Court of Appeals sides with roofing supplier
The South Carolina Court of Appeals handed down a decision on June 1 that will delight the drafters of corporate contracts who imbed arbitration clauses within their warranty provisions. Whether the South Carolina Supreme Court will approve remains to be seen.
The dispute arises over the construction of One Belle Hall, an upscale condominium community in Mt. Pleasant. Tamko Building Products, Inc. was the supplier of the asphalt shingles for the community’s four buildings, and placed a mandatory binding arbitration clause within its warranty provision. The warranty purported to exclude all express and implied warranties and to disclaim liability for all incidental and consequential damages.
At some point after construction was completed, the owners’ association determined that the buildings were affected by moisture damage, water intrusion and termite damage, all resulting from various alleged construction defects. The developer contacted Tamko to report a warranty claim on the roof shingles, contending they were blistering and defective. Tamko sent the developer a “warranty kit”, requiring the claimant to provide proof of purchase, samples of the allegedly defective shingles and photographs. The developer failed to respond.
Two years later, the owners’ association filed a proposed class action lawsuit on behalf of all owners, alleging defective construction against the community’s various developers and contractors. Tamko filed for a motion to dismiss and compel arbitration.
Circuit Court Judge J. C. Nicholson, Jr. denied the motion and ruled that Tamko’s sale of shingles was based on a contract of adhesion and that the condominium owners lacked any meaningful choice in negotiating the warranty and arbitration terms. The trial court held the arbitration clause to be unconscionable and unenforceable because of the cumulative effect of several oppressive and one-sided terms in the warranty.
The Court of Appeals begged to differ. It held that the circuit court erred in finding the arbitration clause in the warranty was unconscionable. It stated that our supreme court has made it clear that adhesion contracts are not per se unconscionable. The underlying sale of Tamko’s shingles was stated to be a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate warranty terms.
The court found it significant that the packaging contained a notation: “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund.
The appellate court also found it significant that the arbitration clause did facilitate an unbiased decision by a neutral decision maker and that the arbitration clause was separable from the warranty.
Consider the exact opposite approach of the CFPB’s recently-announced proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits. That proposed rule can be read here and is the subject of a May 12 blog entitled “CFPB’s proposed rule would allow consumers to sue banks”.
It’s interesting to see such different approaches by two authorities on an issue affecting consumers in the housing arena. I wouldn’t be surprised to see more to come from either ruling.
* One Belle Hall Property Owners Association, Inc. vs. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1,2016)