A large volume of sales business is done every year on the strength of standard terms and conditions of sale. Most commonly, these are found on the reverse side of a buyer’s purchase order or a seller’s sale order, confirmation or invoice.
This form document contains a set of terms and conditions that are “buyer-friendly” – and suitable for customization for use on the reverse side of a buyer’s purchase order. In this form, a buyer (“Buyer”) is placing an order for certain goods (the “Goods”) from a seller (“Seller”). The form is divided into two parts:
• Part A contains a checklist of the items that should be included on the purchase order. Among these items is an example of clear language charging Seller with notice of the standard terms and conditions on the reverse side of the purchase order.
• Part B contains the actual standard terms and conditions for inclusion on the reverse side of the purchase order. By careful formatting and shrinking of the type size, the terms should fit on a single page.
This form is intended for use in any state in the United States. However, as is the case with any agreement for use in the United States, regard must be had for the possibility of variations in the laws from state to state. In the context of commercial relationships, the laws do tend to be substantially similar among the states, but there are areas of substantive difference. In this regard, the state of Louisiana stands out in particular, as it bases parts of its commercial and other laws on the civil codes rather than on the common law. Most relevant for present purposes is that Louisiana is the only state that has not adopted Article 2 of the Uniform Commercial Code, in which most U.S. state sales law is found.
This form provides a good starting point for preparing a first draft of “buyer-friendly” terms and conditions of sale. However, as with use of any form, it is very important to take the time to read the form in its entirety to ensure that it is customized appropriately for use in your individual situation. For all but the simplest types of transactions, it can be anticipated that some customization will be in order; and as mentioned above, it may also be advisable to consult with competent legal counsel.
“BATTLE OF THE FORMS”
The most common issue to arise when using standard terms and conditions is the “battle of the forms.” The “battle of the forms” arises when each party to a sale-of-goods transaction attempts to impose its form of terms and conditions on the other. Issues arise if the forms are in conflict with each other. For example, Buyer might issue a purchase order with terms that stipulate that the purchase order is the only agreement between the parties and that it supersedes all prior and future agreements relating to the sale. Seller might respond with a confirmation or invoice with different terms which also contains a stipulation that it supersedes all prior and future agreements relating to the sale. The battle of the forms is concerned with determining which of the two forms prevails as the binding “agreement” of the parties.
At common law, the general rule was that the last document in time prior to performance of the contract would generally prevail. So if a purchase order from Buyer was followed by an invoice with conflicting terms from Seller, then Seller’s form would initially prevail. The theory here was that Seller’s invoice had the effect of rejecting the terms of Buyer’s original purchase order and substituting the terms of the invoice as a counter-offer. However, if Buyer followed up with a further confirmation with different terms, then Buyer’s confirmation form would prevail, again on the rejection-and-counter-offer theory. This would continue until the transaction was performed. Factual disputes (as to who sent what to whom, and when) could make the situation a good deal more complicated than this, however. In other words, the general rule at common law was that an acceptance had to be on the same terms as the offer in order to be effective – the so-called “mirror image” acceptance rule.
Most U.S. states (that is, all other than Louisiana) have adopted some variation of the Uniform Commercial Code, which substitutes the common law rule relating to the battle of the forms with a rather more complex scheme, in which an acceptance can be effective even if it is not on the same terms as the offer to which it relates. In other words, it is possible for the parties to end up with a contract formed from a blend of both parties’ form documents. Under Section 2-207 of the Uniform Commercial Code:
(1) An acceptance or written confirmation operates as an acceptance (and not as a rejection and counter-offer) even if it states terms additional to or different from those originally offered (i.e., the mirror image acceptance rule does not apply), unless the acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are treated as proposals for addition to the contract. However, in the case of a sale between merchants, such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
As will be evident even from this brief summary, Section 2-207 is incredibly complicated and unpredictable in its operation. Paragraph 1 of this form of purchase order attempts to cause its terms to prevail over contrary terms and conditions from Seller’s confirmation or invoice, but whether it will actually have that effect depends on (a) the particular facts and circumstances in which a dispute arises, and (b) the interpretation and application of Section 2-207 by a court (and state courts have differed in their interpretation and application of some of the details of Section 2-207).
NOTES ON USE OF THIS FORM
The purchase order has been left open to be prepared by Buyer. At a minimum, the purchase order should incorporate the items listed in the bulleted checklist. There should also be included in conspicuous typeface the language drawing Seller’s attention to the terms and conditions supposedly set forth on the reverse side of the purchase order. This is important in case the purchase order is faxed or copied without the reverse side, and helps to avoid an argument by Seller that it is not bound by the standard terms and conditions. Seller is instructed to contact Buyer to obtain a copy of the standard terms and conditions, should they have been omitted from the purchase order transmitted to Seller.
The inclusion of a signature line for Seller to accept the purchase order is important, because a purchase order signed by Seller can be conclusive proof of the parties’ agreement and therefore help avoid the “battle of the forms” issues described above.
PART B – NUMBERED PARAGRAPHS
Many of the paragraphs of the form are self-explanatory, but there follow some comments that may help the user to understand what is intended by the language:
The “battle of the forms” rules have been described above. Paragraph 1 is intended to slant the application of these rules in favour of applicability of this purchase order form as the definitive agreement of the parties.
2. WHEN BINDING
The language in paragraph 2 is necessary because a purchase order is an offer by Buyer to purchase, and therefore can be accepted either by a signed acknowledgment by Seller or by some act on the part of Seller performing the order. As mentioned above, a signature line should be included on the purchase order because a purchase order signed by Seller can be conclusive proof of the parties’ agreement and therefore help avoid the “battle of the forms” issues described above.
Paragraph 3 sets forth the presumption that the agreed on price is a delivered price. If this is not the case, the purchase order should so indicate. This paragraph also contains “most-favoured-customer” pricing language, as well as a general representation by Seller that the pricing complies with federal law prohibiting price discrimination.
4. DELIVERY, TITLE AND RISK OF LOSS
Paragraph 4 sets forth the presumption that delivery will be F.O.B. Buyer’s location. If this is not the case, the purchase order should so indicate. Time is of the essence as far as delivery dates are concerned. As is standard under the Uniform Commercial Code and U.S. practice, risk of loss and title pass upon delivery. In most states, retention-of-title clauses are not effective to retain title in Seller and instead take effect merely as liens on the Goods, and therefore “Romalpa”-type clauses are not widely used in the United States.
Paragraph 5 provides standard terms of payment that should be customized as necessary.
Paragraph 6 contains some specific product warranties. These should be supplemented on the purchase order with any Buyer specifications. This clause is slanted towards Buyer in that it omits standard language excluding other (implied) warranties and special, indirect, incidental and consequential damages.
7. NONCONFORMING GOODS
Paragraph 7 imposes the “perfect tender” rule, which allows Buyer to reject any tender of Goods that is not in full compliance with the requirements of the purchase order.
8. INSPECTION; ACCEPTANCE
Paragraph 8 provides Buyer with rights of inspection and rejection, including a right to return nonconforming Goods to Seller at Seller’s expense.
Paragraph 9 contains standard short-form confidentiality language protecting Buyer’s confidential information.
10. SERVICES ON BUYER’S PROPERTY
Paragraph 10 requires Seller to comply with Buyer’s safety and other requirements when providing related services on Buyer’s property.
11. TERMINATION OR MODIFICATION FOR CONVENIENCE
Paragraph 11 allows Buyer to terminate or modify all or any part of the order for its own convenience, but requires Buyer to compensate Seller for certain costs and lost profits.
12. TERMINATION FOR CAUSE
Paragraph 12 allows Buyer to terminate all or any part of the order for cause, and in this instance no compensation is payable in respect of costs or lost profits.
Paragraph 13 specifies certain of the remedies that may be available to Buyer in the event of a breach by Seller. These include requiring Seller to replace nonconforming Goods, rejection of nonconforming Goods, and/or obtain replacement Goods and charge Seller for any costs and difference in price. These remedies are listed without prejudice to other remedies that may be available (e.g., an action for damages).
Paragraph 14 obligates Seller to indemnify Buyer in certain situations, and to maintain product liability and other insurance.
Paragraph 15 gives Buyer broad authority over recalls of the Goods, and requires Seller to pay certain costs in connection therewith.
Paragraph 16 precludes Seller’s assignment or delegation of the purchase order, but does allow Buyer to assign or delegate.
17. LOGISTICAL ISSUES
Paragraph 17 addresses certain logistical issues, which should be carefully reviewed and customised as necessary.
Paragraph 18 contains standard no-waiver language.
Paragraph 19 is an attempt to instruct a court to take a flexible approach to the Agreement in the event that one or more clauses prove to be illegal or otherwise enforceable, provided that it is still possible for the essential intent of the parties to be achieved.
20. CHOICE OF LAW; DISPUTE RESOLUTION
Paragraph 20 contains choice of law and dispute resolution language. Choice of law can be contentious in U.S. contract negotiations because there are 50 states to choose from, and each party may have an instinctive bias in favour of using its own state law. Unless there is some reason to pick another state’s law (e.g., more favourable substantive law), it is customary to pick the laws of the state with which the drafting party is most familiar (again, usually its own state). This choice of law provision picks the laws of a single state (federal laws apply regardless of the state law election), which is most likely to be respected by the courts if it has some relationship to the contract (subject to application of mandatory principles of local public policy).
Most U.S. states (that is, all other than Louisiana) have adopted some variation of Article 2 of the Uniform Commercial Code. This means that, in the realm of sales law, there is substantial (though not perfect) uniformity among the states.
In U.S. contracts for the international sale of goods, the specific exclusion of the U.N. Convention on Contracts for the International Sale of Goods (the CISG) is common and reflects a typical bias in favour of applying U.S. sales laws over the laws imposed by an international treaty (the interpretation of which is often unclear). Note that unless it is specifically excluded, the CISG will apply to any sales contract where both parties are from countries that are signatories to the CISG. If this purchase order is being used in a purely domestic setting, then the bracketed language relating to the CISG can be deleted.
Paragraph 20 provides for dispute resolution by litigation. Buyer should complete the blank to elect a forum for litigation (usually Buyer’s own city and state).