Corporate & Transactional
Hidden Contract Terms: Incorporation by Reference
What is Incorporation by Reference?
In our offices, we have seen an increase of cases in which our clients came to an agreement with some company for, say, services such as internet marketing, only to confronted by claims arising out of contractual terms they’ve never seen, much less agreed to. How does this happen? Buried within the seemingly innocuous agreement is a reference to terms of services — something along the lines of “you agree that your use of these services are governed by this agreement and the terms of service located on our website.” And contained within those terms of services are hidden and often draconian clauses, allowing the company to make claims of auto-renewals, unreasonable termination notice periods, hidden costs and more. These kinds of agreements are governed by the legal concept of “incorporation by reference”.
Our lawyers routinely bust shady attempts to saddle our clients with unreasonable contractual terms that are incorporated by reference. We do so by starting at the contractual maxim that, in order to uphold the validity of terms incorporated by reference, it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms.17A C.J.S. Contracts, § 402 (2011). For an incorporation by reference to be effective, it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms.
In Valero Marketing & Supply Co. v. Baldwin Contracting Co.Valero Marketing & Supply Co. v. Baldwin Contracting Co., No. H–09–2957, 2010 WL 1068105 (S.D.Tex. Mar. 19, 2010)., the issue was whether a forum-selection clause was incorporated by reference. In that case, the defendant purchased asphalt from the plaintiff, and the parties’ signed contract stated, “All prices quoted above are subject to Valero’s General Terms and Conditions for Petroleum Product Purchases/Sales.” Id. at *1, 3. The General Terms and Conditions included a forum-selection clause. Id. at *3. The district court concluded the incorporation of the General Terms and Conditions did not extend to the forum-selection clause because it was not relevant to the quotation of prices, see id. at *5.
Best practices dictate that, when reviewing a contract, attempts to incorporate by reference should not be taken lightly, and any terms of services should be reviewed in detail. However, in the event it’s too late for that, our approach is to focus on the language by which the incorporation is made, and the terms contained within the terms and conditions. Hidden terms which could not reasonably be expected given the contents of the underlying agreement can be successfully attacked.