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Terminable arbitration agreement was enforceable
March 14, 2006 by Ross Runkel at LawMemo

Lots of courts have held that an employee-employer arbitration agreement cannot be enforced if the employer retains the right to terminate the agreement or to change the agreement. This is because of the contract-law doctrine of "consideration."

Each side has to promise something to the other. If one side "promises" something that really is nothing, then that is aptly called an "illusory promise." And an illusory promise cannot constitute consideration.

So a typical analysis is that if the employer promises to arbitrate under an agreement that the employer has the right to change, then that promise is illusory, it can't be consideration, and the whole agreement fails.

What if the employer's right to change the agreement is prospective only, can be done only once a year, and can be done only after giving 30 days notice? That was the case in Holloman v. Circuit City Stores (Maryland 03/13/2006) (5-2).

The court said the employer was obligated to give 30 days notice before changing the terms of the arbitration agreement, so the employer was bound to its agreement to arbitrate for at least 30 days. That constituted consideration.

The DISSENT argued that the agreement was so one-sided that it was unconscionable because there was no issue about which the employer had an interest or a need to arbitrate.

Rick Bales talks about this case at Workplace Prof Blog.

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