Adhesion contracts are “take-it-or-leave-it” contracts where the contract-writing party dictates the terms and the contract-signing party has little to no room to negotiate. It’s often a large company writing the contract and an individual consumer signing it. We recently covered the topic in our blog “Can I Get Out of a One-Sided Contract? Adhesion Contracts and Unconscionability in South Carolina,” which you can read here.
The conclusion of that blog was that you usually cannot get out of a contact you signed, and that even if a particular term or clauses is not enforceable, the court may simply sever it and enforce the rest of the contract.
But the recent 2024 South Carolina Supreme Court decision in Huskins v. Mungo Homes, LLC, (read the decision here) changes things.
The Future of Adhesion Contracts in South Carolina
Up to now, parties drafting an adhesion contract in South Carolina had nothing to lose by including terms that were highly favorable to themselves and unfavorable to the signing party. At best, the parties would adhere to the terms as written and unchallenged, to the benefit of the contract-writing party. At worst, a court might sever the offending term(s) and enforce the rest of the agreement – again, to the benefit of the contract-writing party.
But now, parties insisting on adhesion contracts must be prepared to abide by the contract as written, even to their detriment. In Huskins (2024), the court rejected the idea of severing contract terms that violate public policy in the absence of a severability clause.
This decision will likely affect how companies (in particular, home builders) write their contracts and how courts interpret adhesion contracts in the state moving forward.
That’s the decision and its implications in a nutshell. To understand the court’s reasoning behind this decision, read on.
Brief Background of Huskins v Mungo Homes
Amanda and Jay Huskins (the Huskins) signed a purchase agreement when they bought a house from Mungo Homes, LLC (Mungo) in June 2015. The purchase agreement included the following arbitration clause:
“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 not asserted within said time periods shall be deemed waived and forever barred.”
This clause clearly violates South Carolina law, which typically gives a statute of limitations of three years for such claims, not just 90 days. It also violates South Carolina Code Section 15-3-140 (2005), which renders void contract clauses that attempt to shorten the statute of limitations for claims.
The Huskins filed a complaint over provisions in the purchase agreement, including the arbitration agreement, which they argued violated public policy. The circuit court disagreed; it sided with Mungo and granted its motion to dismiss the complaint and compel arbitration.
On appeal, the appeals court AFFIRMED AS MODIFIED the circuit court’s decision (find that decision here). While it held that the clause limiting claims to 90 days was unconscionable and unenforceable, it also held that the offending section could be severed, allowing the rest of the arbitration agreement to stand.
The South Carolina Supreme Court took up the case in 2024 and REVERSED AND REMANDED the appeals court’s decision. It voided the entire arbitration agreement and remanded the case back to the circuit court.
The Court’s Reasoning
The supreme court went into depth on a number of issues:
Lack of Severability Clause
The court noted that the Mungo Homes contract did not contain a severability clause “or any hint that the parties intended for the arbitration agreement to stand if any part of it fell.”
South Carolina courts are not allowed to rewrite contracts, the court says, and instead are to enforce contracts according to their terms as written: “This is true even when the parties include a severability term. When they do not add such a term, we are reluctant to force one upon them.”
Violation of Public Policy
The appeals court found the clause limiting claims to 90 days was unconscionable and unenforceable.
The supreme court instead found the clause unenforceable because it’s illegal as a matter of public policy. “Because it is unenforceable, we need not decide whether it is also unconscionable. The only question we are left with is whether we should sever the illegal term and let the remainder of the arbitration agreement stand.”
Not Obtained in Good Faith
Courts have routinely stricken illegal parts from contracts and upheld the legal parts. This practice came to the U.S. from English common law and is part of the Restatement (Second) of Contracts.
The Restatement says a court may strike a contract term that’s unenforceable because it violates public policy and enforce the rest as long as:
- The part deemed unenforceable is not an “essential” part of the exchange, and
- The party that wants to enforce the term “obtained it in good faith and in accordance with reasonable standards of fair dealing”
Comments on the Restatement (Second) of Contracts section 184 says “a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so broad as to offend public policy by redrafting the agreement so as to make a part of the promise enforceable.”
Was the Mungo Homes contract term “obtained in good faith an in accordance with reasonable standards of fair dealing”?
The South Carolina Supreme Court says three reasons help in determining intent:
- The lack of severability clause
- The existence of a merger clause stating the contract “embodies the entire agreement” which can only be modified or amended in writing by the Huskins and Mungo
- The fact that it is, at Mungo’s own admission, an adhesion contract
On the third point, the court says: “Mungo wrote the contract and deemed its terms nonnegotiable. Huskins could not even edit it. This forceful proof of Mungo’s intent that the contract not be tinkered with convinces us that we should not rewrite it now.” As an adhesion contract, it’s “highly doubtful” the parties intended severability.
“Skirting” of Public Policy
The contract term shortening the time to 90 days from what’s typically three years is not an ancillary matter, but “a brash push” to use arbitration to do something that South Carolina statute forbids.
The court says that rather than including the arbitration provision as an alternative method to resolve disputes, Mungo included it to cut down the number of disputes entirely by drastically reducing the time frame in which to bring a claim. “We conclude Mungo’s manipulative skirting of South Carolina public policy goes to the core of the arbitration agreement and weighs heavily against severance.”
For Help with Contracts and More
The “take-it-or-leave-it” nature of the purchase agreement originally put the Huskins at a disadvantage, but now “Mungo is stuck with its choice,” in the words of the court.
This case highlights the importance of contracts. You must understand the terms of the contracts you sign. And if you’re the party writing the contract, avoid including terms that violate public policy and consider including a severability clause.
For help with contracts and other business-related legal matters such as creating governance documents, buying or selling a business, or starting a new business in South Carolina, contact Gem McDowell. Gem and his team at the Gem McDowell Law Group help business owners across the state solve problems, avoid mistakes, and grow their businesses, with offices in Myrtle Beach and Mount Pleasant, SC. Call today to schedule your free consultation.
