A Texas Court of Appeals recently held that an employer's arbitration policy was unenforceable because the policy was conditioned upon an illusory promise. The arbitration policy required all employee-related disputes be submitted to an arbitrator in accordance with procedures described in an employee orientation manual. The employer, however, reserved the right to revoke or modify the manual at any time and without notice to its employees. In Re: Datamark, Inc., No. 08-07-00328-CV (Tex. App. -- El Paso Feb. 5, 2009).

The court held that if an employer can unilaterally terminate an arbitration agreement, its employees would have received no value in exchange for their unconditional promises to arbitrate disputes. Consequently, an employer who retains the unilateral right to unconditionally revoke or modify its arbitration policies risks having its arbitration agreements held unenforceable. The court rejected the employer's argument that the agreement was not illusory because it was still bound to arbitrate claims filed before any changes were made to the program. The court reasoned that the employer could completely avoid arbitrating employee disputes if it modified its program prior to an employee's formal request for arbitration.

Arbitration agreements have become common among certain healthcare employers and often are included in employee handbooks which also contain unilateral modification provisions. Employers should carefully draft employee handbook modification provisions to assure that arbitration and other contractual rights are not treated as illusory.