Badie v. Bank of America
79 Cal. Rptr. 2d 273, 98 Cal. Daily Op. Serv. 8189, 67 Cal. App. 4th 779 (1998)
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Rule of Law:
A unilateral "change of terms" provision in a consumer adhesion contract does not authorize the drafting party to add a new, collateral term that was not contemplated in the original agreement, especially when the new term purports to waive a customer's constitutional right to a jury trial.
Facts:
- Plaintiffs held credit card accounts with Bank of America, with some agreements dating back to the 1960s.
- The original account agreements were contracts of adhesion that contained a "change of terms" provision giving Bank of America the unilateral right to modify the agreements.
- The version of the provision in effect at the relevant time stated, "We may change any term, condition, service or feature of your Account at any time."
- Notably, older, superseded versions of the agreement had explicitly allowed the Bank to "add new terms," but this language was absent from the current agreements.
- The original agreements contained no provisions addressing the method or forum for resolving legal disputes.
- Starting in June 1992, Bank of America enclosed a half-page notice, or "bill stuffer," in its customers' monthly statements.
- This notice announced a new mandatory dispute resolution provision, stating that if either party requested, any controversy would be decided by arbitration or judicial reference, which would "take the place of a trial before a judge and jury."
- The notice informed customers that by continuing to use their accounts, they would be bound by this new provision for all past and future transactions.
Procedural Posture:
- Plaintiffs, four individuals and two consumer organizations, filed a complaint against Bank of America in a California trial court.
- The complaint sought, among other things, a declaration that the Bank's newly added alternative dispute resolution (ADR) clause was invalid and unenforceable.
- After a 17-day nonjury trial, the trial court entered a judgment in favor of Bank of America.
- The trial court found that the "change of terms" provision in the original account agreements permitted the addition of the ADR clause and that the clause was enforceable.
- Plaintiffs (as appellants) filed a timely appeal of the trial court's judgment to the California Court of Appeal.
- On appeal, the plaintiffs waived their statutory claims, limiting the appellate court's review to the declaratory relief action regarding the ADR clause's validity.
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Issue:
Does a unilateral "change of terms" provision in an adhesion contract for a credit card account permit the bank to add a new alternative dispute resolution (ADR) clause, thereby waiving the customer's right to a jury trial, by sending a notice in a monthly bill?
Opinions:
Majority - Phelan, P. J.
No, a unilateral "change of terms" provision does not permit the bank to add a new ADR clause in this manner. The bank's power to modify the contract is limited by the implied covenant of good faith and fair dealing, which requires that any change be objectively reasonable and within the parties' contemplation at the time of contract formation. Adding an entirely new term that strips customers of their constitutional right to a jury trial is not a modification of an existing term, but rather an attempt to "recapture" a foregone opportunity that was not part of the original bargain. Because the original agreements were silent on the subject of dispute resolution, customers could not have reasonably expected that their right to a judicial forum was a "term" of the account subject to unilateral change. Furthermore, a contractual waiver of the right to a jury trial must be clear and unequivocal, which cannot be achieved through a customer's passive failure to object to an ambiguous notice buried in a monthly bill.
Analysis:
This decision significantly limits the power of a drafting party in an adhesion contract to unilaterally alter the agreement through a general "change of terms" clause. It establishes that such clauses are not a blank check to add entirely new substantive provisions, particularly those that eliminate fundamental rights like access to a jury trial. The court's focus on the implied covenant of good faith and fair dealing reinforces that discretionary contract powers must be exercised reasonably and within the original scope of the parties' agreement. This case serves as a crucial consumer protection precedent, requiring clear and unmistakable consent for the waiver of constitutional rights and preventing such waivers from being imposed through passive acceptance of bill stuffers.
