Failure to pay off credit card balance does not constitute acceptance of arbitration amendment to original agreement

Law Reporter, May 2003

Shea. v. Household Bank, 129 Cal. Rptr. 2d 387 (Ct. App. 2003).

A California appellate court held that a credit card user did not ratify an arbitration amendment to the credit card agreement merely because the user failed to immediately pay off his entire outstanding balance.

Here, a credit card issuer notified its customers that any future disputes would be resolved by binding arbitration. A consumer informed the issuer that he did not agree to the new terms and stopped using the card, but he did not immediately pay off his balance and close the account. One month later, the consumer, individually and as representative of a class, sued the issuer for excessive fees. Defendant argued that the claim was subject to arbitration, but the trial court disagreed.

Affirming, the appellate court said that while the law favors arbitration, there is no public policy compelling persons to accept arbitration of controversies that they have not agreed to arbitrate. The court rejected defendant's contention that plaintiff is bound by the new terms because he kept his account open. The court noted that the state statute regulating credit card agreements refers to ratification of an initial agreement by "actual use."

The common sense meaning of "actual use" denotes some kind of affirmative act; mere inaction, such as failure to pay off an outstanding balance, would notseem to suffice, the court said. It is not likely the legislature would require actual use by a consumer to accept the original terms of a credit card agreement, yet settle for something less definite or overt to signify acceptance of an amendment to that agreement, the court added.

The issuer's position is based on the unwarranted premise that a credit card holder is always in a financial position to be able to immediately pay off the entire balance when confronted with an unacceptable change of terms, the court said. In fact, it is much more likely the reverse is true, and credit card issuers must be aware of that.