Contracts Law In Action

A Brief Summary

Dr. John E. Murray, Jr.

“Where the buyer’s purchase order and the seller’s acknowledgment contain terms that do not match, we have a “battle of the forms.”

Consider a simple problem: A buyer sends a purchase order for a model L-76 computerized measuring device to a seller. The purchase order describes the product ordered, the price, $180,000, and the delivery date. Seller responds with its acknowledgment form which repeats the description of the L-76, the price at $180,000 and the same delivery date. These terms on both forms match. The purchase order is an offer and the acknowledgment is the mirror image of the offer that accepts the offer and a contract is formed on those terms.

If the acknowledgment stated the price of the L-76 at $200,000, the acknowledgment would not be an acceptance. It would be a counter offer because the terms of the acknowledgment were not the “mirror image” of the offer. A party receiving an offer (an “offeree”) cannot accept terms that were never offered. If the seller shipped the L-76 and the buyer accepted it, the price would be $200,000. Suppose the seller’s acknowledgment stated the model as an L-89 at $180,000. Again, the acknowledgment would not be an acceptance. It would be a counter offer. No contract would be formed by the exchange of forms. If the seller then shipped an L-89 and the buyer accepted it, there would be a contract for the L-89 at $180,000.

In our simple problem the model and price terms in both the offer and acceptance matched. A contract was formed. There was no counter offer. Suppose, however, the seller’s standard acknowledgment also contained printed terms–terms that are often ignored by purchasers and often ignored by the seller’s own people. These “boilerplate” terms are not the terms that parties consciously consider when they form contracts. Buyers and sellers typically focus on the product that is being bought and sold, the price of the product and the delivery terms. These are the “negotiated” terms, the “dickered” terms that came to mind when the deal was made. There may have been no mention of warranty terms or damages in the event of a breach or arbitration if a dispute occurred under the contract. Yet, the seller’s acknowledgment will typically include boilerplate dealing with these and, perhaps, other matters that were never consciously considered when the contract was made.

The Basic Problem–Focusing on the Buyer

Return to the simple problem with some additions: Assume the acknowledgment contained clauses that disclaim implied warranties (the implied warranty of merchantability and the implied warranty of fitness for a particular purpose). The acknowledgment also contained a clause stating that product is warranted against defects in materials and workmanship for a limited period–perhaps 90 days or, at best, a year. Another clause states that the sole and exclusive remedy in the event of a breach will be repair or replacement of defective parts during the warranty period and, in no event, will the seller be liable for consequential damages. Consequential damages would include the buyer’s lost profits or other expenses due to the failure of the product. The seller’s boilerplate clause would deny such recovery. The seller’s boilerplate may also include a clause stating that, in the event of a dispute, the parties agree to settle it through arbitration which will deny the buyer’s normal right to sue in a court of law.

The buyer has not agreed to any of these boilerplate terms. Would this acknowledgment containing all of these additional or different boilerplate terms constitute an acceptance of the buyer’s purchase order offer, thereby forming a contract? The “matching acceptance” or “mirror image” rule requiring the acceptance to exactly match the terms of the offer would appear to be violated by the seller’s boilerplate. This rule, however, was changed over a half century ago under the Uniform Commercial Code (governing all contracts for the sale of goods), Section 2-207. Recognizing that parties often ignore boilerplate (printed) clauses, Section 2-207 states that a definite expression of acceptance operates as an acceptance even though it contains different or additional terms. It is important to note that this new rule does not apply to different “negotiated” or “dickered” terms such as the price or a different product. It only deals with the terms that are often ignored.

If an acknowledgment containing these different or additional boilerplate terms constitutes an acceptance of an offer forming a contract, do these terms become part of the contract? This is the essential “battle of the forms” question. Section 2-207 allows the buyer to avoid such terms by stating in the purchase order that the acceptance of the offer is limited to the terms of the offer or by a statement that the buyer objects to any different or additional terms in the response to the offer. If the purchase order does not contain such a statement, the different or additional boilerplate terms in the seller’s acknowledgment will become terms in the contract unless they materially alter the terms of the buyer’s offer. How does a court determine whether such terms “materially alter” the terms of the offer? It is generally recognized that a disclaimer of implied warranties such as the warranty of merchantability is a material alteration of the offer. A limitation on the buyer’s normal remedies for breach, however, may be viewed as an immaterial alteration which means that the buyer’s clause limiting remedies to repair or replacement for a limited time will become part of the contract. Similarly, the seller’s boilerplate arbitration clause may become part of the contract is a court decides that it is not a material alteration of the offer.

Solution: The purchase order, therefore, should include a statement such as, “This purchase order expressly limits acceptance to the terms of this offer and buyer hereby objects to any different or additional terms contained in any response to this purchase order.” Such a clause will eliminate the seller’s bolierplate clauses.

The Seller’s Revenge–The Counter Offer

Sellers desire their boilerplate terms to control the deal. Recognizing that they can lose the battle of the forms by a statement in the purchase order limiting acceptance to the terms of the purchase order, sellers often include another boilerplate clause in their acknowledgments along with the clauses already mentioned:

On its face, this clause is not very clear since it speaks of an “acceptance.” If, however, an “acceptance” is expressly conditioned on the offeror’s assent to any different or additional terms in the acknowledgment, it cannot be an acceptance of the buyer’s offer. Courts will, therefore, recognize an acknowledgment containing such a boilerplate clause as a counter offer rather than an acceptance.

If a buyer receives an acknowledgment containing such a clause, the buyer must understand that no contract has been formed. The buyer has no rights against the seller and the seller has no rights against the buyer. Such a clause, however, is often ignored by the buyer and even by the seller. Even though no contract exists because the purchase order (offer) has not been accepted, the seller ships the product and the buyer accepts the product. Here, the question is, by accepting the product, has the buyer accepted the seller’s boilerplate terms in the acknowledgment?

The answer is an emphatic, “No.” Another clause of Section 2-207 deals with this precise situation: where the exchanged purchase order and acknowledgment forms do not match but the seller ships the product and the buyer accepts it, there is still no contract via the exchange of forms that did not match. Rather, there is a contract by conduct because the seller shipped and the buyer accepted the goods. The next critical question is: what are the terms of this contract by conduct? Section 2-207 answers: The terms of such a contract by conduct will be the terms of both forms (purchase order and acknowledgment) that match, such as the description of the ordered product (the L-76) and the price ($180,000). The terms that do not match (implied warranties vs. no implied warranties, buyer’s normal remedies vs. the limitation on those remedies, the buyer’s right to sue in a court of law vs. arbitration) are excised–-they do not become part of the contract. This leaves gaps to be filled in the contract. The gaps are filled by normal Uniform Commercial Code terms–implied warranties, buyer’s remedies and the buyer’s right to its day in court. The net result: The buyer in effect wins the “battle of the forms.”

The Seller’s Second Revenge–The Seller as Offeror

The seller will still not surrender in the “battle.” To this point, we have focused on the buyer as the party making the offer, the offeror. Suppose, however, that the seller is the offeror. Even where the seller responds to an RFP with a “quote,” the quote can be an offer if it promises to deliver a certain product on certain terms.¹ How does the typical buyer respond to such an offer? The buyer will typically use the same purchase order it uses to make offers. The use of the purchase order in responding to a seller’s offer, however, will make the purchase order an acceptance rather than an offer. If the seller’s offer contains the same boilerplate terms that the seller includes in its acknowledgments, the buyer’s purchase order (as an acceptance) will contain different or additional terms by implication. Thus, the seller’s offer states that there are no implied warranties and the buyer’s purchase order implies the warranty of merchantability. This would be a material alteration of the seller’s offer and the buyer’s term would not become part of the contract. There is no implied warranty in such a contract. Similarly, the buyer’s implied remedies would be excised and the seller’s arbitration clause would prevail as part of the contract.

Suppose the buyer’s purchase order included the clause suggested earlier in the purchase order as an offer (expressly limiting acceptance to the terms of the purchase order and objecting to any different or additional terms)? Would this convert the buyer’s purchase order (used as an acceptance) into a counter offer? The emphatic answer is, “No.” The seller will win the battle of the forms. So, what is the antidote to this thrust by the seller in making offers containing its favorite boilerplate terms?

Solution: The buyer’s purchase order should contain express statements incorporating implied UCC terms. For example, “In addition to the other terms in this purchase order, this purchase order expressly includes all implied warranties and all of the buyer’s remedies set forth in the Uniform Commercial Code. In the event of any dispute between the parties, such dispute will be settled exclusively in a court of law (another clause may designate the precise court of law and governing law). The terms of this purchase order are the sole and exclusive terms on which the buyer agrees to be bound.”

By expressly incorporating UCC terms in its purchase order, any conflicting terms in the seller’s form (whether it is an offer or an acceptance) are cancelled. This is called the “knockout” rule since the seller’s terms are “knocked out.”

Confirmations

It is not uncommon for parties to make their contract by telephone or in person followed by an exchange of purchase order and acknowledgment forms. In that situation, Section 2-207 pretends that the purchase order and acknowledgment forms are exchanged as if the prior oral agreement had not occurred. The same essential analysis will apply to such an exchange of forms when they are confirmations of a prior oral contract.

Signing the Other Party’s Form

Sometimes a buyer will send not only a purchase order but the buyer’s own acknowledgment which mirrors the purchase order and requests that it be signed. Seller’s may ignore that request and send their own acknowledgment. Whenever a seller sends an acknowledgment to be signed by the buyer, if the buyer signs, the buyer has just agreed to the seller’s terms. The buyer has, therefore, conceded defeat in the battle of the forms.

The “Poor” Seller

Thus far, we have found ways to protect the buyer in virtually any situation. This is because the current construction of Section 2-207 by courts allows this kind of blanket protection for buyers, if the buyer has the right forms. If a buyer utilized the “weapons” in the battle already suggested, the seller finds itself with only one certain way to win the battle. The seller must have the buyer expressly agree to the seller’s terms by, e. g., having the buyer sign the seller’s form.