The South Carolina Supreme Court recently nixed an argument to get around the Federal Arbitration Act’s requirement of a transaction involving interstate or international commerce. The Federal Arbitration Act (FAA), originally passed in 1925, makes arbitration agreements in contracts involving interstate or international commerce “valid, irrevocable and enforceable.”19 U.S.C. § 2. But what if the contract does not involve interstate or international commerce? State law applies to such contracts, and traditionally many states have been hostile to arbitration. In 1955, the National Conference of Commissioners on Uniform State Laws come out with a proposed “Uniform Arbitration Act” (UAA) which could be adopted by individual states.2The Uniform Arbitration Act, 1986 J. Disp. Resol. Art. 13 (1986) p. 2. Like the FAA, the original UAA provided that arbitration agreements were valid and enforceable.3Id., citing § 1 of the 1955 Uniform Arbitration Act.
South Carolina adopted the UAA in 1978. But in doing so, South Carolina added a curious requirement. If a contract was subject to arbitration, that fact was to be “typed in underlined capital letters, or rubber-stamped prominently, on the first page of the contract.” Absent such a notice, “the contract shall not be subject to arbitration.”4S.C. Code § 15-48-10(a). Most contracting parties have no idea of this notice requirement, nor are business people likely to have a “SUBJECT TO ARBITRATION” rubber stamp lying in a desk drawer. Thus many attempts to enforce arbitration clauses have failed due to the lack of exacting compliance with these requirements. In one case, for example, an arbitration notice was held defective because the notice appeared on the first page of actual contract text, and not on a cover page to the contract.5Richland Horizontal Prop. Regime Homeowners Ass’n v. Sky Green Holdings, Inc., 392 S.C. 194, 708 S.E.2d 225 (Ct. App. 2011). In another unpublished decision, a notice of arbitration was held defective because it was not “fully underlined.”6Turk. Creek Dev., LLC v. TD Bank, 2012 S.C. App. Unpub. LEXIS 490, *3.
Fortunately, if the FAA applies, it preempts South Carolina’s picky notice requirements. But, as stated above, the FAA applies to contracts involving interstate or international commerce. Many contracts simply state that the FAA applies to arbitration provisions in the contract. Thus some parties have argued that, regardless of whether a contract involved interstate or international commerce, the FAA applies because the parties agreed to it. In substance, they stipulated to the existence of interstate or international commerce.
This theory was put to the test in Hicks Unlimited Inc., v. UniFirst Corporation.7Opin. No. 28158 (S.C. Supr. Ct. June 14, 2023). Hicks Unlimited, a South Carolina business, agreed to rent uniforms from UniFirst, a Massachusetts corporation. Their contract called for binding arbitration, “governed by the Federal Arbitration Act.” After a dispute arose, UniFirst sought to compel arbitration in accordance with the contract. A lower court held that the contract did not involve interstate commerce, and failed to meet the notice requirements of South Carolina’s UAA. The court therefore denied UniFirst’s motion to compel arbitration. On appeal, the South Carolina Supreme Court rejected the argument that the presence of interstate commerce was immaterial because the parties had agreed to apply the FAA. A court cannot apply the FAA, the Court explained, without first “peeking behind the curtain to ensure interstate commerce was involved.” The party seeking to enforce arbitration must therefore “prove the contract involves ‘commerce in fact.’”
The court below, however, had in fact concluded that the contract in question involved interstate commerce.8The Supreme Court reviewed an opinion of the South Carolina Court of Appeals on a writ of certiorari. The Court of Appeals had enforced arbitration based on its opinion that the contract involved interstate commerce. After all, UniFirst was a Massachusetts company and had contracted to provide uniforms to a customer in South Carolina. The uniforms were shipped from Kentucky to South Carolina, with payments made to UniFirst’s Massachusetts headquarters. The South Carolina Supreme Court, however, found only that the contract “was between a Massachusetts company and a South Carolina company.” There was “no other sign the contract was to be performed using instrumentalities or channels of interstate commerce, or that the uniform supply involved any thing or matter beyond South Carolina’s borders.”
This statement is a bit confusing, in that the contract seems to have contemplated a company in one state supplying goods (namely uniforms) to a company in another state—quite the stuff of interstate commerce. But UniFirst does not seem to have provided any factual evidence that the transaction in fact involved the interstate flow of goods. Presumably UniFirst could have obtained the uniforms in South Carolina rather than in Kentucky or some other state. Apparently the contract alone was insufficient to establish interstate commerce, even though it was between parties in different states and seems to have involved the supply of goods.
Hicks at least clarifies South Carolina law, in that the parties cannot contract around the jurisdictional requirements of the FAA—interstate or international commerce must be demonstrated by the party seeking enforcement of the arbitration clause. In many cases (particularly those involving international trade), this seems pretty obvious. If party A in Germany has promised to deliver goods to party B in South Carolina, it sure looks like international commerce. But what if the contract makes no mention of where the goods are coming from and states only that they are to be delivered to the buyer in South Carolina? Under Hicks, the fact that the seller is based in another country would appear to make no difference. So a party seeking arbitration would need to show facts sufficient to established that the goods were to be procured outside the United States and imported to South Carolina. In some international trade transactions, the buyer has no idea where the seller intends to procure the goods—only that the contract requires the goods to conform to the contract and be delivered to the buyer South Carolina (assuming those are the delivery terms).
Hicks is also a reminder of the antiquated nature of South Carolina’s “uniform” arbitration act. The point of the original UAA was to make arbitration generally enforceable in intrastate commerce, where the FAA did not apply. South Carolina seems to have adopted the UAA, only to add notice provisions that seem to undermine it in an awful lot of contracts. It looks like, way back in 1978, an influential legislator who disliked arbitration managed to sneak some language into the UAA’s original text. If the policy of South Carolina is to prohibit arbitration, the law may as well say so plainly.9South Carolina’s UAA excludes various subjects, including certain employment-related claims, attorney-client and physician-patient relationships, insurance claims, and personal injury claims. It seems better policy to exclude subjects deemed inappropriate for arbitration than to impose picayune notice requirements that frustrate arbitration in situations where it would be appropriate and ease the burden on South Carolina’s courts. If the policy is to encourage arbitration (which seems like a good idea in general, particularly in commercial transactions), then the notice provisions in the South Carolina Uniform Arbitration Act ought to be scrapped.
- 19 U.S.C. § 2.
- 2The Uniform Arbitration Act, 1986 J. Disp. Resol. Art. 13 (1986) p. 2.
- 3Id., citing § 1 of the 1955 Uniform Arbitration Act.
- 4S.C. Code § 15-48-10(a).
- 5Richland Horizontal Prop. Regime Homeowners Ass’n v. Sky Green Holdings, Inc., 392 S.C. 194, 708 S.E.2d 225 (Ct. App. 2011).
- 6Turk. Creek Dev., LLC v. TD Bank, 2012 S.C. App. Unpub. LEXIS 490, *3.
- 7Opin. No. 28158 (S.C. Supr. Ct. June 14, 2023).
- 8The Supreme Court reviewed an opinion of the South Carolina Court of Appeals on a writ of certiorari. The Court of Appeals had enforced arbitration based on its opinion that the contract involved interstate commerce.
- 9South Carolina’s UAA excludes various subjects, including certain employment-related claims, attorney-client and physician-patient relationships, insurance claims, and personal injury claims. It seems better policy to exclude subjects deemed inappropriate for arbitration than to impose picayune notice requirements that frustrate arbitration in situations where it would be appropriate and ease the burden on South Carolina’s courts.