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UCC Battle of the Forms: Confronting Conflicting Terms in Purchase Orders, Invoices and Related Documents

Minimizing Disputes Over Contract Formation, Enforceability, Terms and Conditions in Commercial Sale of Goods Transactions

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, NOVEMBER 18, 2015

William J. Serritella, Jr., Partner, Taft Stettinius & Hollister, Chicago John M. Riccione, Partner, Taft Stettinius & Hollister, Chicago Douglas H. Fleming, Principal, Riddell Williams, Seattle

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5

Welcome

UCC Battle of the Forms:

Confronting Conflicting Terms in Purchase Orders, Invoices and Related Documents November 18, 2015

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Minimizing Disputes Over Contract Formation, Enforceability, and Terms and Conditions in the Commercial Sales of Goods Transactions

John M. Riccione Partner, Taft Stettinius & Hollister jriccione@taftlaw.com William J. Serritella, Jr. Partner, Taft Stettinius & Hollister wserritella@taftlaw.com Douglas Fleming Principal, Riddell Williams dfleming@riddellwilliams.com

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The Bottom Line

1. Battle of the Forms is critical to your business

– Unless you have a signed contract, you will be in a Battle of the Forms – For the sale of goods, it’s the buyer’s game to lose – For the sale of services, the winner may be whoever fires the “last shot”

2. You must have terms and conditions

– If not, you are potentially stuck with the other side’s terms – Their terms will not favor you

3. You should reference and attach your terms and conditions

– Every time – URL

4. “Magic Language” matters 5. Watch out for international transactions

– The United Nations Convention on the International Sale of Goods (CISG) is not the same as the UCC – Default favors seller, not buyer

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How Sales Contracts are Formed

• 3. By conduct
• 2. By exchange of purchase and sale

documents 1. By signed agreement

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Contract by Signed Agreement

Best Case Scenario No Battle of the Forms

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Countersigning

• Avoid the battle and win the war

– There is no battle of the forms if the other side signs your form — you win! – Create forms that give you a chance – When possible, try to get it signed

• Casual efforts often work best
• Little risk in trying unless you have no leverage and invite a request

that you sign the other side’s form

– Do not sign the other side’s forms – Countersigning is even more important for purchases of services

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Contracts Formed by Exchange of Documents (Sale of Goods)

Purchase and sale documents:

Request for Quote, Quote, Purchase Order, Order Acknowledgement Shipping documents, Invoice (usually too late)

When conflicts arise, 2-step analysis:

• 1. If/when was a contract formed?

OFFER + ACCEPTANCE = CONTRACT Offer:

• Typically Purchase Order
• Can be Quote if the terms are sufficiently definite to invite

acceptance by simply saying “yes” (varies by jurisdiction)

Acceptance:

• Typically Order Acknowledgment, but could be a Purchase

Order if the Quote was sufficiently definite to constitute an Offer

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UCC § 2-206: Offer and Acceptance in Formation of a Contract

• An offer will be construed as inviting acceptance

in any manner and by any medium reasonable under the circumstances.

• UCC 2-201: The Statute of Frauds

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The UCC Supplies “Gap Fillers” to Fill in Terms Which are Missing from a Contract

• UCC § 2-305: Open Price Term
• UCC § 2-306(1): Quantity Only if Output or

Requirement

• UCC § 2-308: Place for Delivery
• UCC § 2-309: Time for Performance
• UCC § 2-310: Time for Payment
• UCC § 2-312: Title

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Mirror Image Rule

• Common Law
• UCC 2-207(1) modifies the Mirror Image Rule
• Exception: The Offer/Acceptance is expressly

conditioned upon the assent to the terms and conditions in this offer/acceptance, including any additional or different terms.

• Exception to Exception: Performance

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UCC § 2-207(2)(a) – (c): Proposed Additional Terms Do Not Become Part of the Contract When:

a) The offer expressly limits acceptance to the terms

• f the offer;

b) The proposed terms materially alter the contract; or c) The recipient previously objected to inclusion of any additional terms or objects within a reasonable time after notice of the proposed terms was received

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Material vs. Non-Material Additions (Sale of Goods)

Material Terms: OUT Split Among Jurisdictions Non-Material Terms: IN

Why: Result in surprise or hardship Examples: LIMITING REMEDY IN A REASONABLE MANNER* Why: No unreasonable surprise Examples:

• Price, quantity, quality
• Choice of law
• Limitation/disclaimer of

remedies?

• 90-100% guaranty of

deliveries

• Cancellation of contract upon

failure to pay a single invoice when due

• Unreasonably short time for

complaints

• Arbitration clauses
• Attorneys fees
• Force majeure
• Choice of law
• Payment of costs of

collection/attorney’s fees upon breach

*In jurisdictions that follow the comments to UCC 2-718 AND 2-719

• Limited (reasonable) time to

complain

• Credit terms within trade

practice

• Limited right to rejection for

defects (within customary trade tolerances)

• Interest on overdue invoices

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What About Different Terms? (Sale of Goods)

• Not the same everywhere

– “Majority Rule”

• Knock-out Rule
• UCC gap fillers

– “Leading Minority Rule”

• Acceptor’s terms rejected
• Offeror’s terms control!

– “California Rule” (possibly also followed by New York)

• Different terms treated the same as additional terms
• Acceptor’s material terms rejected
• Acceptor’s non-material terms added

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Battle of the Forms “Hot Topics”

The most common “Battle of the Forms” issues:

1.Warranty disclaimers 2.Limitations/exclusions of remedies 3.ADR clauses 4.Delivery terms 5.Insurance

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Contracts Formed by Conduct: No Additional Terms (Sale of Goods)

What happens when purchase and sale documents don’t meet elements necessary to form a contract (i.e., no agreement on key terms or “expressly conditional” language of 2-207(1) is used in acceptance)?

UCC §2-207 continued. . . (3) 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. In such case, the terms of the particular contract consist of those terms

• n which the writings of the parties agree, together with any

supplementary terms incorporated under any other provisions of this Act.

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The “Mirror Image Rule” (Sale of Services)

• UCC 2-207 does not apply to sales of services
• Common Law “Mirror Image Rule”

– An acceptance that does not “mirror” the offer is deemed a counteroffer – Who fired the “last shot” before acceptance by performance?

• Courts look to mitigate

– Course of performance – Industry practice

• Good forms won’t save you
• You must be vigilant about responding to seller’s documents
• Have countersigned agreements whenever possible

21

Buyer: Magic Language for Front of Purchase Order

THIS PURCHASE ORDER IS EXPRESSLY LIMITED TO, AND EXPRESSLY MADE CONDITIONAL ON, SELLER’S ACCEPTANCE OF THE TERMS OF THE ORDER AND THE ATTACHED ________ PURCHASE ORDER TERMS AND CONDITIONS. (A COPY OF THE PURCHASE ORDER TERMS AND CONDITIONS IS AVAILABLE AT [INSERT URL].) BUYER OBJECTS TO ANY DIFFERENT OR ADDITIONAL TERMS.

Acknowledged and Accepted By Seller: Name: ________________________ Date: ________________

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Seller: Magic Language for Front of Quotation, Order Acknowledgment, and Invoice

[THIS QUOTATION] or [SELLER’S ACCEPTANCE OF THIS ORDER] IS EXPRESSLY LIMITED TO, AND EXPRESSLY MADE CONDITIONAL ON, BUYER’S ACCEPTANCE OF THESE TERMS AND THE ATTACHED ______ TERMS AND

• CONDITIONS. (A COPY OF THE ____ TERMS AND

CONDITIONS IS AVAILABLE AT [INSERT URL].) SELLER OBJECTS TO ANY DIFFERENT OR ADDITIONAL TERMS.

Acknowledged and Accepted By Buyer: Name: ________________________ Date: ________________

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International Sales - CISG

• Article 19 – “Last Shot Rule”

– Acceptance with different material terms = counteroffer – Virtually everything is “material” under the CISG – Performance after last form means that the last form wins

• Favors seller who sends order acknowledgment

– Buyer must object after receiving counteroffer – Requires buyer vigilance

• Opting out – the chicken and egg problem

– CISG is a treaty signed by most industrial countries – Both parties’ forms must opt out

• Buyer’s form should opt out
• Seller’s form should not opt out

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Practical Tips

• 1. Review existing terms and conditions

 Do you have standard Terms and Conditions?  Do those terms maximize your business advantage?

• 2. Review existing purchase/sale documents

 Do they have the right magic language?  Do they properly incorporate your T&Cs?

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• 3. Review existing purchase/sale processes

 Do you have policies, practices, equipment and training in place to ensure that your T&Cs are universally used and that procurement personnel do not sign the other party’s terms?

• 4. Establish a triage plan for potential claims

 Do your employees know who to contact when potential claims arise?  Does your legal department have the resources they need to decide whether to pursue a claim?

• Ignoring or litigating to death are rarely the only options
• Quick early analysis is key to making good business decisions

Practical Tips

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Questions?

John M. Riccione Partner, Taft Stettinius & Hollister jriccione@taftlaw.com William J. Serritella, Jr. Partner, Taft Stettinius & Hollister wserritella@taftlaw.com Douglas Fleming Principal, Riddell Williams dfleming@riddellwilliams.com