Pop quiz
Dr. John Murray, Jr. -- Purchasing, 6/3/2004 2:00:00 AM
Time for a pop quiz on the legal aspects of contracts, so take out your pencil and keep your eyes on your own paper. Consider the following: Bill Green is the purchasing manager for Consolidated Industries, Inc. of Austin, Texas, a manufacturer of various products. Review each of the following six situations and provide an analysis of their legal effects. (The analyses appear after the last question. Don't peek!)
Situation 1. Bill directed the issuance of a purchase order to the Omega Corporation of Newark, N.J. for equipment priced at $50,000. Omega's acknowledgment stated that it would ship the equipment for $50,000. The acknowledgment contained clauses disclaiming warranties and limiting the buyer's remedies. It also stated, "This acceptance is expressly conditioned on buyer's assent to any different or additional terms contained in this acknowledgment." What are the legal effects of this situation?
Situation 2. Assume the same facts with one change: Omega has its principal place of business and manufacturing plant in Frankfurt, Germany. How do the legal effects change?
Situation 3. Assume that Omega is, again, a New Jersey corporation, but assume that Bill Green telephoned the order for the equipment and followed up with a purchase order mailed to Omega. Omega did not respond with any acknowledgment. What are the legal issues here?
Situation 4. Assume the same facts except that Bill e-mailed a purchase order to Omega at its New Jersey offices. How does that change the situation?
Situation 5. Assume that Bill had arranged for a negotiated contract for the equipment with Omega in New Jersey. Before the parties signed the contract, Bill asked about a fail-safe feature on the equipment that he had seen on a competitor's product. The Omega sales manager assured Bill that the Omega equipment contained the fail-safe feature. The parties then proceeded to sign the contract that did not mention the fail-safe feature. When the equipment was installed, Bill was informed that it lacked the fail-safe feature. What are his legal options?
Situation 6. Assume the same facts except that Omega is a Frankfurt, Germany corporation.
Analyses
Analysis of situation 1. The Omega acknowledgment will be construed as a counter offer because of the language in the quoted sentence, "This acceptance is expressly conditioned on ..." Bill should understand that there is no contract via the exchange of the purchase order and acknowledgment forms. Omega has no contractual obligation to ship the equipment nor does Consolidated have an obligation to accept it if it is shipped. Notwithstanding such exchanges of forms, however, it is common for the seller to ship the goods after sending such an acknowledgment. If Omega delivers the equipment and Consolidated accepts it, the question is, what are the terms of the contract in this "battle of the forms?" Under the Uniform Commercial Code (UCC), the buyer (Consolidated) does not accept the seller's terms by accepting the goods. Rather, there is a contract by conduct—the seller's delivery and the buyer's acceptance. The terms of this contract by conduct consist of the matching terms on the purchase order and acknowledgment forms such as the description of the product and the price. The non-matching terms (implied warranty vs. no warranty, buyer's normal remedies vs. limitation of remedies) are excised leaving gaps to be filled by the UCC, which favors the buyer. The buyer gets its implied warranties and all UCC remedies assuming, again, that the seller ships the product and the buyer accepts it.
Analysis of situation 2. The UCC does not apply where two parties have their principal places of business in countries governed by the United Nations Convention on the International Sale of Goods (CISG). The United States and Germany are two of the 64 nations governed by CISG. Under CISG, the seller's acknowledgment containing different or additional terms is a counteroffer and no contract is formed. When the seller ships the product and the buyer accepts it, however, the buyer is accepting the seller's counteroffer terms. In effect, the seller wins the "battle of the forms."
Analysis of situation 3. Oral (telephone) contracts do not satisfy the requirement that any contract for the sale of goods priced at $500 or more must be evidenced in writing to be signed by the party to be charged. Omega signed nothing. There is, however, an exception: between businesses or merchants like Consolidated and Omega, where one party sends a confirmation of an oral contract to another and the other does not object to it within 10 days of receiving it, the writing is effective against the non-signing party (Omega). Consolidated would still bear the burden of proving that a contract was made, but the writing requirement is removed by Consolidated's confirmation. The confirmation should, however, confirm that a contract was made, not merely an offer by Consolidated. On their face, purchase orders may appear to be mere offers. The purchase order should state that it is confirming a "contract" made by telephone on a certain date.
Analysis of situation 4. Under the Uniform Electronic Transactions Act (UETA) which is now the law in more than 40 states (including Texas and New Jersey), the e-mail would be an effective "record" to satisfy the writing requirement. Similarly, it would be effective under the federal Electronic Signatures in Global and National Commerce Act.
Analysis of situation 5. The statement by the Omega official would be an express warranty concerning the fail-safe feature. Because it was made prior to signing the contract, however, evidence of that statement may be inadmissible under what lawyers call the parol evidence rule which is designed to avoid allegations of additional terms prior to the execution of the contract where the parties have taken the time and trouble to reduce the final agreement to writing.
Analysis of situation 6. Here again, because the parties have their principal places of business in different CISG countries, CISG applies rather than the domestic law of either country. There is no parol evidence rule under CISG. The evidence of the parties' negotiations concerning the fail-safe feature would be admissible. Beyond the domestic (UCC) law governing the purchase and sale of goods, there are a number of other distinctions between CISG and the UCC which professional buyers of goods should understand in any international transaction. Buyers should not shrink from discussing these matters with their lawyers. An ounce of legal protection in advance is worth many pounds of the distress of litigation.
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