Subsequently adopted arbitration by-law cannot apply to accrued claim

In 1999, Ironwood County Club entered into a land-purchase agreement with current members.  The members loaned the club $25,500 with the agreement that any funds would be repaid by the Club to the member upon resigning membership.  The agreement also required new members to pay the balance of the members' land-purchase account and any unamortized portion.

In 2012, the Club announced that it was abandoning the practice of repaying resigning members any balance.  It was also alleged that the Club failed to require payment from new members’ as described above.  Two current and two former members brought suit against the Club (Cobb v. Ironwood Country Club, 233 Cal.App.4th 960).  Four months after filing, the Club passed an arbitration by-law and filed a motion to compel arbitration.  The Club argued that the plaintiffs’ prior agreement to be bound by the by-laws, which allowed amendment thereto, constituted their agreement to the mandatory arbitration by-law.  The trial court denied the motion to compel on the grounds that retroactive application would impose terms on the plaintiffs to which they did not agree.

On appeal, the Club continued to argue that plaintiffs agreed to the arbitration by-law through their agreement to allow amendment.  The Club also disputed the application as retroactive and argued public policy favored arbitration because the application was not clear.

The Court explained such a retroactive application would violate the covenant of good faith and fair dealing.  When a party retains an unfettered right to modify an agreement, the right must be exercised in good faith.  Since the Club sought to interfere with the rights of the plaintiffs' for the Club’s benefit, the application violated the covenant.  The Court quickly rejected the Club’s argument that the dispute was not retroactive because it was on-going - the by-law was being applied the accrued claim retroactively, not the on-going lawsuit.  Finally, the Court found no doubt as to whether the plaintiffs agreed to arbitration and denied the Club’s public policy argument.  In addition to those findings, the Court also held the by-law unconscionable because it only applied to claims by members and waived any award of punitive or consequential damages.

The Court of Appeal affirmed the trial court order.