Narayan v. The Ritz-Carlton Development Company, Inc.

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Electronically Filed
Supreme Court
SCWC-12-0000819
14-JUL-2017
08:37 AM

IN THE SUPREME COURT OF THE STATE OF HAWAI#I

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KRISHNA NARAYAN; SHERRIE NARAYAN; VIRENDRA NATH;
NANCY MAKOWSKI; KEITH MACDONALD AS CO-TRUSTEE FOR THE
DKM TRUST DATED OCTOBER 7, 2011; SIMON YOO; SUMIYO SAKAGUCHI;
SUSAN RENTON, AS TRUSTEE FOR THE RENTON FAMILY TRUST
DATED 12/3/09; STEPHEN XIANG PANG; FAYE WU LIU; MASSY MEHDIPOUR
AS TRUSTEE FOR MASSY MEHDIPOUR TRUST DATED JUNE 21, 2006;
G. NICHOLAS SMITH; TRISTINE SMITH; RITZ 1303 RE, LLC, a Colorado
Limited Liability Company; and BRADLEY CHAFFEE AS TRUSTEE OF THE
CHARLES V. CHAFFEE BRC STOCK TRUST DATED 12/1/99
AND THE CLIFFORD W. CHAFFEE BRC STOCK TRUST DATED 1/4/98,
Petitioners/Plaintiffs-Appellees,

vs.

THE RITZ-CARLTON DEVELOPMENT COMPANY, INC.;
THE RITZ-CARLTON MANAGEMENT COMPANY, LLC; JOHN ALBERT; EDGAR GUM,
Respondents/Defendants-Appellants,

and

MARRIOTT INTERNATIONAL INC.; MAUI LAND & PINEAPPLE CO., INC.;
EXCLUSIVE RESORTS, LLC; KAPALUA BAY, LLC;
ASSOCIATION OF APARTMENT OWNERS OF KAPALUA BAY CONDOMINIUM;
CAROLINE PETERS BELSOM; CATHY ROSS; ROBERT PARSONS;
RYAN CHURCHILL; THE RITZ-CARLTON HOTEL COMPANY, L.L.C.;
MARRIOTT VACATIONS WORDWIDE, CORPORATION; MARRIOTT OWNERSHIP
RESORTS, INC.; MARRIOTT TWO FLAGS, LP; MH KAPALUA VENTURE, LLC;
MLP KB PARTNER LLC; KAPALUA BAY HOLDINGS, LLC; ER KAPALUA
INVESTORS FUND, LLC; ER KAPALUA INVESTORS FUND HOLDINGS, LLC;
EXCLUSIVE RESORTS DEVELOPMENT COMPANY, LLC; and EXCLUSIVE RESORTS
CLUB I HOLDINGS, LLC, Respondents/Defendants.
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SCWC-12-0000819

ON REMAND FROM THE UNITED STATES SUPREME COURT
(CAAP-12-0000819; CIV. NO. 12-1-0586(3))

JULY 14, 2017

RECKTENWALD, C.J., NAKAYAMA, McKENNA, AND POLLACK, JJ.,
AND CIRCUIT JUDGE NAKASONE, IN PLACE OF ACOBA, J., RECUSED1

OPINION OF THE COURT BY NAKAYAMA , J.

I. INTRODUCTION

In Narayan v. Ritz-Carlton Development Co., 135 Hawai#i

327, 350 P.3d 995 (2015) (Narayan I), this court held that the

Plaintiffs, a group of individual condominium owners, could not

be compelled to arbitrate claims arising from the financial

breakdown of a Maui condominium project. In reaching this

conclusion, this court determined that the arbitration clause was

unenforceable because the Plaintiffs did not unambiguously assent

to arbitration and because the terms of arbitration were

unconscionable.

On January 11, 2016, the Supreme Court of the United

States (Supreme Court) vacated and remanded Narayan I to this

court for further consideration in light of its recent decision

in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015). In

Imburgia, the Supreme Court determined that state law must place

1
At the time this case was originally pending before this court,
Associate Justice Simeon R. Acoba, Jr. was a member of the court; however, he
was recused from the case and Judge Nakasone sat in his place. Justice Acoba
retired on February 29, 2014.

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arbitration agreements “on equal footing with all other

contracts.” Id. at 471 (quoting Buckeye Check Cashing, Inc. v.

Cardegna, 546 U.S. 440, 443 (2006)).

Again recognizing this principle, we affirm our

decision in Narayan I, concluding that, under long-standing

Hawai#i contract law, the arbitration clause is unconscionable.

As such, we vacate the Intermediate Court of Appeals’ (ICA)

October 28, 2013 judgment on appeal, affirm the Circuit Court of

the Second Circuit’s (circuit court) August 28, 2012 order

denying the Defendants’ motion to compel arbitration, and remand

the case to the circuit court for further proceedings consistent

with this opinion.

II. BACKGROUND

A. Factual History

The following facts2 are summarized from this court’s

earlier opinion in Narayan I.

Petitioners/Plaintiffs-Appellees Krishna Narayan et al.

(collectively, the Homeowners) purchased ten condominium units

2
These facts, drawn from the pleadings, are taken as true for the
limited purpose of reviewing the Defendants’ motion to compel arbitration.
Douglass v. Pflueger Haw., Inc., 110 Hawai#i 520, 524, 135 P.3d 129, 133
(2006) (“The standard [for a petition to compel arbitration] is the same as
that which would be applicable to a motion for summary judgment . . .”);
Nuuanu Valley Ass’n v. City & Cty. of Honolulu, 119 Hawai#i 90, 96, 194 P.3d
531, 537 (2008) (“[In evaluating a motion for summary judgment,] we must view
all of the evidence and inferences drawn therefrom in the light most favorable
to the party opposing the motion.” (quoting Kahale v. City & Cty. of Honolulu,
104 Hawai#i 341, 344, 90 P.3d 233, 236 (2004))).

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from Kapalua Bay, LLC, a joint venture owned by Marriot

International, Inc., Exclusive Resorts, Inc., and Maui Land &

Pineapple Co., Inc. (collectively, the Defendants). These units

were part of a Maui condominium development formerly known as the

Ritz-Carlton Club & Residences at Kapalua Bay (the project).3

The Homeowners entered into purchase agreements with

the Defendants when they purchased their condominiums. The

purchase agreements contain two clauses relating to dispute

resolution: a jury waiver clause and an attorneys’ fee clause.

While these clauses do not mention a binding agreement to

arbitrate, the purchase agreement references another document,

the Declaration of Condominium Property Regime of Kapalua Bay

Condominium (declaration), which includes an arbitration clause.

The Defendants recorded the declaration and the Association of

Apartment Owners of Kapalua Bay Condominium Bylaws (AOAO bylaws)

in the State of Hawai#i Bureau of Conveyances prior to the sale

of the individual condominium units to the Homeowners.

Additionally, the Defendants registered the Condominium Public

Report (public report) with the Hawai#i Real Estate Commission.

All of these documents are incorporated by reference through the

3
Respondents/Defendants-Appellants the Ritz-Carlton Development
Company, Inc. and the Ritz-Carlton Management Company, LLC were the original
development and management companies for the project, and were then wholly-
owned subsidiaries of Marriott. Respondents/Defendants-Appellants John Albert
and Edgar Gum served on the board of directors of the AOAO while allegedly
being employed by either Marriott or Ritz-Carlton.

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purchase agreement.

The arbitration clause is found towards the end of the

thirty-six page condominium declaration and provides, in its

entirety:
XXXIII. ALTERNATIVE DISPUTE RESOLUTION.

In the event of the occurrence of any controversy or
claim arising out of, or related to, this Declaration or to
any alleged construction or design defects pertaining to the
Common Elements or to the Improvements in the Project
(“dispute”), if the dispute cannot be resolved by
negotiation, the parties to the dispute agree to submit the
dispute to mediation by a mediator mutually selected by the
parties. If the parties are unable to agree upon a
mediator, then the mediator shall be appointed by the
American Arbitration Association. In any event, the
mediation shall take place within thirty (30) days of the
date that a party gives the other party written notice of
its desire to mediate the dispute. If the dispute is not
resolved through mediation, the dispute shall be resolved by
arbitration pursuant to this Article and the then-current
rules and supervision of the American Arbitration
Association. The duties to mediate and arbitrate hereunder
shall extend to any officer, employee, shareholder,
principal, partner, agent trustee-in-bankruptcy, affiliate,
subsidiary, third-party beneficiary, or guarantor of all
parties making or defending any claim which would otherwise
be subject to this Article.
The arbitration shall be held in Honolulu, Hawaii
before a single arbitrator who is knowledgeable in the
subject matter at issue. The arbitrator’s decision and
award shall be final and binding and may be entered in any
court having jurisdiction thereof. The arbitrator shall not
have the power to award punitive, exemplary, or
consequential damages, or any damages excluded by, or in
excess of, any damage limitations expressed in this
Declaration or any other agreement between the parties. In
order to prevent irreparable harm, the arbitrator may grant
temporary or permanent injunctive or other equitable relief
for the protection of property rights.
Issues of arbitrability shall be determined in
accordance with the federal substantive and procedural laws
relating to arbitration; all other aspects of the dispute
shall be interpreted in accordance with, and the arbitrator
shall apply and be bound to follow, the substantive laws of
the State of Hawaii. Each party shall bear its own
attorneys’ fees associated with negotiation, mediation, and
arbitration, and other costs and expenses shall be borne as
provided by the rules of the American Arbitration
Association.
If court proceedings to stay litigation or compel

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arbitration are necessary, the party who unsuccessfully
opposed such proceedings shall pay all associated costs,
expenses, and attorneys’ fees which are reasonably incurred
by the other party.
The arbitrator may order the parties to exchange
copies of nonrebuttable exhibits and copies of witness lists
in advance of the arbitration hearing. However, the
arbitrator shall have no other power to order discovery or
depositions unless and then only to the extent that all
parties otherwise agree in writing.
Neither a party, witness, or the arbitrator may
disclose the facts of the underlying dispute or the contents
or results of any negotiations, mediation, or arbitration
hereunder without prior written consent of all parties,
unless and then only to the extent required to enforce or
challenge the negotiated agreement or the arbitration award,
as required by law, or as necessary for financial and tax
reports and audits.
No party may bring a claim or action, regardless of
form, arising out of or related to this Declaration or to
any construction or design defects claims pertaining to the
Common Elements or to the Improvements of the Project,
including any claim of fraud, misrepresentation, or
fraudulent inducement, more than one year after the cause of
action accrues, unless the injured party cannot reasonably
discover the basic facts supporting the claim within one
year.
Notwithstanding anything to the contrary in this
Article, in the event of alleged violation of a party’s
property or equitable rights, including, but not limited to,
unauthorized disclosure of confidential information, that
party may seek temporary injunctive relief from any court of
competent jurisdiction pending appointment of an arbitrator.
The party requesting such relief shall simultaneously file a
demand for mediation and arbitration of the dispute, and
shall request the American Arbitration Association to
proceed under its rules for expedited procedures. In no
event shall any such court-ordered temporary injunctive
relief continue for more than thirty (30) days.
If any part of this Article is held to be
unenforceable, it shall be severed and shall not affect
either the duties to mediate and arbitrate hereunder or any
other part of this Article.

(Emphases added.) Significantly, the underlined portions above

indicate that the arbitration clause includes a limit on damages,

a limit on discovery, and a confidentiality provision.

In April of 2012, the Homeowners learned that the

Defendants had defaulted on loans encumbering the project and

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that, as a result, the Defendants could not pay maintenance and

operator fees to Marriott’s management subsidiaries. The

Defendants eventually defaulted on the AOAO assessments,

abandoned the project, and revoked the Ritz-Carlton branding.

Marriott or one of its subsidiaries withdrew approximately

$1,300,000.00 from the AOAO operating fund and threatened to

withdraw the remaining $200,000.00 from the fund. The AOAO board

members, many of whom were employed by Marriott, Ritz-Carlton,

and/or other interested entities, did not attempt to block

Marriott from taking these actions but instead indicated that the

multi-million dollar shortfall would have to be covered by the

Homeowners.

B. Procedural History

On June 7, 2012, the Homeowners filed suit in the

circuit court4 asserting claims for breach of fiduciary duty,

access to books and records, and injunctive/declaratory relief.

The circuit court denied the Defendants’ motion to compel

arbitration, which the Defendants appealed. The ICA concluded

that the parties had entered into a valid agreement to arbitrate,

that the dispute fell within the scope of that agreement, and

that the agreement was not procedurally unconscionable. Thus,

the ICA held that the Defendants could compel the Homeowners to

4
The Honorable Joseph E. Cardoza presided.

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arbitration.

On June 3, 2015, this court issued an opinion in

Narayan I, vacating the ICA’s judgment on appeal, affirming the

circuit court’s order denying the Defendants’ motion to compel

arbitration, and remanding the case to the circuit court for

further proceedings consistent with the opinion. 135 Hawai#i at

339-40, 350 P.3d at 1007-08. This court held that the Homeowners

could not be compelled to arbitrate for two reasons. First, this

court determined that “the arbitration provision contained in the

condominium declaration is unenforceable because the terms of the

various condominium documents are ambiguous with respect to the

Homeowners’ intent to arbitrate.” Id. at 335, 350 P.3d at 1003.

Second, this court determined that portions of the arbitration

clause were unconscionable. Id. at 336-39, 350 P.3d at 1004-07.

This court subsequently issued summary disposition

orders in line with its opinion for two related cases, Nath v.

Ritz-Carlton Hotel Co., No. SCAP-13-2732 (Haw. June 30,

2015)(SDO), and Narayan v. Marriott International, Inc., No.

SCAP-13-3607 (Haw. June 30, 2015)(SDO), (collectively, the

Narayan cases).

The Defendants filed petitions for writ of certiorari

for the Narayan cases and, on January 11, 2016, the Supreme Court

entered orders granting the petitions and vacating and remanding

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the Narayan cases: “The judgment is vacated, and the case is

remanded to the Supreme Court of Hawaii for further consideration

in light of DIRECTV, Inc. v. Imburgia, [136 S. Ct. 463] (2015).”

On remand, both parties filed supplemental briefs

addressing the impact of Imburgia on the Narayan cases.

C. The Imburgia Decision

The Imburgia lawsuit arose in 2008, when the

plaintiffs, DIRECTV customers, challenged DIRECTV’s early

termination fees on the grounds that the fees violated California

law. 136 S. Ct. at 466. The service contract between the

plaintiffs and DIRECTV included a binding arbitration provision

and class action waiver. Id. The contract also provided that

“if the ‘law of your state’ makes the waiver of class arbitration

unenforceable, then the entire arbitration provision ‘is

unenforceable.’” Id.

Prior to 2011, the class arbitration waiver clause was

unenforceable under California law pursuant to the California

Supreme Court’s decision in Discover Bank v. Superior Court, 113

P.3d 1100 (Cal. 2005). In Discover Bank, the California Supreme

Court held that a waiver of class arbitration in a consumer

contract of adhesion was unconscionable under California law and

should not be enforced. Id. at 1110. However, in AT&T Mobility

LLC v. Concepcion, 563 U.S. 333, 352 (2011), the Supreme Court

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held that the Discover Bank rule “stands as an obstacle to the

accomplishment and execution of the full purposes and objectives

of Congress” and that the Federal Arbitration Act (FAA) preempted

and invalidated the rule. (Quoting Hines v. Davidowitz, 312 U.S.

52, 67 (1941)). Thus, after the 2011 Concepcion decision, class

arbitration waiver clauses became enforceable under California

law.

Following the Supreme Court’s decision in Concepcion,

DIRECTV requested that the matter be sent to arbitration pursuant

to the arbitration clause. Imburgia, 136 S. Ct. at 466. The

trial court denied that request and DIRECTV appealed. Id. The

California Court of Appeal referenced two sections of

California’s Consumers Legal Remedies Act in holding that “the

law of California would find the class action waiver

unenforceable.” Id. at 467. The California Supreme Court denied

discretionary review and the Supreme Court accepted DIRECTV’s

petition for writ of certiorari. Id. at 467-68.

The Supreme Court stated that the issue before it was

“whether the decision of the California court places arbitration

contracts ‘on equal footing with all other contracts.’” Id. at

468 (quoting Buckeye, 546 U.S. at 443). The Supreme Court

concluded that “California courts would not interpret contracts

other than arbitration contracts the same way” and offered six

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bases for this conclusion. Id. at 469. Of relevance to this

case, the Supreme Court determined that “nothing in the Court of

Appeal’s reasoning suggests that a California court would reach

the same interpretation of ‘law of your state’ in any context

other than arbitration” and that “the language used by the Court

of Appeal focused only on arbitration.” Id. at 469-70.

Specifically, the Supreme Court noted that “[f]raming the

question in [arbitration terms], rather than in generally

applicable terms, suggests that the Court of Appeal could well

have meant that its holding was limited to the specific subject

matter of this contract–-arbitration.” Id. at 470.

Given these considerations, the Supreme Court concluded

that “California’s interpretation of the phrase ‘law of your

state’ does not place arbitration contracts ‘on equal footing

with all other contracts.’” Id. at 471. As such, the Supreme

Court held that “the Court of Appeal’s interpretation is pre-

empted by the Federal Arbitration Act.” Id.

III. DISCUSSION

The FAA states that “an agreement in writing to submit

to arbitration . . . shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in equity

for the revocation of any contract.” Federal Arbitration Act, 9

U.S.C. § 2 (2012).

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The FAA “creates a body of federal substantive law of

arbitrability, enforceable in both state and federal courts and

pre-empting any state laws or policies to the contrary.” Ticknor

v. Choice Hotels Int’l, Inc., 265 F.3d 931, 936 (9th Cir. 2001)

(quoting Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 285

(9th Cir. 1988)). “Despite the ‘liberal federal policy favoring

arbitration agreements,’ . . . state law is not entirely

displaced from federal arbitration analysis.” Id. at 936-37

(quoting Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79,

81 (2000)). “[A]s long as state law defenses concerning the

validity, revocability, and enforceability of contracts are

generally applied to all contracts, and not limited to

arbitration clauses, federal courts may enforce them under the

FAA.” Id. at 937; see also Concepcion, 563 U.S. at 339

(“[C]ourts must place arbitration agreements on an equal footing

with other contracts . . . and enforce them according to their

terms.”). Specifically, arbitration agreements, like all other

contracts, “may be invalidated by ‘generally applicable contract

defenses, such as fraud, duress, or unconscionability.’” Rent-A-

Center, W., Inc. v. Jackson, 561 U.S. 63, 68 (2010) (quoting

Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).

A. Unconscionability

Under Hawai#i law, unconscionability is recognized as a

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general contract defense:
Unconscionability has generally been recognized to include
an absence of meaningful choice on the part of one of the
parties together with contract terms which are unreasonably
favorable to the other party. Whether a meaningful choice
is present in a particular case can only be determined by
consideration of all the circumstances surrounding the
transaction.

City & Cty. of Honolulu v. Midkiff, 62 Haw. 411, 418, 616 P.2d

213, 218 (1980) (quoting Williams v. Walker-Thomas Furniture Co.,

350 F.2d 445, 449 (D.C. Cir. 1965)); see also Lewis v. Lewis, 69

Haw. 497, 501, 748 P.2d 1362, 1366 (1988) (“The basic test is

whether . . . the clauses involved are so one-sided as to be

unconscionable under the circumstances existing at the time of

the making of the contract. . . . The principle is one of the

prevention of oppression and unfair surprise . . .”).

In Midkiff, this court considered whether a general

issue of material fact existed as to whether a condemnation

clause in a lease was unconscionable. 62 Haw. at 416-17, 616

P.2d at 217. In analyzing the facts of the case under the

doctrine of unconscionability, this court observed that the lease

was a standard pre-printed form, which “may indicate that there

was no arms-length bargaining between the two parties.” Id. at

417, 616 P.2d at 218. Additionally, this court noted that there

could have been a disparity in bargaining power that left the

petitioner in a “take-it-or-leave-it position regarding the

lease.” Id. at 418, 616 P.2d at 218. As such, this court

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concluded that the petitioner did raise a genuine issue of

material fact and remanded the case to the trial court to hold a

hearing on the issue of the unconscionability of the condemnation

clause. Id.

Recent Hawai#i decisions have defined unconscionability

more specifically by articulating two principles that make up the

doctrine: “Unconscionability encompasses two principles: one-

sidedness and unfair surprise.” Balogh v. Balogh, 134 Hawai#i

29, 41, 332 P.3d 631, 643 (2014); see also Lewis, 69 Haw. at 502,

748 P.2d at 1366 (“It is apparent that two basic principles are

encompassed within the concept of unconscionability, one-

sidedness and unfair surprise.”).

These principles are also characterized as procedural

and substantive unconscionability.5 See Balogh, 134 Hawai#i at

41, 332 P.3d at 643. Procedural unconscionability, or unfair

surprise, focuses on the “process by which the allegedly

offensive terms found their way into the agreement.” 7 Joseph M.

Perillo, Corbin on Contracts § 29.1 (Rev. ed. 2002). Substantive

unconscionability, in contrast, focuses on the content of the

agreement and whether the terms are one-sided, oppressive, or

5
Generally, both procedural and substantive unconscionability must
be present in order to make a contract unconscionable; however, Hawai#i courts
“have recognized that, under certain circumstances, an impermissibly one-sided
agreement may be unconscionable even if there is no unfair surprise.” Balogh,
134 Hawai#i at 41, 332 P.3d at 643. Such an analysis is not necessary in this
case because the arbitration clause is both procedurally and substantively
unconscionable.

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“unjustly disproportionate.” Balogh, 134 Hawai#i at 41, 332 P.3d

at 643; Perillo, supra, § 29.1.

Thus, under the common law of Hawai#i,

unconscionability is a generally applicable contract defense. We

turn now to analyzing the facts of the case under this doctrine.

1. Procedural Unconscionability

Procedural unconscionability “requires an examination

of the contract formation process and the alleged lack of

meaningful choice.” Gillman v. Chase Manhattan Bank, N.A., 534

N.E.2d 824, 828 (N.Y. 1988). Courts consider such factors as

“whether deceptive or high-pressured tactics were employed, the

use of fine print in the contract, the experience and education

of the party claiming unconscionability, and whether there was

disparity in bargaining power” between the parties. Id.; see

also Perillo, supra, § 29.4 (noting that the following elements

factor into a determination of procedural unconscionability:

superior bargaining power, lack of meaningful choice for the

weaker party, form contracts that are “heavily weighted in favor

of one party and offered on a take it or leave it basis,” and

where “freedom of contract is exploited by a stronger party”).

Procedural unconscionability often takes the form of

adhesion contracts, where a form contract is created by the

stronger of the contracting parties, and the terms “unexpectedly

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or unconscionably limit the obligations and liability of the

weaker party.” Nacino v. Koller, 101 Hawai#i 466, 473, 71 P.3d

417, 424 (2003) (quoting Leong v. Kaiser Found. Hosp., 71 Haw.

240, 247, 788 P.2d 164, 168 (1990)). Although adhesion contracts

are not unconscionable per se, they are defined by a lack of

meaningful choice and, thus, often satisfy the procedural element

of unconscionability.

In this case, the contracting process for the

arbitration clause exhibits elements of procedural

unconscionability. The party with the superior bargaining

strength, the Defendants, not only drafted the arbitration clause

found in the declaration, but they also recorded the declaration

in the Bureau of Conveyances prior to the execution of the

purchase agreements. The Homeowners were required to conform to

the terms of the declaration as recorded if they wanted to

purchase a Ritz-Carlton condominium on Maui. Thus, the

declaration is adhesive in the sense that it was “created by the

stronger of the contracting parties” on a “take-it-or-leave-it”

basis. Nacino, 101 Hawai#i at 473, 71 P.3d at 424; Midkiff, 62

Haw. at 418, 616 P.2d at 218 (noting that a “disparity in

bargaining position” and a “take-it-or-leave-it” position are

factors in determining whether a contract is unconscionable).

In addition to the inequality of bargaining power

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described above,6 there is an element of unfair surprise in that

the arbitration clause is buried at the end of the declaration

and is ambiguous when read in conjunction with the other

controlling documents, including the purchase agreement and the

public report. For instance, the arbitration clause is on page

thirty-four of the thirty-six page declaration and provides that,

if a dispute cannot be resolved through negotiation or mediation,

“the dispute shall be resolved by arbitration.” (Emphasis

added.) In contrast, the purchase agreement does not provide for

mandatory arbitration but instead contains: 1) a waiver of jury

trial clause, which states that the parties “expressly waive

their respective rights to a jury trial on any claim or cause of

action that is based upon or arising out of this Purchase

Agreement” and that “[v]enue for any cause of action brought by

Purchaser hereunder shall be in the Second Circuit Court, State

of Hawaii,” and 2) an attorneys’ fees clause, which provides for

fees as a result of “any legal or other proceeding.” Similarly,

the public report provides that “[t]he provisions of [the

controlling documents, including the declaration] are intended to

be, and in most cases are, enforceable in a court of law.”

Thus, the controlling documents offer conflicting

6
This court has noted that “inequality of bargaining power, in and
of itself, does not transform an agreement to arbitrate . . . into an
unenforceable contract of adhesion.” Brown v. KFC Nat’l Mgmt. Co., 82 Hawai#i
226, 248 n.27, 921 P.2d 146, 168 n.27 (1996).

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guidance on dispute resolution, with the declaration mandating

arbitration for the parties, while the purchase agreement and

public report allow for disputes to be litigated through

traditional legal proceedings. Such ambiguity in the controlling

documents has the potential to confuse or mislead the non-

drafting parties, and deprives those parties from a full and

adequate understanding of their rights under contract. See

Balogh, 134 Hawai#i at 41, 332 P.3d at 643 (explaining that, in

the context of postmarital and separation agreements, unfair

surprise means that “one party did not have full and adequate

knowledge of the other party’s financial condition when the . . .

agreement was executed”).

For these reasons, we conclude that the arbitration

clause satisfies the procedural element of unconsionability.

2. Substantive Unconscionability

Substantive unconscionability focuses on the one-

sidedness of the agreement. Lewis, 69 Haw. at 502, 748 P.2d at

1366; Balogh, 134 Hawai#i at 41, 332 P.3d at 643; Earl M.

Jorgensen Co. v. Mark Constr., Inc., 56 Haw. 466, 474, 540 P.2d

978, 984 (1975); see also Gillman, 534 N.E.2d at 829 (“This

question entails an analysis of the substance of the bargain to

determine whether the terms were unreasonably favorable to the

party against whom unconscionability is urged.”). Here, the

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Homeowners argue that the arbitration clause is substantively

unconscionable because it eliminates rights to punitive,

exemplary, and consequential damages, precludes discovery,

imposes a confidentiality requirement, and imposes a one-year

statute of limitations.7 We agree, and affirm our earlier

decision that portions of the arbitration clause are

substantively unconscionable.

a. Damages Provision

“Punitive or exemplary damages are generally defined as

those damages assessed in addition to compensatory damages for

the purpose of punishing the defendant for aggravated or

outrageous misconduct and to deter the defendant and others from

similar conduct in the future.” Masaki v. Gen. Motors Corp., 71

Haw. 1, 6, 780 P.2d 566, 570 (1989). “Since the purpose of

punitive damages is not compensation of the plaintiff but rather

punishment and deterrence, such damages are awarded only when the

egregious nature of the defendant’s conduct makes such a remedy

appropriate.” Id. Courts often look to the intentional,

deliberate, and outrageous nature of the defendant’s actions when

considering punitive damages. Id.

Hawai#i law disfavors limiting damages for intentional

7
We do not decide whether the contractually shortened limitations
period is unconscionable because there has been no assertion that the
Homeowners’ claims are barred by that provision.

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and reckless conduct. In Laeroc Waikiki Parkside, LLC v. K.S.K.

(Oahu) Ltd. Partnership, 115 Hawai#i 201, 224, 166 P.3d 961, 984

(2007), this court held that a contract provision limiting tort

liability would violate public policy to the extent that it

attempted to waive liability for criminal misconduct, fraud, or

willful misconduct. Further, we have acknowledged that

“[e]xculpatory contracts are not favored by the law because they

tend to allow conduct below the acceptable standard of care.”

Fujimoto v. Au, 95 Hawai#i 116, 155, 19 P.3d 699, 738 (2001)

(quoting Yauger v. Skiing Enters., Inc., 557 N.W.2d 60, 62 (Wis.

1996)). Such provisions “are strictly construed against parties

relying on them” and will be held void if the agreement is, inter

alia, “gained through inequality of bargaining power.” Id. at

156, 19 P.3d at 739.

While not wholly exculpatory, the damages provision at

issue in this case similarly limits liability because it

restricts the amount or type of recoverable damages. When

coupled with “inequality of bargaining power,” such a limitation

on liability will likewise be unenforceable. See Lucier v.

Williams, 841 A.2d 907, 912 (N.J. Super. Ct. App. Div. 2004)

(concluding that a limitation of liability provision was

unconscionable because: 1) it was incorporated into a contract

of adhesion, 2) the parties had “grossly unequal bargaining

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status” and, 3) the limit on recoverable damages allowed the

drafting party to avoid almost all responsibility for his

actions); Cook v. Pub. Storage, Inc., 761 N.W.2d 645, 668 (Wis.

Ct. App. 2008) (“With respect to punitive damages, we conclude

the limitation of liability clause is unenforceable because it is

against public policy. Punitive damages serve the public policy

purposes of punishing wrongdoers and deterring others.”).

In this case, there is a damages provision that was, as

discussed in the previous section, gained through inequality of

bargaining power. Additionally, the provision prevents an

arbitrator from awarding “punitive, exemplary, or consequential

damages,” thereby shielding a defendant from paying such damages

to an aggrieved party, even upon a showing of egregious or

outrageous conduct by the defendant. It would create an

untenable situation if parties of superior bargaining strength

could use adhesionary contracts to insulate “aggravated or

outrageous misconduct” from the monetary remedies that are

designed to deter such conduct. Masaki, 71 Haw. at 6, 780 P.2d

at 570. Under Hawai#i law, such provisions, regardless of

whether they are found in arbitration agreements or other

contracts, are substantively unconscionable.

b. Discovery Provision

Adequate discovery is necessary to provide claimants “a

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fair opportunity to present their claims.” Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 31 (1991). In

Hawai#i, discovery rules “reflect a basic philosophy that a party

to a civil action should be entitled to the disclosure of all

relevant information in the possession of another person prior to

trial, unless the information is privileged.” Hac v. Univ. of

Haw., 102 Hawai#i 92, 100, 73 P.3d 46, 54 (2003) (quoting

Wakabayashi v. Hertz Corp., 66 Haw. 265, 275, 660 P.2d 1309, 1315

(1983)); see also Hawai#i Rules of Civil Procedure (HRCP) Rule

26(b)(1)(A) (2015) (“Parties may obtain discovery regarding any

matter, not privileged, which is relevant to the subject matter

involved in the pending action.”).

In the arbitration context, limitations on discovery

serve an important purpose because “the underlying reason many

parties choose arbitration is the relative speed, lower cost, and

greater efficiency of the process.” Kona Vill. Realty, Inc. v.

Sunstone Realty Partners, XIV, LLC, 123 Hawai#i 476, 477, 236

P.3d 456, 457 (2010). As such, limitations on discovery may be

enforceable in the arbitral forum, so long as they are reasonable

and do not hinder a party’s ability to prove or defend a claim.

See Hac, 102 Hawai#i at 100, 73 P.3d at 54 (noting that Hawai#i

law favors disclosure of all relevant, unprivileged information);

Gilmer, 500 U.S. at 31 (determining that the discovery allowed in

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the arbitration proceeding - document production, information

requests, depositions, and subpoenas - was sufficient to allow

plaintiff “a fair opportunity to present [his] claims”).

In the current case, the discovery provision in the

arbitration clause provides:
The arbitrator may order the parties to exchange copies of
nonrebuttable exhibits and copies of witness lists in
advance of the arbitration hearing. However, the arbitrator
shall have no other power to order discovery or depositions
unless and then only to the extent that all parties
otherwise agree in writing.

For two reasons, this provision is unenforceable.

First, the discovery provision places severe

limitations on the disclosure of relevant information and hinders

the Homeowners’ ability to prove their claims. Except for

“nonrebuttable” exhibits and witness lists, the Homeowners are

hindered in their ability from discovering potentially relevant

information for their claims against the Defendants. This

restriction runs in direct contravention to Hawaii’s “basic

philosophy” that a party is entitled to all relevant,

unprivileged information pertaining to the subject matter of the

action. Hac, 102 Hawai#i at 100, 73 P.3d at 54. On this basis

alone, we hold the discovery provision unconscionable.

Second, the discovery provision violates parts of

Hawai#i Revised Statutes (HRS) § 658A, which grant an arbitrator

considerable discretion in permitting discovery. Specifically,

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HRS § 658A-17 (Supp. 2001) provides:
(a) An arbitrator may issue a subpoena for the attendance of
a witness and for the production of records and other
evidence at any hearing and may administer oaths. A
subpoena shall be served in the manner for service of
subpoenas in a civil action and, upon motion to the court by
a party to the arbitration proceeding or the arbitrator,
enforced in the manner for enforcement of subpoenas in a
civil action.
(b) In order to make the proceedings fair, expeditious, and
cost effective, upon request of a party to or a witness in
an arbitration proceeding, an arbitrator may permit a
deposition of any witness to be taken for use as evidence at
the hearing, including a witness who cannot be subpoenaed
for or is unable to attend a hearing. The arbitrator shall
determine the conditions under which the deposition is
taken.

(Emphases added.) Pursuant to HRS § 658A-4(b)(1) (Supp. 2001),8

the above subsections of HRS § 658A-17 cannot be waived by

parties to an arbitration agreement. As such, the discovery

provision, which waives the requirements of HRS § 658A-17,

violates HRS § 658A-4(b)(1). Additionally, the discovery

provision undermines the discretion generally afforded

arbitrators. See HRS § 658A-17(c) (“An arbitrator may permit

such discovery as the arbitrator decides is appropriate in the

circumstances, taking into account the needs of the parties to

the arbitration proceeding and other affected persons and the

desirability of making the proceeding fair, expeditious, and cost

effective.”)

8
HRS § 658A-4(b)(1) provides: “(b) Before a controversy arises
that is subject to an agreement to arbitrate, a party to the agreement shall
not: (1) Waive or agree to vary the effect of the requirements of section
658A-5(a), 658A-6(a), 658A-8, 658A-17(a), 658A-17(b), 658A-26, or 658A-28.”
(Emphases added.)

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Although specific to arbitration, the referenced

sections of HRS § 658A-17 reflect Hawaii’s “basic philosophy” on

discovery, and mirror similar provisions found in the Hawai#i

Rules of Civil Procedure. See HRCP Rule 45 (2015) (allowing

courts to issue subpoenas for the attendance of witnesses,

production of documentary evidence, and taking of depositions);

HRCP Rule 26 (2015) (allowing parties to obtain discovery of

relevant information through a variety of methods). As such, the

discovery provision is at odds with Hawaii’s long-standing legal

precedent of allowing parties to access relevant information for

their claims. Such an unreasonable limitation on discovery, in

either a litigation or an arbitration context, is substantively

unconscionable under Hawai#i law.

c. Confidentiality Provision

As is the case with discovery limitations,

confidentiality provisions are not per se substantively

unconscionable. However, where an agreement contains severe

limitations on discovery alongside a confidentiality provision,

the plaintiff may be deprived of the ability to adequately

discover material information about his or her claim. See Ting

v. AT&T, 319 F.3d 1126, 1151 (9th Cir. 2003) (“Although facially

neutral, confidentiality provisions usually favor companies over

individuals. . . . [B]ecause companies continually arbitrate the

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same claims, the arbitration process tends to favor the

company.”); Zuver v. Airtouch Commc’ns, Inc., 103 P.3d 753, 765

(Wash. 2004) (“As written, the [confidentiality] provision

hampers an employee’s ability to prove a pattern of

discrimination or to take advantage of findings in past

arbitrations. Moreover, keeping past findings secret undermines

an employee’s confidence in the fairness and honesty of the

arbitration process.”).

In Hawai#i Medical Ass’n v. Hawai#i Medical Service

Ass’n, 113 Hawai#i 77, 94, 148 P.3d 1179, 1196 (2006), this court

recognized that non-drafting parties to arbitration agreements

are sometimes confronted with unfair limitations, and noted that

the arbitration agreement at issue prevented the non-drafting

party from “placing evidence of broad-based, systemic wrongs

before an internal review panel.” This court concluded that such

one-sided restrictions foreclosed parties from adequately

pursuing their claims and therefore could not be upheld. Id.

The confidentiality provision in the current case

provides: “Neither a party, witness, or the arbitrator may

disclose the facts of the underlying dispute or the contents or

results of any negotiation, mediation, or arbitration hereunder

without prior written consent of all parties.”

Similar to Haw. Med. Ass’n, the confidentiality

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provision at issue here, especially when read in conjunction with

the discovery provision, impairs the Homeowners’ ability to

investigate and pursue their claims. If the confidentiality and

discovery provisions in this case were enforced as written, the

Homeowners would only be able to obtain discovery by consent and

would be prevented from discussing their claims with other

potential plaintiffs because the confidentiality provision would

make them unable to “disclose the facts of the underlying

dispute.” See Pokorny v. Quixtar, Inc., 601 F.3d 987, 1002 (9th

Cir. 2010) (“The confidentiality provision in this case . . .

unfairly favors Quixtar because it prevents Plaintiffs from

discussing their claims with other potential plaintiffs and from

discovering relevant precedent to support their claims.”)

In addition to detrimentally affecting the Homeowners’

ability to investigate their claims, the confidentiality

provision insulates the Defendants from potential liability. See

Ting, 319 F.3d at 1152 (noting that, through a confidentiality

provision, AT&T “placed itself in a far superior legal posture by

ensuring that none of its potential opponents have access to

precedent while, at the same time, AT&T accumulates a wealth of

knowledge on how to negotiate the terms of its own unilaterally

crafted contract” and that, furthermore, “the unavailability of

arbitral decisions may prevent potential plaintiffs from

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obtaining the information needed to build a case of intentional

misconduct or unlawful discrimination against AT&T”). We

therefore hold that the confidentiality provision of the

arbitration clause is substantively unconscionable because it

impairs the Homeowners’ ability to investigate and pursue their

claims.

In sum, we affirm, on state contract grounds, that the

arbitration clause is both procedurally and substantively

unconscionable.9

3. Severability of Unconscionable Provisions

The Defendants argue that, if this court determines

that certain provisions in the arbitration agreement are

unconscionable, those provisions should be severed from the

arbitration clause and the rest of the arbitration clause should

be enforced.

“[T]he general rule is that severance of an illegal

provision of a contract is warranted and the lawful portion of

the agreement is enforceable when the illegal provision is not

central to the parties’ agreement.” Beneficial Haw., Inc. v.

Kida, 96 Hawai#i 289, 311, 30 P.3d 895, 917 (2001). However,

where unconscionability so pervades the agreement, the court may

9
Because we conclude that the arbitration clause is unconscionable,
it is unnecessary for us to address whether ambiguity existed as to the intent
to arbitrate, as we did in Narayan I.

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refuse to enforce the agreement as a whole.10 See Gandee v. LDL

Freedom Enters., Inc., 293 P.3d 1197, 1999-1200 (Wash. 2013)

(“Severance is the usual remedy for substantively unconscionable

terms, but where such terms ‘pervade’ an arbitration agreement,

we ‘refuse to sever those provisions and declare the entire

agreement void.’” (quoting Adler v. Fred Lind Manor, 103 P.3d

773, 788 (Wash. 2004))); Cordova v. World Fin. Corp., 208 P.3d

901, 911 (N.M. 2009) (“[W]e must strike down the arbitration

clause in its entirety to avoid a type of judicial surgery that

inevitably would remove provisions that were central to the

original mechanisms for resolving disputes between the

parties.”).

Here, unconscionability so pervades the arbitration

clause that it is unenforceable. As a starting point, the

10
The Restatement (Second) of Contracts § 208 (Am. Law Inst. 1981)
offers similar guidance on unconscionable contracts:

If a contract or term thereof is unconscionable at the time
the contract is made a court may refuse to enforce the
contract, or may enforce the remainder of the contract
without the unconscionable term, or may so limit the
application of any unconscionable term as to avoid any
unconscionable result.

Likewise, but in the commercial context, HRS 490:2-302(1) (2008) provides,
“[i]f the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made the court may
refuse to enforce the contract . . .” See also Unif. Commercial Code § 2-302
cmt. 2 1A U.L.A. 156 (2012) (“[T]he court, in its discretion, may refuse to
enforce the contract as a whole if it is permeated by the unconscionability,
or it may strike any single clause or group of clauses which are so tainted or
which are contrary to the essential purpose of the agreement . . .” (emphasis
added)).

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arbitration clause is part of an adhesion contract whose terms

were unilaterally determined by the stronger contracting party,

and are ambiguous when read together with the other controlling

documents. On a substantive level, the arbitration clause places

a limitation on damages that would enable the Defendants to

curtail liability for even the most outrageous and intentionally

harmful conduct. The clause also hinders the Homeowners’ ability

to pursue their claims through extreme discovery and

confidentiality limitations. As written, the arbitration clause

goes beyond designating a forum for dispute resolution by

depriving the Homeowners of a meaningful ability to assert rights

that they might legitimately hold. Because unconscionability so

pervades the arbitration clause, it is unenforceable.

4. Unconscionability in Other Jurisdictions

Other state jurisdictions have also invalidated

arbitration clauses on general contract unconscionability

grounds. For instance, in Brewer v. Missouri Title Loans, 364

S.W.3d 486 (Mo. 2012), the Supreme Court of Missouri, on remand

from the Supreme Court of the United States, affirmed that the

arbitration agreement at issue was unconscionable. Brewer

borrowed $2,215 from the title company, which charged an annual

percentage rate on the loan of 300 percent. Id. at 487. The

agreement between the parties provided that Brewer must resolve

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any claim against the title company through arbitration, but that

the title company could enforce its right to repossess the

collateral through the courts. Id. Additionally, no customer of

the title company had ever successfully renegotiated the terms of

the contract. Id.

When Brewer filed a class action petition against the

title company alleging violations of state statutes, the title

company filed a motion to compel arbitration and argued that the

arbitration agreement included a class arbitration waiver. Id.

at 488. The trial court found the class arbitration waiver

unconscionable and unenforceable and, on appeal, the Supreme

Court of Missouri agreed, holding that the class arbitration

waiver was unconscionable and striking the arbitration agreement

in its entirety. Id.

The Supreme Court granted the title company’s petition,

and vacated and remanded Brewer to the Supreme Court of Missouri

for further consideration in light of Concepcion. Id.

On remand, instead of focusing on the enforceability of

the class arbitration waiver, the Missouri court looked to

“whether the arbitration agreement as a whole is unconscionable.”

Id. at 492. The Missouri court explained that “[t]he purpose of

the unconscionability doctrine is to guard against one-sided

contracts, oppression and unfair surprise” and that

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“unconscionability is linked inextricably with the process of

contract formation because it is at formation that a party is

required to agree to the objectively unreasonable terms.” Id. at

492-93.

The Missouri court then applied the doctrine to the

facts of the case:
The evidence in this case supports a determination
that the agreement’s arbitration clause is unconscionable.
There was evidence that the entire agreement--including the
arbitration clause--was non-negotiable and was difficult for
the average consumer to understand and that the title
company was in a superior bargaining position. Brewer could
not negotiate the terms of the agreement, including the
terms of the arbitration clause. Indeed, the evidence
further demonstrated that no consumer ever successfully had
renegotiated the terms of the title company’s arbitration
contract.

Id. at 493. The court also noted that the terms of the agreement

were “extremely one-sided,” and that the terms made it unlikely

that a consumer like Brewer “could retain counsel to pursue

individual claims.” Id. at 493-94. The Missouri court

determined that this “disparity in bargaining power,” coupled

with the “disparity between Brewer’s remedial options and the

title company’s remedial options,” was “strong evidence that the

agreement [was] unconscionable.” Id. at 495. As such, the

Missouri court held that the entire arbitration clause within the

agreement was unconscionable and unenforceable. Id. at 496. The

title company subsequently appealed this decision to the Supreme

Court, which declined review of the case the second time. See

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Mo. Title Loans, Inc. v. Brewer, 133 S. Ct. 191 (2012).

Similarly, in Brown v. Genesis Healthcare Corp., 729

S.E.2d 217 (W. Va. 2012), the Supreme Court of Appeals of West

Virginia, on remand from the Supreme Court of the United States,

also considered if its earlier ruling invalidating the

arbitration clause could be upheld under the doctrine of

unconscionability. In Brown, three lawsuits arose from a nursing

home’s attempt to compel plaintiffs to participate in arbitration

pursuant to a clause in the nursing home admission contract. Id.

at 222. In two of the three cases, the West Virginia court ruled

that the arbitration clauses were unconscionable. Id.

Additionally, the court determined that the FAA could not be

applied to personal injury or wrongful death actions. Id.

On certiorari, the Supreme Court reversed the West

Virginia opinion on the grounds that the FAA requires courts to

enforce arbitration agreements, with no exception for personal

injury or wrongful death claims. Marmet Health Care Ctr., Inc.

v. Brown, 565 U.S. 530, 532-33 (2012). The Supreme Court noted

that, on remand, the West Virginia court must determine whether

the arbitration clauses were unenforceable under “state common

law principles that are not specific to arbitration and pre-

empted by the FAA.” Id. at 534.

On remand, the West Virginia court determined that the

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Supreme Court’s decision did not alter their ultimate decision

regarding unconscionability because the “doctrine of

unconscionability that we explicated in Brown I is a general,

state, common-law, contract-law principle that is not specific to

arbitration, and does not implicate the FAA.” Brown, 729 S.E.2d

at 223. Ultimately, the West Virginia court determined that

further development of the factual record regarding

unconscionability was proper, and reversed the circuit court’s

prior orders and remanded for further proceedings on that issue.

Id. at 229-30.

Thus, on remand from the Supreme Court, both Missouri

and West Virginia determined that the unconscionability doctrine,

as rooted in state, common-law contract principles, was a proper

method for invalidating arbitration agreements. Likewise, we

hold that, under the specific facts of this case, the arbitration

clause was unconscionable pursuant to well-established Hawai#i

contract law.

IV. CONCLUSION

For the foregoing reasons, we affirm our earlier

decision in Narayan v. Ritz-Carlton Development Co., 135 Hawai#i

327, 350 P.3d 995 (2015), on the grounds that the arbitration

clause is unconscionable under common law contract principles.

As such, the ICA’s October 28, 2013 judgment on appeal is vacated

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and the circuit court’s August 28, 2012 order denying the

Defendants’ motion to compel arbitration is affirmed. This case

is remanded to the circuit court for further proceedings

consistent with this opinion.

Terence J. O’Toole, /s/ Mark E. Recktenwald
Judith Ann Pavey, and
Andrew J. Lautenbach /s/ Paula A. Nakayama
for petitioners
/s/ Sabrina S. McKenna
Bert T. Kobayashi, Jr.,
Lex R. Smith, Joseph A. /s/ Richard W. Pollack
Stewart, Maria Y. Wang, and
Aaron R. Mun for respondents /s/ Karen T. Nakasone
The Ritz-Carlton Development
Company, Inc., The Ritz-
Carlton Management Company,
LLC, John Albert and Edgar
Gum and respondents Marriott
International, Inc., The
Ritz-Carlton Hotel Company,
LLC, Marriott Two Flags, LP,
Marriott Ownership Resorts,
Inc., MH Kapalua Venture,
LLC, and Marriott Vacations
Worldwide Corporation

35