The Ritz-Carlton Management Company (RCMC) was able to compel arbitration as provided for in a condominium association LLC operating agreement, even though condominium owners alleged the agreement was unconscionable, and that RCMC had committed fraud. (Ritz-Carlton Mgmt. Co. v. Ass’n of Apartment Owners of Kapalua Bay Condo. (D. Haw., 2013), rehearing denied, http://www.gpo.gov/fdsys/pkg/USCOURTS-hid-1_13-cv-00055/pdf/USCOURTS-hid-1_13-cv-00055-1.pdf ) The Court enforced the following language:
A dispute under this Agreement shall be governed exclusively by the laws of the State of Hawaii and shall be controlled and decided by arbitration. The parties agree that the arbitration shall be held in Hawaii and subject to the American Arbitration’s rules then in effect. The decision shall be binding and non-appealable by either party. Unless the arbitrator determines otherwise, the party losing the arbitration shall be responsible for and pay all the reasonable costs, expenses, and attorney’s fees incurred by the other party.
The Court reviewed precedents on arbitration, found that owners were free to buy the properties in question or other real estate, and found that there was no fraud or oppression in the arbitration language, since it was clearly stated in the contract, which each owner signed when joining the Association. The Federal Arbitration Act, 9 U.S.C. § 1 et seq. therefore applied, and compelled arbitration instead of court resolution of any contract disputes between the parties to the LLC Operating Agreement, whatever the merits of their underlying dispute may have been.
The legal take-away: An organization can require a forum that is more convenient to its location, and a set of rules less expensive than years long motions, discovery, litigation, and appeals, by requiring arbitration in commercial agreements, including basic operating agreements for limited liability companies (LLC’s).