Contract Formation Under Article 2 of the Uniform Commercial Code
UCC § 2-204 Formation in General
A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy
UCC § 2-206 Offer and Acceptance in Formation of Contract
(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;
(b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
(2) Where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
Mutual Assent Under the Uniform Commercial Code
Jannusch v. Naffziger
FACTS
Plaintiff, business sellers. appealed a decision, which found in favor of defendant, business buyers, on the sellers action for breach of an oral contract of sale.
The contract of sale was for the sellers' mobile concession business, which they operated at various festivals.
The buyers made a $10,000 payment on the sellers mobile food concession business, immediately taking possession of the assets of the business and operating the business for the remainder of a festival season.
ISSUE
Was the oral argument valid under the UCC?
HELD
The appellate court reversed.
The oral agreement was covered by the UCC.
It was enforceable under exceptions to the UCC statute of frauds.
The essential terms were agreed upon.
The purchase price was $ 150,000, and the items to be transferred were specified.
No essential terms remained to be agreed upon.
The buyers took possession of the items to be transferred and used them as their own.
The fact that the buyers were disappointed in the income from the festivals was not inconsistent with the existence of a contract.
Further, one buyer admitted in deposition that there was an agreement to purchase the business for $ 150,000.
The buyers breached the agreement when they failed to pay the additional purchase price and returned the business assets at the end of the festival season.
E.C. Styberg Engineering Co. v. Eaton Corp
FACTS
Plaintiff, a component manufacturer, sued defendant, auto parts producer, for breach of contract. After a bench trial, the district court entered judgment in favor of the producer. The manufacturer appealed.
ISSUE
Under the U.C.C., is a contract for the sake of goods formed where the parties communications evidence ongoing negotiation, but no agreement as to key terms, such as price, quantity, and monthly production value?
HELD
No. In this case, the evidence was ambigous and the court of appeals could find no evidence that the district court's understanding of the facts was clearly erroneous
This case evidences the fact heavy nature of questions of ongoing negotiations
Evidence for contract:
“thank you” theory, the early interactions suggest price quotation which is an invitation to an offer
Buyer had responded positively to another letter that had price quotation
The 240 unit trial run suggested existence of the contract
Weaknesses of Argument:
the price was an invitation to contract
Seller’s account was ambiguous, the seller keeps trying to build contract up to bigger than it is (suggesting ongoing negotiations)
Harlow & Jones, Inc. v. Advance Steel Co.
FACTS
P sues D for alleged breach of contract to purchase 1000 tons of imported steel.
D claims the shipment was late and thus properly rejected under the contract.
Parties disagree as to what form constituted the contract.
Court found neither form constituted the contract, instead the contract was formed during their phone conversation before either party started sending or receiving written contract forms (UCC 2-204).
Testified that much of the steel importing business is conducted by phone and oral contracts are often made this way and then later confirmed in writing.
HELD
A contract can be formed even if the parties are not sure of when the formation happened and even if they disagree about some of the terms. (*Both UCC and Common Law- you can form an agreement notwithstanding clearly spelled out terms)
Court cites UCC § 2-207 allowing an integration of the parties confirmations into the contract.
Court found there was a substantial agreement between the confirmation forms of the parties (same price terms, weight and grade specifications)
NOTE
the UCC Statute of Frauds (SoF) does not necessarily require a formal signed contract in order to satisfy the SoF, so even though there was no such document in the case, the requirements of the statute may still have been met.
The Objective Theory of Contract
Rest. 2d § 20 Effect of Misunderstanding
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or
(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
Rest. 2d § 21 Intention To Be Legally Bound
Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.
Rest. 2d § 201 Whose Meaning Prevails
(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made
(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or
(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.
(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.
CISG art. 8
(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.
Offer and Acceptance: Bilateral Contracts
An offer gives the other party a sense that they can conclude the deal by saying “yes” to make the agreement enforceable
Essential Elements:
Intent to enter into a bargain- Offers must be distinguished from mere invitations to begin negotiations.
Definiteness of terms- A statement usually will not be considered an offer unless it make clear the subject matter of the proposed bargain, the quantity involved and the price.
UCC
Offers
Definition
Offer not defined, use common law definition
Mode of Assent
UCC 2-204: Formation in General:
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of a contract,
(2) An agreement sufficient to constitute a contract for sale may be found even if the moment of its making is undetermined
Certainty
UCC- § 2-204
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
Terminations of Power of Acceptance
§ 2-206 Offer and Acceptance in Formation of Contract
(1) Unless stated otherwise…
(a) Offer can be made via any reasonable acceptance method.
Example –offeree can accept by calling, coming into the office, whatever is reasonable.
Abolished mirror-image rule
(b) An order or offer to buy goods can be interpreted as inviting acceptance via shipment.
If offeror calls and leaves message saying “I’d like to buy 100 toys for $50”, offeree can accept offer by sending 100 toys promptly.
(2) If offeror does not have enough notice of acceptance that requested performance has begun, he may treat the offer as having been expired.
At the discretion of the offeror.
CISG
Offers
Definition
Article 14(1)- A proposal for concluding a contract addressed to one or more specific person constitutes an offer if it is sufficiently definite and indicated the intention of the offeror to be bound in case of acceptance…
Certainty
Article 14(1)- …A proposal is sufficiently definite if it indicated the goods and expressly or implicitly fixes or makes provisions for determining the quantity and the price.
Preliminary Negotiations
Article 14(2)- A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal.
Terminations of Power of Acceptance
Article 16 - Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.
Acceptance
Silence or Inactivity as Acceptance (Ninja Rule)
Article 18(1) A statement made by or other conduct of the offeree indicating assent to an offer is acceptance. Silence or inactivity does not in itself amount to acceptance.
When Revocation is Permitted
Article 16(2)- However, an offer CANNOT be revoked:
If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable
If it was reasonable for the offeree to rely on the offer as being irrevocable and the offer has acted in reliance on the offer.
Article 15(2)- An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.
Time when Offer Becomes Effective-
Article 15(1)- An offer becomes effective when it reaches the offeree.
Common Law
Offers
Rest. 2d § 24 Definition - An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
Requires some specificity of terms and some certainty
Mode of Assent: Offer and Acceptance: Rest. 2d § 22
(1)- “The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties”
Normally, assent is through offer and acceptance, BUT
(2)- “A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined”
Manifestations of mutual assent can exists even if offer, acceptance, or moment of formation can’t be determined
Certainty
Rest. 2d § 33- Certainty:
(1)- “Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain”
(2)- “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.”
(3)- “The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance”
What is NOT an offer
If it Lacks Certainty: an offer cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.
Rationale: So offeree knows how to act upon it, so courts know how to enforce it (in subparts of R§33 UCC§2-204).
Lonergan v. Scolnick: One reason ad was not offer was that it was not specific enough; it did not say price. (see full case below)
Preliminary Negotiations
Rest. 2d § 26- A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.
Addressed to public at large because possibility that too many people will accept (not hard and fast rule.. just helps determine if the offeror was really and offeror)
Require additional steps to show expression of assent
Do no show willingness to be bound (often by a lack of reasonably certain terms)
When an “offer” is really an invitation to make offers:
When “offeree” has reason to know “offeror” does not intend “offer” to be binding
Exceptions: Advertisements can be offers if…
A reasonably Prudent Person would understand its terms to be an offer
Specific information: price, quantity, description
Offered to one person or limited number of people
Language does not imply need to bargain further
Arrangement of language and arrangement of ad is deceiving
Bait and switch
Fine print can be disregarded if there are reasons for someone to read one section v. another (large v. small print)
RS § 26 Comment- to make an offer by an advertisement...there must ordinarily be some language of commitment or some invitation to take action without further communication
rationale for fair-dealing.
Terminations of Power of Acceptance
Revocation: like an offer, revocation is effective only when communicated (meaning only when received)
Can be by someone else other than the offeror but has to be clearly communicated and reliable.
Rest. 2d § 42- Revocation by Communication from Offeror Received by Offeree
An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.
Methods of Termination of Power of Acceptance- REST. 2D § 36:
1) An offeree’s power of acceptance may be terminated by:
a) rejection or counter-offer by the offeree, or
b) lapse of time, or
c) revocation by the offeror, or
d) death or incapacity of the offeror or offeree
2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.
Rejection- Rest. 2d § 38:
1) An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention
2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.
Indirect Communication of Revocation- Rest. 2d § 43 (learning the offer was revoked by a 3rd party)
An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.
Mirror Image Rule- Rest. 2d §§ 39 & 59-
Acceptance has to mirror the offer- Any modification is actually a rejection and constitutes a counter-offer, terminating the offeree’s power of acceptance. Acceptance must be identical to the offer.
1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer
2) An offeree’s power of acceptance is terminated by his making of a counter offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree
i.e. if the response proposes tentative counter terms but hedges so as not to kill the offer “I am not proposing a counter offer, I merely propose X…but I am still entertaining your offer” – then it may not be seen as a counter off.
A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.
Acceptance
Defined
Rest. 2d § 50
(1)- Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer
(2)- Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise
(3)- Acceptance by a promise requires that the offeree complete every act essential to the making of the promise
Acceptance must be made in:
Manner invited by offer
Medium invited by offer
Rest. 2d § 58- Necessity of Acceptance Complying with Terms of Offer
An acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered.
Rest. 2d § 60- Acceptance of Offer Which States Place, Time, or Manner of Acceptance
If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract. If an offer merely suggests a permitted place, time or manner of acceptance, another method of acceptance is not precluded (and does not need to be complied with for the creation of K).
Silence or Inactivity as Acceptance (Ninja Rule)
Generally you cannot impose a contractual obligation on silence.
Rest. 2d § 69- (1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only:
Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation (ex. brick layer)
Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer
Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.
Generally only exceptional circumstances in which we allow a contract to be imposed by silence
Ex.if offeree imposes the silence obligation and says if you don’t hear from me then I accept, that is okay because it is not the offeror imposing on the offeree.
Time when Acceptance Takes Effect-
Rest. 2d § 63- Time when Acceptance takes Effect- (when it is sent)
Unless the offer provides otherwise:
a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but
b) An acceptance under an option contract is not operative until received by the offeror.
Irrevocability by Statute: The Firm Offer
Limiting the Power to Revoke
Common Law
Traditional Option Contract (Promise + Consideration)
Two Requirements: 1) There needs to be a promise to hold the offer open and 2) that the promise was held open by consideration
Time When Acceptance Takes Effect- Rest. 2d § 63(b)
Unless the offer provides otherwise, an acceptance under and option contract is not operative until received by the offeror.
Traditional contract theory requires consideration to keep the option open
“an option contract which is not supported by consideration is a mere offer to sell which may be withdrawn at any time prior to acceptance.”
Consideration must be in writing or bargained for
You can’t just give someone money and say its consideration, it needs to be bargained for
Consideration cannot be vague, it must be definite
\
#1- Option Contracts without Consideration
Traditional notion is that you need Promise + Consideration to make a contract.
Other ways to make an offer “binding as an option contract” without consideration
Rest. 2d § 87- Option Contract (most jurisdictions apply to Drenna based cases)
1) an offer is binding as an option contract if it
a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or
b) is made irrevocable by statute
2) an offer which the offeror should reasonably expect to induct action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
Special Circumstances of Subcontracting/ Contracting
Three Options:
Classical Rules- sub can withdraw anytime before the bid has been accepted (Baird)
Promissory Estoppel- if the GC relies on the sub’s bid by using it in it’s own bid, then the sub can’t revoke until such time as the GC has had a reasonable time/ opportunity to accept (Drennan)
Bilateral Contract- we could say when the GC uses the subs bid in preparing their own bid the GC accepts the subs bid and creates a bilateral contract (road not taken)
Majority Rule: if there is reasonable reliance, the promise will be enforced
Minority Rule: Promise is not enforceable if no consideration and acceptance
Based on classical rule requiring consideration
Offer is not effective unless accepted
This tends to leave the general contractors out on a limb and leaves them at the mercy of sub-contractors
General Promissory Estoppel- Rest. 2d § 90- predicated on a series of assurances
1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires.
2) A charitable subscription or a marriage settlement is binding under subsection (1) without proof that the promise induced action or forbearance.
Difference between Rest. 2d § 90 & 87(2)
Courts are reluctant to apply 87 (2) beyond a Drennan context
Section 90- predicated on a promise
Promises are more definite in character and not contingent on the formation of a contract
Promise: I will give you a clown car…
Offer: I will give you a clown car if…
Section 87- predicated on an offer and requires substantial reliance (courts are not willing to say that all offers are promises)
Offers are just a stage in the formation of a contract
#2 Irrevocability by Statute- The Firm Offer
UCC
Provides that some offers will be irrevocable despite the absence of any consideration.
Offers must be firm- i.e. giving assurance they will be held open
UCC §2-205- Firm Offers (applied to offers without consideration)
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
Requires offeror to be a “merchant”
Does not require them both to be merchants
“signed” here also includes authentication but the reasonableness of the authentication herein allowed must be determined in the light of the purpose of the section.
Typically the kind of authentication allowed would consist of a minimum of initialing but the circumstances surrounding the signing may justify something less (i.e. a handwritten memorandum on the writer’s letterhead purporting in its terms to “confirm” a firm offer already made, or an authorized telegram, even with a typed signature, would be enough to satisfy).
“signed separately”
Any assurances of “firmness” must be signed separately by offeror
to protect against the inadvertent signing of a firm offer within a form prepared by the offeree.
Length of period of irrevocability-
If an offer states it is guaranteed until the happening of a contingency which will occur within the three month period, it will remain irrevocable until that event.
A promise made for a longer period will operate under this section to bind the offeror only for the first three months of the period but may of course be renewed.
Unlike § 87(2) and §90, UCC §2-205 appears to impose no requirement that the offeree demonstrate reliance on the offer in order to claim the right to accept despite an attempted revocation.
UCC §2-104
(1) Merchant
UCC §1-201
(39)- “signed” includes any symbol executed or adopted by a party with present intention to authenticate a writing.
(46)- “written” or “writing” includes printing, typewriting or any other intentional reduction to tangible form.
CISG
CISG takes an even more expansive attitude toward the possibility of “firm offers,” giving legal effect to the apparent intention to make an offer binding, without the restrictions imposed by UCC §2-205
Yet, CISG does not apply to purchase of goods by consumers
Article 16(2)(a)
However, an offer cannot be revoked: if it indicated, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable.
Note there is not time limitation like that in UCC
Qualified Acceptance: The “Battle of the Forms”
Classical Principles
Princess Cruises, Inc. v. General Electric Co.
FACTS
P contracted with D for inspection and repairs of ship. Both services and goods were included in the contract.
HELD
GE changed terms, so its response was a counter offer (mirror image rule from Normile v. Miller). Last Shot Rule- Princess did not object to the letter by GE, they gave GE permission to proceed and they paid the final amount…therefore accepted by conduct, so they accepted the last contract sent by GE. (Trial court applies UCC) Appellate court applies Common Law.
At common law, an offeror who proceeds under a contract after receiving the counteroffer can accept the terms of the counteroffer by performance.
Factors court took into consideration to decide if UCC or Common Law applies (to see if it is predominately for services or goods):
The language in the contract
The language talks a lot about service
The nature of the business of the supplier
GE is manufacturer…but it was the service engineering department…
The intrinsic worth of the materials
Battle of the Forms
Imposing agreements on parties despite the fact that the writings don’t agree.
Where businesses use forms with “boiler-plate” terms
Which Law to Apply?
If there is a mix of goods/ services in the contract it is up to the court’s discretion whether to use the UCC, Common Law or apply both.
If majority of agreement based on goods, courts tend to use UCC
If majority of agreement based on services, courts tend to use common law.
If there is a 50/50 split, the courts may chose to appy the UCC to part and common law to the other part.
Factors to Consider:
Language of the Contract
Nature of the Business of the Supplier
Intrinsic Worth of the Materials
Other Relevant Factors
If it is international, apply CISG
UCC § 2-207
Purpose: to alter the mirror image rule!
Terms where there is agreement are not in question
What was the first offer? (use common law to determine)
Price Quotations- generally NOT an offer
Purchase Order- generally IS an offer
UCC 2-207- OLD
1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
2) the additional terms are to be construed as proposals for addition to the contract. 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.
3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provision of this Act.
Under 2-207(1)-only about determining if the parties had an agreement (is there an offer and is there acceptance?)
You still need acceptance to the fundamental terms, but if a party responds to an offer with different or additional terms it may still be acceptance.
To be acceptance you need:
Definite and timely expression of acceptance -OR-
Written confirmation
If parties don’t accept terms à look to part (3)
It is a counter-offer if:
Not genuinely an acceptance and replies with drastically different terms by proposing completely different transaction
Acceptance is expressly conditional on the offeror’s assent to new terms (Hercules)
Conduct alone is not enough to be acceptance
Assent to one part of the contract is not assent to all
*clown examples in notes
2-207(2)- parties trying to figure out the terms
Are the parties both merchants?
Are they additional terms or different terms?
If additional, do one of the three exceptions apply?
What happens with Additional Terms? (brand new term)
Between consumers “additional” terms are ONLY proposals for addition to the contract and ONLY become part of the contract if expressly agreed to (still have a contract but discrepant terms are not included unless both parties accept)
Between merchants the “additional” terms come in UNLESS one of the 3 exceptions listed applies.
Offer expressly limits acceptance to the terms in the offer
Courts look to the language of acceptance to see if it is expressly conditional, the language must be clearly indicate that it is expressly conditional.
Some courts go beyond this and examine all the facts and circumstances, including trade usage and course of dealings between the parties
New terms materially alter the contract
What is a material alteration? Surprise/ Hardship test
Surprise- objective inquiry… is the term uncommon in the commercial context?
Hardship- significant shift in liability
Examples of material alterations under this test:
Disclaimer of warranty
Limitations of Liability (Princess Cruises)
Indemnifications (Brown Machine)
Choice of law, choice of forum and arbitration clauses
Not regarded as material alterations:
Reasonable period of delivery
Not responsible for acts beyond our control
The offeree has already expressly objected to the terms or he objects within a reasonable period of time after he learns of them.
What happens with Different Terms?? (changing a term that has already been discussed).
Courts have sketched 3 approaches:
Minority Rule: First Shot Rule
1) Inclusive Approach: we should treat the different terms the same way we treat additional terms
but under the 3 part test the term gets bounced because it is a material alteration
2) Categorical Exclusion: different terms are not included at all (like #1 but don’t even look at material alteration)
Majority Rule: Knock Out Rule
3) Knock Out Approach: if you have different and conflicting terms, those two collide and knock each other out and neither becomes part of the agreement.
The court then supplements with the default principles of the UCC to fill in the gaps.
Preserves fairness to both parties so that the offeror’s terms aren’t always used.
2-207(3)
if the parties behave like they have a contract, then they do and the court will sort the terms out later. Terms on which the parties agree and there are no inconsistencies about will become part of the contract.
2-207(1)- acceptance not undone; 2-207(2) new terms can accrue; 2-207(3)- and/even conduct can agree
Brown Machine, Inc. v. Hercules, Inc.
FACTS
P sues D for indemnification clause to get damages for an employee injured while using P’s trim press.
HELD
Price quote is NOT an offer but rather an invitation to enter into negotiations, unless it is detailed enough and can amount to an offer creating the power of acceptance.
Orders are considered offers to purchase. Seller’s acknowledgement is acceptance because not expressly limited.
But the purchase order expressly limited to the terms of its offer so the indemnification provision would not have come in under 2-207(2)
Question is whether Brown Machine’s acknowledgment containing the indemnity provision constitutes a counter offer or an acceptance with additional or different terms?
General notion is that under UCC 2-207(1) to convert an acceptance to a counter offer, the conditional nature of acceptance must be clearly expressed in a manner sufficient to notify the offeror that the offferee is unwilling to proceed with the transaction unless the additional/ different terms come in.
Court found it was acceptance with additional terms. So then if the term doesn’t come in, it is just hanging out there as a proposed addition. Court says nonetheless the parties did not accept based on their conduct because it was a material alteration
“if they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party” pg.158
Court found that the buyer’s response of “all other specifications are correct” did not satisfy the requirement that they expressly assented to the new terms
Finding express assent under 2-207(2) cannot be presumed by silence or mere failure to object
Paul Gottlieb & Co. v. Alps South Corp.
FACTS
Paul Gottlieb & Co., Inc. Contended that a limitation of liability clause on the back of its standardized finished foods contract did not materially alter the contract is had with Alps South Corp.,, so that the clause should not, as a matter of law, have been excluded from the contract, and, therefore the clause served to limit Gottlieb's liability to Alps for consequential damages
ISSUE
Under the UCC 2-207, does a limitation of liability clause found on the back of a standardized contract for the sale of goods between merchants materially alter the contract where it does not, as a matter of law, cause unreasonable surprise or hardship?
HELD
The trial court erred in its finding that the limitation of liability clause, upon which the seller relied in defense to the buyer's counterclaim, materially altered the contract. The fact that the seller altered a yarn type in filling the buyer's order that resulted in a breach of contract was separate and distinct from the legal analysis of how the language of the contract was construed.
The central issue was whether the limitation of damages clause, as an additional term, materially altered the contract under the Fla. Stat. If so, it was excluded.
The evidence did not allow a conclusion that the seller's limitation of liability clause was either an unreasonable surprise to the buyer or a hardship as a result of surprise.
Rather, the evidence showed that the buyer neglected to inform the seller of the larger consequences of providing nonconforming goods;
thus, the seller did not meet its burden of proving that incorporating the limitation of liability clause would have resulted in an economic hardship. The trial court erred by not enforcing the limitation of consequential damages clause. The buyer also failed to prove lost profits with reasonable certainty.
Burden of proof is on the party on the party claiming that there was a material alteration - ALPS in this case
An issue of law is reviewable de novo
UCC §2-207 Comment 4 describes material that would alter the contract in surprise or hardship
Clause negating standard warranties, standard of cancellation - think of this like advice
Criticism of this is by Judge Posner: “hardship is a consequence not a criterion” pg. 182 (Union Carbide opinion)
Hardship that results from some surprising term
There exists a duty to read, mere ignorance is no excuse
This is the 6th contract between these parties that contains this limitation
Looking for substantial economic hardship or shift in liability that imposes some unreasonable cost
Would something be surprising to reasonable merchant behaving in a reasonable manner?
Similar to a reasonably foreseeability issue in regards to damages arising under common law
Court will look to reasonable expectations of parties
Comment 5 - lists things that are not material alterations, what the court was trying to determine was if there was a material alteration
Clauses of choice of law or choice of forum (per se material alteration - not a general rule)
CISG
CISG arts. 8(3)
In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.
To determine the intent of a party or how a reasonable person would have understood it, including if silence can be construed as acceptance consider:
Negotiations (Chateau)
Established practices between the parties
Usages
Subsequent conduct of the parties.
CISG arts. 18(1)
A statement made by or other conductof the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (Filanto)
CISG arts. 19
1) A reply to an offer which purports to be an acceptance but containsadditional, limitations or other modification is a rejection of the offer and constitutes a counter-offer
2) However, a reply to an offer which purports to be an acceptance butcontains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.
3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.
*need to read 19(1) and 19(2) together.
19(1)- adopts the mirror image rule
19(2) if the new terms do not materially alter and the offeror does not rejected them, then there is acceptance. (under UCC 2-207(2) materially alteration determines if a term comes in or not; but here the material alteration would derail acceptance). This question determines if there is acceptance or not.
19(3)- details the terms that are considered material alterations
Material alterations are defined so broadly that it is hard to imagine a change that would not be material. So this means that in almost every case an acceptance that varies the terms of the offer will be a counter-offer which will be accepted by the other party’s conduct.
Filanto v. Chilewich
FACTS
A New York enterprise agreed to sell shoes to a Russian enterprise pursuant to a master agreement that required disputes to be arbitrated in Moscow.
To fulfill the agreement, the New York enterprise entered into multiple contracts with an Italian [seller].
Pursuant to one purported contract the Italian manufacturer supplied shoes but the New York buyer made only partial payment.
The Italian [seller] sued in a New York court to recover the price.
Alleging that the contract incorporated the Russian master agreement by reference, the New York buyer sought a stay of proceedings to permit arbitration.
HELD
1) CISG governs because parties of different countries that are both signatories of the treaty (Italy v. US)
2) F did not reject new terms in a timely manner, therefore they are included in K,
3) if they had replied in a timely manner, it would have been a rejection/ counter offer, and
4) b/c they later tried to invoke one of the rules they claim to have rejected, all rules they claim to have rejected apply.
Chateau Des Charmes Wines Ltd. v. Sabate USA Inc.
FACTS
D shipped corks bought by P to him with invoices and clause about dispute resolution in French. P noticed corks tainted wine with cork flavor, sued D.
ISSUES
(1) whether the parties orally concluded a contract; and
(2) whether the forum selection clause contained in seller’s invoice modified the original terms of the contract or rather constituted a separate agreement between the parties.
HELD
CISG governs because parties of different countries that are both signatories of the treaty (Canada v. USA/France);
Oral agreement formed the contract (had this been the UCC it would have needed to be in writing)
The forum selection clause printed on every invoice does not govern agreements because it wasn’t part of the telephone agreement.
Distinguishing between Filanto and Chatreau- Acceptance in Chateau case came before the new terms surface.
