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California Appeals Court Says Bylaw Amendment Compelling Arbitration Unenforceable – Glass & Goldberg | Financing, Property & Bankruptcy Law
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California Appeals Court Says Bylaw Amendment Compelling Arbitration Unenforceable

California Appeals Court Says Bylaw Amendment Compelling Arbitration UnenforceableThe California Fourth District Court of Appeals has ruled that an amendment to a bylaw to require arbitration in disputes that was made by members of a corporation after other corporate members had already lodged a complaint is unenforceable.

In Cobb v. Ironwood Country Club, the country club was sued by several current and former members who alleged that the loans they made to the club for a land purchase deal had not been repaid per their agreement with the club. Five months after the suit was filed, the club’s Board of Directors amended club bylaws to require arbitration of any disputes or claims by past or current club members. Ironwood then filed a motion to compel arbitration, which a trial court denied.

Upon appeal, the appellate court affirmed the trial court’s ruling, stating that one party to a contract may not unilaterally amend that contract in a manner that violates the covenant of good faith and fair dealing by applying that amendment retroactively.

The court also dismissed Ironwood’s argument that by consenting to bylaws that permit future amendments, the plaintiffs were bound by future amendments, saying this renders the bylaws illusory and unenforceable. In addition, the court found the arbitration provision to be one-sided, stating that, “when coupled with the purported waiver of punitive or consequential damages, could be deemed unconscionable.”

The court noted that there was no language in the bylaws or the arbitration amendment that specified retroactive application. Spurning Ironwood’s argument that public policy strongly favors arbitration in disputes, the court said that arbitration by its very nature is consensual. By amending the bylaws in order to compel arbitration in a matter that was already pending, Ironwood did not create an agreement that was legally enforceable.

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