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South Carolina Court of Appeals Invalidates Arbitration Clause in Employment Application

    Client Alerts
  • July 29, 2011

Highlighting the importance of ensuring consistency in the documents that employees sign, the South Carolina Court of Appeals recently invalidated a mandatory arbitration clause in an employment application because of an inconsistent provision in the employee's offer letter. Specifically, in Davis v. KB Home of SC, Inc., the Court of Appeals held that the "merger clause" of an employee's employment agreement superseded and invalidated the arbitration clause in his employment application. Notably, the court held that it - not an arbitrator - had jurisdiction to decide whether the arbitration clause was enforceable.

Davis applied for employment with KB Home by filling out, signing and submitting an application that contained a broad mandatory arbitration clause. When Davis was hired, he signed an offer letter stating: "This letter together with the documents referenced herein contain all of the agreements and understandings regarding your employment and the obligations of KB Home in connection with employment. . . . This letter supersedes any and all prior agreements and understandings between you and KB Home and alone expresses the agreement of the parties." This provision, generally known as a "merger clause," is standard in many offer letters and employment agreements, and is designed to preclude employees from claiming that the employer is bound by any alleged terms, conditions, or promises that are not set forth in the offer letter or agreement.

In Davis, the employee argued that the offer letter which did not include an arbitration clause, superseded and replaced the employment application. The Court of Appeals agreed, and the arbitration provision was not enforced.

Much of the argument in Davis focused on whether the court or the arbitrator should determine the applicability of the merger clause. The Court of Appeals held that the decision was for the court to make because it concerned the validity of the arbitration clause itself. This ruling reversed the trend in many recent cases of sending such questions to the arbitrator, and serves as a reminder that courts in South Carolina will closely examine the enforceability of arbitration provisions.

Based on Davis, it is critical for South Carolina employers that want to arbitrate employment disputes to review their arbitration provisions to ensure that there are no offer letters, agreements, non-competes, or other documents that may supersede them. Merger clauses are part of the boilerplate language contained in many such documents, so ensuring that employment documents and agreements do not contain any provisions inconsistent with the company's intent to arbitrate disputes will require a comprehensive review of all documents that employees sign.