Today’s guest post comes from one of my top attorneys for construction and friends, Burr partner Ned Nicholson in our Columbia, SC office. Ned often assists clients with construction defect and compensation cases, disputes between manufacturers and dealers, and Insurance coverage litigation. Additionally, he is a South Carolina certified mediator. Ned is available by email at nnicholson@burr.com at (803) 799-9800.
If you’re a homeowner or residential housing developer insurance company for the construction industry or one of the numerous participants in the construction industry that provide decent and affordable housing to the residents in South Carolina, you are already aware that South Carolina courts have for long periods favored the protection rights of consumers ( i.e., the home buyer) rights, often with the cost of suppliers of housing. There’s nothing wrong with that, and it’s a noble goal. But, like many ways, its implementation has proved extremely costly for the construction industry, as a clever plaintiff’s bar has made use of the grey areas naturally created by the judicial system.
For instance, some time ago, the South Carolina Supreme Court Justice proudly declared the following: “South Carolina, through both its courts and legislature, has previously been in the vanguard of protecting consumers, particularly in the area of home construction.” Reynolds v. Ryland Group, Inc. 531 S.E.2d 917, 921 (S.C. 2000). It’s no secret to builders or insurers that the joint and various liability rules state that the builder who is one percent negligent in the causing of defects in construction, the builder could still be liable for all the damage however the courts will leave the building company to collect the money from negligent third parties.
Therefore, it is not a surprise it is no surprise that there is a growing trend in South Carolina and nationally; in general, homebuilders have tried to bring economic fairness by incorporating arbitration clauses into their sales and construction contracts. Arbitration is an alternative to private dispute resolution in which the parties to an agreement agree that, instead of bringing a case to the Court for a lawsuit in public, the dispute will be dealt with by a neutral third party, typically attorneys, and in an informal and less costly way rather than the court procedure. The majority of homebuilders try to ensure that arbitrators with experience in the field of construction will resolve these disputes in order to allow experts to determine the issues.
It is not surprising that plaintiff’s lawyers are generally not a fan of arbitration because they believe that their clients will be treated more fairly by a judge or jury who aren’t construction experts and may be more sympathetic to the customer in a close case. In light of this, the constant admonishments of arbitration clauses in courts as property owners attempt to think of methods to avoid mandatory arbitration.
Beware! The South Carolina Supreme Court, on September 14, 2022, adopted one of those clever evasions within Damico v. Lennar Carolinas, LLC, et al., Op. No. 28114. Damico, Damico Damico, the builder, was able to masterfully integrate specific warranties along with arbitration clauses and other contract documents that give a clear, solid plan and procedure for the buyer of the home and the builder to follow to resolve disputes through arbitration. The homebuilder believed.
The surprise of the construction contractor, to the dismay of the builder Court, declared arbitral clauses to be “unconscionable,” and thus not legally binding. The only way in which the Court could arrive at this conclusion was because it was clear that the clause governing arbitration in the decision didn’t mention that issues regarding the enforceability of the clause were to be decided by an arbitrator and not the courts to decide. (If the clause specifies that, the Court has to suspend and leave the issue to the arbitrator regarding that question.) For the homebuilder involved in this instance, the lengthy arbitration clause did not meet that checkpoint, opening the way for the Court to challenge the clause in its entirety.
The Court did strike back. With the skill of a champion, the Court was able to weave and turn around the various legal obstacles that might have stopped its decision-making process and then landed at the unconscionability rule. The Court took advantage of the clause of arbitration that allowed joinder, which provided that the homebuilder, at its discretion, may join any subcontractors or other responsible parties in the arbitration. The Court decided that this seemingly insignificant legal issue made the clause illegal and unenforceable because, typically, it is the homeowner (home buyer) who chooses the person to sue, and this clause took that decision immediately. The Court considered that it could cause different results in different instances and force homeowners to resolve the same issues in the courts.
Of course, within the world of reality, there’s an almost constant chance of having a variety of forums. The homeowner could always take on subcontractors at fault on other theories in Court, and it occurs often. The argument of the Court, when taken to its highest degree, could be a threat to every arbitration clause since the homeowner has no agreements with subcontractors, and therefore there are no arbitration clauses.
So, how can a builder get out of the trap set by Damico’s Court In Damico? One possible solution is that the homebuilder adds to every subcontract an arbitration clause that allows the homebuyer to seek the arbitration of a subcontractor, as well as being a joinder in arbitration with the builder. Another possibility is to follow the well-known legal rule of KISS (Keep It Simple Stupid.) The authors of arbitration clauses might prefer for the agreement to remain basic, such as going over and above the language that is required to make sure arbitration is appropriate to any dispute and allow an arbitration agreement’s rules from a nationwide arbitration organization to apply and make sure not to introduce any procedural barriers that a judge could consider as unfair in any way to the customer. Also, be certain that an arbitrator, and not the Court, decides the validity of a clause or not.
There are more lessons to be gained from Damico as well, and homebuilders are likely to confront a new wave of repercussions on their contracts once the courts and lawyers begin to apply the ruling not only to the homebuilder business but also to consumer transactions as a whole.