The Hardwood Flooring, the Insects and the Online "Terms of Sale"

As its title probably indicates, this post examines an opinion recently issued in a civil case:  Walker v. BuildDirect.com Technologies, Inc., 2015 WL 2074964 (Oklahoma Supreme Court 2015).   The Supreme Court begins the opinion by explaining that the

United States Court of Appeals,Tenth Circuit, certified the following question of Oklahoma law under the Revised Uniform Certification of Questions of Law Act, Oklahoma Statutes title20, §§ 1601–1611 (2011):

`Does a written consumer contract for the sale of goods incorporate by reference a separate document entitled “Terms of Sale” available on the seller's website, when the contract states that it is “subject to” the seller's “Terms of Sale” but does not specifically reference the website?’

Walker v. BuildDirect.com Technologies, Inc., supra.

As Wikipedia explains,

[i]n the law of the United States, a certified question is a formal request by one court to one of its sister courts, usually but not always in another jurisdiction, for an opinion on a question of law.

These cases typically arise when the court before which litigation is actually pending is required to decide a matter that turns on the law of another state or jurisdiction. If that other jurisdiction's law is unclear or uncertain, a certified question can then be sent to that jurisdiction's courts to render an opinion on the question of law that arose in the court in which the actual litigation is pending. The courts to whom these questions of law are certified are typically appellate courts or state supreme courts.

If you would like to read more about the process, check out this Wikipedia entry.  

So here, a case pending in the U.S. Court of Appeals for the 10^th Circuit involves this issue of law and, since it would not be appropriate for a federal Court of Appeals, to declare what is, and is not, Oklahoma law on the issue noted above, the Court of Appeals has asked the Oklahoma Supreme Court to “declare” what that law is.  As Wikipedia notes, the Court of Appeals for the 10^th Circuit is the U.S. Court of Appeals with jurisdiction over cases arising the three U.S. District Court districts in Oklahoma, i.e., the Eastern District, Northern District and the Western District.

The Supreme Court began the substantive part of its opinion by explaining what facts produced the litigation that involved the issue quoted above:

In April 2008, Shannon and Eric Walker requested several samples of hardwood flooring from BuildDirect.com Technologies, Inc., a Canadian corporation, through BuildDirect's website. The next month they arranged, over the telephone, to purchase 113 boxes of flooring from BuildDirect for $8,559.70. BuildDirect emailed a two-page written Contract entitled `Quotation’ to Ms. Walker, who signed and dated the Contract and returned it to BuildDirect via fax. The Contract describes the type, amount, and price of the flooring purchased by the Walkers. And, it includes 14 bullet points setting forth additional terms. The sixth bullet point states in full, `All orders are subject to BuildDirect's “Terms of Sale.”’

Walkers allege that after they installed the flooring, they discovered their home was infested with nonindigenous wood-boring insects. According to the Walkers, the insects have severely damaged the home, and have caused the home to be subject to quarantine and possible destruction by the United States Department of Agriculture.

In July 2011, the Walkers filed suit against BuildDirect and Fuzhou BuildDirect Limited, LLC (a Chinese company, which . . . was later voluntarily dismissed from the action) in the United States District Court for the Western District of Oklahoma, invoking diversity jurisdiction. See 28 U.S. Code § 1332. They alleged that the flooring purchased from BuildDirect contained the larvae of wood-boring insects and BuildDirect should have exterminated the larvae during the manufacturing process. Claiming to represent a class of similarly situated purchasers of BuildDirect's products, the Walkers asserted causes of action including fraud, breach of contract, negligence, trespass, breach of implied warranties of merchantability and fitness for a particular use, deceptive trade practices, products liability, and nuisance. They demanded a jury trial.

Walker v. BuildDirect.com Technologies, Inc., supra.

BuildDirect responded by filing a motion to

compel arbitration. It pointed to the bullet point of the Contract stating that the Walkers' purchase is `subject to BuildDirect's “Terms of Sale.”’ It claimed that `Terms of Sale’ refers to a specific document bearing that name, which was available on BuildDirect's website. The document could be accessed by clicking on a hyperlink labeled `Terms of Sale’ under the heading `Customer Service’ near the bottom of each page of the website. The online `Terms of Sale’ contained 15 numbered paragraphs, which provided, among other things, that the customer is responsible for shipping costs, that BuildDirect bears the risk of loss during shipping, and that the customer can return a product for any reason within 30 days of delivery for a full refund.

One paragraph requires arbitration of disputes. It states:

`12. ARBITRATION

All disputes arising out of or in connection with this Agreement shall be referred to and finally resolved by a single arbitrator (the “Arbitrator”) pursuant to the [Canadian] Commercial Arbitration Act, R.S.B.C.1996, c. 55, as amended. The decision of the Arbitrator on all issues or matters submitted to the Arbitrator for resolution shall be conclusive, final and binding on all of the parties. The Arbitrator shall determine who shall bear the costs of arbitration pursuant to this section 12.’

Walker v. BuildDirect.com Technologies, Inc., supra.

The Supreme Court goes on to explain that the Walkers

responded that they were unaware of the online document and that it was not a part of the Contract because it was not adequately referenced in the Contract. The district court denied BuildDirect's motion, explaining that the Contract was ambiguous and it could not say as a matter of law that the Contract incorporated the `Terms of Sale’. BuildDirect then initiated an interlocutory appeal to the U.S. Courts of Appeals, Tenth Circuit. See 9 U.S. Code § 16(a)(1)(B) (authorizing immediate appeal of order denying motion to compel arbitration). That court certified a limited question of Oklahoma law to this Court.

Walker v. BuildDirect.com Technologies, Inc., supra.

The Supreme Court begins its analysis of that question by explaining that the

Federal Arbitration Act (FAA) governs the enforcement of written arbitration provisions in contracts involving commerce. See Thompson v. Bar–S Foods Co., 2007 OK 75, 174 P.3d 567 (Oklahoma Supreme Court 2007). State law, however, governs contract formation and the terms contained therein. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (holding, courts generally—though with a qualification—should apply ordinary state-law principles that govern contract formation). The parties here do not dispute Oklahoma law is controlling and neither party contends a conflict of law analysis is necessary.

In Oklahoma, as in most jurisdictions, the paramount objective of contract interpretation is to effectuate the intent of the parties as expressed by the terms of the contract. Currey v. Willard Steam Service, Inc., 321 P.2d 680 (Oklahoma Supreme Court 1958). `The cardinal rule’ in interpreting written contracts is to ascertain the parties expressed intent and give effect to the same, `if it can be done consistently with legal principles.’ Continental Supply Co. v. Levy,  247 P. 967 (Oklahoma Supreme Court 1926). `The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.’ Oklahoma Statutes title 15, § 154. Thus, unambiguous, clear, and consistent contract terms will be enforced as written to carry out the expressed intention of the parties. Phillips v. Estate of Greenfield, 859 P.2d 1101 (Oklahoma Supreme Court 1993); Oklahoma Statutes title 15, § 153.

Walker v. BuildDirect.com Technologies, Inc., supra.

The Supreme Court then went on to explain that the

paramount question facing this Court is whether the `Terms of Sale’ located on BuildDirect's website, was incorporated into the parties' written contractual agreement by reference. This case raises an issue of first impression. Oklahoma's jurisprudence in contract law on the doctrine of incorporation, commonly referred to as incorporation by reference, is sparse.  

While Oklahoma's recognition of the principles of incorporation are abundant, a bright-line standard has yet to be formulated. The limited precedent that exists, however, permits incorporation of an extrinsic document by reference where the incorporated material was clearly identified in the text, See Monkey Island Dev. Auth. v. Staten, 76 P.3d 84 (Oklahoma Supreme Court 2003); or words of express incorporation were utilized. See High Sierra Energy, L.P. v. Hull, 241 P.3d 1139 (Oklahoma Supreme Court 2010). But, standards to effectively incorporate by reference sufficient to resolve the underlying dispute before this Court are lacking.

Walker v. BuildDirect.com Technologies, Inc., supra.

Notwithstanding that, the court went on to explain that a

contract may include a separate writing or portions thereof, if properly incorporated by reference. See Continental Supply Co. v. Levy, 247 P. 967 (Oklahoma Supreme Court 1026); Aetna Life Ins. Co. v. Bradford, 45 Okla. 70, 145 P. 316 (Oklahoma Supreme Court 2014). As Samuel W. Williston explains, extrinsic material is properly incorporated when the underlying contract makes clear reference to the separate document, the identity of the separate document may be ascertained beyond doubt, and the parties to the agreement had knowledge of and assented to the incorporation. See 11 Williston on Contracts § 30:25 (4th ed.1999).

Incorporation however, is ineffective to `accomplish its intended purpose when the provisions to which reference is made do not have a reasonably clear and ascertainable meaning.’ Williston on Contracts, supra. When incorporated material is properly referenced, `that other document, or portions to which reference is made, becomes constructively a part of the writing,’ forming a single instrument. Williston on Contracts, supra; See High Sierra Energy, L.P., 241 P.3d 1139 (Oklahoma Supreme Court 2010). See also Oklahome Statutes title 15, § 158. Although the contract at issue here concerns the incorporation of an extrinsic document warehoused in cyberspace -- contract formation, incorporation therein, and basic principals of contract law remain fundamentally unchanged. See One Beacon Ins. v. Crowley Marine Serv., Inc., 648 F.3d 258 (U.S. Court of Appeals for the 5th Circuit 2011) (although Internet commerce has exposed courts to many new situations, contract principles remain unchanged).

Walker v. BuildDirect.com Technologies, Inc., supra.

The Supreme Court then took up the issue involved in this case, noting that

BuildDirect contends its `Terms of Sale’, housed on its website, was incorporated by reference into the Contract. It asserts that the quotation marks encapsulating the phrase `Terms of Sale’ in the written contract places the Walkers on notice to the existence of an extraneous document to be incorporated into the parties' agreement.

The Walkers, on the other hand, contend they neither had notice of nor assented to the additional terms housed on BuildDirect's website. Rather, the Walkers maintain that the Contract contained all relevant terms and failed to identify or give the location of an internet sales agreement.

Walker v. BuildDirect.com Technologies, Inc., supra.

It went on to explain that a

chief consideration of incorporation is whether the party to be bound had reasonable notice of and assented to the terms to be incorporated. One Beacon Insurance Co. v. Crowley Marine Services, Inc., 648 F.3d 258 (U.S. Court of Appeals for the 5^th Circuit 2011). A party is deemed to have notice of incorporated terms where a reasonable prudent person, under the particular facts of the case, should have seen them. One Beacon Insurance, supra.  See generally Cooper v. Flesner,  24 Okla. 47, 103 P. 1016 (Oklahoma Supreme Court 1909) (`notice’ is knowledge of facts and circumstances that would alert a reasonable, prudent person to investigate). But, a party's failure to read duly incorporated terms will not excuse the obligation to be bound. See McDonald v. McKinney Nursery Co., 44 Okla. 62, 143 P. 191 (Oklahoma Supreme Court 2014).

Further, neither physical attachment nor magic words are necessary.  See Monkey Island Development Authority, 76 P.3d 84 (Oklahoma Supreme Court 2003) (finding incorporation by reference of additional provisions not affixed to the parties' contract where express language of incorporation was used); 11 Williston on Contracts § 30:25. But, incorporation will fail when this Court must employ a forced construction to `construe an ambiguity . . .to import a more favorable consideration to either party than that expressed in the contract.’ Porter v. Oklahoma Farm Bureau Mutual Ins. Co., 330 P.3d 511(Oklahoma Supreme Court 2015). Such a standard ensures that Oklahoma consumers are protected from deceptive and unfair trade practices.

Walker v. BuildDirect.com Technologies, Inc., supra.

The Supreme Court then outlined its response to the issue certified for its decision:

Applying the foregoing principles to the facts of this case, this Court concludes that BuildDirect's `Terms of Sale’ were not properly incorporated into the parties' Contract. `A contract must be so interpreted as to give effect to the mutual intention of the parties, as it existed at the time of contracting, so far as the same is ascertainable and lawful.’ Scungio v. Scungio, 291 P.3d 616 (Oklahoma Supreme Court 2012) (quoting Oklahoma Statutes title 15, § 152 (2011)).

This Court ascertains the parties' mutual intentions from the four corners of the contract. Scungio v. Scungio, supra. Merely placing quotation marks around the phrase terms of sale, without more, was insufficient to convey to the Walkers that BuildDirect was making reference to anything other than the multitude of sales terms already expressly enumerated within the four-corners of the Contract.

The Contract, as presented, embodied all relevant contract terms and conditions. Certainly the phrase `Terms of Sale’ fails to clearly and unambiguously state that the parties intended to incorporate any additional terms beyond the four-corners of the Contract. That oblique reference falls short of this Court's demanding standard. And, it buttresses this Court's conclusion that, the Walkers neither assented to nor had notice of the additional online terms.

If BuildDirect intended to make the online `Terms of Sale’ part of the parties' agreement, BuildDirect could easily have accomplished that purpose by drafting the Contract employing words of express incorporation or clearly referencing, identifying and directing the Walkers to the document to be incorporated.

In this Court's view, BuildDirect's reliance upon incorporation by reference must, as a matter of law, fail. Indeed, the Contract as presented gives every appearance of being a complete agreement -- capturing the price, payment method, delivery and sales terms expressly enumerated in the Contract. No reasonable prudent person, under the particular facts of this case, would have notice to think otherwise. Therefore, BuildDirect's attempt at incorporation was nothing more than a vague allusion.

Walker v. BuildDirect.com Technologies, Inc., supra.

The court therefore held that

[f]or the reasons stated herein, Oklahoma law does not recognize a vague attempt at incorporation by reference as demonstrated in this action. Under the Oklahoma law of contracts, parties may incorporate by reference separate writings, or portions thereof, together into one agreement where (1) the underlying contract makes clear reference to the extrinsic document, (2) the identity and location of the extrinsic document may be ascertained beyond doubt, and (3) the parties to the agreement had knowledge of and assented to its incorporation.

Walker v. BuildDirect.com Technologies, Inc., supra.