How to lose over $4 million
By Dr. John Murray, Jr. -- Purchasing, 6/17/1999 2:00:00 AM
The governing law in a contract for the sale of goods is the Uniform Commercial Code (UCC) which has been enacted throughout the country. The UCC, however, does not apply if the contract is one for services such as a repair contract or an employment contract. The differences between the UCC and general contract law dealing with services can be dramatic as seen in a recent case.
When a cruise ship operated by Princess Cruises (Princess) needed routine inspection and repair services, Princess requested that General Electric (GE)--the company that made the ship's main turbines--perform the services and provide any necessary new parts. Princess sent a purchase order proposing a contract price of $260,000. The PO indicated that Princess intended it to be an offer containing terms and conditions that could not be changed by GE and further stating that GE would provide a warranty of workmanlike quality and fitness. On the same day it received the PO, GE faxed a fixed price quotation to Princess which provided a more detailed work description than the PO and included a parts and materials list with a total price of $201,888. After reviewing the Princess PO more carefully, however, GE discovered that Princess had requested work that was not part of GE's price quotation causing it to send another quotation at a price of $231,925.
Both of GE's price quotations contained terms different from the Princess PO. The quotation limited GE's liability to repair or replacement of any defective goods or damaged equipment resulting from defective service and this repair and replacement warranty was in place of any written, oral, or implied warranty. There was also a limitation of GE's liability to the greater of $5,000 or the total contract price, but GE would not be liable for any consequential damages according to its quotation. During a phone conversation a few days later, Princess agreed to the price in GE's quotation. GE followed this conversation with a letter confirming the deal on all of GE's terms. Princess never expressed agreement to the other terms in the GE quotation.
GE performed services which Princess alleged to be defective causing the cancellation of a cruise and other damages. Princess claimed that it had suffered losses of more than $4.5 million due to GE's failure to perform the contract. The lower court decided to apply the principles of the UCC to this contract and instructed the jury that this was a UCC "battle of the forms" case in which the PO of Princess should prevail, thereby including UCC warranties such as the implied warranty of merchantability, the implied warranty of fitness for a particular purpose, and all of the UCC rights to recover damages including consequential damages. The jury returned the hefty verdict of just over $4.5 million for Princess. GE appealed on the ground that the UCC should not apply to this contract because it dealt with services rather than goods.
The court of appeals noted that the parties had formed a maritime contract governed by admiralty law to which the principles of the UCC would apply if the contract were one for the sale of goods. While there were some "goods" involved in this contract (replacement parts), if the predominant purpose of the contract was the rendition of services (labor), the contract would be one for services to which the UCC would not apply. Rather, the general law of contracts (called the "common law") would apply and produce a quite different result.
There was no question that the exchange of the Princess PO and the two price quotations from GE did not form a contract. This would be true under either the UCC or common law since the price in the PO was $260,000 and the price in the final GE quotation was $231,925. Princess did agree to the GE price, but not to the other terms in the GE quotation. Under the UCC, however, where the exchanged forms do not form a contract but the parties proceed to perform as if there is a contract, the result is a contract by conduct. Where such a contract by conduct occurs under the UCC, the terms of the contract include those on which the parties had agreed (the work to be performed and the price) but the non-matching terms in their respective PO and quotation forms do not become part of the contract. The non-matching terms are rejected and UCC terms are substituted--the warranty protection and consequential damages that favor the buyer. Thus, if the UCC applied, Princess would have all of the UCC protection and recover more than $4.5 million.
While the GE quotation would be viewed as a counter offer under either the UCC or the common law because the price in the quotation was different from the Princess offer, unlike a UCC counter offer which requires express agreement to all of its terms, a common law counter offer, including all of its terms, can be accepted by the conduct of the original offeror (Princess)--allowing GE to do the work--and Princess would be stuck with all of the terms of the counter offer.
Here, GE's counter offer in its final price quotation with all of the terms favoring GE prevailed in the "battle of the forms" because the court held that the contract was predominantly one for services and not for the sale of goods. Therefore, the contract rules of the common law prevailed instead of the rules of the UCC that so heavily favor the buyer. As a result, the court of appeals reversed the decision of the lower court which had awarded Princess more than $4.5 million. Instead, damages were restricted to the contract price as mandated by GE's quotation which limited the maximum damages to the contract price. Instead of recovering more than $4.5 million, Princess recovered $231,925 because the common law of contracts rules applied to this contract for services rather than the rules of the UCC which apply only to contracts for the sale of goods.
The moral of the story is to be aware of which law applies to your particular contract. While the differences between the UCC and the common law of contracts can be dramatic as in this case, typically the differences between the UCC and the common law are not dramatic.
A buyer should, however, be aware of other dramatic differences in the applicable law. For example, a red flag should pop up in a contract between a U.S. company and a company with its principal place of business in another country. In such a situation, even a contract for the sale of goods may demonstrate major differences between the UCC and the applicable law. If, for example, your company makes a contract for the sale of goods with a Canadian or Mexican company or a company in 47 other countries including such major trading nations as Germany, China, France, Italy or many others, the governing law is not the UCC. It is the United Nations Convention on Contracts for the International Sale of Goods (cisg) which became effective in the United States on January 1, 1988. cisg preempts the UCC. Among many differences between the UCC and cisg, a "battle of the forms" case will favor the seller rather than the buyer since cisg applies principles almost identical to the common-law approach which favored GE. More than ever before, it is important for buyers to know which law will apply to a particular transaction if trouble occurs.
Dr. John E. Murray Jr. is president of Duquesne University and Professor of Law at Duquesne University School of Law.
GE to build hybrid battery plant in New York
05/12/2009What the updated UCC means to you
05/05/2004
Now Playing: 