October 2002

Liability Limitations and Invoice Terms in the Commercial Context

In a recent decision, Puget Sound Financial, LLC v. Unisearch,1 the Washington State Supreme Court unanimously upheld the validity of a liability-limitation clause printed in a regular invoice for commercial services. The decision extended the applicability of the trade usage and course-of-dealing doctrines to commercial services transactions.2 The exclusionary clause at issue restricted a public-records search company's potential liability to the cost of the search service that it provided, here, $25.3 The Supreme Court held that the clause was not a material alteration to the parties' original oral contract, which did not include a liability limitation, but rather had been incorporated into the contract at issue three years later, through prevailing trade usage and a history of course of dealing.4 

The Unisearch decision consisted of three major holdings. First, trade usage and course of dealing are appropriate evidentiary doctrines for determining the terms of a non- or partially integrated agreement, including one that began as an oral contract. Second, where there is a history of trade usage or course of dealing between commercial parties with respect to a liability limitation, that term is not unconscionable. And third, even in the absence of a history of trade usage or dealing, if the exclusionary clause is conspicuous and if both parties have had an opportunity to review it, the term is not unconscionable.

As noted below, by using the term "conspicuous," the Supreme Court does not actually require that a liability limitation "stand out," but rather that the treatment it receives is comparable to that of other contractual terms. In practice, the inquiry is whether the term is "hidden in a maze of fine print" and/or if the term is as conspicuous as other terms in the contract.

In Unisearch, the Supreme Court explored the issue of whether terms included in an invoice, but not expressly alluded to in a preliminary oral agreement, should be considered a part of that agreement or material alterations to the agreement.5 An analysis of which category the additional term should fall under requires a determination of (1) whether there is an integrated agreement, and (2) whether the term was incorporated into the parties' agreement as part of a layered contract.

Determining whether additional terms not included in the original communication between contracting parties are part of the contract or material alterations to it depends upon the absence of a fully integrated agreement. The Restatement (Second) of Contracts § 210(1) states: "A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement."

In general, when there is not an integrated agreement, or even when there is only a partially integrated agreement, a court has the authority to review extrinsic evidence. In Berg v. Hudesman, the Supreme Court held that "[contract] terms not included in the [original] writing may be proved by extrinsic evidence provided that the additional terms are not inconsistent with the written terms."6 While the Unisearch court did not expressly review the question of integration, the absence of an integrated agreement clearly informed its decision.7 

When there is no integrated agreement, a court must determine which additional terms may have been incorporated into the contract. In M.A. Mortenson v. Timberline Software Corp.,8 the Supreme Court acknowledged the applicability of a "layered" contract analysis to sale-of-goods contracts under RCW 62A.2-204.9 According to the Mortenson court: "[B]ecause RCW 62A.2- 204 allows a contract to be formed 'in any manner sufficient to show agreement … even though the moment of its making is undetermined,' it allows the formation of 'layered contracts.'…" The Unisearch court extended this doctrine to commercial service contracts. It held that "Unisearch's contract with [Puget Sound Financial] could be interpreted as a 'layered' contract, which incorporates the search reports and sales invoices."10 Trade usage and course of dealing are two factors used to determine which terms have been incorporated into a layered contract.

Where the contract is silent with respect to a particular term, it is proper to rely upon evidence of trade usage to interpret the contract. According to the Restatement (Second) of Contracts § 222(3), "Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement." This position was adopted by Division

That court held that "[o]nce a contract is established, custom and usage are admissible to explain its terms."12 Unisearch affirmed this position. Writing for the court, Justice Bobbe Bridge stated: "We find this unrebutted evidence persuasive of trade usage, supporting the inclusion of the limiting language in the contract between [Puget Sound Financial] and Unisearch."13 

Course-of-dealing analysis is well-established in Washington. In the common-law context, the Washington State Supreme Court has adopted Restatement (Second) of Contracts §§ 212, 214(c)(1981)(App. E), and quoted with favor comment b to § 212.14 That comment states that "the course of dealing between the parties" is a consideration that should be addressed as courts interpret contracts.15 

In the Uniform Commercial Code (UCC) context, the Washington Legislature has specifically adopted the UCC's course-of-dealing provision.16 Indeed, the very definition of "agreement" under the UCC "means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing. …"17 

Prior to Unisearch, the 9th Circuit had already explicitly endorsed the incorporation of invoice terms into a commercial service contract under a course-of-dealing analysis. In Insurance Company of North America v. NNR Aircargo Service (USA), Inc., the 9th Circuit held that "[l]iability is a term inherent to shipping contracts. We have thus tacitly approved the use of course-of-dealing analysis in interpreting such contracts where the agreement is silent with respect to liability."18 The Restatement (Second) of Contracts takes a similar approach, stating that "[u]nless otherwise agreed, a course of dealing between the parties gives meaning to or supplements or qualifies their agreement."19 Relying on NNR and the Restatement, the Unisearch court upheld the liability-limitation clause printed on Unisearch's invoices, stating that the limitation was "established through the course of dealing between the parties."20 

Under Washington UCC law, an exclusionary clause is valid unless it is established that the limitation is unconscionable.21 Whether a limitation on consequential damages is unconscionable is a question of law.22 In Unisearch, the UCC approach was adopted for commercial service transactions.

Washington courts have identified two classifications of unconscionability: substantive and procedural.23 

"As an initial matter, it is questionable whether clauses excluding consequential damages in a commercial contract can ever be substantively unconscionable."24 Substantive unconscionability involves "cases where a clause or term in the contract is alleged to be one-sided or overly harsh."25 Substantive unconscionability has also been described as "shocking to the conscience," "monstrously harsh" and "exceedingly calloused."26 This type of unconscionability is rarely found in transactions between two commercial entities.

Procedural unconscionability is "described as the lack of a meaningful choice, considering all the circumstances surrounding the transaction including '[t]he manner in which the contract was entered,' whether each party had a 'reasonable opportunity to understand the terms of the contract,' and whether 'the important terms [were] hidden in a maze of fine print.'"27 Most cases reviewing the unconscionability of warranty disclaimers and exclusionary clauses (such as a liability limitation) have framed the issue as one of procedural unconscionability. As such, this analysis will focus on this species of unconscionability.

In the seminal consumer-warranty disclaimer case, Berg v. Stromme, the Washington State Supreme Court noted that "[p]rinted disclaimers of warranty … are now regarded with increasing disfavor by the courts."28 The court reasoned that "[s]uch waiver, even though printed, should not be allowed to arise from the fine print to haunt the buyer … unless he has agreed to be bound by it with the same degree of explicitness that he bound himself to the other vital conditions of the contract of purchase."29 The Berg court placed the evidentiary burden on the party trying to enforce a warranty disclaimer to show that the contract clause was conscionable,30 and formulated a rule holding a warranty disclaimer to be "ineffectual unless explicitly negotiated between buyer and seller and set forth with particularity."31 

Unlike consumer sales transactions, where a liability-limitation clause must be "explicitly negotiated between buyer and seller," the inquiry in the commercial contracting context is whether, under the totality of the circumstances, the limitation is unconscionable.32 This is a question of law for the court to decide, and the party trying to exclude the clause has the burden of proof in light of the principle that "[e]xclusionary clauses in purely commercial transactions … are prima facie conscionable."33 

Under totality of circumstances review, a history of trade usage or course of dealing can establish that a liability limitation is conscionable "regardless of the surrounding circumstances."34 If no history of trade usage or course of dealing exists, a court must engage in a balancing test geared toward protecting the integrity of good-faith dealings.35 While Washington courts have developed a number of lists of nonexclusive factors that are applicable to the analysis,36 the Unisearch court attempted to consolidate these efforts and focused its examination to the "conspicuousness of the clause" and the "presence or absence of negotiations."37 

The Unisearch court remarked: "[A court's] considerations regarding the conspicuousness of the clause are the same as 'whether the important terms were hidden in a maze of fine print.'"38 In practice, courts have not required that liability-limitation clauses stand out, but rather that they are at least as conspicuous as other contractual clauses.39 

A review of the presence or absence of negotiations consists of an evaluation of how the parties entered into the contract and whether the parties "had a reasonable opportunity to understand the terms of the contract."40 Thus, even when a contractual term is not explicitly negotiated, courts are unlikely to strike a contractual term if the complaining party had occasion to review the term.41 

There is no requirement that parties to an agreement have actual knowledge of the included term. In a commercial transaction, imputed knowledge suffices to bind a party to a liability limitation. According to the Mortenson court, "[i]t was not necessary for Mortenson to actually read the agreement in order to be bound by it." 42 Additionally, in the Unisearch case, the Supreme Court held that where a party receives an invoice after the fact, if previous invoices had included the identical term, the party receiving the invoice had sufficient notice of its presence.43 

IV. The Unisearch Decision in Light of Underlying Policy Principles

By refusing to require that all terms in a commercial service contract be explicitly negotiated, the Unisearch court acted consistent with Washington precedent. In explaining its reluctance to extend Berg to purely commercial transactions, the Supreme Court wrote in American Nursery Products: "To so hold would unnecessarily interfere with the freedom to contract in the commercial context."44 The Court went on to explain that "[p]arties to a commercial contract … generally have equal bargaining power and an equal ability to seek advice and alternative offers. As a result, commercial transactions are less subject to the type of unfair surprise which may be found in consumer sales transactions."45 

The Unisearch decision supports allocation of risk to the contracting party with the best information as to potential liability. In many industries, service firms are unlikely to be able to predict the nature and extent of the loss that they might suffer in any given business transaction. In Unisearch itself, the company with the most knowledge of potential liability resulting from an adverse outcome was Puget Sound Financial. It clearly would have been a perverse result had Unisearch become a de facto guarantor of Puget Sound Financial's loan, simply on the basis of running a $25 search. Moreover, it would often be nearly impossible to determine what portion, if any, of any loss could be attributable to the service-providing company rather than to its customer or third parties.

The U.S. Supreme Court has explained that liability limitations serve a public purpose by reducing the cost of goods, writing that in contract law "and the law of warranty in particular … the parties may set the terms of their own agreements. The manufacturer can restrict its liability … by disclaiming warranties or limiting remedies. In exchange, the purchaser pays less for the product."46 

Had the liability limitation in Unisearch not been enforced, liability would have been shifted from search-requesting companies to records-providing companies. But as noted above, the customers requesting searches — not the search companies — have the best information with respect to potential liability. Though search companies could demand that companies requesting searches provide them with all relevant information with respect to the potential liability resulting from an incorrect search, such duplication of information-gathering would be costly and imperfect.

The Supreme Court's extension of trade usage and course-of-dealing analysis in Unisearch significantly strengthens the ability of companies to form workable contracts and efficiently allocate risk.

The practical reality of commercial contract interpretation requires an acknowledgment that in a significant number of transactions, a court will be required to infer terms based upon subsequent actions of the parties involved and other extrinsic evidence. Trade usage and course-of-dealing analysis generally comport with the intentions of the parties and are appropriate tools by which to review contract formation.

Additionally, it is important to allow parties to allocate risk between themselves, particularly where one party has far superior information with respect to potential liability. In scenarios where commercial parties have had a clear course of dealing, where there is a history of trade usage, or where there is fair notice of a contractual term, the Supreme Court has instructed that trial courts should uphold liability limitations, including those printed in regular service invoices.

NOTES

1. 2002 WL 1205735 (Wash. 2002).

2. Prior to Unisearch, it was clear that trade usage and course of dealing were appropriate criteria for examining contract formation in a sale-of-goods transaction. In Washington, sale-of-goods contracts are covered by the Uniform Commercial Code (UCC), which has been codified as under RCW Title 62A.

3. Puget Sound Financial, LLC (formerly known as Factors of Puget Sound) is a commercial lender and receivables factoring company. Unisearch searches government files and computer databases for a fee. Puget Sound Financial sued Unisearch on the basis of an allegedly negligent search for a UCC filing. The dispute drew national attention because it was the first lawsuit in the public-records research industry to come so close to trial. Unisearch provides excellent service and has had only two dissatisfied customers in its 10-year history. Puget Sound Financial had made a loan thinking it was in first position on the collateral, when in fact the borrower had failed to disclose that a prior lien had been recorded under a slightly different name. The borrower subsequently defaulted. Puget Sound Financial contended that Unisearch should have located the prior lien and that, had it done so, Puget Sound Financial would not have extended any credit to the borrower. Unisearch vigorously denied that its search was negligent, and in any event won a pretrial summary judgment ruling from King County Superior Court Judge Suzanne Barnett, who held that "[i]f plaintiff were to establish liability … arising in contract or in tort, the measure of damages … would be limited to the cost of the services rendered, viz., $25.00." Unisearch, 2002 WL 1205735 at 1.

4. Unisearch, 2002 WL 1205735 at 4.

5. Neither party disputed the basic factual background. Puget Sound Financial would call Unisearch and request a search for UCC filings against a given debtor name; Unisearch would perform the search and then send the search results and an invoice; Puget Sound Financial would pay the amount indicated on the invoice. Unisearch had performed dozens of searches for Puget Sound Financial over the course of several years prior to the allegedly negligent search. In addition, there was no dispute that every invoice included a liability-limitation clause.

6. Berg v. Hudesman, 115 Wn.2d 657, 670, 801 P.2d 222 (1990).

7. 2002 WL 1205735 at 2.

8. M.A. Mortenson Co. v. Timberline Software Corp., 140 Wn.2d 568, 584, 998 P.2d 305 (2000).

9. RCW 62A.2-204 states: "(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such contract; (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined."

10. 2002 WL 1205735 at 4.

11. Bremerton Concrete Products Co. v. Miller, 49 Wn. App. 806, 745 P.2d 1338 (2d Div. 1987). Bremerton is a case in which a manufacturer relied upon industry standards to supplement the contract when applicable standards had not been written into the contract.

12. Id. at 810.

13. 2002 WL 1205735 at 3.

14. Berg, supra, 115 Wn.2d at 667-68.

15. Restatement (Second) of Contracts § 212 cmt. b (1981).

16. RCW 62A.1-205 (App. E).

17. RCW 62A.1-201(3) (App. E).

18. 201 F.3d 1111, 1113 (9th Cir. 2000).

19. Restatement (Second) of Contracts § 223(2) (1981).

20. 2002 WL 1205735 at 4.

21. RCW 62A.2-719(3).

22. Mortenson, 140 Wn.2d at 575.

23. Shroeder v. Fageol Motors, Inc., 86 Wn.2d 256, 260, 544 P.2d 20 (1975).

24. Mortenson, 140 Wn.2d at 586.

25. Id.

26. Nelson v. McGoldrick, 127 Wn.2d 124, 131, 896 P.2d 1258 (1995).

27. Id. See also, Mortenson, 140 Wn.2d at 588.

28. Berg v. Stromme, 79 Wn.2d 184, 187, 484 P.2d 380 (1971). In this case, a car manufacturer attempted to waive all warranties, express and implied. The court disallowed the fine-print waiver, ruling that absent a negotiated agreement to the contrary, there could be no waiver of fitness for use.

29. Id. at 193-94.

30. Unisearch, 2002 WL 1205735 at 5.

31. Id. at 196.

32. Am. Nursery Prods., Inc. v. Indian Wells Orchards, 115 Wn.2d 217, 222-23, 797 P.2d 477 (1991).

33. Id. at 222.

34. Mortenson, 140 Wn.2d at 588 n.12, quoting Am. Nursery Prods, 115 Wn.2d at 223.

35. Shroeder, 86 Wn.2d at 262.

36. "In Schroeder we recognized the following nonexclusive factors to consider in assessing the unconscionability of a liability exclusionary clause: (1) the conspicuousness of the clause in the agreement; (2) the presence or absence of negotiations regarding the clause; (3) the custom and usage of the trade; and (4) any policy developed between the parties during the course of dealing. Additionally in American Nursery, we noted that '[u]nconscionability is determined in light of all the surrounding circumstances, including (1) the manner in which the parties entered into the contract, (2) whether the parties had a reasonable opportunity to understand the terms of the contract, and (3) whether the important terms were hidden in a maze of fine print.'" Unisearch, 2002 WL 1205735 at 7 (citations omitted).

37. Id.

38. Id.

39. In its analysis, the court observed that the clause was "written in the same font size as other print on the invoice" and that there were "only a few lines of text on the invoice" and proceeded to hold that "we conclude that the clause is not hidden in 'a maze of fine print' and is not inconspicuous." Id.

40. Id.

41. Id.

42. Mortenson, 240 Wn.2d at 584.

43. Unisearch, 2002 WL 1205735 at 7.

44. Am. Nursery Prods., 115 Wn.2d at 224.

45. Id.

46. East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 872-73 (1986).