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California Courts Reject Compelled Arbitration Bylaw

Friday, March, 27, 2015

The State of California remains hostile to binding arbitration clauses of all kinds, and has now issued a decision finding arbitration clauses in the bylaws of corporations to be unenforceable. The bylaws, requiring members of the corporation to settle disputes through an arbitration process many feel will always be skewed in favor of the company, are increasingly common. Delaware and Maryland have also recently issued similar decisions.


The case involves a California-based country club incorporated under the name Ironwood, which was sued by former and current members when it failed to repay loans made by members for the purchase of property as part of a plan to expand the club. The board of directors of the club subsequently adopted bylaws without dissent that required disputes to be settled via binding arbitration, and filed a motion to compel the suing members into arbitration as a result. This was denied by the court, but upon appeal was upheld. The Appellate court found that because the litigants had agreed to allow changes to the bylaws when they became members of the corporation, such actions were permissible.


However, upon further appeal, the decision was reversed again. It is not clear how wide-reaching the effects of these decisions will be, and the interpretation of the contract language in these cases is very narrow; had details been different it is entirely possible the courts would have ruled otherwise. However, it is in line with prior decisions in the California court system, which remains hostile to arbitration in the wake of the Supreme Court decision on them several years ago.