Smith v. D.R. Horton, Inc.

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Gregory W. Smith and Stephanie Smith, Respondents,
v.
D.R. Horton, Inc., Tom's Vinyl Siding, LLC, Lutzen
Construction, Inc., Boozer Lumber Company, All
American Roofing, Inc., Myers Landscaping, Inc.,
Defendants,
of whom D.R. Horton, Inc. is the Petitioner.
Appellate Case No. 2013-001345
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal From Dorchester County
Edgar W. Dickson, Circuit Court Judge
Opinion No. 27645
Heard March 3, 2015 – Filed July 6, 2016
AFFIRMED
Matthew Kinard Johnson and W. Kyle Dillard, both of
Ogletree Deakins Nash Smoak & Stewart, PC, of
Greenville, for Petitioner.
Phillip Ward Segui, Jr., of Segui Law Firm, of Mt.
Pleasant, John T. Chakeris, of Chakeris Law Firm, and
Michael A. Timbes, of Thurmond Kirchner Timbes &
Yelverton, PA, both of Charleston, for Respondents.
CHIEF JUSTICE TOAL: D.R. Horton, Inc., asks this Court to reverse the
court of appeals' decision in Smith v. D.R. Horton, Inc., 403 S.C. 10, 742 S.E.2d 37
(Ct. App. 2013), affirming the circuit court's refusal to compel arbitration between
Gregory and Stephanie Smith (collectively, the Smiths) and D.R. Horton. We
affirm.
FACTS/PROCEDURAL BACKGROUND
D.R. Horton is a corporation specializing in residential construction. In
March 2005, the Smiths entered into a home purchase agreement (the Agreement)
with D.R. Horton for the design and construction of a new home in Summerville,
South Carolina.
The Agreement is organized into numbered paragraphs and lettered
subparagraphs, and sets forth the various responsibilities of the parties prior to and
immediately following closing.1 Paragraph 14 of the Agreement is titled
"Warranties and Dispute Resolution," and consists of subparagraphs 14(a) through
14(j). Subparagraphs 14(c) and 14(g) contain provisions stating that the parties
agree to arbitrate any claim arising out of D.R. Horton's construction of the home,
as well as any disputes related to the warranties contained in the Agreement.
However, in the majority of the remaining subparagraphs of paragraph 14, D.R.
Horton expressly disclaims all warranties for the home—including the implied
warranty of habitability—except for a ten-year structural warranty. Moreover,
subparagraph 14(i) stipulates that D.R. Horton "shall not be liable for monetary
damages of any kind, including secondary, consequential, punitive, general, special
or indirect damages." (Emphasis in original).
In August 2005, D.R. Horton completed construction of the Smiths' home,
and the Smiths closed on the property and received the deed. Thereafter, the
Smiths experienced a myriad of problems with the home that resulted in severe
1
For example, the Agreement requires the Smiths to obtain suitable financing to
purchase the home prior to the start of construction and to deposit a specified
amount of earnest money, and requires D.R. Horton to convey marketable title to
the Smiths at the closing.
water damage to the property. D.R. Horton attempted to repair the alleged
construction defects on "numerous occasions" during the next five years, but was
ultimately unsuccessful.
In 2010, the Smiths filed a construction defect case against D.R. Horton and
seven subcontractors. In response, D.R. Horton filed a motion to compel
arbitration. The Smiths opposed the motion, arguing, inter alia, that the arbitration
agreement was unconscionable and therefore unenforceable.
The circuit court denied D.R. Horton's motion to compel arbitration, finding
that the arbitration agreement was unconscionable. The court based its ruling on "a
number of oppressive and one-sided provisions," including D.R. Horton's
attempted waiver of the implied warranty of habitability, as well as subparagraph
14(i)'s prohibition on awarding money damages of any kind against D.R. Horton.
D.R. Horton made a motion to reconsider pursuant to Rule 59(e), SCACR, but the
circuit court again denied the motion to compel.2
D.R. Horton appealed, and the court of appeals affirmed the circuit court's
order. See Smith, 403 S.C. at 10, 742 S.E.2d at 37. The court of appeals found the
arbitration agreement was unconscionable, citing subparagraph 14(i) and its
prohibition on awarding money damages against D.R. Horton. Id. at 15, 742
S.E.2d at 40–41. Further, the court of appeals sua sponte conducted a severability
analysis to determine whether subparagraph 14(i) could be severed from the
remaining provisions of the arbitration agreement. Id. at 17, 742 S.E.2d at 41. The
court of appeals ultimately concluded that severing the subparagraph would be
inappropriate. Id.
D.R. Horton petitioned the court of appeals for rehearing, asserting that the
court of appeals made two fundamental errors. First, D.R. Horton argued that the
court of appeals' unconscionability analysis was flawed because it did not discuss
whether the Smiths lacked a meaningful choice in entering the arbitration
agreement. See Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14, 24–25, 644
S.E.2d 663, 668 (2007) (stating that an unconscionability analysis has two prongs,
one of which is whether one of the parties to the contract lacked a meaningful
2
In the second order denying D.R. Horton's motion to compel arbitration, the court
elaborated on its previous finding of unconscionability, finding that the Agreement
was a contract of adhesion, and that the Smiths had significantly less bargaining
power than D.R. Horton.
choice in agreeing to arbitrate (citing Carolina Care Plan, Inc. v. United
HealthCare Servs., Inc., 361 S.C. 544, 554, 606 S.E.2d 752, 757 (2004); S.C. Code
Ann. § 36-2-302(1) (1976))).
Second, D.R. Horton asserted that the court of appeals' decision violated the
United States Supreme Court's holding in Prima Paint Corp. v. Flood & Conklin
Manufacturing Co. See 388 U.S. 395, 406 (1967) (holding that courts may only
consider the threshold question of whether the arbitration agreement is
fraudulently induced and thus invalid, not whether the contract as a whole is
invalid); see also S.C. Pub. Serv. Auth. v. Great W. Coal (Ky.), Inc., 312 S.C. 559,
562–63, 437 S.E.2d 22, 24 (1993) (adopting a broad interpretation of Prima Paint
in South Carolina, and holding that "a party cannot avoid arbitration through
rescission of the entire contract when there is no independent challenge to the
arbitration clause" (the Prima Paint doctrine)). In D.R. Horton's view, the
arbitration agreement was contained exclusively in subparagraph 14(g), and
therefore, the court of appeals' consideration of the allegedly one-sided terms in
subparagraph 14(i) was inappropriate.3
Ultimately, the court of appeals denied the petition for rehearing, and we
granted D.R. Horton's petition for a writ of certiorari to review the court of appeals'
decision.
ISSUE
Whether the arbitration agreement is unconscionable?
STANDARD OF REVIEW
Arbitrability determinations are subject to de novo review. Bradley v.
Brentwood Homes, Inc., 398 S.C. 447, 453, 730 S.E.2d 312, 315 (2012). However,
a circuit court's factual findings will not be reversed on appeal if any evidence
reasonably supports the findings. Id. at 453, 730 S.E.2d at 315.
ANALYSIS
3
In conjunction with this argument, D.R. Horton also asserted that a severability
analysis was inappropriate because the portions of the Agreement that the court of
appeals considered severing were not actually part of the arbitration agreement,
i.e., were not part of subparagraph 14(g).
I. The Prima Paint Doctrine
As an initial matter, we address D.R. Horton's argument regarding the court
of appeals' alleged failure to heed the Prima Paint doctrine.4
In Prima Paint, the Supreme Court held that to avoid arbitration, a party
must assert a contractual defense to the arbitration agreement itself, and not to the
contract as a whole. See 388 U.S. at 406. Thus, for example, a party must allege
that the arbitration agreement is unconscionable, not that the entire contract is
unconscionable. See S.C. Pub. Serv. Auth., 312 S.C. at 562–63, 437 S.E.2d at 24.
Similarly, in conducting an unconscionability inquiry, courts may only consider
the provisions of the arbitration agreement itself, and not those of the whole
contract.
Here, the parties fundamentally disagree on the application of the Prima
Paint doctrine to the Agreement. D.R. Horton asserts that the arbitration
agreement is wholly contained in subparagraph 14(g). Therefore, according to
D.R. Horton, the Court may not consider any of the remaining subparagraphs of
paragraph 14—such as subparagraph 14(i)'s damages limitation—in determining
whether the arbitration agreement is unconscionable. We disagree.
Like the lower courts, we construe the entirety of paragraph 14, entitled
"Warranties and Dispute Resolution," as the arbitration agreement. As the title
indicates, all the subparagraphs of paragraph 14 must be read as a whole to
understand the scope of the warranties and how different disputes are to be
handled. The subparagraphs within paragraph 14 contain numerous cross-
references to one another, intertwining the subparagraphs so as to constitute a
single provision.
Thus, in accordance with the Prima Paint doctrine, we find that in
determining whether the arbitration agreement is unconscionable, we may properly
consider the entirety of paragraph 14.
II. Unconscionability
4
As will be explained further, infra, we must address this issue first because it
controls which portions of the Agreement we may properly consider in conducting
our unconscionability analysis.
"In South Carolina, unconscionability is defined 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." Simpson, 373 S.C. at 24–
25, 644 S.E.2d at 668 (citations omitted)).5
Whether one party lacks a meaningful choice in entering the arbitration
agreement at issue typically speaks to the fundamental fairness of the bargaining
process. Gladden v. Boykin, 402 S.C. 140, 148, 739 S.E.2d 882, 886 (2013)
(quoting Simpson, 373 S.C. at 25, 644 S.E.2d at 669). Thus, parties frequently
allege they lacked a meaningful choice when the dispute involves an adhesion
contract. See Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 541, 542 S.E.2d 360,
365 (2001) (defining adhesion contracts as "standard form contract[s] offered on a
take-it or leave-it basis with terms that are not negotiable"). While adhesion
contracts are not unconscionable per se, courts tend to look upon them with
"considerable skepticism" because they give rise to "considerable doubt that any
true agreement ever existed to submit disputes to arbitration." Id. at 26–27, 644
S.E.2d at 669–70 (quotation marks omitted). In determining whether a party
lacked a meaningful choice to arbitrate, courts should consider, inter alia, the
relative disparity in the parties' bargaining power, the parties' relative
sophistication, whether the parties were represented by independent counsel, and
whether "'the plaintiff is a substantial business concern.'" Id. (quoting Simpson,
373 S.C. at 25, 644 S.E.2d at 669).
"We have [] taken judicial cognizance of the fact that a modern buyer of new
residential housing is normally in an unequal bargaining position as against the
seller." Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 343, 384 S.E.2d
730, 735–36 (1989); cf. Sapp v. Ford Motor Co., 386 S.C. 143, 147–48, 687 S.E.2d
47, 49–50 (2009) (stating that South Carolina's "courts have shifted from following
the doctrine of caveat emptor ('let the buyer beware') to the doctrine of caveat
venditor ('let the seller beware')"). There is no indication in the record that the
Smiths enjoyed a substantially stronger bargaining position against D.R. Horton
than the average homebuyer, or that they were represented by independent counsel.
Moreover, the Smiths were a single client to a corporation that constructs houses in
5
We note that the court of appeals addressed only the allegedly oppressive nature
of the terms found in the arbitration agreement, but appears not to have considered
whether the Smiths lacked a meaningful choice in agreeing to arbitrate. We
caution courts and parties in the future to analyze both prongs of unconscionability.
twenty-seven states. Thus, the Smiths were also not a substantial business concern
of D.R. Horton, as they did not comprise a large portion of D.R. Horton's clientele.
Accordingly, we find that the Smiths lacked a meaningful choice in their
ability to negotiate the arbitration clause in the Agreement.
Moreover, in considering the actual provisions of the arbitration agreement,
we find that D.R. Horton's attempts to disclaim implied warranty claims and
prohibit any monetary damages are clearly one-sided and oppressive. Under the
terms of paragraph 14, the only remedy provided for a defect in the home is repair
or replacement—options left entirely in the discretion of D.R. Horton. This is no
remedy at all because it leaves the relief to the whim of D.R. Horton while
simultaneously allowing no monetary recuperation when, as here, the repairs are
simply inadequate. We therefore affirm the court of appeals and hold the
arbitration provision is unconscionable and thus unenforceable.6
6
Because the arbitration agreement does not contain a severability clause, we find
the parties did not intend for the Court to strike unconscionable provisions from the
arbitration agreement. Thus, we decline to analyze whether the unconscionable
provisions are severable, as doing so would be the result of the Court rewriting the
parties' contract rather than enforcing their stated intentions. See Simpson, 373
S.C. at 34, 644 S.E.2d at 673.
CONCLUSION
For the foregoing reasons, the decision of the court of appeals is
AFFIRMED.
BEATTY and HEARN, JJ., concur. KITTREDGE, J., dissenting in a
separate opinion in which PLEICONES, C.J. concurs.
JUSTICE KITTREDGE: The underlying contract involves interstate commerce
and, as a result, the Federal Arbitration Act (FAA) controls. Because I believe the
majority has not followed controlling precedent of the United States Supreme
Court, I respectfully dissent. In my judgment, state law does not provide a valid
basis to avoid enforcing this particular agreement to arbitrate, and the court of
appeals erred in upholding the circuit court's refusal to compel arbitration. I would
reverse.
I.
This arbitration agreement is subject to the FAA, a fact conspicuously absent in the
majority opinion. "'Generally, any arbitration agreement affecting interstate
commerce is subject to the FAA.'" Cape Romain Contractors, Inc. v. Wando E.,
LLC, 405 S.C. 115, 121–22, 747 S.E.2d 461, 464 (2013) (quoting Landers v.
Federal Deposit Ins. Co., 402 S.C. 100, 108, 739 S.E.2d 209, 213 (2013)). "The
United States Supreme Court 'has previously described the [FAA]'s reach
expansively as coinciding with that of the Commerce Clause.'" Id. at 122, 747
S.E.2d at 464 (quoting Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 274
(1995)). "Thus, in determining whether the FAA applies to a particular arbitration
agreement, a court considers whether the contract concerns a transaction involving
interstate commerce." Id. (citing Episcopal Housing Corp. v. Fed. Ins. Co., 269
S.C. 631, 637, 239 S.E.2d 647, 650 (1977)).
In support of its motion to compel arbitration, D.R. Horton submitted affidavits
from several executives indicating that D.R. Horton is a Delaware corporation with
its principal place of business in Texas. These affidavits further establish D.R.
Horton is engaged in the residential construction business in twenty-seven states
and that many of the building materials and supplies used in constructing the
Smiths' home in Summerville were obtained from suppliers outside South
Carolina.7 Because the arbitration clause at issue here is included in a contract that
evidences a transaction involving interstate commerce, the FAA governs the
enforceability of the arbitration provision. See Cape Romain, 405 S.C. at 123–24,
747 S.E.2d at 465 (citing Zabinski v. Bright Acres Assocs., 346 S.C. 580, 594–95,
553 S.E.2d 110, 117–18 (2001); Episcopal Housing, 269 S.C. at 640, 239 S.E.2d
647 S.E.3d at 652) (observing that out-of-state materials used in construction were
7
These materials include rebar, framing materials, wall sheathing, windows,
gypsum drywall, shingles, cabinets, carpet, vinyl flooring, plumbing fixtures,
lighting hardware, and appliances.
instrumentalities of interstate commerce); see also Zabinski, 346 S.C. at 594, 553
S.E.2d at 117 (relying upon affidavits in determining whether a transaction
involves interstate commerce).
II.
The FAA requires that an arbitration agreement "shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation
of any contract." 9 U.S.C. § 2. The United States Supreme Court has construed
section 2 of the FAA as permitting "agreements to arbitrate to be invalidated by
generally applicable contract defenses, such as fraud, duress, or unconscionability."
AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746 (2011). However, this
provision of the FAA has been narrowly construed.
Moreover, "[a] recurring question under § 2 [of the FAA] is who should decide
whether grounds exist at law or in equity to invalidate an arbitration agreement."
Preston v. Ferrer, 552 U.S. 346, 353 (2008) (internal quotations omitted). The
United States Supreme Court has determined that "unless the challenge is to the
arbitration clause itself, the issue of the contract's validity is considered by the
arbitrator in the first instance." Buckeye Check Cashing, Inc. v. Cardegna, 546
U.S. 440, 445–46 (2006) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395 (1697)). Indeed, absent a "discreet challenge to the validity of the
arbitration clause," federal law establishes that challenges to the validity of
contractual provisions "are within the arbitrator's ken." Preston, 552 U.S. at 353–
54.
"[W]hen parties commit to arbitrate contractual disputes, it is a mainstay of the
[FAA]'s substantive law that attacks on the validity of the contract, as distinct from
attacks on the validity of the arbitration clause itself, are to be resolved by the
arbitrator in the first instance . . . ." Nitro-Lift Techs., LLC, v. Howard, 133 S. Ct.
500, 503 (2012) (internal quotation marks omitted) (citing Preston, 552 U.S. at
349; Prima Paint, 388 U.S. at 403–04). The permissible scope of the initial
judicial inquiry is "highly circumscribed" and must relate "specifically to the
arbitration clause." Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938 (4th
Cir. 1999). If the arbitration provision is found to be valid (or is not challenged),
then the validity of the remainder of the contract is for the arbitrator to decide.
Nitro-Lift, 133 S. Ct. at 503. Moreover, "this arbitration law applies in state as well
as federal courts." Buckeye, 546 U.S. at 446. Simply put, courts—state or
federal—may decide only the question of whether the parties validly agreed to
arbitrate the dispute that has arisen; controversies as to the enforceability of any
other contractual provision(s)—including those which may be so objectionable as
to undermine the contract in its entirety—are to be resolved by the arbitrator.
Here, the majority acknowledges this point of law, as it must. However, the
majority nevertheless adopts the findings of the trial court, which circumvent the
application of these legal principles by expanding the relevant scope of the
contractual language at issue to include matters beyond the arbitration provision.
This is accomplished by the fiction that the arbitration provision is the entirety of
Paragraph 14, which contains more than 1,800 words. Indeed, the following is the
portion of the parties' contract the majority finds to constitute the "arbitration
provision":
14. WARRANTIES AND DISPUTE RESOLUTION
a. Structural Warranty. At Closing, Seller shall execute and deliver to
Purchaser at no additional cost a warranty from Residential Warranty
Corporation ("RWC") or such other national warranty provider as Seller
may reasonably elect (the "RWC Warranty"). This RWC Warranty will
provide, at a minimum, a ten (10) year structural warranty. The RWC
Warranty referred to in this paragraph is the only warranty being made
by Seller, except for such warranties which may not be disclaimed by
State or Federal law. In addition, Seller hereby assigns to Purchaser all
warranties, expressed or implied, which arise or are given by the
manufacturer of any product installed in the home built on the Property.
b. RWC Warranty. Purchaser has been, or will be prior to Closing,
provided with a copy of the RWC Warranty book on the Ten Year
Limited Warranty, which is administered by the Residential Warranty
Corporation. Validation of the RWC Warranty is conditioned upon the
Seller's compliance with all RWC's enrollment procedures and upon
Seller remaining in good standing in the RWC Program.
c. The RWC Warranty is provided by Seller to Purchaser in lieu of all
other warranties, verbal agreements, or representations and Seller
makes no warranty, express or implied, as to quality, fitness for a
particular purpose, merchantability, habitability or otherwise, except
as is expressly set forth in the Program or as otherwise required by
Federal or State law. Particularly, Purchaser understands and
agrees that any and all complaints of any nature in regard to the
property that arise more than 365 days after closing must be
submitted to RWC. Purchaser understands and agrees that the
warranties of all appliances and other consumer products installed in the
home are those of the manufacturer or supplier and same are assigned to
Purchaser, effective on the date of Closing. In any event, Seller shall not
be liable for any personal injury or other consequential or secondary
damages and/or losses, which may arise from or out of any and all
defects. Except for purchasers of FHA or VA financed homes,
Purchaser acknowledges and understands that the RWC Warranty
includes a provision requiring all disputes that arise under the RWC
Warranty to be submitted to binding arbitration. Purchaser has
been, or will be given prior to Closing, provided with a copy of the D.R.
Horton Warranty manual, "Foundations." Purchaser understands and
agrees to all warranties to their extent as outlined in said manual.
Purchaser shall execute an acknowledgement that Seller makes no
warranties express or implied, as to fitness for a particular purpose,
merchantability, and habitability as set forth above at Closing, which
statement shall be affixed to Purchaser's deed.
Purchaser Initial(s): s/GS s/SM
d. Exclusions. The following are excluded from all warranties provided
by Seller: (i) those matters excluded in the RWC Warranty documents;
(ii) those matters excluded in sub-paragraph (f) below, and (iii) the
following matters:
Landscaping, including trees, shrubs, grass and flowers are not
covered by any warranty. All grading, fill, landscaping, disposition of
trees and control of water flow shall be constructed and maintained at
the sole discretion of Seller prior to Closing. Grading and drainage
are not covered by any warranty nor will they be maintained or
modified by Seller after closing in any way whatsoever UNLESS the
grading or drainage is found to be in violation of the applicable
provision of the South Carolina Residential Construction Standards.
Many areas will be left in their natural state and will not be
landscaped in any way. As of the date and time of Closing, Seller
shall have no further responsibility for soil erosion, the growth of
grass, death of trees, grass or shrubbery, or soil conditions. Seller is
not liable for trees or shrubs, or damage or destruction to same. Seller
makes no warranty whatsoever as to the type, location or amount of
trees, which will exist on the property after construction. Seller will
plant grass seeds or install sod, as the case may be, as part of its
construction. Because the growth of grass seeds and the health of sod
is dependent on Purchaser's care and maintenance, no warranty is
provided and all grass is installed "as-is." Because prevention of
erosion is dependent on Purchaser's proper maintenance of the grass
and sod, Seller provides no warranty for erosion. Purchaser's closing
of the sale constitutes an acceptance of Seller's drainage and erosion
controls for the Property, except for matters noted on Purchaser's
"Punch list." Seller shall not be responsible for the correction of any
leakage or seepage caused by (i) damaged water pipes or mains, (ii)
alteration of the landscaping by a party other than Seller (specifically
including, without limitation, any changes which cause water to flow
toward the dwelling), or (iii) prolonged direction of water against the
outside foundation wall from a spigot, sprinkler, hose, or improperly
maintained gutters or down spouts. Seller will not warrant any
cosmetic defect post-closing unless this condition is listed on the
"punch list" prior to Closing. Examples of "cosmetic defects" include
sheetrock dings, dimples and nail pops, paint discoloration, chips or
irregularities in marble, Formica, or tile. Unless a defect is noted on
the "punch list," Seller does not warrant the installation or the quality
of any carpet or flooring product (however, note that Seller assigns the
manufacturer warranties to Purchaser at Closing).
Purchaser Initial(s): s/GS s/SM
e. Existing Trees: D.R. Horton will make every effort to save as many
existing trees as possible during the construction process. Those trees
that must be removed will be removed at the sole discretion of the Area
Manager and their Field Manager. D.R. Horton reserves the right to
remove any trees, which in their judgment may have roots damaged by
construction to the extent that the tree would not be expected to live.
Those trees that are in or within close vicinity of the home's footprint or
concrete flatwork area will be removed. Additionally, trees that impede
the drainage of the site, or overall community drainage plan will be
removed. D.R. Horton does not guarantee the health, survival or growth
of any tree after closing. Repairs to living trees and removal or
replacement of dead trees at any time after closing is the responsibility
of the buyer unless requested before closing, agreed upon, and noted in
writing at the "Pre-settlement Orientation Inspection."
Purchaser Initial(s): s/GS s/SM
f. Landscaping. D.R. Horton does not guarantee the continued health,
growth or life of any landscape components after closing. Survival of
landscaping components (trees, bushes, plants, sod, seed etc.) after
closing is the buyer's responsibility. No landscaping items will be
replaced or repaired after closing unless noted in writing and agreed
upon at the "Pre-settlement Orientation Inspection." Landscaping
requires a continuous maintenance program, which includes proper
watering, fertilization, mowing and weed control. Deficiencies, other
than those noted prior to closing, will not be warranted by D.R. Horton.
Upon closing, all maintenance is the responsibility of the buyer. The
buyer is responsible for any damage due to neglect or inadequate
maintenance. Wetland, wetland buffers and wooded natural areas
throughout the Community will be left "as is." Buyer understands that
"standing water" beyond 40'-0" of the home may occur in wetland,
wetland buffers and wooded natural areas. Maintenance and repair of
the aforementioned areas are the sole responsibility of the Buyer after
closing. Clearing and disturbance of natural areas in order to provide
underground utility services to the home may be necessary. These areas
will be left un-landscaped and allowed to return to their natural state.
The remaining undisturbed area will be left in its natural state.
Purchaser Initial(s): s/GS s/SM
g. MANDATORY BINDING ARBITRATION. Purchaser and Seller
each agree that, to the maximum extent allowed by law, they desire to
arbitrate all disputes between themselves. The list of disputes which
shall be arbitrated in accordance with this paragraph include, but are not
limited to: (1) any claim arising out of Seller's construction of the home;
(2) Seller's performance under any Punch List or Inspection Agreement;
(3) Seller's performance under any warranty contained in this Agreement
or otherwise; and (4) any other matters as to which Purchaser and Seller
agree to arbitrate.
i. If the arbitration arises out of a claim arising under the RWC
Warranty, the rules, terms and conditions in the RWC Warranty
certificate and related materials delivered to Purchaser shall control.
ii. If the arbitration arises out of any claim other than a claim under
the RWC Warranty, then the arbitration shall be conducted in
Charleston/Dorchester/Berkeley County, South Carolina. The
arbitrations shall be conducted by an arbitrator or panel of arbitrators
agreed upon by the parties, and to the extent possible, the proceeding
shall be conducted under rules, which provide for an expedited
hearing. The filing fee for such arbitration shall be paid by the party
filing the arbitration demand, but the arbitrator shall have the right to
assess or allocate the filing fees and any other costs of the arbitration
as part of the arbitrator's final order. The arbitration referred to in this
paragraph shall be binding and any party shall have the right to seek
judicial enforcement of the arbitration award.
Purchaser Initial(s): s/GS s/SM
h. In addition to the rights and obligations of each party specified in
subparagraphs (a)–(d) above, in the event that a bona fide dispute, as
determined by the Seller, should arise between Purchaser and Seller
prior to the Closing Date, and such dispute cannot in good faith be
resolved completely and to the mutual satisfaction of all parties within
ten (10) days after the beginning of the dispute, then Seller shall have the
right, upon written notice to Purchaser, to terminate this Agreement and
return the Earnest Money to Purchaser, and no cause of action shall
accrue on behalf of Purchaser because of such termination.
i. Limitation of liability. EXCEPT FOR THE RWC WARRANTY,
AND EXCEPT FOR THE TITLE WARRANTIES SPECIFIED IN
PARAGRAPH 4 ABOVE, AND EXCEPT FOR ANY
WARRANTIES IMPOSED BY LAW, WHICH CANNOT BE
DISCLAIMED, SELLER MAKES NO OTHER WARRANTY OF
ANY KIND, ALL SUCH OTHER WARRANTIES ARE HEREBY
DISCLAIMED BY SELLER. SELLER MAKES NO WARRANTY AS
TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, EITHER EXPRESSED OR IMPLIED. THE
EXCLUSIVE REMEDY FOR ANY DEFECT OF ANY ITEM OR
CLAIMED DEFECT IN THE HOME IS BY WRITTEN
NOTIFICATION PRIOR TO THE EXPIRATION OF THE
WARRANTY PERIOD. SELLER'S OBLIGATION SHALL BE
THE CORRECTION OF SUCH DEFECT BY REPAIR OR
REPLACEMENT, IN ITS DISCRETION. NO SUCH ACTIONS
TAKEN BY SELLER TO REPAIR OR REPLACE A DEFECT
SHALL EXTEND THE WARRANTY PERIOD. SELLER SHALL
NOT BE LIABLE FOR MONETARY DAMAGES OF ANY KIND,
INCLUDING SECONDARY, CONSEQUENTIAL, PUNITIVE,
GENERAL, SPECIAL OR INDIRECT DAMAGES.
j. Requests for warranty service within the first 365 days after closing,
must be in writing and faxed, mailed, or delivered to Seller at Seller's
address as indicated below Seller's signature on this Agreement. Verbal
requests to Seller's staff are not acceptable. Such requests must comply
with all applicable law and must state the nature of the problem with
particularity. Seller has 30 days to determine whether such request will
be fulfilled.
(italicization added).
In seeking to avoid arbitration on the basis of unconscionability, the Smiths
claimed the italicized language in the above excerpt represents D.R. Horton's
attempt to disclaim certain implied warranties and to eliminate liability for
monetary damages, the terms of which are unfairly oppressive and one-sided.
However, in opposing arbitration, the Smiths do not challenge any provision of
subparagraph (g) titled "MANDATORY BINDING ARBITRATION." More to
the point, the Smiths do not contend the specific agreement to arbitrate was
unconscionable.
As noted, federal law requires that unless the claim of unconscionability goes to
the arbitration clause itself, the issue of enforceability must be resolved by the
arbitrator, not by the courts. Thus, courts can consider unconscionability
challenges only when they relate to the issue of whether the parties agreed to
arbitrate disputes in the first place. See Sydnor v. Conseco Fin. Servicing Corp.,
252 F.3d 302, 305 (4th Cir. 2001) ("Principles of equity may counsel for
invalidation of an arbitration agreement if the grounds for revocation relate
specifically to the arbitration clause. . . . However, when claims allege
unconscionability of the contract generally, these issues are determined by an
arbitrator because the dispute pertains to the formation of the entire contract, rather
than the arbitration agreement." (citing Hooters of America, 173 F.3d at 938;
Coleman v. Prudential Bache Sec., Inc., 802 F.2d 1350, 1352 (11th Cir. 1986))).
Here, the majority circumvents controlling federal law by construing the entirety of
paragraph fourteen—i.e. all ten separately denominated subparagraphs—as
comprising the arbitration agreement. In attempting to justify such a construction,
the majority cites no supporting authority, instead reasoning that the contract
groups warranties and dispute resolution together under a single heading
"Warranties and Dispute Resolution" and that "[t]he subparagraphs within
paragraph 14 contain numerous cross-references to one another, intertwining the
paragraphs so as to constitute a single provision." Indeed, it is only by treating
paragraph fourteen as a single, indivisible provision that the majority is able to
transform the Smiths' objection to certain warranty and liability disclaimers into a
challenge to the arbitration provision, only the latter being proper for judicial rather
than arbitral determination.
I reject the majority's construction that the arbitration provision is the entirety of
paragraph fourteen. In my judgment, under well-established state law, paragraph
fourteen is comprised of numerous severable provisions, which include not only
the parties' mutual promise to settle any disputes through arbitration, but also
various other distinct provisions, including D.R. Horton's promise to provide a ten-
year structural warranty, D.R. Horton's promise to assign appliance manufacturer
warranties to the Smiths, mutual promises regarding which party is responsible for
landscaping maintenance at various points in time, and the Smiths' promise to give
written notice of any warranty claims in accordance with specified procedures,
among many other things.
Specifically, I believe the challenged warranty disclaimers and liability limitations
are separate and distinct from the agreement to arbitrate, in terms of both
formatting and subject matter. Indeed, not only does the parties' chosen paragraph
structure and subparagraph denomination spatially delineate these provisions as
separate from the agreement to arbitrate, but also the gravamen of each of these
terms is distinct and independently operative. Consequently, as a matter of South
Carolina law, these provisions are properly viewed as discrete terms rather than as
a cohesive contractual provision. See Columbia Architectural Grp., Inc. v. Barker,
274 S.C. 639, 641, 266 S.E.2d 428, 429 (1980) (explaining that a "severable
contract is one in its nature and purpose susceptible of division and apportionment,
having two or more parts, in respect to matters and things contemplated and
embraced by it, not necessarily dependent upon each other, nor is it intended by the
parties that they shall be," and finding a lump-sum contract for services involved
severable provisions despite interdependence of material terms); Packard & Field
v. Byrd, 73 S.C. 1, 51 S.E. 678, 680 (1905) (finding contract terms relating to the
seller's promise to deliver shoes and the buyer's promise to purchase shoes were
distinct and severable, and therefore enforceable, despite the presence of other
contractual provisions which were deemed unenforceable as against public policy);
Beach Co. v. Twillman, Ltd., 351 S.C. 56, 65, 566 S.E.2d 863, 867 (Ct. App. 2002)
(finding a single subparagraph was comprised of three discrete provisions because
"separate and distinct rights" were implicated in each provision).
Further, I emphasize the fact that the Smiths separately initialed subparagraph (g)
titled "MANDATORY BINDING ARBITRATION" (and four other subparagraphs
within paragraph fourteen), which in my judgment indicates the parties themselves
viewed these terms as distinct contractual provisions to which they separately
consented. See Schulmeyer v. State Farm Fire & Cas. Co., 353 S.C. 491, 495, 579
S.E.2d 132, 134 (2003) (noting "[t]he cardinal rule of contract interpretation is to
ascertain and give legal effect to the parties' intentions" (citation omitted));
Columbia Architectural Group., 274 S.C. at 641, 266 S.E.2d at 429 ("The entirety
or severability of a contract depends primarily upon the intent of the parties rather
than upon the divisibility of the subject, although the latter aids in determining the
intention." (quoting Packard & Field, 73 S.C. at 6, 51 S.E. at 679)); Jaffe v.
Gibbons, 290 S.C. 468, 473, 351 S.E.2d 343, 346 (Ct. App. 1986) (finding a party's
act of initialing two paragraphs amounted to a signing and an acceptance of a
counter offer relating to those two provisions). Thus, it is my view that the
majority's decision to ignore the obvious divisibility of the multitude of contractual
terms within paragraph fourteen contravenes state law.
Moreover, "as a matter of substantive federal arbitration law, an arbitration
provision is severable from the remainder of the contract." Buckeye Check
Cashing, 546 U.S. at 445; see also 6 C.J.S. Arbitration § 11 ("Agreements for
arbitration contained in a contract are treated as separable parts of the contract, so
that the illegality of another part of the contract does not nullify an agreement to
arbitrate." (citing Robert Lawrence Co. v. Devonshire Fabrics. Inc., 271 F.2d 402
(2d Cir. 1959))). The United States Supreme Court has identified an arbitration
provision as consisting of the "specific written provision to settle by arbitration a
controversy." Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 72 (2010)
(internal quotation marks omitted). Stated differently, as a function of federal law,
the relevant arbitration provision consists of only that portion of subparagraph (g)
in which the parties agree to arbitrate any controversies. Accordingly, even if state
law justified the majority's finding that the entirety of paragraph fourteen
constitutes the relevant arbitration provision (which it does not), such a finding
would in any event be in conflict with, and therefore preempted by, federal
substantive law identifying only a portion of subparagraph (g) as the arbitration
agreement. See Concepcion, 563 U.S. at 352 (finding state law rules that conflict
with or "stand as an obstacle to the accomplishment and execution of the full
purposes and objectives of [the FAA]" are preempted and invalidated); see also
DirecTV, Inc. v. Imburgia, 136 S. Ct. 463, 468–69 (2015) (citing U.S. Const. art.
VI, cl. 2) (reaffirming the holding in Concepcion that state contract principles
which conflict with the FAA are preempted).
Because the Smiths fail to raise any challenge to the arbitration provision in
subparagraph (g), I would find the Smiths' claims regarding unconscionability must
be resolved in an arbitral forum, and I would reverse the court of appeals' decision.
Cf. Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 542, 542 S.E.2d 360, 365
(2001) ("An agreement providing for arbitration does not determine the remedy for
a breach of contract but only the forum in which the remedy for the breach is
determined.").
PLEICONES, C.J., concurs.