A recent avvo.com post reminded me that along with the American resurgence in manufacturing, is a resurgence in the importance of the Uniform Commercial Code (UCC). Then only days later I received an email promoting a conference titled something like “Is the UCC dead?” or “Has the UCC lost its relevance?”.
There may be disagreement over the importance of the UCC these days, but there is no shortage of disputes involving the purchase and sale of goods – which is exactly what the UCC applies to. Most businesses are entirely unfamiliar with the Uniform Commercial Code or have never even heard of it UNTIL a dispute over the sale of goods arises. These disputes often involve problems over delivery dates, non-confirming goods (i.e. the buyer doesn’t receive what it ordered or the specs are not as advertised), quality, quantity, price, dispute resolution or indemnification.
If the buyer and seller have an independent, comprehensively drafted contract to govern the purchase and sale of goods between them, signed by both parties, then that contract will likely control. But if there are missing terms or provisions OR if the ‘contract’ is merely printed on the back of a quote or purchase form from the seller and an order form from the buyer, then any conflicting or inconsistent terms may be cancelled out entirely and replaced by the UCC’s ‘gap-fillers’. So, for example, if a buyer’s order form contains a provision requiring indemnification by the seller while the seller’s sales invoice contains a provision expressly stating it does not indemnify the buyer, then the conflicting provisions could be cancel out by a court interpreting the contract, and default to the UCC’s gap-fillers (a/k/a ‘default terms’).
To illustrate how this works in the real world, take the following example:
Wiley Corp. wants to buy toy trains from ACME Corp. ACME Corp. sends a quote with prices for various quantities and styles to Wiley Corp. on its standard purchase order form for the toy trains. The quote / purchase order form contains ACME Corp’s boilerplate purchase and sale terms, including a provision that requires any claim arising from the sale of the trains to be filed in court within one year of the purchase date. Wiley Corp then sends ACME Corp. a purchase order for 100,000 toy trains. Wiley Corp’s purchase order contains Wiley Corp’s standard terms, including a provision that states it may bring claims against ACME Corp. for three years following the date of delivery of the goods.
ACME Corp. accepts payment from Wiley Corp., and ships the 100,000 toy trains to Wiley Corp per the purchase order. Wiley Corp. accepts delivery of the toy trains. Two and half years goes by and Wiley Corp. discovers that the toy trains are defective and must be recalled. Wiley Corp. is unable to sell any more of the toy trains. Wiley Corp. files suit against ACME Corp. one month later. ACME Corp. then files a motion for summary judgment and points to the one-year limitations period included in its quote / purchase order form. Wiley Corp. opposes the motion, and points to the three-year limitations period stated in its purchase order form.
Where contracts for the sale of goods are concerned, this is often referred to as “The Battle of the Forms”. And who wins is so very important to both parties. ACME Corp. may have to reimburse Wiley Corp for the entire purchase price which could be hundreds of thousands of dollars. Wiley Corp. may be stuck with 100,000 toy trains that it cannot sell and cannot return to ACME Corp or get a refund, and may incur the cost to properly dispose of them all.
In this “Battle of the Forms” between Wiley Corp. and ACME Corp., who wins? Is the deadline to file suit over the defective trains 1 year OR is it 3 years? A better question may be why did neither Wiley Corp or ACME Corp’s lawyers advise them that serious issues can arise where there are conflicting terms contained in purchase forms, quotes, sales invoices and/or sales slips? Did Wiley or ACME consult a lawyer? The failure to obtain a relatively inexpensive consultation with an attorney could now cost one of them hundreds of thousands of dollars.
According to Section 2-207 of the UCC, several factors will determine whether Wiley Corp. or ACME Corp. wins the Battle of the Forms. Despite the fact that the parties have submitted differing contract terms to each other, the UCC allows for the creation of an enforceable contract even if the acceptance of the contract contains terms in addition to the terms offered. The additional terms become part of the contract UNLESS (and this is a big ‘unless’):
(See UCC § 2-207(2) (a)-(c))
This process is called the “Knock-Out Rule” and it is used by courts to resolve a “Battle of the Forms” where the forms contain conflicting terms. The result is a valid contract where by operation of the rule the conflicting terms are rejected (or knocked out) and replaced by the gap-filler provisions of UCC Article 2.
In our example, ACME Corp’s motion for summary judgment based on the one-year statute of limitations contained in its form will fail because of the “Knock-Out Rule.” The one year limitation provision in ACME Corp’s quote form directly conflicts with the three-year limitations provision contained in Wiley Corp’s purchase orderf form. At the end, both parties’ terms are knocked out of the contract and replaced by the gap-filler, the UCC § 2-725’s default four-year statute of limitations. ACME Corp loses.
ACME Corp could have done something that would have easily preventing this outcome: make the intent of the parties clear by adding a requirement to its order intake process. If ACME Corp required that both parties sign a sales confirmation instead of merely accepting a purchase order form that could contain terms that are contradictory to its own quote / sales form. This can be implemented in the following way. ACME Corp should have sent a quote to the potential buyer (Wiley Corp) inviting it to submit an order but specifically and expressly stating that no agreement or sale can be made until both parties sign a sales confirmation to be provided by ACME Corp after the order details are specified. This requirement defines how a contract can be formed between the buyer and seller, and ensures that the buyer’s response to the quote (regardless of whether it contains conflicting terms or not) will not be construed as an acceptance by the seller with conflicting terms.
Upon receipt of the buyer’s order, and in response to it, the seller should send the sales confirmation to the buyer. The sales confirmation should identify the buyer’s order details and state the seller’s terms. The sale confirmation should also contain an Integration Clause stating that the terms contained therein govern the sale and supersede all prior terms that may have been discussed by or exchanged between the parties. Perhaps most importantly, the sales confirmation must clearly state that (1) a contract for the sale will not be formed until the sales confirmation is signed by both the buyer and seller; and (2) the “knock-out rule” will not apply if interpretation of the contract is required at some later date.
The seller’s additional sales requirements should avoid a “Battle of the Forms” and eliminate the chance that the “Knock-Out Rule” will apply. This arrangement will likely withstand scrutiny by the courts as long as there is not a great disparity in bargaining power between the buyer and seller such that the adhesion sales confirmation’s terms would be deemed to violate public policy.
In the context of e-commerce, where the parties can exchange multiple forms contained on a website, in emails and in attachments to emails, and via fax, a seller should take a few extra steps to ensure its terms will control the sale. Where a seller posts its price lists on its website or where it e-mails a quote to a prospective buyer, the seller should expressly state on its website and in its emails that the formation of a contract for sale is conditioned on a signed sales confirmation. Once the buyer submits its order, the seller should respond by sending a sales confirmation to the buyer (with the statements and Integration Clause discussed above) and require that the buyer sign and return to the seller the sale confirmation to complete the sale and form a contract.
If you are seller of goods or a buyer / distributor of goods, you should contact a Business Lawyer from The Jacobs Law LLC to review your sales invoices and purchase order forms, and revise or draft them for you. A Business Lawyer from The Jacobs Law LLC can draft a Sales Confirmation and assist in implementing a procedure that will ensure your contract terms do get a TKO due to the UCC’s Knock-Out Rule.
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