The Battle Of The Forms | Losing the Battle Is Losing the War
JAKE HOLLY | Attorney | Foulston Siefkin LLP
Buying and selling equipment, materials, and more is an everyday part of most businesses. For companies that buy and sell, form contracts with favorable provisions are not enough to protect your business interests. In any given supply chain transaction, many documents change hands: requests for quotations, acknowledgment forms, purchase orders, and more.
Most of the time, those transaction go smoothly, and the contracts backing the transactions are barely reviewed. But when something goes wrong, the contracts come out for review, and the initial issue is which terms govern the transaction. This exchange, commonly referred to as the “battle of the forms,” can lead to increased liability and costs. So, before you find yourself in that situation, learn about a contracting strategy that can help you win the battle—and the war—of the forms.
STANDARD FORM CONTRACTS
Most businesses that regularly buy or sell use a boilerplate or “standard” form contract. Standard forms are a necessity—the transaction costs (time and money) would be too high to negotiate the terms of each individual deal. And businesses need certainty in allocating their risks.
The exchange of standard forms is very common. Efficiency and time constraints demand businesses move forward without giving much attention to the fine print—until something goes wrong.
UNIFORM COMMERCIAL CODE
The Uniform Commercial Code (UCC) lays out the framework for the “battle of the forms.” It only applies in transactions involving “merchants,” which are essentially any business or person engaged in buying and selling products.
One court of law called this UCC provision “a defiant, lurking demon patiently waiting to condemn its interpreters to the depths of despair.”
This particular provision under the UCC addresses situations where companies have exchanged standard forms and agreed on the key deal points, such as price and quantity.
However, the parties have never expressly agreed on other crucial points that don’t routinely come into play, such as warranties, choice of law, and limitations on liability. In this situation, the UCC determines what terms will govern if the parties still consummate the transaction and if properly contested, the default terms under the UCC will apply (commonly referred to as gap-fillers).
Under the framework, additional terms or different terms not included in the first offer become part of the agreement unless one of the following conditions are met:
The initial offer expressly limits acceptance to the terms of the offer;
The additional or different terms “materially” alter the offer; or
Notification of objection to the additional or different terms was already given or is given within a reasonable time after notice of the terms is received.
EXAMPLE OF HOW THE UNIFORM COMMERCIAL CODE FRAMEWORK APPLIES
A food distributor orders a machine part from a manufacturer to use in its assembly line. The machinery part is defective—causing the line to shut down for days until the part is repaired. As a result, the distributor loses sales and sues the manufacturer not only for the part, but also for hundreds of thousands of dollars of lost profits from the shutdown.
The distributor solicited the part with its standard order form, which provided that the manufacturer would be liable for consequential damages and litigation must take place in New York. The manufacturer responded to the purchase form with an acknowledgment that contained conflicting terms—expressly providing for no consequential damages, limiting its liability to the price of the part, and stating any litigation must take place in Kansas.
Both forms expressly limited acceptance to its terms and objected to any inconsistent terms. Depending on which form controls, the manufacturer could be liable for hundreds of thousands of dollars in lost profits (consequential damages).
In Kansas, under this scenario, a court would ignore the conflicting terms among the parties and apply the UCC gap-fillers.
The gap-fillers are default statutory terms that will apply if the two terms conflict with each other. In the battle, both sides have the ability to opt into the UCC gap-fillers by conditioning their offers.
MASTER AGREEMENT
The best way to win the battle of the forms is to not play the game. If both sides sign what is often called a “master agreement,” then the UCC gap-fillers do not apply.
A typical master agreement contemplates future transactions between the parties governed by the general terms of the master agreement. This permits the parties to engage in future transactions and negotiate only the key deal points specific to that transaction.
Master agreements give the parties an opportunity to negotiate the finer points on the front end and prevent any inconsistent terms from applying in the future.
The drawback is that master agreements typically take time to agree on. Additionally, if the transaction is a one-off deal, it may make little sense to take the trouble of entering into a master agreement. But if the transaction leads to litigation, the upfront expense of negotiating master terms will easily be less than the post-dispute litigation costs concerning which terms will govern.
If you do have to wage the battle of the forms, the next best approach is to ensure that your form contains sufficient language that expressly limits acceptance to the terms of the offer and objects in advance to any different or additional terms. That way, the worst case scenario is that the UCC gap-fillers may apply (and not the other side’s terms).
Unfortunately, the gap-fillers are too exhaustive to summarize here, but overall, the terms are more buyer-friendly. Most notably, the terms include fairly broad warranty and remedy provisions, including consequential damages.
It is important that you understand these terms and ensure your business is able to bear the allocation of the risks that is imposed by them.
TK
