In re International Profit Associates, Inc., No. 08-0531 (Tex. Jun. 12, 2009) (per curiam) (DocketDB)

The first draft of this note was written the day this opinion came out, but it was left in the cutting room when the blog took a hiatus this summer.

At last week’s State Bar of Texas appellate CLE in Austin, the subject of enforcing forum-selection clauses against non-signatories to a contract was a big point of discussion, so I’ve decided to dust off this case note and share it. Please let me know if you have further thoughts about how this case fits in with general Texas contract law or the evolving law about how to enforce contract provisions against nonsignatories.

This is a strange little contract case.

If two parties innocently sign a contract that clearly has a missing page — say, “page 7 of 14” is left out of the final deck — what is the legal effect? Is that page nonetheless part of the contract? Do the parties mean to formally incorporate it by reference? Would one party have to try to “reform” the contract to enforce a term on that page against the other? If the counter-party had never seen that page or discussed its terms at any point in the negotiation, how would contract reformation be shown?

Put down your pens. The contract exam is over.

This case has an added wrinkle — one that moves us down the hall from the first-year “Contracts” classroom to the “Conflict of Laws” course. The disputed page in this case includes a forum-selection clause. And that might make all the difference.

People usually fight about the enforceability of a particular forum-selection clause — not whether it exists at all. Those clauses are usually tested under a somewhat deferential due-process framework that looks to whether enforcement of the clause as written would be fair.

That’s the framework that the trial court used. It concluded that it would be unfair to enforce a forum-selection clause absent proof that it had been shown to the other side. And it placed the burden of proof on IPA to show that the page had been presented.

The Texas Supreme Court disagreed. It granted mandamus relief, holding that forum-selection clauses need not be specifically pointed out to be enforceable.

The odd facts here, in which one party denied having ever been shown the first page of the contract

But the facts of this case are strange.

Here, Riddell initialed three of the four contract pages — but did not initial the one containing the forum-selection clause. But, as the Court noted, the other pages alluded to the existence of that first page and, the Court concluded, should have put Riddell on notice that it existed:

First, as we explained in Lyon, “[a] party who signs a document is presumed to know its contents,” including “documents specifically incorporated by reference.” 257 S.W.3d at 232. Scott Riddell claims not to have seen page one of the contract containing the forum-selection clause at the time he signed it. There is specific evidence demonstrating that he knew or should have known of the existence of the clause when he signed the contract. Most notably, Scott Riddell signed page four of the contract. A clause two lines above his signature noted: “This document, 4 pages in total, constitutes the entire agreement for services . . .” (emphasis in original). Furthermore, each of the three pages that Riddell claims he saw and endorsed states that the respective pages are “2 of 4,” “3 of 4,” and “4 of 4.” Even assuming that Riddell was not shown page one of the contract, the statements on pages two through four of the contract put him on notice that page one existed; he could have asked for the missing page.

That sounds like general contract-law stuff.

But the Court concludes: “Riddell’s testimony, as well as the affidavits of Riddell’s other representatives stating that he was never shown the first page of the contract, is insufficient evidence to meet Riddell’s heavy burden of proof to avoid enforcement of the contract provision.” [emphasis added]

That phrase, “heavy burden of proof,” refers back to the Court’s earlier discussion of the standard to show an existing forum-selection clause was too unfair to enforce under constitutional due process.

But that’s not the standard (to my understanding) for determining whether language is part of the contract at all. The party seeking to enforce a contract must prove its terms.

Due process is not how we usually determine which clauses are part of a contract

If these parties had a genuine dispute about whether “page 1” was a part of the agreement at all, that seems like a general contract-law question to which general contract-law principles should apply.

It’s not crystal clear from the opinion whether the Court believed that the factual dispute here was less than genuine. (( That jumps out as a possibility, given some of the strange allegations in the briefing, such as that the four contract pages were all part of the same, folded, 11 x 17″ piece of paper. )) But, in the procedural context of this mandamus petition, the Court chose to assume the truth of the allegation that “page 1” had never been shared as part of the contract negotiations.

With that in mind, I can’t quite get my head around the standard chosen by the Court to determine whether the clause was part of the contract. The Court applied the very deferential due-process framework and by so doing, seems to have applied a presumption not only that the clause is valid but also that it was part of the agreement at all.

I’m just not convinced a Texas court would enforce commercially significant terms on a disputed missing “page 1” — such as a more favorable price, liquidated damages, or even authorization for consequential damages — without requiring some proof that those terms were part of the agreement.

I might just have some lingering retinal burn from first-year contracts class. (( I distinctly remember when my class reached the part of the casebook about contract reformation. My professor asked a question of the room, got no response, took a sip of coffee, and said, “That answer is so important that I’m almost tempted to tell you.” (He didn’t.) )) But if a lenient due-process framework is how we determine which clauses are in a contract at all — rather than just whether those clauses are valid — I may have to relearn a few things.

Future implications

This might just be a case of hard procedure making bad law. Because the procedural limitations on a mandamus prevented the Court from directly addressing the core factual allegations, the Court assumed their truth — and chose a broader question of law on which to rest its decision.

My hope is that future cases clarify how the evolving law that liberally applies dispute-resolution clauses to nonsignatories applies (if at all) to signatories.

In the non-signatory context, it makes a certain amount of sense to extract just the dispute-resolution clauses to apply to a broader web of contracts among a group of parties, so that the overlapping questions can all be decided consistently. When a court is doing that, it should be applying a due-process framework to test whether the result is fair.

But, when there are just two parties to the contract (the signatories), some of that logic starts to break down. It seems like there is a simple answer to the question whether “page 1” was part of this contract. And that answer could, in the first instance, have been decided by normal principles of contract law.