Narayan v. The Ritz-Carlton Development Company, Inc., 140 Haw. 343

Background

Homeowners purchased units in the Ritz‑Carlton Kapalua Bay project; purchase agreements incorporated a recorded Declaration (which contained an arbitration clause) and referenced a public report and AOAO bylaws.
The Declaration's arbitration clause required mediation then arbitration (AAA), limited arbitrator authority on damages (no punitive, exemplary, consequential), severely restricted discovery, imposed confidentiality, and included a one‑year limitations period for many claims.
Defendants (developers/management) recorded the Declaration before sales; homeowners had no ability to negotiate the Declaration terms (adhesion setting).
After the developer defaulted on project loans and abandoned duties, homeowners sued in state court for breach of fiduciary duty, access to records, and injunctive/declaratory relief; defendants moved to compel arbitration.
The trial court denied the motion to compel; ICA reversed and ordered arbitration; this Court in Narayan I reversed the ICA holding the clause ambiguous and unconscionable; the U.S. Supreme Court vacated and remanded for reconsideration in light of DIRECTV v. Imburgia.
On remand, the Hawai`i Supreme Court reaffirmed Narayan I: applying state unconscionability doctrine (procedural and substantive), the arbitration clause is unenforceable and not severable in part because unconscionability pervades the clause.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the arbitration clause is enforceable under FAA and Hawai`i law	Narayan: clause is procedurally and substantively unconscionable (adhesion, buried/ambiguous, limits remedies, discovery, confidentiality)	Defendants: FAA and Imburgia require enforcing arbitration; any bad provisions should be severed and remainder enforced	Court: FAA allows generally applicable state contract defenses; clause is unconscionable and unenforceable in whole because unconscionability pervades it
Procedural unconscionability (formation process)	Clause was imposed via recorded Declaration before sale; buyers had no meaningful choice; clause buried and conflicts with other sale documents	Defendants: purchasers were bound by recorded Declaration and incorporated documents; arbitration is plainly stated	Court: found adhesion, disparity in bargaining power, buried/ambiguous clause; procedural unconscionability established
Substantive unconscionability (specific terms) — damages limitation	Narayan: barring punitive/exemplary/consequential damages shields egregious misconduct and is against public policy when imposed in adhesion contracts	Defendants: parties can contractually limit remedies in arbitration	Court: limitation on punitive and consequential damages is substantively unconscionable given bargaining imbalance and public‑policy concerns
Substantive unconscionability — discovery and confidentiality	Narayan: discovery bar plus confidentiality prevents adequate investigation, presentation of claims, and identification of systemic wrongdoing	Defendants: arbitration efficiency and limits on discovery are valid; confidentiality common in arbitration	Court: discovery restriction violates Hawai`i discovery principles and HRS provisions; confidentiality combined with limited discovery unfairly disadvantages homeowners; both substantively unconscionable

Key Cases Cited

Narayan v. Ritz‑Carlton Dev. Co., [citation="135 Hawai'i 327"] (Haw. 2015) (state supreme court opinion invalidating arbitration clause as ambiguous and unconscionable)
DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (U.S. 2015) (FAA requires arbitration agreements be placed on equal footing with other contracts; state rules cannot single out arbitration)
AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (U.S. 2011) (FAA preempts state rules that prohibit class‑action waivers in arbitration)
Rent‑A‑Center, W., Inc. v. Jackson, 561 U.S. 63 (U.S. 2010) (generally applicable contract defenses like unconscionability apply to arbitration agreements)
City & Cty. of Honolulu v. Midkiff, 62 Haw. 411 (Haw. 1981) (describes unconscionability test and factors including adhesion and disparity in bargaining power)
Masaki v. Gen. Motors Corp., 71 Haw. 1 (Haw. 1989) (discussion of punitive damages and public‑policy limits on contractual waivers)