Imagine this scenario: After working for several years to build the company’s book of business, the sales team just had a major breakthrough. A potential new customer is interested in placing a million dollar order and is eager to close the deal. This is the perfect growth opportunity, and the team wants to act fast.
Quickly, the sales team sends off the quote, and the customer responds with a pre-printed purchase order that says in small font at the bottom, “This Purchase Order is subject to our General Terms and Conditions of Purchase, which can be found at our website and are hereby incorporated by reference.” The sales team overlooks this in a rush.
The sales team shoots off a purchase order confirmation that includes its own fine print statement that declares, “This Confirmation is subject to Supplier’s General Terms and Conditions of Sale, which can be found on our website and are hereby incorporated by reference.” The warehouse processes and ships the order right away.
A couple of weeks later, notice arrives that the products were destroyed in transit, and soon after, an e-mail is received from the customer’s legal department. The customer is informing the seller that it is not paying the invoice for the products received and that the seller is responsible for all of its and its customers’ damages that resulted from the products failing to arrive on the delivery date in the purchase order.
The seller forwards the email to its attorney, asking one critical question — whose terms will govern the transaction when both terms and conditions were exchanged?
The seller – which would provide that the customer’s risk of loss began when the products were shipped from the warehouse and excluded all damages that may result from failure to deliver.
The customer – which would provide that the seller was responsible for any loss of the products until the products arrived at the customer’s manufacturing facility, and all direct and indirect damages to the customer and their customers as a result of failing to deliver on time.
This scenario is an all-to-common pitfall called a “battle of the forms,” which occurs when parties (1) exchange documents with conflicting terms and conditions, (2) begin to perform under such documents, and (3) a dispute arises. The threshold issue becomes whose terms prevail. To resolve the dispute, the communications between the parties and each set of terms and conditions will need to be carefully reviewed to determine what terms apply to a specific transaction.
Generally, in order to form a valid contract, the two parties must have documents that “mirror” each other (i.e., contain identical terms and conditions). However, in the context of the sale of goods, which is governed by Article 2 of the Uniform Commercial Code (UCC), the UCC assumes a contract was formed as long as there was an expression of acceptance on the part of the offeree within a reasonable time. When a buyer and seller each supply their own terms and conditions to govern the sale, the conflicting terms will “knock each other out” and will be supplemented by the UCC’s “gap-filler” provisions. These gap-fillers include substantive terms like price and delivery. Gap-filler terms are generally pro-buyer and will be automatically incorporated into the parties’ agreement if a court finds the parties did not agree on all material terms.
In the scenario first described above, a court would most likely “knock out” each party’s own risk of loss and delivery terms, and apply the UCC’s gap-filler terms. Applying these terms may lead to a result that neither party anticipated when they entered into the agreement.
To help avoid a “battle of the forms” and the attendant unexpected outcomes, here are a few practical tips to implement into the contracting process:
- Slow down! Do not accept the other party’s document without actually reading it. Implementing an internal administrative process for contract review is a useful tool as a business grows.
- Review and revise the document as necessary, especially with respect to any conflicting terms.
- Draft and use a master agreement that supersedes all agreements between the parties. With careful attention to include the correct terms, this document can take precedence over any conflicting terms found in the parties’ own terms and conditions.
- Draft and use terms and conditions that are customized to the business. Templates found online will likely leave the business open to risk.
- Make sure the standard terms and conditions are referenced or included in the orders and confirmations.
- Use explicit language in the standard terms and conditions indicating that the offer or acceptance is conditioned on acceptance of the terms and conditions. This prevents the other side from arguing that its terms and conditions apply.
- Utilize legal counsel to (1) draft agreements that are tailored to the business, (2) review and help implement a thorough contracting process, and (3) review and negotiate customer and supplier contracts.