Parsons v. John Wieland Homes ( 2016 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Ralph Wayne Parsons, Jr., and Louise C. Parsons,
Respondents,
v.
John Wieland Homes and Neighborhoods of the
Carolinas, Inc., Wells Fargo Bank, N.A., and South
Carolina Bank & Trust, N.A., Defendants,
Of which John Wieland Homes and Neighborhoods of
the Carolinas, Inc. is Petitioner.
Appellate Case No. 2014-000782
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal from York County
Jackson Kimball, III, Special Circuit Court Judge
Opinion No. 27655
Heard May 7, 2015 – Filed August 17, 2016
REVERSED
G. Trenholm Walker and Ian W. Freeman, both of Pratt-
Thomas Walker, PA, of Charleston, for Petitioner.
Herbert W. Hamilton, of Hamilton Martens Ballou &
Carroll, LLC, of Rock Hill, for Respondents.
CHIEF JUSTICE PLEICONES: We granted certiorari to review a Court of
Appeals' decision affirming a circuit court order which denied petitioner's ("JWH")
motion to compel arbitration. Parsons v. John Wieland Homes and Neighborhoods
of the Carolinas, Inc., Op. No. 2013-UP-296 (S.C. Ct. App. refiled August 28,
2013). We reverse.
FACTS
In 2002, JWH purchased approximately sixty-five acres of land for the
development of a residential subdivision. The land was previously utilized as a
textile-related industrial site. Following the purchase, JWH demolished and
removed all visible evidence of the industrial site and removed various
underground pipes, valves, and tanks remaining from the industrial operations.
JWH then began selling lots and "spec" homes on the sixty-five acres. In 2007,
respondents ("the Parsons") executed a purchase agreement to buy a home built
and sold by JWH ("the Property").1 Paragraph 21 of the purchase agreement for
the Property states the purchaser has received and read a copy of the JWH
warranty ("Warranty") and consented to the terms thereof, including, without
limitation, the terms of the arbitration clause. The Parsons initialed below the
paragraph. Upon executing the purchase agreement, the Parsons were provided a
"Homeowner Handbook" containing the Warranty. The arbitration clause is set
forth in paragraph O of the Warranty's General Provisions. The Parsons signed an
acknowledgment of receipt of the handbook dated the same date as the purchase
agreement.
In 2008, the Parsons discovered PVC pipes and a metal lined concrete box buried
on their Property. The PVC pipes and box contained "black sludge," which tested
1
The Parsons paid $621,102 for the Property, which was financed by the other
defendants named in the lawsuit.
positive as a hazardous substance. JWH entered a cleanup contract with the South
Carolina Department of Health and Environmental Control. JWH completed and
paid for the cleanup per the cleanup contract.2
The Parsons claim they were unaware the Property was previously an industrial
site and contained hazardous substances. In 2011, the Parsons filed the present
lawsuit alleging JWH breached the purchase agreement by failing to disclose
defects with the Property, selling property that was contaminated, and selling
property with known underground pipes. The Parsons further alleged breach of
contract, breach of implied warranties, unfair trade practices, negligent
misrepresentation, negligence and gross negligence, and fraud.
JWH moved to compel arbitration and dismiss the complaint. The motion asserted
that all of the Parsons' claims arose out of the purchase agreement, and the Parsons
clearly agreed that all such disputes would be decided by arbitration. The circuit
court denied the motion and found the arbitration clause was unenforceable for two
reasons.
First, the circuit court found that because the arbitration clause was located within
the Warranty booklet, its scope was limited to claims under the Warranty. The
circuit court further found that because the Warranty was limited to claims caused
by a defect or deficiency in the design or construction of the home, the Parsons'
claims fell outside the scope of the arbitration clause, and, thus, the arbitration
clause was unenforceable.
Second, the circuit court applied the outrageous torts exception to arbitration
enforcement3 and found that because the Parsons alleged outrageous tortious
2
The cleanup cost JWH approximately $500,000. In addition to the PVC pipes
and box, the cleanup revealed a twelve-inch cast iron pipe associated with the prior
industrial site running the length of the Property. The cleanup further revealed
pipes within the foundation of the Parsons' home, some of which were unable to be
removed; therefore, they were capped and remain on the Property.
3
See, e.g., Wachovia Bank, Nat. Ass'n v. Blackburn, 407 S.C. 321, 755 S.E.2d 437
(2014); Timmons v. Starkey, 389 S.C. 375, 698 S.E.2d 809 (2010); Partain v.
Upstate Auto. Grp., 386 S.C. 488, 689 S.E.2d 602 (2010); Aiken v. World Fin.
Corp. of South Carolina, 373 S.C. 144, 644 S.E.2d 705 (2007); Chassereau v.
Global Sun Pools, Inc., 373 S.C. 168, 644 S.E.2d 718 (2007); Simpson v. World
conduct, namely, the intentional and unforeseeable conduct of JWH in failing to
disclose concealed contamination on the Property, the arbitration clause was
unenforceable.4
The Court of Appeals affirmed the circuit court's finding that the scope of the
arbitration clause was restricted to Warranty claims and declined to address the
circuit court's application of the outrageous torts exception doctrine.
We granted JWH's petition for a writ of certiorari to review the Court of Appeals'
decision.
ISSUE
Did the Court of Appeals err in affirming the circuit
court's ruling that the arbitration clause was
unenforceable?
LAW/ANALYSIS
The Court of Appeals found the circuit court correctly determined the arbitration
clause was unenforceable. We disagree.
The determination whether a claim is subject to arbitration is reviewed de novo.
Gissel v. Hart, 382 S.C. 235, 240, 676 S.E.2d 320, 323 (2009). Nevertheless, a
circuit court's factual findings will not be reversed on appeal if any evidence
reasonably supports the findings. Simpson v. MSA of Myrtle Beach, Inc., 373 S.C.
14, 22, 644 S.E.2d 663, 667 (2007) (citing Thornton v. Trident Med. Ctr.,
L.L.C., 357 S.C. 91, 94, 592 S.E.2d 50, 51 (Ct. App. 2003)).
The policy of the United States and of South Carolina is to favor arbitration of
disputes. Zabinski v. Bright Acres Assocs., 346 S.C. 580, 590, 553 S.E.2d 110, 115
(2001). Arbitration is a matter of contract law and general contract principles of
state law apply to a court's evaluation of the enforceability of an arbitration clause.
Simpson, 373 S.C. at 24, 644 S.E.2d at 668. (citations omitted).
Fin. Corp. of South Carolina, 373 S.C. 178, 644 S.E.2d 723 (2007); Hatcher v.
Edward D. Jones & Co., L.P., 379 S.C. 549, 666 S.E.2d 294 (Ct. App. 2008).
4
We note the circuit court did not explain how the outrageous torts doctrine
precluded arbitration of the Parsons' non-tort claims.
I. Scope
The Court of Appeals affirmed the trial court's finding that because the arbitration
clause was located within the Warranty, the scope of the arbitration clause was
limited to claims covered by the Warranty. We hold the Court of Appeals erred in
affirming this finding.
To determine whether an arbitration clause applies to a dispute, a court must
determine whether the factual allegations underlying the claim are within the scope
of the arbitration clause. Zabinski, 346 S.C. at 597, 553 S.E.2d at 118 (citing
Hinson v. Jusco Co., 868 F. Supp. 145 (D.S.C. 1994); S.C. Pub. Serv. Auth. v.
Great W. Coal, 312 S.C. 559, 437 S.E.2d 22 (1993)). The heavy presumption in
favor of arbitrability requires that when the scope of the arbitration clause is open
to question, a court must decide the question in favor of arbitration. Landers v.
Fed. Deposit Ins. Corp., 402 S.C. 100, 109, 739 S.E.2d 209, 213 (2013) (quoting
Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 94 (4th
Cir. 1996) (quoting Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 867
F.2d 809, 812 (4th Cir. 1989))).
Paragraph 21 of the purchase agreement provides, in pertinent part:
21. Warranty and Arbitration. Purchaser and Seller
hereby agree that, in connection with the sale
contemplated by this agreement, Purchaser will be
enrolled in the John Wieland Home and Neighborhoods
5-20 Extended Warranty program, booklet revision date
04/06 (JWH Warranty), the JWH Warranty being
incorporated herein by reference . . . . PURCHASER
ACKNOWLEDGES THAT PURCHASER HAS
RECEIVED AND READ A COPY OF THE CURRENT
JWH WARRANTY AND CONSENTS TO THE
TERMS THEREOF, INCLUDING, WITHOUT
LIMITATION, THE BINDING ARBITRATION
PROVISIONS CONTAINED THEREIN. . . .
(Capitalization, bold, and underline in original).
Paragraph O of the Warranty provides, in pertinent part:
Mandatory Binding Arbitration. Wieland and
Homebuyer(s) will cooperate with one another in
avoiding and informally resolving disputes between
them. . . .
Any and all unresolved claims or disputes of any kind or
nature between [petitioner] and Homebuyer(s) arising out
of or relating in any manner to any purchase agreement
with Wieland (if any), this warranty, the Home and/or
property on which it is constructed, or otherwise, shall be
resolved by final and binding arbitration conducted in
accordance with this provision, and such resolution shall
be final. This applies only to claims or disputes that arise
after the later of: (a) the issuance of the final certificate of
the occupancy for the home, or (b) the initial closing of
the purchase of the Home by the initial Homebuyer(s).
This specifically includes, without limitation, claims
related to any representations, promises or warranties
alleged to have been made by Wieland or its
representatives; rescission of any contract or agreement;
any tort; any implied warranties; any personal injury; and
any property damage.
....
WIELAND AND HOMEBUYER(S) HEREBY
ACKNOWLEDGE AND AGREE THAT THE
ARBITRATION PROCEDURE SET FORTH HEREIN
SHALL BE THE SOLE AND EXCLUSIVE REMEDY
FOR THE RESOLUTION OF ANY AND ALL
DISPUTES ARISING AFTER THE INITIAL CLOSING
OF THE PURCHASE OF THE HOME BY THE
INITIAL HOMEBUYER(S). WIELAND AND
HOMEBUYERS HEREBY WAIVE ANY AND ALL
OTHER RIGHTS AND REMEDIES AT LAW, IN
EQUITY OR OTHERWISE WHICH MIGHT
OTHERWISE HAVE BEEN AVAILABLE TO THEM
IN CONNECTION WITH ANY SUCH DISPUTES.
(Capitalization, bold, and underline in original).
The plain and unambiguous language of the arbitration clause provides that all
claims, including ones based in warranty, be subject to arbitration. Accordingly,
we find the Court of Appeals erred in affirming the circuit court's finding that
because the arbitration clause was located within the Warranty, its scope was
limited to claims covered by the Warranty. See Jackson Mills, Inc. v. BT Capital
Corp., 312 S.C. 400, 403, 440 S.E.2d 877, 879 (1994) ("Arbitration clauses are
separable from the contracts in which they are imbedded." (quoting Prima Paint
Corp. v. Flood & Conklin, 388 U.S. 395, 402, 87 S. Ct. 1801, 18 L. Ed. 2d 1270
(1967))); see also Zabinski, 346 S.C. at 592, 553 S.E.2d at 116 (finding that like
other contracts, arbitration clauses will be enforced in accordance with their terms
(citing Volt Info. Scis. Inc. v. Board of Trs., 489 U.S. 468, 109 S. Ct. 1248, 103
L. Ed. 2d 488 (1989))).
II. Outrageous Torts Exception
In 2007, this Court created the outrageous torts exception doctrine permitting
parties whose claims arose out of an opponent's "outrageous" tortious conduct to
avoid arbitration. See generally Aiken v. World Fin. Corp. of South Carolina, 373
S.C. 144, 644 S.E.2d 705 (2007) (establishing, in South Carolina, the outrageous
torts exception to arbitration enforcement). The exception established that
outrageous torts, which were unforeseeable to the reasonable consumer and legally
distinct from the contractual relationship between the parties, were not subject to
arbitration. See Aiken, 373 S.C. at 151–52, 644 S.E.2d at 709. While this Court
has continued to apply this standalone exception to arbitration enforcement, recent
United States Supreme Court precedent requires us to reexamine its viability.
In AT&T Mobility, L.L.C. v. Concepcion, the Supreme Court reiterated its position
that "courts must place arbitration agreements on equal footing with other
contracts, . . . and enforce them according to their terms[.]" 563 U.S. 333, 339, 131
S. Ct. 1740, 179 L. Ed. 2d 742 (2011) (citing Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 443, 126 S. Ct. 1204, 163 L. Ed. 2d 1038 (2006); Volt Info.
Scis, Inc., 489 U.S. at 478). The Concepcion decision further explained that the
Federal Arbitration Act ("FAA") permits arbitration agreements to be invalidated
by "generally applicable contract defenses," such as fraud, duress, or
unconscionability, but not by defenses that apply solely to arbitration or that derive
their meaning from the fact that an agreement to arbitrate is at issue.5 See 131
S. Ct. at 1746 (citing Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116
S. Ct. 1652, 134 L. Ed. 2d 902 (1996) (finding courts may not invalidate arbitration
agreements under state laws applicable only to arbitration provisions); Perry v.
Thomas, 482 U.S. 483, 492–93, n. 9, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987)
(finding state law, whether of legislative or judicial origin, is applicable only if it
arose to govern issues concerning contract validity, revocability, and
enforceability, and state-law principles that take their meaning from the fact that an
arbitration agreement is at issue does not comport with the requirements of the
FAA) (citation omitted)); see also Nitro-Lift Techs., L.L.C. v. Howard, --- U.S. ---,
133 S. Ct. 500, 502, 184 L. Ed. 2d 328 (2012) (reiterating that state supreme courts
must adhere to United States Supreme Court's interpretations of the FAA).
The Supreme Court recently reconfirmed the obligation state courts have to apply
Concepcion, and ensure arbitration agreements are "on equal footing with all other
contracts." See DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 468 (2015) ("No one
denies that lower courts must follow this Court's holding in Concepcion. . . .
Lower court judges are certainly free to note their disagreement with a decision of
this Court. . . But the Supremacy Clause forbids state courts to dissociate
themselves from federal law. . . The Federal Arbitration Act is a law of the United
States, and Concepcion is an authoritative interpretation of that Act.
Consequently, the judges of every State must follow it." (citing U.S. Const., Art.
VI, cl. 2; Howlett v. Rose, 496 U.S. 356, 371 (1990); Khan v. State Oil Co., 93
F.3d 1358, 1363–1364 (CA7 1996), vacated, 522 U.S. 3 (1997))). In finding
California state courts failed to meet the requirements set forth in Concepcion, and,
therefore, the arbitration agreement at issue was enforceable, the Supreme Court
found, in relevant part:
[S]everal considerations lead us to conclude that the
court's interpretation of this arbitration contract is unique,
restricted to that field. . . . The language used by the
Court of Appeal focused only on arbitration. . . .
Framing that question in such terms, rather than in
generally applicable terms, suggests that the Court of
5
It is undisputed that the arbitration clause at issue is governed by the FAA.
Appeal could well have meant that its holding was
limited to the specific subject matter of this contract—
arbitration. . . . [T]here is no other principle invoked by
the Court of Appeal that suggests that California courts
would reach the same interpretation of [the phrase at
issue] in other contexts. . . . The fact that we can find no
similar case interpreting [the phrase at issue] . . .
indicates, at the least, that the antidrafter canon would not
lead California courts to reach a similar conclusion in
similar cases that do not involve arbitration.
DIRECTV, 136 S. Ct. at 469–71 (citing 9 U.S.C. § 2; Buckeye Check Cashing, Inc.,
546 U.S. at 443; Volt Info. Scis, Inc., 489 U.S. at 476; Perry, 482 U.S. at 493, n.9).
Analogous to DIRECTV, the application of the outrageous torts exception in South
Carolina is "unique," and "restricted" to the field of arbitration. Comparable to the
analysis provided in DIRECTV in finding California courts failed to place
arbitration on equal footing with other contracts, the language of every outrageous
torts exception case published by this Court has focused explicitly on arbitration.
Further, comparable to the analysis in DIRECTV, this Court has never used the
terminology associated with, or applied the principle of, the outrageous torts
exception outside the context of arbitration enforcement.6 Because the outrageous
6
The dissent argues the "outrageous and unforeseeable tort exception to
arbitration" is a general contract principle but fails to cite any cases outside the
realm of arbitration where outrageous and unforeseeable conduct has been applied
as an exception to contract enforcement. This exception was created in 2007, and
has only been applied not to void a contract itself, but instead to change the forum
from arbitration to the courtroom based on the outrageous manner in which the
underlying contract was breached. The Concepcion Court specifically addressed
the issue of state laws that appear to apply to "any" contract, but in practice have a
disproportionate impact on arbitration clauses, and held such disproportionate
application "stands as an obstacle to the accomplishment of the FAA's objectives."
Therefore, if the dissent were correct that the outrageous torts exception is a
general contract principle, it is so disproportionately applied in South Carolina that
it unquestionably stands as an obstacle to the FAA's cited objectives in violation of
Concepcion.
torts exception is not a general contract principle, but instead one that has been
applied only to arbitration clauses, I find the exception inconsistent with
Concepcion and its supporting federal jurisprudence. Accordingly, to the extent
South Carolina cases apply the outrageous torts exception, I would now overrule
those cases and find the trial court erred by determining the exception precluded
enforcement of the arbitration clause.7
Additionally, the dissent contends our opinion "fails to accurately relay the facts
and holding of [DIRECTV]." To clarify, the second and third sentences of the
DIRECTV opinion reveal that the question before the Supreme Court in DIRECTV
was decidedly the same question before this Court: "We here consider a California
court's refusal to enforce an arbitration provision in a contract. In our view, that
decision does not rest 'upon such grounds as exist . . . for the revocation of any
contract,' and we consequently set that judgment aside." See DIRECTV, 136 S. Ct.
at 464. Contrary to the dissent's reliance on one of six grounds provided in
DIRECTV regarding how the California courts erred, our opinion relies on the
grounds which lend general guidance as to determining whether an arbitration
clause is being placed on equal footing with all other contracts. Accordingly,
because the DIRECTV analysis we rely upon is not contingent upon the facts, we
need not provide a detailed recitation thereof.
In regard to the dissent's proposition that Kennedy v. Columbia Lumber & Mfg.
Co., 299 S.C. 335, 384 S.E.2d 730 (1989), should be extended to arbitration
enforcement, nothing in our opinion impacts a homebuyers rights to sue in
warranty or in tort, and we refuse to extend the narrow substantive holdings in
Kennedy to the issue of arbitration enforcement before the Court in this case.
7
We note that JWH argues the Court of Appeals erred by failing to address the
trial court's ruling as to the outrageous torts exception doctrine. Because the Court
of Appeals affirmed the circuit court on the scope issue, we find JWH's argument
is without merit. See Futch v. McAllister Towing of Georgetown, Inc., 335 S.C.
598, 613, 518 S.E.2d 591, 598 (1999) (citation omitted) (noting an appellate court
need not address remaining issues on appeal when the disposition of a prior issue is
dispositive). Further, because we find the circuit court erred in its ruling as to the
scope of the arbitration clause, we address the outrageous torts issue without a
remand to the Court of Appeals in the interest of judicial economy. See Furtick v.
S.C. Dep't of Prob., Parole & Pardon Servs., 352 S.C. 594, 599, 576 S.E.2d 146,
III. Unconscionability
As an additional sustaining ground, the Parsons ask this Court to find the
arbitration clause is unconscionable. Cf. I'On, L.L.C. v. Town of Mt. Pleasant, 338
S.C. 406, 419–20, 526 S.E.2d 716, 723 (2000) (noting the decision to review an
additional sustaining ground is discretionary). We find the Parsons' arguments as
to unconscionability are without merit. See Simpson, 373 at 25, 644 S.E.2d at 668–
69 (explaining unconscionability requires courts to focus generally on whether the
arbitration clause is geared towards achieving an unbiased decision by a neutral
decision-maker (citing Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 938 (4th Cir.
1999))); Carolina Care Plan, Inc. v. United HealthCare Servs., Inc., 361 S.C. 544,
554, 606 S.E.2d 752, 757 (2004) (citation omitted) ("Unconscionability has been
recognized as the absence of meaningful choice on the part of one party due to
one-sided contract provisions, together with terms that are so oppressive that no
reasonable person would make them and no fair and honest person would accept
them.").
CONCLUSION
We reverse the Court of Appeals' decision upholding the circuit court's finding that
because the arbitration clause was located within the Warranty, its scope was
limited to the terms of the Warranty. Further, while the majority of this Court
finds the outrageous torts exception to arbitration remains viable, I would hold the
exception cannot survive in light of Concepcion, 131 S. Ct. 1740. Finally, we find
the Parsons' unconscionability argument is without merit. Accordingly, we find
the Court of Appeals erred in affirming the circuit court's refusal to enforce the
arbitration clause.
The Court of Appeals' decision is therefore
REVERSED.
KITTREDGE, J., concurs. HEARN, J., concurring in part and dissenting in
part in a separate opinion in which BEATTY, J., concurs. Acting Justice Jean
H. Toal, dissenting in a separate opinion.
149 (2003) (addressing the merits of a claim in the interest of judicial economy).
JUSTICE HEARN: With great respect, I concur in result with the majority.
However, I write separately to concur in part and dissent in part from both the
majority opinion and the dissent.
I agree with the majority that the scope of the arbitration clause covers the
claims against JWH. However, I also agree with the dissent that the outrageous
and unforeseeable torts exception remains a viable principle of law after
Concepcion,8 because it embodies a generally applicable contract principle:
effectuating the intent of the parties. In my opinion, abolishing the "exception"—
allegedly applicable only to arbitration9—could lead to absurd results, such as
forcing parties to arbitrate behavior that they clearly did not contemplate upon
entering the contract or arbitration agreement. See Doe v. Princess Cruise Lines,
Ltd., 657 F.3d 1204, 1214 (11th Cir. 2011) ("Even though there is [a] presumption
in favor of arbitration, the courts are not to twist the language of the contract to
achieve a result which is favored by federal policy but contrary to the intent of the
parties." (citation omitted) (internal quotation and alteration marks omitted)); see
also, e.g., Koon v. Fares, 379 S.C. 150, 155, 666 S.E.2d 230, 233 (2008)
(explaining a contract "interpretation which establishes the more reasonable and
probable agreement of the parties should be adopted while an interpretation leading
to an absurd result should be avoided"); cf. Auto Owners Ins. Co. v. Rollison, 378
S.C. 600, 609, 663 S.E.2d 484, 488 (2008) (stating the Court will refuse to
interpret statutory language in a manner that would lead to an absurd, and clearly
uncontemplated, result (citation omitted)).
8
AT&T Mobility, L.L.C. v. Concepcion, 563 U.S. 333 (2011).
9
To the extent the majority may consider this exception only applicable to
arbitration, I wish to note my disagreement and clarify my understanding of the
concept. I believe, despite its name, the legal principles underlying the outrageous
and unforeseeable torts exception are equally applicable to contracts and
arbitration agreements. Thus, if a litigant files a breach of contract suit for
behavior not contemplated by the parties upon entering the contract, I believe this
exception would provide the opposing party a defense to the breach of contract
claim. Similarly, if a litigant attempts to defend himself by asserting an arbitration
defense to a claim that does not fall within the scope of the arbitration agreement
(perhaps because it was not contemplated by the parties upon entering the
contract), I likewise believe this exception could provide the opposing party a
defense to the demand for arbitration.
Nonetheless, I disagree with the dissent that the outrageous and
unforeseeable torts exception applies here to bar JWH's demand for arbitration. In
a residential purchase agreement, it is entirely foreseeable that a seller would fail to
disclose defects with the property.10
More importantly, in examining the scope of arbitration agreements, this
Court has traditionally considered whether a "significant relationship" exists
between the claims asserted and the contract in which the arbitration clause is
contained. Zabinski v. Bright Acres Assocs., 346 S.C. 580, 598, 553 S.E.2d 110,
119 (2001); see also Aiken v. World Fin. Corp. of S.C., 373 S.C. 144, 150, 644
S.E.2d 705, 708 (2007) (stating the significant relationship test is not a mere "but-
for" causation standard). Thus, the Court must determine "whether the particular
tort claim is so interwoven with the contract that it could not stand alone."
Zabinski, 346 S.C. at 597 n.4, 553 S.E.2d at 119 n.4. In fact, the Court has
specifically stated the outrageous and unforeseeable torts exception sought only "to
distinguish those outrageous torts, which although factually related to the
performance of the contract, are legally distinct from the contractual relationship
between the parties." Aiken, 373 S.C. at 152, 644 S.E.2d at 709.
Accordingly, in this instance, I believe the correct inquiry is whether JWH's
alleged fraud in failing to disclose the presence of hazardous waste on the property
10
Numerous lawsuits in our state involve a seller's failure to disclose. See, e.g.,
Lawson v. Citizens & S. Nat'l Bank of S.C., 259 S.C. 477, 193 S.E.2d 124 (1972)
(involving a homebuyer's complaint that the seller failed to disclose that the
residence's lot was filled with unsuitable material and "capped" with clay); Cohen
v. Blessing, 259 S.C. 400, 192 S.E.2d 204 (1972) (involving a homebuyer's
complaint that the seller deliberately failed to disclose that the residence was
infested with insects); Winters v. Fiddie, 394 S.C. 629, 716 S.E.2d 316 (Ct. App.
2011) (involving a homebuyer's complaint that the seller failed to disclose the
presence of toxic mold in a house prior to closing). As such, it cannot come as a
complete shock should a particular seller fail to disclose a defect to a particular
buyer. In fact, the General Assembly has expressly provided a remedy in such an
event, further supporting the idea that a seller's failure to disclose is a foreseeable,
albeit regrettable, possibility. See, e.g., S.C. Code Ann. § 27-50-65 (2007)
(permitting recovery of actual damages, court costs, and attorneys' fees against a
seller who knowingly fails to disclose "any material information on the disclosure
statement that he knows to be false, incomplete, or misleading").
is essentially a freestanding tort that is not significantly related to the sales contract
and arbitration agreement between JWH and the Parsons. I would find there is a
significant relationship between the claim and the contract in which the arbitration
agreement is contained. The Parsons could not bring their claim against JWH
absent the sales contract, as the claim is entirely reliant on the parties' statuses
under the contract. In other words, absent the sales contract, JWH would be under
no duty to disclose these particular defects with the property to the Parsons or any
other third-party.
Therefore, I would find the outrageous and unforeseeable torts exception,
while a viable principle of law, does not apply to bar JWH's demand for arbitration
here due to the significant relationship between the claims and the contract in
which the arbitration agreement is contained. Accordingly, I concur in result with
the majority to reverse the denial of JWH's motion to compel arbitration.
BEATTY, J., concurs.
ACTING JUSTICE TOAL: I respectfully dissent. I disagree that the outrageous
and unforeseeable tort exception is not a general contract principle. Accordingly, I
believe the majority errs in overruling previous South Carolina cases that apply the
exception. Moreover, the majority's opinion undermines the protections the Court
has previously extended to homebuyers in Kennedy v. Columbia Lumber &
Manufacturing Co.11 and its progeny. See, e.g., Smith v. Breedlove, 377 S.C. 415,
422–24, 661 S.E.2d 67, 71–72 (2008). Therefore, I dissent.
I. General Contract Principles
In "overrul[ing] the judiciary's long-standing refusal to enforce agreements
to arbitrate," the United States Supreme Court has held numerous times that
arbitration agreements must be placed "upon the same footing as [all] other
contracts." Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489
U.S. 468, 478 (1989) (citations omitted) (internal quotation marks omitted).
Accordingly, the Federal Arbitration Act (FAA)12 "imposes certain rules of
fundamental importance, including the basic [contract] precept that arbitration 'is a
matter of consent, not coercion.'" Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp.,
559 U.S. 662, 681 (2010) (quoting Volt, 489 U.S. at 479); see also Volt, 489 U.S.
at 478 ("[T]he FAA does not require parties to arbitrate when they have not agreed
to do so, nor does it prevent parties who do agree to arbitrate from excluding
certain claims from the scope of their arbitration agreement." (internal citations
omitted)).13 Similarly, as with all other contracts, when a court interprets an
arbitration agreement, "'the parties' intentions control'" such that the court's
interpretation merely "'give[s] effect to the contractual rights and expectations of
the parties.'" Stolt-Nielsen, 559 U.S. at 681–82 (quoting Volt, 489 U.S. at 479;
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626
(1985)).
11
299 S.C. 335, 384 S.E.2d 730 (1989).
12
9 U.S.C. §§ 1–16 (2006).
13
However, given the strong federal and state policies favoring arbitration, a court
should generally compel arbitration "[u]nless [it] can say with positive assurance
that the arbitration clause is not susceptible to any interpretation that covers the
dispute." Partain v. Upstate Auto. Grp., 386 S.C. 488, 491, 689 S.E.2d 602, 603–
04 (2010).
As I read our precedents, the so-called "outrageous and unforeseeable tort
exception to arbitration" is merely a label for this Court's application of a long-
standing contract principle—effectuating the parties' contractual expectations. In
the past, when the Court invoked the exception, it merely recognized that upon
executing the arbitration agreement, the parties did not intend to arbitrate claims
arising out of the other party's extreme and unforeseeable conduct. Aiken v. World
Fin. Corp. of S.C., 373 S.C. 144, 151, 644 S.E.2d 705, 709 (2007) ("Because even
the most broadly-worded arbitration agreements still have limits founded in
general principles of contract law, this Court will refuse to interpret any arbitration
agreement as applying to outrageous torts that are unforeseeable to a reasonable
consumer in the context of normal business dealings."); see also Landers v. Fed.
Deposit Ins. Corp., 402 S.C. 100, 115, 739 S.E.2d 209, 217 (2013) ("[E]ven the
broadest of [arbitration] clauses have their limitations."); Partain v. Upstate Auto.
Grp., 386 S.C. 488, 492, 689 S.E.2d 602, 604 (2010). In other words, absent
evidence to the contrary, parties do not intend to arbitrate wholly unexpected,
outrageous behavior. Timmons v. Starkey, 389 S.C. 375, 379, 698 S.E.2d 809, 811
(2010) (Toal, C.J., dissenting) ("An arbitration clause does not cover every
potential suit between the signing parties; instead, it only applies to those claims
foreseeably arising from the contractual relationship.").14 Forcing the parties to
arbitrate claims based on such behavior would be contrary to their intent in
entering the arbitration agreement, and would impose the court's will upon the
parties.
Accordingly, I disagree with the majority's assertions that the outrageous
and unforeseeable tort exception to arbitration is not a general contract principle.
In my view, the exception treats arbitration agreements and contracts precisely
14
Cf. Landers, 402 S.C. at 115, 739 S.E.2d at 217 (finding claims arbitrable in part
because the plaintiff provided a "clear nexus" between the contract, its arbitration
clause, and the causes of action, such that they were all significantly related);
Mibbs, Inc. v. S.C. Dep't of Rev., 337 S.C. 601, 608, 524 S.E.2d 626, 629 (1999)
(finding that contractual duties may be affected by foreseeable actions taken in the
future); S.C. Fed. Sav. Bank v. Thornton-Crosby Dev. Co., 303 S.C. 74, 78–79, 399
S.E.2d 8, 11–12 (Ct. App. 1990) (acknowledging that a party could defend itself
from a breach of contract suit in part if a consequence of the breach was
unforeseeable).
equally. Specifically, the exception ensures that a court will consider the parties'
intentions when it determines the scope of the agreement at issue, be it contract or
arbitration agreement. See Chassereau v. Global Sun Pools, Inc., 373 S.C. 168,
172, 644 S.E.2d 718, 720 (2007) ("Although we are constrained to resolve all
doubts in favor of arbitration, this is not an absolute truism intended to replace
careful judicial analysis. While actions taken in an arrangement such as the one
entered into by these parties might have the potential to generate several legal
claims and causes of action, we have no doubt that [the plaintiff] did not intend to
agree to arbitrate the claims she asserts in the instant case [because those claims
are based on the defendant's allegedly outrageous and unforeseeable behavior].");
cf. Volt, 489 U.S. at 478 ("[T]he FAA does not require parties to arbitrate when
they have not agreed to do so . . . ." (citations omitted)).
In fact, many courts have recognized that outrageous and unforeseeable
conduct is generally not arbitrable. See, e.g., Doe v. Princess Cruise Lines, Ltd.,
657 F.3d 1204 (11th Cir. 2011) (holding that claims of false imprisonment,
intentional infliction of emotional distress, spoliation of evidence, invasion of
privacy, and fraudulent misrepresentation were outside the scope of an arbitration
clause in an employment agreement between the cruise line and a crewmember
who claimed she was drugged and raped by fellow crewmembers); cf. Landers v.
Fed. Deposit Ins. Corp., 402 S.C. 100, 108, 739 S.E.2d 209, 213 (2013) ("Whether
a party has agreed to arbitrate an issue is a matter of contract interpretation and a
party cannot be required to submit to arbitration any dispute which he has not
agreed so to submit." (emphasis added) (quoting Am. Recovery Corp. v.
Computerized Thermal Imaging, Inc., 96 F.3d 88, 92 (4th Cir. 1996) (quoting
United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582
(1960))) (internal marks omitted)). The majority suggests that considering the
scope of the arbitration agreement is a new concept "created in 2007," and that
South Carolina disproportionately invalidates arbitration agreements based on
conduct falling outside the scope of the contract. I strongly disagree with this
contention. Cf. Stolt-Nielsen, 559 U.S. at 684 (rejecting the view that once an
entitlement to arbitration is established, any claim may be arbitrated). Merely
because this Court attributed a formal label to the concept of considering the scope
of an arbitration agreement is no reason to invalidate the rationale underlying the
label.
It appears that the majority approves of considering the parties' intentions in
determining the scope of the agreement, but takes issue with the exception because
of its label—the outrageous and unforeseeable tort exception to arbitration.
However, this label is a misnomer. The analysis underlying the exception—
defining the scope of the agreement by effectuating the parties' contractual
expectations—is equally applicable to contracts and arbitration agreements.
Accordingly, I disagree that the Court should abolish this analytical process
in future cases. Abolishing the outrageous and unforeseeable tort exception
effectively places arbitration agreements in a position of vast superiority to all
other contracts. In essence, arbitration agreements now become "super contracts,"
in which the parties' intentions in outlining the scope of their agreement are
irrelevant, and courts must now indiscriminately send parties to arbitration
regardless of their intentions. As stated previously, this blind imposition of
judicial might on the parties not only lacks a legal foundation, but takes the
Supreme Court's directives to enforce arbitration agreements to irrational lengths.
See Stolt-Nielsen, 559 U.S. at 684 ("It falls to courts and arbitrators to give effect
to the[] contractual limitations, and when doing so, courts and arbitrators must not
lose sight of the purpose of the exercise: to give effect to the intent of the parties."
(emphasis added)).15
15
In an effort to shore up its analysis, the majority cites to the recent Supreme
Court holding in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015). However,
despite its use of selective quotes from the opinion, the majority fails to accurately
relay the facts and holding of that case. As the Imburgia opinion sets forth in
detail, in 2005, the California Supreme Court held that a waiver of class arbitration
in a consumer contract of adhesion is unconscionable under California law, and
thus unenforceable. Id. at 466 (quoting Discover Bank v. Superior Court, 113 P.3d
1100 (Cal. 2005)). However, in AT&T Mobility L.L.C. v. Concepcion, the
Supreme Court specifically invalidated California's so-called Discover Bank rule,
holding that it was preempted by the FAA because it stood "'as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.'"
Id. (quoting AT&T Mobility L.L.C. v. Concepcion, 563 U.S. 333, 352 (2011)).
Nonetheless, in Imburgia, the California Court of Appeal held that California law
"'would find the class action waiver unenforceable,'" citing to the Discover Bank
rule. Id. at 467 (quoting Imburgia v. DIRECTV, Inc., 170 Cal. Rptr. 3d 190, 194
(Cal. Ct. App. 2014)).
On appeal, the Supreme Court invalidated the decision of the California
Court of Appeal, stating, among various other rationale:
II. Application
South Carolina courts have applied the outrageous and unforeseeable tort
exception sparingly and are reluctant to declare the tortious conduct underlying a
lawsuit to be unrelated to the contract containing the arbitration agreement.16 In
Fifth, the Court of Appeal reasoned that invalid state arbitration
law, namely the Discover Bank rule, maintained legal force despite
this Court's holding in Concepcion. The court stated that "[i]f we
apply state law alone to the class action waiver, then the waiver is
unenforceable." And at the end of its opinion, it reiterated that "[t]he
class action waiver is unenforceable under California law, so the
entire arbitration agreement is unconscionable." But those statements
do not describe California law. The view that state law retains
independent force even after it has been authoritatively invalidated by
this Court is one courts are unlikely to accept as a general matter and
to apply in other contexts.
Imburgia, 136 S. Ct. at 470 (emphasis added) (internal citations and alteration
marks omitted). Thus, Imburgia stands merely for the unsurprising proposition
that the Supremacy Clause forbids state courts from ignoring the specific holdings
of the Supreme Court.
16
In fact, this Court has cautioned that the exception should not be used as an
"end-run" around arbitration clauses. See Partain, 386 S.C. at 494, 689 S.E.2d at
605. Only when the parties truly and clearly did not contemplate arbitrating a
particular claim should a court decline to enforce an otherwise proper arbitration
agreement on the grounds that the claim is not significantly related to the contract.
Id. at 494–95, 689 S.E.2d at 605; compare Landers, 402 S.C. at 100, 739 S.E.2d at
209 (finding the slander and intentional infliction of emotional distress claims
brought by a man who was fired significantly related to his employment contract
that specified grounds and remedies for rightful and wrongful termination because
the offensive comments related to the man's purported inability to do his job), with
Partain, 386 S.C. at 488, 689 S.E.2d at 602 (finding that a claim involving a "bait
and switch" in relation to a used car purchase was outrageous and unforeseeable
and thus was not subject to arbitration), and Chassereau, 373 S.C. at 168, 644
S.E.2d at 718 (finding a claim for extensive public harassment of a customer was
not significantly related to the contract to pay for a pool, and thus was not subject
to arbitration).
determining whether the exception applies, a court should focus on the parties'
intent, the foreseeability of a particular claim when the parties entered into the
agreement, and whether or not the specific claims fall within the scope of the
arbitration agreement, either expressly or because they significantly relate to the
contract. See Chassereau, 373 S.C. at 172–73, 644 S.E.2d at 720–21.
Here, the gravamen of the complaint is that JWH failed to disclose certain
defects with the property, including industrial pipes and a concrete box containing
a hazardous substance. As explained further, infra, it is unreasonable and
unforeseeable that JWH would fail to clean up such extreme pollution on a
residential construction site. Cf. Kennedy, 299 S.C. at 344, 384 S.E.2d at 736 ("We
have made it clear that it would be intolerable to allow builders to place defective
and inferior construction into the stream of commerce." (citing Rogers v. Scyphers,
251 S.C. 128, 135–36, 161 S.E.2d 81, 84 (1968))). Therefore, it is inconceivable
that the parties contemplated claims involving hazardous pollution on the
construction site when executing their arbitration agreement. Accordingly, I would
not compel arbitration of these particular claims, as doing so would not fulfill the
parties' expectations in entering the arbitration agreement.
III. Residential Construction Arbitration Agreements
Although the primary issue in this appeal involves the enforceability of an
arbitration agreement, the entire lawsuit arose due to extreme defects concealed
during JWH's construction of a home. Because the case involves residential
construction, the protections this Court has previously extended to homebuyers in
Kennedy and the like impose an extra "gloss" on the relevant analysis, one which
the majority overlooks.
South Carolina courts have historically been inclined to expand general
contract and tort principles to protect innocent homebuyers. See, e.g., Kennedy,
299 S.C. at 343–44, 384 S.E.2d at 735–36; Lane v. Trenholm Bldg. Co., 267 S.C.
497, 501–03, 229 S.E.2d 728, 730–31 (1976) ("Disparity in the law should be
founded upon just reason and not the result of adherence to stale principles which
do not comport with current social conditions."); Rogers v. Scyphers, 251 S.C. 128,
132–34, 135–36, 161 S.E.2d 81, 83, 84–85 (1968). To that end, South Carolina
courts embraced the maxim caveat venditor, or "seller beware," and abolished the
requirement of strict privity between a home purchaser and a homebuilder.
McCullough v. Goodrich & Pennington Mortg. Fund, Inc., 373 S.C. 43, 53, 644
S.E.2d 43, 49 (2007); Kennedy, 299 S.C. at 343, 344–45, 384 S.E.2d at 735, 736;
see also Sapp v. Ford Motor Co., 386 S.C. 143, 147–48, 687 S.E.2d 47, 49–50
(2009) (discussing Kennedy and noting that its holding "followed cases from
around the country expanding protections afforded to homebuyers and imposing
tort liability on residential homebuilders"). Thus, in cases involving residential
construction contracts, general contract and tort principles occasionally give way to
the State's dual policies of protecting the homebuyer and making it easier for that
buyer to pursue claims against the builder or seller.
Because Kennedy and its progeny explicitly apply only to residential
construction contracts, this Court has not previously had occasion to address how
this line of cases applies to residential construction arbitration agreements.
However, again, the Supreme Court has held numerous times that arbitration
agreements must be placed "upon the same footing as [all] other contracts." Volt,
489 U.S. at 478 (citations omitted) (internal quotation marks omitted). Thus, I
conclude that South Carolina's longstanding policy of protecting innocent
homebuyers extends to arbitration agreements involving residential construction as
well. See Perry v. Thomas, 482 U.S. 483, 492–93 n.9 (1987) ("Thus state law,
whether of legislative or judicial origin, is applicable [to arbitration agreements] if
that law arose to govern issues concerning the validity, revocability, and
enforceability of contracts generally. . . . A court may not, then, in assessing the
rights of litigants to enforce an arbitration agreement, construe that
agreement in a manner different from that in which it otherwise construes
nonarbitration agreements under state law." (bold emphasis added)).17
Accordingly, as in all other residential construction cases, I would extend this
Court's protection to the Parsons, as the innocent homebuyers.18
In the arbitration context, I believe this protective "gloss" specifically
applies to whether the homebuilder's conduct is outrageous, unforeseeable, and not
contemplated by the parties when entering into the residential construction
contract. Thus, as applied here, Kennedy and its progeny lead me to find that
17
Were I to conclude that Kennedy's protections did not extend to homebuyers
whose contracts involved an arbitration agreement, I would place those arbitration
agreements in a position of vast superiority over contracts, rather than treating
them equal to contracts.
18
In failing to extend Kennedy's protection to the Parsons here, the majority
opinion undermines our extensive precedent in the residential construction context.
JWH's failure to disclose the extreme pollution and defects with the property was
not only unreasonable, but unforeseeable as well. As stated, supra, I would
therefore refuse to compel arbitration between the parties, as claims based on such
outrageous conduct by a homebuilder surely were not contemplated by the parties.
IV. Conclusion
I believe the outrageous and unforeseeable tort exception to arbitration is
merely a label for a general contract principle: effectuating the contractual
expectations of the parties. Therefore, I would adhere to the Court's previous
holdings that the exception may invalidate an arbitration agreement if certain
criteria are met. Further, I would extend the protections of Kennedy and its
progeny to arbitration agreements involving residential construction. Accordingly,
I dissent.