Can a contract be unilaterally amended? Then its arbitration clause might be unenforceable

Unilateral-amendment provisions are common …

You’ve surely seen this in the fine print of (say) a credit-card company contract. The contract has a unilateral-amendment provision. That provision gives the credit-card company the right to change the contract terms at any time by giving you written notice. If you keep using the credit card after that, you’re bound by the changed terms.

The same kind of language shows up in Web-site terms of service — such as WordPress’s otherwise-admirable model terms of service; in bank customer agreements; and many other types of contract.

… but might invalidate the contract’s arbitration provision

This kind of contract often includes an arbitration requirement that prohibits the consumer from suing the credit-card company. If you have a dispute, you have to submit the dispute to arbitration. That’s not a universally-popular option.

The arbitration requirement might be unenforceable, though, if the company can unilaterally amend the contract — and thus the arbitration provision — even as to existing disputes.

24 Hour Fitness learned this the hard way

The Fifth Circuit held that Texas law requires such a result in a case involving 24 Hour Fitness. The arbitration provision was in an employee handbook, not a contract per se, but that provision was an agreement to arbitrate (and had to be, otherwise it wouldn’t have been enforceable at all).

The problem for 24 Hour Fitness was that it retained the right to modify the employee handbook at any time — and there was no exception for the arbitration provision. Thus, the Fifth Circuit said:

Carey argues that the arbitration clause in the Handbook is illusory because the Change-in-Terms Clause would allow 24 Hour Fitness to unilaterally avoid its promise to arbitrate by modifying the Handbook. The Acknowledgment gives 24 Hour Fitness the “right to revise, delete, and add to the employee handbook” in which the arbitration provision is located.

As in Morrison, there is no “Halliburton type savings clause” in the Acknowledgment that limits 24 Hour Fitness’s ability to make retroactive modifications to the arbitration provision.

If a 24 Hour Fitness employee sought to invoke arbitration with the company pursuant to the agreement, nothing would prevent 24 Hour Fitness from changing the agreement and making those changes applicable to that pending dispute if it determined that arbitration was no longer in its interest.

In effect, the agreement allows 24 Hour Fitness to hold its employees to the promise to arbitrate while reserving its own escape hatch.

The appellate court upheld a trial-court ruling that the arbitration provision was unenforceable. Carey v. 24 Hour Fitness USA, Inc., No. 10-20845, slip op. at 6 (5th Cir. Jan. 24, 2012) (affirming denial of motion to compel arbitration; emphasis and extra paragraphing added, citations and internal quotation marks omitted).

Model contract language for a Halliburton exception

The lesson for contract drafters here is: If you’re going to include a unilateral-amendment provisions, include a carve-out for dispute-resolution requirements. Here’s some language I’ve used:

AMENDMENTS – UNILATERAL – DISPUTE-RESOLUTION PROVISIONS

For the avoidance of doubt, no unilateral amendment will retroactively modify agreed dispute-resolution provisions of this Agreement, if any — including for example arbitration provisions — for then-pending disputes unless the parties expressly agree otherwise.