A tremendous amount of business is conducted via purchase orders without signed contracts. Overall, this is good for commerce because business doesn’t have to screech to a halt every time a company needs to buy something, to give the lawyers time to work out the legal terms. But if there’s no signed contract, how do you know when a contract has been formed, and how do you know what the terms of the contract are?
These are million-dollar questions that are very difficult to answer and which are often litigated. In fact, it’s impossible to know the answers until after the fact because they depend on the specific facts and circumstances of each individual transaction.
Typical battle of the forms scenario
In the typical scenario, the purchaser submits a purchase order with unreasonable one-sided standard terms (often called “boilerplate”) printed in small print on the back, and the seller sends an acknowledgement with equally unreasonable vendor-friendly terms printed on the back. Of course, these days this is usually done electronically, and there are numerous variations (e.g., maybe the seller first issues a quotation, then the purchaser issues a purchase order), but the concept is the same–form documents that contain different terms are exchanged between the buyer and the seller and no contract is signed. So with competing terms and no signed contract, what’s the agreement, assuming there is one?
The common law mirror image rule
Contract formation requires an offer and an acceptance (plus consideration, but that’s the subject for another day). When someone extends a contract offer to another party, the power to create a contract is placed in the hands of the other party. All the other party has to do is accept the offer. Once that happens, the legal relationship between the two parties changes, because they are now bound legally to do what they’ve agreed to. They’ve formed a contract. If the offer was to sell a kayak for $400, for example, the person offering to sell the kayak can’t renege once the offer is accepted. If the offer is rejected, however, the kayak owner doesn’t have to sell.
The acceptance has to match the offer exactly
Under the common law, the acceptance has to match the offer in every detail. This is known as the mirror image rule. (For a brief description of the role of the common law and the Uniform Commercial Code in contract law, see this post.) If the terms of the acceptance differ from the offer at all, it constitutes a counteroffer. A counteroffer is a rejection of the original offer, plus a new offer, which vests the original offeror with the power to create a contract by accepting the counteroffer. Going back to our kayak example, if the potential buyer agrees to buy the kayak for $400, but only if she can pay in 10 days, this is a counteroffer. The original offer is terminated and a new offer is on the table — $400 on 10-day payment terms. The kayak owner can accept the counteroffer or reject it.
Now let’s take these concepts of offer, acceptance, and counteroffer and apply them to the purchase order/acceptance scenario. Let’s say a buyer submits a purchase order to buy a kayak for $400 with payment due before shipment. The purchase order is sent with the buyer’s standard purchase order terms and conditions. The seller responds by sending an “acceptance,” agreeing to sell the kayak for $400 with payment due before shipment. Accompanying the acceptance are the seller’s standard terms and conditions of sale, which are substantially different from the buyer’s purchase order terms. Is there a contract?
The last shot rule
Under the common law, there wouldn’t be a contract because the acceptance doesn’t exactly match the offer. If the buyer sent payment, however, there would be a contract. The seller’s “acceptance” functions as a counteroffer, the terms of which are $400 with payment due before shipment, plus all of the seller’s standard terms and conditions of sale. The buyer’s payment of the purchase price functions as an acceptance by performance. Obviously, this would be a bad deal for the buyer, because both parties sent their standard terms, yet the seller’s terms control, because they were contained in the last document to be sent before the contract was performed. This is known as the last shot rule.
So under the common law we have the mirror image rule, which means that boilerplate terms in a responsive document that differ from the terms of the initial document function as a counteroffer. Plus, we have the last shot rule, which means that the boilerplate document that is sent just before performance governs the contract. Obviously, in this scenario, you want to send the last document. Also, there’s a winner and a loser because one party’s terms might govern the contract in every respect.
Another problem with this scenario that isn’t readily apparent is that the parties can renege until a contract is formed through performance. If the ordering documents are such that the buyer sends the last document and then decides that she wants to get out of the transaction, say because the price of kayaks falls dramatically and she can get a better deal elsewhere, all she has to do is let the seller know that she’s not going to buy the kayak because no contract is formed until the seller actually ships the kayak or accepts the buyer’s offer in every detail.
Now that I’ve weeded out the imposters, and only real contract aficionados are still reading, let’s talk about the Uniform Commercial Code. UCC section 2-207 was designed to solve both the problem of reneging and the unfairness that can result from the last shot rule. As I discussed in The Law of Stuff Isn’t the Same as the Law of Services, article 2 of the Uniform Commercial Code applies to the sale of goods. Section 2-207, which has generously been described as a “murky bit of prose,” governs the battle of the forms situation I describe above in contracts that involve the sale of goods.
Here’s section 2-207, in full, as codified in the Missouri Revised Statutes:
Additional terms in acceptance or confirmation.
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.
[Mo. Rev. Stat. section 400.2-207]
It would be impossible to exhaustively break down all of the issues raised in this short section of the UCC, but here is a brief summary of what section 2-207 does.
UCC 2-207 ensures (usually) that there is a contract once the documents are exchanged
Section 2-207 overrules the mirror image rule and the last shot rule. If the parties exchange writings demonstrating that they intend to enter into a contract, differences in standard terms won’t prevent the formation of a contract. The second writing, therefore, acts as an acceptance, rather than as a counteroffer, even when it contains additional or different terms. (Note, however, that this result can be overridden if the second writing conditions acceptance on assent to additional or different terms contained in the second writing.) This solves the problem of the unfairness that often results from the last shot rule and it solves the problem of reneging. Unfortunately, it also opens up a huge can of worms, because a contract is formed, but neither document controls in all respects. So how do you know what the terms of the contract are?
Additional and different terms in the acceptance might be worked into the contract
The standard terms of the second document passed between the parties will undoubtedly differ in many respects from the standard terms of the first document. The terms are “additional terms” if they don’t contradict a term in the initial document, and they are “different terms” if they contradict a term in the initial document. In some states, whether a term is “additional” or “different” makes a big difference, but for our current purposes, we’ll gloss over that issue. If the parties aren’t “merchants”–another interesting issue–neither additional nor different terms become part of the contract. If both parties are merchants, however, additional or different terms in the second document become part of the contract unless the first document expressly limits acceptance to its terms (“my terms only”), the additional or different terms are material, or the initial document objects to additional or different terms.
If a contract isn’t formed under UCC 2-207(1) and (2), there still might be a contract
Sometimes the writings of the parties don’t form a contract, but the parties act as if there were a contract. What happens then? For example, a buyer sends a purchase order containing its standard terms, and the seller responds with an acceptance containing language that conditions acceptance on the buyer’s assent to the additional or different terms contained the seller’s standard terms and conditions of sale. The “acceptance” is thus a counteroffer, so it doesn’t form a contract. The seller ships the goods, however, and the buyer pays for them. Is there a contract? Yes. Although the writings themselves don’t form a contract, section 2-207(3) provides that a contract is still formed because the conduct of the buyer and seller recognizes the existence of a contract.
The terms of contracts that are formed by conduct
Section 2-207(3) provides that the terms of the contract are the terms on which the parties agree, together with supplementary terms from article 2 of the UCC. Exactly what “supplementary terms incorporated under any other provisions of this chapter” means is yet another interesting issue.
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Quick and dirty flow chart for solving UCC 2-207 puzzles
Here’s a link to a battle of the forms chart to help you figure out whether you’ve got a contract and what the terms are. Although it looks complicated, it’s deceivingly simplistic
[Note: I updated this post on January 28, 2018 to address AAD’s and Mike’s comments regarding confusing conditional acceptance and “my terms only.”]
[Note: I’ve heard from several people that the battle of the forms chart at Picjur is no longer available, so on August 18, 2020, I replaced the link with a link to the Wayback Machine archives.]
Really nice work. Thanks.
This is really helpful! Thanks
Why do you show 2-207(3) as only applying to merchants?
Chessie: You’ve found one of the problems with the chart. (I didn’t create the chart, but it was the most helpful one I could find). Section 2-207(3) should have had its own treatment, but it was thrown in with 2-207(2), which causes a bit of confusion. Another problem is the inaccuracy of the definition of “goods” in box A.1 as “non-moveable.” In addition, the treatment of different terms in a purported acceptance varies from jurisdiction to jurisdiction and is not expressly addressed in 2-207. The chart only reflects the knockout rule approach, which isn’t applied in all jurisdictions. I should have footnoted these issues, so thanks for prompting me to do so.
Thank You so very much Brian for making an extreamely complicated subject easy to understand. You are terrific.
Quoting directly: “If a contract isn’t formed under UCC 2-207(1) and (2), there still might be a contract
Sometimes the writings of the parties don’t form a contract, but the parties act as if there were a contract. What happens then? For example, a buyer sends a purchase order that contains a “my terms only” provision and the seller responds with an acceptance containing the seller’s standard terms and conditions of sale, which of course differ in many respects from the purchase order terms and conditions. The acceptance is thus a counter offer, so it doesn’t form a contract.”
The “my terms only” refers to 2-207 (2)(a). But if we reach 2-207 (2)(a), that means we have a contract between the merchants and what remains is to determine the terms. Since the additional terms become part of the contract between merchants “unless,” wouldn’t that mean that the contract exists and the terms would be those of the offer only?
From the above-quoted example, it appears you are illustrating 2-207(2)(a) but applying the second part of subsection (1) for conditional acceptance?
Exactly, this appears to be incorrect. The article is confusing conditional acceptance with expressly limited terms of offer. “My terms only” is simply limiting acceptance to its terms i.e. no different/additional terms. Nevertheless, there is still a contract based on the original terms. The article assumes that “my terms only” refers to conditional acceptance of the offer to assent on additional or different terms, which is treated as a counter-offer.
Mike: Thanks for your input. I finally fixed the article to remove the confusion.
AAD: Thanks for your comments. I finally fixed the article to remove the confusion.
Correct me if I am wrong on this please… but in respect to whether additional or different terms are binding (assuming the existence of a contract)
“If both parties are merchants, however, additional or different terms in the second document become part of the contract unless the first document expressly limits acceptance to its terms (“my terms only”), the additional or different terms are material, or the initial document objects to additional or different terms.”
The UCC objection 2-207 (2)(c) states that the terms will be binding unless “notification of objection to them has already been given or is given within a reasonable time after notice of them is received.”
I have interpreted 2-207(2)(c) to mean that, in the event that a party objects to an additional or different term AFTER the 2nd form (in a 3rd form, for example) that this would meet the exception above.
As you note in one of your replies: “The chart only reflects the knockout rule approach, which isn’t applied in all jurisdictions.”
Have you run across a matrix by state that says which ones follow the knockout rule?
I think the UCC has been adopted in every state in the U.S. except for Louisiana, but that is based on notes based on a 2005 Contracts class outline.
This is a very good explanation, and the visual organization organogram helps a lot on understanding this confusing part of the UCC, especially for non-US lawyers like myself. thank you for posting this. Denise.
Thanks for the kind words, Denise.
Great work, Brian and Todd; I’m going to reference this in the commentary to the Common Draft provisions that I’m working on.
One comment about the middle-right segment, the 2-207(2) branch when one party is not a merchant (3(b)(i)(A)(2)): It might be clearer to say (alternatively or additionally) that any *different* terms in the acceptance document are simply ignored, and that the counterpart terms in the offer are the ones that are given effect.
Another comment: There might be room at the bottom to cram in some examples as footnotes, such as: “EXAMPLE: A purchase order (offer) says that payment terms are net 90 days; the vendor’s confirmation document (acceptance) says that payment terms are net 15 days. RESULT: Payment terms are net 90 days as stated in the purchase order.”
One more point about the sample example I gave: It would be better to say “EXAMPLE: A purchase order (offer) ***from a non-merchant*** says that payment terms are net 90 days ….”
This post is very helpful in trying to understand UCC 2-207. Thank you.
I thought acceptance with additional/ different terms in common law is viewed as counter offer
I also thought that the additional/different terms under UCC becomes part of the contract unless one of the three happened
This site is such a life save for 1 year law students like myself. Thank you
Per 2.207, forms can create a contract even if the terms are different. So, if Merchant A submits an offer to buy X for certain price terms and certain delivery date, and then Merchant B responds accepting the order, but stating different price terms and different delivery date, then would there still be a contract even though the terms are materially different? In this situation, there is no language regarding conditional acceptance from either merchant. Overall, I am questioning at some point can the terms be so materially different, that a contract is not created even under 2.207? Thank you in advance.
Help me out, if you would. Imagine that the Missouri UCC you quote above is operative. Two merchants sign a sales agreement on seller’s paper. The following clauses are included: “This Agreement, including its applicable Transaction Documents [defined to include purchase orders, confirmations and anything on buyer’s paper], is the complete agreement between you and us regarding your acquisition of Products from us, and replaces any prior oral or written communications between you and us. No change to the terms of this Agreement is valid unless signed by you and us. Additional or different terms in any written communication from you (such as a purchase order) are void and deemed objected to by us without further notice of objection.” Both parties have signed the above. Later, buyer submits its purchase order that has T&C on the back stating that these terms are applicable if seller either signs them or fulfills the order. Seller fulfills the order. A contract has been formed, but would the court apply the “additional/different” analysis with respect to the terms in buyer’s T&C, or does that fall within the rule in 207(2)(c) and they are excluded? Thanks for any comments — this stuff makes my head spin.
Kim: Parties enter into written contracts to avoid the battle of the forms provisions altogether. The clauses you mention are also intended to make sure that the negotiated written contract — rather than boilerplate that neither party reads — will govern the business relationship going forward. If things go well, the issues raised in this post won’t apply when there’s a written contract. However, things don’t always go as planned, as is illustrated in this case discussed in “NO LIMIT” + “Awesome!” = Contract Modification.
Correction to the above: “Transaction Documents” are defined only as documents issued by Seller (including those signed by Buyer). Sorry.
Does the UCC have effect on state entities such as state schools?
I work for a large corporation, and this scenario happens daily. While I know that not enforcing the signing of contracts speeds things up, I do sometimes feel uncomfortable carrying out tasks when I know a contract hasn’t been fully validated. Thanks for this article, it answered a lot of questions.
Thanks for such a nice explanation–have not read any of tho since law school many years ago–and your concise summary did the trick!! DK
So where does this leave Louisiana? Merchant and I had verbal agreement on proficiency of goods. Goods are defective against known reason for purchase. I live in Louisiana and so does the merchant.
Thank you so much for making this so much easier to understand!
The chart is too small too view.
Good read though
helped me prepare for the bar exam
Oh, Thank you! Thank you! Thank You! I was, am about to give up. L1 is hell one! Why can’t they just explain this stuff like you have. In ENGLISH! I am going to share you blog and site with my friends……
THANKS SO MUCH-LOVE THE CHART!
Thoughtful blog post – I loved the points ! Does someone know where I would be able to locate a fillable a form document to edit ?
I am preparing for the NY bar and this was very helpful.
Hi the chart is not clear, could plz email it.
I would love to see the form of Battle of the Contracts but it is too small!!
Ok, so its established for non-merchants that the seller’s terms stated in their acceptance document that are different or contradictory are non-binding. Are the buyer’s terms and conditions therefore binding?
So, technically speaking, the chart is incorrect regarding the knockout view. It shows the knockout view is only used under 2-207(3), which is wrong. 2-207(3) actually uses a different test completely (it compares the writings to see what matches and only those matching terms stay…it’s actually more strict than the knockout rule). The knockout rule applies to any different terms from contracts created under 2-207(1).
I would recommend reading Murray on Contracts (section 51) if you would like an alternative source beside some guy on the internet (me).
Good research source.
My question is what is battle of documents in law of contract ?
I believe that the sale of a kayak would fall under the UCC and therefore not be bound by the mirror image rule, no? It’s the sale of a good.
Yes, that’s true.
My comment/ question is not appearing on my browser so apologies if I’m posting twice, but I believe your kayak example would fall under the UCC and therefore wouldn’t be bound by the mirror image rule.
help me out i want to know that whether doctrine of caveat emptor relates to principle of mirror image rule and if yes then how?