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WSHB Case Update: The Nevada Supreme Court Issues Two Opinions Concerning Arbitration Provisions in Purchase Agreements

December 3, 2015

Why These Cases Are Important

On November 18, 2015, the Nevada Supreme Court issued two (2) unpublished opinions regarding the enforceability of arbitration provisions in builder purchase agreements. These decisions contain several key holdings that clarify and/or expand upon existing law. Unfortunately, the opinions were unpublished and, pursuant to existing Nevada rules, cannot be cited as legal authority. However, these opinions provide insight as to how the Court would rule if these issues arise in the future.1 First, the Court ruled that subsequent purchasers can be compelled to arbitrate if (1) the builder can produce the agreement signed by the original purchaser; (2) the subsequent purchaser is asserting claims under the agreement such as breach of contract; and (3) the purchaser received a direct benefit from the contract containing the arbitration clause. Second, the Court held that the builder did not waive its right to arbitrate merely by actively participating in litigation and delaying several years before it sought to enforce the arbitration provisions in its purchase agreements.

Facts of the Cases

Lennar v. Macedo: From November 2009 to April 2011, Lennar received Construction Defect Notices from 101 homeowners. The parties proceeded through the Chapter 40 process and conducted the NRS Chapter 40-mandated mediation in November 2013. Thereafter, the homeowners filed their first amended complaint, asserting breach of contract and construction defect causes of action. Lennar answered on January 26, 2012. Discovery proceeded over the next 23 months.

Lennar moved to compel arbitration under the purchase agreements on December 3, 2013. The district court denied Lennar’s motion, finding that the Lennar waived its right to arbitrate by allowing litigation to proceed for approximately 23 months and that the delay prejudiced the homeowners. Lennar appealed.

Michalowski v. Lennar: This matter involved 27 Lennar homes in three different subdivisions. The NRS Chapter 40 process began in 2013 and suit was filed in September 2013. Chapter 40 mediation was completed in October 2013. The suit was removed to federal court, but eventually remanded to the district court. Lennar filed a motion to compel arbitration, which was granted. Plaintiffs filed a writ, asserting that the arbitration provisions were unconscionable, the arbitration agreements are contrary to Nevada law, and subsequent purchasers cannot be bound by the arbitration agreements.

The Rulings

Lennar v. Macedo: The Nevada Supreme Court held that the district court erred in denying Lennar’s motion to compel arbitration and rejected the homeowners’ argument that Lennar had waived its right to compel arbitration. While arbitration waivers are generally a question of fact, the court may determine them as a matter of law when the determination rests on the legal implications of uncontested facts. Nev. Gold & Casinos, Inc. v. American Heritage, Inc., 121 Nev. 84, 89, 110 P.3d 481, 484 (2005). See also Tallman v. Eighth Judicial Dist. Court, 131 Nev., Adv. Op. 72, P.3d (2015).

For a party to waive its right to arbitrate, the opposing party must demonstrate the following: (1) the party knew of its right to arbitrate, (2) the party acted inconsistently with that right, and (3) the party prejudiced the opposing party by its inconsistent acts. Nev. Gold & Casinos, Inc., 121 Nev. at 90-91, 110 P.3d at 485 (2005). Further, to demonstrate prejudice, the opposing party must show (1) the parties had used discovery not available in arbitration, (2) the parties litigated substantial issues on the merits, or (3) compelling arbitration would require a duplication of efforts. Id. Although the Nevada Supreme Court found that the district court correctly concluded that Lennar moved to compel arbitration two years later than necessary, the determination that the two year delay prejudiced the homeowners was incorrect. The Nevada Supreme Court reasoned that the parties only engaged in limited discovery, much of which could be used during the arbitration proceedings.

Further, the district court erred in its determination that prejudice existed because 40% of the homeowners would remain in district court since Lennar could not compel them to arbitration. The Nevada Supreme Court found that all of the respondent homeowners must go to arbitration because they were estopped from refusing to comply with the arbitration clause when they received a direct benefit from the purchase agreement containing the arbitration clause. Subsequent purchasers asserting breach of contract claims under the very same contracts are estopped from refusing to comply with the arbitration clause.

Michalowski v. Lennar: Presented with facts that were analogous to the Lennar v. Macedo appeal, the Nevada Supreme Court again confirmed that the homeowners, including subsequent purchasers, are estopped from refusing to comply with the arbitration clause where they are receiving a direct benefit from the same contract containing the clause. Importantly, the inability to produce the purchase agreements for four of the homeowners precludes the enforcement of the arbitration clause as to those homeowners. All other homeowners, both original purchasers for whom signed purchase agreements can be produced and nonsignatory subsequent purchasers, are estopped from refusing to comply with the purchase agreements’ arbitration clauses.

The homeowners’ writ raised the issue of unconscionability; however, the district court failed to address this issue for each home purchase agreement. The Nevada Supreme Court emphasized that any unconscionable clauses in the purchase agreement can be severed according to the severability clauses in the purchase agreement. As such, the matter was remanded for further analysis and findings, with the Court noting that the district court “shall sever only the language in the agreements which constitutes an unconscionable abrogation of the homeowners’ rights.”

Lessons to be Learned from these Cases

Move to compel arbitration as early in the process as feasible to eliminate any argument that delay in doing so has resulted in prejudice. The longer litigation proceeds and the more extensive the discovery procedures are that ensue, the more difficult it will be to compel arbitration.

Keep copies of your project records, particularly the purchase agreements. The inability to produce the signed agreements will likely result in a denial of the motion to compel arbitration.

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1 As of January 1, 2016, unpublished decisions from the Nevada Supreme Court and Court of Appeals can be cited for their persuasive value so long as the opinion was issued after January 1, 2016.

 

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