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Manufacturer’s Corner: Merchants, Battles of the Forms, and Forum-Selection Clauses

If you read this column with any regularity, it will not surprise you that I was thrilled to read this introduction to a recent court opinion: “The motions to dismiss in this case present a difficult legal issue, as if a civil procedure professor and a Uniform Commercial Code professor conspired on a law school exam question[.]”[1]  And boy does the opinion deliver![2]  Let’s use it as a springboard to discuss some important contract formation questions manufacturers should keep in mind.  But, before beginning, I feel compelled to commend Judge Lange (and/or his clerks) on his well-reasoned opinion.  I’ve been a bit hard on the courts in this column, so it only seems fair to give praise when due.

So here’s the short version of the story.  A company called Quality Wood wanted to buy a used laser it could use in its manufacture of office and store fixtures.  It had never owned such a laser before.  So it called a company called Ex-Factory, which sold woodworking machinery and industrial lasers.  Ex-Factory, in turn, contacted Lasercare, Inc. to find a suitable laser.  Ex-Factory agreed to buy a laser from Lasercare, then sell it to Quality Wood.  Apparently the laser didn’t work or something, but believe it or not that’s not really relevant for our purposes.

Quality Wood and Ex-Factory reached their agreement orally.  Ex-Factory later sent an invoice and accompanying terms and conditions.  Quality Wood and Ex-Factory had limited prior dealings, but they included substantially similar written terms and conditions.  As especially pertinent here, the invoice stated that “[j]urisdiction and venue for actions arising out of this transaction shall be Mecklenburg County, North Carolina,” and the terms and conditions stated that the parties “irrevocably submit to the jurisdiction of the Mecklenburg County, North Carolina (sic) for the purposes of any suit, action, or other proceeding arising out of this agreement.”

Quality Wood sued Ex-Factory and Lasercare in federal court in South Dakota.  One or both of the defendants moved to dismiss the case, or have it transferred to North Carolina, arguing that the contract between Quality Wood and Ex-Factory required that any litigation be brought in North Carolina.  This, of course, is what makes the case interesting: was there an enforceable venue provision in the parties’ contract?

As a threshold matter, the Court kind of assumed that if the venue provisions in the invoice and terms and conditions were enforceable, then suit could be brought only in North Carolina.  Maybe the parties didn’t raise the issue, but I’m not so sure those provisions actually call for venue exclusively in North Carolina.  I guess the “shall” in the invoice could be read that way, but venue can be proper in multiple places, so merely providing that venue is proper in one place doesn’t by itself exclude the possibility that venue would be proper elsewhere.[3]  Ex-Factory’s invoice and terms and conditions could use some work.  Check yours to see if they have the same problem.

Anyway, Quality Wood said the venue provisions weren’t part of its contract with Ex-Factory.  Ex-Factory’s attorneys, evidently quite fluent in the UCC, said “oh yes they are, because you’re a merchant, Quality Wood, and the UCC provides that terms in a confirming memorandum like an invoice are treated as proposals to modify the contract which, in a contract between merchants, are deemed accepted if not timely rejected.”  And they were right – that’s the rule.

So Quality Wood found itself in a bit of a pickle, but thought it found a way out.  “No,” its attorneys said, “Quality Wood is not a ‘merchant’ with respect to lasers and, even if it was, the venue provisions materially alter the contract such that the general rule about proposed terms being accepted if not rejected doesn’t apply.”  And they were sort of right too – those are indeed the rules.[4]

The problem with Quality Wood’s argument, the Court found, was that it was a merchant with respect to this transaction, and that the venue provisions didn’t materially alter the contract.  This is where the opinion gets interesting.[5]

Let’s start with the merchant thing.  The shorthand definition that I’ve used in past installments of this column is that a party is a merchant with respect to goods if it regularly deals in goods of that kind.  That’s a useful and common shorthand definition (and the mechanism by which one obtains merchant status 99.47%[6] of the time), and it definitely suggests that Quality Wood is not a merchant in lasers, because it had never bought, sold, or owned a laser before.  But that’s not the whole definition!  Specifically, the UCC provides that a company is a merchant if it “holds [itself] out as having knowledge or skill peculiar to the practices or goods involved in the transaction.”  (Emphasis added).  Although Quality Wood did not ordinarily deal in lasers, it was knowledgeable in commercial transactions generally, as evidenced by its prior dealings with Ex-Factory.  Thus, the Court concluded Quality Wood was a merchant for purposes of this transaction.

With that issue out of the way, the Court turned to whether the venue provision “materially altered” the contract such that it would not bind Quality Wood notwithstanding its merchant status.  The Court first acknowledged that different courts have reached different conclusions on the issue.  It then turned to the policies underpinning the “materially altered” rule, namely avoidance of hardship or surprise.  The Court found that there was no risk of hardship or surprise because (a) Ex-Factory tendered its terms and conditions the day after the parties struck their oral deal, at which point no performance had been rendered by either party, (b) the venue provision appeared conspicuously on the face of the one-page terms and conditions, and (c) Quality Wood inspected the laser, made complete payment on the laser, and never objected to the venue provision or acted to rescind the contract as a whole, notwithstanding that the invoice including the venue provision was twice tendered to Quality Wood.  Notably, however, the Court was careful to observe that it made its finding only under “the unique circumstances of this situation.”

This case presents several issues for your careful consideration.  First, take a hard look at your forum-selection clause and be sure it specifies exclusive venue.  Ex-Factory may have dodged a bullet on that one, but you might not.  Second, don’t assume that you’re not a merchant simply because you don’t typically deal in the type of goods at issue in a contract.  If you’re on the buy-side, you should simply consider yourself a merchant and conduct yourself accordingly.[7]  Third, your purchase order should specify that it may only be accepted on the terms set forth therein, and that any additional or varying terms suggested by your counterparty are rejected.  That may not work in many instances, but it’s a layer of protection you shouldn’t neglect.  It should go without saying that, yes, you should send a purchase order that includes your terms and conditions.  Fourth, while the Court here found the venue provision didn’t materially alter the contract, the Court was also careful to limit its holding to the facts presented, and other courts have reached the opposite conclusion.  If a venue provision is important to you – or any provision, really – be sure you can document that it was called to the attention of your counterparty in a timely manner.

[1] It’s actually not so recent anymore.  I’ve had this post in the hopper for a long time now.  Press of business, etc.  The case is Quality Wood Designs, Inc. v. Ex-Factory, Inc., 2014 WL 4168463 (D. S.D. Aug. 20, 2014).

[2] My excitement about this goes a long way toward explaining why I’m not invited to more parties.

[3] This is an argument I might make anyway.  I’m not saying it’s necessarily right.

[4] Incidentally, Quality Wood could have helped itself out a lot by sending a purchase order that stated its offer to purchase was limited only to the stated terms, and that any other proposed terms were to be deemed rejected.  But, oral contract, so that didn’t happen.  Write stuff down.

[5] Because this column is for manufacturers, this post really focuses on the contract issues in the opinion.  BUT!  If you happen to be a litigator, do yourself a favor and read the Court’s discussion about the underlying choice-of-law issues and the burden of persuasion on whether proposed terms materially alter the contract. 

[6] That’s a number I made up and wrote down.

[7] If you’re on the sell-side, you’re obviously a merchant, come on.