879 S.E.2d 746
S.C.2022Background:
- Homeowners sued Lennar and subcontractors for construction defects in a new-home subdivision; Lennar moved to compel arbitration under arbitration clauses in the purchase-and-sale agreement and a limited warranty booklet.
- Circuit court treated the documents as an integrated agreement, found the contracts (including the arbitration clause) unconscionable, and denied Lennar’s motion to compel arbitration.
- Court of Appeals reversed, applying Prima Paint to limit judicial review to the arbitration clause itself and holding the arbitration agreement was confined to Section 16 of the purchase-and-sale agreement.
- South Carolina Supreme Court granted certiorari, agreed the arbitration scope is Section 16, but analyzed Section 16 on its own and found multiple unconscionable terms (notably paragraphs 4 and 5).
- The Court refused to sever the offending provisions because they are material, the contract is an adhesion consumer contract (new-home sale), and severance would contradict public policy protecting homebuyers; the circuit court’s denial to compel arbitration was reinstated and the case remanded.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of arbitration agreement (whether whole contract/warranty booklet or only Section 16) | Purchase agreement and warranty booklet cross-reference and should be read together as one arbitration agreement | Section 16 is a standalone arbitration clause; Prima Paint requires separating clause validity from whole-contract defenses | Section 16 alone defines the arbitration agreement (Prima Paint/Buckeye line controls) |
| Validity/unconscionability of the arbitration clause | Section 16 is adhesive; paragraphs 4 & 5 (seller’s "sole election" to include subcontractors and refusal of collateral estoppel without mutuality) strip plaintiffs’ choice of defendants and create likely inconsistent results — unconscionable | Arbitration clause is enforceable; FAA preempts; unconscionability must be proven as to clause itself | Section 16 is unconscionable on its face—paragraphs 4 and 5 are oppressive and render the arbitration agreement unenforceable |
| Applicability of the Federal Arbitration Act (interstate commerce) | Transactions do not involve interstate commerce | Construction of new homes involves interstate commerce; FAA applies | FAA applies because construction of new homes implicates interstate commerce |
| Severability of unconscionable terms | Do not sever; clause/material term; public policy and adhesion context counsel scrapping rather than blue‑penciling | Severability clause should allow excision of offending language and enforcement of remainder | Court refused to sever: naming/joining parties is a material term, adhesion consumer context and public-policy concerns defeat severance |
Key Cases Cited
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (courts decide challenges to arbitration clause itself; otherwise arbitrator decides contract-wide validity)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) (reiterating prima facie separability of arbitration clause from contract)
- D.R. Horton, Inc. v. 417 S.C. 42, 790 S.E.2d 1 (2016) (cross-referenced subparagraphs may form an "intertwined" arbitration provision for unconscionability review)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (general contract defenses apply to arbitration clauses but not defenses that single out arbitration)
- Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63 (2010) (delegation provisions can allocate gateway arbitrability questions to arbitrator)
- Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14 (2007) (adhesion arbitration agreements receive heightened scrutiny in unconscionability analysis)
- Fanning v. Fritz's Pontiac-Cadillac-Buick, Inc., 322 S.C. 399 (1996) (defines unconscionability as lack of meaningful choice plus oppressive terms)
- Munoz v. Green Tree Fin. Corp., 343 S.C. 531 (2001) (applies Prima Paint in South Carolina and distinguishes arbitrability from contract validity)