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Now is the time to reevaluate commercial sales contracts that incorporate other documents by reference

published in McAfee & Taft Litigation Update | June 2, 2015

By Jason A. McVicker

Legal documents of all kinds — everything from wills and trusts to commercial sales agreements — often reference other documents. This “incorporation by reference” comes with certain risks. Historically, courts looked beyond the four corners of a contract with great reluctance. While Oklahoma has permitted parties to “incorporate by reference” certain documents into contractual agreements, the rules for accomplishing this are vague. Nevertheless, the issue is growing in importance thanks to e-commerce. Consumers consent to numerous terms and conditions scattered across the web, often without even being aware of them. In Walker v. Builddirect. com Technologies, Inc., the Oklahoma Supreme Court has finally provided guidance on how to properly incorporate extrinsic documents. With this new case in hand, businesses should consult with counsel and make sure their agreements pass muster.

The Walker case began innocuously enough — with online shopping. Two homebuyers purchased hardwood flooring online from a Canadian manufacturer. After examining some samples, they decided to buy. They received a sales contract from the manufacturer that included the type, amount and price of the flooring. Tucked away in the middle of the terms was a statement that “[a]ll orders are subject to [the manufacturer’s] ‘Terms of Sale.’”

It turns out that if you navigate to the manufacturer’s website, click a small link at the bottom of the page, and then navigate through another menu, you will find “Terms of Sale.” These terms purport to impose additional burdens on buyers, above and beyond what appears in the sales agreement. The consumer never receives a copy of these Terms of Sale, and the sales agreement does not give the identity or location of these “Terms.” In fact, the sales agreement does not even explain that a separate document is being referenced. One of those extra “terms” is a mandatory arbitration clause the homebuyers never saw.

sales contractWhen the flooring arrived, it was allegedly infested with wood-boring insects that damaged the home. The homebuyers sought a jury trial, but the manufacturer tried to force arbitration. The homebuyers argued they had no notice of the “Terms of Sale,” and that they should not be bound by some foreign document that was not part of the contract.

The Oklahoma Supreme Court agreed, and finally answered the question of how, exactly, to incorporate documents. To do it properly, the contract must (1) clearly reference the extrinsic document, (2) give the identity and location of the extrinsic document, and (3) show that the parties had knowledge of and assented to the incorporation. The Supreme Court found that these principles were just as applicable in cyberspace as everywhere else. Since these “Terms of Sale,” hidden on a website and not clearly referenced by the sales agreement, were not adequately incorporated, they were not a proper part of the contract.

Commercial sellers — especially those that deal directly with consumers — should reexamine their contracts and consult with counsel on the best way to handle extrinsic documents. The Supreme Court noted that Oklahoma has a public policy of protecting consumers from deceptive and unfair trade practices, and courts may be especially vigilant when applying Walker in that context. Counsel can assist with ensuring any extrinsic documents are sufficiently identified and easy to find. It may also be advisable to incorporate some of these boilerplate terms directly into the contract, rather than putting them in the fine print of your website. If these contracts become the subject of litigation, compliance with this new case may be the key to victory.

This update has been provided for clients and friends of McAfee & Taft A Professional Corporation. It does not provide legal advice, and is not intended to create a lawyer-client relationship. Readers should not act upon information in this update without seeking professional counsel.