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Wednesday, July 25, 2012

Peleg v. Neiman Marcus: Court of Appeal Finds Arbitration Agreement Illusory and Unenforceable

Peleg v. Neiman Marcus Group, Inc. (4/17/12) 204 Cal.App.4th 1425, represents a unique twist on the enforceability of arbitration clauses:  
In this employment case, an employer and its at-will employees purportedly entered into a contract requiring the arbitration of claims by both sides. But the contract contains a modification provision stating that the employer may amend, modify, or revoke the arbitration contract on 30 days' written notice; at the end of the 30-day period, a contract change applies to any claim that has not been filed with the American Arbitration Association (AAA). The contract also has a choice-of-law clause stating that the contract shall be governed by Texas law and the FAA. The employee contends that, under the choice-of-law clause, the employer's unilateral right to make contract changes renders the contract illusory. We ultimately conclude that the choice-of-law clause is valid and that the arbitration contract is illusory under Texas law.  
In reaching that conclusion, we also examine California law regarding illusory arbitration contracts. On that subject, we determine that an arbitration contract containing a modification provision is illusory if an amendment, modification, or revocation—a contract change—applies to claims that have accrued or are known to the employer. If a modification provision is restricted—by express language or by terms implied under the covenant of good faith and fair dealing—so that it exempts all claims, accrued or known, from a contract change, the arbitration contract is not illusory. Were it otherwise, the employer could amend the contract in anticipation of a specific claim, altering the arbitration process to the employee's detriment and making it more likely the employer would prevail. The employer could also terminate the arbitration contract altogether, opting for a judicial forum if that seemed beneficial to the company. 
Id. at 1432-1433.  

The opinion is available here.  

1 comment:

  1. Thanks for posting this. i really enjoyed reading this.

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