The rules of engagement

Consider the following: A roofing contractor contracted with an owner to reroof a large downtown office building. The project's specifications called for a roof system produced by a specific manufacturer. After negotiating with a local distributor with whom the contractor had an ongoing relationship, the contractor issued a purchase order for $155,000 designating the specific materials needed for the project.

The purchase order contained a provision, which had been recently added by the contractor, requiring the distributor to warrant the roofing materials against deficiencies and defects for a period of two years from the date of project completion.

After receiving the purchase order, the distributor sent the roofing contractor its standard order acknowledgment form, which the contractor had received on many occasions, agreeing to provide the materials for the $155,000 price. The order acknowledgment form contained a standard provision that stated the distributor would warrant the materials for a period of one year from the purchase date.

The distributor's order acknowledgment form also contained a provision limiting the time in which the contractor could bring a lawsuit against the distributor to one year after project completion. According to the form, all claims brought after this time would be invalid.

The contractor's purchase order was silent as to the time period during which these claims could be made. The contractor did not notice the warranty or claim limitation language in the distributor's order acknowledgment form and did not send any response to the distributor.

A year and a half after the project was completed, the building owner notified the contractor that a substantial leak had developed during a recent storm, causing thousands of dollars worth of damage. The contractor investigated the leak and determined the materials purchased from the distributor were defective. Faced with the threat of a lawsuit, the contractor called on the distributor to pay for the damage and cost of reroofing the affected areas based on the two-year warranty in the contractor's purchase order.

The distributor responded, explaining that under the terms of its order acknowledgment form, it had only issued a one-year warranty on the materials from the date of purchase.

The distributor also argued that under the form's terms, the contractor was unable to bring a lawsuit against the distributor because more than one year had elapsed since the project's completion. Faced with mounting pressure from the owner to make repairs and pay for the leak-related damages, the contractor filed suit against the distributor for breach of warranty. The distributor countered based on the terms of the order acknowledgment form.

How would a court rule in this situation? Would the warranty terms in the contractor's purchase order or distributor's order acknowledgment form govern? What about the distributor's limitation on lawsuits filed more than one year after project completion? Would this limitation preclude the roofing contractor's lawsuit altogether?

To answer these questions and ultimately determine whether the contractor can recover against the distributor, we will need to examine an often misunderstood area of the law: the Uniform Commercial Code's (UCC's) "battle of the forms" doctrine.

The UCC

The UCC is a set of recommended uniform laws that have been enacted in all 50 states, as well as Washington, D.C.; Puerto Rico; Guam; and the U.S. Virgin Islands, with only a few variations. The UCC applies to a variety of commercial transactions, including leases, letters of credit and investment securities. The UCC also contains a section that applies to all sales of "goods," which are defined as "all things that are movable at the time of identification to a contract for sale."

As demonstrated in the hypothetical situation, transactions for goods often are accomplished through parties exchanging documents containing inconsistent terms. According to the UCC, a contract for the sale of goods can be formed through multiple documents or the parties' conduct. When parties in a transaction for goods exchange multiple documents and no single contract has been executed, the terms contained within each document are merged to form the final contract.

In its most basic form, the battle of the forms doctrine governs whether and to what extent additional or inconsistent terms contained in the parties' documents become part of the final contract.

Because the doctrine, which is found in UCC 2-207, a section of the UCC, potentially applies to any terms contained in your contract documents or a document provided to you during a transaction for goods, there is no limit to the areas in which a battle of the forms may arise. If you are not careful, you could bind yourself to onerous contract terms regarding indemnity, warranties, dispute resolution, delivery or payment you never knew existed.

UCC 2-207

UCC 2-207 is separated into three subsections. Subsections 1 and 3 generally address how a contract can be formed when two inconsistent documents are exchanged between parties in a goods transaction. Subsection 2 provides certain conditions, or "guardians," that are used to determine whether additional or inconsistent terms become part of the final contract. Subsection 3 also contains similar rules to be applied in certain situations.

UCC 2-207 was drafted to overcome the application of a common law requirement of contract law called the "mirror image rule." Under this rule, any acceptance of an offer that does not precisely mirror the offer's terms is considered a counteroffer and a rejection of the original offer. This precludes the formation of a legally binding contract between the parties even when they intend otherwise.

In the hypothetical situation, the distributor's order acknowledgement form would be considered a counteroffer under the common law mirror image rule. This parallels what would occur if a roofing contractor and general contractor were to exchange differing subcontract forms for services (which are not "goods") rather than materials. The contractor's subcontract would likely be considered a counteroffer to the general contractor, and no legally binding contract would be formed.

According to the mirror image rule, if the roofing contractor in the hypothetical situation accepted delivery of the materials provided by the distributor after the counteroffer was made, all the terms and conditions contained within the order acknowledgment form—even those that directly contradicted terms in the roofing contractor's purchase order—would control. In an extreme case, this would mean a boilerplate requirement in the distributor's order acknowledgement form that limited the roofing contractor's damages in any resulting lawsuit to the purchase price of the materials, no matter how small, would control even if the roofing contractor was unaware the form contained this provision.

UCC 2-207 was created to prevent one party from gaining an undeserved advantage and provide a fair process to resolve contract disputes resulting from the exchange of inconsistent documents or conduct.

In doing so, UCC 2-207 establishes certain rules of engagement that are applied to situations similar to the hypothetical one presented. According to these rules, during a contract dispute like the one between the roofing contractor and distributor, an initial determination must be made as to whether a valid contract was formed between the parties. UCC 2-207 subsections 1 and 3 provide guidance in making this determination. Then, UCC 2-207 subsections 2 and 3 are used to determine the actual terms of the parties' contract.

Seasonable expression

UCC 2-207 subsection 1 is intended to eliminate the mirror image rule entirely, allowing for the formation of a legally binding contract between two parties even when there are additional or contradictory terms in the parties' writings as long as two requirements are met.

First, there must be a "definite and seasonable expression of acceptance or written confirmation sent within a reasonable time."

In the hypothetical situation, acceptance occurred through the distributor's issuance of the order acknowledgment form shortly after the roofing contractor's purchase order was received. However, the roofing contractor's offer to buy the roofing materials also could have been accepted by the distributor through a letter acknowledging receipt and processing of the roofing contractor's purchase order; the distributor sending its standard purchase agreement for the roofing contractor's signature; or any other expression from the distributor to the roofing contractor (such as an e-mail) agreeing to provide the requested materials.

Second, for a contract to be formed between parties who exchange inconsistent documents, the acceptance cannot contain any language indicating it is conditional on agreement to the new or differing terms.

In the hypothetical situation, the distributor could have avoided creating a binding contract with the roofing contractor by inserting language in the order acknowledgment form indicating the distributor's acceptance was contingent on the contractor's agreement to the differing warranty terms.

Had this language been included, the distributor's order acknowledgment form would be considered a counteroffer for the roofing contractor to accept or reject and no contract would have been formed.

Conduct

UCC 2-207 subsection 3 is intended to address situations in which the writings exchanged by the parties are insufficient to form a legally binding contract but where the parties' conduct recognized a valid contract's existence. Simply put, this means there was no "definite and seasonable expression of acceptance or written confirmation" or the acceptance was made contingent on assent to the differing terms as described in the previous section.

Forming a contract through conduct usually occurs in situations when one party accepts another party's offer to buy materials by shipping the requested materials with a written confirmation, such as an invoice, or nothing at all. Therefore, had the hypothetical situation been somewhat different and the distributor shipped the materials without sending the order acknowledgment form, there still would be a binding contract between the two parties.

Contract terms

Once it has been established that a legally binding contract has been formed, it is time to determine what terms of the parties' inconsistent writings actually become part of the final contract between them. This is where the real battle begins.

UCC 2-207's rules of engagement generally break potential terms into two categories: consistent terms and additional or differing terms. The rules for determining whether these terms become part of a contract are found in UCC 2-207 subsections 2 and 3 depending on whether the contract was formed through a seasonable expression or through the parties' conduct.

Consistent terms

Generally, when two parties exchange differing documents, consistent terms in the two writings become part of the contract. So in the hypothetical situation, the $155,000 price term for the roofing materials will become a term of the contract between the roofing contractor and distributor. Likewise, other consistent terms found in the purchase order and order acknowledgment form will be part of the parties' contract.

Other terms

What about additional terms, such as the distributor's one-year limitation on lawsuits by the roofing contractor, and differing terms, such as the contradictory warranty periods found in the two documents?

If a contract is formed through a "seasonable expression" (the exchange of a written confirmation or something similar), courts generally will use UCC 2-207 subsection 2 to analyze whether any additional terms become part of the contract. Generally, courts treat differing terms, such as warranty provisions, as additional terms. If a contract is formed by the parties' conduct, UCC 2-207 subsection 3 governs the contract terms.

However, as a protection to unsophisticated buyers and sellers, UCC 2-207 subsection 2 only applies when the parties are merchants as defined by the UCC.

The UCC defines a merchant as "a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill."

Basically, a merchant is one who typically deals in the types of goods at the heart of the transaction.

In the hypothetical situation, the roofing contractor and distributor would be considered merchants because each regularly deals in roofing materials. If the situation were somewhat different and the roofing contractor exchanged inconsistent documents with a homeowner for the purchase of some excess roofing materials after the homeowner's house was reroofed, the homeowner would not be considered a merchant. In such a situation, additional or differing provisions would not be included in the parties' contract.

If both parties are merchants, subsection 2 will allow the additional and/or differing terms to become part of the contract as long as certain conditions are met. If neither of the parties is a merchant, the additional or differing terms are considered proposals for additions to the contract.

However, because both parties are merchants according to the UCC, a court's determination of whose warranty provision will become part of the parties' contract and whether the distributor's one-year limitation on lawsuits will be included will depend on the application of the guardian conditions found in UCC 2-207 subsection 2.

Guardian conditions

The first guardian condition states that any additional or differing terms in the documents exchanged by merchants for the sale of goods will not become part of the final contract unless "the offeror expressly limits acceptance of the terms of the offer."

This means the roofing contractor's purchase order in the hypothetical situation would have had to contain language stating his offer to buy the roofing materials was contingent on the distributor accepting the exact terms of the purchase order and no others. Basically, the roofing contractor would have needed to require a mirror image acceptance by the distributor. But because the roofing contractor's purchase order was silent on this point, the first guardian condition would be overcome.

The second guardian condition says any additional or differing terms in the documents exchanged by the parties will not become part of the final contract if "notification of objection to the additional terms is given within a reasonable time after notice of these additional terms is received by the offeror." Because the contractor failed to notice, much less object in writing to, the liability limitation or the warranty period in the distributor's order acknowledgment form, the second guardian condition also would be overcome.

The third guardian condition states that any additional or differing term in documents exchanged by merchants for the sale of goods will not become part of the final contract if the term "materially alters" the agreement between the parties. Therefore, the distributor's differing warranty language and the one-year limitation on lawsuits by the roofing contractor will only become part of the final contract if these provisions do not materially alter the agreement between the contractor and distributor.

Unfortunately, the UCC does not directly define what terms will be considered material alterations to an agreement.

The comments provided by the National Conference of Commissioners on Uniform State Laws (NCCUSL), which drafted the UCC, generally define a material alteration as a change that would "result in surprise or hardship if incorporated without express awareness by the other party." However, there is no definition that can be applied to every situation.

According to the courts, whether a specific clause in a document materially alters an agreement generally must be determined on a case-by-case basis.

Typically, the analysis of what terms may "result in surprise or hardship if incorporated without express awareness by the other party" comes down to the course of performance between the parties and industry and trade standards. A term that is inconsistent with the parties' prior dealings is more likely to be considered a material alteration because its inclusion is more likely to "result in surprise or hardship."

NCCUSL provides example clauses that generally do not materially alter an agreement, such as clauses fixing a reasonable time for complaints within customary limits, clauses providing for interest on overdue invoices and clauses setting forth a seller's reasonable standard credit terms. A number of courts have similarly found a reasonable limitation on the ability of one party to bring suit against another is not a material alteration.

Examples of clauses that materially alter an agreement include clauses allowing a seller to cancel a contract if the buyer fails to pay any invoice when due and clauses requiring that complaints be made in a much shorter time period than what is customary or reasonable given the circumstances.

Courts also have found that clauses adjusting the purchase price, requiring one party to indemnify the other, providing for payment of attorneys' fees, changing the quantities of materials to be shipped, requiring mandatory arbitration of all disputes, and disclaiming or changing warranties materially alter agreements.

Using these general rules, a court could find that the third guardian condition would protect the roofing contractor from the inclusion of the distributor's one-year warranty term because it was a material alteration to the agreement.

However, because the distributor's order acknowledgment form containing the one-year warranty provision had been provided to the roofing contractor on many earlier occasions, the court could find this provision was not a material alteration. This determination would be based on the assumption that the inclusion of the boilerplate one-year warranty term would not result in surprise or hardship to the roofing contractor.

Likewise, the court easily could follow decisions by other courts and find the one-year limitation on lawsuits found in the distributor's order acknowledgment form is not a material alteration to the parties' agreement and is, therefore, part of the contract, preventing the roofing contractor from pursuing its lawsuit altogether.

Knockout rule

What if a contract had been formed through the actions and not writings of the parties and inconsistent terms exist in the parties' documents? Whose term will win over the other?

In this case, the hypothetical situation would change with the distributor shipping the roofing materials without sending the order acknowledgment form. Also, assume instead of differing warranty terms, the material delivery time was set differently on the parties' forms with the distributor promising delivery later than the roofing contractor desired.

When a contract is formed in this manner, inconsistent terms in the parties' documents cancel each other out with each falling out of the final contract. This often is referred to as the "knockout rule." In these situations, there is an assumption that, because the terms conflict, one party objects to the other party's inconsistent term.

Therefore, in the modified hypothetical situation, the roofing contractor's delivery date and distributor's delivery date would be knocked out of the final contract. If this is the case, when must the materials be delivered under the final contract?

To answer this question, we must look to other provisions in the UCC to fill the gap left by the two knocked-out provisions. The UCC contains a number of default rules known as "gap fillers" that apply in instances where an important term is left out or knocked out of an otherwise valid contract. Generally, gap-filler provisions are based on a determination of what is reasonable under the relevant circumstances.

The UCC contains gap-filler provisions regarding delivery price and location if the terms are not contained in a given contract.

For instance, if the place of delivery for roofing materials was knocked out because the roofing contractor's and distributor's documents contained different locations, the roofing contractor would be required to pick up the materials at the distributor's place of business or residence unless another arrangement had been agreed upon.

The UCC also contains a gap-filler provision for delivery time. Under UCC 2-309, the time for shipment or delivery (or any other action under a contract for that matter), if not agreed upon by the parties, shall be a "reasonable time." According to NCCUSL, what is reasonable should be determined by considering the parties' conduct and what constitutes "acceptable commercial conduct" under the circumstances.

Therefore, in the modified hypothetical situation, the distributor would only be required to provide the materials to the contractor within a "reasonable time."

If, for instance, the distributor had been handling a high volume of orders at the time its order acknowledgment was sent and the roofing contractor was aware of this fact, the court could determine the distributor's later delivery date was "reasonable" under the circumstances. If this were the case, the roofing contractor would have difficulty holding the distributor responsible for a late delivery.

Winning the battle

Although the rules of engagement are clear, the specific application and interpretation of those rules by the courts leaves you open to substantial risks. For example, it is easy to see how the hypothetical roofing contractor could unknowingly agree to burdensome terms contained in the distributor's form without even knowing these terms existed. Given these risks, what steps can you take to ensure you win the battle of the forms?

Because UCC 2-207 was created to address situations in which multiple inconsistent documents were merged to form a contract, the first line of defense is to try your best to negotiate one master contract signed by both parties to the transaction. Be sure to include all important terms, including price, time for delivery, etc. If you are able to do this, the battle will be won before it is fought.

UCC 2-207 also provides a number of additional options to ensure inconsistent or differing terms do not make it into a final contract.

Remember, one of the guardian provisions provides that any nonmaterial (yet still burdensome) differing or additional terms that are proposed by another party may become part of your contract with that party unless you expressly limit acceptance of your offer to its terms or object to the additional or differing term within a reasonable time.

Consequently, when you issue a purchase order or other document offering to purchase "goods" from another "merchant," your purchase order should contain language limiting the acceptance by the other merchant to the exact terms of your document and expressly objecting to any additional or inconsistent terms that may be contained in the other party's documents.

For example, a purchase order could state: "Acceptance of this contract is limited to the terms and conditions stated in this Purchase Order. Terms on Distributor's invoice, bills of lading or forms that are additional to or inconsistent with the provisions in this Purchase Order are objected to and rejected and shall be deemed a material alteration. No changes or deviations will be effective unless this Purchase Order is modified in writing by an authorized representative of Buyer."

If this language is included, additional or inconsistent terms contained in the other party's acceptance document will be considered proposals for additions to the contract, not terms of the contract itself.

Although you may limit the acceptance of your offer to its terms, it is likely you still will receive a boilerplate acceptance form containing additional or inconsistent terms you are unwilling to accept. To protect yourself further from the inclusion of these terms in your final contract, read all acceptance documents carefully to determine what terms have been added. If you see something you disagree with, send a letter in response clearly stating your objection to those terms.

Brian P. McCormick is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.