Mass Confusion in Transactional Business: Boilerplate Forms and Competing Contractual Terms Often Lead to a “Battle of the Forms” - Practical Considerations For Minimizing Litigation
March, 2007
by Dean S. Rauchwerger and Michael S. Errera and Allison K. Ferrini and John F. O'Brien III
We often give our enemies the means to our own destruction.
-Aesop
Introduction
As businesses grow and engage in repeat business, parties often use “boilerplate” contracts to govern the terms of a sale. These “boilerplate” terms, however, are usually not mentioned in the negotiations leading to a final agreement. In such cases, the buyer and seller often do not pay attention to the reality that the offer and acceptance do not mirror one another. Generally, this situation doesn’t cause a problem unless or until one party is alleged to have not performed up to their side of the bargain - evolving into claims of breach. Then, the difficult issues surface - was there a legitimate contract in the first place? And, if so, whose terms control?
A Viable Contract
A valid contract must include the following:
- Parties with capacity to contract;
- Terms sufficiently definite to manifest assent;
- A clear offer and acceptance; and
- Valid consideration (i.e., a “bargained for” exchange of promises between the parties).
Once a contract exists, it is necessary to determine whose terms (typically “boilerplate”) control in the event of a dispute.
The Common Law’s Approach: Too Arbitrary and Inflexible?
Prior to the Uniform Commercial Code (“UCC”), common law followed what is known as the “mirror image” rule and the “last shot” doctrine. The “mirror image” rule governs contract formation and says that when an offer is made, a purported acceptance whose terms are not the “mirror image” of the offer will not be treated as acceptance, but instead as a counter-offer. For example, suppose Buyer sends a purchase order to Seller, containing the model price and needed delivery date of widgets on front, with various other terms, including warranties and remedies, in “boilerplate” on the reverse. Seller responds to Buyer’s purchase order with an acknowledgement form that reiterates Buyer’s performance terms on front but contains completely different “boilerplate” terms on the back. Seller proceeds to send the proper widgets by the delivery date required to Buyer and Buyer accepts the widgets. In this example, Seller’s form would not necessarily serve as an acceptance of Buyer’s offer, since the terms did not “mirror” each other - instead it would serve as a counter-offer.
It is at this point, that the “last shot” doctrine comes into play. Because Seller’s contract is treat-ed as a counter-offer, which is then accepted by Buyer, Seller’s terms will govern by virtue of it having fired the “last shot.” Under this approach, the contract would be formed upon Buyer’s payment and Seller would get the benefit of its presumably more limited warranties and remedies included in its “boilerplate” terms.
Both common law approaches had their critics. Under the “mirror image” rule, a party was free to renege on what was likely considered a binding contract, so long as the party did so before any performance on its part. A second, and arguably more legitimate criticism, was that under the common law approach, parties were subjected to the arbitrariness and all-or-nothing nature of the “last shot” doctrine. Why, after all, should one party’s “boilerplate” terms control over another, given that there was no bargained for exchange on those terms in the first place?
UCC § 2-207: Contracting’s Rosetta Stone or Just a Further Muddying of the Contracting Waters?
The enactment of UCC § 2-207 attempted to respond to these critics. Subsection (1) of § 2-207 marks an end to common law’s “mirror image” rule, and provides that the mere existence of additional/different terms in a writing that otherwise purports to be an acceptance will not prevent that writing from operating as such. Subsection (2) of § 2-207 changes the “last shot” doctrine. Now, if a contract is formed between merchants, consistent with § 2-207(1), then under § 2-207(2), any additional terms in the acceptance document will become part of the contract, unless those terms “materially alter the offer,” or the offeror expressly indicates, either in its offer or after receiving acceptance, that the offer is limited to its terms. Instead of arbitrarily determining the terms of the contract based on who fired “last,” the UCC also provides gap-fillers for those terms, pursuant to § 2-207(3).
UCC § 2-207, “Additional Terms in Acceptance or Confirmation,” is utilized by the majority of courts to reconcile the terms of contracts. The section states:
- A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
- The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
a. the offer expressly limits acceptance to the terms of the offer;
b. they materially alter it; or
c. notification of objection to them has already been given or is given within a reasonable time after notice of them is received. - Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contact 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 on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.
U.C.C. § 2-207; see, e.g., Northrop Corp. v. Litronic Indus., 29 F.3d 1173, 1178 (7th Cir. 1994) (describing this rule as the “majority view”).
Subsection 2 of § 2-207 addresses “additional” terms of a contract for the sale of goods. The additional terms in the acceptance, “are deemed to be proposals for addition to the contract, and between merchants, they automatically become part of the contract unless” one of the following circumstances is present: 1) the offeror has expressly limited acceptance to the terms of the offer; 2) the additional terms materially alter the contract; or 3) the offeror has already objected to the additional terms or notifies the offeree of his objection within a reasonable time after he should have become aware of them. Williston on Contracts §6:19 (4th ed.).
The Official Comment to UCC § 2-207 states that “[t]he most difficult aspect of determining whether terms are ‘additional’ is the evaluation of whether those terms ‘materially alter’ the bargain.” U.C.C. § 2-207, cmt. 3. If the terms materially alter the original bargain, they will not be included unless they are expressly agreed to by the other party. Id. If, however, they are terms that would not change the bargain, they will be incorporated unless notice of objection to them has already been given or is given within a reasonable time. Id. Further, the Official Comment “indicate[s] that the basic test of materiality is whether inclusion of the term in the contract would result in ‘surprise or hardship.’” 72 A.L.R. 3d 479 §2(a). Some clauses that materially alter the bargain, resulting in surprise or hardship if they are incorporated without express notice to the other party are: “a clause negating such standard warranties as that of merchantability or fitness a particular purpose in circumstances in which either warranty normally attaches . . . [and] a clause requiring that complaints be made in a time materially shorter than customarily reasonable.” U.C.C. § 2-207, cmt. 4. If an additional term materially alters the bargain, it will not become part of the agreement and the offeror’s terms will be applied to the contract.
That discussion leads naturally to the question - what happens if the contract terms in question are considered to be “different” from and not “additional” to the terms in the offeror’s form? Williston on Contracts explains:
it is a difficult if not im-possible task to distinguish between additional and different terms. While the argument might be made that a term in the offeree’s form is different only to the extent that it deals with a concern considered in the offeror’s form in a manner contrary to the offeror’s form, this ignores the fact that the offer itself may include many implied terms, so that a response which operates to change an implied term is also, in effect, different.
2 Williston on Contracts § 6.20.
This distinction is important because “while § 2-207(1) makes effective an acceptance that states additional or different terms, subsection § 2-207(2) by its terms only applies to additional terms.” 2 Williston on Contracts § 6:20 (4th ed). As Williston points out, if the term is an “additional” term “whether it will become part of the agreement, and hence have controlling effect in resolving the dispute will be determined by § 2-207(2). If, however, it is classified as a different term, the application of subsection (2) becomes less clear, as does the outcome.” Id.
There is a conflict over how the courts handle “different” terms under § 2-207, with three views having been adopted and discussed by commentators on how to best handle this issue. See Northrop Corp., 29 F.3d at 1175. The majority view is that the “discrepant terms in both the nonidentical offer and acceptance drop out, and default terms are found elsewhere in the code to fill the resulting gap.” Id. The minority view is that the “offeree’s discrepant terms drop out and the offeror’s become part of the contract.” Id.; See also Richardson v. Union Carbide Indus. Gases, Inc., 790 A.2d 962, 967 (N.J. Super Ct. App. Div. 2002). Under the third view,
the outcome turn[s] on whether the new terms in the acceptance are materially different from the terms in the offer--in which event they operate as proposals, so that the offeror’s terms prevail unless he agrees to the variant terms in the acceptance--or not materially different from the terms in the offer, in which event they become a part of the contract.
Northrop Corp., 29 F.3d at 1175.
The majority rule - known as the “knock-out” rule - is considered preferable because adopting a different approach for conflicting terms would allow the offeror to prevail “on its terms solely because it sent the first form.” Richardson, 790 A.2d at 968. Some courts have found that such a result is not desirable, “particularly when the parties have not negotiated for the challenged clause.” Id.
Section 2-207 Practical Implications
Any astute commercial lawyer who steps back a moment and assesses the practical impact of the § 2-207 vis-à-vis the common law would quickly come to a number of conclusions. First, whether you are the offeror or offeree, you can and should include magical language in your “boilerplate” forms that will greatly limit the likelihood that you will be bound by the other party’s “boilerplate” terms. If you are the offeror, you can limit the terms of your offer to the terms specifically included therein, and can object in advance to any additional terms that the offeree might include in its purported acceptance of your offer. Similarly, if you are the offeree, you can thoughtfully mimic the language of § 2-207(1), and expressly condition your acceptance on the offeror’s assent to any additional/different terms included in your acceptance. By watchfully drafting the “boilerplate” terms in your contracts, you can ensure that the worst outcome is reliance on the UCC gap-fillers, which include fairly broad warranty and remedy provisions, including the implied warranty of merchantability (see U.C.C. § 2-314), and generous consequential damages (see U.C.C. § 2-715(2)) provisions.
Second, you will also likely come to the conclusion that even with the provisions contained in UCC § 2-207, essentially, there is no simple way to ensure success in a battle of the forms absent true contract negotiations.
Finally, you would likely come to the conclusion, after studying § 2-207, that this section leaves a lot of uncertainty. For instance, when is an acceptance sufficiently “definite and seasonable,” or an additional term in an acceptance so different as to be considered a “material alteration” of the offer’s terms? Further, what happens if, or when, the UCC is silent, or fails to provide a specific gap-filler for the issue on which the terms conflict?
Conclusion
Given the significant liability risks that businesses face when one of the contracting parties are alleged to have not lived up to their promises, it is imperative that management fully appreciate the implications of divergent terms and conditions in the innumerable contract business forms that are mutually exchanged as part of everyday transactions. These forms carry legal weight and do make a difference for firming-up the deal that was entered into by the offeror and offeree. Being studious and mindful of the contracting form details are important to ensure that your contract expectations are met and have a strong legal basis should disputes arise - as they often do. Accordingly, businesses should recognize the value in having experienced counsel audit their contract forms regularly and to provide wise, practical advice to those engaged in entering into commercial contracts. This vital, ongoing learning process will help maximize the potential that your “boilerplate” transactional forms are achieving your business needs and will greatly enhance your chances of winning a “battle of the forms,” should such a battle arise in litigation or otherwise.
Should you have any questions, please contact any of the authors. If you would like an in-house client seminar on this topic, contact CM partner, Dean S. Rauchwerger (drauchwerger@clausen.com).
Practice Pointer
The best approach to ensuring you receive the maximum benefit of the bargain, is to negotiate the terms of any contract directly with the other party.
Review the terms of any contract you are considering entering into carefully, to ensure that you do not get stuck with the other side’s warranty and remedy provisions that benefit them solely.
Include “magic” language in your forms that can greatly limit the likelihood that you will get stuck with the other side’s boilerplate terms:
If offeror:
specifically limit the terms of your offer to the terms included in your form, and object in advance to any additional/different terms that offeree might try to include in its purported acceptance.
If offeree:
mimic the language of §2-207(1) by expressly conditioning your acceptance on the offeror’s assent to any additional/different terms you have included in your acceptance.
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