Eva Cornell v. Desert Financial Credit Union

IN THE

SUPREME COURT OF THE STATE OF ARIZONA

EVA CORNELL,
Plaintiff,

v.

DESERT FINANCIAL CREDIT UNION, ET AL.
Defendants.

No. CV-22-0071-CQ
Filed March 2, 2023

Certified Questions from the United States District Court of Arizona
The Honorable Dominic W. Lanza, Judge
No. CV-21-00835-PHX-DWL
QUESTION ANSWERED

COUNSEL:

Cindy C. Albracht-Crogan, Kaysey L. Fung, Cohen Dowd Quigley,
Phoenix; and Steven A. Haskins (argued), Richard D. McCune, David C.
Wright, Emily J. Kirk, McCune Law Group, ACP, Ontario, CA, Attorneys
for Eva Cornell

Brian A. Cabianca (argued), David S. Norris, Lukas M. Landolt, Kaitlyn R.
Hertzog, Squire Patton Boggs (US) LLP, Phoenix, Attorneys for Desert
Financial Federal Credit Union

Karl M. Tilleman, Jason Sanders, Douglas D. Janicik, Dentons US LLP,
Phoenix, Attorneys for Amici Curiae Chamber of Commerce of the United
States of America and Arizona Chamber of Commerce and Industry

JUSTICE LOPEZ authored the Opinion of the Court, in which CHIEF
JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, JUSTICES BOLICK,
BEENE, MONTGOMERY, and KING joined.
 CORNELL V. DESERT FINANCIAL CREDIT UNION ET AL.
Opinion of the Court

JUSTICE LOPEZ, Opinion of the Court:

¶1 The United States District Court for the District of Arizona
certified two questions for our review: (1) Does an effective modification of
a consumer contract occur when the offeror sends notice of the proposed
modification to the offeree, through a communication channel to which the
offeree previously consented, even if the offeree fails to respond?; and (2) If
not, what additional showings (such as actual receipt of the notice of
proposed modification, subjective understanding of the proposed
modification, or affirmative consent to the proposed modification) are
necessary to achieve an effective contract modification in this circumstance?

¶2 We hold that on-going, at-will, consumer-business
relationships consist of the day-to-day offer and acceptance of unilateral
contracts; thus, businesses may effectively modify the non-negotiated,
standardized terms governing these relationships if the business
demonstrates that (1) the contract’s initial terms expressly notified the
consumer that the business could make future changes to the terms; (2) the
business gave—and the consumer received—reasonable notice of the
modification and an opportunity to opt out with no change to the status
quo business relationship; and (3) the consumer continued the business
relationship past a reasonable opt-out period. In so holding, we adopt the
Restatement of Consumer Contracts § 3 (Am. L. Inst., Tentative Draft No. 2,
2022) (“Restatement § 3”) to the extent our previous holding in Darner
Motor Sales v. Universal Underwriters Insurance Co., 140 Ariz. 383 (1984), does
not provide for this result. Our answer to the first question in the
affirmative obviates the need to address the second question.

BACKGROUND

¶3 In October 2018, as a part of opening checking and savings
accounts with Desert Financial, Eva Cornell agreed to certain terms and
conditions (the “Terms”). These stated that Desert Financial could “change
those terms and conditions from time to time.” Cornell also “consented to
the electronic delivery of all future communications from Desert Financial,
including all disclosures, notices, and account statements.” At that time,
the Terms did not contain an arbitration clause.

¶4 When Cornell agreed to the Terms, she was subjectively
unaware of the absence or presence of an arbitration clause. In a later

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Opinion of the Court

deposition, she testified that even had the Terms originally included an
arbitration clause, and she knew of the clause, she would have still agreed
to the Terms.

¶5 In February 2021, Desert Financial updated its Terms, adding
a mandatory arbitration clause. The clause appeared on page five of a
fourteen-page document and began as follows: “DISPUTE RESOLUTION:
MANDATORY ARBITRATION. READ THIS PROVISION
CAREFULLY AS IT WILL HAVE A SUBSTANTIAL IMPACT ON HOW
LEGAL CLAIMS YOU AND THE CREDIT UNION HAVE AGAINST
EACH OTHER WILL BE RESOLVED.” The following text explained that
“[a]rbitration is not a mandatory condition of you maintaining an account
with Credit Union” and that “YOU MAY OPT OUT of this arbitration
provision so long as the Credit Union receives notice of your desire to opt-
out by April 30, 2021 or 30 days after you open your account, whichever is
later.” The clause also explained how to opt out.

¶6 Desert Financial did not directly contact its account holders
concerning its updated Terms. Rather, it posted on monthly account
statements a contrasting orange-and-blue banner stating in large block
lettering: “Change-in-Terms.” In much smaller font, the banner informed
readers that the changes concerned “how we will resolve legal disputes
related to your accounts.” At the banner’s bottom, it directed readers to
view the complete and updated version of the Terms by clicking on a
provided URL written in bold font typical to hyperlinks.

¶7 Because Cornell opted for electronic communications, she did
not receive account statements in the mail. On March 23, 2021, Desert
Financial notified her that her March account statement was available for
online viewing. The “Change-in-Terms” banner appeared on the
statement, which she could access any time she signed into her account.

¶8 On April 13, 2021, in conjunction with her efforts to buy a car,
Cornell used Desert Financial’s mobile app to download a PDF of her
monthly account statement for March 2021. During the downloading
process, she saw the “Change-in-Terms” banner appearing on the
statement. Later, when she was unable to locate her downloaded PDF, she
again saw the banner when she obtained an electronic copy of the March
2021 statement from Desert Financial via DocuSign. Ultimately, she never
clicked the banner’s URL, viewed the updated Terms, or took the
prescribed steps for affirmatively opting out of the arbitration clause.

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Opinion of the Court

¶9 On May 5, 2021, Cornell filed a class action suit in the District
of Arizona, alleging “ambiguous and misleading language” concerning
overdraft fees in violation of federal law. In response, Desert Financial
moved to compel arbitration, arguing that the February 2021 arbitration
clause became part of its Terms binding on Cornell. Cornell argued that
she never assented to the updated Terms; thus, the arbitration clause was
never incorporated into her agreement with Desert Financial.

¶10 On October 8, 2021, the district court ordered supplemental
briefing on whether Cornell’s continued patronage following Desert
Financial’s amendment and notice via the orange-and-blue banner
constitutes “a valid contract modification under Arizona law.” Following
a hearing and review of the parties’ briefing, on March 11, 2022, the district
court certified to this Court two questions concerning contract
modification. Because Arizona law is unclear concerning the requirements
for unilateral modification of standard consumer contracts, we agreed to
provide clarification pursuant to our jurisdiction under article 6,
section 5(6) of the Arizona Constitution and A.R.S. § 12-1861.

DISCUSSION

¶11 In considering the requirements for modifying the terms of
at-will, on-going, business-consumer relationships, we conclude that our
jurisprudence does not provide definitive guidance. To fill this void, we
adopt Restatement § 3 because it is consistent with Arizona contract law
and sets forth sound public policy.

I.

A.

¶12 We begin with fundamental Arizona contract law, which
distinguishes between bilateral contracts and unilateral contracts. Knack v.
Indus. Comm’n, 108 Ariz. 545, 548 (1972). Bilateral contracts consist of an
exchange of promises. Id.; Wagner v. City of Globe, 150 Ariz. 82, 85 (1986)
(“[B]ilateral contract[s] . . . require mutuality of obligation . . . .”). Once a
bilateral contract is formed, its terms cannot be modified absent an
additional offer, acceptance, and consideration. Demasse v. ITT Corp., 194 Ariz. 500, 506 ¶ 18 (1999).

¶13 In contrast, unilateral contracts are formed upon the offeree’s
acceptance by performance. Id. at 515 ¶ 53 (Jones, V.C.J., concurring in part
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and dissenting in part) (describing unilateral contracts as the “performance
of an act in exchange for a promise to pay”). Before performance is
rendered, the doctrine of contract modification does not apply to offers of
unilateral contracts because there is no contract to modify, as shown in the
at-will employment context:

At-will employment contracts are unilateral and typically
start with an employer’s offer of a wage in exchange for work
performed; subsequent performance by the employee
provides consideration to create the contract. Thus, before
performance is rendered, the offer can be modified by the
employer’s unilateral withdrawal of the old offer and
substitution of a new one: the employer makes a new offer
with different terms and the employee again accepts the new
offer by performance (such as continued employment). Thus
a new unilateral contract is formed—a day’s work for a day’s
wages.

Id. at 504–05 ¶ 12 (internal citations omitted). In this scenario, the next day’s
unilateral contract offer’s terms may be changed at any time before
performance. Id.; accord Wagner, 150 Ariz. at 85–86; see also Johnson v.
Associated Milk Producers, Inc., 886 N.W.2d 384, 392 (Iowa 2016) (“In an at-
will contract, a party who gives notice of a changed term effectively offers
a new contract in place of the existing one, which the other party may accept
by continued performance.”).

¶14 Applying this at-will contract modification doctrine, the
Alabama Supreme Court held that at-will bank patrons “implicitly assented
to be bound by [new] arbitration provisions by holding open their accounts
after notice of the amendment.” SouthTrust Bank v. Williams, 775 So. 2d 184,
191 (Ala. 2000). The court reasoned that “[a]mendments to the conditions
of unilateral-contract relationships with notice of the changed conditions
are not inconsistent with the general law of contracts.” Id. at 190–91.

¶15 Conversely, a bilateral employment contract’s terms may
only be modified with an offer, acceptance, and consideration. Demasse,
194 Ariz. at 506 ¶ 18. In proving acceptance, the employer carries the
burden to show that the employee (1) received “legally adequate notice,”
which is “more than the employee’s awareness of or receipt of the newest
[employee] handbook,” id. at 508 ¶ 24; and (2) “assented with knowledge
of the attempted modification and understanding of its impact on the
underlying contract,” id. ¶ 23.

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¶16 In Demasse, this Court answered a certified question
concerning employment contract modification. Id. at 502 ¶ 2. The initial
terms of the case’s particular contract did not expressly allow unilateral
changes to the terms, id. at 503 ¶¶ 4, 6, and for purposes of answering the
certified question, we assumed that the contract was bilateral. Id. ¶ 5 n.1.
Accordingly, we treated the inclusion of a reverse-seniority layoff provision
to the contract as creating an implied-in-fact, bilateral, contractual term. Id.
at 503 ¶ 5, 504 ¶ 11. We reasoned that, by creating job security, the
provision “substantively govern[ed] the employee’s job and employment
expectations”; thus, “‘the employer should reasonably have expected the
employee to consider [the provision] as a commitment from the employer,’”
as required for implied-in-fact employment contracts. Id. at 505 ¶ 16
(quoting Soderlun v. Pub. Serv. Co., 944 P.2d 616, 621 (Colo. App. 1997)).
Ultimately, we found ineffective the employer’s unilateral attempt to
modify the bilateral contract’s reverse-seniority layoff term. Id. at 507 ¶ 21,
508 ¶¶ 24–25.

¶17 Cornell cites federal court rulings, 1 arguing that Demasse’s
stringent modification rule applies to her and Desert Financial’s at-will
banking deposit agreement. We disagree. Cornell and Desert Financial’s
business relationship consists of day-to-day unilateral contract offers and
acceptances. Like the at-will bank patrons in SouthTrust Bank, Cornell was
free to terminate her accounts with Desert Financial at any time and vice
versa. This materially differs from Demasse, where we considered the

1 Rose v. Humana Ins. Co., No. CV-17-08107-PCT-DGC, 2018 WL 888982, at *3
(D. Ariz. Feb. 14, 2018) (holding that an insurer’s email failed to modify an
agreement because “even if . . . [the insurer’s] evidence of sending the email
is accepted as true . . . [i]t does not show that [the insured] read . . . [or]
understood the email and assented to the arbitration agreement it
contained”); Vantage Mobility Int’l LLC v. Kersey Mobility LLC, No. CV-19-
04684-PHX-JJT, 2021 WL 1610229, at *15–16 (D. Ariz. Apr. 26, 2021)
(holding that a car dealer’s continued business with a supplier did not
amount to acceptance of the supplier’s e-mailed offer to modify their
existing agreement where the original agreement contained no unilateral
modification clause, reasoning that “the daily business of sales did not
implicate the terms of [the proposed modification],” and “[the supplier]
produced no evidence that . . . gave [the dealer] reason to understand that
[the dealer’s] assent could be manifested as silence or inaction”).

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modification of a bilateral employment contract whose original terms did
not expressly provide for unilateral modification. Demasse does not
articulate the applicable rule for altering the terms of at-will, on-going,
consumer-business relationships. 194 Ariz. at 504 ¶ 11 (describing the
difference between at-will agreements and bilateral agreements as
“dispositive with regard to methods necessary for modification”); Taleb v.
AutoNation USA Corp., No. CV-06-02013-PHX-NVW, 2006 WL 3716922,
at *5 (D. Ariz. Nov. 13, 2006) (“The holding of the Arizona Supreme Court
in [Demasse] is limited to situations in which an employer attempts to
unilaterally modify a contract that creates an expectation of job
security . . . .”).

B.
¶18 Of our precedents, our decision in Darner comes closest to
stating the applicable rule. In Darner, we held that courts may construe
standardized agreements to reflect oral assurances made during
negotiations even where the contract’s unambiguous, boiler plate language
directly conflicts with the assurances. 140 Ariz. at 395–96. We reasoned
that although standardized contracts are integral to sustaining the sheer
volume of daily transactions in modern society, customers entering
standardized agreements do not often read or fully digest them, id.
at 393–94; thus, customers “are not bound to unknown terms which are
beyond the range of reasonable expectation,” id. at 391 (quoting
Restatement (Second) of Contracts § 211 cmt. f (Am. L. Inst. 1981)).

¶19 In so holding, we adopted the Restatement (Second) § 211,
which recognizes that a term is unenforceable if “the other party has reason
to believe that the party manifesting such assent would not do so if he knew
that the writing contained a particular term.” Id. at 391 (quoting
Restatement (Second) § 211). We further embraced Restatement (Second)
§ 211’s guidance concerning indicia of unenforceability of contract
modifications:

Such a belief or assumption may be shown by the prior
negotiations or inferred from the circumstances. Reason to
believe may be inferred from the fact that the term is bizarre
or oppressive, from the fact that it eviscerates the non-
standard terms explicitly agreed to, or from the fact that it
eliminates the dominant purpose of the transaction. The
inference is reinforced if the adhering party never had an
opportunity to read the term, or if it is illegible or otherwise
hidden from view. This rule is closely related to the policy

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against unconscionable terms and the rule of interpretation
against the draftsman.

Id. at 392 (quoting Restatement (Second) § 211 cmt. f).

¶20 Synthesizing unilateral contract law with Darner, an at-will
consumer’s continued patronage (i.e., performance of the next day’s
unilateral contract) constitutes valid acceptance of the business’s new terms
if the consumer knew of the new terms when performing, see Demasse,
194 Ariz. at 504–05 ¶ 12, but the consumer cannot be bound by “unknown
terms . . . beyond the range of reasonable expectation, ” Darner, 140 Ariz.
at 391 (quoting Restatement (Second) § 211 cmt. f). For example, for the
Terms to be enforceable against Cornell, Desert Financial objectively must
have had no reason to believe that she would not have accepted the Terms
“if [she] knew that the writing contained a particular term.” Id. (quoting
Restatement (Second) § 211).

¶21 Although this standard establishes the proper analytical
framework, it fails to resolve whether enforceability requires the
consumer’s actual knowledge of new terms, an issue that has divided
courts. Compare Cap. One Bank v. Davey, No. 1 CA-CV 13-0109, 2013 WL
6729261, at *5 ¶ 20 (Ariz. App. Dec. 19, 2013) (mem. decision) (“An offer
cannot be accepted unless the offeree actually knows of the offer’s existence.”
(emphasis added)), with Hagin v. Fireman’s Fund Ins. Co., 88 Ariz. 158, 162
(1960) (holding that an insurance company effectively modified an implied
contract term permitting late payments by mailing notice to its customer
because “where all that [the insured] had to do was to open their mail, they
are charged with constructive notice”). Darner provides no insight because
it obviated the issue by effectively modifying the parol evidence rule. See
140 Ariz. at 391 (describing its adoption of the Restatement (Second) § 211
as “basically a modification of the parol evidence rule when dealing with
contracts containing boiler-plate provisions which are not negotiated, and
often not even read by the parties”).

¶22 This framework also fails to address whether additional
consumer protections are necessary in this context, such as (1) requiring
express notice that the business may unilaterally modify terms and that the
consumer’s failure to opt out constitutes acceptance, cf. SouthTrust Bank,
775 So. 2d at 185 (observing that initial terms contained an express change-
in-terms clause); and (2) ensuring the consumer’s ability to opt out of
proposed modifications without penalty, i.e., to reject a proposed

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modification and maintain the status quo business relationship. 2 See
Restatement § 3(a)(2). Consequently, we are tasked with filling this gap in
the common law.

II.
¶23 In the absence of binding precedent, we follow the
Restatement if it sets forth sound legal policy. See In re Sky Harbor Hotel
Props., LLC, 246 Ariz. 531, 533 ¶ 6 (2019). Notably, we have followed the
Restatement of Contracts in interpreting and enforcing standardized
contracts. See Darner, 140 Ariz. at 391. We also have followed draft
statements. See, e.g., Sullivan v. Pulte Home Corp., 232 Ariz. 344, 346 ¶ 10
(2013) (illustrating the Court aligning its opinion “with the most recent
draft of the Restatement” (citing Restatement (Third) of Torts: Liability for
Economic Harm § 3 cmt. a (Am. L. Inst., Tentative Draft No. 1, 2012)));
Peagler v. Phx. Newspapers, Inc., 114 Ariz. 309, 315 (1977) (“We hold the
standard adopted in the Tentative Draft of the . . . Restatement (Second) of
Torts . . . is the standard to be followed in this State.”).

A.
¶24 Restatement § 3 offers an effective modification procedure
that fairly balances the public policies of economic efficiency and consumer
protection:

(a) A modification proposed by the business of a standard
contract term in a consumer contract governing an ongoing
relationship is adopted if the business demonstrates that:
(1) the consumer received reasonable notice of the
proposed modified term and a reasonable opportunity to
review it;
(2) the consumer received a reasonable opportunity,
including reasonable notice of the opportunity, to reject

2 To preserve the at-will nature of the relationship, businesses must be
allowed to terminate the relationship if the consumer refuses to accept the
new terms. Accordingly, Restatement § 3 balances consumer and business
interests by recognizing this termination power subject to certain
requirements: Businesses must expressly reserve this termination power in
the agreement’s initial terms, and they may exercise it only if termination
will not cause “unreasonable cost, loss of value, or personal burden.”
Restatement § 3(b).
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the proposed modified term and continue the contractual
relationship under the existing term, and;
(3) the consumer received reasonable notice that
continuing the contractual relationship without rejecting
the proposed modified term will result in the
modification being adopted; and
(4) the consumer either:
(A) manifested assent to the modified term, or
(B) did not reject the proposed modified term and
continued to take the benefit of the contractual
relationship after the expiration of the rejection period
provided in the proposal.

Id. Thus, Restatement § 3’s central rule is that a business’s changes of its
standard contract terms are binding on its at-will consumers if (1) the
consumers received reasonable notice of the changes and of an opportunity
to opt out without penalty; and (2) the consumer continues to do business
past a reasonable rejection period. Id. There is no actual notice
requirement. Id.

B.

¶25 Restatement § 3’s position merits our adoption—it is
consistent with Arizona law and sets forth sound policy. Notably, it aligns
with our prior decisions recognizing effective modification through silent
conduct. See, e.g., Hagin, 88 Ariz. at 162 (finding effective modification of
an implied term allowing late payments where the offeree received
constructive notice that strict compliance with the agreement’s express
payment schedule would be thereafter required and the offeree failed to
object); Restatement (Second) § 19(3) (“The conduct of a party may manifest
assent even though he does not in fact assent.”).

¶26 Restatement § 3’s approach also permits businesses to readily
update their terms, which facilitates economic efficiency in the context of
standardized contracts. Darner, 140 Ariz. at 391 (characterizing
standardization as “essential ‘to a system of mass production and
distribution.’” (quoting Restatement (Second) § 211 cmt. a)). Similarly, by
rejecting an actual notice requirement, Restatement § 3 simplifies business
operations and reduces transaction costs to the advantage of all parties
concerned. It makes little sense to require parties to quit their at-will
relationship just to immediately resume it with additional terms. See
Johnson, 886 N.W.2d at 392 (“We do not require formalistic language

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terminating an at-will contract before a change in terms will be effective
going forward.”).

¶27 We also recognize that Restatement § 3’s position imposes
several safeguards to protect consumers from unfair exploitation. For
example, businesses must propose modifications in good faith, and new
terms cannot undermine negotiated parts of the original bargain.
Restatement § 3(c); see also Rawlings v. Apodaca, 151 Ariz. 149, 153 (1986)
(“The law implies a covenant of good faith and fair dealing in every
contract.”); Wagenseller v. Scottsdale Mem’l Hosp., 147 Ariz. 370, 383 (1985).

¶28 Consumers also must receive reasonable notice that their
failure to opt out of proposed modifications constitutes acceptance, and
they must be given a reasonable opportunity to opt out without penalty.
Restatement § 3(a); see also Duling v. Mid Am. Credit Union, 521 P.3d 1145,
1154 (Kan. Ct. App. 2022) (“[F]ailure to opt-out of a voluntary arbitration
program constitutes acceptance, especially where [it] is the exact form of
acceptance [expressly] invited by the offer.” (quoting Rittenhouse v.
GlaxoSmithKline, No. 21-1836, 2021 WL 6197361, at *4 (E.D. Pa. Dec. 30,
2021))). At minimum, “reasonable notice” requires that the initial terms or
the notice of the proposed modification expressly indicate the consumer’s
ability to opt out and that failure to do so manifests the consumer’s binding
assent. Restatement § 3(a); see also Miracle-Pond v. Shutterfly, Inc., 19 CV
04722, 2020 WL 2513099, at *6 (N.D. Ill. May 15, 2020) (finding effective
modification where the business gave notice of new terms pursuant to an
express change-in-terms clause in the initial terms).

¶29 These consumer safeguards supplement—and do not
supplant—other contract defenses. See A.R.S. § 47-2302 (unconscionability);
Darner, 140 Ariz. at 391–92 (reasonable expectations). In other words, the
requirements for effective modification under Restatement § 3 do not
preclude the application of other contract law.

CONCLUSION

¶30 We answer the first certified question in the affirmative. In an
on-going, at-will, business-consumer relationship, effective modification of
the relationship’s governing terms occurs if the business demonstrably
satisfies the requirements of Restatement § 3 (as set forth in the Opinion and
as follows): Consumers must (1) receive express and reasonable notice of
the business’s right to unilaterally modify the agreement; (2) receive
reasonable notice of new terms and the opportunity to opt out without

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penalty; and (3) upon receiving actual or constructive notice of new terms,
continue the business relationship past a reasonable opt-out period. Our
holding does not foreclose the applicability of contract defenses. We
decline to answer the second certified question as moot.

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