Pop quiz on breach of contract claims
Dr. John Murray, Jr. -- Purchasing, 8/17/2004 2:00:00 AM
One of the basic defenses against a claim for breach of contract is to claim that no contract ever existed. Consider the following problems based on an alleged breach of contract and consider who should win the case and why. (The answers follow the last problem. Don't peek!)
Situation 1. The two parties sign a letter of intent stating that the seller promises to ship 1,000 units of X-35 plastic at $100 per unit to the buyer who promises to pay the total price of $100,000. The letter of intent also states that the parties intend to sign a formal document containing these terms. Are the parties bound?
Situation 2. The buyer sends a purchase order for a model 360 lathe at a price of $122,000 to the seller who ships a model 385 lathe to the buyer at the same price. Is there a contract?
Situation 3. The buyer and seller have had many deals over the last year. The buyer calls the seller to order certain goods, which the seller must procure from a third party. When the seller has made this arrangement and paid for the goods, the buyer sends its purchase order that contains a standard "boilerplate" clause stating that the purchase order must be confirmed by fax or e-mail. The seller has never bothered confirming the purchase order in the past and the buyer has paid the invoice. This time, however, the buyer notifies the seller that it is not bound to any contract because the seller never confirmed the purchase order. Is the buyer bound to a contract?
Situation 4. The buyer is interested in a certain product but not yet willing to make the purchase. The seller's agent presents a sales agreement at the buyer's office and asks the buyer to sign it saying, "I won't put this through until you give me a confirmation." With that assurance, the buyer signs the seller's sales agreement and, without any confirmation, it is processed. The buyer doesn't want the product. Is the buyer bound to a contract?
Situation 5. This time, the buyer wants to purchase the product immediately and signs the seller's sales agreement in the buyer's office but a boilerplate clause in the agreement states, "This offer will be accepted when signed by an authorized official of the seller at the seller's home office," (located 1,000 miles away). Within 30 minutes after the seller's agent has left the buyer's office, the buyer wants to cancel the deal. Is there a contract?
Answers:
Situation 1. A letter of intent will often contain a clause saying that the parties do not intend to be bound by its terms. Absent such a clause, a letter of intent may evidence a binding contract between the parties. The statement that the parties intend a formal document to be executed later is not, by itself, sufficient. The essential question is, did the parties intend to be bound before that document was signed? If the answer is yes, the formal document is simply a memorial or formal record of the contract they made by signing the letter of intent. If they never sign such a formal document, they are still bound to their contract. Letters of intent should clearly state that the parties are not bound to any of its terms until a formal document is executed.
Situation 2. Shipping the wrong model may appear to create a counteroffer that does not accept the original purchase order (offer) and, therefore, no contract may appear to be formed. A contract is formed, however, since the shipment of either conforming or non-confirming goods is an acceptance of the offer forming a contract. The contract is for the 360 model in the buyer's offer. By shipping the wrong model, the seller has simultaneously accepted the buyer's offer to supply the 360 and breached the contract by shipping the 385. If, however, the seller sends a notice that it is shipping a different model only as an accommodation to the buyer, the shipment of the 385 is a counteroffer rather than an acceptance, and no contract would be formed. There is no such notice in the problem.
Situation 3. The buyer will not be able to wriggle out of the contract by belatedly insisting that it must receive a confirmation of the purchase order. The parties have a course of dealing (past practice) indicating that the buyer doesn't care about the confirmation. In effect, the buyer has "waived" any requirement of a confirmation by its prior course of dealing.
Situation 4. The buyer has signed a document that appears to evidence a contract. There is a "parol evidence rule" that prevents the introduction of different terms based on alleged pre-contractual negotiations. That rule, however, does not apply here since the buyer is not claiming different terms than those in the document. Rather, the buyer is claiming that no contract ever existed because a condition to the contract taking effect was the buyer's O.K. That evidence may be introduced to show that no contract ever existed.
Situation 5. The seller may be hoisted on its own petard through the boilerplate clause. If an authorized official at the home office has not yet signed the sales agreement, no contract exists. Though a buyer who signs such a document without reading them may believe he has just made a contract, the buyer's signature did not create a contract. It only created an offer because the document itself states that before it becomes a contract, it must be signed by an official at the home office. The party making the offer (the offeror) is the master of the offer. The offer can require a particular manner of acceptance. Though the buyer may not have known it, he made an offer that had to be accepted through the signature of an official at the seller's home office. The buyer may simply call the home office and revoke (withdraw) the offer before the document is signed.
Where’s the money?
08/07/2007Operational Buyer
09/11/2007Just what are the terms of your contract?
12/08/2004The 'silent' purchase order
01/13/1999
Now Playing: 