As noted previously on this blog, South Carolina courts are routinely hostile to arbitration agreements. However, in a decision issued in August, Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc.,[1] the South Carolina Supreme Court found a residential builder’s arbitration agreement enforceable and potentially did away with and certainly narrowed the Court’s “outrageous torts” exception to enforcing arbitration agreements.  The decision also rejected an unconscionability challenge to the arbitration agreement, and in doing so raised questions as to the scope of recent decisions refusing to enforce arbitration, particularly Smith v. D.R. Horton, Inc. which found an arbitration provision unenforceable because unconscionable.

In Parsons, the builder constructed a residential development on a brownfield site on which it thought it had removed all contamination.  The plaintiffs found a box filled with hazardous sludge on the property they purchased from the builder and filed suit against the builder.  The builder moved to compel arbitration based on an arbitration provision in the purchase agreement and warranty, and the circuit court denied the motion.

On appeal, in a plurality opinion, the Supreme Court held the outrageous torts exception, under which a party can avoid arbitration where the party’s claims arise out of outrageous tortious conduct unforeseeable at the time the parties entered into an arbitration agreement, did not bar arbitration. Two of the Court’s five justices expressed their opinions that the outrageous torts exception was created solely for avoiding arbitration agreements and that it accordingly violates federal law on the enforceability of arbitration agreements, and therefore, they would abolish the exception.

Two other justices expressed their opinion that the outrageous torts exception remains a valid basis for refusing to enforce an arbitration agreement but concluded the exception did not apply to the plaintiffs’ claims. In doing so, the justices set out a narrow conception of the outrageous torts exception and thereby effectively narrowed the exception to the point that it will no longer serve as a serious obstacle to enforcing arbitration agreements.  These two justices’ conception of the exception is that it bars arbitration of “a claim that does not fall within the scope of the arbitration agreement” and bars arbitration when there is no “significant relationship between the claims and the contract in which the arbitration agreement is contained.”  However, this view of the outrageous torts exception essentially gives it the same parameters of and collapses it into the existing determination of whether a claim falls within the scope of an arbitration provision.  Therefore, while a majority of the justices were not willing to outright abolish the outrageous torts exception, the constrained construction given to the exception likely renders it a nullity moving forward.

The plaintiffs also challenged the enforceability of the arbitration agreement on the grounds it was unconscionable, and the Court rejected this argument. The Court’s opinion does not provide any details as to the basis for the plaintiffs’ unconscionability argument and does not provide any reasoning for rejecting the unconscionability argument beyond stating that it was “without merit.”  While short on reasoning, the opinion does provide the text of the arbitration provision, and the fact that the Court found the provision enforceable despite an unconscionability challenge indicates some of the Court’s more recent decisions, like Smith v. D.R. Horton, Inc., finding arbitration agreement unenforceable as unconscionable may not be as strict as originally thought.  For example, the arbitration provision provided that the arbitration procedure was “the sole and exclusive remedy for the resolution of any and all disputes” and provided that the parties “waive any and all other right and remedies at law, in equity or otherwise which might otherwise have been available to them in connection with any such disputes.”

[1] Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc., Op. No. 27655 (S.C. Sup. Ct. filed Aug. 17, 2016) (Shearouse Adv. Sh. No. 33 at 28).