S.C. Supreme Court Rules on the Scope of an Arbitration Clause

Post by Insurance Chair Pete Dworjanyn

Insurers and insureds have occasion to dispute whether lawsuits between them are subject to arbitration clauses in insurance policies. While Landers v. FDIC did not involve an insurance policy, the South Carolina Supreme Court’s holding that an employee’s breach of contract claim and related tort claims were all within the scope of an arbitration clause in his employment contract and thus subject to arbitration, could apply in insurer/insured litigation.

An employee’s written employment agreement with a bank contained an arbitration provision which provided: “Except matters contemplated by Section 17 below [Applicable Law and Choice of Forum], any controversy or claim arising out of relating to this contract, or the breach thereof, shall be settled by binding arbitration . . .” (Emphasis in original). The employee alleged that a new CEO began a systematic campaign to discredit and constructively terminate him.  His lawsuit against the bank included causes of action for: (1) breach of contract/constructive termination; (2) slander; (3) intentional infliction of emotional distress; (4) illegal proxy solicitation; and (5) wrongful expulsion as a director.

The employee argued the tort claims of slander and intentional infliction of emotional distress were not within the scope of the arbitration clause, as they did not require reference to or construction of the employment contract.  The Supreme Court, in holding that those claims were subject to arbitration, found they bore significant relationship to the employment agreement, which contained not only monetary rights and obligations, but also articulated the duties and obligations of the employee and provided he was subject to the direction of the employer, requiring him to diligently file and implement all policies and decisions.  The employment agreement also contemplated, as a cause for termination, a “material diminution in [] powers, responsibilities, duties or compensation.”  The court held that, in light of the breadth of the employment agreement, and in the particular manner in which the employee pled his underlying factual allegations, his tort claims were significantly related to the agreement, as the perceived inability to perform his job certainly related to his employment contract.

The court also held that the claims of illegal proxy solicitation and wrongful expulsion as a director were within the scope of the arbitration provision.  The essence of the illegal proxy solicitation claim was that the statement issued by the Bank was materially misleading as to the effect the recapitalization would have on common shareholders, including the employee.  Although the employee’s status as a shareholder did not originally derive from the agreement, the agreement contemplated his status as a shareholder, and according to the employee, he was entitled to an option to purchase additional shares of stock pursuant to the agreement.  The court concluded the employee’s allegations provided a direct link between his status as a shareholder and the breach of the agreement.  The court further held that the wrongful expulsion claim was arbitrable, given that the employee contended the breach of the employment agreement resulted in his expulsion as a director.

Practice Pointer: South Carolina Code § 15-48-10(b)(4), in part, provides that the South Carolina Uniform Arbitration Act does not apply to any insured or beneficiary under any insurance policy or annuity contract. Therefore, where an insurance policy is construed under South Carolina law, a dispute arising thereunder is likely not subject to arbitration. This is particularly important as § 38-61-10 provides that all contracts of insurance on property, lives, or interests in South Carolina are considered to be made in the State and all contracts of insurance the applications for which are taken within South Carolina are considered to have been made within the State and are subject to the laws of the State.  Arbitration is still a viable option where a policy is not subject to § 38-61-10, for example, where the property, lives, or interests at stake are not in South Carolina, or where due process prohibits the application of § 38-61-10.