Employee Handbooks: Is your Arbitration Clause Valid?


Recently, the Fourth Circuit Court of Appeals in Coady v. Nationwide Motor Sales Corp issued an opinion regarding the enforceability of Nationwide Motor Sales Corporation’s arbitration agreement contained in the company’s employee handbook. Applying Maryland contract law, the Fourth Circuit held that Nationwide’s arbitration agreement failed because the signature page found within the same document contained terms allowing Nationwide the option to unilaterally change the terms of the agreement therein.

Similar to the law in South Carolina, Maryland’s courts hold that unless there is a binding obligation, there is not sufficient consideration to support a legally enforceable agreement. Simply put, there is no contract if the promise given in exchange is illusory, and the terms capable of changing. Basic contract principles apply to form this rule. According to Corbin on Contracts, an “illusory promise” is one that appears to be a promise, but it does not actually bind or obligate the promisor to anything. An illusory promise is composed of “words in a promissory form that promise nothing.” 

Prior to the Fourth Circuit’s decision in Coady v. Nationwide Motor Sales Corp, previous case law in Maryland held that a promise to arbitrate is illusory, and cannot constitute consideration to form a contract with an employer, if the employer reserves the right to alter, amend, or revoke the arbitration clause at any time. In the recent Fourth Circuit case, this concept was expanded further to the scenario where the arbitration clause, while a separate paragraph, was contained within the same document as a signature page and acknowledgment which allowed the employer to revoke or amend its contract’s terms.

While the Fourth Circuit’s decision was not based on South Carolina law, it raises the question whether similar issues could arise in South Carolina employment contracts. South Carolina generally holds that where an employer proffers a contract to arbitrate, and there is a mutual promise to arbitrate, that is sufficient consideration to uphold an arbitration agreement. However, to ensure an arbitration clause is not illusory, it is important that arbitration clauses can stand alone and that language integrated into the clause itself would not alter the mutual promise made under these agreements. With the ever-changing law in this area, it is always helpful to speak with legal counsel when creating or re-drafting employment contracts. Contact us with any concerns you have with employee contracts.