)