Contracts Class Notes 1/7/04


Livingstone v. Evans


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?


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