The ‘outrageous torts’ exception

A tool that allows consumers to keep claims against a company from being forced into arbitration faces an uncertain future, following a recent ruling out of the South Carolina Supreme Court.

The outrageous torts exception — which enables parties to an agreement to avoid arbitration if they can show their claims arose out of an opponent’s “outrageous” tortious conduct — appears to have survived because of an unusual split among the justices in Parsons v. John Wieland Homes and Neighborhoods of the Carolina’s Inc.

The lead opinion written by Chief Justice Costa Pleicones said all South Carolina cases applying the exception should be overturned based on recent U.S. Supreme Court decisions that put its viability in doubt. That holding was joined by Justice John Kittredge.

But because a concurring opinion and a dissent agreed that the exception “embodies a generally applicable contract principle,” a majority of the court ruled that the exception should survive to be applied another day.

In spite of that finding, the three-justice majority voted to overturn two lower court rulings which supported a York County couple’s attempt to use the exception to avoid arbitration in a dispute with a home builder.

Parsons marks the latest in a series of recent cases in which the state’s appellate courts have been forced to grapple with questions about how arbitration agreements should be enforced. Judges in the state appear to be split on what, if any, exceptions apply to those agreements.

Claire Manning, manager of the Chicago Title Insurance Co.’s South Carolina office, compared the judicial back and forth over arbitration to a tennis match. In a recent post on “Let’s Talk Dirt,” the real estate law blog Manning runs, she wrote that the score is currently tied between those who support applying some exceptions to arbitration agreements and those who favor a more bullet-proof approach.

But Manning noted that “the tennis match involving arbitration clauses in our area is still being played.”

“Black sludge”

The underlying dispute in Parsons stems from a real estate transaction between Ralph and Louise Parsons and John Weiland Homes.

The Parsons bought a $621,102 “spec” home from JWH in 2007. As part of the sale, the Parsons signed a purchase agreement, in which they acknowledged they had received a copy of JWH’s warranty on the home. That warranty contained a provision that required “any and all unresolved claims or disputes of any kind or nature” arising out of the purchase agreement to be resolved in arbitration.

Everything appeared to be going well until about one year later. Court records say the Parsons discovered discarded PVC pipes and a metal-lined concrete box buried on their property. The pipes and box were found to contain “black sludge,” which tested positive as a hazardous substance.

It turns out that the Parsons’ property was part of a sixty-five acre plot of land JWH bought in 2002 that was once the site of an industrial textile mill. JWH attempted to remove all traces of the industrial site. But the company overlooked some remnants on the Parsons’ property.

JWH worked with state environmental regulators to clean up the Parsons property, ultimately spending about $500,000.

Outrageous conduct?

The Parsons claimed they had no idea the property was previously an industrial site and contained hazardous materials. In 2011, the couple sued JWH, alleging the company had breached the purchase agreement by failing to disclose defects with the property, selling property that was contaminated and selling property with known underground pipes.

They also claimed breach of contract, breach of implied warranties, unfair trade practices, negligent misrepresentation, gross negligence and fraud.

JWH responded to the suit with a motion to compel arbitration. The circuit court denied the motion, finding that the agreement was unenforceable.

Because the arbitration provision was included in the warranty, the court determined that its scope was limited to warranty claims. Additionally, the court ruled that the Parsons had alleged outrageous tortious conduct, meaning the exception to the arbitration agreement applied.

Those findings were upheld by the Court of Appeals.

However, a majority of the Supreme Court took quite a different view of the case.

Pleicones said the Court of Appeals erred by limiting the arbitration to claims covered by the warranty because arbitration clauses are “separable” from the contracts in which they are embedded. Pleicones said there is a “heavy presumption” in favor of arbitrability, which mandates that when the scope of an arbitration clause is uncertain, courts must come down in favor of arbitration.

But Pleicones focused the majority of his opinion on the viability of the outrageous torts exception.

He said the Federal Arbitration Act allows arbitration agreements to be invalidated by “generally applicable contract defenses,” including fraud, duress or unconscionability. But the act prohibits defenses that apply solely to arbitration.

Pleicones said the U.S. Supreme upheld that view in its 2011 opinion in AT&T Mobility v. Concepcion, which held that arbitration agreements must be “on equal footing with all other contracts.”

The outrageous torts exception did not meet that requirement, Pleicones said, because it has only been applied to arbitration clauses.

“Accordingly, to the extent South Carolina cases apply the outrageous torts exception, I would now overrule those cases and find the trial court erred by determining the exception precluded enforcement of the arbitration clause,” Pleicones said.

Split decision

Pleicones’ position on the outrageous tort exception failed to carry the day, however, because it was joined only by Kittredge.

Justice Kaye Hearn wrote separately to join Pleicones and Kittredge in their decision to overturn the Court of Appeals holding. But Hearn made clear she and Justice Donald Beatty, who joined the concurrence, believe the exception remains viable, even after the Concepcion decision. The concurrence said the exception helps to “effectuate the intent of the parties,” which she said is a generally applicable contract principle.

But while Hearn and Beatty came out in favor of keeping the exception in place, the concurrence said it did not apply in the Parsons’ case.

Acting Justice Jean Toal went even further in her solo dissent. Not only did Toal say she supports the exception and would apply it to the Parsons’ lawsuit, she would also extend the consumer protections adopted by the court in its 1989 decision in Kennedy v. Columbia Lumber & Mfg, in which South Carolina embraced a “seller beware” policy.

Kennedy and its progeny apply only to residential construction contracts. But the court addressed how it applies to residential construction arbitration agreements, Toal said.

In the end, the majority said the arbitration clause should be enforced in the Parsons’ case.

Sister cases

The Parsons decision follows similar rulings handed down by the Court of Appeals and the Supreme Court this summer.

In June, the Court of Appeals blessed an arbitration clause in a lawsuit against a roofing supplier that alleged the supplier’s warranty provision was unconscionable.

And just last month, the Supreme Court struck down the arbitration agreement at issue in Smith v. D.R. Horton because the contract included a number of “oppressive and one-sided provisions.” In that case, Pleicones and Kittredge filed a dissent to argue the arbitration agreement should have been enforced.

The Parsons’ attorney, Herbert Hamilton of Hamilton Martens in Rock Hill, said his clients are considering asking the Supreme Court to reconsider their case in light of its holding in D.R. Horton.

“This opinion is difficult to reconcile with the opinion of the court in D.R. Horton, which had similar facts but came out differently,” Hamilton said. “These arbitration agreements are used by every major builder in South Carolina, and they’re basically identically worded. If they are going to be enforced, it should be done in a way that is fair to the consumer.”

But JWH’s attorney, Ian Freeman of Pratt-Thomas Walker in Charleston, said he thinks the court reached the correct decision because the Parsons’ claims have a “significant relationship” with the purchase agreement, meaning the arbitration provision should apply.

“It was a good day for any business looking for the streamlined dispute resolution that arbitration can provide,” Freeman said. “The consumer still has remedies available to them. The fate of the outrageous torts exception may be in limbo right now. But they can still rely on traditional contract defenses.”

The 22-page opinion is Parsons v. John Wieland Homes and Neighborhoods of the Carolina’s Inc. (Lawyers Weekly No. 010-062-16). An opinion digest is available at sclawyersweekly.com.

Follow Jeff Jeffrey on Twitter at @SCLWJeffrey