December 18, 2014

Battle of the Forms

What are the terms of my contract when I buy from a supplier or sell to a customer?

The answer to this seemingly simple question likely lies in the fine print of the two documents exchanged between the buyer and seller. When a dispute arises, differing terms in the documents may leave you wondering what terms govern the transaction. For instance, the transaction might begin with the email of a purchase order containing the basic terms of the order, such as the quantity, product, price and payment terms. The back or second page of the purchase order may contain all sorts of terms and conditions fashioned by (and favorable to) the buyer in small print. This we consider the offer.

The seller may respond with an acknowledgement accepting the basic terms of the transaction. However, the acknowledgement may contain additional or different terms and conditions. The added terms are often favorable to the seller. We consider this the “acceptance.” When the terms on the order and acknowledgement do not match, then what happens?

Under traditional contract law, if the offer and acceptance did not mirror one another, the “last shot rule” applies. Under that rule, the acceptance actually constituted a counteroffer. If the buyer proceeded with the transaction, then the counteroffer terms were deemed to be accepted. Under this rule, it was preferable to be the last one to send a document. The last shot rule tended to favor the seller, but it became impractical for modern commerce.

For sales of goods, the “battle of the forms” rules under the Uniform Commercial Code (UCC) have replaced the last shot rule in determining the terms of a contract when the offer and acceptance contain different or additional terms. Indiana’s version provides that “a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon.” Ind. Code § 26-1-2-207.

When the acceptance contains additional terms, the additional terms are considered proposals for additions to the contract and generally will become part of the contract unless they constitute a material alteration of the parties’ agreement. When the documents exchanged contain different terms, the differing terms fall out and are replaced by UCC gap-fillers. Thus, any conflicting terms and conditions in fine print on the forms exchanged will likely not become part of the agreement.

In this age of electronic communication, there is often no time to meaningfully review all the terms and conditions sent back and forth between a buyer and seller. It is important to realize that, absent further agreement, neither the purchase order nor the acknowledgement will control as to differing terms. Rather, the terms of the contract will generally consist of the basic elements (product, price and timing) agreed to by the parties, any additional terms in the acceptance that do not materially alter the contract, and UCC gap-filling provisions that replace any differing terms. In an upcoming legal update, we will discuss some of the important gap-filling provisions so that you can answer this question: “What are the terms of my contract?”

This article also appeared in RV Focus: A Newsletter for the RV Industry Professional, authored by lawyers who understand the RV industry and take a practical look at legal issues that can affect a company. Legal problems are costly and distracting, and company time is better spent focusing on production, sales, cost control and business relationships.

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