UCC fills gap when boilerplates conflict
Dr. John Murray, Jr. -- Purchasing, 7/15/2004 2:00:00 AM
To purchase equipment at a certain price, a buyer typically sends a collection of forms containing its fine print (boilerplate) terms to the seller. The seller in turn responds with its boilerplate form indicating that it wants to sell the desired equipment to the buyer at the price the buyer is willing to pay. The forms often agree with respect to the description of the equipment, performance specifications and the price, but a comparison of the boilerplate clauses in the exchanged printed forms, however, may reveal a conflict which often gets overlooked.
It is generally conceded that the parties do not read each other's boilerplates. And if they do happen to read it, they may not understand it. Indeed, it is likely that the parties do not understand the boilerplate in their own forms, much less the other party's form. They tell themselves the "lawyer stuff" is there to protect each party from trouble. The lawyers are paid to draft forms to keep their clients out of trouble. If, however, lawyers on each side are drafting what they hope will be ironclad protection for their clients and their boilerplates conflict, somebody is going to lose.
A recent illustration of this issue came when the Goodyear Corp. sent a request for proposal (RFP) to Dynamic Air Corp. for a carbon black pneumatic conveyor system. Goodyear's RFP was 31 pages long and contained detailed specifications. The RFP contained a clause warranting the equipment for one year. Dynamic came back with a 30-page RFP including price and a separate document containing Dynamic's terms and conditions, which included a clause stating that Dynamic would repair or replace any defective part in the system for one year, but Dynamic would not be liable for any "consequential damages."
In response to this RFP, Goodyear sent its purchase order that agreed with the terms in the Dynamic RFP except that the purchase order was subject to all of Goodyear's terms and conditions which included consequential damages. Dynamic responded to the purchase order with a letter stating that Goodyear's purchase order terms and conditions were "superceded" by Dynamic's terms and conditions which excluded consequential damages.
The conveyor system was purchased and installed and malfunctioned causing a particular grade of carbon black to be conveyed to the wrong silo, contaminating the contents of that silo. Dynamic replaced the defective part, but the malfunction required Goodyear to scrap tires that failed to meet specifications resulting in consequential damages of $2 million.
Consider the exchange of forms between these parties. Each party insisted on its own terms and conditions. In effect, each party stated that with respect to the boilerplate terms in their respective forms, it was either "my way or the highway." The boilerplate terms conflicted and the parties did not discuss this conflict. Instead, Dynamic shipped and installed the equipment and Goodyear began to use the equipment and the resulting malfunction cost Goodyear $2 million.
The court found that the exchange of forms, alone, did not create a contract. The parties, however, proceeded to act as if they had a contract. Contracts can be formed by conduct even though the exchanged forms do not create a contract. What are the terms of this contract by conduct? Though the exchanged writings did not create a contract, the court reviews those forms to discover the terms that match. The matching terms included the specifications and the price. With respect to liability for consequential damages, however, the forms were in conflict, so the conflicting terms are discarded by the court. Neither Goodyear's statement that the contract includes consequential damages nor Dynamic's statement that such damages are excluded become part of the contract. It is as if those clauses never existed.
This leaves a void or gap to be filled. The gap is filled under the law that governs contracts for the sale of goods, the Uniform Commercial Code (UCC), which allows the buyer to recover consequential damages. The court in this case filled the gap with this provision from the UCC, deciding that Goodyear was entitled to recover $2 million in consequential damages. The UCC contains implied or "default" terms that are included in every contract for the sale of goods unless the parties agree that such terms are not part of their contract. There are implied warranties or merchantability and fitness for a particular purpose as well as remedies for breach such as the cost or repair and the recovery of consequential damages by buyers.
If the parties agree that implied warranties will be disclaimed or that the seller will only be liable for repairing or replacing defective parts but will not be liable for consequential damages, courts will honor that contract. Where, however, the parties' own forms expressly conflict on these terms but they proceed to perform as if they had a contract (a contract by conduct), the court is faced with the necessity resolving that conflict. Under the current interpretation of the governing law (the UCC), Goodyear protected itself very effectively.
Some buyers may assume that they have ample protection under implied terms of the UCC and not bother to express the implied terms in a purchase order. The answer is provided by this case. Goodyear's purchase order expressly stated that it was insisting on those UCC terms that gave it protection. As a result, any conflicting term in the seller's form is thereby "knocked out." Indeed, lawyers often refer to the "knockout" view. The moral of the story is, your purchase order should expressly state that the implied warranties and remedies of the UCC are included in the purchase order. While the buyer's lawyer should also include other important statements, the express inclusion of protective provisions of the UCC can be the difference allowing the recovery of losses such as two million dollars that Goodyear was entitled to recover.
Just what are the terms of your contract?
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