Terms Incorporated by Reference – Contract Law

When scanning a contract it is common to encounter schedules, annexes, appendices that are incorporated by reference to other documents, additional contracts and supplementary terms and conditions. Often this referenced material is essential to the form and consequences of a legal agreement. And too often it is overlooked. But when can this additional material be insufficiently incorporated into a contract, rendering it of no legal consequence?

Reasonable notice must be given if terms are to be incorporated by reference

Terms and conditions which are not immediately visible will be effectively incorporated by reference into the relevant contract as long as reasonable steps are taken to bring existence of the terms and conditions to the notice of the other party (Parker v South Eastern Railway Company [1877]). Once drawn to the attention of the other party, incorporation will take place if the latter proceeds in such a way that he is deemed to have accepted the terms (i.e. he proceeds without raising any objections).

Notice

For a term to be considered incorporated by reference into a contract, notice of that term must be given before or during the time of contracting. In Olley v Marlborough Court Hotel [1949], the claimant booked a room in a hotel owned by the defendant. Inside the door of her room was a notice stating that the hotel was not liable for anything lost or stolen unless the item had been given to the management to look after. When the fur coat of the claimant was stolen from her room, she sued the defendant for damages. It was held that because the contract had been made at the reception desk before the parties got to the room, and because notice of the term was only given after the formation of the contract, it was not an incorporated term and the claimant could sue the defendant for damages.

Contractually binding

The second rule required for clauses to be considered incorporated by reference is that they must be found in a document intended to be contractually binding. In Chapelton v Barry Urban District Council [1940] the claimant hired a deckchair from Barry Urban District Council to use on a beach in Cold Knap (a district in South Wales). The claimant took two receipts from the beach attendant, on the back of which were the words “the council will not be liable for any accident or damage arising from the hire of the chair”. The chair was defective and broke, injuring the claimant. He sued the council, who relied on the clause on the receipts to protect them from liability. The Court of Appeal held that the clause could not protect the council, as the receipt was not a document that one would expect to contain contractual terms.

However it is important to note that if someone signs a contractual document it is automatically considered to be binding, even if the party has not read the terms. In L’Estrange v F Graucob Ltd [1934] 2 KB 394 the Court of Appeal held that a written document was contractually binding even though the claimant had not read the document and the clause was in “regrettably small print”.

References

Referring a party to another document which contains terms can constitute reasonable notice, even if they don’t have the document and it’s difficult for them to access (Thompson v London Midland [1903]). The more onerous and unusual the terms are, the more clearly they have to be brought to the other party’s attention to get incorporated by reference. But if a document doesn’t look like it’s important/ part of the contract it’s less likely this will count as reasonable notice (Chapelton v Barry [1940]).

Visibility of term in relation to importance

The more burdensome or unusual the terms and conditions, the more clearly they should be drawn to the attention of the other party to be incorporated by reference. In this context, there is the well-known statement of Lord Denning that “some clauses I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient” (J Spurling Ltd v Bradshaw [1956]).

Thus there is a clear principle that, where there is a contractual provision which is particularly unusual or onerous, but not immediately visible, a party will not be able to rely on the clause unless he has done enough to bring the clause fairly to the attention of the other party and thereby successfully rendered the clause incorporated by reference. But also, it has been argued that, in some cases, unusual or burdensome terms set out in a contract which is about to be signed should also be brought to the attention of the signatory:

• In One World (GB) Ltd v Elite Mobile Ltd [2012], the Court of Appeal was prepared to assume that the principle might apply to onerous and unusual clauses in a signed contract “in an extreme case where a signature was obtained under pressure of time or other circumstances”.
• In Amiri Flight Authority v BAE Systems Plc [2004], Mance LJ envisaged that the principle might apply where, for example, a car owner was asked to sign a ticket on entering a car park or a holiday maker asked to sign a long small print document when hiring a car.

Otherwise, the rule in L’Estrange v Graucob applies to signed contracts: the signatory will be bound whether he has read the contract or not.

Incorporation of terms by course of dealing

A customer may be bound even if, for example, the standard terms of sale only appear on the reverse of a post-contractual document such as the invoice (Spurling v Bradshaw), if the seller can establish a course of dealing incorporating the contested term. The party seeking to establish the course of dealing must show that:

• There has been regular trading between the parties. Thus several transactions per month over a period of years might be sufficient for these purposes, but three or four transactions over a period of several years are unlikely to be enough. However, each case will depend on its own facts.
• The trading has been consistent: previous trading must have been on the same terms and a consistent procedure must have been followed. In McCutcheon v David MacBrayne Ltd [1964], it was held that conditions set out on a risk note, which was only sometimes signed, were not incorporated into the parties’ contract because each trade had consequently not taken place on the same terms.

Given the stringent and somewhat uncertain tests which must be satisfied before a court will hold that terms have been incorporated by a course of dealing, it is clear that this is an argument of last resort for the seller, to be used in negotiations and, if necessary, in court, if the customer has challenged the seller’s terms. It is no substitute for proper contracting procedures.

Certainty of terms

A problem for the signing party now would be that if they argue that the terms were not incorporated by reference, then a court may not be able to enforce the contract as a whole because ‘unless all the material terms of a contract are agreed, there is no binding obligation’ (Foley v Classique Coaches [1934]). Given that the signing party of a contract may still want the benefit of the contract this could be a problem.

Watch out

Incorporation of terms applies to all areas of law. When you go to exercise your share option, for example, and you haven’t checked all the applicable rules because they are in supplementary documents. Or when you have been selling to the same customer for years but haven’t necessarily made every transaction subject to the same terms. Or when you seek to limit liability to a great extent but don’t draw attention to what could very arguably be an ‘onerous’ obligation on the other party of the contract. Being alive to these issue can have substantial impact.

Issues most frequently arise where one party is arguing their standard terms and conditions apply and the other argues they weren’t incorporated by reference. A checklist for incorporation in simple terms would be: if the contract has been signed then the parties are normally taken to have agreed to them (L’Estange v Graucob); terms have to be brought to the other party’s attention before the contract is concluded (Parker v South Eastern Railway) – the more onerous, the more clearly they have to be brought to the other party’s attention; if the documents referred to don’t look important or part of the contract then it’s less likely this will count as reasonable notice (Chapelton v Barry); incorporation is possible by a course of dealings (McCutcheon v MacBrayne) but requires a high threshold of proof – i.e. the other party actually knew about the terms and agreed to them.

If you have any questions about terms being incorporated by reference, incorporation of terms in other contexts, contract law more generally or if you need help with resolving a dispute please contact Neil Williamson.