Citing the Prima Paint doctrine, the South Carolina Supreme Court held in Sanders v. Savannah Highway Automotive Company that an arbitrator must determine the enforceability of an assigned arbitration clause if the validity of the container contract has not been challenged.
When a contract containing an arbitration clause is assigned, who is responsible for determining whether the arbitration clause remains enforceable: the Court or an arbitrator? In a recent 3-2 decision by the South Carolina Supreme Court, the Court held that even where the party seeking to enforce the arbitration clause acknowledges that the contract containing the agreement has been “fully assigned,” the matter must be referred to an arbitrator so long as the party seeking to avoid enforcement does no specifically challenge the validity of the arbitration clause.
The Prima Paint Doctrine
In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801 (1967), the United States Supreme Court divided challenges to arbitration clause contained within contracts into two separate types: 1) challenges to the validity of the contract as a whole, and 2) challenges to the validity of the arbitration clause. In that decision, the Supreme Court held
[I]f the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the ‘making’ of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally.
Id. at 403-04, 87 S.Ct. 1801.
Sanders v. Savannah Highway Automotive Co., 2023 WL 4752347, involved a complaint by a purchaser of an automobile against the dealership that sold him the car. To finance the purchase, the purchaser executed a retail installment sales contract (“RISC”). On the RISC was printed an arbitration clause, the only agreement to arbitrate between the purchaser and the dealer. After execution of the RISC, the dealership assigned its rights in the RISC to a finance company.
An assignment of a right is a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance. Moore v. Weinberg, 373 S.C. 209, 219–20, 644 S.E.2d 740, 745 (Ct. App. 2007) (quoting Restatement (Second) of Contracts § 317(1) (1981)). For an assignment to occur, there must be “(1) an assignor; (2) an assignee; and (3) transfer of control of the thing assigned from the assignor to the assignee.” Donahue v. Multimedia, Inc., 362 S.C. 331, 338, 608 S.E.2d 162, 165 (Ct. App. 2005).
Both the trial court and the Court of Appeals held that the dealership’s assignment of the RISC deprived the dealership of any rights it held under that contract, “including the right to have an arbitrator determine the arbitrability of the action and the right to arbitrate.” Sanders v. Savannah Highway Automotive Company, 432 S.C. 328, 334, 852 S.E.2d 744, 746-47 (Ct. App. 2020). The Supreme Court of South Carolina disagreed, determining that the purchaser’s argument was not directed towards the validity of the arbitration clause, but, instead, was simply an argument that “the contract had ceased to exist at a certain point in time.” As such, the challenge was a challenge to the contract as a whole, and therefore a matter to be decided by an arbitrator under the Prima Paint doctrine.
Arbitration and Expense Post-Sanders
Businesses in South Carolina need to take notice of the limited nature of the South Carolina Supreme Court’s ruling. In rejecting the argument of the purchaser, the Court did not render an opinion on whether the arbitration clause remained enforceable by the dealership after assignment. Instead, it simply ordered that the question be turned over to an arbitrator. When faced with an assignment of a contract containing an arbitration clause that, on its face, does not reserve any rights to the assignor, an arbitrator is likely to rule that the assignor has no right to compel arbitration. Ironically, an arbitration clause contained within a contract, while intended to avoid much of the expense associated with litigation, may now generate unnecessary expense if the assignor attempts to invoke it after assignment.
There are, however, ways that businesses in South Carolina can avoid the missteps of the dealership in Sanders and retain the right to compel arbitration, ensuring that arbitration serves its original purpose: reducing the time and expense of dispute resolution. To learn how, contact us.
This website is for information purposes only. The information should not be construed to constitute formal legal advice or the formation of an attorney/client relationship. A result achieved on behalf of one client does not necessarily indicate similar results can be obtained for other clients. For information, contact Greg Studemeyer at (803) 393-4399.