Cottonwood Centers, Inc. v. Klearman
Posted on Categories Court Decisions, Securities Arbitration

By Paul J. Dubow

Incorporation of a separate document into an agreement requires that the reference must be clear and unequivocal and must be called to the attention of the other party who must consent thereto.

Cottonwood Centers, Inc. vs. Klearman, No. 18-252 (D. Ariz., 10/17/18).

In 2008, Steven Welch, the executive vice president of plaintiff, contacted defendant in order to seek his assistance in the sale of plaintiff’s behavioral healthcare company. Defendant emailed Welch five documents, including two entitled Exclusive Fee Agreement (Agreement) and Standard Terms and Conditions to CFA Fee Agreements (Terms and Conditions). The latter document contained an arbitration clause and contained a line for a representative of plaintiff to sign it. Welch made several changes to the Agreement, which defendant accepted, and signed and sent the Agreement to defendant. He did not sign or initial the Terms and Conditions.

Subsequently, a sale occurred and a dispute arose between the parties with respect to whether defendant was involved in the sale and entitled to a commission. Plaintiff filed suit seeking a declaratory judgment that defendant was not entitled to a commission. Defendant moved to compel arbitration, arguing that the Terms and Conditions were incorporated into and were a part of the Agreement. The motion is denied. Incorporation of a separate document into an agreement requires the reference must be clear and unequivocal and must be called to the attention of the other party, who must consent thereto. Here, although the reference in the Agreement refers to an attached document, the Terms and Conditions were not physically attached to the Agreement, but was one of multiple attachments to an email. The provisions of the Terms and Conditions were not accessible unless Welch viewed the attachments to the email—and there is no evidence that he did so prior to signing the Agreement. In other words, Welch could not view the provisions of the Terms and Conditions without opening a separate document—an action that was not required to sign the Agreement.

Further, there is no acknowledgment of the incorporation which would clearly indicate plaintiff’s consent. Although the Terms and Conditions would not necessarily have to have been initialed, the failure to do so in this case (where the form was not physically attached to the Agreement and the form included an initial line) indicates a lack of consent. Further, it is not clear that the reference had been called to the attention of plaintiff or Welch. Rather, there was nothing to specifically draw Welch’s attention to the Terms and Conditions or the incorporation reference. The email itself does not include any language that defendant intended the Terms and Conditions to be attached to the Agreement.

Although Welch’s proposed modifications of the Agreement indicate Welch was engaged and focused on the terms of the Agreement, there is no similar evidence as to the Terms and Conditions. Indeed, there is no evidence that any subsequent modified Agreement ever had the Terms and Conditions attached to it. Thus, there is insufficient evidence that Welch had actual knowledge of the provisions of the Terms and Conditions, including the arbitration agreement. Neither the email nor the Agreement put a reasonably prudent person on notice of the provisions of the Terms and Conditions. Hence, the Court finds the parties did not enter into a valid agreement to arbitrate.

(P. Dubow)

(SOLA Ref. No. 2018-46-01)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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