U.S. Fifth Federal Circuit Holds That Terms and Conditions Posted on Websites Can Be Incorporated Into Contracts By Reference
By: Philip C. Brickman, Partner, Fowler Rodriguez Valdes-Fauli
In One Beacon Insurance Company v. Crowley Marine Services, Inc., 2011 U.S. App. Lexis 15620 (5th Cir. 2011), the U.S. Fifth Circuit Court of Appeals recently affirmed a district court ruling that contractual terms appearing on a company’s website can be sufficiently incorporated into a contract, so long as the other contracting party is put on notice of the location of the posted clauses.
Crowley Marine Services Inc. (“Crowley”) hired Tubal-Cain Marine Services, Inc. (“Tubal-Cain”) to perform work on one of Crowley’s vessels. Tubal-Cain then hired Rio Marine, Inc. (“Rio”) as a subcontractor to perform some of the work. During the course of operations, an employee of Rio allegedly sustained a severe injury. The Rio employee filed suit against Crowley and Tubal-Cain alleging negligence for his injuries. In other proceedings, Crowley then made a formal demand for defense and indemnity from Tubal-Cain for any liability or expenses incurred as a result of the injured workers’ lawsuit. Crowley also sought insurance coverage from One Beacon Insurance Company (“One Beacon”) as an additional insured under the maritime comprehensive liability policy that One Beacon had issued to Tubal-Cain. One Beacon denied coverage to Crowley alleging that it was not an additional insured under the policy, and that there was no insured contract between Tubal-Cain and Crowley that would entitle Crowley to coverage under the One Beacon policy. Tubal-Cain denied its obligation to defend and indemnify Crowley against any claims by Rio’s employee because Tubal-Cain never agreed to those obligations under the repair service order (“RSO”) that was issued by Crowley for the work.
Crowley alleged that its contractual terms and conditions were specifically referenced in the RSO that it issued to Tubal-Cain for the repair work. The terms and conditions included in an obligation to defend and indemnify Crowley against any contractor claims. To find the contractual terms and conditions on Crowley’s website, a user would need to take four steps. Crowley’s terms and conditions clearly obligated the contractor to defend and indemnify Crowley for any claims that are brought against Crowley in connection with the work. The terms and conditions also obligated the contractor to procure certain insurance policies that would cover any such claims and name Crowley as an additional insured under that policy.
At the completion of the work, Tubal-Cain issued an invoice which referenced Crowley’s RSO number. At no time did Crowley object to the terms and conditions. Crowley later approved the invoice and paid the total sum in full.
The district court concluded that the oral agreement between Crowley and Tubal-Cain, the RSO, and subsequent invoice constituted one contract between Tubal-Cain and Crowley for the repair service job. The same process had been used on multiple occasions for previous Crowley repair jobs by Tubal-Cain. Because of this, the court found that Tubal-Cain and Crowley established a course of dealing from which they could infer the terms and conditions on the website in every contract between them. Further, the district court found that Tubal-Cain ratified and agreed to the terms by issuing an invoice without making any objections to those terms.
The contract for the repair of the vessel is a maritime contract which is governed by general maritime law.(1) General principles of contract law as adopted by the general maritime law apply to the interpretation of maritime contracts.(2) Oral contracts are generally regarded as valid by the general maritime law.(3) Under the general maritime law, terms and conditions contained in subsequently-issued purchase orders may supplement an oral agreement if there is evidence of a prior course of dealing between the parties from which a court may infer that the parties were aware of and consented to those additional contractual terms.(4) The principle of issuing a purchase order or invoice containing terms and conditions after the orally agreed upon repair work has been done or completed is typical for the maritime ship repair industry.(5) The Fifth Circuit has also upheld limitation of liability terms where a written document which constituted the contract for the repair was not sent to the plaintiff until sometime after the work was completed.(6)
Tubal-Cain argued that the indemnity obligations could not be inferred from the terms and conditions referred to in the RSO because they had only done eight prior jobs for Crowley. However, the court noted that the brief history between the two parties is not in and of itself a basis for finding that those terms were not incorporated in the contract.
Tubal-Cain also contended that indemnity terms that purport to indemnify a party for damages caused by its own negligence must be specific and conspicuous to be enforceable under maritime law.(7) Under maritime law, terms incorporated by reference will be valid so long as it is clear that the parties to the agreement had knowledge of and assented to the incorporated terms.(8) Notice of incorporated terms is reasonable where under these particular facts of the case, a reasonably prudent person should have seen them.(9) This principle also applies where terms to be incorporated are contained on a party’s website. While commerce on the internet has exposed courts to many new situations, it does not fundamentally change the principles of contract and that holding a party with notice of an opportunity to review contract terms is bound by those terms even where the party has not read them, and the same rule applies to contracts which appear in electronic format.(10)
Under admiralty law, maritime contracts may validly incorporate terms from a website in the same manner that they may incorporate by reference terms from paper documents. The chief considerations in determining whether the validity of contractual terms in contracts, with or without a nexus to the internet, is whether (1) the party to be bound had reasonable notice of the terms at issue and (2) whether the party manifested assent to those terms. Here, Tubal-Cain was provided notice that Crowley’s terms and conditions were posted on its website through the RSO. Tubal-Cain later agreed to those terms by issuing an invoice for payment without raising any objections. Further, it was reasonable to assume that a representative of Tubal-Cain could have taken the short steps necessary to read the terms and conditions on Crowley’s website and, therefore, was found to have actual notice of and access to the terms and conditions even though they allegedly did not read them. Accordingly, the Fifth Circuit ruled that there was a written agreement between Tubal-Cain and Crowley which obligated Tubal-Cain to defend, indemnify and procure insurance for Crowley.(11)
There is a long standing practice in the maritime industry whereby terms and conditions to particular contracts are incorporated by reference to either the reverse side of the bills of lading, invoices or a separate and distinct document such as a tariff or master service agreement. This Fifth Circuit opinion should serve as a reminder to contracting parties to carefully review the terms of any work order, purchase order, or other similar document and take the additional steps necessary to locate and identify the express terms and conditions that will govern the particular work between those parties. Failure to do so may result in an unwanted exposure to risk of liabilities for personal injury, property or other damages.
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- Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401 (5th Cir. 1982).
- Har-Win, Inc. v. Consol. Grain and Barge Co., 794 F.2d 985 (5th Cir. 1986).
- Kossick v. United Fruit Co., 365 U.S. 731, 734 (1961).
- Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d 1115 (5th Cir. 1992), superseded by statute on other grounds.
- B & B Schiffahrts GmbH & Co. v. Am. Diesel & Ship Repairs, Inc., 136 F.Supp.2d 590 (E.D. La. 2001).
- Coastal Ironworks, Inc. v. Petty Ray Geophysical, 783 F.2d 577 (5th Cir. 1986).
- Orduna S.A. v. Zen-Noh Grain Corp., 913 F.2d 1149 (5th Cir. 1990).
- Coastal Ironworks, 783 F.2d at 582.
- Barnett v. Network Solutions, Inc., 385 S.W. 3d 2001 (Tex. Ct. App. Eastland, pet. denied).
- The court also held that Crowley was not an additional insured under the One Beacon policy because Crowley was not specifically so named on the policy endorsement.
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