Be Wary of Incorporating Clauses in Commercial Contracts

May 8, 2015 in Kentucky Courts by Christopher Arlinghaus

The Kentucky Supreme Court rendered an interesting decision recently in Dixon v. Daymar Colleges Group, LLC, 2012-SC-000687-DG. In this case, a group of students challenged a for-profit college’s enrollment process as both procedurally and substantively unconscionable.  The College challenged the students’ right to institute legal proceedings in circuit court based upon an arbitration clause on the reverse side of a “Student Enrollment Agreement.”  The Court found attempted incorporating language found in the contract was not sufficient to prove assent to arbitrate, and the students who signed the agreement were not bound by the arbitration clause on the reverse side of the agreement, reversing the Kentucky Court of Appeals.

This lengthy case recites an interesting factual scenario whereby students executed Student Enrollment Agreements upon initial visit with college personnel. Apparently, some of them did not realize they had actually enrolled in the college.  Several students sued the college in 2010, claiming the college’s representations and promises were deceptive.  The Agreement was a single page, front and back.  The students only signed the front of the agreement.  Above the signature line, in regular type, was the following clause:  “This Agreement and any applicable amendments, which are incorporated herein by reference, are the full and complete agreement between me and the College.”  The Students were also directed to initial in a blank space they had read all of the terms of the agreement, directly above the signature line.

The reverse side of the agreement contained several additional provisions, including an a clause in regular type requiring the students to arbitrate any dispute, controversy or claim arising out of their enrollment, the actual Agreement, or any breach of the Agreement.  Noteworthy terms of the arbitration provision were: “(1) the Students Are required to split the costs of arbitration with Daymar; (2) the Students are responsible for their own attorneys’ fees; (3) the validity or enforcement of the arbitration provision is a question for the arbitrator, not a court; and (4) Kentucky law shall govern the validity, interpretation, and performance of the Agreement.”  The students were not permitted to amend any of the provisions of the Agreement.   The students claimed they were unaware of the arbitration clause or its meaning, and the college conceded no admissions counselor could have explained its meaning or how the arbitration process would operate.

The trial court found the arbitration clause procedurally unconscionable due to the rushed enrollment process and substantively unconscionable due to the costs of arbitration being unduly expensive in this situation.  However, the Court of appeals rejected these arguments, including, among other findings, that the students’ signatures on the line in the middle of the front page was sufficient because it was below the “incorporating language.”

The Kentucky Supreme Court reversed the Court of Appeals, focusing on the students’ challenge whether they actually agreed to arbitrate the merits of the dispute and who should have the primary power to decide the arbitrability of the merits.  This blog focuses on the issue of the whether the signature in the middle of the Agreement was sufficient, and whether the arbitration provision was properly incorporated into the agreement and therefore, whether it was binding on the students.

The students argued they were not bound by the clause because they did not sign at the end of the writing, as required by Kentucky revised Statute (KRS) 446.060.  They also argued the attempted incorporating language was insufficient to actually incorporate the clause on the reverse side.  The college argued there is no requirement an arbitration clause be signed, rejected the contention that the Statute of Frauds applied to the Agreement, and argued the incorporating language was sufficient.

The Court found that, although an arbitration clause need not be signed in Kentucky, it must be in writing.  It also found that since the Statute of Frauds did apply because “it was contemplated by the parties that the contract would not, and could not, be performed within the year, even though it was possible of performance within that time, it comes within the inhibition of the Statute,” and the students could not obtain their degree within one year, then the contractual agreement did need to be signed at the end.

Even so, the college could have still prevailed in requiring arbitration if it had successfully incorporated by reference the arbitration clause on the reverse side.  In order to properly incorporate other terms, the language must clearly show the parties had knowledge of and actually assented to those incorporated other terms, and the actually incorporating language must be clear.  If the signature then follows proper incorporating language, then there will be a successful incorporation of the clearly identified other terms.

At the bottom of the first page, the following clause was found: “This Agreement and any applicable amendments, which are incorporated herein by reference, are the full and complete agreement between me and the College.  By signing this, Agreement, I confirm that no oral representations or guarantees about enrollment, academics, financial aid, or career/ employment prospects have been made to me, and that I will not rely on any oral statements in deciding to sign this Agreement.  My enrollment is not complete and this Agreement is not in effect until it is signed by an Authorized College Official.”  Below that clause was the following clause, capitalized: “—I HAVE READ BOTH PAGES OF THIS STUDENT ENROLLMENT AGREEMENT BEFORE I SIGNED IT AND I RECEIVED A COPY OF IT AFTER I SIGNED IT.”  The students were to initial in a blank space adjacent to that clause.  Below that clause was the signature line.

The Court found multiple problems with the attempt to incorporate the arbitration clause.  The attempted incorporating language claims to apply to “any applicable amendments” and the arbitration clause was an “original term.”  Furthermore, the clause providing the students “read both pages” was not sufficient because it does not also state they “assented” to the terms referenced, including the arbitration clause.  The attempted incorporating language was not sufficient, and therefore, Kentucky’s requirement that the contract be signed at the end of the document was not met.  Accordingly, the Kentucky Supreme Court found the arbitration clause did not apply.

This Kentucky case is instructive because far too often, attempts at incorporating terms following a signature on a contract, including many commercial contracts, seem to be an “after thought.”  This case gives an idea of the level of scrutiny a court may give to attempted incorporating language, especially if the terms attempting to be incorporated appear controversial or not truly agreed upon.  Care should be given that any incorporating language be absolutely clear on what is being incorporated, that the incorporated language is incorporated herein by reference and made a part hereof, that the incorporated terms be described as specifically as possible, and evidence on its face that the parties actually assent to all terms.

 

THE FULL TEXT OF THE OPINION MAY BE FOUND HERE