Agreement to Arbitrate Not Enforced Because, Well, There Was No Agreement

Agreement to Arbitrate Not Enforced Because, Well, There Was No Agreement

      In a recent decision, the Sixth Circuit Court of Appeals held there to be no binding agreement to arbitrate where the underlying agreement was itself illusory.  Day v. Fortune Hi-Tech Marketing, Inc., __ Fed. Appx ___, 2013 WL 4859781 (6^th Cir. Sept. 12, 2013).

      Certain individuals who had paid to become independent representatives of Fortune Hi-Tech Marketing, Inc., a company that was ultimately a multi-level marketing (pyramid scheme) company, brought suit against Hi-Tech.  Hi-Tech, in turn, sought to compel arbitration of their claims.  The trial court initially ordered the claims to go to arbitration, but later reversed that decision.   Presented to the Court of Appeals was the question of whether there existed valid agreements to arbitrate.

      The various agreements between the independent representatives and Fortune Hi-Tech, while calling for arbitration, also provided that Fortune Hi-Tech had the authority to modify those agreements in any manner at any time with those modifications being effective upon notice of the change, going on to define that notice is effective when issued.

      Both the trial court and the Sixth Circuit Court of Appeals agreed that the arbitration agreement was unenforceable because the contract between the independent representatives and Hi-Tech Marketing lacked adequate consideration.  “Because [Hi-Tech] retained the ability to modify any term of the contract, at any time, its promises were illusory.”

      This finding that the contract was illusory was not set aside on the basis that the parties had performed in accordance therewith and Hi-Tech had never modified the agreements as it had the right to, the Sixth Circuit observing that there is a distinction between performance and the legal enforceability of an obligation.