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Manufacturer’s Corner: Forming the Contract

In the introduction to this column, we discussed in very broad terms how two people can form a contract for the sale of goods: one person offers to buy or sell, and the other accepts the offer. Simple!

But that isn’t the way business usually happens, and when it does, things go wrong. Consider this far more common scenario: your customer issues you a purchase order, you issue an invoice, you deliver product, you receive payment. If everything goes smoothly, it really can be (and often is) this easy.

Say there is a problem though.  You have an issue with your supplier and can’t get the product out to your customer as you quickly as you thought. Or your customer isn’t paying when you expected. Now we need to know what the terms of the contract are, and that can be tricky.

The first step is to look at that purchase order you received. That’s typically considered an offer to buy from you, which you can accept or decline. For the most part, we look at the purchase order to find out what the customer wants to buy, but it also invariably includes language about terms of sale (if not on the front, check the back). Those terms – be they a net-60 payment provision or a time-is-of-the-essence clause – are part of your customer’s offer to buy.

Now here’s where contracts for the sale of goods are significantly different from others. The general rule for most contracts is that an offer must be accepted in full without varying any terms, or it is deemed rejected (your varying “acceptance” is considered a counteroffer). That’s not the case in sale-of-goods contracts though – the acceptance can include additional or different terms from the offer, and still serve as an acceptance.[1]

So, when you accept the offer set out on the purchase order by sending your invoice to the customer, you are not only accepting their offer, but you are probably proposing different or additional terms.  Your invoice, like your customer’s purchase order, includes contract language too (which, by the way, should be reviewed regularly to ensure it is appropriate for your company and your industry). And it’s unlikely that your contract language matches that in the purchase order.

The different terms are usually ineffective, and the original terms prevail. [2] The additional terms are treated as proposed additions which, provided your customer is someone who regularly deals in goods of the kind at issue, [3] become part of the contract unless: (a) their purchase order limited your acceptance to the terms of the offer; (b) the additional terms materially alter the contract; or (c) your customer already notified you of their non-acceptance of those terms, or does so soon after receiving your invoice.  In those instances, the proposed additions do not become part of the contract, unless the buyer manifests an intent to accept them.

Because this is a blog post, it glosses over a lot of important issues. But it serves to highlight a few critical points. First, look at your invoice terms regularly to ensure that they serve your needs. I’ve written elsewhere that your business is your business and not anybody else’s, so your terms should be too. Second, look at the purchase order you receive and review its terms. If any are unacceptable to you, make sure you address them with your buyer, preferably in writing. Although you may be able to avoid some of them merely by making your acceptance conditional on the buyer accepting your terms, you may not be able to avoid all of them. Third, understand common terms in contracts for sales of goods, and know which ones are important to you and which are not. Some are worth a fight – others you may let go to preserve a customer relationship.

Stay tuned for our next installment. We will address common terms that often are deemed to materially alter a contract if proposed in an invoice: warranty disclaimers.

[1] Of course, discerning which terms are additional terms and which are different terms can be a challenge in and of itself.

[2] Different courts reach this result in different ways. It’s important to note, though, that this is not always the case. Some courts hold that the different terms “knock each other out” and the gap-filler provisions in the UCC control instead. This unsatisfactory approach ensures that neither party gets exactly what they were expecting.

[3] This entry assumes your customer regularly deals in the goods, because it assumes that your customer was the type to send a purchase order.  When dealing with a typical consumer, you presumably control the contract terms much better.  Note, however, that just because a buyer is sophisticated generally, it does not mean that the buyer regularly deals in the goods.  In that situation, you should require express consent to the proposed modifications.