Individuals routinely enter into contracts every day without assigning legal terms or meanings to such simple transactions. For instance, we go to the gas station and “accept” the “offered” price for a gallon of gas that is posted on the pump, give the cashier our cash “consideration”, and walk away with a receipt “memorializing” the agreement. In today’s world, where purchases via internet or telephone from the comfort of your sofa have become as commonplace as the gas station fill-up, we hurriedly click on the "I have read and accept the above terms & conditions" box to download music onto our computers without paying much thought or attention to such “additional contract terms” (aside from the annoyance that comes from the stern "You must accept the terms & conditions to continue" pop-ups upon your failure to do so). Finally, consider that toaster that was just delivered to your home—do you read the absurdly thick instruction manual and pay attention to the legal provisions tucked away on the back page (EVEN IF THEY ARE IN BOLD CAPS), or are you like me and simply pop in your bagel and have cream cheese at the ready? Although mundane, these examples illustrate our acceptance of contract terms in day-to-day life and, when magnified or translated to a commercial context, may have costly consequences.
This article reviews two cases where, as in our toaster illustration, certain contract terms were first disclosed upon delivery of purchased goods, however the case-specific facts of each case resulted in two dramatically different outcomes.
Generally, when contract terms are first disclosed when the goods are delivered, such terms have been found effective. The landmark UCC Article 2 case of Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997) set forth the reasoning behind the acceptance of such “deferred terms.” In Hill, a buyer purchased a computer by credit card via a toll-free telephone call. The computer was delivered to the buyer and the package included a set of Gateway’s standard terms (which included the disputed arbitration clause at issue in the case). Judge Easterbrook of the Seventh Circuit Court of Appeals reasoned that most buyers would not want to stay on the line and listen to every contractual provision at the time of purchase. Rather, delivery of the terms with the purchased product would be most efficient and give the buyer time to decide to not accept/return the product if the buyer did not agree with the included contract terms. Under this analysis, which has gained some traction in recent years, a contract is not completely formed until the buyer receives the goods and either keeps or returns the goods within a reasonable return period. Finally, under Hill, a seller that wishes to use the deferred terms approach would need to bring them to the attention of the buyer (i.e., “put them in the box with the goods”).
However, in a recently decided case where the facts appear to parallel those of Hill, a decidedly different outcome was reached. In Hartford Fire Insurance Company v. Roadtec, Inc., 2010 WL 4967979 (S.D.N.Y.), the District Court refused to recognize contract terms that were delivered concurrently with the purchased goods.
In Roadtec, the buyer and Roadtec both signed an “Equipment Proposal” which described the purchased machinery and gave the buyer the option to purchase an extended warranty, which the buyer chose to exercise. Included with Roadtec’s delivery of the machinery to the buyer were two manuals that were several hundred pages long. On the last page of each manual was a section titled “Warranty” which concluded with a disclaimer of the implied warranty of merchantability in bold font. The machinery broke down and resulted in a fire which destroyed it. The buyer then sued Roadtec, arguing that due to a design defect the machinery was unmerchantable1. Roadtec, relying on the disclaimer of merchantability in the manual, moved for summary judgment. In its decision denying summary judgment, allowing the buyer to proceed, the District Court sided with the buyer and held that the disclaimer was ineffective because it was not a part of the Equipment Proposal and since the disclaimer itself was not conspicuous.
Where in Hill the court held that the contract was not fully formed until the additional terms were delivered with the goods, the Roadtec court held that the signing of the Equipment Proposal completed the contract formation, and that at most the disclaimer of the warranty of merchantability was an additional term in a written confirmation of the contract (i.e., a proposed addition to the contract) and, under UCC §2-207(2)(b), such an additional term between merchants can only automatically become part of the contract if it does not materially alter the contract’s terms.
In addition, even if the disclaimer were not a material alteration, the Roadtec court held that the manuals’ disclaimers were not conspicuous (i.e., “so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it”2). The test, said the court is “whether a reasonable person would notice the disclaimer when its type is juxtaposed against the rest of the agreement.” In this case, the disclaimers were written in bold type, but since the disclaimers were inserted at the end of two lengthy reference manuals and not in the operative Equipment Proposal contract itself, they were not placed in an “eye-catching location” that would commend “the attention of the non-drafting party.” Therefore, Roadtec’s effort to disclaim merchantability of the goods was not effective.
Although there are some cases which take the Hill fact pattern and apply the Roadtec analysis by recognizing the completion of contract formation over the phone (with the terms contained in the product box being considered a confirmation of the contract), certain facts in Roadtec are clearly distinguishable from the Hill case. Perhaps most importantly, while the Hill contract was created with a telephone call, the parties in Roadtec proceeded to take the time to reduce their agreement to writing. With such a written contract, the Roadtec court reasoned that there is little reason to include some key contract details while omitting others until delivery of the merchandise, and a buyer would not necessarily be “looking in the box” for additional contract terms. As is often the case in contractual disputes and commercial transactions, the devil is in the details and fact pattern differences from one case to another can dramatically alter the outcome. When buying online or over the phone, don't forget to look in the box when the goods arrive.