To Arbitrate Or Not To Arbitrate – Or Do We Even Get To That Question?

Stephanie U. (Roberts) Eaton | Spilman Thomas & Battle | November 4, 2016

Chances are that if you work in the construction industry, you have had at least one construction dispute. The longer you work in the construction industry, the greater chance you have of encountering a dispute that does not go away with phone calls, meetings or a handshake deal.  Some disputes lead to legal action. The kind of legal action that follows depends on the contracts—including warranties—created for or during the construction process itself.

Warranties, you ask? What do warranties have to do with arbitration? A lot, it turns out, if the warranties contain clauses that require parties to arbitrate instead of litigate in court to resolve the dispute. Well, what if you did not contract with the party that furnished the warranty? What if the warranty language is terrible and one-sided, and should not be enforced? And, what if the warranty lists certain claims that it covers, but the type of claim among the parties in your case is not listed? It may not matter in South Carolina. Both the South Carolina Court of Appeals and the South Carolina Supreme Court recently weighed in on the enforceability of arbitration agreements. What did the courts rule?

First, the South Carolina Court of Appeals made it clear that if a construction product warranty includes an arbitration provision, then that provision is enforceable even if the warranty itself contains provisions that are unconscionable and/or unenforceable.  One Belle Hall v. Trammell Crow, Op. No. 5407 (S.C. Ct. App. heard May 4, 2016; filed June 1, 2016; withdrawn, substituted and refiled September 28, 2016).

Second, the South Carolina Supreme Court made it clear that if a home warranty includes an arbitration provision, then all claims may be subject to arbitration, not just the claims listed in and covered by the warranty itself.  Parsons v. John Wieland Homes, Op. No. 27655 (S.C. Sup. Ct. filed Aug. 17, 2016).

What do these cases mean to you? If you are involved in a construction dispute in South Carolina, and one or more warranties may be involved in the construction project, then utilize this checklist:

  • Review all construction contracts, stand-alone warranties and product warranties for arbitration provisions that may apply to the dispute resolution.
  • If you find an arbitration provision in the warranty, read the arbitration clause (and warranty it is contained in), and, if possible, ask the party that issued the warranty (and arbitration clause) to explain what claims are subject to arbitration and answer any questions about the process (and get them to tell you in writing).
  • See if there are any prerequisites before arbitration can be conducted, such as providing information or samples to the manufacturer, and be sure the steps are taken within any deadlines.
  • For construction products, check to see if the packaging or labeling for the product has a warranty that contains an arbitration provision. If so, save the packaging or labeling in the event a dispute arises over that product. The way the product is labeled, and whether it makes it clear to the person who placed the order that they can return the product if they don’t like the warranty, may be important to the dispute.
  • Consider where the parties to the dispute are located. If the dispute arises between a local party and an out-of-state party, the Federal Arbitration Act likely will apply.
  • If an arbitration clause is contained within a warranty, whether it is a home/building warranty or a product warranty, then be sure to file a claim for arbitration within the deadline listed in the arbitration clause to avoid losing the right to arbitrate.
  • If more than one warranty is issued for a single construction project, which may be the case where multiple product warranties were issued—such as warranties for shingles, windows and siding—review them all for arbitration clauses, as well as for differences in warranty applicability. It is possible that separate claims must be brought for warranties that contain arbitration provisions from claims arising under warranties that allow for mediation and/or litigation of disputes.
  • If someone in the construction dispute raises a claim that is not specifically listed in the warranty, such as fraud, but the warranty contains an arbitration provision, then remember that the dispute may still be subject to arbitration even if the warranty does not list that claim as one covered.
  • Remember that even if an arbitration clause is contained in a warranty that you believe has unfair or unenforceable provisions, it is possible that the court may still enforce it, even if the rest of the warranty is disregarded or thrown out by the court.

Bottom line—be sure to check all warranties for your project for arbitration clauses, because those clauses may send the parties straight into arbitration.

Arbitration Clauses Under Attack – do they Harm Consumers?

John Paul Nefflen | Burr Foreman LLP | November 2, 2015

Arbitration clauses are a common feature in a large part of my business litigation practice. They are generally enforceable under both federal and state statutes (e.g., the Federal Arbitration Act and the Tennessee Uniform Arbitration Act), and federal and state case law generally uphold them under common contract principles.

Arbitration clauses are supported by strong public policy favoring private dispute resolution, outside of court. These contractual provisions, often between companies and consumers, require disputes to be resolved by a private arbitrator, instead of through the court system. An arbitrator has the power to render a binding decision in much the same way a judge does.

But some are now arguing that mandatory arbitration harms consumers while benefitting companies. There is an emerging public backlash against arbitration clauses propelled by the belief that they prevent consumers from protecting rights provided by federal and state law. Some view arbitration proceedings as the privatization of justice in forums where the decision-makers are beholden to the large corporations which drafted the arbitration clauses in the first place.

Over this past weekend (October 30 – November 1, 2015), the New York Times published two articles detailing an investigation it conducted on the effect of mandatory arbitration clauses over the last several years. In one article, the NYT claims that companies have used arbitration to create an alternate system of justice. It asserts that the arbitration rules tend to favor businesses, and judges and juries have been replaced by biased arbitrators who consider the companies their clients.

As a result, the NYT states, tens of millions of Americans have lost the fundamental right to have their day in court. These arbitration clauses, which the NYT claims most employees and consumers do not read, cover a great number of diverse legal issues including medical malpractice, sexual harassment, hate crimes, discrimination, theft, fraud, elder abuse and wrongful death. The NYT interviewed numerous individuals who believe the arbitration proceedings were biased against them and that they lost many of the advantages and protections they would have had in court, such as the right to discovery and the right to an appeal.

In the second article, the NYT examined the increasing use of arbitration clauses in consumer contracts which required litigants with similar complaints against a company to proceed individually, rather than through the more cost effective class action. The use of such provisions grew exponentially after the United States Supreme Court held in American Express Co. v. Italian Colored Restaurant that courts cannot invalidate arbitration provisions which waive the right of similarly situated claimants to assert claims as a class.

The NYT reports that as a result of the class action waiver, many consumers drop their claims because the cost of litigation far outweighs any potential recovery. For example…

To finish reading this article

Understanding Arbitration Clauses In Contracts – Litigation, Mediation & Arbitration – United States

Sally Rogers Culley –  November 14, 2012

Contractual agreements often include clauses that require arbitration should a dispute arise. Sally Culley, a partner with Rumberger, Kirk & Caldwell has encountered instances where arbitration clauses did not fully consider the scope of potential disputes, often resulting in unforeseen outcomes. Here, from a litigator’s perspective, Sally answers questions about formulating contracts to avoid problems down the road.

Related Questions

  • What is one of the biggest problems you have seen lately with arbitration clauses?The biggest issue I’ve seen lately is arbitration clauses that do not clearly set out what claims the parties wish to submit to arbitration. If the clause is too expansive, a party may be forced to arbitrate claims that it never intended to submit to arbitration. On the other hand, if an arbitration clause is too restrictive, a party may not be able to compel arbitration of some claims.

    The problem is that parties do not always appreciate the consequences of the language used in the arbitration provision. For example, clauses that require arbitration of disputes “arising under” a contract are seen as more restrictive by the courts than clauses that require arbitration of disputes “arising under or related to” a contract. A tort claim, as opposed to a breach of contract claim, may not be arbitrable under an “arising under” contract, but could be sent to arbitration under an “arising under or related to” contract.

  • What are the top three things an attorney should consider when drafting or reviewing an arbitration clause for a client?The most important thing an attorney can do is to clearly understand the client’s business, including the risks they face. The lawyer should then have a real, substantive discussion with the client to determine what claims would be appropriate for arbitration, and what claims would not. Finally, thought should be given to the arbitration process itself – i.e., whether written pleadings should be required, the scope of any discovery, whether to use an arbitration service like AAA, how to pick the arbitrators, etc. Once all these things are fully understood, a very specific and detailed arbitration clause can be drafted that meets the client’s needs and sets forth the client’s expectations.
  • What should attorneys do if they are retained to represent a client involved in a dispute where there is an arbitration provision?After talking with the client to determine whether it wants to litigate or arbitrate the dispute, the attorney should carefully review the language used in the arbitration provision. It may be that the arbitration provision does not provide for arbitration of part or all of the dispute. If there is an arbitrable issue, the client needs to move to compel arbitration right away, because the right to arbitration can be waived. Conversely, if a client participates in arbitration without raising any objection to it, that client could waive the right to litigate the matter. Accordingly, whether to push for litigation or arbitration is a decision that needs to be made as quickly as possible.

Understanding Arbitration Clauses In Contracts – Litigation, Mediation & Arbitration – United States.