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What South Carolina Businesses Should Know about Arbitration Clauses

Businesses traditionally have inserted arbitration clauses in contracts to attempt to quickly and quietly resolve disputes in a favorable setting. Arbitration clauses are commonly found in employment contracts, home purchase warranty contracts, operating agreements and service contracts. However, they can have downsides, and South Carolina businesses should be aware of the potential pitfalls.

An arbitration clause puts the binding resolution of a dispute in the hands of an arbitrator or arbitration panel as opposed to a court of law. In arbitration, the parties usually give up the right to appeal on substantive grounds to a court. 

Unlike a courtroom trial, the parties also usually bear the costs of the arbitration process. The expense is one of the major reasons businesses may ask if arbitration is worthwhile. The cost of assembling a panel of three arbitrators – certified either by the American Arbitrators Association or the state – can approach the cost of the litigation itself. Each day of arbitration could approach $10,000 to $15,000 just for the arbitrators – and that’s before the cost of attorneys and other expenses.

Also, arbitrators may not have experience with the complex issues involved in your case, which could lead to more unpredictable outcomes and increased costs to cover time for research. A judge will usually have the benefit of a law clerk who can assist the judge with the research, free of charge to the parties. 

An alternative to arbitration is including a jury waiver in a contract to remove some of the unknowns of a jury trial. In this case, the matter would be decided by going before a judge only.

South Carolina courts are continuing to enforce arbitration agreements that abide by statutory requirements. What is covered by arbitration clauses has been a hot topic recently in South Carolina case law. In the 2016 case of Wilson v. Willis, the South Carolina Court of Appeals said an arbitration clause can encompass a broad variety of claims even if claims arise out of the agreement that are not specifically mentioned. The Court of Appeals reaffirmed that any doubts concerning the scope of the arbitration clause in a contract should be resolved in favor of the arbitration.  (The South Carolina Supreme Court granted certiorari on March 28, 2018). In Parsons v. John Wieland Homes, South Carolina’s Supreme Court said an arbitration clause in a home warranty could cover claims outside those covered by the warranty because the arbitration provision was not limited to the terms of the warranty.

There are circumstances where an arbitration may make the most sense, but businesses are discovering that arbitration clauses can lead to incredibly expensive arbitrations. That risk should be measured against potential outcomes in civil litigation.

Consult a lawyer experienced in business litigation to determine whether an arbitration clause is right for you before entering into a contract. If a dispute leads to arbitration, you will have to decide whether to try to enforce a potentially costly solution.

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