Battle of the Forms – Controlling Your Company’s Destiny* – Part Two

Under common law in the United States, the terms of an acceptance must exactly match the terms of an offer to create a contract (the so-called mirror image rule).  If the terms of the acceptance vary from the offer in any way, the acceptance is deemed a rejection and a counter-offer, which the original offeror can accept.   So under the common law, if even just the boilerplate (i.e, terms and conditions such as choice of law, warranty, etc.) of the customer’s purchase order varied from the terms of the vendor’s proposal form, no contract is formed and the vendor can choose not to perform; this is the result even though the divergent boilerplate terms in the forms may be immaterial and the parties did, by any objective standard, intend to form a contract.  More often, however, the parties ignore the divergent boilerplate terms in the forms, the vendor does not change its mind and proceeds to ship the goods or provide the services which inescapably (lest all reality be ignored) means a contract is formed.

But what are the terms?

Under the described scenario, the vendor’s decision to perform after receiving the customer’s purchase order is an acceptance of the terms in the purchase order, because the purchase order was the last document issued; this principle is known as the last shot rule. Application of the last shot rule to supersede the terms of party A’s form with the terms of party B’s form simply because party B’s form was the last issued hardly accomplishes the goal of contract law to give effect to the intention of the parties.

To avoid the arbitrariness of the last shot rule, the Uniform Commercial Code (UCC), which has been adopted in all states (although with variations) in the United States except Louisiana, applies a different approach to the sale of goods through section 2-207.  Section 2-207(1) expressly rejects application of the mirror rule by stating that a definite expression of acceptance or written confirmation operates as an acceptance even though it includes additional or different terms than those offered, unless the acceptance is expressly made conditional to the offeror’s acceptance of the additional or different terms.

But while 2-207(1) does a fairly good job of resolving the issue of whether a contract is formed, resolution of the extent to which the additional or different terms are a part of that contract is governed by application of other provisions in the UCC, which do not necessarily lead to the contract including the terms intended by the parties.

Section 2-207(2) provides that between merchants, additional terms in an acceptance become part of the contract unless the offer expressly limits acceptance to the terms of the offer, they materially alter it, or notification of objection to them is made within a reasonable time.  Section 2-207(2) does not refer to “different” (i.e., conflicting) terms, just “additional” terms. Most jurisdictions in the U.S. deal with different terms through the so-called knockout rule, which results in disregarding the conflicting terms altogether and applying the UCC’s default terms in their place.

Under the CISG, the creation of a contract through the exchange of forms is governed under Section 19, which states:

(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

(3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially

Thus, Section 19(1) applies the mirror rule in general, while Section 19(2) says it does not apply if the additional or different terms in the acceptance do not materially alter the terms of the offer (with the additional and different terms being incorporated into the contract).  But then Section 19(3) states that additional or different boilerplate terms relating to the extent of a party’s liability or the settlement of disputes are automatically considered to alter the terms of the offer, which means there is no contract.  Of course, of all of the different and additional terms that are found in exchanged forms, terms relating to liability are probably the most prevalent.

As a practical matter, most transactions in the ordinary course of a business must be conducted on a contract-manager level which focuses on the relevant business terms, e.g., price, quantity, delivery, etc., and are too financially insignificant to involve lawyers and upper management to negotiate the important, overarching issues such as warranties, disclaimers, indemnities, and IP ownership each time a purchase order is issued and/or accepted.

But where a vendor-customer relationship involves multiple transactions over time – or is expected to do so – creating a unified document signed by both parties which states their agreement on the non-business terms will avoid the risk of a dispute that, as examples, an order for goods was not accepted or that the vendor is liable for all damages resulting from the failure of the goods to perform instead of just a refund of the purchase price.

The better practice is to establish both an internal contract management process and a relationship with the other prospective contracting party to create a master agreement that is signed by both parties which expressly provides that the business terms of each transaction between the parties will be stated in a work order, also to be signed by both parties, that is subject to the so-called boilerplate terms and conditions of the master agreement.  The standard forms are disregarded.

A business should create its own master agreement template suitable for its principle line(s) of sales and supply chains to ensure that its required terms and conditions are included.  But since the master agreement, unlike terms and conditions on a purchase order or an acknowledgement form that is not countersigned by the other party, is intended to be executed by both parties, care should be taken to make the master agreement (at least appear) reasonable. An objectively reasonable master agreement template will minimize the amount of time management and legal counsel will have to spend negotiating a final form of document with the other party at the commencement of the relationship.

Utilizing a master agreement process does require an initial investment to create the template, and at times to modify it for a particular business partner, but it will allow the day to day transactions to flow more efficiently without the risk that a court will later rule that no contract exists or that an important written provision is not included as a term in the contract.

If you or your company have questions about creating proper forms or master agreements, please contact attorney Rich Israel at risrael@earpcohn.com.

^*Richard S. Israel, Esquire, Earp Cohn PC, © 2019-2020