Court of Appeals holds arbitration clause unconscionable

315 Corley CW LLC v. Palmetto Bluff Development* involves an appeal from Beaufort County arising from the sale of real estate in the Palmetto Bluff Development to homeowners who ultimately became plaintiffs in this case.

Palmetto Bluff is a planned residential community. Purchasers, by accepting deeds, automatically become members in the Palmetto Bluff Club. Club membership is further memorialized by a Club Membership Agreement. The governing terms of the Club are set out in the Club Membership Plan. The Club is a for-profit entity which retains the power, according to the parties, to unilaterally change its fees and policies with no input from Club members.

In 2017, a clause was added to the Membership Agreement stating that disputes surrounding the Membership Agreement will be resolved by mandatory arbitration in accordance with the rules of the American Arbitration Association (AAA), applying the substantive law of South Carolina.

In 2020, several homeowners complained that the Club was planning to make changes that they understood would limit the ability of their short-term tenants to use the Club’s facilities. After failed mediation attempts, this lawsuit was brought in 2022. The plaintiff homeowners then demanded arbitration.

Later in 2022, the homeowners asked the circuit court to stay arbitration and sought summary judgment on the alleged invalidity of the arbitration clause. The defendants moved to compel arbitration. The lower court held that the arbitration clause was invalid because the agreement was unconscionable.

The Court of Appeals agreed that the agreement was unconscionable because the homeowners lacked a meaningful choice in entering the agreement and because the agreement can be unilaterally modified. 

The Court cited cases to the effect that whether one party lacks a meaningful choice in entering the arbitration agreement typically speaks to the fundamental fairness in the bargaining process. Courts consider the relative disparity in the parties’ bargaining power, the parties’ relative sophistication, whether the parties were represented by independent counsel, and whether the plaintiff is a substantial business concern. Contracts of adhesion, according to these cases, are standard form contracts offered on a take-it-or-leave-it basis with terms that are not negotiable. However, contracts of adhesion are not per se unconscionable. Instead, adhesion contracts are not unconscionable in and of themselves so long as the terms are even-handed.

The Court of Appeals held that the contract at issue is unconscionable because there is no conceivable potential for bargaining power on the part of those whom the provisions purport to bind. There was an absence of meaningful choice. The Court also held that the agreement was oppressive and one-sided because it limited the award of treble damages, regardless of whether they are construed as compensatory or punitive.

I recommend that South Carolina dirt lawyers read this case in detail and apply its guidelines in drafting documents for developer and builder clients.

*South Carolina Court of Appeals Opinion 6074 (Filed July 24, 2024, Refiled November 13, 2024)