Motion to Compel Arbitration Denied as Subject Matter Outside Scope of Arbitration Clause (South Carolina Court of Appeals, April 20, 2010)


In this week’s selection from the South Carolina Construction Defect Law Blog, attorney Clay Olson examines a recent South Carolina decision which, at first glance, seeks to limit the scope of arbitration provisions.  After further review, however, the case simply states what arbitration clauses are enforceable as to issues contemplated within the arbitration clause. 

This week the South Carolina Court of Appeals issued and opinion which appears to further limit arbitration clauses and their enforceability.  In Faltaous v. Anderson Ocean Club Development, a circuit court order denied Anderson Ocean Club’s (“Developer”) motion to compel arbitration, causing some speculation as to the future of arbitration in South Carolina.  While Arbitration is still considered to be a favorable means of resolving disputes, the Faltaous decision further suggests that South Carolina refuses to uphold any and all arbitration clauses.

In a decision that certainly has implications on the construction industry, the Anderson Ocean Club clause at issue stated, as follows:

ARBITRATION AGREEMENT: Any and all claims, disputes, demands, actions and causes of action of every nature and kind which arise out of or are in any manner whatsoever related to the development, design, construction, condition, merchantability, habitability, fitness for a particular purpose or any other implied or express warranty for the common elements of or the individual units at the [condominium] that are asserted against Seller, the architect or contractor for the Project, and their respective agents, employees, owners, officers, subcontractors, consultants, successors or assigns by any entity formed to serve as the Regime’s Homeowners’ Association or by any person or entity which now has or hereafter acquires any interest in a unit at the [condominium] shall be subject to and resolved by final and binding arbitration conducted in Horry County, South Carolina pursuant to the terms of the South Carolina Arbitration Act found at South Carolina Code Section 15-48-10, et. Seq. (Emphasis Added)

In my analysis, the arbitration provision appears to be one which seeks to compel arbitration of construction defect claims by future owners and the Owners Association.  The Court in http://www.sccourts.org/opinions/displayOpinion.cfm?caseNo=4679  focused on the factual allegations contained in the Plaintiff’s lawsuit, which sought to recover an earnest money deposit under causes of action including negligent misrepresenation, the Interstate Land Sales Full Disclosure Act, and the South Carolina Unfair Trade Practices Act.  According to the allegations made by the Plaintiff, the Developer failed to disclose that parking for the condominium building was not onsite but, rather, located two streets behind the condominium.   Based on the alleged misrepresentations, the Plaintiff sought a refund of earnest money deposits which were made subject to a preconstruction deposit and reservation agreement.   

While the Court’s decision is succinct and not overly detailed, it implies that arbitration may only be used to decide those disputes which are contemplated in the arbitration clause.  Since the clause at issue references construction disputes (“development, design, construction, condition, merchantability, habitability, fitness for a particular purpose”), the Plaintiff’s breach of contract claims are not subject to arbitration.

The lesson to be learned for contractors and developers is clear:  Be careful to draft clauses which are broad enough to cover issues of concern.  It is pretty certain that this clause would have been upheld in a construction defect suit, as the clause is clear as to claims made for design and construction issues.  One will never know if the developer in this matter did not foresee potential contract actions, or the attorneys representing the developer failed to recognize potential issues.  In any event, South Carolina has certainly made it clear that arbitration clauses are not enforceable per se, and the disputes arbitrated must be contemplated by those parties to the contract and subject arbitration clause.

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