[No. 56265-7-I. Division One. June 11, 2007.]
[1] Arbitration — Scope of Issues — Review — Standard of Review. A determination of the arbitrability of a dispute is reviewed de novo. [2] Condominiums — Purchase and Sale Agreement — Warranty Addendum — Arbitration Clause — Applicability — Subsequent Owners. Where a condominium purchase and sale agreement expressly requires original unit owners to bind later purchasers to the terms of a warranty addendum containing an arbitration clause, all owners, original and subsequent, are bound by the agreement to arbitrate. [3] Condominiums — Associations — Action on Behalf of Members — Representative Capacity — Contract Requirements Binding Owners — Arbitration Clause. A condominium owners association that brings an action on behalf of unit owners for breach of contractual, statutory, and implied warranties and for violations of the Consumer Protection Act (chapter 19.86 RCW) does so in a representative capacity, not on its own behalf as a separate juristic entity. As such, the association stands in the shoes of individual unit owners and is subject to contractual provisions binding unit owners, including clauses requiring arbitration of claims. [4] Arbitration — Public Policy — In General. Public policy favors the arbitration of disputes. [5] Arbitration — Scope of Issues — Arbitration Agreement — Resolution of Doubts. Any doubts about the scope of arbitrable issues under an arbitration agreement are resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a similar defense to arbitrability. [6] Arbitration — Federal Arbitration Act — Purpose. The basic purpose of the Federal Arbitration Act (9 U.S.C. §§ 1-16) is to overcome the unwillingness of courts to enforce arbitration agreements. When the act applies, it preempts state law, prohibiting application of state statutes that invalidate arbitration agreements. [7] Arbitration — Federal Arbitration Act — Applicability — "Involving Commerce" — Broad Construction — Inclusive Scope. The "involving commerce" element for application of the Federal Arbitration Act (9 U.S.C. §§ 1-16) is functionally equivalent to the phrase "affecting commerce," a term of art that ordinarily signals the broadest permissible exercise of Congressional power under the commerce clause (U.S. Const. art. I, § 8). [8] Condominiums — Condominium Act — Warranties — Dispute Resolution — Right to Judicial Forum — Waiver. Under former RCW 64.34.100(2) (1989), the right to a judicial forum for the resolution of disputes over warranties required by the Washington Condominium Act (chapter 64.34 RCW) cannot be waived. While contractual warranties are arbitrable to the extent that they exceed the protections required by the act, the statutory right to a judicial forum applies to the statutorily required warranties so long as the statute is not preempted by the Federal Arbitration Act (9 U.S.C. §§ 1-16). [9] Condominiums — Condominium Act — Warranties — Dispute Resolution — Right to Judicial Forum — Preemption by Federal Arbitration Act — Factors. The RCW 64.34.100(2) right to a judicial forum for the resolution of disputes arising under the Washington Condominium Act (chapter 64.34 RCW) is not preempted by the Federal Arbitration Act (9 U.S.C. §§ 1-16) with regard to a private dispute over warranties contained in agreements for the purchase and sale of condominium dwelling units if the warranties at issue are those authorized or required by the Condominium Act, the agreements are standard sales agreements involving a Washington company and Washington residents, no national marketing or interstate media were used in selling the condominium units, no out-of-state architects or contractors were involved in constructing the condominium block, and nothing about the purchase and sale transactions have the earmarks of an economic activity that in the aggregate would represent a general practice subject to federal control. The fact that construction materials for the condominiums came from out of state is not, alone, sufficient to establish preemption by the Federal Arbitration Act. AGID, J., dissents by separate opinion. Nature of Action: A condominium owners association sought damages from the condominium developer for breach of contractual warranties, breach of express and implied warranties under the Washington Condominium Act, breach of the implied warranty of habitability, and violations of the Consumer Protection Act. The developer denied the allegations and demanded arbitration based on the arbitration clause in the warranty addendums to the original purchase and sale agreements. The developer claimed that the association's claims were subject to arbitration under the Federal Arbitration Act because most of the building materials used to construct the condominium were manufactured and shipped in interstate commerce. The association moved to quash the demand for arbitration. Superior Court: The Superior Court for King County, No. 05-2-05510-3, Bruce W. Hilyer, J., quashed the demand for arbitration on April 25, 2005. Court of Appeals: Holding that the association's contract and common law claims are subject to arbitration but that its statutory warranty claims are not preempted by the Federal Arbitration Act, the court remands the case for further proceedings. Stellman Keehnel-, Kit W. Roth-, and Rogelio O. Riojas- (of DLA Piper US, LLP); Joel T. Salmi- and Daniel L. Dvorkin- (of Salmi & Gillaspy, PLLC); and Anthony Todaro- (of Peterson Young Putra), for petitioner. Marlyn K. Hawkins- and Dean E. Martin- (of Barker Martin, PS), for respondent. ¶1 ELLINGTON, J. — The chief question here is whether the Washington statute providing for judicial enforcement of statutory condominium warranties must yield to the federal arbitration statute solely because some construction materials came from outside Washington state. We hold that under the circumstances here, the commerce clause does not reach so far, and the state statute controls. BACKGROUND ¶2 Satomi, LLC (Company), developed the Satomi Condominium, an 85-unit complex located in Bellevue. In 2005, the Satomi Owners Association (Association) filed suit against the Company, alleging numerous construction defects and other deficiencies throughout the complex, and claiming breach of contractual warranties, breach of implied and express warranties under the Washington Condominium Act (WCA), chapter 64.34 RCW, breach of the implied warranty of habitability, and violations of the Consumer Protection Act (CPA), chapter 19.86 RCW. ¶3 The Company denied the allegations and demanded arbitration based on the arbitration clause in the warranty addendum, which was an attachment to the original purchase and sale agreements. The Company asserted that most of the building materials used to construct the condominium were manufactured and shipped in interstate commerce, and the Association's claims were therefore subject to arbitration under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-6. ¶4 The Association moved to quash the demand for arbitration, contending it is not bound by the agreement and that in any event, the agreement violates the judicial enforcement provision of the WCA, which is not preempted by the FAA because the contract does not involve interstate commerce. ¶5 The trial court quashed the demand for arbitration motion on three grounds: (1) The Company did not prove that all of the individual owners agreed to arbitrate. (2) Even if the individual owners agreed to arbitrate, the Association "is a legally separate corporate entity which is neither a 'successor or transferee' to [the Association]. Thus, the arbitration clause is simply inapplicable." (3) The FAA does not apply because Marina Cove Condominium Owners Ass'n v. Isabella Estates DISCUSSION ¶7 The Company argues the court erred and that all unit owners agreed to arbitrate their claims, the Association is bound to arbitrate these issues in the same manner as the unit owners, and the FAA applies and mandates arbitration. We agree with the first two arguments, but not the third. I. Applicability of Arbitration Agreement to Association ¶10 The WCA requires condominiums to have a homeowners' association whose membership consists solely of the unit owners, all of whom must belong. ¶11 Such is the case here. The claims asserted belong to the individual unit owners. In addition to violations of the CPA, the Association alleges breaches of warranties under the WCA, the purchase contract, and the implied warranty of habitability, resulting in damage to property owned by its members. ¶12 The Association stands in the shoes of the individual unit owners. The trial court erred when it concluded the arbitration clause does not apply to the Association. If the claims are subject to arbitration, the Association must arbitrate. ¶13 The remaining question is whether statutory warranty claims are subject to arbitration because the FAA preempts state law. II. Applicability of the Federal Arbitration Act ¶14 The Association contends that we decided this issue in Marina Cove, wherein we held that condominium purchase and sale agreements between Washington companies and Washington residents do not implicate the FAA. A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. ¶17 The United States Supreme Court most recently considered the scope of the FAA in Citizens Bank v. Alafabco, Inc., ¶18 The Court emphasized that the commerce clause power " 'may be exercised in individual cases without showing any specific effect upon interstate commerce' if in the aggregate the economic activity in question would represent 'a general practice . . . subject to federal control.' " ¶19 The Citizens Bank debt restructuring agreements, although executed in Alabama by Alabama residents, easily met the "involving commerce" test for at least three reasons: (1) Alafabco used funds from loans that were the subject of the debt restructuring agreements to finance large projects throughout the southeastern United States; (2) the restructured debt was secured in part by Alafabco's inventory of goods assembled from out-of-state parts and raw materials; and (3) the general practice represented by the transactions at issue, commercial lending, has a broad impact on the national economy and is clearly within Congress' regulatory power. ¶20 Citizens Bank confirmed the broad reach of the FAA announced in 1995 in Allied-Bruce Terminix Cos. v. Dobson. ¶21 In another 1995 decision, United States v. Lopez, ¶22 In Marina Cove, we adopted an interpretation of Lopez enunciated in L&L Kempwood Associates, LP v. Omega Builders, Inc., Similarly here, Marina Cove Condominiums were constructed, marketed, and sold solely within the state of Washington. The contract at issue is a limited warranty offered by a Washington corporation on condominium units located within the state, whose owners all reside in Washington. The only connection to other states involves one buyer, who moved to Washington from another state, and another buyer, who transferred funds from an out-of-state bank account for use as a down payment on one unit purchased. That negligible contact with other states does not constitute a substantial effect on interstate commerce. The FAA does not apply. ¶23 But in Citizens Bank, the Court rejected the "substantially affecting" interpretation as an "improperly cramped view" of the commerce clause power, ¶24 We know of only one other case similar to this one, Basura v. U.S. Home Corp. "(a) Any written affirmation of fact or promise which relates to the unit, its use, or rights appurtenant thereto, area improvements to the condominium that would directly benefit the unit, or the right to use or have the benefit of facilities not located in the condominium creates an express warranty that the unit and related rights and uses will conform to the affirmation or promise; "(b) Any model or written description of the physical characteristics of the condominium at the time the purchase agreement is executed, including plans and specifications of or for improvements, creates an express warranty that the condominium will conform to the model or description except pursuant to RCW 64.34.410(1)(v); "(c) Any written description of the quantity or extent of the real property comprising the condominium, including plats or surveys, creates an express warranty that the condominium will conform to the description, subject to customary tolerances; and "(d) A written provision that a buyer may put a unit only to a specified use is an express warranty that the specified use is lawful." "(1) A declarant and any dealer warrants that a unit will be in at least as good condition at the earlier of the time of the conveyance or delivery of possession as it was at the time of contracting, reasonable wear and tear and damage by casualty or condemnation excepted. "(2) A declarant and any dealer impliedly warrants that a unit and the common elements in the condominium are suitable for the ordinary uses of real estate of its type and that any improvements made or contracted for by such declarant or dealer will be: "(a) Free from defective materials; "(b) Constructed in accordance with sound engineering and construction standards; "(c) Constructed in a workmanlike manner; and "(d) Constructed in compliance with all laws then applicable to such improvements." 1. Limited Warranty. The Unit in the Condominium identified above and the Common Elements are suitable for the ordinary uses of real estate of their type and, except as provided below, all parts of the Unit and Common Elements constructed by or for the Declarant are free from defective materials and have been constructed in accordance with applicable law, in accordance with sound engineering and construction standards, and in a workmanlike manner. ¶26 The warranty addendum purports to require arbitration of all warranty disputes: 7. Seller's Right to Arbitration. At the option of the Seller, Seller may require that any claim asserted by Purchaser or by the Association under this Warranty or any other claimed warranty relating to the Unit or Common Elements must be decided by arbitration, in King County, Washington, under the Construction Arbitration Rules of the American Arbitration Association (AAA) in effect on the date hereof, as modified by this Warranty. ¶27 Contractual and common law warranties are subject to arbitration. WCA warranties, however, are not: "[A]ny right or obligation declared by this chapter is enforceable by judicial proceeding." ¶29 Second, real property law has historically been the law of each state. ¶30 Third, the warranties in question arise entirely from state law. Unlike Citizens Bank and Allied-Bruce, where the very subject matter of the contracts involved interstate commerce, here the issues are confined to claims founded in warranties created by the Washington legislature. ¶31 Fourth, these transactions have none of the earmarks of an economic activity that in the aggregate would represent a general practice subject to federal control. The Company offers no authority holding that local real estate transactions represent such a practice, or that warranties required by state law for state condominium projects represent such a practice, or that local regulation of real estate transactions can constitute an economic activity that in the aggregate would represent a general practice subject to federal control. The Company relies upon a single fact: that construction materials came from outside Washington state. In some cases, this is adequate for FAA preemption. Here, it is not. ¶32 Where the issue is federal regulation of the business itself—for example, enforcement of the rights of employees to nondiscriminatory and healthy workplaces—the "transaction" involves the internal operation of the business, and its use of materials shipped in interstate commerce is enough to characterize that business as affecting commerce for purposes of the FAA. ¶33 Where the issue is a private dispute, however, the analysis must identify the transaction involving commerce. In Citizens Bank, the Court reasoned that because the commerce clause gives Congress "the power to regulate local business establishments purchasing substantial quantities of goods that have moved in interstate commerce," it followed that it also permits regulation of "substantial commercial loan transactions secured by such goods." ¶34 Here, the only connection to interstate commerce is that materials from elsewhere were used in construction, and some of those were allegedly unsound or unsuitable, thereby violating the warranty required by RCW 64.34.445 that the condominium be free from defective materials and constructed in accordance with applicable state law. This warranty amounts to a guarantee that the builder has examined the materials used and ensures they are of sound quality and suitable for the use to which they are put, on site, in Washington state. The origin of the materials is irrelevant to the warranty, and the giving of the warranty is not a transaction involving commerce because, in the aggregate or otherwise, it does not represent a general practice subject to federal control. Whether the condominium declarant violated the warranty is not a dispute involving interstate commerce. ¶35 It has been often observed that the "affects commerce" test is easily met. ¶36 Here, a significant right created by state law is at issue. The legislature of Washington state retains sovereignty over local real estate transactions. Despite its strong policy favoring arbitration, the legislature created warranty rights in condominium purchasers and provided an exclusively judicial remedy. We do not think this legislative determination as to the appropriate forum for adjudicating legislatively created rights is preempted solely because construction materials may have crossed state lines. ¶37 The reach of the commerce clause is broad, but it is not unlimited. We hold that WCA statutory warranty claims are not arbitrable, that contract and common law claims are, and remand for further proceedings consistent with this opinion. APPELWICK, C.J., concurs. ¶38 AGID, J. (dissenting) — I respectfully dissent from Part II of the majority opinion. Despite recognizing that the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-6, " 'signals[s] the broadest permissible exercise of Congress' Commerce Clause power' " (majority at 6) (quoting Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S. Ct. 2037, 156 L. Ed. 2d 46 (2003)), the strong policy of both state law and the FAA favoring arbitration (majority at 5-6), the purpose of the FAA "to overcome courts' unwillingness to enforce arbitration agreements" (majority at 6), and the "questionable" viability of our decision in Marina Cove Condominium Owners Ass'n v. Isabella Estates, ¶39 There are two major problems with the majority's approach. First, it relies on authority it admits is of questionable continuing validity for one of its major premises: that "[t]he right to a judicial forum for resolution of WAC warranty disputes cannot be waived." ¶40 The FAA provides that A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. The party moving to compel arbitration must make a threshold showing that there is a written agreement to arbitrate and that the contract at issue involves interstate commerce. ¶41 Satomi, LLC (Company), argues the transactions evidenced by the warranty addendum involve interstate commerce because over 70 percent of the building materials used to construct the condominium complex were manufactured in and shipped from outside Washington. The Association asserts the origin of the building materials is too remote an interstate connection for the FAA to apply. It contends this court in Marina Cove established that condominium purchase and sale agreements between Washington companies and Washington residents do not implicate the FAA. ¶42 The FAA's basic purpose is to overcome courts' refusals to enforce arbitration agreements. functional equivalent of the more familiar term "affecting commerce"—words of art that ordinarily signal the broadest permissible exercise of Congress' Commerce Clause power. Because the statute provides for "the enforcement of arbitration agreements within the full reach of the Commerce Clause", it is perfectly clear that the FAA encompasses a wider range of transactions than those actually "in commerce"—that is, "within the flow of interstate commerce." ¶43 In Allied-Bruce, the Gwins entered into a termite protection contract for their home with Allied-Bruce and Terminix.