• Washington State Supreme Court -- Clause on Invoice Adds to Contract
  • July 31, 2003
  • Law Firm: Perkins Coie LLP - Seattle Office
  • Does your company pay close enough attention to invoices?

    On June 6, 2002, the Washington State Supreme Court issued an opinion that suggests greater scrutiny of "routine" documents like invoices is warranted. In Puget Sound Financial, L.L.C. f/k/a Factors of Puget Sound, L.L.C. v. Unisearch, Inc., the court ruled that a clause on an invoice limiting damages to the amount of the fee charged (in the case a mere $25.00) is part of the commercial contract and enforceable.

    Search Misses Prior UCC Filing Under Name Differing by One Letter

    In July 1996, as it had done numerous times in the past, Factors, a company in the business of purchasing accounts receivable and loaning money to other businesses, requested that Unisearch conduct a Uniform Commercial Code ("UCC") search on its behalf for liens against The Benefit Group, Inc. Factors requested a search for the name "The Benefit Group, Inc." Unisearch completed the search and sent Factors an invoice along with a search report showing no security interest. The invoice mirrored 47 others that Unisearch had previously sent Factors. Upon receiving the report, Factors extended The Benefit Group $100,000, secured by existing and future accounts receivable and other business assets. A year later, The Benefit Group defaulted, and when Factors attempted to realize on the collateral, it discovered a prior UCC filing under the name "The Benefits Group, Inc." Unisearch had failed to locate this filing under the plural version of the name. Factors then sued Unisearch, alleging breach of contract and negligence. Prior to trial, Unisearch brought a motion for summary judgment on damages, claiming its liability would be limited to $25.00 in any event because of a clause on its invoice stating "Liability Limited to Amount of Fee."

    Court's Decision

    The Washington State Supreme Court ruled in favor of Unisearch, upholding the limitation of its liability for damages (under both the breach of contract and negligence theories) to $25.00 on the grounds that the exclusionary clause contained on the invoice was part of the contract, not "unconscionable" and, therefore, enforceable. The court determined that the invoice and search report together formed part of a "layered" contract, and the limitation was part of the contract based on either a trade usage or course-of-dealing analysis (discussed in more detail below).

    The court further held that the clause was not "unconscionable." Because the clause did not change during any of the 48 transactions between the parties, the invoices were directed to Factors' principals (and reviewed by its president), and all 47 prior invoices were paid by Factors without dispute, the court found no "indicia of unfair surprise" that would require closer scrutiny of the clause as applicable to warranty disclaimers in consumer contracts. The court then applied a "totality of the circumstances" test and concluded that Unisearch's liability limitation clause was not unconscionable for the following reasons:

    Conspicuousness of Clause. The invoice was a single sheet of paper with the liability disclaimer printed on the front in the upper right hand corner in a shaded box that was found to be sufficiently conspicuous.

    Trade Usage (a usage of trade is a usage having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to a particular agreement). Unisearch's evidence of liability exclusions on invoices from other states, as well as experts testifying that it was industry practice to place liability limitations on invoices, was found by the court to establish such clauses as standard industry practice.

    Course of Dealing (a course of dealing is a sequence of previous conduct between parties to an agreement fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct). The court found that the 47 previous invoices containing the identical clause were sufficient to establish a course of dealing between the parties that included the clause; however, the court did not go so far as to indicate the minimum number of invoices (beyond the first) necessary to establish a course of dealing.

    Absence of Negotiations. Although the absence of negotiations over the clause weighed in Factors' favor, it was "only one factor to be considered." The court found that Factors had a reasonable opportunity to understand the terms of the clause (that, as the court again emphasized, remained unchanged in 48 transactions between the parties).

    Factors Implications for Your Business Practices

    • Your company should increase vigilance of any terms added to invoices -- don't assume that because you haven't negotiated an additional term that shows up on an invoice that it is not a part of your contract with the invoicing party. If your company receives a steady stream of invoices, your vendors have a steady stream of opportunity to "layer" new terms onto your agreements.

    • Your company may also want to consider placing a statement in certain contracts that conflicting terms on a purchase order or invoice are superseded by the terms of such contracts. These provisions need to be used with extreme care to be sure they do not negate terms favorable to your business.