Battle of the Forms? It sounds like the latest video game or a new virtual reality show. However, if your company is involved in such a battle, you will find it is no game, and the consequences can be very real and costly.

So, what is it? It is what happens when your terms and conditions for the purchase or sale of goods that have already been purchased and sold materially differ from those presented by the other side. 

In such situations, determining whose terms and conditions will control is known as the “Battle of Forms;” that is, whose “boilerplate” (the often tiny, unreadable print on the reverse side of a commercial form, such as a purchase order or acknowledgment or on a website) will prevail and govern the transaction — despite what the parties expected or may want. 

An example

A buyer issues a purchase order that requires the seller to provide a warranty that the subject goods will be free from defects for a period of two years following delivery. However, the seller, in response, issues an acknowledgment that includes a limited warranty of only 90 days following delivery. Yet, despite such a significant disparity of terms, neither party raises any objections, and the sale proceeds with the goods being delivered, used and paid for. 

All is good until there is a problem. For instance, let’s say six months after delivery, the goods (such as a piece of equipment) no longer operates as they once did. At that point, the buyer will contact the seller regarding the problem and make a warranty claim — thinking that the warranty extends for another 18 months. However, the seller undoubtedly will quickly advise the buyer that the warranty expired three months earlier. So, who is correct? Stay tuned.

Now, let’s add some additional facts and terms to this dispute. As a result of the goods not working properly, the buyer cannot supply its own customer and has lost significant business and income. The buyer, of course, wishes to be made whole and not only wants the equipment repaired or replaced, but also demands that the seller reimburse the buyer for its resulting losses. However, the seller’s terms and conditions include a provision that expressly limits the seller’s liability to the buyer, as follows:

“EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED IN THIS SECTION, SELLER SHALL NOT BE LIABLE TO BUYER (OR TO ANY PERSON OR ENTITY CLAIMING THROUGH BUYER) FOR ANY LOSS OF ACTUAL OR ANTICIPATED PROFIT, LOSS OF INCOME OR REVENUE, LOSS OF GOODWILL, OPPORTUNITY, BUSINESS OR CONTRACT, LOSS, DESTRUCTION OR CORRUPTION OF DATA OR TECHNOLOGY, BUSINESS INTERRUPTION, DOWNTIME COSTS, OR ANY WASTED EXPENDITURE OR TIME, LOSS OF ANTICIPATED SAVINGS, LOSS OF USE OF ANY PROPERTY, COST OF SUBSTITUTE PERFORMANCE, EQUIPMENT OR SERVICES OR FOR SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL PUNITIVE, OR EXEMPLARY DAMAGES ARISING OUT OF OR IN ANY MANNER CONNECTED WITH THIS TRANSACTION OR THE SUBJECT MATTER HEREOF, REGARDLESS OF WHETHER OR NOT SELLER HAS BEEN INFORMED OF, OR OTHERWISE MIGHT HAVE ANTICIPATED, THE POSSIBILITY OF SUCH DAMAGES. SELLER’S ENTIRE LIABILITY TO THE BUYER FOR ANY CLAIM, LOSS, COST, EXPENSE, OR DAMAGES ARISING FROM OR RELATED TO THIS TRANSACTION WILL IN NO EVENT EXCEED THE PRICE ACTUALLY PAID BY BUYER FOR THE GOODS SOLD.” (emphasis added)

In this example, we not only have two different warranty provisions but also a provision that limits the seller’s liability. And now, let’s add a little bit more to the mix. Let’s say that prior to the parties exchanging their commercial documents, the buyer made the seller aware of the buyer’s specific needs for the goods and that the buyer was relying upon the seller’s knowledge and experience to select the appropriate goods to satisfy the buyer’s specific needs. 

And finally, let’s assume that the seller’s boilerplate terms and conditions fail to disclaim implied warranties, which often reads as follows:

“DISCLAIMER OF WARRANTIES. THE FOREGOING WARRANTIES ARE EXPRESSLY IN LIEU OF ALL OTHER WARRANTIES EXPRESSED OR IMPLIED, AND WHETHER WRITTEN OR ORAL, INCLUDING, BUT NOT LIMITED TO, THE WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND OF ANY OTHER OBLIGATIONS OR LIABILITIES ON THE PART OF SELLER.” (emphasis added)

Resolving the battle: The UCC as peacemaker

So, we (like a court) are confronted with the following situation: the parties have different warranties — one for two years and the other for 90 days; the buyer has purchased goods (such as a machine or piece of equipment) that no longer is operating or is operating but not in the manner that the buyer specifically requested (such as how many widgets the machine can make in an hour) and which the seller selected to satisfy the buyer’s needs; as a result, the buyer has suffered significant damages, including lost sales and income; the seller‘s acknowledgment contains a limitation of liability provision; but the seller failed to disclaim any implied warranties. 

Under this Battle of the Forms, who is liable for what, and why or why not? The answer often is found in Article 2 of the Uniform Commercial Code (UCC), a model uniform statute that all 50 states have adopted. 

First, you need to know that the UCC only pertains to transactions involving the sale of goods, not services, between “merchants” (which the UCC defines as a person, including business entities, who deals in goods of the kind at issue). Second, as some of you may recall from your undergraduate business law classes, a contract requires an offer and an acceptance. If one party changes the terms proposed by another, it is deemed to be a counter-proposal that can be accepted either in writing or by performance. 

Prior to the UCC, if a seller’s acknowledgment form differed from a buyer’s purchase order and the goods were shipped and were received and paid for, then the buyer would be subject to the seller’s terms and conditions stated in its order acknowledgment form, based upon what commonly was referred to as the “last shot rule.” In other words, the seller had the last shot at the terms which the buyer accepted by not objecting and proceeding with the sale. 

However, many transactions are not the subject of formal written contracts (although many should be), and because most businesses don’t scrutinize the boilerplate terms and conditions of the other party due to the need to process sales quickly, parties often encounter the disparity of terms exemplified above. To cope with this situation, the UCC recognizes that a contract indeed has been established, even if some of the terms are still at issue or in dispute. 

The UCC strives to create a contract even when there are conflicting or additional provisions. It resolves these disputed terms by providing certain rules of construction, as well as alternative terms that it (the UCC) will impose onto the contract. 

In that regard, the UCC provides that additional terms found in one party’s boilerplate terms and conditions that don’t expressly conflict with the terms found in the other party’s form are automatically incorporated into the resulting contract, except when (i) the offer, such as a purchase order, expressly limits acceptance to the purchaser’s stated terms; (ii), the additional terms materially alter the contract; or (iii), the receiving party objects to the additional terms within a reasonable period of time. 

The UCC also provides that additional terms materially alter a contract when it results in a hardship or surprise to the other party, such as provisions that disclaim warranties or provide for indemnification. So, if the additional terms in a seller’s acknowledgment do not materially alter the contract, they are deemed to be part of it. If they do materially alter the contract, the UCC provides certain “gap filler” terms to replace the objectionable additional term. 

These are terms that the UCC, as a matter of law, will impose on the parties to create a contract between them, even if such terms are contrary to the parties’ own commercial documents. 

Thus, in the scenario described previously, since the parties’ respective warranty provisions are so disparate (one being for 90 days and the other for two years), a court likely will use a UCC gap filler term to avoid the conflict. Additionally, the court could find that the seller’s limitation of liability provision is an additional term that materially alters the terms of the contract and, therefore, the court could decide to disregard it. 

The only remaining issue is the buyer’s reliance on the seller’s skill and judgment in selecting suitable goods for the buyer’s stated need, coupled with the fact that the seller’s terms and conditions do not disclaim implied warranties. 

In our scenario, the UCC will impose its own implied warranties into the contract — one relating to the merchantability of the sold goods, and another regarding the goods’ fitness for a particular purpose. As enacted in Illinois (where I am located), UCC Sections 314 and 315 provide implied warranties, in pertinent part, as follows:

Ҥ 2-314. Implied Warranty; Merchantability; Usage of Trade.

“(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind….

“(2) Goods to be merchantable must be at least such as

“(a) pass without objection in the trade under the contract description; and

“(b) in the case of fungible goods, are of fair average quality within the description; and

“(c) are fit for the ordinary purposes for which such goods are used; and

“(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and

“(e) are adequately contained, packaged, and labeled as the agreement may require; and

“(f) conform to the promises or affirmations of fact made on the container or label if any.

“(3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing.” (emphasis added): and

“§ 2-314 Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.”

In addition to these implied warranties, the UCC also provides remedies for breaches of warranties for buyers who, as in our scenario above, have already accepted defective goods. 

These include the right to obtain replacement goods for defective goods and to seek recovery of any difference in the purchase price (which the UCC refers to as “cover”), to seek recovery of incidental damages for any additional costs and expenses (such as storage and cartage expenses), and consequential damages (such as lost profit), none of which otherwise would be available had seller properly limited its damages. 

Clearly, as shown by these provisions, the UCC’s gap filler terms favor the buyer in such disputes.

Avoiding the Battle of the Forms

It should be clear that resolving Battle of the Forms disputes through litigation can be a complex, fact-intensive, time-consuming and expensive exercise. More significantly, it is not the best way to conduct your business affairs or to spend your resources. Therefore, all businesses should strive to avoid such disputes, if at all possible. 

The best way to do that is to negotiate a single document that governs the rights between the parties, namely, a contract signed by the parties. This could be a master supply agreement or some other document containing negotiated and agreed-upon terms that will control the parties’ relationship and resulting transactions. However, when doing so is not a realistic option, then your company should institute the following best practices: 

1.    Have trained personnel carefully review the terms and conditions contained in each of your customers’ or suppliers’ commercial documents and notify them in writing of any objections you have to their terms within a reasonable period of time. 

2    Review and, if necessary, update and use your own standard terms and conditions (which will differ whether you are a seller or a buyer) and make sure that you understand your terms and conditions and the impact that their inclusion (or not) in any transaction could have on your business. 

3.    Require that the other party (whether your customer or supplier) countersign and return a copy of your commercial document expressly agreeing to the terms and conditions stated therein. 

4.    Walk away from the potential transaction (no matter how good the deal may seem) if the other party insists upon using its terms and conditions that are adverse to your company’s best interest position. 

5    Include in all of your commercial documents a term that expressly provides that your acceptance of an offer is conditional upon the other side’s acceptance of your terms and conditions, including any additional or different terms, such as:

“Any terms or conditions proposed by Buyer that are inconsistent with or in addition to the terms and conditions contained herein are hereby expressly rejected and shall be void and of no effect unless specifically agreed to by Seller in a writing signed by the Seller. The Buyer’s acceptance of the Goods shall constitute the formation of a contract for the purchase and sale of the Goods solely upon the terms and conditions set forth herein.”

By implementing these simple practical business procedures, you can better protect your company and hopefully avoid or minimize the effect of a Battle of the Forms.