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Nishimura v. Gentry Homes, Ltd.

Supreme Court of Hawai'i

October 31, 2014

THOMAS NISHIMURA, COLETTE NISHIMURA, Individually and on Behalf of a Class of All Persons Similarly Situated, Petitioners/Plaintiffs-Appellees,
GENTRY HOMES, LTD., a Hawai'i Domestic Profit Corporation, Respondent/Defendant-Appellant, and SIMPSON MANUFACTURING CO., INC., a Delaware Corporation; SIMPSON STRONG-TIE COMPANY, INC., a California Corporation, Defendants


Melvin Y. Agena for petitioners.

Ryan H. Engle for respondent.

Mark E. Recktenwald, C.J., Paula A. Nakayama, Sabrina S. McKenna, Richard W. Pollack, AND Michael D. Wilson, JJ.


Page 525

[134 Hawai'i 144] McKENNA, J.

I. Introduction

This appeal raises an issue of first impression in Hawai'i: what standard applies in reviewing the enforceability of an arbitrator--selection provision' We adopt the " fundamental fairness" standard set forth by the United States Court of Appeals for the Sixth Circuit in McMullen v. Meijer, Inc., 355 F.3d 485 (6th Cir. 2004), and we hold that the arbitrator-selection provision at issue in this appeal was fundamentally unfair, because it gave the defendant's agent " sole discretion" to select an arbitration service to resolve a dispute between the plaintiffs and defendant. In the instant case, the Circuit Court of the First Circuit (" circuit court" )[1] properly severed and struck the arbitrator-selection provision and ordered the parties to meet and confer to select an arbitration service. The circuit court also properly reserved for itself the authority to appoint an arbitration service if the parties could not come to an agreement. Therefore, we vacate the ICA's judgment on appeal, which vacated the circuit court's " Order Granting in Part and Denying in Part Defendant Gentry Homes, Ltd.'s Motion to Compel Arbitration Filed August 29, 2012," and its " Order Denying Gentry Homes' Motion for Reconsideration of the Order Granting in Part and Denying in Part Gentry Homes, Ltd.'s Motion to Compel Arbitration [Filed August 29, 2012], Filed on November 13, 2012." The circuit court's orders are affirmed.

II. Background

A. Circuit Court Proceedings

1. The First Amended Class Action Complaint

On October 12, 2011, Petitioners/Plaintiffs-Appellees Thomas Nishimura and Colette Nishimura, individually and on behalf of a

Page 526

[134 Hawai'i 145] class of all persons similarly situated (" Nishimuras" ), filed their First Amended Class Action Complaint. The Nishimuras alleged that Gentry Homes, Ltd. (" Gentry" ) constructed the Nishimuras' home without adequate high wind protection.

2. Motion to Compel Arbitration

On August 29, 2012, Gentry filed its Motion to Compel Arbitration, pursuant to the following provision in the Home Builder's Limited Warranty (" HBLW" ) between Gentry and the Nishimuras (with emphasized portions relevant to this appeal):

VIII. Binding Arbitration Procedure
Any disputes between YOU and US, or parties acting on OUR behalf, including PWC,[2] related to or arising from this LIMITED WARRANTY, the design or construction of the HOME or the COMMON ELEMENTS or the sale of the HOME or transfer of title to the COMMON ELEMENTS will be resolved by binding arbitration. Binding arbitration shall be the sole remedy for resolving any and all disputes between YOU and US, or OUR representatives.
. . . .
The arbitration shall be conducted by Construction Arbitration Services, Inc., or such other reputable arbitration service that PWC shall select, at its sole discretion, at the time the request for arbitration is submitted. The rules and procedures of the designated arbitration organization, that are in effect at the time the request for arbitration is submitted, will be followed. A copy of the applicable rules and procedures will be delivered to YOU upon request.
This arbitration agreement shall be governed by the United States Arbitration Act (9 U.S.C. § § 1-16) to the exclusion of any inconsistent state law, regulation or judicial decision. The award of the arbitrator shall be final and binding and may be entered as a judgment in any court of competent jurisdiction. . . .

The Nishimuras' Opposition to Gentry Homes' Motion to Compel Arbitration drew the circuit court's attention to a notice on Construction Arbitration Services, Inc.'s website, announcing that it had " permanently exit[ed] from the binding construction arbitration dispute case administration business effective July 1, 2009." (Emphasis in original.) Thus, under the HBLW's arbitrator-selection provision, PWC was authorized to " select, at its sole discretion" " such other reputable arbitration service" to conduct the arbitration. " Reputable" was not defined in the HBLW. The Nishimuras argued that the instant arbitrator-selection provision contained no safeguards against " potential bias," and that PWC was empowered to choose any arbitrator, including one with a pro-defense view.

The Nishimuras feared that PWC would select an arbitration service aligned with developers, because PWC marketed its " close relationship" with Zurich, the parent of the insurance company for Haseko Homes, Inc. and Haseko Construction, Inc., which at that time was also being sued for the same construction defect as in the instant case. The Nishimuras alleged that PWC would have a " strong financial incentive in helping secure an outcome in favor of Gentry in the instant action. . . ." They noted that another circuit court judge had severed and stricken the arbitrator-selection provision in the Haseko case " on the ground of PWC's conflict of interest. . . ." The Nishimuras argued, " Allowing a party so closely aligned with the defendants in a similar case involving similar claims before this Court to unilaterally select the arbitrator would deprive Plaintiffs of a fair and effective forum in which to vindicate their claims." In support of their argument, the Nishimuras cited, inter alia, McMullen, 355 F.3d 485.

In its Reply, Gentry argued that the Nishimuras set forth " no evidence of bias with the ultimate arbitrator," because none had been selected. Gentry pointed out that the arbitration-selection provision authorized PWC to choose an arbitration service, not the ultimate

Page 527

[134 Hawai'i 146] arbitrator. Gentry also argued that a party who does not consent to the other party's choice of arbitrator can petition the court to appoint an arbitrator. Gentry also argued that a party must await the conclusion of arbitration to raise a challenge of " evident partiality" in the arbitrator.

At a hearing on the Motion to Compel Arbitration, counsel for the Nishimuras asked the circuit court to sever and strike the arbitrator-selection provision, order the parties to agree to a local arbitrator, or appoint one itself, as another circuit court had done in the Haseko case. Counsel for Gentry countered that he did not believe the circuit court had the authority to order the parties to agree to an arbitrator. The circuit court, on the other hand, stated that " just on the face of" the HBLW arbitrator-selection provision, " there is a potential conflict . . . ." The circuit court stated to Gentry's counsel, " [T]he less you have to reserve in the future as possible appealable issues, the better. . . ."

The circuit court therefore granted in part and denied in part Gentry's Motion to Compel Arbitration. While it ordered the Nishimuras to arbitrate their claims against Gentry, the circuit court found the following:

The Motion is DENIED to the extent that this Court finds that there is a potential conflict of interest with Professional Warranty Services, Inc. (" PWC" ) selecting the arbitration service as set forth under the Home Builder's Limited Warranty. Accordingly, the method by which the arbitration service is to be selected under the Home Builders' Limited Warranty is severed and stricken. Pursuant to Hawaii Rules of the Circuit Courts Rule 12.2[3], this Court orders that Plaintiffs and Gentry shall meet and confer on the selection of a local arbitration service within forty-five (45) days of entry of this Order. If Plaintiffs and Gentry are unable to agree, the Court shall select a local arbitration service for this matter.

3. Motion for Reconsideration

Gentry filed a Motion for Reconsideration of the circuit court's order asking the court to set aside the provision severing and striking the arbitrator-selection provision. In addition to reiterating arguments that the time to challenge arbitrator bias is post-award and that the Nishimuras had presented no evidence of bias or potential bias, Gentry argued that RCCH Rule 12.2 did not authorize the circuit court to " modify the parties' agreement for binding arbitration. . . ." Gentry argued that RCCH Rule 12.2 authorizes court-mandated non-binding arbitration, not binding arbitration, which is what the parties had agreed to in the HBLW.

In the Nishimuras' Opposition to Gentry's Motion for Reconsideration, they argued that the circuit court had " broad discretion to appoint an arbitration service (or here, order the parties to meet and confer to appoint one) when the specified arbitration service is no longer in business or the arbitrator is partial to one of the parties." The ...

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