Supreme Court Holds Condo Defect Claims Subject to Arbitration
In an important decision, on December 24, 2009, the Washington Supreme Court held that claims under the Washington Condominium Act (WCA) are subject to arbitration despite provisions in the Act requiring judicial resolution of claims where condominium owners agree to arbitrate disputes in their purchase and sale agreements. The case is Satomi Owners Ass'n v. Satomi, LLC. www.courts.wa.gov/opinions/pdf/804800.opn.pdf
In Satomi, purchasers of individual condominium units had agreed in their purchase and sale agreements to arbitrate claims they might have against the seller/developer. Satomi gathered three separate cases in which trial courts had denied motions to compel arbitration of claims under the WCA. The WCA historically prevented parties from opting out of judicial resolution of disputes. In 2005, the Legislature amended the WCA to permit arbitration of at least some disputes pursuant to RCW 64.55.100 through .160, but allowed any aggrieved party to demand a new trial in superior court at the end of arbitration proceedings – in other words, the arbitration was not binding. In Satomi, the Court concluded that the statute’s requirement of a judicial resolution (and the amended statute’s resort to trial de novo) was preempted by the Federal Arbitration Act (FAA).
First, the Court held that the FAA applied to the transactions, at least where arbitration provisions were clearly tied to purchase and sale agreements relating to purchase and sale of the condominiums at issue. The Court rejected the argument that the “transaction” at issue involved only warranties and therefore did not involve interstate commerce. It held instead that the “transaction” included the purchase and sale of the condominium. Based upon this broader view of the “transaction” at issue, the Court held that the transactions “involve commerce” so as to be subject to preemption by the FAA based on (1) the use of out-of-state materials in constructing the condos; (2) a substantial number of purchasers were not Washington residents; (3) a substantial number of mortgages obtained by Washington and non-Washington residents were obtained from out-of-state mortgage companies.
Second, the Court concluded that the WCA's provisions conflicted with the FAA. To begin with, the earlier statutory enforcement clause - dictating judicial resolution and not permitting the parties to agree to arbitration - clearly conflicted with the FAA. Further, the amended statute, although it permitted arbitration of at least some issues, nonetheless required trial de novo where one party was disappointed in the result. The Court held that declaring arbitration to be non-binding conflicted with the FAA.
Third, the Court concluded that the associations were bound by the arbitration clauses to which their members had agreed in purchasing their units. The associations claimed no property interest of their own; they were suing entirely on behalf of their members (members owned undivided percentages of common and limited common areas). Consequently, the associations were bound.
Finally, the Court held that the arbitration clauses were not unconscionable or lacking in mutuality of obligation, despite the fact that the developers retained the sole right to have disputes heard in arbitration.
The WCA therefore no longer stands as a barrier to parties who wish to require arbitration of disputes under the WCA. They should nevertheless assure that their contracts are written with the Satomi decision in mind.
