Law Tips: Incorporation by Reference

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Authored by attorney Dustin Paul

One of the most dangerous things a business can do is agree to contract terms that it has never read. Hidden in contracts may be a variety of provisions that could become expensive to a project or deal. Contracts may contain a forum selection clause requiring that suit be brought in another state. Contracts may contain a choice of law provision selecting the law of an unfavorable jurisdiction. A contract may waive your right to a jury trial. Or a contract may completely waive your business’s right to file a lawsuit, and instead force you to arbitration.

While there may be economic reasons to adopt any of these contractual terms, it is important a business intends to adopt these terms after consideration of their impact. But many businesses throughout the country are agreeing to these terms without ever reading them through a process called “incorporation by reference.”

Incorporation by reference is when one legal document adopts the terms of another legal document. And some businesses are using incorporation by reference to adopt their standard terms and conditions into contracts. Many businesses never provide a paper copy of their terms and conditions to their contractual partners. Instead, they include language in their invoices, contracts, or purchase orders that states that any transaction is subject to a business’s standard terms and conditions and identifies a website address where the terms can be read. Judges are increasingly enforcing these standard terms and conditions, especially where both parties are businesses. They are being enforced even where one of the parties has never read the incorporated terms.

A diligent business should review all the documentation related to a contract to ensure that its contractual partner has not attempted to incorporate unfavorable terms and conditions. If incorporation is attempted, a business should be prepared to negotiate changes or exceptions to the general terms and conditions. Otherwise a business may never know what it has agreed to until it is too late. A one-year warranty on workmanship is typical and acceptable but the Contractor should still attempt to establish definite commencement/end dates for all warranties and make sure that timely notice is required.

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