The terms and conditions found in preprinted forms that accompany both retail and wholesale transactions matter. They describe in detail what is being purchased, can enlarge or limit warranties, specify what specifications apply to the product or service, limit recovery, vest jurisdiction in certain locations and provide for remedies if there is a breach. Such critical issues as delivery dates, what occurs if there is delay in delivery, the right to cancel, and what law applies to the transaction are usually addressed. While many people do not trouble to even read the “small print,” that small print can make all the difference if there is a dispute as to the product or services provided or if failure to pay for them is alleged. The courts will normally enforce with vigor the terms and conditions, especially in transactions involving merchants and wholesalers.
Local law may limit the effect of certain terms, especially in sales to consumers, but most terms will be enforced against both consumers and in the case of products, merchants. (“Merchants” is a term of the Uniform Commercial Code and for the purposes of this article, simply means not a consumer but someone who buys or sells goods as part of their business process.)
Due to the importance of terms, most companies create a standard set of terms and conditions for sale or purchase that either must be executed before delivery or agreed upon online prior to the transaction. At times, such terms are part of the credit application filled in by a potential customer. Likewise, many purchasers also include terms and conditions on their sales orders which seek to impose their terms on the transaction. Usually, all these terms and conditions are preprinted forms which accompany the confirmation of order or purchase order.
And often, the terms and conditions on the various forms conflict as each side attempts to gain advantage if there is a dispute. Often, warranties are limited extremely as are remedies if you are the seller. The buyer seeks to gain guaranties as to quality and delivery date. Both parties seek to have the jurisdiction of the dispute resolved in their local areas.
What happens when terms and conditions of the parties differ? What terms do the courts rely upon in interpreting and enforcing the transaction?
That is the subject of this article.
The Basic Law:
State law normally controls on the issue of contract interpretation; thus, the law of the State will be the first source of direction for interpretation of the agreement between the parties. For transactions involving goods bought or sold in more than one state, the Uniform Commercial Code (“UCC”) which applies to transactions between Merchants applies more often than not, with each State having enacted similar but not identical UCC provisions. For consumers, or purchases of services, often the local state of the consumer will require its law to apply for transactions sold into the State.
And, of course, it is common for the conflicting terms of the buyers and sellers to seek to impose the law of their own jurisdiction, with any dispute being heard in the local courts.
Let us first examine UCC law as to conflicting terms.
A merchant is someone who is involved in the sale, purchase or trade of a specific good or commodity and usually has familiarity with that specific good. Merchants are considered knowledgeable as to the specific product with which they deal and usually do business often with that good. Under the UCC, if the parties are each Merchants, there is an assumption that the parties are sophisticated and therefore, any terms or conditions that are added by the offeree become a part of the contract absent events below.
Article 2 of the UCC governs contract disputes (for the sale of goods) concerning conflicting terms. These battles of conflicting forms, with different contract terms, usually occur when a seller and buyer exchange order forms with their own small print terms on the reverse side of the forms. When the forms are exchanged, typically the transaction proceeds without having to sign a contract or reach an agreement on the specific terms and conditions of the relationship.
This is required quite often so that business can operate efficiently given the high volume of transactions and without having to obtain advice from attorneys or negotiate on a case-by-case basis whenever an order is placed.
But when a dispute arises, each claims that its own terms and conditions apply to the relationship and govern the dispute. In these situations, the UCC will usually assume that a contract was formed, even if all the form terms are not identical, so long as there was a definite expression of acceptance on the part of the offeree and this acceptance was sent in a reasonable time frame.
But this is NOT true if any one of the following conditions is present:
- the new terms or conditions fundamentally or materially alter the terms of the offer;
- the offeror objects to the new terms and conditions within a reasonable amount of time; or
- the offer specifically limits the offeree’s acceptance to the terms and conditions found in the offer.
What is “materially alter?” The definition is any alterations to the terms that would impose a hardship on the other party, or significantly shift risk within the agreement, or “surprise” the other party.
Material alterations have been found in circumstances where there was a change in the price or delivery timeframe; a change in the law(s) that govern the agreement; a change to or addition of attorney fee provisions; a change in the remedies for a breach; a change to a warranty provision; or a change to the quantity of the goods being sold. Any of the above changes, made in an acceptance, would be stricken from the agreement, if a conflict arose unless the original offeror affirmatively accepted the change. This is termed the “Knock Out” rule.
In a battle of the forms dispute over a contract for goods, between merchants, the final agreement is to contain the terms and conditions that match both parties’ forms. The terms that do not match are eliminated but any terms that are added in the acceptance and do not violate the three criteria above, are also a part of the agreement.
As for disputes over terms that were not agreed upon, the UCC has its own “reasonable” provisions that apply in such cases. Note this is not universal in all jurisdictions.
NON UCC TRANSACTIONS
The Mirror Image Rule used in other jurisdictions provides that in order to form a valid and enforceable contract, the two parties must have documents that contain identical terms and conditions. This common-law rule applies to contracts for services or for real estate, but not for the sale of goods (which, again, is governed by the UCC).
Under common law contract rules, if one party makes an offer and the other party seemingly accepts the offer, but alters the terms and conditions, then there actually has been no acceptance, but rather the second party has rejected the offer and made a counteroffer. Now, under the “last shot rule”, if the parties perform the transaction under the above scenario, the contract that governs the relationship is the last document exchanged between the parties because in effect the counteroffer was accepted by performance. So, under the above scenario, the second party/offeree’s document (with the changed terms), is the one that governs. Again, this mirror image rule applies to contracts for services and real estate, not goods which are subject to the UCC.
Note that if one or both of the parties in a battle of the forms dispute is not a merchant, then different rules apply. If there are any terms added in the acceptance of an offer, they are to be considered proposals and are not a part of the final agreement, unless agreed to by the offeror. However, failure to object and subsequent performance of the transaction has been held to act as acceptance of the new terms by the other party.
But, if the original offer indicates that any acceptance is conditional upon the other party accepting all of the offeror’s terms without change, then if the offeree changes any terms, it is considered a rejection of the offer and a counteroffer which may or may not be accepted by the original offeror. The court could very well find that no contract was entered into even if performance of the party follows.
STATE LAW APPLIES
Once again, it is vital to note that the law of the State is what is used to interpret and enforce agreements, both UCC and non UCC and while many states have nearly identical laws (especially UCC rules) not all do. In California, the State has added numerous unique provisions to its UCC statutes, as have many other states.
If one does not read the various exchanges of terms and conditions, one is, essentially, signing a “blank check” as to the transaction. The wise businessperson will carefully craft terms and conditions that are useful (and fair) and insist that they are utilized in all transactions, whether UCC or to consumers.
Note that local law…State and, in some cases, county, may impose additional criteria on terms and conditions and those should be reviewed as well.
A key element of protection is actually reading and obtaining advice regarding conflicting terms of the other party. This is often the protection most often ignored by the busy businessperson and the one that most often results in a battle of the forms.
Entering the battle of the forms does not necessarily destroy a transaction or agreement, but these battles are expensive and can cause ill will. A battle also has potential for negative results in that the UCC may supply default gap filling terms, which may be disfavored by both or one of the parties. These gap-filling default terms are often pro-buyer and will only be supplied if the court finds that the parties intended to enter into an agreement and the parties did not agree on all material terms.
The best way to avoid the battle of the forms is to have a contract that supersedes all agreements between the parties. This is especially helpful for parties that plan on repeatedly doing business with each other. The idea here is to create a document that is overarching and takes precedence over any conflict between the parties. In this way, if a disagreement arises, the contract will dictate how to proceed and the uncertainty of the UCC rules will be avoided.
It is useful to have the terms and conditions not small print but clearly stated and as many on the front of the form (or website) as possible. Bold print stating that the other party’s changes are void and these terms and conditions are the only ones that apply would be quite useful.
One other way to avoid these types of disputes is to simply include a provision in all offers or acceptances that indicates that the offer or acceptance is conditional on acceptance of the terms and conditions on your form. This should prevent the other side from changing terms of the agreement or arguing that their terms should apply. It may be appropriate to include a provision indicating that if the other party changes or adds any terms and conditions, that such changes are rejected.
An example of such a provision:
This (offer/acceptance) is expressly conditioned on the (Buyer’s/Seller’s) assent to the all the terms contained in this (offer/acceptance) and no alteration will be accepted absent a signed acceptance by (Buyer/Seller).
Courts are places in which practical fairness is common and the more one sided and unfair a term and condition is, the more likely that court will attempt to find some way to avoid enforcing it. Further, business thrives on fair and appropriate relationships which, in turn, require fair terms and conditions. Do not go too far in seeking to impose your own unfair terms.
That said, it is vital to protect yourself from unfair provisions “slipped in” to the transaction so some careful drafting prohibiting same is intelligent. One does not want to find that your own limitations on warranty are somehow voided by such a provision or that one is forced to litigate the matter in South America!