Battle of the Forms
LEGAL ASPECTS OF SELLING
THE MODERN LAW OF SALES MAY BE SUMMARIZED IN ONE BRIEF STATEMENT: LET THE SELLER BEWARE!
If parties to a transaction do not commit their understanding to writing, or if they engage in a battle of forms with neither party assenting in writing to the terms in the form sent by the other, the law will imply a contract with terms that are very much to the advantage of the Buyer and the disadvantage of the Seller including:
- 4 year warranties
- Implied warranties of fitness for a particular purpose and merchantability
- Recovery of consequential damages (lost profits) in the event of a breach of warranty or contract
- No Force Majeure
The point is that a Seller must exercise a degree of prudence in concluding a sales transaction, especially since its obligations are far more complex than those of the Buyer, whose principal obligation is merely to pay the price. Before you relegate formal documentation of an agreement to the level of a handshake or otherwise minimize the importance of the paperwork, you should have an understanding of the consequences. Your understanding the law of commercial transactions could save your business thousands of dollars annually.
However, you must also remember that rules of law are never absolute and that their application is never purely logical or mechanical. Nor can rules of law offer crystal-clear answers to each of the innumerable problems that can arise in the course of the creation and performance of a contract. This discussion can only give you an idea of the general law, the broad parameters of a few of the issues inherent in any sales contract, not dispositive guidance.
Uniform Commercial Code
Forty-nine states -- all except Louisiana -- have adopted the Uniform Commercial Code (``UCC"), which sets forth the basic guidelines for certain commercial transactions. Article 2 of the UCC establishes rules governing the formation, performance, and enforcement of contracts concerning the purchase and sale of goods.
Under the UCC, a contract will be found to exist if the parties, through their conduct, act as though they are contractually bound -- e.g., by shipping and receiving the goods. This ``contract by conduct" may exist even if the forms exchanged do not evidence an agreement on terms. The Seller in such a situation may find that he is bound by provisions he probably never even considered or discussed with the Buyer.
The Battle of the Forms
The exchange of purchase orders and sales acknowledgment forms often creates just such a ``contract by conduct" and is referred to as the ``battle of the forms." This legal ``battle" is too often lost because a selling business has inadvertently been committed to the Buyer's terms (or, alternatively, the default rules supplied by the UCC) while at the same time assuming that the provisions of its own sales order form govern. The rules governing the ``battle of forms" support the admonition: LET THE SELLER BEWARE.
A typical ``battle of the forms" occurs when the Buyer submits a purchase order, be it written or electronic. Since the Buyer will have lawyers of its own, the purchase order will typically state that the purchase order is the offer to buy and is ``expressly subject to the terms and conditions on the reverse side hereof." On the other side of the purchase order are probably some 20 odd terms and conditions. Your business, if it is like most businesses, responds with a sales order acknowledgment which contains your business terms and conditions, or worse yet, no terms and conditions.
Both your business and the Buyer retain one another's forms but neither indicates in writing its acceptance of the other's terms. The goods are shipped and (hopefully) accepted.
Eighteen months later defects in the goods appear. Your business contends that the warranty in its sales acknowledgment controls. The Buyer contends that the actual warranty is contained in the Buyer's purchase order form.
The two questions which arise are:
- Is there a contract?
- If so, what are its terms?
In other words, what are your business' obligations?
Contract by Conduct
The UCC recognizes the existence of the contract: ``Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract."
The Terms of the Contract
The next and more important question is what are the terms of the contract? The UCC answers this as follows:
"In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of [the UCC]."
Thus, there is a contract. Not on your business' terms. Not on the Buyer's terms. But on the terms common to their respective forms plus such additional terms as the UCC may imply.
What terms are common to the forms? Most likely, only the description of the goods and the price. In any event, your business's warranty terms do not apply. Nor do the Buyer's. If there is a warranty, it is by virtue of the warranties supplied by the UCC. The same is true of patent indemnification, damages for breach of contract or breach of warranties, force majeure, etc.
While it may be true that in 99 cases out of 100, even if there is not a contract on the terms set forth in either party's form, no one ever knows the difference. The parties go through with the deal, your business is paid the purchase price, and the Buyer is completely satisfied with the quality and performance of the goods. Even if there is a problem, it is solved informally without the involvement by attorneys.
However, it is that one case in 100 where an informal adjustment cannot be made which may result in substantial losses to your business, losses which are not covered by insurance but which come directly off the ``bottom line." It is not even necessary that any such claims go before a court: a Buyer's threat to enforce its rights to substantial consequential damages under the UCC would seriously undermine your business' ability to negotiate a fair and reasonable settlement of any claims by Buyer. In other words, Buyer can put your business ``over a barrel" with very little effort.
The Moral of the Battle
The moral of the battle of the forms is that for your business's protection, basic agreement between the parties as to the major provisions--such as those governing warranty protection and damages in the event of breach--should be negotiated at the outset and Buyer's written agreement obtained before commencing any work on the purchase order.
Winning the Battle of the Forms
No amount of legal draftsmanship that can assure winning the battle of the forms. The only way to be sure that terms and conditions acceptable to your business are included in the agreement is to negotiate those terms and get those terms in writing signed by both parties. At the very least, those fundamental terms of the contract, such as warranty, damages, patent indemnification, etc., should be negotiated and agreed upon.
The Unknown Terms
You've negotiated a great price and cajoled that purchase order out of the purchasing agent. You've won -- but have you really? Do you know what you've agreed to? Have you read the ``fine print" or ``boilerplate" on the back of the purchase order? Well, take out your magnifying glass and try it. You may be horrified to see what it is you have agreed to. If that isn't bad enough, the UCC will also supply several critical terms, such as:
A. Express Warranties. The contract will include any representation or promise made with regard to the goods, whether those promises were made orally or in writing. No special language is needed to create an express warranty i.e., portions of your ``sales pitch" or presentation may very well be held to create an express warranty which will bind your business.
B. Implied Warranties. Warranties of merchantability, fitness for a particular purpose and other implied warranties are part of the contract.
- The warranty of merchantability will include warranties that the goods: (a) pass without objection in the trade, (b) are of fair average quality, (c) are fit for ordinary purposes. (d) are of even kind, quality and quantity, (e) are adequately contained, packaged and labeled, and (f) conform to any promises or affirmations of fact.
- Warranties for a particular purpose arise when the Seller knows the purpose for which the Buyer is purchasing the goods and that the Buyer is relying on the Seller's skill and knowledge with regard to the goods. The goods are warranted as fit for such purpose. Salesmen for the Seller can create warranties of fitness for a particular purpose, if for instance, they know what the end-use of the product will be.
- Other implied warranties may arise from course of dealing or usage in the trade. There are good reasons for excluding implied warranties: (1) Contractual certainty is desirable. (2) The contents of implied warranties are not well-defined.
Limited remedies i.e., repair or replacement for breach of an express warranty, has no application to breach of an implied warranty.
Your business must avoid any implication that the Buyer is relying upon its skill or judgment to furnish suitable goods.
Implied warranties can have serious product liability implications for your business.
C. Remedies. The UCC provides that a warranty may be enforced for 4 years, and allows for broad remedies for the Buyer including recovery of the purchase price, and damages in what could be substantial amounts. (See also the discussion on consequential damages).
2. Consequential Damages
The UCC allows a Buyer to recover damages for any breach of the contract by Seller. Consequential damages could include such losses as lost profits on resales, both present and future, loss of revenues, costs involved in system shutdowns, costs of retrieval and reinstallation, purchase of replacement products, damage to property, injury to persons, etc. The type and amount of such damages may be limited only by the Buyer's imagination and the conscience of a court or jury. These damages could easily amount to 5, 6 or 7 times the total mount of the sale, if not more!
3. Delays in /Delivery
Under the UCC, failure to make timely delivery is a breach of contract except in very limited circumstances. The UCC excuses timely performance by the Seller only upon ``the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made."
This provision has been strictly construed and would most likely not include difficulties in obtaining materials, delays by suppliers, strikes, etc., and may or may not even include so-called ``acts of god" under certain circumstances. These questions are frequent subject of litigation.
4. Patent Indemnification
The UCC implies a warranty against infringement of any kind anywhere in the world, and allows a Buyer remedies, including recovery of the purchase price, damages including lost profits, etc.
Missing in Action
You should also note that the UCC will not provide some very basic terms:
In absence of an agreement, the UCC does not allow your business to collect interest on overdue invoices, nor would it allow your business to charge for rescheduling (delays) of delivery.
The UCC does not protect your business from misappropriation or wrongful disclosure of your business' confidential information.
3. Entire Agreement
Buyers often read into contract -- even written contracts -- more than you intended. They listen to and rely on your sales presentation, perhaps even the glowing recommendations and promises regarding that contract. The cases are legion in which a dissatisfied Buyer has claimed misrepresentation outside of the written contract. The UCC will not protect you from such a claim.
That purchase order you've just accepted exposes your business to the risks outlined above. Risks that could, in a year, 2 or even 4 or 5 years down the road, cost your business substantial amounts of money. The old line that ``we've been doing business like this for years" just won't wash when your business gets its first multi-million dollar claim for lost profits.
Painful as it may sound and as agonizing as negotiations on written agreements may be at times, in the long run negotiating these agreements will protect your business. Get a lawyer to help you.