Are Standardform Arbitration Agreements Enforceable in South Carolina?
| Publication year | 2023 |
| Pages | 33 |
Are Standard- Form Arbitration Agreements Enforceable in South Carolina?
By Laura Paton
Given South Carolina's traditional assertion that it is a pro-arbitration state, the South Carolina Supreme Court ruling in Damico v. Lennar Carolinas, LLC[1] serves as a cautionary tale for businesses and attorneys. South Carolina courts have previously professed that "[u]nless the court can say with positive assurance that the arbitration clause is not susceptible to an interpretation that covers the dispute, arbitration should be ordered."[2] However, the recent ruling in Damico indicates that perhaps arbitration agreements, particularly those between big businesses and "less sophisticated and less powerful" parties, may be subject to unfavorable interpretation. From vacation o rental agreements to employment contracts[3] to click-wrap acknowledgements accepted prior to online purchases, arbitration agreements are ubiquitous in almost all commercial transactions in South Carolina.[4] But, as evidenced by Damico, these agreements may be subject to intense scrutiny and invalidated under certain circumstances.
Damico is a construction defect case brought by a putative class of homeowners living in "The Abbey" subdivision in the Spring Grove neighborhood. After filing the initial Complaint, Plaintiffs and developer Lennar Carolinas, LLC ("Lennar") spent the next eight (8) years litigating whether the claims were subject to arbitration. Finally, in September of 2022, the South Carolina Supreme Court found Lennar's arbitration agreement unenforceable.[5] The court analyzed several arbitration provisions which may seem commonplace to attorneys practicing commercial law. This article examines the provisions rejected by the court and posits practice pointers for both transactional attorneys and litigators.
Background
After the plaintiff-homeowners filed suit against Lennar in 2014, the parties amended pleadings and added Lennar's subcontractors to the case while the parties worked through compliance with a "Notice and Opportunity to Cure"[6] stay. In early 2016, Lennar moved to compel plaintiffs to arbitrate based on multiple arbitration agreements included in the Purchase and Sale Agreement ("PSA"), Lennar's limited warranty booklet, the deeds to Plaintiffs' residences, the deed for the lots between defendant Spring Grove Plantation Development, Inc. and Lennar, and the applicable covenants and restrictions (collectively, "the Agreements"). Lennar also moved to compel some, but not all, of its subcontractor defendants to arbitration based on their respective subcontractor agreements.[7] The homeowners opposed arbitration and between 2016 and 2022 litigation centered almost exclusively on the enforceability of the arbitration agreement(s).
Lennar moved to compel arbitration pursuant to Federal Arbitration Act, 9 USC §§ 1 - 16 (2021) (the "the FAA") and/or alternatively, the South Carolina Uniform Arbitration Act, S.C. Code §§ 15-4810 to -240 (2005) (the "SCUAA").[8]Lennar's attorney argued Plaintiffs were bound to arbitration under each of the aforementioned Agreements.[9] Plaintiffs responded first that the PSA arbitration provision (entitled "Mediation / Arbitration of Disputes") was unenforceable because the heading was not underlined as is required by the SCUAA.[10] Second, Plaintiffs argued that the transactions governed by the contracts were intrastate and therefore subject to the SCUAA and not the FAA.[11] Because the home purchases were subject to the SCUAA, South Carolina contract law applied, hence the Agreements were unconscionable and therefore unenforceable under South Carolina law.[12] Plaintiffs also noted Lennar's decision to compel only some of the subcontractor defendants to arbitrate was tantamount to "litigat[ing] Plaintiffs' claims in a piecemeal fashion," as "other at-fault parties would not be participating in that arbitration."[13] The bulk of Plaintiffs' brief relied on the argument that the arbitration terms in the Lennar Warranty were "wholly unconscionable"[14] and unenforceable.[15] Furthermore, Plaintiffs insisted that the terms were oppressive and one-sided and, according to South Carolina law, not severable. At the time, the Smith v. DR Horton[16] decision was relatively new and was cited multiple times in Plaintiffs' initial brief.[17] Lennar's Reply rejected the argument of unconscionability noting that (1) Plaintiffs only challenged the arbitration clause in the Limited Warranty, not the PSA or the Covenants, (2) Plaintiffs presented no evidence supporting the argument that there was a lack of meaningful choice tantamount to unconscionability, and (3) Plaintiffs' unconscionability argument was based solely on contract terms outside of the arbitration provision.[18]
The Circuit Court Decision
The Circuit Court agreed with Plaintiffs.[19] The Circuit Court first acknowledged Prima Paint Corp. v. Flood & Conklin, 388 US 395 (1967), the touchstone case about the validity of arbitration agreements.[20] In Prima Paint the United States Supreme Court held that courts must analyze the fairness of the arbitration provision in a vacuum and may not look to other provisions in the contract.[21] After discussing Prima Paint, the Circuit Court considered what constituted the "arbitration agreement" between Plaintiffs and Lennar. Previously in DR Horton, the court determined that all 10 subsections in a "Warranties and Dispute Resolution" section (not just the subsection about arbitration) comprised the "arbitration agreement" because the terms of the other subsections were "intertwined," cross-referencing other paragraphs therein.[22] Thus, the DR Horton court determined the entire multi-paragraph "Warranties and Dispute Resolution" section constituted a single arbitration agreement for the purposes of determining validity.[23] Applied here, the Circuit Court found that all four arbitration provisions included across four different Agreements must be read "in conjunction with each other" and that collectively they constituted one agreement.[24] Read together, the Circuit Court concluded that the terms in the Lennar Agreements were unconscionable.[25] The Court's Order cited the South Carolina Supreme Court's test for contractual unconscionability outlined in Simpson v. MSA of Myrtle Beach, Inc.[26] The Simpson test balances the nature of the injuries suffered by the plaintiff, whether the plaintiff is a substantial business concern, relative disparity in bargaining power, the parties' relative sophistication, whether there is an element of surprise in the clause, and the conspicuousness of the clause.
The Court of Appeals Decision
Lennar appealed, and in 2020 the Court of Appeals reversed the Circuit Court.[27] The appellate court held (1) the FAA, not the SCUAA, applied and (2) the Mediation/ Arbitration of Disputes section in the PSA was a valid, independent agreement to arbitrate which must be enforced under the FAA.[28] The analysis looked at the validity of the agreement itself beginning with the application of the Prima Paint case.[29] The court reiterated Prima Paint's requirement that an arbitration agreement must be analyzed in a vacuum separate and apart from the contract as a whole.[30] It indicated that the Circuit Court may have misapplied Smith v. DR Horton by intermingling multiple arbitration provisions across various separate Agreements between Plaintiffs and Lennar.[31] Here, the Court of Appeals distinguished the Lennar Agreements as multiple separate agreements with discrete arbitration provisions.[32] In its analysis, the court limited its examination to the Mediation / Arbitration of Disputes section of the PSA, which it found to be valid.[33] Thus, the court concluded it did not need to analyze the other three Agreements.[34] Interestingly, the validity of the arbitration clause itself was subject to arbitration under the terms of the Agreement.[35] Therefore, citing to another Supreme Court case holding that "clear and unmistakable" delegation as to questions of arbitrability may be subject to an arbiter, the Court of Appeals left that question for an arbiter to decide.[36] Shortly thereafter, the plaintiffs appealed and the South Carolina Supreme Court granted certiorari.
Supreme Court Arguments and Decision
The Supreme Court heard arguments on February 1, 2022, and issued an opinion in September 2022.[37] At oral argument, Plaintiffs contended that the Court of Appeals erred in its application of the standard of review and its application of Prima Paint.[38] Counsel argued that because the circuit court considered all four (4) of the underlying Agreements, the appellate court erred in considering only the PSA; the other arbitration provisions in the various Agreements were part of a single arbitration provision under Prima Paint .[39] Moreover, he argued that the terms therein were unconscionable.[40]
The Supreme Court began its decision affirming the Court of Appeals in part.[41] First, the court held that the arbitration agreement in the PSA stood on its own and was not intertwined like the multi-part DR Horton agreement.[42] Thus, it was a violation of Prima Paint to read all four of the independent arbitration provisions in the Agreements as a single arbitration provision.[43] The Court distinguished between DR Horton's multi-part "intertwined" "Warranties and Dispute Resolution" section and the "Mediation/ Arbitration of Disputes" provision in Lennar's PSA.[44] Of particular import, the Lennar provision dealt "solely with the scope of arbitration and the requisite formalities accompanying an arbitration proceeding" and had "nothing that refers to the [other three (3) Agreements]."[45] More importantly, the court reiterated new home construction "manifestly involves" interstate commerce...
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