Recent Cases on the Reach of the S.C. and Federal Arbitration Acts

The Fourth Circuit Court of Appeals and the Supreme Court of South Carolina recently have had occasion to consider the interplay of the South Carolina Uniform Arbitration Act (“SCUAA”) with the Federal Arbitration Act (“FAA”) and the requirements of an international treaty.

The Convention Act Trumps The McCarran-Ferguson Act and the SCUAA

In ESAB Group Inc. v. Zurich Insurance, PLC, a group of insurers refused to defend and indemnify ESAB Group in a number of product liability actions.  ESAB Group is a foreign-owned company, but also a South Carolina-based manufacturer of welding materials and equipment.   ESAB Group sued these insurers in state court in Florence seeking coverage under several insurance policies, and the insurers removed the case to federal court.  Magistrate Judge Rogers referred all claims related to the insurance policies to arbitration in Sweden based upon the arbitration agreements contained therein, and ESAB Group appealed that decision.

The Fourth Circuit began its analysis with the now familiar proposition that South Carolina law, like federal law, favors arbitration.  The SCUAA  (tracking 9 U.S.C. Section 2 of the FAA) provides that written arbitration agreements are “valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  S.C. Code Ann. § 15-48-10(a).  

However, a combination of state and federal law invalidates certain arbitration agreements contained in insurance policies.  The SCUAA's arbitration mandate expressly does “not apply to … any insured or beneficiary under any insurance policy.”  S.C. Code Ann. § 15-48-10(b)(4).  And the federal McCarran-Ferguson Act (“MFA”) protects state insurance laws from federal statutes (including Chapter 1 of the FAA) that would otherwise preempt them.  As a result, the SCUAA "reverse preempts" the FAA in the domestic arbitration context.  Cox v. Woodmen of the World Ins. Co., 556 S.E.2d 397, 399–402 (S.C. Ct. App. 2001).

ESAB Group presented a slightly different question- whether the MFA allows the SCUAA to reverse preempt a foreign arbitration agreement- and some additional law.  In 1970, the U.S. became a party to the  Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”), and in that same year Congress passed Chapter 2 of the FAA (the "Convention Act") in order to enable federal district courts to enforce the Convention.

ESAB Group argued that the MFA permitted the SCUAA to 1) “reverse pre-empt” the Convention so that the foreign arbitration agreements would not be enforced; and 2) invalidate any arbitration agreements contained in these insurance policies.  

The Fourth Circuit disagreed, concluding that the MFA does not allow reverse-preemption of the Convention: “[n]othing in [the MFA] suggests that, by enacting that statute, Congress intended to delegate to the states the authority to abrogate international agreements that this country has entered into and rendered judicially enforceable.  We will not read it to do so.”  The court believed this holding was necessary to preserve the United States’ ability to “speak with one voice when regulating commercial relations with foreign governments.”

Home Purchase Contract Purely Intrastate In Nature Avoids Reach of FAA 

In Bradley v. Brentwood Homes, Inc., No. 2010-163350, 2012 WL 2847616 (S.C. July 11, 2012), the Supreme Court of South Carolina concluded that the FAA was not applicable to a contract for the purchase of a completed residential dwelling because “these types of transactions have historically been deemed to involve intrastate commerce.”   The court reflected back to Mathews v. Fluor Corp., 312 S.C. 404, 440 S.E.2d 880 (1994), and its holding that interstate commerce was not involved in a contract for sale of a commercial building in the state, even though the buyers were out-of-state parties.  Since Mathews, the court has continued to adhere to this view.  See Zabinski v. BrightAcres Assocs., 346 S.C. 580, 595, 553 S.E.2d 110, 117-18 (2001) (“The development of land within South Carolina borders is the quintessential example of a purely intrastate activity.”)

The intrastate nature of the transaction was not changed by the existence of a national warranty or the fact that the homebuyer used a bank in North Carolina to finance his home purchase.  Additionally, the SCUAA was not available because the defendant failed to follow the statutory protocol for making an arbitration agreement enforceable (e.g. the statement that the arbitration would be pursuant to the SCUAA was not in underlined letters or rubber-stamped prominently and was also not located on the first page of the contract.)

Importantly, the court narrowed its holding by stating that if the Home Purchase agreement containing the arbitration agreement had encompassed the construction of the residence, then it would have been subject to the FAA.  It would be impossible to construct a present-day building with materials, equipment, and supplies all produced and manufactured solely within the State of South Carolina.  However, the plaintiff’s out-of-state financing “did not bring the sale of the home within interstate commerce as the use of this lender was tangential to the performance” of the Home Purchase agreement.