Just what are the terms of your contract?
Dr. John Murray, Jr. -- Purchasing, 12/9/2004 2:00:00 AM
When a dispute arises over a contract, the parties invariably rush to pour over the terms of the contract and ask: "Exactly what are my legal obligations?"
But just what is the contract? Although there is a tendency to think of "the contract" as the document signed by the parties—the contract is not the document. The document is simply evidence of the parties' agreement. The written evidence of the contract may be represented by one document that's anywhere from a page to hundreds of pages, or it may found in various documents—purchase orders, acknowledgments, change orders, letters, e-mails, faxes or a variety of other documents. Even electronic messages such as voicemails may be evidence of the contract or some modification of the contract. And, beyond the written or electronic records of the agreement, any number of discussions, conversations or even the conduct of the parties may also be entered as evidence of the agreement.
Keep in mind that when the courts look at an agreement that two parties have made, they will look at whatever forms of communication were used.
A typical transaction may begin with a buyer sending a request for proposal (RFP). The seller's response will usually be a quote. If the buyer reacts to the quote with a purchase order, the buyer may assume that it is forming a contract through its purchase order. But, unless the quote was an "offer," the purchase order will be an offer which must be accepted by the seller to form the contract. The seller may respond to the purchase order with an acknowledgment that is a definite expression of acceptance.
The contract would be formed as soon as that acceptance is mailed—even if it was lost in the mail and never received. If the acknowledgment otherwise appears to be an acceptance of the basic terms of the purchase order, it would form a contract, even though it contained some boilerplate terms that were additional to or different from the terms of the buyer's purchase order. This would be a "battle of the forms" case that would require the court to determine the effect of the seller's different or additional terms.
Other issues
Suppose the parties had discussed the deal before the forms were exchanged and the seller allegedly made statements about certain aspects of the product to be delivered, but neither the purchase order nor the acknowledgment form contained those statements. Suppose, for example, that the seller had mentioned the production capacity of the product and the product failed to meet that specification. Whether that evidence would be admissible would require the court to decide whether the parties intended to be bound only by what is contained in their documents. A negotiated contract will often contain a clause stating that the parties intend to be bound only by what is contained within the document. This is called a "merger" or "integration" clause. A buyer who signs a contract containing such a clause should recognize that courts will enforce such clauses and refuse to admit any evidence of additional terms that one party alleges the other party agreed to prior to the formation of the contract.
Another recurring issue in contract disputes is the meaning of certain words in the contract. For example, even though the price of the product in one contract was clearly stated as $175,000, there was a dispute between a U.S. and Canadian corporation as to whether the parties meant U.S. dollars or Canadian dollars. Where another contract specified meat products to register no less than 50% protein, one party claimed that 50% meant anything from 49.5%, based on the claim that that was how it was understood in the trade.
In addition, the parties may have dealt with each other on a regular basis in the past before entering into a new contract with terms identical to past contracts. One of the terms required the buyer to make monthly payments no later than the 15th of every month, but the buyer often made payments later than the 15th with no objection from the seller. A court would hear evidence of the prior course of dealing to determine whether late payments were a breach since it was never a breach in the past. Or suppose the parties have never dealt with each other in the past and the contract required payments by the 15th of every month, but for 10 consecutive months, the seller had accepted payments after the 15th of each month with no objection. Here, a court might be persuaded that the parties had modified the contract—not by words, but by their conduct.
The most important advice about contracts? It is far better to have legal advice before the contract is made rather than be forced to have legal representation in expensive litigation where two results are possible and one of them is distressing.
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