The 'silent' purchase order
By John Murray -- Purchasing, 1/14/1999
A recent case raises red flags in the continuing "battle of the forms." To understand the importance of this case, a quick review is in order.The buyer sends a purchase order for certain goods and the seller's response appears to accept this offer but also contains fine print ("boilerplate") clauses that limit the seller's liability to the return of the purchase price. Prior to the enactment of the Uniform Commercial Code throughout the country thirty to forty years ago, the seller's response would be a counter offer and no contract would exist. If, however, the seller shipped the goods and the buyer accepted them, the buyer would be bound by the seller's terms (including the limitation of liability clause) because the seller fired the "last shot" in the "battle of the forms."
Enter the Uniform Commercial Code (UCC) that had become widely enacted by state legislatures by the late 1960s. Under the identical facts, the seller's response is an acceptance of the buyer's offer forming a contract and the seller's limitation of liability to a return of the purchase price would not become part of the contract. The result is reversed: the buyer wins because the additional term in the seller's response would typically be excised as a "material alteration" of the terms of the buyer's purchase order (offer).
The UCC contains implied terms (sometimes called "default" terms) that favor the buyer. Among others, there is an implied warranty of merchantability and buyer damages include all losses caused by the seller's breach of contract. If the purchase order is silent concerning these implied terms and seller sends an acknowledgment or an invoice with different or additional terms, such terms should not become part of the contract if they "materially alter" the terms of the purchase order even though the buyer's purchase order was silent on liability. A recent case suggests some problems with this analysis.
Chipco International Ltd. manufactures gambling chips used in casinos made from polyester resin. Chipco decided to purchase its resin from a new supplier, Adell Plastics Inc. It manufactured millions of gambling chips using the new resin but its customers began to complain about the quality of the chips. Chipco was forced to replace large numbers of its chips at considerable expense. Chipco claimed the resin was the problem and sued Adell. Chipco's purchase order was silent concerning warranties or damages. Adell's response to the purchase order, however, contained a clause limiting Adell's liability to the return of the purchase price.
Instead of relying upon the UCC provision stating that material alterations do not become part of the contract between businesses (merchants), Adell relied upon another clause in the UCC "battle of the forms" section. That clause allows a buyer like Chipco to include a clause in its purchase order that limits acceptance to the terms of the purchase order and notifies the seller of buyer's objection to any different or additional terms in the seller's response to the offer. Even though Chipco did not include such a clause in its purchase order, it argued that the purchase order should be construed to object to Adell's different liability clause because the purchase order impliedly contained the normal UCC remedy of full damages to the buyer. By reading that implied term into the purchase order, Chipco contended that it had, in effect, given notice of objection to any different term in Adell's response.
The court rejected this argument and overturned a lower court holding granting Chipco damages amounting to more than $884,000. If Chipco had argued and proven that the Adell clause limiting liability to the return of the purchase price was a "material alteration" of the terms of the offer, Chipco would have been $884,000 dollars richer. Most important, if Chipco had included certain clauses in its purchase order, it would have won.
Instead of a "silent" PO, the buyer should take advantage of certain UCC sections by inserting certain clauses:
First, it is desirable for a buyer to include a clause in its purchase order expressly limiting acceptance to the terms of the purchase order and expressly objecting to any different or additional terms in any response to the purchase order. The UCC states that such a clause will negate any different or additional term in the seller's response to the purchase order, regardless of whether the seller's term is material or immaterial.
Second, the purchase order should contain another clause stating that the buyer reserves all warranty and remedy (damages) protection afforded under the Uniform Commercial Code. There is some overkill in such a clause because it is not essential to expressly state that a buyer is entitled to the protection of the powerful implied warranty of merchantability. Nonetheless, a court may not be willing to interpret a silent purchase order as including the buyer's normal right to full damages. Such a clause removes any doubt.
Third, while the UCC is pretty uniform throughout the states, to avoid the possibility that a particular state's version of the Code would not provide the buyer with maximum protection, it is desirable to include a clause indicating the contract will be governed by the UCC as enacted in a particular state, making certain that the chosen state has a reasonable relationship with the transaction.
While Chipco may have prevailed in this case even without such clauses had it relied upon the UCC provision concerning material alterations, it would have clearly prevailed if it had included the suggested clauses. Such clauses can be inserted without unduly lengthening the purchase order. The bottom line is that the UCC "battle of the forms" section is one of the most complex and controversial in the entire Code. The buyer should take advantage of the maximum protection allowed under the UCC by including clauses that will make it much easier for a court to find for the buyer.
Dr. John E. Murray Jr. is president of Duquesne University and Professor of Law at Duquesne University School of Law.
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