Smith v. D.R. Horton, Inc.
417 S.C. 42
| S.C. | 2016Background
- In 2005 the Smiths purchased a newly built home from D.R. Horton under a form purchase agreement that included Paragraph 14 titled "Warranties and Dispute Resolution." Paragraph 14 contains multiple subparagraphs: a ten‑year structural warranty, extensive warranty disclaimers, a mandatory arbitration clause (subpara. g), and a broad damages‑limitation (subpara. i).
- After closing the Smiths experienced severe water damage and repeated unsuccessful repairs; they sued D.R. Horton and subcontractors in 2010 for construction defects and damages.
- D.R. Horton moved to compel arbitration under the agreement; the Smiths opposed, arguing the arbitration agreement was unconscionable (adhesion contract, one‑sided disclaimers, and a clause barring monetary damages).
- The circuit court denied the motion to compel arbitration, finding the arbitration agreement unconscionable; the court of appeals affirmed, relying on the damages‑limitation and refusing severance.
- The Supreme Court granted certiorari and affirmed the court of appeals: it construed the arbitration agreement to encompass the whole of Paragraph 14, concluded the Smiths lacked a meaningful choice, and held the arbitration provision unconscionable and unenforceable.
Issues
| Issue | Plaintiff's Argument (Smith) | Defendant's Argument (D.R. Horton) | Held |
|---|---|---|---|
| Whether the arbitration agreement is unconscionable | Paragraph 14 is adhesive and one‑sided (disclaims implied warranties, bars monetary damages), so arbitration clause is unconscionable | Arbitration clause is in subparagraph 14(g) only; unconscionability attack improperly relies on separate provisions | Court: Paragraph 14 read as a whole is the arbitration agreement; Smiths lacked meaningful choice and the provisions are one‑sided and oppressive; arbitration unenforceable |
| Whether court may consider provisions outside subparagraph 14(g) under Prima Paint/Buckeye | Whole Paragraph 14 governs warranties and dispute resolution and must be considered together | Prima Paint/Buckeye permit judicial review only of defenses targeting the arbitration clause itself; only 14(g) should be considered | Court: Prima Paint allows considering the arbitration agreement; Paragraph 14 — including cross‑referenced disclaimers and limits — constitutes the arbitration agreement, so those provisions are properly part of the unconscionability inquiry |
| Severability of unconscionable provisions | No severability clause in paragraph 14; court should not rewrite contract to strike offensive terms | (Implicit) if problematic term severable, arbitration could be enforced | Court: Because parties did not include a severability clause, court declined to sever and rewrite the contract; unenforceable as written |
Key Cases Cited
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (threshold rule: challenges to the whole contract are for arbitrator unless attack is to arbitration clause itself)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) (arbitrability challenges that attack the contract generally belong to the arbitrator)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (FAA preempts state rules that undermine arbitration agreements)
- Preston v. Ferrer, 552 U.S. 346 (2008) (who decides validity issues under FAA and limits of judicial inquiry)
- Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14 (2007) (South Carolina two‑prong unconscionability test: lack of meaningful choice plus oppressive terms)
- Munoz v. Green Tree Fin. Corp., 343 S.C. 531 (2001) (adhesion contracts definition and caution in arbitration enforcement)
- S.C. Pub. Serv. Auth. v. Great W. Coal (Ky.), Inc., 312 S.C. 559 (1993) (adopting a broad Prima Paint interpretation in South Carolina)