October 24, 2012 Articles

When Amendable Arbitration Clauses Are Illusory

By Brian E. Cohen

According to the Federal Arbitration Act of 1925 (FAA), 9 U.S.C. §1 et seq., "arbitration is a matter of contract." As a result, agreements to arbitrate disputes are contracts that require consideration—a bargained-for benefit or detriment. An illusory promise, "a promise merely in form, but in actuality not promising anything, . . . cannot serve as consideration . . . it would impose no obligation since the promisor always has it within his power to keep his promise and yet escape performance." 3 Williston on Contracts § 7:7 (4th ed.). In Peleg v. Neiman Marcus Group, Inc., a California court, analyzing Texas Law and the FAA, held that an arbitration clause in an employment agreement was illusory because the employer retained the ability to amend the clause to cover claims that had already accrued. 204 Cal. App. 4th 1425, 140 Cal. Rptr. 3d 38 (Cal. Ct. App. 2012).

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