Seventh Circuit lets payday borrowers keep case in federal court

A federal appeals court in the Seventh Circuit said online borrowers can keep their consumer case in court after finding they never agreed to arbitration under a legal system that did not exist when they signed.

The case involves Joshua Harris and Donita Olds, Illinois borrowers who took out $600 loans from W6LS, which does business as WithU and WithU Loans, and Caliber Financial Services. The loans carried annual interest rates close to 500 percent, and the borrowers sued under Illinois and federal consumer laws.

The problem with the arbitration clause

The loan papers said disputes would go to arbitration, a private process that can keep a case out of court. They also said the arbitrator had to use tribal law and federal law to decide questions about the agreement itself.

The court said that setup failed because the tribal contract code the lenders pointed to was adopted later. In contract law, both sides have to agree to the same essential terms when they sign. Judges said the borrowers could not have agreed to a rulebook that was not there yet.

Why that mattered here

The judges said the basic problem was mutual assent, or real agreement. The lenders argued the later tribal code should apply retroactively, but the court said that still did not show the borrowers agreed to that system at the start.

The ruling does not decide whether the loans themselves were lawful or whether the borrowers will win on their claims. It only means the dispute stays in federal court, where the Illinois and federal consumer claims can keep moving forward.

For borrowers, the case is a reminder that arbitration clauses can only do so much. If a contract tries to send disputes to a forum or legal rulebook that was not actually available when the deal was made, a court may refuse to enforce it.