The Battle of the Forms
The fine print on run-of-the-mill documents can cause a legal mess
June 9, 2020
Read the fine print. We’ve all heard it; we all know better. But, it is essential to actually read and understand it. Purchase orders, order acknowledgements, invoices—these are often viewed as generic forms or templates but can be just as binding as any formally negotiated contract.
It is often unclear which of the terms contained in these documents truly “control” in a given transaction. And, the terms and conditions contained in the forms can even tie into other agreements or terms, creating a convoluted set of obligations one or both of the parties did not intend to create.
A typical scenario involves one party issuing a purchase order to a supplier. The supplier sends an order acknowledgement or simply fulfills the order. An invoice is submitted to the buyer; the buyer pays the supplier. These actions, together with the various terms and conditions in the documents, have formed a legally binding contract.
Usually, this does not present a problem … until a dispute arises. And that’s when it gets really tricky, really fast. This is commonly referred to as a “battle of the forms” and there is usually no clear way to determine which terms control without involving the court.
The Uniform Commercial Code addresses situations where additional or different terms are provided in a party’s acceptance or confirmation than the terms offered or agreed upon. If a dispute reaches the court, the court will examine the context, communications and actions of the involved parties in addition to the forms. It will then determine which terms constitute the agreement on a case-by-case basis under the UCC.
Through the purchase and sale process, you may unwittingly enter into an agreement for more than you would have bargained for had you entered into an express contract signed off by all parties. If the terms in the forms do not line up, the parties may be left wondering who is obligated to do what. Read the documents to determine whether anything contained in that document is at odds with what you intend to agree to. It seems obvious but, in the usual course of business, it can be easy to overlook.
Warranties present an example of the potential for a battle of the forms in the window and door industry. We all rely on warranties. In the context of a component supplier transaction, both parties should be familiar with the other’s warranty terms.
Manufacturers of fully assembled window products that purchase hardware components from a supplier, for example, want to ensure protection if the hardware component is defective. On the flip side, a supplier wants to limit its risk and exposure, too; i.e., if the terms of the supplier warranty and the manufacturer’s warranty are at odds, what happens when the manufacturer is pulled into a lawsuit that involves the supplier’s hardware?
Perhaps the supplier warranted its materials for five years, but the manufacturer provided a lifetime warranty to the consumer purchaser.
What if the manufacturer included terms and conditions in its purchase order that obligate the supplier beyond the scope of the supplier’s warranty? Both sides of this transaction should consider the implications of these terms to ensure they intended to accept the scope of the obligations they are committing to as a part of the relationship.
It is possible that these individual documents may reference other documents with a separate set of terms and conditions purporting to govern all transactions between the parties. Or, if master terms and conditions exist, the order documents may not even expressly reference the master. It is even possible that a seller’s order acknowledgement and invoice each contain conflicting terms. Each set of terms and conditions likely includes a statement that they control. So which ones really apply?
Resolving conflicts in these scenarios can become convoluted, and no one really wants to get involved in a legal battle, so what can you do to protect yourself? Read the fine print.
Your company may have a designated person or department to handle contracts and manage risk. Regardless, it is wise to establish a protocol and requirements for anyone who is authorized to enter into these purchase transactions so they can know what to look for and when to push back or seek additional input, either internally or from legal counsel.
Review the terms on each document involved in the transaction. Make sure the terms and conditions reflect your understanding of the obligations you intend to accept. If not, reach out to the other party to coordinate and modify the terms. Do not simply move forward with the transaction and deal with potential consequences down the road. These proactive steps can prevent conflict and preserve the business relationships.
Additionally, a master set of terms and conditions can potentially resolve some of the unknowns if the parties agree and the terms state that they control regardless of terms in purchase orders and invoices. The master terms and conditions can be put in place to control the transactions, so at least the parties have a common understanding of their obligations without needing to make sense of the terms across multiple documents and guess at the true scope of the agreements.
Be careful what you agree to. Know the documents at play. Read and understand the terms and conditions. Be proactive. Even if you’ve dealt with a party in previous transactions, confirm that the terms and conditions under which you’ve operated previously remain unchanged. Do not hesitate to seek legal counsel if you encounter any questions as to applicability of a term, potential impacts or enforceability.