Severability of Limitations Provision: Introduction
One defense to a motion to compel arbitration is that the arbitration agreement on which the movant relies is, as a matter of arbitration-neutral state law, void or unenforceable on public policy grounds. (See, e.g., here.) But if only one term or provision of an arbitration agreement is unenforceable on public policy grounds, can that offending provision simply be removed from the contract and the rest of the arbitration agreement enforced?
In Huskins v. Mungo Homes, LLC, No. 28245, slip op. (S.C. Sup. Ct. December 11, 2024), the South Carolina Supreme Court said the answer depends principally on the intent of the parties. And as respects the adhesive, “take-it-or-leave-it” home sale contract before it, the Court said the answer was no.
By statute South Carolina prohibits and deems void contractual provisions that purport to shorten the statute of limitations. S.C. Code Ann. § 15-3-140 (2005). In Mungo Homes, the defendant sold the plaintiff a new home, the contract of sale for which contained an arbitration agreement that said: “Each and every demand for arbitration shall be made within ninety (90) days after the claim, dispute or other matter in question has arisen, except that any claim, dispute or matter in question not asserted within said time periods shall be deemed waived and forever barred.” Slip op. at 2 (quotation omitted). The parties agreed that provision violated Section 15-3-140.
The question before South Carolina’s highest court was whether the provision could be severed from the contract, leaving intact the rest of the arbitration agreement, and the contract containing it (the “container contract”), or whether that unlawful provision rendered invalid and unenforceable the entire arbitration agreement. In Huskins the Court held that the limitations period provision could not be severed and the arbitration agreement was accordingly unenforceable on public policy grounds. The container contract was not affected by the Court’s decision. Slip op. at 6.
Discussion
Severability of Limitations Provision: Party Intent and Relevance of not Including a Severability Clause in the Agreement
The Court said “[t]he only question we are left with is whether we should sever the illegal term and let the remainder of the arbitration agreement stand.” Slip op. at 3. The touchstone for answering that question was party intent: “whether an agreement can be modified so its remaining provisions survive [generally] depends upon what the parties intended.” Slip op. at 2.
The Court observed that the parties did not include in their contract a severability provision and the contract otherwise did not suggest the parties intended the arbitration agreement to survive if any part of it, including the limitations provision, was deemed void. Slip op. at 2.
The Court explained that the absence of a severability clause, in and of itself, may be grounds for not severing an unenforceable clause from a contract. For courts are not supposed to “rewrite contracts” but (subject to certain exceptions) enforce them according to their terms. Slip op. at 2.
But the Court decided not to rest its decision solely on the parties’ decision not to include a severability clause in their contract. The Court explained that, in the absence of a severability clause, Courts are reluctant to impose severability on the parties. Slip op. at 2-3. Yet “devotion to that principle[,]” said the Court, “can work a cost to other interests. It can exact a needless forfeiture or cause unjust enrichment, tossing out the essence of a bargained for exchange over a trivial technicality.” Slip op. at 3 (citation omitted).
Severability of the Limitations Provision: Common Law, South Carolina Law, and the Restatement (Second) of Contracts
The Court briefly discussed pertinent English common law, and U.S. and South Carolina precedent on the severability issue, explaining how courts have “stricken illegal parts from contracts and upheld the legal parts, as long as the central purpose of the parties’ agreement did not depend on the illegal part.” Slip op at 3. South Carolina, said the Court, “followed this main current and interpreted contracts as severable if consistent with the parties’ intent.” Slip op. at 3 (citations omitted).
The Restatement (Second) of Contracts, said the Court, “takes the further view that if only part of a contract term is unenforceable on the grounds of public policy, a court may enforce the rest of the term as long as 1) ‘the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange’ and 2) the party seeking to enforce the term ‘obtained it in good faith and in accordance with reasonable standards of fair dealing.’” Slip op. at 3-4 (quoting Restatement (Second) of Contracts § 184). Restatement (Second) Section 184’s comments, in turn, “emphasize that ‘a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so broad as to offend public policy by redrafting the agreement so as to make a part of the promise enforceable.’” Slip op. at 4 (quoting Restatement (Second) § 184, comment b).
No Question of Fact that the Parties did not Intend to Permit Severability of the Limitations Provision
The Court determined that, although party intent is often a question of fact, there were three reasons why there was no such question concerning party intent not to allow severability:
- The parties did not agree to a severability clause;
- The contract’s merger clause states that the “contract ‘embodies the entire agreement’ and that it can only ‘be amended or modified’ by a writing executed by both the Huskins and Mungo[;]” and
- Mungo conceded that the contract was an adhesion contract.
Slip op. at 4.
The Court found that the contract was offered on a “‘take it or leave it’” basis, drafted by Mungo, deemed nonnegotiable, and not editable by the Huskins. Slip op. at 4. “This forceful proof,” said the Court, “of Mungo’s intent that the contract could not be tinkered with convinces us we should not rewrite it now.” Slip op. at 4.
The Court further concluded that the illegal provision in the arbitration agreement was material because it would be outcome determinative of many disputes. Slip op. at 4. The Court viewed the provision not as a “mere ‘ancillary logistical concern’ of the arbitration agreement” but “a brash push to accomplish through arbitration something our statutory law forbids.” Slip op. at 4 (citation omitted). Were the Court to to “lift[] out the clause, the legal statute limitations period (which in most cases allows claims to be filed within three years of their reasonable discovery) would drop in.” Slip op. at 4 (parenthetical material in original). That “would rewrite arbitration agreement to expand the statute of limitations by several orders of magnitude.” Slip op. at 4.
Arbitration, said the Court, is designed “to provide an alternative way to resolve disputes in a fair an efficient manner[,]” but “Mungo designed its arbitration provision not to streamline the resolution of disputes but to reduce their number” by greatly reducing the limitation period for bring those disputes. Slip op. at 4. The Court “conclud[ed] Mungo’s manipulative skirting of South Carolina public policy goes to the core of the arbitration agreement and weighs heavily against severance.” Slip op. at 4-5 (citations omitted)
The Court ruled that it would not save the arbitration agreement by severing the offending limitations provision, finding that because this was an “adhesion contract” it was “highly doubtful that the parties truly intended for severance to apply.” Slip op. at 5 (citation omitted). The contract was a consumer home-purchase agreement, triggering the “public policy concerns that [Damico v. Lennar Carolinas, LLC, 437 S.C. 596, 619-20 (2022)] eloquently addressed.” Slip op. at 5.
Permitting Severance would Provide a Perverse Incentive for Dominant Parties to Include in Adhesion Contracts Illegal Contract Provisions
“We have[,]” said the Court, been steadfast in protecting home buyers from unscrupulous and overreaching terms, and applying severance here would erode that laudable public policy.” Slip op. at 5 (citation omitted). Mungo wanted an “adhesion contract so its terms could not be varied and would stick[,]” and, now, “Mungo was stuck with its choice.” Slip op. at 5. Finding otherwise would ensure there was “no downside to throwing in blatantly illegal terms, betting they will go unchallenged or, at worst, that courts will throw them out and enforce the rest.” Slip op. at 5 (citations omitted).
The Court thus did not sever the offending contract provision and held that the arbitration agreement was therefore unenforceable. Slip op. at 6. It further found that the container contract contract was not affected by the Court’s ruling. Slip op. at 6.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
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Section 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where “the award was procured by corruption, fraud, or undue means. . . .” 9 U.S.C. § 10(a)(1). Cases vacating awards on Section 10(a)(1) grounds are rare, presumably because the circumstances that would trigger relief are relatively rare.
