Supply chain disputes come in a multitude of varieties. They may arise between brands, ingredient suppliers, manufacturers, distributors or retailers and can occur in a variety of contexts. The one constant in almost all supply chain disputes is that an “agreement” governs the dispute. What that agreement is, however, is not always as straightforward as one may expect.

This article explores contract formation in the purchase and sale of goods. Understanding the rules governing contract formation may assist supply chain professionals in identifying potential problems at the early stages of purchase and sale transactions and help avoid disputes down the road.

Article 2 of the Uniform Commercial Code

Article 2 of the Uniform Commercial Code (UCC) governs contracts for purchasing and selling goods in the United States. Article 2 has been adopted in almost every U.S. state, and it only applies to the purchase and sale of goods and does not govern service contracts. Special provisions apply when the transaction is between “merchants”—a person who deals in or otherwise holds themselves out as having knowledge related to the goods subject to sale.

Under the UCC, a contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by the parties that recognizes the existence of an agreement. An offer to make a contract is construed as inviting acceptance in any manner reasonable in the circumstances. Typical offers include seller quotations or buyer purchase orders. Acceptance may take the form of an acknowledgement, or where the parties begin to perform, performance may constitute acceptance.

Example 1 – Contract Formation

Monday morning, your receiving department tells you that the pumps on the containers you ordered and received a little over a month ago are not dispensing correctly. You email the manufacturer, but get a quick response that the quotation states: This quotation expressly incorporates the terms and conditions of sale located at www.abcsalesterms.com, and the terms require any rejection of product to be within 30 days of delivery. You quickly reply that you did not agree to these terms and have never seen them.

In this situation, the terms on the manufacturer’s website would likely govern. The quotation would serve as an offer, which was accepted by ordering the pumps. Even though you did not read the terms, the quotation provided conspicuous notice that the terms were part of the agreement, and their terms and conditions would be binding.

Example 2 – The Battle of the Forms

In a variation of the foregoing example, you call the manufacturer. Still, you are told that the terms and conditions governing the sale require any rejection within 30 days of delivery. You state that your purchase order expressly disclaims any terms and conditions contained in a quotation and, in fact, the purchase orders contain terms and conditions allowing rejection of goods up to 90 days after delivery.

This situation is known as “the battle of the forms.” The UCC provides guidelines for how to handle competing forms in three different scenarios:

• In the first scenario (as in the previous example), the terms contained in an offer (e.g., quotation), and acceptance (e.g., purchase order) conflict, and each document expressly precludes the applicability of the other’s terms. In this situation, conflicting terms are not enforceable. The agreement consists of the terms the parties agreed to in writing, and the UCC fills any gaps. Here, the times for rejection conflict. Accordingly, neither would be enforceable, and the UCC would fill the gap. Under the UCC default rules, rejection must be made “within a reasonable time” of delivery, and there would be a factual dispute as to whether a rejection just over 30 days is reasonable in the circumstances.

• The second scenario involves an acceptance (e.g., purchase order) that contains additional terms to the offer (e.g., quotation). In this scenario, the UCC treats the additional terms as proposals for addition to the contract and as between merchants become part of the contract unless (a) the offer expressly limits acceptance to the terms of the offer; (b) the additional terms materially alter the offer; or (c) notice of objection to the additional terms has been given or is given within a reasonable time after notice of the additional terms is received.

• In a third scenario, the acceptance (e.g., purchase order) provides different or conflicting terms to the offer (e.g., quotation). In this scenario, unfortunately, it depends. In most jurisdictions, different or conflicting terms will cancel each other out, and the UCC will fill in the gaps. However, in some jurisdictions, different or conflicting terms are not considered a part of the contract, and the offer terms will apply. Finally, in some jurisdictions, different or conflicting terms are handled in the same manner as additional terms.

Example 3 – Warranties and the Extrinsic Evidence Rule

Tuesday afternoon, the production department lets you know that the machine you purchased does not produce pouches like the sample that was provided. You pull out a letter you sent to the machine supplier stating, “It is our understanding that the subject machine will produce a finished pouch identical in construction to the enclosed sample.” You call the manufacturer, but they deny any warranty, citing the disclaimer of warranties on the purchase order. The purchase order contains a general description of the machine on the front and a disclaimer of warranties on the back: This writing contains the entire agreement between the buyer and seller. There are no warranties, express or implied, including without limitation, any warranty of merchantability or fitness for a particular purpose, which extend beyond the description on the face hereof.

The UCC details how express warranties are made. An affirmation or promise relating to the goods that becomes part of the basis of the bargain creates an express warranty that the goods will conform to the affirmation or promise. Similarly, a description of the goods that is made part of the basis of the bargain creates an express warranty that the goods will conform to the description. Also, a sample or model that is made part of the basis of the bargain creates an express warranty that the goods will conform to the sample or model.

The UCC also establishes implied warranties. The most notable being the implied warranty of merchantability. This implied warranty establishes, for example, that the goods will pass without objection in the trade under the contract description, be of fair average quality within the description, are fit for the ordinary purposes for which the goods are used and conform to the promises or affirmations of fact made on the container or label. The UCC also supplies an implied warranty of fitness for a particular purpose, such that where a buyer relies on a seller’s skill or judgment to furnish suitable goods, the goods shall be fit for such specific purpose.

There are two critical caveats regarding warranties. First, the UCC provides for the disclaimer of warranties. Accordingly, the implied warranties of merchantability may be disclaimed by conspicuous language that mentions merchantability. Likewise, the implied warranty of fitness for a particular purpose may be disclaimed by conspicuous language. Second, the extrinsic evidence rule under the UCC provides that a writing intended to be a final expression of an agreement may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.

In the example above, because the purchase order states that it contains the entire agreement between the parties and expressly excludes any additional warranties, a court would likely exclude evidence of the letter and uphold the disclaimer of additional warranties contained in the purchase order. If you wanted the additional warranty to be part of the agreement, it would have had to be included in the description of the machine or otherwise referenced as part of the basis of the bargain.

Conclusion

The quotation and purchase order remain the foundational documents for many purchase and sale agreements. To ensure you know what terms will govern a purchase and sale transaction, be sure to adopt the following best practices:

• Read offer and acceptance documents carefully to determine what terms may be included.

• Ensure the key attributes of the goods are included in the description of the goods or expressly referenced in the offer and acceptance; and

• Expressly object to any terms you do not agree with within a reasonable time of receiving the other party’s form.

Understanding the rules governing contract formation may help identify potential issues at the early stages of purchase and sale transactions and avoid later, costly disputes. NIE

George R. Spatz is a partner in Amin Wasserman Gurnani’s Litigation Group. Spatz has nearly two decades of experience representing food and beverage, dietary supplement, cosmetic, drug, medical device, software and technology companies in supply chain, trademark/intellectual property, and other business disputes. He regularly handles contract disputes associated with manufacturing, supplying and distributing products, developing, licensing and implementing software, and associated services and business arrangements. Spatz helps clients enforce their intellectual property (trademark, trade secret, patent, copyright) rights and regularly defends clients against intellectual property, false advertising and government claims.