In a significant reversal of prior lower court authority, the Washington Supreme Court presented builders with a game-changing ruling on December 24, 2009, holding that a contractual arbitration agreement affecting interstate commerce preempts and trumps the Washington Condominium Act (“WCA”).  In Satomi Owners Ass’n v. Satomi, LLC, Docket No. 80480-0, the Court held in 6-3 decision that construction defect disputes must be resolved by a binding arbitration provision formed pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. § 2.  That section of the FAA requires preemption of the WCA’s judicial enforcement provision, RCW 64.34.100(2), including that statute’s provision for non-binding arbitration proceedings, if the transaction involves interstate commerce.

Preg O’Donnell & Gillett PLLC Lawyers represented Leschi Corp. in achieving this major victory, which overturned an earlier Washington Court of Appeals decision,Satomi Owners Ass’n v. Satomi, LLC, 139 Wn. App. 175, 159 P.3d 460 (2007), which had held that a condominium owners association and its members could simply ignore a contractual binding arbitration agreement in favor of a trial court’s resolution of a WCA construction defect claim.  The issue of FAA preemption was one typically lost at the trial court level, but one which builders, insurers and defense counsel continued to pursue to ultimate resolution in the Supreme Court.

A part of the larger Satomi decision issued on December 24, 2009, by the Supreme Court is the case of the Pier at Leschi.  In that case, each original unit purchaser at a Seattle conversion condominium, The Pier at Leschi, had agreed to binding arbitration as the sole remedy for any construction-related dispute when they signed their purchase and sale agreement and a limited home warranty addendum.  The Condominium Owner’s Association filed suit in 2006 against the declarant, Leschi Corp., alleging violations of the WCA and other non-WCA claims.  On behalf of Leschi Corp., Preg O’Donnell filed a motion to enforce the provisions of the arbitration agreements and to stay the trial court proceedings while the entire matter was resolved by binding arbitration.  The trial court denied that motion, and Preg O’Donnell appealed, asserting that the construction materials used in the conversion project had largely come from outside Washington state, that several of the unit purchasers were out-of-state purchasers, and the financing of several of the units had been provided by out-of-state lenders.  Preg O’Donnell argued that this was substantial evidence of interstate commerce, which triggered the FAA arbitration provisions of the purchase and sale agreement and limited warranty, citing many other state and U.S. Supreme Court decisions in a wide variety of commercial transactions, which had found preemption of state judicial remedies by a contractual agreement to arbitrate disputes arising from the transactions.

Division I of the Court of Appeals punted, and referred the appeal to the Washington Supreme Court, which consolidated Leschi with an appeal of theSatomi decision, along with a similar appeal brought by Blakeley Commons, LLC.  In its decision of the Satomi, Leschi and Blakeley consolidated appeals, the Washington Supreme Court found that the FAA applies to transactions involving an economic activity that, taken together, “represent a general practice subject to federal control that bears on interstate commerce in a substantial way.”

The Court found that the FAA applied to the purchase and sale agreements and the incorporated limited warranties in each case, because the Commerce Clause of the U.S. Constitution “necessarily reaches the warranting and sale of condominiums” where there has been substantial use and warranting of out-of-state materials in the construction of the condominiums.  Moreover, in the Leschi unit sales, 4 of 28 purchasers were out-of-state residents, and 9 of 28 unit sales were financed by out-of-state lenders.

The current WCA enforcement provision requires, with a few non-relevant exceptions, that “any right or obligation” declared by the WCA is enforceable by judicial proceeding, which includes the non-binding arbitration proceedings provided for in RCW 64.55.100 through 64.55.160.  Because a non-binding arbitration provision is contradictory to the binding arbitration permitted under the FAA, the Court found that the WCA’s judicial enforcement provision conflicts with the FAA “because it stands as an obstacle to enforcing the terms of the arbitration agreements that provide for binding arbitration.”  Because the FAA applied to the transaction in question and the WCA enforcement provisions “directly conflict” with the FAA, the Court held that in these cases, the FAA preempts the WCA provisions and requires binding arbitration.

As a result of the SatomiSupreme Court decision, the trial court in the Leschi case must now enforce the binding arbitration agreement to finally resolve the Leschi Owners Association’s claims.  Significantly, the Court held that the Association’s non-WCA claims (breach of implied warranty of habitability and violation of the Consumer Protection Act) are “clearly and unmistakably” subject to binding arbitration, based on the arbitration agreement contained in the limited warranty.

Practice Tip:  Developers and builders would be well served to review their purchase and sale and warranty provisions to assure they contain arbitration provisions.  The arbitration provisions should be broad enough to include all types of legal theories, e.g., Consumer Protection Act, common law claims, etc.  As to single-family homes, Washington courts have usually upheld arbitration provisions because they are not governed by the Washington Condominium Act.

Lori O’Tool, Mark O’Donnell, and David Chawes of Preg O’Donnell & Gillett were involved in the Satomi/Leschi appeal.

Link to Satomi Owners Ass’n v. Satomi, LLC decision.