North Carolina Supreme Court Approves Unilateral Modification of Agreement to Add Arbitration Clause
A consumer or customer signs up with a service provider. The provider might be a bank, as it is in this case. It may be a credit card company. It may be a utility or a cell-phone service provider. It may be your employer. You agree to terms and conditions when you first enter into a relationship, and those terms give the service provider or employer the right to change the terms at will, so long as they provide “notice,” which comes in the form of updated terms of service that the service provider or employer know you will not read. The situation is fairly common, and we should expect to see more of this (if that is even possible) as courts continue to see “objective manifestations of assent” when well-resourced parties impose terms on consumers and employees that the latter will only see and understand after the trap door has slammed shut behind them.
In 2014, Pamela Phillips opened an account with the Charlotte Metro Credit Union (the Credit Union). When she did so, her membership agreement (the Agreement) included the following clause:
Except as prohibited by applicable law, [defendant] may change the terms of this Agreement. We will notify you of any change in the terms, rates, or fees as required by law.
In 2021, the Credit Union added an arbitration clause to the Agreement, and it sent Ms. Phillips notice of this change through three separate electronic notices. The notice also included an opt-out option, which Ms. Phillips did not exercise. In March 2021, she filed a class-action complaint relating to alleged overdraft fees charged to accounts that were not overdrawn.
The Credit Union filed a motion to compel arbitration. The trial court denied the motion, both because it did not think the Credit Union had the right to unilaterally add an arbitration clause to the Agreement and because, even if it did, doing so was inconsistent with the duty of good faith and fair dealing. By a two-to-one vote, a North Carolina court of appeals reversed this decision. The dissenting judge would have upheld the trial court’s decision based on the duty of good faith and fair dealing.
In Canteen v. Charlotte Metro Credit Union, the Supreme Court of North Carolina sided with the court of appeals majority. The Court begins by setting out basic principles. Common-law contracts cannot be modified without new consideration. However, where parties agree to unilateral modifications with notice, courts should honor their agreement. That leaves only the question of whether adding an arbitration clause through unilateral modification violates the duty of good faith and fair dealing.
After reviewing the relevant case law, the Court determined that it is permissible to alter terms if the new terms “relate to subjects discussed and reasonably anticipated in the original agreement.” [Note to the Court: it would be less gas-lighty if you said “addressed” rather than “discussed.” No terms in this form contract were discussed. Bank customers have no idea about choice of law provisions. These terms are dictated by the vendor, not discussed.] Be that as it may, the Agreement had a provision on “Governing Law,” which included a choice of forum. Under the announced standard, changing the forum does not violate the duty of good faith and fair dealing. Moreover, because that duty is a limitation on the Credit Union’s power to unilaterally change the terms of the Agreement, the contract is not illusory.
Ms. Phillips’ final argument was that her inaction or silence should not count as consent. This argument is a clear loser in the eyes of the Court given her agreement to unilateral modification with notice and her inaction upon receiving notice of such modification. The Court thus concluded that the arbitration agreement in the Agreement as modified is binding and enforceable against Ms. Phillips.
Justice Riggs, joined by Justice Earls, dissented, finding that the unilateral modification mechanism rendered the Agreement illusory. In marked contrast to the majority, the dissenting opinion is rich in citations to law school and scholarship. Among other things, Justice Riggs cites to Jeff Sovern, the late Elayne E. Greenberg, Paul F. Kirgis, & Yuxiang Liu, Whimsy Little Contracts’ with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, discussed on the Blog here.