Commercial Litigation Flash Update

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Consumers and business litigators need to be aware of an important decision by the Arizona Supreme Court yesterday that clears up an open question of law about the power of a business to unilaterally modify a standard consumer contract. In siding with the business, the Supreme Court reaffirmed our State’s consistent reliance on Restatement of Laws—and even draft Restatements not yet formally published.

In this case, a customer opened an account with a bank. In doing so, she agreed to terms and conditions specifying that, among other things, the bank could “change those terms and conditions from time to time.” Three years later, the bank did just that, by adding an arbitration clause to its terms and conditions. The bank did not directly contact customers about the change, opting instead to simply put a “change in terms” banner across the top of its monthly written and online statements.

Not long after that, the customer brought a class action lawsuit against the bank in the U.S. District Court for Arizona on an unrelated issue (allegedly unlawful overdraft charges). The bank demanded arbitration. The customer responded that the arbitration clause was unenforceable because she had never assented to it. Who was right? The District Court certified the question to the Arizona Supreme Court. And yesterday, the Supreme Court sided with the business.

In finding the clause enforceable, the Supreme Court turned—as it has done in the past—to Restatement (Second) of Contract § 211’s guidance concerning indicia of unenforceability of unilateral contract modifications. Under that provision, a term in a unilateral contract modification is unenforceable if “the other party has reason to believe that the party manifesting such assent would not do so if [s]he knew that the writing contained a particular term.” Traditionally, the Restatement continues, that would apply if the new term is “bizarre or oppressive,” if it “eviscerates the nonstandard terms explicitly agreed to,” if it “eliminates the dominant purpose of the transaction,” or if the customer “never had an opportunity to read the term.”

So far, so good—the arbitration term was not oppressive nor inconsistent with the underlying terms of the agreement, and the customer did have a chance to see it. But she claimed she never actually did see it. Did that matter? Courts in other jurisdictions were divided—but again, the Restatement provided the answer. Here the Court adopted not merely the published Restatement of Contracts, but a provision within the 2012 draft Restatement (Third) of Torts. And that provision, § 3, answered the question at hand. Under § 3 of the 2012 draft, a business may impose unilateral changes to its terms with at-will consumers if (1) the consumers received reasonable notice of the changes and of an opportunity to opt out without penalty; and (2) the consumer continues to do business past a reasonable rejection period. “Restatement § 3’s position merits our adoption,” the Court concluded. “[I]t is consistent with Arizona law and sets forth sound policy.”

The decision is Cornell v. Desert Financial Credit Union et al., No. CV-22-0071-CQ (Ariz. filed March 2, 2023). The decision can be found at this link:

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