South Carolina Supreme Court Finds Homebuilder's Arbitration Provision Unconscionable 

In a troubling result for businesses, the South Carolina Supreme Court recently refused to enforce a straightforward arbitration provision in a national homebuilder's home purchase agreement. The case, Smith v. D.R. Horton, Inc., et al., Slip Op. No. 27645 (July 6, 2016), continues a trend of undermining the enforceability of arbitration provisions in South Carolina.

The defendant homebuilder included in its standard home purchase agreement a basic arbitration provision entitled "Mandatory Binding Arbitration." The plaintiff homebuyers' claims, which involved water damage from alleged construction defects, fell squarely within the scope of the arbitration provision.

Despite these facts, the South Carolina Supreme Court decided that the parties were not required to arbitrate their dispute. To reach this conclusion, the Court construed several unrelated provisions of the home purchase agreement together to find that the arbitration provision was unconscionable and, thus, unenforceable. As noted by two justices in a dissenting opinion, the Court reached this conclusion despite federal law requiring courts to examine arbitration provisions in isolation from other contract provisions when evaluating their enforceability.

In light of this opinion, careful drafting – and even formatting – of arbitration provisions becomes even more critical to parties seeking to ensure enforceability of their arbitration provisions in South Carolina state courts. For example, the homebuilder in this case presumably would have been in a better position if the subject arbitration provision had been formatted as a separately numbered paragraph, instead of a subparagraph lumped under a section with other subparagraphs. Businesses (and their attorneys) may reasonably hope that such seemingly trivial formatting issues would not be deemed legally significant, but South Carolina cases concerning the enforceability of arbitration provisions have proven remarkably unpredictable over the last decade.

David Kimball practices commercial litigation and chairs the firm's Construction Practice Group. This article is provided as a general commentary and should not be relied upon or construed as legal advice.