Opinion ID: 2833120
Heading Depth: 2
Heading Rank: 3

Heading: The ADR Policy is unenforceable because it is illusory.

Text: In my view, the unilateral termination right in the ADR Policy makes Davidson = s performance optional as to the entire policy, and thus, renders the ADR Policy illusory. Thus, I would find that the agreement between Davidson and Webster fails to rise to the level of a contract as it lacks consideration.
Consideration is an essential element for a valid, enforceable contract . Federal Sign v. Texas S. Univ. , 951 S.W.2d 401, 408-09 ( Tex. 1997). If mutual, reciprocal promises are binding on both parties, they may constitute consideration for a contract. Texas Gas Util. Co. v. Barrett , 460 S.W.2d 409, 412 ( Tex. 1970); Johnson v. Breckenridge-Stephens Title Co. , 257 S.W. 223, 225 (Tex. Com. App. 1924). But, if the terms of a promise make performance optional, the promise is illusory and cannot constitute valid consideration. Light v. Centel Cellular Co. of Texas , 883 S.W.2d 642, 645 (Tex. 1994) ( A When illusory promises are all that support a purported bilateral contract, there is no contract. @ ); Restatement (Second) of Contracts ' ' 2 cmt . e; 77 cmt . a. Valid consideration exists if a party reserves the right to terminate an agreement with notice. See Restatement (Second) of Contracts ' 77 cmt . b, illus. 5. But, a termination clause that allows a party to terminate the contract at will makes performance optional, and thus, makes any promise illusory. See Light, 883 S.W.2d at 645; see also, Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386, 388-89 (Tex. App . B Houston [14th Dist.] 1998, pet. dism = d w.o.j .). Here, the ADR Policy reserves Davidson = s right to A unilaterally abolish or modify any personnel policy without prior notice. @ Under the plain language of the contract, Davidson reserved the right to abolish or modify any personnel policy. As explained above, the unilateral termination right would also apply to the agreement to arbitrate all claims. By retaining the right to terminate the ADR Policy at any time, Davidson can avoid arbitration. Thus, Davidson is not bound to its promise to arbitrate, and its promise to avoid litigation does not amount to consideration. See In re Halliburton , 80 S.W.3d 566, 570 (Tex. 2002) (reciprocal promises are not sufficient if one party can avoid its promise). Because there is no consideration for the ADR Policy, the agreement is illusory and unenforceable.
In an attempt to create consideration where none exists, Davidson claims that the language regarding the unilateral termination right complied with contractual mutuality requirements because, A If...Davidson changed the ADR policy, or abolished it altogether, the changes would have applied to both parties. @ However, because Davidson alone had the unilateral right to terminate or change the agreement, the agreement is illusory. It is irrelevant that any changes made by Davidson would apply to both parties. Davidson also argues that the promise to arbitrate is not illusory because, under Halliburton, 80 S.W.3d at 570, it is bound to resolve any dispute according to the ADR plan in effect at the time the dispute arises. However, the express contract terms we relied on to find the Halliburton agreement enforceable are missing here. The plain language of the Halliburton ADR plan required the employer to provide notice before enacting any modifications or terminating the plan. Davidson suggests that because the agreement we upheld in Halliburton required notice and prospective application, the same protective language can be implied here. I disagree. In Halliburton , we relied on the ADR policy = s notice provisions to conclude that Halliburton could not A avoid its promise to arbitrate by amending the [policy] or terminating it altogether. @ Halliburton , 80 S.W.3d at 570 . Here, we cannot imply the obligations that precluded Halliburton from avoiding its promise to arbitrate. The agreement = s plain language establishes Davidson = s unhindered right to modify or terminate the agreement without notice. It is not proper to imply terms that contradict the express contract language. See Haws & Garret Gen. Contractors, Inc. v. Gorbett Bros. Welding Co., 480 S.W.2d 607, 609-610(Tex. 1972) (the terms of an implied contract are inferred from the circumstances). Davidson further attempts to explain the unilateral termination language as simply acknowledging an employer = s right to make changes to at-will employment terms, as in Hathaway v. Gen. Mills, Inc ., 711 S.W.2d 227, 229 (Tex. 1986). But, the arbitration agreement = s language contradicts Davidson = s explanation. In Hathaway , we held that an employer may enforce changes to an at-will employment contract if the employer unequivocally provides notice of a definite change and the employee accepts the change by continuing employment. Hathaway , 711 S.W.2d at 229 . Here, the contract expressly allows Davidson to effect a change in the ADR plan = s terms without notice. Thus, it is inconsistent to explain the reservation language as merely restating our holding in Hathaway, because the arbitration agreement = s terms contradict the Hathaway requirements. Additionally, whether an employer has satisfied the Hathaway requirements is a separate inquiry from the determination of whether the arbitration agreement is enforceable under traditional contract principles. If an employer seeks to change the terms of an employment relationship by implementing an agreement to arbitrate all disputes, the employer must show the arbitration agreement, standing alone, satisfies all requisite elements of a valid contract. See Light , 883 S.W.2d at 645-46; Halliburton , 80 S.W.3d at 569. This showing is separate from the employer = s duty to meet the Hathaway requirements of notice and acceptance. Id . Davidson = s attempts to create consideration via an alternate reading of the language of the agreement are not reasonable. When the meaning of an agreement is plain and unambiguous, a party = s construction is immaterial. 718 Associates, Ltd., 1 S.W.3d at 360. I would find the contract unenforceable because it fails for lack of consideration and is illusory.
The Court sends this case back for the trial court to consider parol evidence, finding that a fact issue exists concerning the applicability of the language in question to the arbitration agreement. But, as discussed above, the language unambiguously gives Davidson the right to unilaterally terminate any part of the agreement. Thus, there is no fact issue to be determined by the trial court and there is no need for parole evidence to be taken.
Although I agree with Justice Smith that the contract is unambiguous and the arbitration agreement is a personnel policy subject to Davidson = s unilateral termination right, I cannot agree that the right to abolish or modify personnel policies only applies prospectively with contemporaneous notice. The ADR Policy allows Davidson to unilaterally abolish or modify any personnel policy A without prior notice. @ Justice Smith looks to England to determine how to interpret the phrase A without prior notice. @ However, applicable precedent can be found closer to home. For example, in Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991), we held that the language A without prior notice @ waived the right to all notice. 801 S.W.2d at 893-94. Similarly, in Musgrave v. HCA Mideast , Ltd., 856 F.2d 690 (4th Cir. 1988), the court interpreted a contract providing that the employer had the right to terminate an employee = s service A without prior notice. @ The Fourth Circuit concluded that this language A states simply that [the employee] could be terminated during the probation period without notice. @ 856 F.2d at 694. Justice Smith = s interpretation that A without prior notice @ means A with contemporaneous notice @ is not supported B and indeed, is contradicted B by caselaw from American jurisdictions. Justice Smith is essentially inserting a qualifying phrase into Davidson = s unilateral, unqualified right to terminate. Even though the ADR Policy permits Davidson to A unilaterally abolish or modify any personnel policy without prior notice, @ Justice Smith interprets this as requiring contemporaneous notice. The agreement contains no such limitation. Justice Smith also attempts to distinguish our holding in Hathaway by noting that in that case, while we required an employer making a change to an at-will employment policy to provide notice, we did not specify that the notice had to be given before the change was made. Justice Smith contends that under our decision in Hathaway, notice could be A either in advance of or contemporaneous with the policy change. @ __ S.W.3d __. However, Justice Smith misunderstands our holding in Hathaway. In Hathaway, we explained the employee must have knowledge of the employer = s proposed modification to an at-will employment policy to constitute effective notice; that is, the employee must A know the nature of the changes and the certainty of their imposition. @ Hathaway, 711 S.W.2d at 229 . Requiring the employer to prove unequivocal notification of changes to the employment terms was based, in part, on fairness to the employee. See id. The requirement that an employee be aware that changes to the employment policy are certain to be imposed implies that there must be prior notice. It is unreasonable to conclude contemporaneous notice of a policy change is permissible under Hathaway . Indeed, permitting an employer to give contemporaneous notice of changed employment terms undermines Hathaway = s concerns for fairness to an employee and stretches our holding in Hathaway too far. Moreover, Justice Smith confuses the Hathaway requirements for changes to an at-will employment agreement with the requirements for a valid, enforceable arbitration agreement. They are two separate inquiries. Even assuming Justice Smith is correct that Davidson may give contemporaneous notice of a change to the terms of Webster = s employment terms under Hathaway , the arbitration clause of the ADR Policy remains illusory and unenforceable. If contemporaneous notice to cancel the arbitration agreement is permissible, Davidson retains the right to discontinue performance at any time. Under this scenario, there is no consideration, as Davidson is not giving up a benefit or suffering a detriment. See e.g., In re C&H News Co., No. 13-02-529-CV, 2003 WL 131770 at  (Tex. App . B Corpus Christi 2003, orig. proceeding). Thus, the arbitration clause would still be illusory and unenforceable.