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Discover Bank v. Shea

362 N.J. Super. 200, 827 A.2d 358 (Law Div. 2001)

CONTRACTS; UNCONSCIONABILITY—A credit card issuer’s attempt to amend its credit card agreement to require arbitration by including such a change in a bill stuffer is unconscionable and contrary to public policy and such a change won’t be enforced in New Jersey.

A credit card issuer attempted to amend its agreement with its credit card holders by inserting a modification with the monthly account statement, a “bill stuffer.” The bill stuffer required the cardholders to submit all disputes to arbitration, thereby prohibiting jury trials and class action lawsuits. Here, the credit card issuer moved to compel a cardholder to submit his claims to arbitration. The lower court refused to enforce the changed contract terms. First, it noted that the change was unconscionable and contrary to public policy. There is a fundamental right to a jury trial, and, in order to validly waive that right the parties must have equal bargaining power. If a contract amendment changes material terms and one party does not have the bargaining power to accept or reject the change, it is unenforceable. In this case, the cardholder had no power to consent to the change. The credit card issuer admitted that it would have cancelled the credit card account if the change was not agreed to by the cardholder. Therefore, the cardholder had no option but to accept the change or to risk the uncertainty of obtaining new credit cards from different issuers. He ran the risk of not being able to get a new credit card or of getting a new card on less favorable financial terms than he had before. In essence, he had no choice but to accept the changes. The lower court rejected the credit card issuer’s argument that a New Jersey statute permitted it to change the terms of the agreements, finding that the statute contemplated amendment of financial terms but was not intended to include material terms that were not part of the original agreement, such as arbitration provisions. Lastly, the lower court rejected the credit card issuer’s claim that the contract had to be interpreted under Delaware law and that the change was permitted under Delaware law. First, the lower court noted that in determining choice of law, a court must consider the residence of the parties, the place of business of the parties, the place of performance of the contract, and the policies of the different states. In found that since the cardholder was a New Jersey resident and bills were sent and payments were made in New Jersey, New Jersey had a stronger interest and it was therefore appropriate to apply New Jersey law and not Delaware law. The lower court took it one step further, noting that, even under Delaware law, the arbitration provision was an unconscionable and unenforceable contract of adhesion. It found that the arbitration provision, in prohibiting class actions, would effectively immunize the credit card issuer from any liability to cardholders. Cardholders would be essentially deprived of their small claims against the issuer because the cost of bringing the matter to arbitration would be too costly, whereas, with a class action, the claims of all the cardholders could be addressed.

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