Can I get Out of a One-Sided Contract? Adhesion Contracts and Unconscionability in South Carolina

Unless you live off the grid, you have almost certainly signed a very long contract full of dense legalese. You probably didn’t even read it. You certainly didn’t attempt to negotiate better terms for yourself. You just signed your name and hoped for the best.

These types of one-sided, boilerplate contracts are known as adhesion contracts, and they’re very common. If you want to lease a car, buy a new build home, enjoy streaming content, or enjoy any other number of products or services, you’ll encounter one. It’s a take-it-or-leave-it situation: accept the contract as is or simply don’t enjoy the product or service.

But what if you discover after signing that you’ve made a big mistake and want out? Can you get out of a one-sided adhesion contract?

Maybe. One way to get out of such a contract is for a court to find the contract terms so one-sided and oppressive they’re considered unconscionable. Today we’ll look at where South Carolina courts draw the line between enforceable and unenforceable with respect to adhesion contracts, and see what the South Carolina Court of Appeals said on the topic in Mart vs. Great Southern Homes, Inc. (2023).

Elements of Unconscionability in South Carolina

A court can find a contract, a clause, or behavior “unconscionable” when it’s so egregious that it shocks the conscience of the court. We’ve covered unconscionability in depth on this blog before when looking at Huskins v Mungo Homes, LLC (2022); read that blog here.

In South Carolina, two elements are required for unconscionability with respect to contract law:

Absence of meaningful choice
Oppressive and one-sided terms

Both elements need to be present for a court to find a contract or its terms unconscionable.

When a clause is found to be unconscionable, the court has the discretion to sever that clause and enforce the rest of the contract as is; render the entire contract unenforceable; or limit the application of the unconscionable clause. (See South Carolina code Section 36-2-302).

Adhesion Contracts in South Carolina and Unconscionability

The question is whether adhesion contracts contain:

Absence of meaningful choice AND
Oppressive and one-sided terms

By their nature, adhesion contracts entail an absence of meaningful choice. The party signing the contract (typically an individual consumer) does not have the opportunity to negotiate terms with the party writing and presenting the contract (typically a large company).

Adhesion contracts are also one-sided by nature. Terms favor the party providing the contract and disfavor the signing party.

The final element to satisfy for unconscionability is “oppressive.”

What’s Considered “Oppressive”?

The 2023 South Carolina Court of Appeals case Mart v. Great Southern Homes, Inc. (find it here) mainly focuses on whether arbitration can be compelled when a single contract contains conflicting arbitration clauses. (The court says yes.) At the end of its decision, the court also briefly addressed the issue of adhesion contracts and unconscionability.

Quoting the South Carolina Supreme Court case Damico v. Lennar Carolinas, LLC (2022), it wrote “a take-it-or-leave it contract of adhesion is not necessarily unconscionable, even though it may indicate one party lacked a meaningful choice. […] Rather, to constitute unconscionability, the contract terms must be so oppressive that no reasonable person would make them and no fair and honest person would accept them.” (emphasis added)

And: “The distinction between a contract of adhesion and unconscionability is worth emphasizing: adhesive contracts are not unconscionable in and of themselves so long as the terms are even-handed.” (emphasis in the original)

In the Mart opinion, the court provides some examples of unconscionable and therefore unenforceable terms from other cases involving home builders:

Smith v. D.R. Horton, Inc. (SC Supreme Court, 2016, here): D.R. Horton’s attempts to disclaim implied warranty claims and prohibit monetary damages of any kind; contract terms left relief “to the whim” of D.H. Horton
Damico (SC Supreme Court, 2022, here): Lennar’s contract gave Lennar “sole election” to choose the parties for arbitration, potentially forcing purchasers to separately litigate against subcontractors in circuit court
Huskins (SC Court of Appeals, 2022, here): The Mungo Homes contract shortened the statutory limitation period to bring a claim from three years (as provided for in state law) to a maximum of ninety days

These terms go beyond normal contract terms in favoring the contract-writing party such that the courts ultimately found them “oppressive.”

Be Careful What You Sign

So, can you get out of an adhesion contract? Maybe – but probably not. Even if you’re successful in proving in court that certain contract terms are unconscionable, the court may simply sever those terms and allow the rest of the contract to stand.

The bottom line: If you don’t want to be held to the terms of the contract, simply don’t sign it in the first place. You can’t count on getting out of a contract after the fact.

(And don’t forget that many contracts, including many EUAs and contracts you agree to digitally, give you the opportunity to opt out of arbitration in writing within 30 days, as we previously covered in this blog on arbitration.)

For help with contracts, business law, estate planning, and probate, contact Gem McDowell at the Gem McDowell Law Group. Gem and his team help individuals, families, and businesses in South Carolina from offices in Myrtle Beach and Mount Pleasant. Gem has over thirty years of experience and can help you and your family or your business protect your interests, avoid mistakes, and achieve peace of mind. Call today to schedule your initial consultation at 843-284-1021.

The FTC’s Proposed Final Noncompete Rule: What It Means for South Carolina

*This blog will be updated with new information as it becomes available*

UPDATE: On August 20, 2024, the U.S. District Court for the Northern District of Texas entered a final judgment stating that the ban should not take effect or be enforced nationwide. The FTC “is considering an appeal,” according to its website. Additionally, “The decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”

UPDATE: On July 3, 2024, federal judge Ada E. Brown of the Northern District of Texas issued an injunction pending litigation on the FTC’s noncompete rule, effectively putting it on hold. The ban on noncompetes was set to go into effect on September 4, 2024. The court says that it will issue a final order on the merits by August 30.

ORIGINAL POST published 04/25/24:

The Federal Trade Commission (FTC) released its final proposed rule on noncompetes on Tuesday, April 23, 2024. If adopted, the Non-Compete Clause Rule would ban new noncompete agreements altogether for all workers (with very few exceptions) as of the effective date, which could be as soon as late August. (The effective date is 120 days after the publication of the rule in the Federal Register, according to the 570-page PDF which you can find here.)

The rule is already being challenged. The U.S. Chamber of Commerce and the tax firm Ryan LLC both filed lawsuits in Texas on Wednesday aiming to stop the rule from going into effect.

South Carolina, like most states, does allow noncompete agreements, aka covenants not to compete. How would this rule affect the workers and employers in our state?

What the FTC’s Proposed Noncompete Rule Means for South Carolina Businesses

On this blog we’ve previously looked at how SC courts view covenants not to compete; they are enforceable as long as they are reasonable and don’t overly restrict the worker’s ability to find gainful employment. Covenants not to compete that are excessively restrictive in terms of duration, geographic location, and/or industry will be found to be unenforceable.

The FTC’s noncompete rule, if adopted, would override state law. No new noncompete agreements would be allowed in South Carolina for any kind of worker (with very few exceptions), not even for “senior executives” who earn more than $151,164 annually and are in a “policy-making position.”

What about existing noncompete agreements? Existing noncompete agreements for senior executives would remain in force as of the effective date. Extant noncompete agreements for other kinds of workers in South Carolina would no longer be enforceable after the effective date.

Is the FTC’s Proposed Noncompete Rule Likely to Go into Effect?

We don’t know for sure, but many people are predicting that the proposed rule will fail, including former FTC general counsel Alden Abbott (via Forbes). Or if it does go into effect, it will likely not be permanent. The rule is already being challenged and will certainly continue to be challenged, as many view it as exceeding the FTC’s authority.

Here at the Gem McDowell Law Group, we also think it’s unlikely that this rule is here to stay. We will follow this story closely and provide updates – stay tuned.

What Makes an Arbitration Agreement Unenforceable?

Is it easy to get out of arbitration in South Carolina? That’s the question we’ll look at today.

Arbitration agreements and clauses are ubiquitous these days, from employment contracts to online End-User License Agreements. Arbitration is often touted as being a faster, less expensive, and more private alternative to civil lawsuits and civil court. But arbitration agreements can put individuals at a disadvantage by requiring them to waive their rights or burden them with lopsided terms. This may prompt them to try to get out of arbitration.

Maybe you’re a customer or consumer who doesn’t want to be bound to arbitration. Or maybe you’re a business owner or professional who wants to ensure the arbitration agreements in your contracts are enforceable. Whatever your situation, you should understand when arbitration is enforced and when it’s not in South Carolina so you can better look after your own interests.

First we’ll look at what makes a contract enforceable and unenforceable in South Carolina, then dive into some cases to see how these issues played out in the courts.

Are Arbitration Agreements Always Binding in South Carolina?

Generally yes, but occasionally no.

Valid arbitration agreements are enforceable in South Carolina. In the 2020 case Weaver v. Brookdale Senior Living, Inc. (which we’ve previously covered here), the South Carolina Court of Appeals stated that there is “potent” public policy favoring arbitration when the terms are entered into validly.

What constitutes a valid and enforceable contract in South Carolina? To start, parties signing the contract must have the authority and capacity to understand and enter into such an agreement. The contract also must:

Be mutually agreed upon
Be freely entered into
Include “consideration,” an exchange of values between the parties, such as money or the promise of a service
Not violate public policy

Since South Carolina courts view and treat arbitration agreements as they do any other part of a contract, these same standards apply.

In short, there’s no way to “get out” of a valid arbitration agreement in South Carolina.

Reasons an Arbitration Agreement May Be Unenforceable (Or, How to Get Out of Arbitration)

Arbitration agreements are not enforceable in South Carolina if they are not valid. Arbitration clauses within a contract may also be found to be unenforceable.

Reasons an arbitration agreement may found to be unenforceable (this list is not exhaustive):

Absence of signature
Fraud
Duress or coercion
Lack of authority to sign the agreement
Lack of capacity (aka sound mind)
Lack of mutual agreement
Lack of consideration
Unconscionability
Unclear language

Proving an arbitration agreement is unenforceable can be difficult, but it does happen. Next we’ll look at cases where arbitration agreements were successfully challenged in court.

Lack of Authority to Enter into Arbitration Agreement without Power of Attorney: Solesbee

In some cases, the enforceability of an arbitration agreement comes down to small details. That’s what happened in the 2022 South Carolina Court of Appeals case The Estate of Mary Solesbee v Fundamental Clinic (read it here).

The Background

Mary Solesbee entered Magnolia, a skilled nursing facility in Spartanburg County, in June 2016. Her son, Allen Dover, signed the admission agreement and a separate arbitration agreement when she was admitted. On July 14, 2016, Solesbee was transported to a hospital, where she died two weeks later.

Connie Bayne, Solesbee’s personal representative, then filed a wrongful death and survival action alleging nursing home negligence for actual and punitive damages. In response, Magnolia filed a motion to compel arbitration.

The trial court denied the motion to compel arbitration, finding that Dover did not have the authority to sign the arbitration agreement on behalf of his mother and rendering it invalid. On appeal, the SC Court of Appeals agreed with the trial court’s decision to deny Magnolia’s motion to compel arbitration.

The Details

The appeals court determined that the admission agreement and the arbitration agreement were two separate documents. Magnolia argued that the court should have found the two were merged, since merger is usually presumed when multiple documents are signed by the same parties at the same time as part of the same transaction.

But the court says that’s not always so. It found that the two documents were indeed separate because:

The admission agreement provided it was governed by South Carolina law, while the arbitration agreement provided it was governed by federal law
The arbitration agreement referenced the admission agreement, showing it was conceived of as a separate document
Each document was separately paginated with its own signature page

Additionally, the arbitration agreement was not a requirement for admission to Magnolia.

This matters because Bayne (Solesbee’s representative who brought the suit) argued that Dover (her son) did not have the authority to sign the arbitration agreement on his mother’s behalf. He did not have power of attorney for his mother at the time (and had only briefly possessed such powers years earlier before they were revoked) and did not have the authority to sign under any other legal theory.

He did, however, have the authority to sign the admission agreement under South Carolina’s Adult Health Care Consent Act. This act is limited to making health care related decisions only, and therefore did not give Solesbee’s son the power to sign the separate arbitration agreement.

Ultimately, because of how Magnolia wrote and structured its contracts, the court found that it could not compel arbitration.

Other Examples of Unenforceable Arbitration Agreements in South Carolina

Here are brief overviews of three other South Carolina cases in which arbitration agreements or sections were found to be unenforceable.

Lack of Authority Even with Power of Attorney: Arredondo

In Arredondo v. SNH SE Ashley River Tenant, LLC (2021), the South Carolina Supreme Court found that a daughter did not have the authority to sign an arbitration agreement on behalf of her father, despite being his agent under both a health care power of attorney and a general durable power of attorney. This case came down to the very specific wording in the powers of attorney, and it demonstrates how enforceability of a contract can hinge on language and word choice.

(The daughter also contended that the agreement was unconscionable and therefore unenforceable, but the court did not address this issue.)

Read more in detail about powers of attorney and the full story behind Arredondo in our blog on this case here.

Lack of Authority Due to Timing: Stott v White Oak Manor

In Stott v White Oak Manor, Inc. (2019), the South Carolina Court of Appeals found that a niece did not have the authority to sign an arbitration agreement on behalf of her uncle. There are two important elements in this case: One, capacity. The uncle possessed “intact mental functioning” at the time of his admission into a medical facility and therefore had the capacity to enter into agreements himself. Two, timing. A power of attorney that would have given the niece authority to enter into the agreement on his behalf was not recorded – and therefore not valid – until six days after her uncle was admitted to the facility.

Read more in detail about the background and the court’s reasoning in our blog on Stott here.

Unconscionability: Huskins v Mungo Homes

In Huskins v Mungo Homes (2022), the South Carolina Court of Appeals found that a portion of an arbitration clause within a purchase agreement was unconscionable and therefore unenforceable. It found the offending terms were absent of meaningful choice and were oppressive and one-sided, making them unconscionable.

Importantly, only the offending portion was severed from the clause, leaving the rest of the arbitration clause enforceable, and the court affirmed the circuit court’s order to compel arbitration under the newly modified terms.

Read more in detail about the background of this case and about unconscionability in our blog on Huskins v Mungo Homes here.

Understanding Arbitration and Reserving Your Rights

The examples of cases above show just how challenging it can be to get out of arbitration in South Carolina.

As a consumer, customer, or patient, you need to understand that the majority of the time, you are bound to arbitration when you agree to it. However, it’s not a given that you must agree; many contracts and agreements online allow you to opt out in writing within (typically) 30 days of signing the agreement. The next time you encounter a wall of text online that tells you to click the “I Agree” button, first look in the fine print for instructions on how to opt out of compelled arbitration and reserve your rights.

As a business owner or professional drafting an arbitration agreement or arbitration clause, you should know that the enforceability of your agreement can come down to terms, word choice, and other seemingly small details. It’s also important to ensure that the parties signing your agreement have the authority to do so.

Get Help with Contracts and Business Law in South Carolina

For help drafting or understanding arbitration agreements, employment contracts, and other contracts, contact Gem at the Gem McDowell Law Group. With over thirty years of experience, Gem along with his team helps South Carolina business owners grow their businesses and protect their interests and can represent individuals in contract disputes. Call to schedule your free consultation today at the Mount Pleasant office or Myrtle Beach office by calling 843-284-1021 today.

What is a Right of First Refusal and When Is It Enforceable?

The right of first refusal sounds simple on the surface. A right of first refusal (ROFR) gives the right-holder the opportunity to enter into a business transaction with another party before anyone else. It’s most commonly seen in real estate contracts, such as when a lessor signs a contract giving them the ROFR to put in an offer to purchase the property if it ever comes up for sale.

But as straightforward as it sounds on paper, it’s not always so straightforward in the real world. Contracts that include an ROFR must be clear and detailed in order to be enforceable.

The Supreme Court of South Carolina addressed this issue in the 2023 case Clarke v. Fine Housing, Inc. (here). We’ll look at the factors required for an enforceable right of first refusal in South Carolina and how they played out in this recent case.

The Pros and Cons of a Right of First Refusal

An ROFR can benefit both parties. In the example of a lessor with the ROFR to purchase the property, if and when it comes up for sale, they can be sure not to miss out on the opportunity to put in an offer. There’s no downside for the potential buyer; if they don’t want to buy the property, they simply refuse.

The property owner can benefit by having a potential buyer already lined up when it’s time to sell, which may help them in negotiations with other potential buyers. However, the downside for the property owner is that a ROFR can restrict their power of alienation, which is their ability to dispose of property.

“South Carolina law prohibits enforcement of unreasonable restraints on alienation of real property,” the court says in the Clarke opinion. The key word here is “unreasonable.” Whether a particular ROFR is enforceable depends on whether the restraints on alienation are considered unreasonable.

Unreasonable Restraints on Alienation of Property: What is Unreasonable?

In the Clarke opinion, the SC Supreme Court turns to the Restatement (Third) of Property. The Restatements of the Law (Third) are a comprehensive set of legal treatises widely referenced and relied upon by courts, judges, lawyers, and others across the U.S. On the subject of the ROFR, it says, “Reasonableness is determined by weighing the utility of the restraint against the injurious consequences of enforcing the restraint.”

The Supreme Court of South Carolina uses the factors listed in the Restatement (Third) of Property (Comment f) to determine, on a case-by-case basis, whether a right of first refusal is enforceable. The factors are:

The legitimacy of the purpose of the right,
The price at which the right may be exercised, and
The procedures for exercising the right

These factors are not exclusive.

Let’s look at each one of the factors and how they figure into the Clarke case.

Background of Clarke v Fine Housing (2023)

First, the pertinent background of 2023 Supreme Court of South Carolina case Clarke v. Fine Housing, Inc.: Barry Clarke owned a strip club in Charleston. In 1999, he entered into a lease agreement with the owners of another strip club across the street to use part of their unimproved land for parking. The lease contained the following language:

Section 5.2. Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.

Note that there’s no mention of price, timing, how to exercise the right, or any other specifics – not even which property this right of first refusal applies to.

In 2013, then-owner RRJR conveyed the property in question to Fine Housing, Inc. Clarke learned of the sale in 2014 after it was a done deal, having had no opportunity to exercise what he believed to be his enforceable right of first refusal (Right).

In 2015, Clarke brought this action for specific performance against Fine Housing and RRJR. The case eventually came before the Supreme Court of South Carolina, which agreed with the SC Court of Appeals that the Right was not enforceable because it constituted an unreasonable restraint on alienation.

Factors for an Enforceable Right of First Refusal

Here are the three factors the Supreme Court of South Carolina uses to determine enforceability of a right of first refusal on a case-by-case basis and how they show up in Clarke.

Factor 1: Legitimacy

In Clarke, Fine Housing didn’t challenge the legitimacy of the purpose of the Right, so the court didn’t address the issue.

Factor 2: Price

Price may or may not be an unreasonable restraint on alienation. If, for example, the ROFR were dependent on a fixed price, that could restrain alienation. If the price were to be matched to a third party’s offer, there would be less restraint.

In Clarke, Clarke argued that the Right left the price to be determined entirely by RRJR and required him to match any offer from a third party. He also argued that exercising the Right would have started a bidding war that would have benefitted RRJR.

The court agreed with Fine Housing that the absence of any method for determining the purchase price in the lease constituted an unreasonable restraint on alienation. Absence of specifics on how to determine price may not be as restraining as a fixed price, says the court, but it is still a restraint, and “a right of first refusal should contain some method for determining the price at which it may be exercised.” The lease Clarke signed had no method, and therefore this factor worked against him.

Factor 3: Procedures governing the exercise of the right

Comment f to the Restatement stresses the importance of provisions governing the exercise of the right, stating, “Lack of clarity may cause substantial harm by making it difficult to obtain financing and exposing potential buyers to threats of litigation. Lengthy periods for exercise of rights of first refusal will also substantially affect alienability of the property.”

Time is also an important consideration. How soon after the owner decides to sell does the right holder have to exercise their right? An extended period of time can be a restraint on the property owner, while a “reasonable” time frame does not impose unreasonable restraint and is generally enforceable.

In Clarke, Clarke argued that a ROFR does not require detailed instructions on how to exercise it to be valid, but this directly contradicts the Restatement (Third) of Property. He also argued that the lease provided satisfactory procedures regarding the exercise of the right. The court disagreed “because the Right contains no such procedures whatsoever.”

As for timing, Clarke argued that if there’s no mention of a timeline in the language of the agreement, then it must be done within a “reasonable time.” The court disagreed, saying that the point of the Restatement is to include a predetermined time limit so as to protect the property owner’s power of alienation, rather than having the owner rely on a “judicially implied ‘reasonable time.’”

Because of the total lack of provisions regarding timing and procedures on how to exercise the Right, the court found again in favor of restraint on alienation.

Additionally: Which Property?

The court also addressed a matter specific to Clarke: to which property did the Right ostensibly apply? The entire property that includes the unimproved land Clarke leased for parking, or the unimproved land only?

Clarke argued that the Right applied to the entire property, but the court disagreed because the language in the lease was not clear. That uncertainty constitutes an additional unreasonable restraint on alienation.

Takeaway: Rely on Clear, Specific Contracts

The SC Supreme Court affirmed the appeals court’s decision, finding in favor of Fine Housing and against Clarke, stating “The Right does not identify the property it encumbers, contain price provisions, or contain procedures governing the exercise of the Right. We conclude the Right is an unreasonable restraint on alienation. We therefore affirm the court of appeals’ holding that the Right is unenforceable.”

An important takeaway for anyone entering into a contract with a right of first refusal in South Carolina: Make sure the language in your contact is clear and specific and that it addresses the three factors discussed above. It must contain language on how the price should be determined and how the right should be exercised. Language that unreasonably restrains the property owner’s power of alienation may render it unenforceable, so the right cannot be construed too favorably to the would-be buyer.

Call Gem McDowell for Contracts, Strategic Business Advice, and Commercial Real Estate

Many legal disputes come down to the language in a contract. Is it clear? Is it enforceable? Would the courts side with you if the matter were ultimately litigated? It’s critical to get the contract right before signing it, so you lessen the chances of complications and litigation down the road.

For help with business contracts and commercial real estate, call business attorney Gem McDowell at the Gem McDowell Law Group. Gem has over 30 years of experience working with business owners to help them start, grow, and protect their businesses. He and his team can help you with contracts, corporate governance documents, strategic advice, and more. He also has extensive experience in commercial real estate transactions in South Carolina. Call the Gem McDowell Law Group today to schedule a free consultation at 843-284-1021.

What is “Unconsionability” in the Law?

What is “unconscionability” in the law, and how is it viewed by the high courts in South Carolina? In this blog we’ll look at the definition of unconscionability, its elements, and what unconscionability looks like in real-life cases, including the 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC.

“Unconscionability” in the Law

“Unconscionability” is used by courts most often in the context of contract law. It refers to terms that are so egregiously unjust or one-sided that they are unreasonable and may shock the conscience of the court. Typically, it’s the party with greater bargaining power that creates a contract favoring themselves to the detriment of the other party. When a contract or one of its terms are found unconscionable, it is unenforceable.

“Unconscionable” is also used by courts to describe a party’s grossly unfair conduct. A party that behaves unconscionably may not benefit from their conduct.

Elements of Unconscionability in South Carolina

“Unconscionability has been recognized as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” – South Carolina Court of Appeals quoting the SC Supreme Court decision Carolina Care Plan, Inc. v United HealthCare Servs., Inc. (2004) in the Huskins decision (emphasis added).

From this understanding of unconscionability, South Carolina courts look for two elements to determine whether something is unconscionable or not:

Absence of meaningful choice
Oppressive and one-sided terms

What would constitute a “meaningful choice” in the eyes of the court, and when are contract terms considered “oppressive and one-sided”? Let’s look at unconscionability in some real-life South Carolina cases.

Unconscionability in Real Life: Huskins v Mungo Homes, LLC

We’ve run into the concept of unconscionability in previous blogs:

To describe bad conduct in the context of minority member oppression (squeeze out/freeze out) in Wilson v Gandis (SC Supreme Court, 2019) (blog here)
Whether a prenuptial agreement in Hudson v Hudson (SC Court of Appeals, 2014) was unconscionable (blog here)
Whether an arbitration agreement in Arredondo v SNH SE Ashley River Tenant (SC Supreme Court, 2021) was unconscionable (blog here)

The 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC (read the decision here) also looked at unconscionability in regards to an arbitration clause.

Briefly, a couple (the Huskinses) bought a house from Mungo Homes, LLC (Mungo), entering into a purchase agreement that included an arbitration clause and a limited warranty. Two years later, in July 2017, the Huskinses filed an action against Mungo over issues they had with the purchase agreement. (They did not allege any problem with the home itself.)

Mungo filed a motion to dismiss and to compel arbitration. The Huskinses argued that the arbitration clause was unconscionable and unenforceable. The appeals court looked at the two elements described above to determine unconscionability.

Element 1: Absence of Meaningful Choice

The appeals court found that the Huskinses did have an absence of meaningful choice. It found that the Huskinses:

Were average purchasers of residential real estate
Were not represented by independent counsel
Were not a substantial business concern to Mungo and therefore had no more bargaining power than the average homebuyer

The Huskinses did not have a viable alternative to the arbitration agreement in the purchase agreement; if they wanted Mungo to build their home, they had to sign it and agree to its terms.

Element 2: Oppressive and One-Sided Terms

The Huskinses argued that the arbitration agreement was unconscionable, in part, because of its last two sentences: “Each and every demand for arbitration shall be made within ninety (90) days after the claim, dispute or other matter in question has arisen, except that any claim, dispute or matter in question arising from either party’s termination of this Agreement shall be made within thirty (30) days of the written notice of termination. Any claim, dispute or other matter in question not asserted within said time periods shall be deemed waived and forever barred.”

South Carolina law provides a statutory period of three years for such claims, which is drastically different from 30 or 90 days.

Still, the circuit court found these limited terms were not one-sided and oppressive. The appeals court disagreed, citing SC Code Section 15-3-530(1), which provides a three-year statute of limitations for such claims, and Section 15-3-140, which explicitly states that no contract provision attempting to shorten the statutory period shall bar any such actions from being brought.

Furthermore, the appeals court states that while in theory the clause applies equally to both the Huskinses and Mungo, in reality it would disproportionately affect the Huskinses. The appeals court also found that it was not “geared towards achieving an unbiased decision by a neutral decision-maker,” as the Fourth Circuit Court of Appeals directs courts to consider when it comes to arbitration agreements.

The SC Court of Appeals therefore found that due to an absence of meaningful choice and the presence of oppressive and one-sided terms, this section of the arbitration agreement was unconscionable and unenforceable. (The court also found this section was severable, meaning the rest of the arbitration agreement and purchase agreement stood, and the circuit court’s order compelling arbitration was affirmed.)

Contract Law in South Carolina

Would your contracts hold up to such scrutiny in court? You need to know what’s in every contract you write and sign as a business representative and as an individual and to avoid terms that could be construed as unconscionable.

For help creating and understanding contracts, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help ensure your contracts are clear, fair, honest, enforceable, and don’t violate SC code or public policy. Call Gem at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

Can You Be Bound by an Arbitration Clause You Didn’t Agree to?

In June 2016, 90-year-old Bonnie Walker moved into the Brookdale Senior Living Center, a residential care facility in Charleston, SC. Six weeks later, she wandered out of the center one evening, and the following day her body was found by family members at a retention pond on the property, where she had been maimed and dismembered by an alligator.

This tragic event forms the basis of Weaver v. Brookdale Senior Living, Inc. (find the opinion here), a case heard by the South Carolina Court of Appeals in 2020. Walker’s granddaughter Stephanie Walker Weaver brought a lawsuit in her personal capacity (rather than on behalf of her deceased grandmother or anyone else) against the facility, its owner, and its director (collectively, the Appellants) for negligence, negligent infliction of emotional distress, and intentional infliction of emotional distress.

However, those aren’t the main issues for the court here. Instead, the court focuses on arbitration – specifically, whether the Appellants could compel Weaver to arbitration.

Arbitration and Potent Public Policy

Arbitration is an effective form of alternative dispute resolution (ADR) that settles matters out of the courtroom. In binding arbitration, the outcome is legally binding, just as it would be in litigation. Unlike litigation, however, arbitration is typically less expensive and faster in reaching a resolution. Another benefit of arbitration is that it keeps private business private, as opposed to resolving an issue in court where it becomes a matter of public record.

In this case, the Appellants say the trial court erred by denying their motion to compel Weaver to arbitration because there is strong state and federal policy favoring arbitration. The court of appeals agrees there is “potent” public policy favoring arbitration, but only in terms of interpreting and enforcing arbitration agreements that are entered into validly. The Federal Arbitration Act, which was signed in 1925 and applies to both state and federal courts, commands that arbitration agreements be treated like other contracts – no better or worse – but it doesn’t compel arbitration where mutual agreement among parties to arbitrate is absent. Nor does it give Appellants a “leg up,” in the words of the appeals court, in determining whether a valid arbitration agreement exists in the first place.

With this in mind, the issue in the present case is to determine whether a valid arbitration agreement exists: Are Weaver and the Appellants bound by a valid arbitration agreement?

When Nonsignatories Can Be Bound to Arbitration Agreements

If you’ve signed many contracts in your life or clicked “I Agree” on terms of service online, there’s a high chance you’ve agreed to binding arbitration with certain parties. That’s because standalone arbitration agreements and arbitration clauses within contracts are now commonplace. In those situations, you’ve agreed that you and the other party will settle disputes through arbitration rather than through litigation.

The residency agreement that Weaver’s grandmother signed when she entered the Brookdale facility contained an arbitration provision. It not only bound Walker to arbitration, but “third parties not signatories to this Arbitration provision,” including her family members, too.

However, Weaver herself never signed such an agreement with Brookdale, and there’s no evidence that she was aware of the content of the agreement her grandmother signed, yet the Appellants moved to compel her to arbitration. How is this possible?

In South Carolina, state law says that that nonsignatories can be bound to arbitration in an agreement they were not a party to under a number of theories, such as incorporation by reference, assumption, veil piercing/alter ego, and estoppel. For appellants, there’s only one theory: equitable estoppel, also called direct benefits estoppel in arbitration.

Equitable Estoppel, or Direct Benefits Estoppel

Equitable estoppel prevents someone taking legal action that goes against their previously stated words or prior behavior. The idea of equitable estoppel is that the party wishing to use it was in some way misled by the other party.

Under equitable estoppel/direct benefits estoppel, a nonsigner can be compelled to comply with a contract’s arbitration provision if all three of these conditions are met:

The nonsigner’s claim arises from the contractual relationship;
The nonsigner has “exploited” other parts of the contract by reaping its benefits; and
The claim relies solely on the contract terms to impose liability

As to the first point, the court of appeals concludes that Weaver’s claims do not arise from the contractual relationship. Her claims are not about how the Appellants breached any provision(s) in the residency agreement entered into with her grandmother; rather, they’re about general duties Appellants owe to everyone.

For instance, the court notes that one of Weaver’s claims was for emotional distress over the Appellants’ mishandling and failure to safeguard her grandmother’s remains. There is no provision in the residency agreement Walker signed relating to handling of remains. So Weaver’s claims do not arise directly from the contractual relationship between Walker and the Appellants, meaning the first of the three conditions is not met.

As to the second point, the court concludes that Weaver “exploited” and otherwise benefited from the residency agreement as much as “a pedestrian run over by a truck has benefited from the contract for the purchase of the truck” – that is to say, not at all. Therefore the second condition is not met, either.

Since all three conditions must be met and the first two weren’t, equitable estoppel cannot be used here. The court of appeals concludes that there is no valid arbitration agreement between Weaver and Brookdale and therefore affirms the trial court’s denial of the Appellants’ motion to compel arbitration.

Legal Help for Strong Contracts

Whatever side of the agreement you’re on, it’s important to understand the rights and limitations relating to arbitration whenever you sign a contract or agree to terms of service that include an arbitration provision. South Carolina courts have enforced arbitration agreements when valid but do not go so far as to bind nonsignatories to arbitration except under certain conditions.

For help with arbitration clauses, contracts, and other business matters, contact Gem McDowell at the Gem McDowell Law Group in Mt. Pleasant, SC. He and his associates serve clients in the Charleston area and across South Carolina, protecting their business interests and helping them plan for the future. If you have an issue to discuss or are looking for an experienced business attorney to advise you, call Gem today at 843-284-1021 to schedule a free consultation.

Your Risks as a Minority Member in an LLC: Oppression and Squeeze-Out

A limited liability company (LLC) is a great thing for many entrepreneurs. Among other things, it provides liability protection while requiring fewer formalities than a corporation. But it’s not risk-free. One of the potential risks is minority oppression of members who own less than 50% of the LLC.

Today we’re going to look at what minority member oppression is, what your rights are as a minority member of an LLC, and what you can do to protect yourself.

Risk of Oppression for Minority Members in an LLC

Minority member oppression occurs when a member or members of an LLC act to reduce a minority member’s involvement in the LLC against their will.

When minority shareholder oppression occurs in a corporation, the shareholder can simply sell their shares (albeit at an unfairly low price in many cases) and walk away. However, in an LLC and close corporations, it’s often not so easy. The minority member may find that their investment is essentially being held hostage, and they don’t have a legal avenue to get it out of the company. Walking away means losing their investment.

The oppression often entails reducing the minority member’s income from the business, keeping them out of the loop regarding company business, and excluding them from important management decisions. Another tactic is for the majority member(s) to create a new, separate business entity and merge that with the existing business without giving the minority member any ownership in the new merged business, instead exchanging their interests for cash or eliminating it altogether.

When the end goal of this oppression is to force the minority member to give up their ownership in the LLC altogether, that’s commonly referred to as a squeeze-out or freeze-out.

LLC Minority Members’ Rights Under South Carolina Law

If your LLC does business without important governance documents (covered in the section below) and a dispute arises and goes to court, then South Carolina laws regarding LLCs apply. These vary somewhat depending on what kind of LLC it is (member-managed or manager-managed), but under SC law, minority members can expect certain rights, including:

The right to a share of distributed profits
The right to a share of proceeds of a sale if the LLC is sold or dissolved in proportion to their ownership
The right to see the company’s books and financial records
The right to sue another member or members for breach of fiduciary duty if they engage in misconduct

These protections sound great but they may not play out the way you want in real life. For example, majority members may take an income as an employee (rather than a distribution as an owner) or spend the company’s money in another way to avoid making distributions to minority members. Or they could structure a sale of the LLC in such a way as to legally cut out a minority member from the proceeds.

In short, don’t rely on default South Carolina laws to protect your interests as a minority member in an LLC. It’s best to have governance documents including an operating agreement with terms that are favorable to minority members and for you as a minority member to know, understand, and agree to those terms.

How Minority Members Can Protect Themselves: The Operating Agreement

In South Carolina, the Articles of Incorporation is the only document your LLC is legally required to have to be in business. Other governing documents are optional but extremely important for multi-member LLCs, the most important of which is the operating agreement.

An operating agreement details the ways in which the LLC will operate, covering such topics as ownership, members’ and managers’ duties, voting rights, how decisions are made, how profits and losses are handled, and more. Terms regarding buying and selling ownership or the LLC may be included or can be handled in a separate buy-sell agreement. Same with raising capital, which may be included in the operating agreement or detailed in a separate capital call agreement.

It’s important to understand that an operating agreement is not bulletproof. Majority members may still try to squeeze out or freeze out a minority member. However, when drafted in a way that protects a minority member’s interests, an operating agreement can help. If an issue arises and goes to court, then the court will look at the terms of the operating agreement rather than defaulting to SC law, which will be better for you (assuming the agreement is drafted well).

Work with a Business Attorney to Draft Your LLC’s Governing Documents

Each LLC is different and the members within each LLC are different, so no two operating agreements are alike. If you’re planning on joining or starting up an LLC with other people, or if you’re already in one but don’t have governing documents, talk to a business attorney. They can not only draft an operating agreement (and other documents) tailored to you and your business, they can also advise you on potential pitfalls and situations you may not have considered. Because what you don’t know can hurt you.

Gem McDowell is a business attorney in Mount Pleasant, SC, serving clients in the Charleston area and across the state. He and his associates at the Gem McDowell Law Group help people start, grow, and protect their businesses and business interests. Gem is a problem solver who has seen a lot in over 30 years of experience, and he can advise you on your situation and help you protect your interests. To schedule a free consultation, call 843-284-1021 today.

Get It in Writing – It’s the Law

Please be advised that the Court assumed for purposes of the Motion for Summary Judgment that all the facts the Plaintiff (Kagan) alleged were true in the light most favorable to him and without consideration of the Defendants Simchons’ version of the events to form the basis for their legal analysis.

Have you heard that oral contracts are legally binding? While many verbal agreements are valid and can be upheld in court, that’s not always the case. South Carolina law requires written contracts for certain types of agreements, and without evidence in writing, the contract cannot legally be enforced.

Still, some people, either not knowing the law or not seeing the need for a written contract, go ahead with a deal in good faith based on a verbal agreement and a handshake.

Jeffrey S. Kagan did so, lending large amounts of money on handshake deals, in a case (Kagan v Simchon) that was heard by the South Carolina Court of Appeals in May 2019.

Can you guess how it turned out for him?

Lending Money Without a Written Contract

Kagan had a close relationship with Renee Simchon, the respondent in the case, and her husband, Sam. Kagan worked as an independent contractor for many years for Sam’s company, Bay Island Sportswear, Inc., which was next door to Simchon’s realty company, Greenwood Realty, in Greenwood, SC.

Over the years, Kagan occasionally loaned them money, including $129,000 in June 2009 (First Loan), $210,000 in October 2010 (Second Loan), and $52,000 in November 2013 (Third Loan). Kagan later stated that the agreements for the First Loan and Third Loan were not reduced to writing, but stated there was written evidence of the Second Loan.

Simchon used the money from the Second Loan to pay off a mortgage she held for one of her clients, and the plan was to repay the principal when the property was sold. Instead, after the sale of the property, Simchon wrote Kagan a check for $31,616.46 and gave the remaining $180,000 to her husband Sam to invest on Kagan’s behalf. Kagan later stated in a deposition that he did not authorize that transfer of money to Sam.

Kagan also believed that from this point, the First Loan and Second Loan were consolidated. When he made the Third Loan, he stated he believed that it was also consolidated with the first two. Again, this consolidation was not put down in writing, and was done on the basis of “a handshake, a look in the eye and a personal relationship.”

Sam made periodic payments until November 2013. In April 2014, Kagan’s employment with Sam’s shop was terminated.

Taking It to the Courts

In August 2015, Kagan filed summons and complaint seeking repayment on all three loans, alleging breach of contract and other actions. In response, the defendants filed a motion to dismiss.

The case was heard in circuit court in February 2016, in which Kagan’s claims regarding the First Loan and the Third Loan were dismissed after he admitted that the terms of these loans had not been reduced to writing. The case was heard again in circuit court in January 2017 after some claims were dismissed and Simchon remained as the only defendant. This time, the Second Loan was dismissed for the same reason; despite Kagan claiming that there was written evidence of the Second Loan, he was not able to produce it.

Without written evidence of the terms of the loans, the court was not able to enforce Kagan’s claims for repayment, citing Section 37-10-107 of South Carolina Code:

No person may maintain an action for legal or equitable relief […] to lend or borrow money; […] or […] to renew, modify, amend, or cancel a loan of money […] involving in any such case a principal amount in excess of fifty thousand dollars, unless the party seeking to maintain the action or defense has received a writing from the party to be charged containing the material terms and conditions of the […] agreement and the party to be charged, or its duly authorized agent, has signed the writing.

In short, if you make a business deal that involves lending, borrowing, renewing, modifying, amending, or canceling a loan over $50,000, you must have the agreement written down and signed to be legally enforceable. (Note that this does not apply to “a loan of money used primarily for personal, family, or household purposes,” per 37-10-107(3)(a).)

The circuit court thus granted Simchon’s motion for summary judgment. The case was appealed and heard by the SC Court of Appeals in May 2019.

The Statute of Frauds in South Carolina

The circuit court cited the statute of frauds (SOF) as the reason for barring or dismissing Kagan’s claims. SOF requires that certain types of agreements be written down and signed to be enforceable. The concept comes from common law and is present in every state in one form or another.

In South Carolina, the statute of frauds is found in SC Code Title 32 Chapter 3. Agreements that must be reduced to writing and signed by an authorized party are those:

Requiring an executor or administrator to pay damages from their own estate
Requiring a person to pay the debt of another
Made in the consideration of marriage (i.e., prenuptial agreements)
Involving the contract or sale of land
That take longer than a year to perform

In addition, Section 36-2-201(1) requires a contract recording the sale of goods valued over $500 in order for any related action to be enforceable, and, as seen above, Section 37-10-107 requires written evidence to enforce actions on lending or borrowing $50,000 or more in business deals, or making changes to the agreement related to it.

Kagan argued that the circuit court erred because Simchon used the money from the Second Loan to pay off a mortgage that was in her name – not that of her realty company – therefore making it a personal loan that wasn’t subject to 37-10-107.

The SC Court of Appeals disagreed, stating that even if the mortgage was in her own name, the money was “used” (the word in the statute, the court notes) on behalf of a client in the course of business, making it subject to 37-10-107. The Court of Appeals agreed with the circuit court’s finding that Kagan’s claim with respect to the Second Loan was therefore barred.

The Statute of Limitations in South Carolina

The circuit court found that Kagan’s breach of contract claim was barred because of the statute of limitations (SOL), or the time allowed by law in which to bring a legal claim. Kagan argued that the circuit court erred, saying that Sam’s payments on the loans tolled the statute of limitations until the payments stopped.

“Tolling” means pausing or delaying the time left on the SOL. Tolling may allow someone to bring a lawsuit even after the SOL has seemingly run out.

However, in this case, the appeals court did not agree that the SOL was tolled, as that would have depended on the loans being consolidated. If you remember, Kagan stated that he believed all three loans were consolidated. He also stated that the terms of the consolidation were never written down – and that’s the problem.

The appeals court affirmed the circuit court’s finding, again citing 37-10-107, which states (as discussed above) that any amendment or modification to a loan over $50,000 must be in writing to be enforceable. Without the terms in writing, there is no tolling of the SOL.

The SOL therefore began when Simchon breached their agreement by failing to transfer the remainder of the money from the sale of the property to Kagan. This happened on March 21, 2011, and since the SOL for a breach of contract claim in South Carolina is three years, Kagan had until March 21, 2014 to file. He didn’t until August 2015, nearly a year and a half after the SOL had run out.

Get Help with Your Contracts

The South Carolina Court of Appeals affirmed the circuit court’s order to grant summary judgment to Simchon. Unfortunately for Kagan, he wasn’t able to use the force of the law to help him recover the outstanding money he was owed. This could have been avoided had he gotten everything in writing.

Contracts exist for a reason, and a correctly written one can save you time, money, and heartache. Don’t rely on a handshake or the goodwill you have with another party when making a deal, especially when there’s a substantial amount of money on the line. Work with an attorney to ensure that your interests are looked after and protected.

Business attorney Gem McDowell of the McDowell Law Group in Mt. Pleasant, SC, serves clients in the greater Charleston area and the state of South Carolina. He and his associates can help you with contracts, business creation and planning, commercial real estate, and more. To make an appointment or to schedule a free 20-minute consultation with an attorney, call Gem and his team today at 843-284-1021.

What Happens If You Sell the Same Land to Two Separate Parties? Specific Performance as a Remedy

When seeking justice through the courts, a person or party who has been wronged may receive compensation to help right that wrong. That compensation may be a “legal remedy,” which means it can take the form of monetary damages, or it may be an “equitable remedy,” which includes remedies that don’t involve money. Specific performance is one such equitable remedy.

Specific performance was at the heart of a case that was heard by the South Carolina Court of Appeals in February 2020, Shirey v Bishop, in which a woman entered into two agreements to sell the same piece of land to two parties.

Specific Performance as an Equitable Remedy

Specific performance is a legal concept where the court can order a party to perform a specific act. The performance of the specific act is the equitable remedy that compensates the injured party for the wrong done to them.

Usually, the specific act is the completion of a contract they were already party to and is most commonly seen in cases involving the sale or purchase of land. That’s because the law considers land unique; even if the injured party were awarded monetary damages, they would not be able to purchase a piece of land identical to the one in question, because every piece of land is different.

Specific performance may also be compelled in cases not relating to real estate. For example, the Uniform Commercial Code (UCC), a set of laws adopted by all 50 states and D.C. that standardizes commerce laws between the states, does allow for specific performance as a remedy to the buyer in some cases. “Specific performance may be decreed where the goods are unique or in other proper circumstances” (SC Code Section 36-2-716). However, in practice, specific performance as a remedy is rarely used in cases not involving the conveyance of land.

Selling the Same Land to Two Separate Parties

We can see specific performance in action in Shirey v Bishop.

The background: Gwen G. Bishop and her husband ran a grave digging and burial vault business together for over 30 years from a property (the Property) located in Newberry County, SC. After her husband’s death in 2010, Bishop ran the business by herself, but soon decided she no longer wanted to continue.

In April 2012, Bishop agreed to sell the Property to her niece, Cassandra Robinson. They entered into a contract under which Robinson agreed to pay Bishop’s mortgage until it was satisfied. (The mortgage holder, TD Bank, was not notified of this arrangement and did not agree to it.) The contract was never recorded.

A few years later, in late 2014 or early 2015, Bishop then entered into an agreement to sell the Property to Robert G. Shirey, even though she had already previously entered into a contract to sell it to her niece.

Shirey and Bishop signed a contract (the Shirey Contract) in which Shirey agreed to buy the land for $125,000, including $1,000 in earnest money. The contract included a provision that the closing must occur “no earlier than Aug 3, 2015 [,] and no later than Aug 12, 2015.”

They set the date of closing for August 12, 2015. Shirey brought a check for $122,976.92 to his attorney’s office and waited for Bishop to arrive for the closing to complete the transaction. She never showed up.

Shirey’s attorney then called Bishop and asked if the closing period could be extended to the following day, the 13^th. Bishop agreed, and a new appointment for the closing was set.

Once again, Bishop did not show up. Her doctor sent a note to Shirey’s attorney asking to excuse Bishop from the closing.

But that same afternoon, when she should have been closing the deal with Shirey, Bishop entered into a second contract to sell the Property to Robinson. Robinson agreed to purchase the Property for $33,000 and assume the mortgage. Bishop executed a deed conveying the Property to Robinson, and Robinson recorded the deed the same day.

The Case is Heard by a Special Referee

On August 20, 2015, Shirey filed a complaint against Bishop requesting specific performance of the Shirey Contract plus attorney’s fees. He later amended his complaint to add TD Bank (the mortgage holder) and Robinson after he discovered the deed conveying the land from Bishop to Robinson.

In March 2017, the case was heard by a special referee. (A special referee is lawyer who has expert knowledge in a particular field and may hear cases where the law is clear but the facts are in dispute. They judge on the facts and bind the parties to a decision.)

In May 2017, the special referee found in favor of Shirey, setting aside the deed to Robinson, awarding attorney’s fees to Shirey, and ordering specific performance of the Shirey Contract. This means that Bishop and Shirey would need to carry out the terms of their contract and Robinson would lose the Property.

Bishop and Robinson appealed.

Requirements for Specific Performance

Quoting another case, the SC Court of Appeals states in its opinion:

“In order to compel specific performance, a court of equity must find (1) clear evidence of an agreement; (2) that the agreement has been partly carried into execution on one side with the approbation of the other; and (3) that the party who comes to compel performance has performed on his part, or has been and remains able and willing to perform his part of the contract.” (Gibson v Hrysikos, 1987)

The Appellants raised a few arguments against the validity of the special referee’s awarding of specific performance, including these two: 1, there was no valid contract for the conveyance of the land from Bishop to Shirey and 2, Shirey had not demonstrated that he was able to perform the contract.

Contract Validity and the Statute of Frauds

The Statute of Frauds (SOF) requires certain types of agreements to be in writing and signed in order to be enforced by law. Under this statute, contracts involving land must be written down. Furthermore, modifications or amendments to the agreement must also be in writing to be enforceable.

In this case, the Appellants argue that the special referee erred in finding Shirey was entitled to specific performance because there was no valid contract, a valid contract being the first of three requirements to compel specific performance, as stated above.

They argue that the Shirey Contract was no longer valid because the closing did not happen within the period specified in the contract. After Bishop failed to show up at the closing on August 12^th – the last day that the deal could go through, according to the Shirey Contract – Shirey’s attorney called her and they agreed to extend the closing period by one day. This was an oral agreement and was not written down.

So, does this make the Shirey Contract invalid under the SOF? It’s a very interesting legal question but unfortunately, we don’t get an answer. It’s well established that an issue cannot be brought up anew on appeal, and that’s what happened here. The SC Court of Appeals dismisses the argument because the Appellants did not bring it up to the special referee nor did they bring it up in their answers to Shirey’s complaint.

Capability of Performing the Contract

The Appellants also argue that Shirey did not demonstrate he was capable of performing his obligations under the Shirey Contract both at the time of closing and when he brought the legal action. Ability and willingness on the part of the complainant to perform their part of the contract is the third of three requirements to compel specific performance, as stated above.

Shirey argues that he fulfilled his obligations under the Shirey Contract by tendering the purchase price on August 12, 2015, the original closing date, when he brought a check for the purchase price to his attorney’s office. He had also put down $1,000 in earnest money. At the time of the appeal, he was still ready, willing, and able to go through with the Shirey Contract. Therefore, the SC Court of Appeals agreed with Shirey.

The Importance of Legal Help for Real Estate Contracts

Finding that all three requirements to compel specific performance were satisfied, the SC Court of Appeals affirmed the special referee’s grant of specific performance. The deed from Bishop to Robinson will be set aside and the Property will be sold to Shirey.

Most people know better than to enter into multiple contracts to sell the same piece of land to different parties. Still, real estate law can be complex, and getting the right help with real estate transactions, particularly in business, is crucial.

Gem McDowell is a commercial real estate attorney and business attorney with nearly 30 years of experience in the law. He has closed over $1 billion worth of real estate deals, including a single deal of $270,000,000. Along with his extensive experience, he’s also a problem solver who can help you grow and protect your business. To schedule an appointment or a free 20-minute consultation on your issue, call Gem and his team at his Mount Pleasant, SC office at 843-284-1021 today.

Can You Be Held Personally Liable for Your LLC’s Debts?

Entrepreneurs who create a limited liability company (LLC) are protected from putting their personal assets at risk for business debts. Right? After all, that’s the main purpose of the LLC. “Limited liability” is even in the name.

Well, not always. There are situations in which a member of an LLC is not protected and can be held personally responsible for business debts.

Today we’re going to look at a 2019 case from the South Carolina Court of Appeals, Johnson v Little (read it here), that touches on a number of issues that are important for business owners to know, including limited liability and breach of contract.

Johnson v Little: The Facts of the Case

Robin Johnson of CQI Pharmacy Services, LLC and Robert Little of CQI Oncology/Infusion Services, LLC, had a rather unusual situation. Both were the sole owners of their companies and at the same time were employees at the other’s company, with the power to write checks from the other’s business.

In spring 2013, Johnson paid invoices in the amount of $25,568.59 to settle vendor accounts for Little’s company, CQI Oncology. At some point, Little removed Johnson as an authorized signatory for his business and the checks Johnson had signed and sent to the vendors ended up not going through.

Shortly thereafter, the two entered into a contract for Johnson to purchase assets of Little’s company for the price of $30,000. The contract stated that “the Property is free and clear of any liens or encumbrances” but due to the bounced checks, that turned out not to be the case. Johnson discovered that the invoices were still outstanding and that as the new owner, she owed the outstanding amount to the vendors.

Johnson sued Little for breach of contract, among other things. The matter was tried by a master, who found in favor of Johnson. An appeal followed.

The Three Elements of Breach of Contract

The master found that the following three elements of breach of contract were satisfied in this situation:

There was a valid contract. Neither party disputed this.
There was a breach of the contract. The contract contained language stating the Property was free and clear of “encumbrances” when that was not true. The outstanding invoices were a clear encumbrance. Little tried to argue this point unsuccessfully.
There were damages resulting from the breach. Johnson had to pay the vendors’ invoices herself, costing her over $25,000.

All three criteria must be satisfied in order to find a breach of contract occurred, as they were in this case.

The standard remedy for a breach of contract is for the breaching party to reimburse the nonbreaching party so that it’s as if the breach had never happened. The Court of Appeals reaffirmed this standard in this case, by rejecting the master’s decision to award Johnson an additional $30,000 above the amount of the invoices. This would have put her in a better position than she would have been had the breach never occurred, which violates the general rule for breach of contract remedy.

A Lesson on the Limits of Limited Liability

Now we come to the part about personal liability for company debts. In the appeal, Little argued that the master erred in finding him personally liable in addition to his company. The contract he entered into with Johnson was done so and signed by Little as the sole member and manager of the LLC, and as an individual.

This is so important, it bears repeating: Little entered into the contract and signed it as a representative of his LLC and on his own behalf.

The Court of Appeals states that because Little “was a party to the contract as an individual and his actions caused the contract to be breached, the master did not err in holding him individually liable.”

A simple lesson here is to always sign anything relating to your business as the LLC’s owner. When signing a contract or endorsing a check, include the full name of the LLC and sign as “John Q. Smith, Manager.” Sign a company check (which already has the LLC’s name on it) with your name and role.

Other Limits of Limited Liability

If Little had signed only as a member/owner and not as himself, could he still have been found personally liable? Possibly. In its decision, the Court of Appeals cites a 2012 South Carolina Supreme Court case, Dutch Fork Dev. Grp. II, LLC v. SEL Props: “as a matter of law, a manager of a limited liability company can wrongfully interfere with his company’s contracts and be held individually liable for his acts.” In the case at hand, the Court did determine that Little’s actions constituted “wrongful interference” with the company contracts, whether he signed the contract as an individual or not.

Another way a business owner may be held personally liable is if they commit a tort, or wrongful act, such as fraud. Liability can also be suspended due to piercing the corporate veil. Learn more about this important concept on our blog, here.

Get Help with Contracts Strategic Business Advice

This is just a brief overview of the ways in which an LLC owner may be held personally liable for business debts, and the true lesson is that business law is often not as straightforward as it appears. For that reason, it’s smart to have an experienced business attorney in your corner who can provide you with strategic business advice like Gem McDowell.

Gem is a problem solver and a business attorney with over 25 years of experience who can advise you whether you’re looking to buy a company, start a new company, or grown an existing company. Call Gem and his associates at their Mt. Pleasant office at 843-284-1021 to schedule a free consultation today and get the help you need.

How to Word an Enforceable Provision: Invention Assignment Agreements and Confidentiality Agreements

Some of the most valuable assets a company can own are its trade secrets, patents, and inventions. Losing control of these assets can be very costly, so protection is a must.

To protect their intellectual property, companies often include clauses and provisions regarding trade secrets and inventions. Confidentiality agreements and nondisclosure agreements stop employees from sharing trade secrets and sensitive information. Assignment of Inventions clauses ensure that relevant inventions made by employees during their time at the company are assigned to the company. Trailer Clauses do the same thing but cover a period after the employee leaves the company’s employment.

For businesses in South Carolina with sensitive information, trade secrets, and other intellectual property to protect, it’s important to understand that having such clauses and agreements with your employees isn’t enough. They must be worded precisely in order to be enforceable by a South Carolina court.

A case in point, decided by the South Carolina Supreme Court in 2012, gives a real-life example of what happens when these types of agreements come under the scrutiny of the state’s highest court.

Background to the Milliken & Company v. Morin case

Brian Morin is a research physicist who started working for Milliken, an industrial chemical and textile producer, in April 1995. While employed, he began working on a new multifilament fiber, but Milliken did not agree to support its research and development. Morin resigned from Milliken in May 2004 and filed for a patent for the new fiber which he assigned to Innegrity, a company he founded the same week he quit Milliken.

Milliken found out about what Morin was doing and demanded he stop working with the fiber and furthermore said that under an employment agreement Morin had signed, the invention rightfully belonged to Milliken.

Eventually, Milliken and Morin’s case ended up in the South Carolina Supreme Court. The issue of interest to us here is Morin’s argument that the agreement he signed was overbroad and therefore unenforceable. He argued that the inventions assignment provision and confidentiality clause in his agreement should be scrutinized and enforced to the same standard of covenants not to compete.

The Supreme Court disagreed.

Why are Covenants Not to Compete Disfavored in South Carolina?

As we’ve discussed in previous blogs (here, here and here), South Carolina courts tend to side with the employee rather than the employer when it comes to covenants not to compete. The South Carolina Supreme Court has stated that “restrictive covenants not to compete are generally disfavored and will be strictly construed against the employer” and that they must also be reasonably limited in time and geographical scope. (See Rental Uniform Service of Florence, Inc. v. Dudley, 1983)

This is a high standard to hold all provisions to. However, it’s important to understand why these agreements are often found unenforceable by South Carolina courts. It’s because when they are overly broad and badly worded, they violate public policy by hampering an individual’s ability to make a living in their profession.

The same is not true about the provisions at hand, which do not hamper Morin’s ability to make a living within his profession. The Supreme Court found the inventions assignment agreement and the confidentiality agreement to be clear, reasonable, and enforceable. That’s why it upheld the Court of Appeals’ decision and decided against Morin.

What Employers Need to Know About Drafting These Provisions

While this South Carolina Supreme Court decision is good news for employers in this state, it’s important to understand that the Court upheld the enforceability of reasonable provisions. A reasonable provision is one that protects legitimate business interests yet does not violate public policy by hampering an individual from making a living in their profession.

In this particular case, the exact wording of the relevant parts of the employment agreement signed by Morin was important to the Court. Let’s look at the specific language used and upheld by the Court to understand what businesses can do when wording their own provisions in the future.

Clear Definitions

For both the confidentiality clause and the invention assignment agreement, the Court’s opinion stressed that the definitions were extremely clear. Here they are, as presented in the opinion.

Milliken’s definition of confidential information contains five elements, all of which must be met for information to be considered confidential. The Court wrote “It does not take much elaboration to see that rather than covering general skills and knowledge, it encompasses only important information […]” As defined by Milliken in the agreement, confidential information is:

Competitively sensitive information
Of importance to and
Kept in confidence by Milliken,
Which becomes known to the employee through his employment with Milliken, and
Which is not a trade secret.

Regarding the invention assignment agreement, the Court notes that at first Milliken defines inventions broadly, then provides the following broad exception to that definition:

“for which no equipment, supplies, facility or proprietary information of Milliken was used and

Which was developed entirely on your own time, and

Which does not relate
- Directly to the business of Milliken or
- To Milliken’s actual or demonstrably anticipated research or development, or
Which does not result from any work performed by you for Milliken.”

Both of these provisions had clear definitions that protected Milliken’s interests without limiting Morin’s ability to find employment.

Reasonable Time Limitations

The Court stated that the confidentiality agreement was “reasonably limited” to “only” three years and it called the one-year restriction attached to this provision “eminently reasonable.”

Businesses should be conservative, not greedy, when attaching time limitations to any and all provisions.

Reasonable Geography Limitations

Although not discussed in this decision, geographical limitations on such provisions are also important. The Court of Appeals decision in this case cited a previous South Carolina Supreme Court decision which found “geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”

For companies that do business with customers across the country and across the globe, this means that a provision unlimited in territory may not be considered unreasonable if the company actually does do business all over. For companies that do business solely in South Carolina, it would be unreasonable to have a provision unlimited in territory.

Employers should err on the side of being conservative when it comes to limitations in geography.

Get Help with Business Contracts, Employment Agreements, and More

As you can see, the wording in an employment agreement or provision can make the difference between being enforceable and unenforceable here in South Carolina’s courts. If you have business interests to protect, you should be working with an experienced attorney.

Gem McDowell is a business attorney with over 25 years of experience solving legal problems and helping businesses protect their interests. For advice and help with your business legal matter, contact Gem McDowell Law Group in Mt. Pleasant, SC today at 843-284-1021.

Would Your Contract Hold Up in Court? Indemnification Clauses and Public Policy.

If you’re in business, you know that contracts are a must to protect yourself. But don’t make the mistake of assuming that simply having a contract is enough. If it’s worded incorrectly, it can cost you.

In previous blogs we’ve discussed what can happen when covenants not to compete and nondisclosure agreements overreach or violate public policy – they become unenforceable.

The same is true with other common clauses in business contracts. Today we’re looking at the indemnification clause, which was the subject in a recent case before the South Carolina Court of Appeals. The Court determined that the clause in question was worded in such a way as to violate state public policy and was therefore unenforceable.

Let’s look at what indemnification is first, then the case, and finally, what you as a business owner can do so you don’t find yourself in the same situation.

What is Indemnification?

In an indemnification clause, the indemnifying party (the indemnifier) agrees to – in standard contract language – “indemnify, hold harmless, and defend” the indemnified party (the indemnitee) against lawsuits and losses resulting from the actions or negligence of the indemnifying party.

In practice, indemnification serves to shift the costs of defending lawsuits and paying resulting damages, if any, from one party (the indemnitee) to the other (the indemnifier). It may also shift the actual defense litigation as well.

For example, say a construction company hires a subcontractor to do some work on a house. The subcontractor indemnifies the construction company against damages arising from lawsuits due to its (the subcontractor’s) work. Let’s say the subcontractor does a shoddy job and the homeowner later sues the construction company for damages. Because it was indemnified, the construction company can expect the subcontractor to cover the fees it spends defending itself and the damages it pays to settle the claim.

A Real-Life Example

This was the general situation in the case at hand, D.R. Horton v. Builders FirstSource v. Jamie Arreguin.

The builder D.R. Horton, Inc. (Horton) entered into a contract with Builders FirstSource (BFS) for BFS to do some construction work on a home. Several years after the work was completed, Horton was sued by Patricia Clark for damages related to multiple alleged construction defects in the home. Horton was ordered to pay Clark $150,000 in general damages after arbitration.

Horton then sought to recover those damages and legal fees from BFS under their contract’s indemnification clause. The case went to a circuit court, which sided with BFS. It then went to the South Carolina Court of Appeals, which affirmed the lower court’s decision.

(For more details about this case, read the PDF of the court’s opinion here.)

What happened? BFS and Horton had an indemnification clause in their contract; why was Horton not able to recover under it?

The Indemnification Clause Violated Public Policy

The main reason the Court decided in BFS’s favor was that the contract’s indemnification clause was written in such a way as to violate South Carolina public policy.

The Court of Appeals found that it was allowable under state statute for Horton and BFS to agree that BFS would indemnify Horton for damages caused by BFS. However, the Court also found that it was not allowable for Horton to have BFS indemnify Horton for damages caused by Horton, which is how the clause was worded. That violated Section 32-2-10 of the South Carolina code and went against public policy, making it illegal and therefore unenforceable.

Here is the relevant section of the Code, abridged for clarity:

“Notwithstanding any other provision of law, a promise or agreement in connection with the […] construction […] of a building […] purporting to indemnify the promisee […] against liability for damages […] proximately caused by or resulting from the sole negligence of the promisee […] is against public policy and unenforceable.”

In addition, the circuit court and Court of Appeals found that Horton failed to provide BFS written notice of the Clark matter, as per their contract, which acted as a waiver of Horton’s right to indemnification. Also, Horton and Clark requested that the arbitration award be general, which means there was no way to know what part, if any, of the $150,000 award was related to construction work completed by BFS.

What This Means for You

Time and again, businesses get in trouble when they try to get more than they fairly and lawfully deserve. Here, Horton wanted BFS to pay damages for what may have been Horton’s own negligence, which is not reasonably fair, and is also not legal. In the end, Horton got nothing.

As a business owner, here’s what you can do to avoid a similar situation:

Be very intentional about the wording in the contracts you create. While you want to protect your company’s interests, if you go overboard, you could end up with a clause or contract that’s unenforceable.
Be just as careful about the contracts you sign. Do you understand what every clause means, and is it fair?
Work closely with an attorney who understands contract law. Have your attorney draft new contracts or review existing contracts and discuss them with you to ensure they’re worded correctly and align with your business interests.

Get Help with Your Contracts From the Business Attorneys at Gem McDowell Law Group

Gem McDowell is a problem solver and a business attorney with over 25 years of experience. He can help you with your legal needs including reviewing and drafting contracts. Call them at Gem McDowell Law Group in Mt. Pleasant, South Carolina to discuss your business matter at (843) 284-1021 today.

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