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North Carolina Supreme Court Affirms Enforceability of Arbitration Clause Added by Amendment to Existing Account Agreement

In the modern economy, companies often amend the terms of consumer contracts pursuant to change-of-terms provisions, providing notice of the amendment to the consumer via email. In a recent decision, the North Carolina Supreme Court confirmed that, pursuant to such change-of-terms provisions, companies can amend consumer contracts to add arbitration clauses, at least where the original agreement contemplates some method of forum selection or dispute resolution. See Canteen v. Charlotte Metro Credit Union, No. 10A23 (N.C. May 23, 2024).[1]


When plaintiff Pamela Phillips[2] joined the Charlotte Metro Credit Union (“CMCU”) in 2014, she signed CMCU’s Membership Agreement. The Membership Agreement included both a Notice of Amendments provision and a Governing Law provision. The Notice of Amendments provision said that, “[e]xcept as prohibited by applicable law, [CMCU] may change the terms of this Agreement,” and CMCU would notify the member “of any changes in the terms, rates or fees as required by law.” The Governing Law provision specified that “any legal action regarding this Agreement shall be brought in the county in which the credit union is located.”

In 2021, CMCU amended the Membership Agreement to include an arbitration clause and class-action waiver.  Pursuant to the Notice of Amendments provision, CMCU emailed Ms. Phillips—who had also agreed to receive account notifications by email—three times in early 2021 with a notice of this amendment and an opportunity to opt out. Ms. Phillips did not opt out.

Later in 2021, Ms. Phillips filed a putative class action complaint against CMCU in Mecklenburg County Superior Court, alleging that CMCU improperly collected overdraft fees on accounts that were not overdrawn. CMCU responded with a motion to stay the proceedings and compel arbitration. The trial court denied CMCU’s motion, ruling that the arbitration agreement was not enforceable on the grounds that the Notice of Amendments provision did not permit CMCU to “unilaterally add a wholly new arbitration provision,” and even if it did, the implied covenant of good faith and fair dealing prohibited such an addition.

CMCU appealed, and the North Carolina Court of Appeals reversed the lower court in a 2-1 decision. The majority (Judges Dillon and Dietz) held that the arbitration amendment was a valid change to the forum selection procedure in the original Membership Agreement. In dissent, Judge Arrowood, like the trial court, contended that the change violated the implied covenant of good faith and fair dealing and rendered the contract illusory. Pursuant to the dissent, Ms. Phillips appealed to the North Carolina Supreme Court.[3]

Supreme Victory for Arbitration

In a 4-2 decision,[4] the North Carolina Supreme Court affirmed, holding that the arbitration clause was a binding and enforceable agreement between Ms. Phillips and CMCU. The Supreme Court began by noting that, in North Carolina, there is a “strong public policy favoring the settlement of disputes by arbitration” and “any doubt concerning the existence of such an agreement must . . . be resolved in favor of arbitration.”

In evaluating the validity of the arbitration agreement, the Court began with the Notice of Amendments provision. Through this provision, the parties mutually agreed that CMCU had the ability to unilaterally change the terms of the Membership Agreement. Therefore, as long as CMCU’s changes fell within the “universe of terms” of the original Membership Agreement, the traditional contract modification analysis—requiring mutual assent and consideration—did not apply.  Additionally, such changes would not violate the covenant of good faith and fair dealing (an implied covenant applicable to all contracts) so long as the change “reasonably relate[d] to the subjects discussed and reasonably anticipated in the original agreement.”

Thus, the Court had to evaluate whether arbitration was within the “universe of terms” and “reasonably anticipated” in the original Membership Agreement. It concluded that it was.  In the context of arbitration, the majority reasoned that, if an original agreement includes any provisions related to forum selection or the method of dispute resolution, then a modification to include an arbitration clause falls within the universe of terms and is reasonably anticipated in the original agreement.  Here, the original Membership Agreement’s Governing Law provision “contemplated the forum and method for dispute resolution between the parties.” The amendment adding an arbitration clause “simply changed the forum in which the parties could raise certain disputes.”  Thus, the arbitration clause was a permissible amendment under the Notice of Amendments provision and did not violate the implied covenant of good faith and fair dealing.

Justice Riggs dissented, joined by Justice Earls. The dissent concluded that the Notice of Amendments provision rendered the amendment to include an arbitration clause and class-action waiver an illusory contract, and thus unenforceable, and that the amendment violated the covenant of good faith and fair dealing. 

Lessons Learned

The Canteen majority noted that “[g]iven the nature of the modern economy, change-of-terms provisions are a necessary and efficient way for companies to update contractual provisions without canceling accounts and renegotiating contractual terms every time modification may be required.” Canteen clarifies that companies can add arbitration clauses through such provisions so long as the original agreement governs forum selection or some other method of dispute resolution. Companies with longstanding account agreements with their customers considering the benefits of arbitration clauses may wish to review their original agreements and look for provisions similar to CMCU’s Notice of Amendments and Governing Law provisions that would provide grounds for an arbitration amendment.  Of course, where possible, companies that wish to arbitrate will want to include arbitration clauses in their original agreements to avoid litigation over the validity of amendments.

[1] Ellis & Winters LLP represented the Carolinas Credit Union League as amicus curiae in support of the Defendant Charlotte Metro Credit Union.

[2] Latoya Canteen, another plaintiff to this action, was not a party to the appeal because she did not have an arbitration agreement with CMCU, and thus CMCU did not move to compel arbitration of her claim.

[3] The North Carolina Supreme Court no longer automatically accepts appeals when there is a dissent for cases filed with the Court of Appeals on or after October 3, 2023.  S.L. 2023-134, § 16.21(d).

[4] Justice Dietz did not participate in the decision, because he was on the Court of Appeals panel that decided the intermediate appeal.

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May 31, 2024 Ty Jameson
Posted in  Arbitration