Contracts
Class Notes
This
is where we left off. The idea is that
if you have an offer and the offeree rejects it straight out, then that
terminates the offeree’s power of acceptance. This reason for this is the probable effect
of rejection on the offeror. The offeror
will probably rely on the offeree’s statement. Rejection
terminates the power of acceptance without any proof of reliance. We figure it’s almost certainly true that the
offeror relies on the statement of rejection.
Let’s
say the offeror is to sell a car for $5000 and the offeree says “I’ll give you
$4,000 for your car.” That’s not a
flat-out rejection but rather a counteroffer.
What the offeree has done is make a new offer. It’s a new offer that the original offeror
could accept. However, this statement
also contains an implicit rejection
of the original offer. Making a
counteroffer terminates the power of the offeree to accept the original offer.
The
editors of the text say that contracts aren’t necessarily formed by a process
of offer, counteroffer, and acceptance.
The negotiating process is often hasty and sloppy and it disregards “lawyerly
niceties”. This can be the case between both
private individuals and businessmen.
You
don’t need an offer and acceptance in order for there to be a contract. Often you can’t tell who the offeror was and
who the offeree was. If it’s clear that
the parties reached a deal, we’ll deal with that deal and we don’t care how it
was reached. Sometimes the offer and
acceptance machinery will be useful, but other times it is irrelevant.
Another
thing the editors suggest is that the law about this grew up a long time ago
when transactions tended to be much more individuated than they are today. There used to be no such thing as a
typewriter or printed forms. The old law
is more suited to those old circumstances than the way they are today.
The battle of the forms
When
we think about the “battle of the forms”, realize that people started putting contract
terms into print with standard terms that they wanted to make. It started out with railroads and insurance
companies. It turned out to be quite
useful. It makes economic sense to have
mass-produced, standardized agreements.
It can produce efficiency, but it can also produce problems.
Another
thing to keep in mind is how commercial contracts of purchase and sale are
often made. The battle of the forms has
nothing to do with consumer contracts.
In this battle, each party has a form.
Thus, this is a merchant-to-merchant situation. How does a merchant seller, who is not
selling consumer goods but rather selling to businesses, market their
goods? They will use advertising,
catalogs, and traveling salesmen. They
will thus have sales personnel who know who the buyers are.
There
are probably only three sellers in the world that Idaho Power could buy this
big fancy voltage regulator from. The
three sellers would know that there aren’t that many people who want that
particular widget. There would be
contact between the buyer and the seller.
When
there’s a need for this kind of item, the purchasing agent will get in touch
with a salesperson for the seller and chat.
The buyer will also talk to competing sellers and they’ll try to strike
a deal. However, there will be no legal
effect yet. The reason for this is that
the salespeople don’t have the authority to bind their employer. Basically, their role is to solicit orders to
buy.
That’s
not the case in Idaho Power, but
usually the first legally significant act is the submission of a purchase
order, which is an offer to buy.
The purchaser knows when the purchase order is submitted, they know that
the goods are available, and they know the price.
The
purchaser fills out the form with the “dickered” terms: what it is, how much it
costs, the delivery date, how it will be shipped and so on. These will be fill-in-the-blanks and already negotiated. The purchase order is then sent to the
seller.
The
buyer will invite the seller to accept by signing the tear sheet from the
purchase order and returning it. Instead,
the buyer will usually pull out a standard acknowledgement form with a bunch of
blanks to fill in. A purchase order is
an offer, an
acknowledgement may or may not be an acceptance.
However,
the back of both forms will differ
considerably. The buyer’s form will have
sometimes outrageously pro-buyer
terms on the back, while the seller’s acknowledgement will have standard
boilerplate language that will make the seller responsible for nothing.
The backsides of the two forms will differ markedly.
When
that happens, what do you do? What’s the
old-fashioned common law solution? Say
all the dickered terms are exactly alike and there’s only one difference in the
printed terms on the back. Let’s say the
buyer’s doesn’t say anything about how disputes will be resolved, while the
seller’s form has an arbitration clause.
Say the purchase order is submitted on October 31st. On the same day or on the next day the seller
dispatches its acknowledgement, which is the same except for the arbitration
clause. Say the dickered terms call for
shipment a month later. Say it arrives
December 15th and the buyer accepts the item and puts it into use on
the first of January. When was the contract
formed? What are its terms with respect
to arbitration?
Notice
that probably 99% of the time it doesn’t make any difference. 99% of transactions go fine. Inevitably, however, you’ll have some
pathological transactions where things go off the tracks.
At common
law, when does contract formation occur?
At common law, a deviant acceptance is a counteroffer. The seller’s purported acceptance is deviant
because it has a different term. When
the buyer actually takes the goods, the contract will actually be formed. But the exchange of forms will not make a contract
at common law. So until January 1st,
either party could walk.
When
you have offer and counteroffer you do not have mutual agreement until the
counteroffer is accepted, which is accomplished by accepting the goods.
What’s
wrong with this? Why did the UCC set off
“with a vengeance” to change it?”
1. The business people think
they’ve got a deal when the acknowledgement is sent off as a response to the
purchase order. When the law comes along
and tells them something else, it goes against their ordinary understanding.
2. The common law defers
contract formation for a couple of months and allows the parties to walk away
from the contract scot-free long after it would commonly be understood to be
binding.
3. What are the terms of the contract? Common law analysis would have the seller, as
the counterofferor, dictate the terms to the buyer. The buyer would thus implicitly accept the
seller’s terms when the buyer accepts the goods. This used to be referred to as the “last shot”
principle: whichever side sends the last form gets its preferred terms. This was criticized as being as arbitrary as
can be. We need to find a rational way
to figure out whose terms control rather than just picking the terms of the
party that fires the last shot.
So
in § 2-207 we get the changes made. §
2-207 is complicated!
UCC § 2-207
Let’s
say we take the same hypothetical as before and we use the UCC. What happens?
§
2-207 (1) says that a deviant acceptance is still, essentially, an acceptance
even though it has some differing terms.
Notice
that acceptance is used two different ways in the text: (1) “expression of acceptance”, that is,
something that looks like an acceptance, and (2) “operates as an acceptance”, that is, having the legal effect of an
acceptance.
This
is a significant rejection of the mirror-image principle that any deviant
acceptance acts as a rejection. You can
have deviant acceptances that create contracts.
So
the receipt of the acknowledgement in our hypothetical creates a contract. Thus, our parties would be bound legally as well as commercially.
But
what would the terms of the contract be?
The deviant acceptance operates as an acceptance of what? The only possible
answer could be that it’s an acceptance of the offer on the buyer’s terms.
But
what if there’s something different like our arbitration clause? That’s taken care of in § 2-207 (2). The additional terms are going to be proposals for additions to the contract. Between merchants, the terms become part of
the contract except, among other things, the new terms
materially alter the original offer.
That’s a very simple hypothetical.
This
is a big change over common law. Is this
good or bad? Is this progress or
regress? Most people think it’s good
without much doubt because it advances the date of contract formation.
Is
this good or bad in regard to the terms of the contract? Is this just a “first shot” principle as
opposed to a “last shot” principle? §
2-207 hasn’t worked as well as has hoped.
Let’s
do a variation on the hypothetical. Say
the seller’s salespeople call the buyer and there’s lots of negotiation and
haggling. Say the buyer submits a
purchase order and fills in all the blanks, filling in $179,000 as the
price. Say the seller responds with an
acknowledgement where all the dickered terms are identical with the purchase
order offer except for the price, which is $229,000. When the delivery date comes, the shipper
ships the goods and the buyer takes the goods.
Does the buyer have a deal at $179,000?
Well, this isn’t an additional
term, it’s a different term. Parties will focus more on the dickered terms
than the boilerplate.
The
thing is, sending an acknowledgement at $229,000 doesn’t sound like an
acceptance. Instead, it sounds like a
counteroffer. You’re not in § 2-207 (1)
because it’s not a definite and seasonable expression of
acceptance. If the parties are far apart
on a significant term, they haven’t reached agreement. If nothing else happens, then we say the
buyer in accepting the goods has accepted the $229,000 counteroffer.
Think
about whether there is a definite and seasonable expression of acceptance when
you think about § 2-207 problems.
Idaho Power
Co. v. Westinghouse Electric Corp.
Idaho
Power engaged in some preliminary negotiation and received a price quotation
from Westinghouse. Such quotations don’t
usually arise to the level of offers, but this one does according to the
court. The court says that a solicited
price quotation subject to stated terms is in the nature of an offer where the
seller is the offeror. The terms on the
back of this offer include the statement that the seller will not be liable for
any damages in contract or tort. That’s
a significant limitation of the seller’s liability.
The
buyer responds with a purchase order.
Purchase orders are primarily designed to make offers rather than to
accept. This is sloppy! The purchase order deviates not in the dickered
terms, but in the boilerplate language on the back. There is no limitation of warranty or liability
on the purchase order. The parties
exchange the forms without paying attention to the stuff on the back. They’re wearing those good old rose-colored
glasses!
But
now there’s a problem (explosion!) and the buyer wants to recover damages. The buyer wants to say that the limited liability
clause isn’t a part of the deal. But the
court concludes that since the seller is the offeror and the buyer’s purchase
order was a definite and seasonable expression of acceptance, the buyer has
accepted the seller’s offer with the disclaimer. Thus, the contract occurred on the seller’s
terms and was formed when the buyer put in its purchase order accepting the
seller’s offer.
What
would happen if we had simply reversed the order of the documents? How would that have affected the outcome of
the case? Is this just a “first shot”
rule instead of a “last shot” rule?
How
does the buyer defend against its purchase order being an acceptance of the
seller’s terms? The buyer tries to make
use of the “unless” clause of § 2-207 (1).
You can prevent an acceptance from being an acceptance if you make it expressly conditional on the additional
and different terms. That’s a great
defensive clause for the person with the responding document. All responding documents will contain this
language in ALL CAPS BOLDFACE.
Does
that get us back to the common law?
Sometimes yes, but generally no.
The “unless” clause in § 2-207 (1) is read in an extremely restricted
way. Notice that while § 2-207 (1) gives
a great defensive opportunity to the party with the responding document, §
2-207 (2) gives two such opportunities to the party that fires the first shot:
§ 2-207 (2)(a) and (2)(c). The offer can explicitly limit acceptance to the terms of the offer or can reject
the other person’s new terms. This is
war! That’s why it’s called the “battle
of the forms”. Both sides will tend to use
outrageous language. You have to be
tough.
In
commercial sales that go off the tracks, there is a battle of the forms problem
90% of the time. There will be a big
hassle over the competing forms and competing terms.
Check
out the new Article 2 and the new § 2-206 (3).
What’s new?