Should You Litigate In Court or Arbitrate the Dispute?

by McNair Law Firm, P.A.

Faced with the rising costs of doing business in our increasingly litigious society, today's employers are looking at any way to manage fees and costs associated with resolving disputes over employment decisions. Some of the questions companies are asking include: Does insurance cover some or part of the allegations being made against us? Does the company have the right to select its own counsel, or is that a decision the insurance company makes? What forum should the dispute be litigated in? Many companies want to avoid the vagaries of a jury trial and often ask if there are other forums in which to litigate disputes. Arbitration is a possibility.

The South Carolina Supreme Court recently decided a case addressing the language of an arbitration agreement outside the employment context. Many of the findings in the case are instructive because they could be applicable in the employment context.

Factual background

In 2002, John Wieland Homes (JWH) purchased approximately 65 acres of land to develop a residential subdivision. The land was previously utilized as a textile-related industrial site. Following the purchase, JWH demolished and removed all visible evidence of the industrial site and removed various underground pipes, valves, and tanks used in the industrial operations. JWH then began selling lots and "spec" homes on the 65 acres.

In 2007, Ralph and Louise Parsons executed a purchase agreement to buy a home built and sold by JWH. Paragraph 21 of the property purchase agreement stated that the purchaser had received and read a copy of JWH's warranty and consented to its terms, including, without limitation, the terms of the arbitration clause. The Parsonses paid more than $600,000 for the property. When signing the purchase agreement, they initialed below Paragraph 21.

Upon executing the purchase agreement, the Parsonses were provided a "Homeowner Handbook" containing the warranty. The arbitration clause was set forth in Paragraph O of the warranty's general provisions. The Parsonses signed an acknowledgment that they received the handbook on the same date they executed the purchase agreement.

In 2008, the Parsonses discovered PVC pipes and a metal-lined concrete box buried on their property. The PVC pipes and box contained "black sludge," which tested positive as a hazardous substance. JWH entered into a cleanup contract with the South Carolina Department of Health and Environmental Control in which it agreed to cover the costs of cleanup. The cleanup cost JWH approximately $500,000.

In addition to the PVC pipes and box, the cleanup revealed that a 12-inch cast iron pipe associated with the industrial site ran the length of the Parsonses' property. The cleanup further revealed pipes within the foundation of their home, some of which couldn't be removed. As a result, the pipes were capped and remain on the property.

Litigation background

The Parsonses claimed they were unaware that the property was previously an industrial site and contained hazardous substances. In 2011, they filed a lawsuit alleging that JWH breached the purchase agreement by failing to disclose defects in the property, selling property that was contaminated, and selling property with known underground pipes. They further alleged breach of contract, breach of implied warranties, unfair trade practices, negligent misrepresentation, negligence and gross negligence, and fraud.

Citing the language of its agreement with the Parsonses, JWH asked the court to compel arbitration and dismiss the complaint. The developer asserted that all of the Parsonses' claims arose out of the purchase agreement, and they clearly agreed that all such disputes would be decided by arbitration. The circuit court denied the motion and found that the arbitration clause was unenforceable for two reasons.

First, the circuit court found that because the arbitration clause was in the warranty booklet, its scope was limited to claims under the warranty. The court further found that because the warranty was limited to claims caused by a defect or deficiency in the design or construction of the home, the Parsonses' claims fell outside the scope of the arbitration clause, and the clause was therefore unenforceable.

Second, the circuit court applied the outrageous torts exception to arbitration enforcement and found that because the Parsonses alleged outrageous tortious (wrongful) conduct—namely, JWH's intentional and unforeseeable conduct in failing to disclose concealed contamination on the property—the arbitration clause was unenforceable. ("Tort" is the legal term for a personal injury claim.)

The court of appeals affirmed the circuit court's finding that the scope of the arbitration clause was restricted to warranty claims and declined to address the lower court's application of the outrageous torts exception. The South Carolina Supreme Court granted JWH's petition for a writ of certiorari asking it to review the court of appeals' decision. The supreme court framed the question it was to decide as follows: Did the court of appeals err in affirming the circuit court's ruling that the arbitration clause was unenforceable?

Supreme court's analysis

After setting forth the standard of review it would follow in analyzing the lower courts' decisions, the supreme court noted a couple of important legal principles. First, it is the policy of the United States and South Carolina to favor arbitration of disputes. Second, arbitration is a matter of contract law, and general contract principles of state law apply to a court's evaluation of the enforceability of an arbitration clause. The court went on to observe that the circuit court didn't explain how the outrageous torts doctrine precluded arbitration of the Parsonses' nontort claims.

In assessing whether the arbitration clause applied to the dispute, the court noted that it had to determine whether the factual allegations underlying the claim were within the scope of the clause. The court observed that the heavy presumption in favor of arbitrability requires that when the scope of an arbitration clause is open to question, a court must decide the question in favor of arbitration.

Over the years of discussing contracts and agreements in this newsletter, we have pointed out that words used in contracts must be examined closely and that they are generally afforded the meaning they are normally understood to have. Here, in pertinent part, is what Paragraph 21 of the purchase agreement provided:

Warranty and Arbitration. Purchaser and Seller hereby agree that, in connection with the sale contemplated by this agreement, Purchaser will be enrolled in the John Wieland Home and Neighborhoods 5-20 Extended Warranty program, booklet revision date 04/06 (JWH Warranty), the JWH Warranty being incorporated herein by reference. . . . PURCHASER ACKNOWLEDGES THAT PURCHASER HAS RECEIVED AND READ A COPY OF THE CURRENT JWH WARRANTY AND CONSENTS TO THE TERMS THEREOF, INCLUDING, WITHOUT LIMITATION, THE BINDING ARBITRATION PROVISIONS CONTAINED THEREIN.

In addition, Paragraph O of the warranty provided, in pertinent part:

Mandatory Binding Arbitration. Wieland and Homebuyer(s) will cooperate with one another in avoiding and informally resolving disputes between them. . . .

Any and all unresolved claims or disputes of any kind or nature between [JWH] and Homebuyer(s) arising out of or relating in any manner to any purchase agreement with Wieland (if any), this warranty, the Home and/or property on which it is constructed, or otherwise, shall be resolved by final and binding arbitration conducted in accordance with this provision, and such resolution shall be final. This applies only to claims or disputes that arise after the later of: (a) the issuance of the final certificate of the occupancy for the home, or (b) the initial closing of the purchase of the Home by the initial Homebuyer(s). This specifically includes, without limitation, claims related to any representations, promises or warranties alleged to have been made by Wieland or its representatives; rescission of any contract or agreement; any tort; any implied warranties; any personal injury; and any property damage. <

. . .


The supreme court found that the plain and unambiguous language of the arbitration clause provided that all claims, including any claims based on the warranty, were subject to arbitration. As a result, the court determined that the lower courts were wrong in finding that the arbitration clause was unenforceable.

Lessons for employers

The South Carolina Supreme Court has pointed out again that words mean something. You should carefully draft your employment documents to mean what you intend for them to say. If you prefer that a matter be subject to arbitration, you should set that out clearly in the documents you ask employees to sign. Make sure you cover any requirements of applicable federal or state statutes in your arbitration agreements.

Moreover, you should consider which claims are subject to arbitration, how your arbitrator will be selected, the scope of the arbitrator's authority, the length of time between the claim filing and the hearing date, the scope and amount of time that will be allowed for document production and depositions, the available remedies, and who will pay for the costs of arbitration.

Arbitration can be a less costly, less time-consuming approach to dispute resolution if you spell out your intentions in advance. Choose your words to achieve what you want to achieve, and the courts will likely support you.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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