The Supreme Court of South Carolina just ruled that contracts for the sale of residential property are not interstate commerce, and therefore are outside the reach of the Federal Arbitration Act. Bradley v. Brentwood Homes, Inc., __ S.E.2d __, 2012 WL 2847616 (S.C. July 11, 2012). That is a surprising result in my view, given that Wickard v. Filburn, 317 U.S. 111 (1942), established just about anything and everything “affects” interstate commerce, including the growing of wheat for your own consumption.
In Bradley, the plaintiff bought a “completed dwelling” in Myrtle Beach from defendant. Two years later, the plaintiff sued in state court, alleging construction defects. The parties engaged in six months of discovery before the defendant asserted its right to arbitrate and moved to compel arbitration. The district court denied the motion, not on the basis of waiver (which would have been much simpler), but by finding that the arbitration agreement was unenforceable because it did not comply with technical requirements of South Carolina’s Uniform Arbitration Act and was not covered by the Federal Arbitration Act (which could have saved it from the requirements of the state statute).
The facts related to interstate commerce are these:
the agreement stated that the defendant was “not acting as a contractor” for the plaintiff;
the defendant did, however, construct the home using subcontractors, materials and suppliers from outside South Carolina;
the defendant provided a warranty from a national company; and
the plaintiff used an out of state bank to finance the transaction.
Despite those last three facts, the South Carolina court held that the FAA did not apply to this arbitration clause. The analysis relied heavily on the court’s assessment that real estate contracts are unique; it begins with a “discussion of the historical intrastate character of real estate transactions.” To support the exceptional nature of real estate contracts, it cited a state court case from South Carolina and federal district court cases from Puerto Rico and Kentucky. The court held that none of the facts cited by the defendant (out-of-state banks, warranty programs, subcontractors, supplies) “negate the intrastate nature of the sale and purchase of residential real estate.” The Court was careful to narrow its ruling, however, noting that if the agreement had been for the construction of the home, instead of for the completed dwelling, its arbitration clause would have been governed by the FAA.
Because the conventional wisdom is that 99.9% of arbitration agreements are covered by the FAA, this is an important decision for parties who want to keep their claims in state court, despite an arbitration agreement that could be unenforceable under state law grounds.