Drafting Blunder: Hiding Contractual Provisions in Documents That Don’t Look, Feel, or Smell Like Contracts
 

Drafting Blunder: Hiding Contractual Provisions in Documents That Don’t Look, Feel, or Smell Like Contracts

Posted on 09-12-2018

By: Timothy Murray, Murray, Hogue & Lannis

BUSINESSES OFTEN CONDUCT THEIR TRADES BY UTILIZING documents that don’t appear to be contractual in nature but that contain contractual provisions—the information brochure accompanying a smartphone might include a mandatory arbitration clause; a dry-cleaning ticket might have a limitation of liability printed on the back; an online retailer’s order page might have a hyperlink to its terms of use. If a legal dispute arises between the parties, the business likely will try to enforce a contractual provision in the document. But unless the recipient was somehow alerted to it or stumbled across it by happenstance, courts often hold that the recipient had no duty to read it and is not bound by it—because the document where it appears doesn’t look, feel, or smell like a contract.

This is an all-too common phenomenon that is largely ignored. But it means that a party may be bound by a provision tucked away in the underbrush of a multi-page document brimming with legalese so long as the document looks like a contract— but not by a one-sentence disclaimer of liability on the back of a dry-cleaning receipt since the receipt isn’t generally regarded as a contract.

The problem of hiding contractual provisions in noncontractual documents and doing nothing to alert the recipient to the provisions has lately reared its ugly head in high-profile cases involving the sale of smartphones and online orders of all kinds. It can almost always be avoided if the drafter is mindful of one of the most basic of all legal concepts: although there is a duty to read a contract, there is no duty to read a non-contractual document even if it happens to contain a contractual provision.

Drafters: Don’t Lose the Advantage of the Duty to Read

Everyone knows that, typically, a party can’t sign a contract and later claim that it isn’t binding simply because he or she didn’t read it. The duty to read allows courts to bind parties to boilerplate provisions in a multi-page document1 even though, in the case of consumer contracts, it is most unlikely that consumers bother to read a word of it.2 The law, frankly, doesn’t care whether parties read contracts when they manifest assent to them. All that matters is that the parties were provided a meaningful opportunity to do so. “The duty to read rule derives from the objective theory of contracts, under which one party to a contract must be permitted to rely on the manifested assent demonstrated by the other party’s signature (or action) without fear that the latter may subsequently void the contract by claiming failure to read or understand.”3

But the duty to read can be lost. When that happens, drafters lose an incalculable advantage. For example, the recipient has no duty to read a document when the other party deceives him or her about its contents.4 No drafting advice can whitewash a drafter’s fraud.

The duty to read can also be lost in the absence of bad faith. This occurs “when the writing does not appear to be a contract and the terms are not called to the attention of the recipient.”5

Of course, all manner of documents are “so obviously contractual in form as to give the customer reason to know their character.”6 In these cases, the recipient’s failure to read the document will not excuse him or her of the obligations it imposes. The great Justice Benjamin N. Cardozo construed a “cabin passage contract ticket” for a steamship that provided, in large print, that “this contract ticket is issued by the company and accepted by the passenger on the following terms and conditions.” Justice Cardozo explained that “[t]his ticket, to the most casual observer, is . . . plainly a contract, burdened with all kinds of conditions . . . . In such circumstances, the act of acceptance gives rise to an implication of assent.” The document looked like a contract, and “[t]he passenger who omits to read takes the risk of the omission.”7

But in many instances, the realities of the marketplace lead businesses to insert contractual provisions in documents and webpages that are not obviously contractual in nature or that have a limited contractual purpose. “The same document may serve both contractual and other purposes, and a party may assent to it for other purposes without understanding that it embodies contract terms.”8 When that occurs, the business needs to be aware that it loses the advantages of the duty to read unless it takes extra steps to put the recipient of the document on inquiry notice by alerting him or her that the document has contractual provisions.

This Phenomenon Occurs in Many Settings

There is no typical scenario where this phenomenon occurs— perhaps that’s why businesses aren’t on the lookout for it. Some examples:

    • The classic examples: when a plaintiff checks a bag or package in the parcel room of a railway station,9 drops off a coat at a dry cleaner,10 or leaves a car at a public parking garage,11 the bailee who takes the plaintiff’s property might hand the plaintiff a small ticket or claim check that the plaintiff sticks in a pocket without reading. If the ticket contains words that purport to limit the bailee’s liability, it is unlikely that the bailee’s attendant will alert the plaintiff to them. If the bailee loses the property, it probably will offer to pay for it— but only up to the amount listed on the small ticket. In the ensuing litigation, courts often hold that the plaintiff had no duty to read the words on the ticket because the ticket didn’t seem to be a contract but just a means of identifying the property as the plaintiff’s. By taking the ticket, the plaintiff agreed to nothing, and the limitation of liability is not binding.
    • Webpages designed for online ordering of books or other products or services include a hyperlink to the site owner’s terms of use. The webpage is designed to make ordering easy and to advertise other products sold by the site owner. Whatever contractual significance it has seems limited to placing an order. The user has no duty to read through the order page to find the hyperlink to the terms of use. Unless the site owner provides a conspicuous notice of the hyperlink, the user will not be bound by the terms of use. Many prominent online retailers have been stung by this rule.12
    • Recent cases in the U.S. Courts of Appeal for the Ninth and Third Circuits have refused to enforce arbitration provisions contained in brochures found in-the-box with massproduced consumer products, such as smartphones. The consumer didn’t have reasonable notice that the brochures contained contractual provisions. Since the brochures did not appear to be contracts, there was no duty to read the provisions hidden in them, which were not enforced.13
    • A brochure from a car manufacturer that included facts about the capabilities of a vehicle was not a contract because it did not appear to be contractual in nature.14
    • Plaintiff bought a new vehicle that included a 90-day trial subscription to a satellite radio service. Weeks later, he received a Welcome Kit from the radio service containing a customer agreement with an arbitration provision. The radio service claimed that his assent to the arbitration provision was manifested by not canceling the trial subscription to the radio service. Litigation erupted, and the court held that plaintiff had no duty to read the Welcome Kit since it did not appear to be a contract, and the contractual provisions were not called to his attention.15
    • Jacob Brogley signed a contract because the plaintiff had falsely led Brogley to believe that he wanted to see how Brogley spelled his name. Since Brogley didn’t know he was signing a contract, he had no duty to read it, and he was not bound by it.16
    • An employee who wanted to lodge a discrimination grievance with his employer was told he needed to fill out a form before his claim could be investigated. The employee filled out the form not knowing that it included a mandatory arbitration provision. When the employee later filed suit, the court held that the arbitration clause was not enforceable because the form did not look like a contract, and the employee was unaware that he had signed an arbitration agreement.17
    • A former employee was not bound to an arbitration provision contained in a form she filled out when she applied for employment. She was told that the form was needed for a background check and was given no indication that it was a contract.18
    • Plaintiff delivered a new jukebox to defendant’s business to replace an older one. The plaintiff’s truck driver handed a paper to defendant and represented that it was merely a receipt and requested him to sign it. In fact, the reverse side of the paper was replete with contractual terms. The court refused to enforce the agreement because the defendant didn’t know that it was a contract.19

On and on it goes—there is not enough space to chronicle the many instances where this phenomenon occurs. In many of these cases, it would have taken the plaintiff just a few seconds to read the limitation of liability or arbitration provision, but he or she never saw it and had no obligation either to look for it or read it. This is in contrast to any number of formal documents that consumers sign every day—insurance policies, car rental agreements, bank loans, and credit card agreements—that are often much lengthier documents and more difficult to understand, yet because everyone understands that they are solemn legal obligations, the purchaser has a duty to read them.

Takeaways

If the contractual provision is inserted in a document or a website that is primarily intended to serve a non-contractual or a limited contractual purpose, the drafter needs to be cognizant that there will be no duty to read the provision unless it is brought to the attention of the recipient, and the recipient is put on inquiry notice of it. This includes contractual provisions hyperlinked on an online order page or tucked away in the information brochure that comes with a new smartphone.

In the examples above, one of the chief reasons that the recipient didn’t know the document was a contract was because the drafter’s representative who presented the document to the recipient either didn’t tell the recipient or misrepresented the contents. The drafter’s representative needs to understand that the document contains a contractual provision that won’t be binding unless it is brought to the attention of the recipient. The representative must never misrepresent the document’s contents or suggest that it has no contractual significance. In certain circumstances, the representative may need to be charged with affirmatively alerting the recipient to the provision.

The most prudent course of action in many settings is to have the recipient sign off on a document indicating that he or she has had an opportunity to see and read the contractual provisions. Such a practice would obviate disputes about what the recipient actually saw or was told.

When a provision is contained in a brochure in-the-box with the product, depending on the jurisdiction, the seller may need to provide notice to the purchaser at the time of purchase that additional contractual provisions will be found in the box. The document inside the box containing the provisions needs to have conspicuous language on its cover alerting the purchaser that important contractual provisions are contained in the document. If the brochure that accompanies the product contains a limitation of liability or arbitration provision, the notice on the cover of the brochure may be insufficient if it merely indicates that it contains a warranty because warranties are generally thought of as imposing obligations on manufacturers, not purchasers. The notice should signal that the document contains important contract provisions, or words to that effect.

Your client needs to understand that lawyers should be consulted not just about drafting the contractual provision that will be included in a non-contractual document or webpage, but also about how to notify the recipient that the document or webpage contains a contractual provision. For example, this may require that the lawyer be involved in the design of a website or a brochure accompanying smartphones or other products. After all, the provision is worthless if the recipient has no duty to read it.


Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, is co-author of the Corbin on Contracts Desk Edition (2017) and writes the biannual supplements to Corbin on Contracts.


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1. See, e.g., Signor v. GWC Warranty Corp., 2018 N.J. Super. Unpub. LEXIS 1160 (May 17, 2018); Manopla v. Raymours Furniture Co., 2018 U.S. Dist. LEXIS 109024 (D. N.J. June 29, 2018). 2. Debra Cassens Weiss, Chief Justice Roberts Admits He Doesn’t Read the Computer Fine Print, ABA Journal, Oct. 20, 2009, http://www.abajournal.com/news/article/chief_justice_roberts_admits_he_doesnt_read_the_computer_fine_print/ (last visited May 7, 2018). 3. Allied Office Supplies, Inc. v. Lewandowski, Cox & W.B. Mason, Co., 261 F. Supp. 2d 107, 112 (D. Conn. 2003). 4. E.g., 7 Corbin on Contracts § 29.9; Toy v. Metro. Life Ins. Co., 928 A.2d 186 ( Pa. 2007). 5. Marin Storage & Trucking, Inc. v. Benco Contracting & Eng’g, Inc., 89 Cal. App. 4th 1042, 1049-50. See also Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012); Hirsch v. Citibank, N.A., 2014 U.S. Dist. LEXIS 83534 (S.D.N.Y. June 10, 2014); Metters v. Ralphs Grocery Co., 161 Cal. App. 4th 696, 702 (2008). 6. Restatement (Second) of Contracts, § 211 cmt. D (1981). 7. Murray v. Cunard S.S. Co., 139 N.E. 226, 228 (N.Y. 1923). See also Kai Peng v. Uber Techs., Inc., 237 F. Supp. 3d 36 (E.D.N.Y. 2017). 8. Restatement (Second) of Contracts, § 211 cmt. d. 9. Klar v. H. & M. Parcel Room, 270 A.D. 538 (1st Dep’t 1946), aff’d, 73 N.E.2d 912 (N.Y. 1947); Healy v. N.Y., C. & H. R. R. Co., 153 A.D. 516, 519-520 (3rd Dep’t 1912); Kergald v. Armstrong Transfer Exp. Co., 113 N.E.2d 53, 54 (Mass. 1953). 10. Ginsberg v. Spring Dry Cleaners, Inc., 2002 N.Y. Misc. L EXIS 135 (N.Y. App. Term 2002). 11. Palazzo v. Katz Parking Systems, Inc., 64 Misc. 2d 720 (N.Y. Civ. Ct. 1970) (disclaimer of liability on parking garage claim check). See also California’s statute providing that bailment contracts for parking lots are not valid unless the contract meets certain standards of conspicuity and copies of the contract are placed on sizeable signs at the parking lot entrances. Cal Civ. Code § 1630. 12. Specht v. Netscape Communs. Corp., 306 F.3d 17, 31 (2d Cir. 2002) (Sotomayor, J.) (“[P]laintiffs’ ‘apparent manifestation of . . . consent’ was to terms ‘contained in a document whose contractual nature [was] not obvious.’”). See also, e.g., Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016) (website clutter rendered the conspicuity of the terms a question of fact); Herman v. SeaWorld 2016 U.S. Dist. LEXIS 181173 (M.D. Fla. Aug. 26, 2016). 13. Norcia v. Samsung Telecomms. Am., 845 F.3d 1279 (9th Cir. 2017); Noble v. Samsung Elecs. Am., Inc., 682 Fed. App’x 113 (3d Cir. 2017); Samsung Elecs. Am., Inc. v. Ramirez, 2018 U.S. Dist. LEXIS 80983 (E.D. Cal. May 14, 2018); Jones v. Samsung Elecs. Am., Inc., 2018 U.S. Dist. LEXIS 84586 (W.D. Pa. May 21, 2018). In-the-box contracting is an example of a rolling contract—some jurisdictions hold that contract formation is not finalized until after the consumer purchases the product, brings it home, opens the box, sees the contractual provisions, and decides whether to accept the provisions by retaining the product or to reject the provisions by returning the product. Not all states accept this theory of formation. Then-Judge Gorsuch said that the “rolling contract formation theory may be about as controversial an idea as exists today in the staid world of contract law.” Howard v. Ferrellgas Partners, L.P., 748 F.3d 975, 982 (10th Cir. 2014). 14. Lewand v. Mazda Motor of Am., Inc., 2017 U.S. Dist. LEXIS 218371 (C.D. Cal. Aug. 8, 2017). 15. Knutson v. Sirius XM Radio Inc., 771 F.3d 559 (9th Cir. 2014). 16. Alexander v. Brogley, 41 A. 691 (N.J. 1898). See Gabriel v. Glickman, 51 A.2d 106 (N.J. 1947). 17. Metters, 161 Cal. App. 4th at 702. 18. Adams v. Superior Court, 2010 Cal. App. Unpub. LEXIS 1236 (Feb. 22, 2010). 19. Capitol Automatic Music Co. v. Jones, 114 N.Y.S.2d 185 (Mun. Ct. 1952).