Damico & Public Policy: Mandatory Arbitration Clause Found Unenforceable and Court Declines to Sever

November 21, 2022 - J. Patrick Bradley
The South Carolina Supreme Court recently assessed the enforceability of an arbitration provision in contracts for the construction and sale of homes, and much of the Court’s analysis appears to hinge on consumer-protection considerations. See Damico v. Lennar Carolinas, LLC, Op. No. 28114 (S.C. Sup. Ct. filed Sept. 14, 2022) (Howard Adv. Sh. No. 33 at 87). This article briefly outlines only some of the key subjects addressed by the Court in Damico but highlights the significance the Court has placed on public policy considerations and the possible impact on future drafting and enforcement of arbitration provisions to observe this Damico standard. 

Damico Background  
Briefly, Damico is a construction defect lawsuit brought by certain homeowners (“Petitioners”) against their homebuilder and general contractor, Lennar Carolinas, LLC (“Lennar”). The dispute involves alleged defects at homes within The Abbey subdivision, a section of the Spring Grove Plantation neighborhood in Berkeley County, which all but one Petitioner purchased directly from Lennar via a purchase and sale agreement (hereinafter “sale agreement”). After the circuit court denied Lennar’s motion to compel arbitration, finding the arbitration agreement between Lennar and Petitioners included the arbitration section of the parties’ sales agreements as well as other documents (like the home warranty) and that the terms of the arbitration agreement were unenforceable, Lennar appealed. 

On appeal, the South Carolina Court of Appeals reversed the circuit court, finding that it had violated the Prima Paint doctrine because the circuit court’s order relied on terms outside of the arbitration provision in the sales agreements. See Damico v. Lennar Carolinas, LLC, 430 S.C. 188, 197, 844 S.E.2d 66, 71 (Ct. App. 2020) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04 (1967)). The Court of Appeals ended its analysis by, among other things, quoting the following portion of the arbitration provision at issue: “All decisions respecting the arbitrability of any Dispute shall be decided by the arbitrator(s),” and then reasoned that “the parties clearly and unmistakably delegated to the arbitrator” the question of “[w]hether the disputes alleged in this lawsuit are covered by” the arbitration clause in the purchase contracts. Id. at 199, 844 S.E.2d at 73 (citing Henry Schein, Inc. v. Archer & White Sales, Inc., 109 U.S. 524, 530 (2019) (“Just as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.”)).

However, the South Carolina Supreme Court held that while the Court of Appeals properly limited the scope of the parties’ arbitration agreement to the arbitration provision section in the sales agreements (hereinafter “Section 16” or “arbitration provision”), the Court of Appeals’ erred in finding that the arbitrability assessment was for the arbitrator and not the court. See Damico v. Lennar Carolinas, LLC, Op. No. 28114 (S.C. Sup. Ct. filed Sept. 14, 2022) (Howard Adv. Sh. No. 33 at 97–98). The Supreme Court then analyzed the arbitration provision in the sales agreements, ultimately finding several sections unconscionable but declining to sever the unconscionable portions in the arbitration provision “for public policy reasons” given its finding that “this is a contract of adhesion” and “the transaction involves new home construction.” Damico at 110. In doing so, the Court articulated a significant public policy concern that accompanied its contractual analysis. 

Continue reading the full article in the November edition of South Carolina Young Lawyer.

If you have questions about this topic or other related matters, please contact Patrick Bradley. Patrick focuses his practice on construction and commercial litigation. He advises and represents corporations, small businesses, individuals and governmental entities in a range of business, construction, manufacturing, insurance and tort-related matters. He has experience litigating complex cases, including class actions, in federal and state courts as well as arbitration forums.

This article was first published in the South Carolina Young Lawyer and has been reprinted here with permission from the SC Bar.