Sometimes Unilateral Changes To Agreement Are Protected By Covenant of Good Faith And Fair Dealing – But Not Here.
I have posted about employment cases in which the covenant of good faith and fair dealing allowed an employer to unilaterally change an arbitration provision without the contract being illusory, because the covenant reins in the ability of the employer to make unreasonable changes. However, the lesson in Cobb v. Ironwood Country Club, G050446 (4/3 Jan. 28, 2015) (Rylaarsdam, O’Leary, Bedsworth) (published) is that the covenant won’t save a unilateral change that creates an arbitration provision that applies retroactively to accrued or known claims.
Plaintiffs, two present members and two former members of defendant, a country club, sued the country club in August 2012, alleging the country club reneged on a plan to repay members who loaned money to the club and then sold their membership interest before the club repaid their loan. In December, 2012, the club adopted a bylaw mandating arbitration of claims against it, and in January, the club filed a motion to compel arbitration of plaintiffs’ claims.
The Court of Appeal concluded that there was no authority allowing for enforcement of a unilaterally imposed retroactive arbitration agreement on a party who has not expressly consented to that retroactive application, once the plaintiff has already filed a lawsuit. A further problem with the bylaw was that it also mandated waiver of “all claims, rights and demands for punitive and consequential damages.”
The order denying Ironwood’s motion to compel arbitration was affirmed.
COMMENT: The discretionary power to unilaterally change a contract may make a contract illusory. The constraints imposed by the covenant of good faith and fair dealing can save the contract from being illusory, but the discretionary power must be exercised in good faith.