Buying and selling goods or services are basic activities that underpin daily business operations. It is important to understand that even the most basic transaction created by a form purchase order and order acknowledgement is in fact a legal contract. The terms a company includes, or does not include, in its standard purchase order or acknowledgement forms have true legal meaning and can be the determining factor in a future dispute.
Article 2 of the Uniform Commercial Code (UCC) typically governs the sale of goods domestically. On the other hand, a transaction for services is typically governed by common law and will be addressed in a separate article. If a transaction is a mix of goods and services, the transaction is categorized based on which of the two, goods or services, is the predominant factor in the transaction. UCC Article 2 encourages contract formation and allows for the smooth flow of business transactions. All states, except for Louisiana, have adopted a version of UCC Article 2. It should be noted that there are some subtle differences in each states’ version of UCC Article 2 that can make a profound difference in a future dispute between parties. One example of the differences is that North Carolina is a “first shot” jurisdiction as opposed to a “last shot” jurisdiction in the battle of forms discussed below.
It is common practice that companies do not negotiate and agree to every term of a transaction when the order is for “standard” items, lower value parts, or items purchased regularly in the ordinary course of business. In these situations, it is impractical to engage legal counsel to review the other party’s standard forms or have your legal counsel customize your own standard forms for a particular transaction. Instead, the purchaser will send the supplier an order referencing the purchaser’s standard terms and conditions of purchase. The supplier will then confirm the order and reference the supplier’s standard terms and conditions of sale. It is very unlikely that the terms of the transaction referenced in each party’s standard terms and conditions will match each other. The differences between the standard terms and conditions creates, what is often referred to as, the “battle of the forms” in a subsequent dispute.
In a battle of the forms dispute under UCC Article 2: (1) additional terms that are not material in each party’s forms will be read into the contract if they are not contradicted by the forms of the other party; (2) any material alterations are not accepted; and (3) contradictory terms between the forms are “knocked out” of the contract and replaced by UCC Article 2 gap filler provisions. While this process may seem straightforward, in practice the opposing party can exploit it in a dispute to create questions of fact in order to delay an unfavorable legal outcome or as leverage to obtain a more favorable settlement offer.
A business can avoid, or at least minimize, many of the pitfalls from disputes related to the purchase of goods by: (a) ensuring that the price and quantity of goods is clearly defined; (b) address whether partial shipments of goods are allowed; (c) define what specifications and standards (including 3rd party standards) the goods must meet; and (d) especially for regulated markets, address what, if any, documentation is required with the goods. Another important protection is for a business to have standard terms of conditions of purchase as well as terms and conditions of sale that are customized for their business. It is imperative that a business forward
its vendors and suppliers with the business’ standard terms so that these terms can be applied to any future battle of the forms dispute. Without standard terms in a battle of the forms dispute, the business takes the risk of being subjected to the other party’s standard terms since the business has no standard terms to contradict the other party’s. Typical issues and items to address in your standard terms and conditions of sale/purchase will be addressed in a subsequent article.
Businesses contract for the sale of goods on a regular basis and often do not have the time or resources to review the associated risks in detail. Through a combination of working to ensure that key information is addressed in purchase orders/order acknowledgments and creating customized standard terms and conditions of purchase and sale, a business can dramatically reduce the risks associated with a potential future dispute for the purchase and sale of goods.
The information contained in this article, and in material referenced within, is intended for informational and educational purposes only, and does not constitute legal, financial, accounting, medical or other professional advice.