While each of the fifty States have their own version of laws relating to commercial transactions, they are invariably variations on the Uniform Commercial Code which is a standard set of rules and procedures applicable to transactions between businesses in commercial transactions. The same Code also provides for securing the transactions and priority among competing entities in seizing the security in the event of insolvency.

Transactions involving international commerce are often subject to the particular state’s commercial code, depending if the goods are transferred within the state for resale or use in the State.

Such Codes provide for rights and remedies for nonpayment or nondelivery of goods, and also describe in detail the express and implied warranties that the law imposes upon goods shipped into the particular State.

It is usual for a business to obtain local legal advice before engaging in significant business within a particular state to assure compliance with each State’s version of the Uniform Commercial Code and warranties imposed by law.

It is even more usual for entities engaged in such business to use contractual documents such as purchase orders ("POs"), invoices, letters of confirmation, shipping documents and the like to alter what law and rules apply and to limit warranties and risks.

Between merchants, the laws give great freedom to contract and to alter the relationship and applicability of the laws. The rules of the Uniform Commercial Code normally only apply to those terms which the Parties do not, in the contractual documents, set themselves. If you are silent in your contract as to a term, the Uniform Commercial Code will create the term. If you set your own terms, the Uniform Commercial Code is superseded in most instances by your choice of terms. Hence, it is worthwhile for you to take control of your own transaction by creating the terms you choose.

Transactions involving sales directly to the pubic, however, are subject to much stricter supervision by the government since consumer protection is involved and the ability to limit liability in those transactions is limited by operation of law.



Since the United States does not award costs of litigation such as attorney’s fees to the prevailing party absent a written contract so allowing, and since the courts are crowded and often take years to reach a judgement, most businesses in the United States carefully draft their commercial documentation to allow for alternatives to the costly legal process of litigation.

Further, since the laws allow merchants to agree to most of the terms of their transaction without governmental interference, the typical business will create standard forms for purchase orders, invoices, order confirmations and all other commercial transactions that provide for a fully structured, cost efficient and fair system for determining the parties’ duties and resolving disputes.

Even when dealing directly with the public, it is possible to limit liability and expense in numerous ways that more than repay the cost of creation of the documentation the first time a dispute arises. Of course, documents prepared for consumers must be drafted in light of the numerous consumer protection statutes enacted in virtually every state.

Typical contractual terms used by businesses for improving their efficiency include:

1. Precise definition of who is to do what, when it is to be done and what it will cost.
2. Definitions of what is acceptable performance and what specifications the goods must meet.
3. Methods for return of nonconforming goods.
4. Damages allowed if there is a breach.
5. Arbitration of any disputes rather than court action. Attorney fees to be awarded to the Party that prevails.
6. Precise definitions and limitations on warranties that apply.
7. What security will be posted for payment and inspection of goods.
8. What law applies; what locale will be used to arbitrate disputes.

The value of these terms can perhaps be best understood by the following typical scenario.

The typical dispute is whether goods conform to specifications or violate warranty and/or whether they were delivered on time. Assume that none of the above provisions were written. To litigate in the United States will cost each Party a minimum of thirty thousand dollars and take at least two years and more probably three years. The Party that wins will not receive the attorney fees it cost to win, thus if the party wins twenty thousand dollars and it cost them thirty thousand dollars in fees, all they would get is the twenty thousand dollar judgement and the net effect of the "victory" is to lose ten thousand dollars due to the attorney fees costing more than that Party’s total recovery.

Knowing these economics, a defendant, even at the beginning of a case, will offer perhaps fifty cents on the dollar even if their case is weak...and the cost benefit analysis the creditor faces requires acceptance of the offer since even a victory in court would end up costing more than accepting fifty percent immediately.

All this is radically altered by creation of invoices or purchase orders providing for arbitration with the prevailing party receiving reasonable attorney fees. The entire process is private, takes about four months, costs perhaps half of what court would cost, and the party that wins gets attorney fees incurred by that party. Suddenly the party with the weak case faces the unpleasant prospect of paying not only their own attorney...but both sides’ fees!

This, in turn, stops fights before they begin and acts as powerful encouragement to resolve disputes amicably.

It is thus clear that businesses can usually limit the effect of the expensive litigation system of the United States on most of their transactions and create a much more efficient private dispute resolution procedure such as arbitration if they are sophisticated enough to draft and use the correct documents at the beginning. The key is to develop a package of form documentation and to train personnel to always use the forms in their various dealings.



The above valuable use of forms results in the various parties attempting to use their own forms and each including wording that their own forms supersede those of the other parties. Only careful wording in the forms and careful training in how to reject alternative forms can ensure that your forms become the operative documents.

Additionally, such forms often do NOT work in consumer transactions due to the many local and state wide ordinances passed which protect consumer rights. (Thus, in order to impose arbitration in a consumer contract in California, one must put in specific wording that the consumer waives the right to a jury trial by agreeing to arbitration, etc.) Normally a business will create specific sets of forms for specific purposes: one for consumers, one for merchants, etc.

It is also critical to realize that taxation of the transaction can be significant and such taxation must be carefully allocated in the terms and delivery/shipping instructions should take into account the tax ramifications faced.

But a basic rule still applies: the more local legislation that exists, the more important it is for a business to create a set of forms that maximize the protections and limit the expense of the inevitable disputes that arise in business.

While the expense varies with the locale, it seldom will cost a business more than a few thousand dollars to create and print the basic forms they will use. Merely answering the first complaint filed in a United States Court will normally exceed that cost. The forms are without doubt the most cost effective method of protection available in commercial transactions in the United States.

Letters or e mails exchanged back and forth between merchants can create a binding agreement, but in order to maximize protection and avoid the costs of litigation, the letter or e mail should contain at a minimum those standard clauses recommended by experienced counsel.