AA01-#323419-v1-2013 Lorman Battle of the Forms [Read-Only]

Battle of the Forms and Managing the

Contracting Process

Presented By:Darrell W. Pierce

Dykema Gossett PLLC

This manual was created for online viewing. State specific information in this manual is used for illustration and is an example only.

mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: [email protected] • website: www.lorman.com • seminar id: 391107

Battle of the Forms and Managing the

Contracting Process

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mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: [email protected] • website: www.lorman.com • seminar id: 391107

Prepared By:Darrell W. Pierce

Dykema Gossett PLLC

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California | Illinois | Michigan | North Carolina | Texas | Washington, D.C.

www.dykema.com

Exceptional service. Dykema delivers.

The Battle of the Forms

Managing the Contracting Process

Darrell W. Pierce734‐214‐7634

[email protected]

1

2

Exceptional service. Dykema delivers.2

Applicable Law for Sales of Goods

• UCC Article 2 governs sales of goods

– Supplemented by:

• United Nations Convention on International Sale of Goods (CISG)

• Incoterms (Int’l Chamber of Commerce Terms –generally governing shipping and delivery)

• Common law – principles of equity

– UCC Article 2A will also apply to financing leases

• 2003 revisions rescinded

– Current “balance of terror” preserved

– IP issues


Scope of Article 2

• Article 2 uses predominant purpose test:

– Implanted medical devices

– Software: Distinction between customized applications and prepackaged software; what about downloads?

• Other contracts governed by common law

– Yet Article 2 was a codification of “modern” common law circa 1960

– Key difference is implied terms, especially warranties

– New common law, with statutory progress blocked?

3


Basic Advice: What’s at Stake

• Basic Article 2 advice:

– There is simply no substitute for reading the documents.

– If you don’t like what you see, keep on reading.

• Goal = “our” terms or fight Battle of Forms to a draw

– A draw is likely pro-buyer Because buyer gets implied warranties

• Key Misconceptions

– First communication controls

– It’s just boilerplate


Contracting: Minimum Requirements

• To be enforceable, agreements must:

– Be verifiable

• Usually a writing is required (Statute of Frauds)

– Provide for consideration from each party to the other

• Although a promise for a promise is adequate, and

• Fairness is generally not an issue

– Identify and quantify the subject goods

• That’s it, as Article 2 will supplement the agreement to provide other relevant terms, including warranties – even price

4


UCC Statute of Frauds

• 2-201(1) requires: signed writing with quantity for sales over $1,000

• But-

– 2-201(2): timely written confirmations between merchants and no objection within 10 days

– 2-201(3)(a): substantial reliance by seller of specially manufactured goods not suitable for sale to others

– 2-204 & 2-207(3): conduct recognizing existence of a contract

– 2-201(3)(c): accepted payment or goods

• Casual “done deals” are not “as is”


Electronic Contracting

• The good news and the bad news…electronic contracting works

– UETA and E-Sign

– UCC 1-201(b)(37) and (43): “Signed” includes using any symbol executed or adopted with present intention to adopt or accept a writing. “Writing” includes printing, typewriting, or any other intentional reduction to tangible form.

• Embrace email

– It’s fast and cheap and makes actual agreement easy

– But it’s also a two-edged sword

5


Consideration: Adequacy and Firm Offer Exception

• Adequacy of consideration is generally irrelevant

– Except fraudulent transfers under the Bankruptcy Code or UFTA (UFCA)

• Actual intent to hinder, delay or defraud

• Less than fair value while “insolvent” as defined

• Exception: Firm Offers Signed by a Merchant UCC 2-205

– Irrevocable as stated or reasonable time not > 3 months

– Useful in bidding

– Merchant: deals in relevant kind of goods or otherwise has held itself out as having knowledge or skill


Quantity: Output and Requirements Contracts

• Output and requirements contracts, that lack fixed quantities, are acceptable

– As long as not “unreasonably disproportionate” to any estimate provided, if any, or to past activity: UCC 2-306

– In addition, if the contract is exclusive, on either side, best efforts of seller to produce and best efforts of buyer to promote sales are required UCC 2-306

• When is an output or requirements contract notexclusive?

• What about percentage of requirements?

6


Contract Formation

• Classic Offer and Acceptance

– Which communication is the offer? What is mere discussions?

– Counteroffers

– Conditional Acceptances

• Common law “mirror image” and resulting problems once performance is commenced

• Article 2 allows “mirror image” contracting, but rejects it as a requirement (more below), and takes other aspects of the parties relationship into account


Course of Performance, Course of Dealing and Usage of Trade UCC 2-202

• Course of Performance: any course of performance accepted without objection is relevant to interpret an agreement or pre-contract communications

• Course of Dealing: previous conduct between the parties which is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct UCC 2-208

– Invoice terms (proposed post-delivery!) can be controlling if there is a course of dealing

• Cases are split on interest and attorneys fees provisions on invoices

7


Course of Performance, Course of Dealing and Usage of Trade UCC 2-202

• Usage of Trade: any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question

• CoP, CoD and UoT can:

– Add express terms

– Interpret terms without regard to parol evidence rule

– Supercede or vary affect of UCC implied provisions

– Supplement definitions of contract terms

• Precedence: Express terms, the CoP, then CoD, then UoT UCC 2-208 (“current” pre-2003 version)


UCC Favors Contracts

• 2-206(1)(a): Acceptance is invited in any reasonable manner or medium, unless unambiguously indicated otherwise

• 2-207(1): An acceptance works even if additional or different terms are proposed, unless it is expressly made conditional on assent to such new terms

• 2-207(2): New terms survive unless offer expressly limits acceptance to terms of offer, they are material or notice of objection has been or is given

8


UCC Favors Contracts - and Will Provide One: UCC 2-207(3)

• Conduct creates contract even when writings do not

– Accepted goods or payment will establish a contract of some sort

– The terms are those on which the parties’ writings agree, modified by CoP, CoD and UoT, plus terms provided by the UCC

– Implied terms even include price UCC 2-305

• So, how does this all work out where mirror image agreement is not obtained notwithstanding multiple communications but goods have been accepted?


The Battle of the Forms UCC 2-207

• Acceptance can occur even if different terms are proposed, unless acceptance is expressly made conditional on assent to the new terms

• New terms are treated as proposals, that become part of a contract between merchants unless:

– Offer limits acceptance to the terms of the offer

– The new terms materially alter the offer, or

– The offeror has objects within a reasonable time

• A merchant offeree can impose immaterial changes in terms on a merchant offeror unless the offer has “my way or the highway” language

9


Case Law – What Proposed Changes are Material?

• When is an additional or changed term proposed by an offeree merchant so material that it does not become part of a contract between merchants (assuming the offer did not expressly limit acceptance to its terms)?

– Arbitration clause? No, when arbitration was a common trade practice

– Forum selection clause? Yes

– Remedy limited to return of price? No (somewhat surprising as that is a specific example of an allowed limitation on remedies in UCC 2-719)


Battle of the Forms – Fully Engaged

• Obviously, “my way or the highway” language is important so everyone will be advised to include it. Given that, parties often end up with a contract, but with no agreement (indeed conflict) on various terms.

– Note the effect of offer and acceptance analysis in determining where the parties agree – outcomes still depend in part on the court’s determination of who made the offer

• UCC 2-207(3): Contract will be on written agreed terms, plus Article 2 terms. “Knockout” Rule eliminates disputed terms

10

Results. Value. Dykema. 18

Deal or No Deal?

Expression of acceptance?

Y

Y

N

Offer limits acceptance to offer terms?

Deal on offered terms only.

Assumes that the parties are merchants with respect to the goods involved.

Additional or different terms materially alter the offered deal?

Offeror has given notice of objection to the additional or different terms (or does so w/in reasonable time after notice of them)?

N

N

Y

Y

Deal on offered terms with additional and/or different

terms.

N

Acceptance expressly conditional on additional or different terms?

N

Additional or different terms? Y

Y

N

No Deal.

At most, the response is a counteroffer.

Offeror assent?N

Y

Offer is Made(Begin here.)


Deal or No Deal?


Y

Y

N






N

N

Y

Y


terms.

N


N


Y

N

No Deal.


Offeror assent?N

Y

Where offeree manages the process


11


Deal or No Deal?


Y

Y

N






N

N

Y

Y

Deal on offered terms with additional and/or different terms.

N


N


Y

N

No Deal.At most, the response is a counteroffer.

Offeror assent?N

YWhere offeror manages the process



The Knockout Rule – What Implied Terms?

• Reasonable price UCC 2-305

• Delivery at Seller’s place of business UCC 2-308

• Reasonable time to deliver and reasonable notice to terminate UCC 2-309

• Payment due on receipt unless Seller required or opts to extend credit UCC 2-310

• Risk of loss passes on delivery UCC 2-509

• Buyer’s right to inspect UCC 2-513

• Terms concerning acceptance, revocation of acceptance, returned goods

• Remedies

12


Implied Warranties

• By far and away, the most important issue is whether UCC implied warranties will apply

– Merchantability UCC 2-314

• General fitness

– Title and no infringement UCC 2-312

• Title will pass free and clear and use will not infringe IP rights of others

– Fitness for a particular purpose or use (if applicable, based on seller’s expertise and knowledge of actual intended use) UCC 2-315


Want to buy my Widgets?

Sure. Send a few samples over and let’s talk about it.

Sure! Got time to sit down next

week?

It starts innocently enough . . .It starts innocently enough . . .

13


Quality ProgramManual

Request forQuote

Darrellco PurchaseTerms and Conditions

Response to RFQ

Drawings and

Engineering Information

Drawings and


Tupco Sale

Terms and Conditions

Paper goes back and forth ...Paper goes back and forth ...


Purchase Order Acknowledgment

Purchase Order

(Award and proposal?)

Tupco Sale

Terms and Conditions

More paper goes back and forth ...More paper goes back and forth ...

Darrellco PurchaseTerms and Conditions

Cover email

All purchases

must be made on our

T&C…

Cover email

Thank you for

accepting our

proposal…

14


Deal or No Deal?


Y

Y

N






N

N

Y

Y


terms.

N


N


Y

N

No Deal.


Offeror assent?N

Y


YOU ARE HERE


Price Models

Drawings and


Drawings and


Paper goes back and forth ...Paper goes back and forth ...

Tweaks to Specs

15


What Now? Do we have a deal?What Now? Do we have a deal?

Moving forward . . .

Maybe, maybe not . . .

Must Seller ship changed widgets at original price?

Requirements contract?

Original price plus reasonable adjustments?


Widgets

Money

In any event, commerce happens …In any event, commerce happens …

As a result, we have a deal.

The only issue is what are the terms of that deal.

16


Bad Things Happen …Bad Things Happen …

Steel prices skyrocket

Tsunami takes out low-cost

plant

Faulty widgets spontaneously

explode

Credit dries up


Remember my terms and conditions? They govern

the deal.

DarrellCo

Payment: Net 90

Warranties: MerchantabilityFitness for PurposeANSI 2342.1

ADR: Arbitration

Pricing: Fixed through end of program

17


No way! My terms and conditions govern the

deal!

Tupco

Payment: COD

Warranties: No warranties. All disclaimed

ADR: Arbitration

Pricing: Subject to steel surcharges


What is the Deal?

• First, identify areas of agreement and disagreement, then• Keep agreed-upon terms (green) and eliminate others (red):

DarrellCoPayment: Net 90Warranties: Merchantability

Fitness for PurposeANSI 2342.1

ADR: ArbitrationPricing: Fixed through end

of program

TupcoPayment: CODWarranties: No warranties. All

disclaimed

ADR: ArbitrationPricing: Subject to steel

surcharges

18


What is the Deal?

• Then replace the eliminated terms with UCC gap fillers:

The ContractPayment: COD (UCC 2-310)Warranties: Merchantability UCC 2-314

Fitness for Purpose UCC 2-315[No ANSI]

ADR: ArbitrationPricing: Reasonable price at the time for

delivery (includes steel price effects) UCC 2-305


Battle of the Forms Fought to a Draw

• Generally favors buyer• Merchantability• Fitness for purpose• No contractual limitations of liability

• Some elements favor sellers • Effectively FOB seller’s dock• Payment due at the time of shipment

• Layered Contracting – a problem for buyers• Goods are packed with new or additional terms• “Shrinkwrap” licenses upheld• A few cases have applied 2-204 and implied assent

rather the knockout rule

19


Controlling the Process

• Avoid oral agreements • All offers must expressly limit acceptance to terms of the

offer• All acceptances must expressly condition acceptance on

assent to your terms• Don’t engage in conduct that recognizes the existence of

a contract.• Don’t accept goods or payment• What about seller reliance re specially manufactured

goods?• Try to be offeror and invite acceptance by performance


Controlling the Process: Offeror or Offeree?

• Many buyers fall into the trap of thinking that buyer’s RFQ process makes the buyer the offeror. And keepsthe buyer the offeror.

• As soon as the seller tenders terms, the tables can turn.• Regardless, the seller is going to say in litigation that it

tendered terms.• Your terms and conditions must cover both possibilities

under UCC 2-207 with absolute “my way or the highway” language

• Ensure that communications consistently refer to “our offer” as such and confirm that acceptance must and will be only on our terms

20


Avoiding Third Party Interests

• Liens created by Seller UCC 9-320

– Buyer in the ordinary course of business takes free and clear of security interests, even with knowledge and even if perfected

– Note problem if goods were acquired in a non-ordinary course transaction

• “Sale on Approval” or “Sale or Return” terms

– Former, where goods are to be used, NOT subject to buyer’s creditors until acceptance

– Latter, where goods are to be re-sold UCC 2-403 entrusting rule applies


Financing Buyers

• Even on big ticket items and notwithstanding passage of title, the financing Buyer loses to Seller’s creditors under the entrusting rule

– Very limited relief under UCC 2-502 to recover goods paid for in whole or in part if seller becomes insolvent within 10 days of first price installment

• In service contracts, try to get work product assigned and delivered as it is developed

– Work for hire arrangements

21


Warranties

• Express warranties

– Any affirmation which becomes the basis for the bargain

• Distinguished from mere “puffing”

– Remember trade usage and course of dealing

• Implied Warranties

– Warranty of free and clear title, unless specifically disclaimed or special circumstances (sheriff’s sale)

– Merchant warrants no infringement

• Buyer warrants no infringement for goods made to specifications


Other Implied Warranties

• Merchantability

– Pass in the trade without objection

– Fair average quality for fungible goods

– Fit for ordinary purposes

– Run of even kind and quality

– Adequate packaging and labeling

– Conform to promises on container or label

• Fitness for a particular purpose

– Depends on knowledge of seller and seller knowing buyer is relying on seller’s skill

22


Disclaimers

• Disclaimers must be clear and conspicuous

• Merchantability must be specifically mentioned to be disclaimed

• Title must be specifically disclaimed

• However,

– “as is” or “with all faults” works

– Disclaimer can arise from CoD or UoT

– All implied warranties are modified by pre-contract examination of samples (or what would have been revealed by one if buyer declines to perform one when samples are offered)


Inspection and Rejection

• Generally, Buyer has right to inspect at reasonable time, place and manner before acceptance of goods and payment coming due UCC 2-513

• Remember the layered contract issue

• Rejection must be within reasonable time (unless otherwise agreed) with seasonable notification to seller

– Between merchants, seller can demand list of defects

– Upon rejection, buyer has security interest but cannot exercise ownership rights, must follow seller’s reasonable instructions, but in absence of those, may store, return or re-sell the goods UCC 2-604

23


Revocation of Acceptance UCC 2-608

• Allowed if nonconformity that substantially impairs value and based on reasonable assumption that nonconformity would be cured, or if nonconformity undiscovered notwithstanding reasonable inspection or because of seller assurances

– Must occur within a reasonable time of discovery of nonconformity and before any substantial change in the condition of the goods not caused by their defects

– Same duties of care and handling as apply to rejected goods


Breach and Notice of Breach

• Breaches comes in all shapes and sizes

• Key point is that UCC 2-607 requires notice of breach requires notice to other party within reasonable time or claims are fully barred

– Notice need not be technical and specific

– Purpose is to encourage settlement, cures and mitigation of damages

• Installment contracts

– Defective lots can be rejected

– But need substantial impairment of whole contract to terminate contract for a defective lot

24


Force Majeure

• Occurs when performance “has been made impractical by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any (apparently) applicable…governmental regulation.” UCC 2-615

– What about lack of cooperation from other party?

• Party must notify the other and a seller must allocate production in a fair and reasonable manner among customers


Buyer’s Remedies UCC 2-711

• Security interest in rejected goods

– Can be very helpful against seller’s creditors when coupled with implied warranty of title

• Cover

• Damages

– Incidental

– Consequential

• Specific Performance and Replevin

• Deduction of damages from price

• Liquidated damages/deposits

25


Avoiding Seller Remedies

• Remember duty to mitigate

• Negotiate disclaimer of consequential damages

• Limit quantity commitments

• Insist on strict performance of exclusive remedies

• Document everything – all delays and non-performance items and all resulting damages – on a current basis

• Allocate traditional force majeure risks

– Terrorism

– Weather

California | Illinois | Michigan | North Carolina | Texas | Washington, D.C.

www.dykema.com

Exceptional service. Dykema delivers.

Thank you!

Any Questions?

Darrell W. Pierce734‐214‐7634

[email protected]

26

Notes

Documents

AA01-#323419-v1-2013 Lorman Battle of the Forms [Read-Only]