August 11, 2021
On Guard! Battle of the Forms
It may seem silly to liken the exchange of contract documents to a fencing match, but I assure you that there is as much strategy contained in the exchange of commercial contracting forms as there is in a sword fight. Let’s look at a hypothetical situation:
- Party A (“Buyer”) desires to purchase an item from Party B (“Seller”)
- Buyer submits a Request for Quotation to Seller which contains Buyer’s terms and conditions for buying the item
- Seller responds with a Quotation for the item and a Credit Agreement to be signed by Buyer
- Buyer signs the Credit Agreement and issues a Purchase Order to Seller
- Seller ships the items to Buyer with an Invoice and Terms and Conditions of Sale
Now, let’s say there is an issue with the product that must be resolved between Buyer and Seller. Which document represents the contract between the parties which should govern how the dispute is to be treated? It is a question that has often been litigated and requires looking to the basic tenets of contract formation: first there is an offer, then there is acceptance, then consideration and finally performance. It seems simple, right? But when we look at our hypothetical above, which document represents the actual “contract” is not clear. Where is there a meeting of the minds as to which terms and conditions are going to govern this transaction? Frequently, neither party is forced to consider the ramifications of the situation because the item is shipped, the Buyer uses it for its intended purpose and no issues ever arise.
However, that is not the universal experience. It is not uncommon for issues to arise with goods or services that are purchased. When those issues cannot be resolved between the Buyer and Seller, we must look to what the contract provides to resolve the issue. In the Battle of the Forms, which document controls? The body of law governing these types of transactions is extremely diverse and varies depending upon whether the contract is for goods, services or a combination of both.
In the simplest form, a contract for services will most likely follow the common law rules, while a contract for goods will most likely follow the Uniform Commercial Code (UCC) rules which have been adopted in the relevant jurisdiction.
Acceptance as determined by common law is based on the Mirror Image Rule, meaning that both the terms of the offer and the acceptance must mirror one another, indicating true agreement of the parties. If the terms do not mirror one another, then there can be no acceptance, and the offer must be considered rejected unless counter terms are offered. Then whether to accept the terms volleys back to the original offeror. If at some point during this passing back and forth of the terms, the Seller provides the services, then the Last Shot Rule governs and dictates that the last set of terms provided before fulfillment of the purchase dictate what the contractual terms are.
The UCC has codified the governance of the sale of goods in Section 2 – 207. It follows neither of the above rules and may instead allow a binding contract to form despite the provision of changes to the original offer. If the original offer does not contain express language that limits acceptance to the terms of the offer, the UCC will allow a binding contract to form. The dispute over whether the changes to the original offer were considered “additional terms” under the UCC will need to be addressed. If the changes to the original offer are found by a court to be additional terms, those terms will not become a part of the contract between the Buyer and Seller. Ultimately, these disputes are deeply fact sensitive and involve highly nuanced interpretations of the law which vary in each state. If performance of the contract has occurred prior to the term dispute, the UCC affords the court the ability to keep only the non-conflicting terms from the competing terms and conditions and to supplement those terms with standardized terms from the UCC statutes, i.e., the Knockout Rule. These supplemental terms have not been agreed to by either of the parties and typically favor the Buyer.
Now that we have a cursory understanding of what happens when there is a battle of the forms, it is evident that there are steps we can take to avoid disputes related to contracting.
- We can negotiate mutually agreeable terms to govern the purchase of goods and services prior to performance of the services or providing the goods
- We can ensure that our terms and conditions are exchanged at each interaction with our suppliers
- We should never sign someone else’s quotation, forms, etc., without negotiating the terms
- We can object in writing when a supplier changes our terms without consent
- We can ensure that our documentation always states that our offer is expressly limited to accepting the terms of the offer we provided
- We can recognize our conduct will be evidence as to whether an agreement was reached, i.e., that a purchase order is an offer and when performance commences, we have assented to the terms of that offer, whether intentional or not, creating a binding contract
What advice do you have for ensuring your contract terms are fully understood and adhered to?