Whether an arbitration agreement is enforceable is a frequently litigated matter in construction disputes. Federal policy strongly favors arbitration. Typically, the Federal Arbitration Act (FAA) will preempt any contrary state law that might otherwise void an arbitration provision. On June 10, 2020, the South Carolina Court of Appeals reaffirmed this view when it overturned a trial court’s decision denying a motion to compel arbitration.
In Patricia Damico, et al. v. Lennar Carolinas, LLC, et al., a group of homeowners sued the developer, general contractor, and subcontractors of a development in Berkeley County, South Carolina, alleging construction defects in their homes. The general contractor, Lennar Carolinas, sought to compel arbitration. The trial court denied the motion to compel ruling that (1) the South Carolina Uniform Arbitration Act (SCUAA) applied to the parties’ agreement instead of the FAA, (2) the general contractor failed to comply with the SCUAA’s conspicuous notice requirement, and (3) the arbitration agreement included a provision from the parties’ sales agreement, as well as terms from a separate warranty agreement, and was unconscionable. The general contractor appealed.
The Court of Appeals overturned the trial court and ruled that the FAA applied to the parties’ contract. The court explained that the FAA applies to transactions involving interstate commerce, and the parties specifically agreed in their sales agreement that the transaction involved interstate commerce. The court applied basic rules of contract interpretation to enforce this provision, as written, like any other contract term. Moreover, because construction of the homes required use of out-of-state subcontractors and material and equipment suppliers, the court concluded the transaction in fact involved interstate commerce. Therefore, the FAA applied.
The court next determined the trial court improperly voided the sales agreement’s arbitration agreement as unconscionable. The trial court should have considered the validity of the arbitration provision in isolation without reference to separate arbitration language in the warranty agreements or the arbitrability of certain disputes thereunder. Questions of arbitrability of a particular dispute are to be decided by the arbitrator, and the trial court should have addressed only whether the arbitration agreement was enforceable. Once the Court of Appeals concluded the agreement was valid, the FAA required it to be enforced, and the court reversed the trial court’s order denying the motion to compel.
If you agree to arbitrate disputes in your construction contract, think carefully before pursuing litigation and trying to contest a motion to compel. While there are instances where an arbitration agreement may be void or inapplicable to a particular dispute, more often than not the trial court will enforce the arbitration provision and grant the motion to compel. And, even if you succeed at the trial level, this is one of the few circumstances when appellate courts routinely reverse lower court decisions. Absent unique contract language or a novel set of facts, this particular fight may not be worth the time or expense.
In contrast to the above circumstances, if you want your arbitration agreement enforced and would rather avoid the cost of appealing an incorrect ruling from a state trial court, consider reviewing, prior to execution, the form arbitration language in your contract for compliance with state law. Here, had the sales agreement complied with the conspicuous notice requirements of the SCUAA, the general contractor might have, at least partially, avoided the bad result from the trial court.
Have any questions about enforceability of arbitration provisions or arbitrations in general? Please feel free to contact Ryan Beaver, Jim Archibald, or Aman Kahlon.