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In a dispute arising from an automobile trade-in, the South Carolina Supreme Court affirmed a lower court ruling that a limitation on damages and a lack of mutuality rendered the parties' arbitration agreement unconscionable and therefore unenforceable.
In Simpson v. MSA of Myrtle Beach, Inc., No. 26293, 2006 WL 4388016 (S.C. Mar. 26, 2007), Simpson and MSA of Myrtle Beach (MSA) entered into a contract whereby Simpson traded in a used automobile for a new one.
The trade-in contract contained an arbitration agreement that precluded the arbitrator from awarding "punitive, exemplary, double, or treble damages . . . against either party." The arbitration agreement also contained a carve-out allowing MSA to sue in court for repossession or money owed and expressly provided that such lawsuits would "not be stayed pending the outcome of arbitration."
Six months after the trade-in, Simpson sued MSA, alleging that MSA violated the South Carolina Unfair Trade Practices Act (SCUTPA) and the South Carolina Manufacturers, Distributors, and Dealers Act (Dealers Act) by misrepresenting the trade-in value of the used vehicle and failing to provide promised rebates.
MSA filed a motion to compel arbitration. In opposing the motion, Simpson argued that the arbitration agreement was unconscionable and therefore unenforceable. The trial court denied the motion.
On appeal, MSA challenged the trial court's ruling that the arbitration agreement was unconscionable. In addressing this challenge, the Court explained that South Carolina law requires both procedural unconscionability (i.e., "an absence of meaningful choice") and substantive unconscionability (i.e., "oppressive, one-sided terms").
First turning to the question of procedural unconscionability, the Court relied on Ohio caselaw for the proposition that given the necessity of automobiles, an automobile sales contract is a contract of adhesion and thus must be analyzed with "considerable skepticism." Here, the Court relied on the "inconspicuous nature" of the arbitration agreement in finding the agreement procedurally unconscionable.
Next turning to the question of substantive unconscionability, the Court found that the provision precluding the arbitrator from awarding treble or double damages violated public policy because both the SCUTPA and the Dealers Act require a court to award treble or double damages for statutory violations.
The lack of mutuality was also a source of substantive unconscionability but only in light of the arbitration agreement's "express stipulation that the dealer may bring a judicial proceeding that completely disregards any pending consumer claims that require arbitration." In discussing this issue, the Court reaffirmed the principle that under South Carolina law, a lack of mutuality, standing alone, does not necessarily render an arbitration agreement unconscionable.
As this case illustrates, even in those jurisdictions where a lack of mutuality is not in itself sufficient to render an arbitration agreement unenforceable, a lack of mutuality will only cast doubt on the overall fairness of the agreement. Parties can eliminate any doubts about fairness by agreeing that all claims and issues must be resolved in arbitration. Moreover, there is no reason to limit the scope of an arbitration agreement if the arbitration rules enable the arbitrator to grant all forms of relief, including expedited relief and rights of possession. See, e.g., Rules 20 and 27 of the National Arbitration Forum Code of Procedure.
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