790 S.E.2d 1
S.C.2016Background
- In 2005 the Smiths signed a purchase/ construction Agreement with D.R. Horton for a new home; Paragraph 14 ("Warranties and Dispute Resolution") contains multiple subparagraphs including a mandatory arbitration clause and broad warranty disclaimers and a damages waiver.
- After closing, the Smiths experienced severe water damage and repeated unsuccessful repairs; they sued D.R. Horton and subcontractors in 2010 for construction defects.
- D.R. Horton moved to compel arbitration; the circuit court denied the motion, finding the arbitration agreement unconscionable (contract of adhesion, one-sided provisions, waiver of implied warranties, and a prohibition on monetary damages).
- The Court of Appeals affirmed, citing the damages prohibition in Paragraph 14(i) and declined to sever the offending language from the arbitration provision.
- The South Carolina Supreme Court granted certiorari to decide whether the arbitration agreement was unconscionable and whether the court may consider the whole Paragraph 14 under Prima Paint.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the arbitration agreement is unconscionable | Smiths: Paragraph 14 is an adhesion clause; disclaimers and a blanket ban on monetary damages make the arbitration agreement oppressive and one-sided | D.R. Horton: Arbitration clause is contained in subparagraph 14(g); unconscionability must be shown as to the arbitration clause itself, not the whole contract | Court: Arbitration agreement (construed as entire Paragraph 14) is unconscionable and unenforceable because Smiths lacked meaningful choice and paragraph includes oppressive damages waiver |
| Whether courts may consider only subparagraph 14(g) under Prima Paint or the whole Paragraph 14 | Smiths: Paragraph 14 as titled "Warranties and Dispute Resolution" must be read as an integrated arbitration agreement | D.R. Horton: Prima Paint/FAA limit judicial inquiry to the arbitration clause (subparagraph 14(g)) — other provisions belong to the contract generally and must go to arbitrator | Court: Under Prima Paint the inquiry is limited to the arbitration agreement, but here Paragraph 14 is an integrated arbitration agreement; the court may consider the entirety of Paragraph 14 |
| Whether the Smiths had a "meaningful choice" to accept arbitration | Smiths: As typical homebuyers they were in unequal bargaining position, no independent counsel, not a substantial client — lacked meaningful choice | D.R. Horton: Terms were disclosed/initialed; no specific challenge to the arbitration promise itself | Court: The Smiths lacked meaningful choice given adhesion contract characteristics and bargaining disparity |
| Severability of unconscionable provisions from arbitration clause | Smiths: The offending provisions are part of the arbitration agreement and render it unenforceable; no severability clause exists | D.R. Horton: Court of appeals should have severed the offending language or limited inquiry to subparagraph (g) | Court: No severability clause; court will not rewrite the parties' contract — unenforceable in whole; declined to sever |
Key Cases Cited
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (courts decide challenges to the arbitration clause itself; other contract challenges go to arbitrator)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) (unless challenge is to arbitration clause itself, arbitrator decides contract validity)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (state rules that stand as obstacle to FAA objectives are preempted)
- Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14 (2007) (unconscionability requires lack of meaningful choice plus oppressive terms)
- S.C. Pub. Serv. Auth. v. Great W. Coal (Ky.), Inc., 312 S.C. 559 (1993) (adopts Prima Paint doctrine in South Carolina)
- Cape Romain Contractors, Inc. v. Wando E., LLC, 405 S.C. 115 (2013) (FAA applies when contract involves interstate commerce)