Q. Is My Arbitration Provision Enforceable? A. Maybe

Contractors often insert provisions into their contracts that seemingly would benefit them if a dispute were to arise down the road. However, the question often arises whether such provisions are always enforceable. Unfortunately, the answer is usually a resounding “maybe.” This past week, on July 6, 2016, the South Carolina Supreme Court issued an opinion that exhibits why it’s difficult to give a definitive answer to the enforceability question.

In Smith v. D.R. Horton, Inc., Op. No. 27645, the Smiths entered into a home purchase agreement with D.R. Horton for the design and construction of a new home in Summerville, South Carolina. Paragraph 14 of the agreement contained an arbitration provision, a warranty disclaimer, and a prohibition against monetary damages.

In 2010, after the Smiths experienced problems with their home, they filed a construction defect case against D.R. Horton and its subcontractors. In response, D.R. Horton filed a motion to compel arbitration. The Smiths opposed the motion, arguing that the arbitration agreement was unconscionable and therefore unenforceable. The circuit court denied D.R. Horton’s motion to compel arbitration, finding that the arbitration agreement was unconscionable. D.R. Horton appealed, and the South Carolina Court of Appeals affirmed the circuit court’s order. As a result, the case made its way to the South Carolina Supreme Court with the issue of whether the arbitration agreement is unconscionable.

In South Carolina, unconscionability is defined as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them. Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14, 24–25, 644 S.E.2d 663, 668 (2007). Here, the South Carolina Supreme Court found that the Smiths lacked a meaningful choice in their ability to negotiate the arbitration clause in the agreement. In reaching this conclusion, the court noted that the Smiths didn’t enjoy a stronger bargaining position against D.R. Horton, they were not represented by independent counsel, and they were not a substantial business concern of D.R. Horton. The court also looked at the agreement and noted that D.R. Horton’s attempts to disclaim implied warranty claims and prohibit any monetary damages were clearly one-sided and oppressive.

As a result of the above, the South Carolina Supreme Court held that the arbitration provision was unconscionable and, thus, unenforceable. However, it was a close 3-2 decision. Justice Kittredge dissented and wrote that state law does not provide a valid basis to avoid enforcing this particular agreement to arbitrate, and the court of appeals erred in upholding the circuit court’s refusal to compel arbitration.

As you can see, along the way, different judges had varying opinions regarding the enforceability of the arbitration provision. There are likely to be just as many opinions regarding the enforceability of any arbitration provision in your particular contract.