Ass'n of Apartment Owners of the Waikoloa Beach Villas v. Sunstone Waikoloa, LLC

• Decision Date: 29 January 2013
• Docket Number: No. CAAP–11–0000998.,CAAP–11–0000998.
• Citation: 295 P.3d 987,129 Hawai'i 117
• Parties: ASSOCIATION OF APARTMENT OWNERS OF the WAIKOLOA BEACH VILLAS, by its BOARD OF DIRECTORS, Applicant–Appellee, v. SUNSTONE WAIKOLOA, LLC, Respondent–Appellant.
• Court: Hawaii Court of Appeals

129 Hawai'i 117

295 P.3d 987

ASSOCIATION OF APARTMENT OWNERS OF the WAIKOLOA BEACH VILLAS, by its BOARD OF DIRECTORS, Applicant–Appellee,

v.SUNSTONE WAIKOLOA, LLC, Respondent–Appellant.

No. CAAP–11–0000998.

Intermediate Court of Appeals of Hawai‘i.

Jan. 29, 2013.

Michael L. Freed, Brad S. Petrus, David R. Harada–Stone, (Tom Petrus & Miller), on the briefs, for respondent-appellant.

Terrance M. Revere, Malia Nickison–Beazley, (Revere & Associates), on the briefs, for applicant-appellee.

FOLEY, Presiding J., FUJISE and REIFURTH, JJ.

Opinion of the Court by FOLEY, J.

Respondent–Appellant SunStone Waikoloa, LLC (SunStone) appeals from the November 10, 2011 Final Judgment and the July 19, 2011 "Order Granting Applicant Association of Apartment Owners of the Waikoloa Beach Villas, by its Board of Directors' Motion to Compel Mediation and Arbitration" (Order), both entered in the Circuit Court of the Third Circuit¹ (circuit court).

I. BACKGROUND

This appeal arises out of a construction dispute initiated by Applicant–Appellee Association of Apartment Owners of the Waikoloa Beach Villas (AOAO Waikoloa), by its Board of Directors (Board) against SunStone. SunStone is the developer of the Waikoloa Beach Villas. As required under Hawaii Revised Statutes Chapter 514A (2006 Repl.), the Condominium Property Act (CPA), SunStone recorded its Declaration of Condominium Property Regime of Waikoloa Beach Villas (Declaration). See HRS § 514A–11 (Supp.2000). The Declaration describes the property, its easements and reserved rights, restrictions on use, and the administration of the condominium project.

Under Section R ("Claims and Litigation"), the Declaration addresses the Board's ability to initiate proceedings on behalf of AOAO Waikoloa. Pursuant to Section R.2 ("Association Approval"), initiating any proceeding other than an "operational proceeding" requires the approval of at least 75% of the unit owners. The Declaration generally defines an operational proceeding as a proceeding involving matters within the scope of AOAO Waikoloa's day-to-day operations or involving a total amount in controversy of less than $10,000. Section R.6 ("Funding of Proceedings") likewise applies to any proceeding other than an operational proceeding, and it prohibits the use of AOAO Waikoloa's reserve fund or working capital fund to pay for the proceeding.

Under Section R.4, SunStone inserted a clause requiring arbitration of any "development controversies," including construction disputes brought against SunStone.² Section R.4 also outlined a procedure for any development controversies maintained by the Board. The procedure required the Board to first participate in "good faith negotiation" with the other party by providing notice of the issues and participating in a conference, and if the negotiation failed, to then participate in mediation. If mediation failed to resolve the dispute, the Board could not commence arbitration or litigation unless it complied with the following requirements set forth in Section R.4(c):

R. CLAIMS AND LITIGATION

....

4. Procedures for Development Controversies.

....

(c) ...

(1) The Board shall first investigate the legal merit, feasibility, and expense of prosecuting the Development Controversy by obtaining a written opinion of a licensed Hawaii attorney regularly residing in Hawaii, with a Martindale–Hubbell rating of ‘bv’ or better,³ expressly stating that such attorney has reviewed the underlying facts and data in sufficient, verifiable detail to render the opinion, and expressly opining that the [AOAO Waikoloa] has a substantial likelihood of prevailing on the merits with regard to the Development Controversy without substantial likelihood of incurring any material liability with respect to any counterclaim which may be asserted against the [AOAO Waikoloa].

(2) Said attorney opinion letter shall also contain the attorney's best good faith estimate of the amount of legal costs, ... which are reasonably expected to be incurred for prosecution to completion (including appeal) of the Development Controversy.

(3) Upon receipt and review of the Attorney Letter, if two-thirds (2/3) or more of the Board affirmatively votes to proceed with the institution or prosecution of, and/or intervention in, the Development Controversy, the Board thereupon shall duly notice and call a special meeting of the [AOAO Waikoloa].... [T]he Board shall call for a vote of the Owners, whereupon: ... if seventy-five percent (75%) or more of the Owners vote in favor of pursuing such Development Controversy and in favor of levying a Special Litigation Assessment on the apartment owners in the amounts and for the duration set forth in the Special Assessment Report and/or of entering into the loans proposed to fund necessary borrowings, then the Board shall be authorized to proceed to institute, prosecute, and/or intervene in the Development Controversy.

The initial individual owners purchased condominium units in Waikoloa Beach Villas pursuant to a standard sales agreement. The agreement noted, in all capitalized letters and in bold, that all claims relating to the agreement were subject to mandatory and "final and binding arbitration pursuant to and in accordance with the provisions of the arbitration agreement contained in the Home Builder's Limited Warranty (Warranty)[.]" The Warranty, which was also incorporated into the Declaration, stated the agreement is governed by the Federal Arbitration Act (FAA) ( 9 U.S.C.A. §§ 1 – 16 ) and required arbitration be initiated by mailing the Binding Arbitration Request Form to the Warranty's administrator, who would arrange the arbitration proceeding.

On October 7, 2009, the Board sent a letter to SunStone alleging certain construction defects. The Board requested a conference to discuss the defects in dispute, and the parties met on December 3, 2009. The parties continued to discuss repairs over the next several months, and on April 6, 2010, SunStone informed the Board it believed it had completed all work for which it was responsible. The Board responded on June 21, 2010, providing a list of items it believed still needed repair, and demanded mediation.

Further discussions failed to resolve the remaining issues, and the Board filed its Motion to Compel Mediation and Arbitration (Motion to Compel) in the circuit court on April 5, 2011. It is undisputed that the Board has not complied with the procedure set forth in Declaration Section R.4(c) or in the Warranty.

The circuit court held a hearing on May 16, 2011, and entered its Order in the Board's favor on July 19, 2011. Final Judgment was entered on November 10, 2011 from which SunStone timely appealed.

On appeal, SunStone argues the circuit court erred when it granted the Motion to Compel.⁴ SunStone contends the circuit court could not compel arbitration because the Board failed to comply with the procedural requirements for initiating arbitration set forth in the Declaration and in the Warranty.

II. STANDARDS OF REVIEW

A. Motion to Compel Arbitration

We review a ruling on a motion to compel arbitration de novo and based on the same standards that apply to a summary judgment ruling. The Hawai‘i Supreme Court has stated:

The trial court can only decide, as a matter of law, whether to compel the parties to arbitrate their dispute if there is no genuine issue of material fact regarding the existence of a valid agreement to arbitrate. Therefore, we hold that the standard of review applicable to the trial court's decision in this case should be that which is applicable to a motion for summary judgment. Accordingly, we review this case de novo, using the same standard employed by the trial court and based upon the same evidentiary materials "as were before [it] in determination of the motion."

Koolau Radiology, Inc. v. Queen's Med. Ctr., 73 Haw. 433, 439–40, 834 P.2d 1294, 1298 (1992) (citation omitted).

B. Contract Interpretation

"As a general rule, the construction and legal effect to be given a contract is a question of law freely reviewable by an appellate court.... These principles apply equally to appellate review of the construction and legal effect to be given a contractual agreement to arbitrate." Brown v. KFC Nat'l Mgmt. Co., 82 Hawai‘i 226, 239, 921 P.2d 146, 159 (1996) (internal quotation marks and citations omitted).

III. DISCUSSION

"[W]hen presented with a motion to compel arbitration, the court is limited to answering two questions: 1) whether an arbitration agreement exists between the parties; and 2) if so, whether the subject matter of the dispute is arbitrable under such agreement." Koolau Radiology, 73 Haw. at 445, 834 P.2d at 1300. The Board brought its motion pursuant to HRS § 658A–7 (2011)⁵ ; thus, the Board concedes the existence of an agreement to arbitrate the underlying dispute based on the Declaration. However, in its Motion to Compel, the Board contended the Declaration and Warranty provisions for initiating arbitration are unenforceable because the provisions (1) violate HRS § 514B–105(a) (2006 Repl.) and (2) are unconscionable.

A. HRS § 514B–105(a) Is Inapplicable To This Case

HRS § 514B–105(a)⁶ states: "The declaration and bylaws may not impose limitations on the power of the association to deal with the developer which are more restrictive than the limitations imposed on the power of the association to deal with other persons." The Board contends Section R and the Warranty violate HRS § 514B–105(a) because the provisions impose limitations on AOAO Waikoloa's power to deal with SunStone that would not apply if AOAO Waikoloa wished to bring claims against other persons.

Contrary to the Board's contentions, however, Section R.2 (requiring approval by at least 75% of unit owners before commencing any major litigation or arbitration) and Section R.6 (governing funding of proceedings) do not apply only to proceedings brought against the developer; rather, the provisions apply to any proceeding other than an "operational proceeding." As noted above, an...