C. ITOH & CO. (AMERICA) INC., a New York Corporation, Plaintiff-Appellee

Any and all controversies arising out of or relating to this contract, or any C. ITOH & CO. (AMERICA) INC., A New York modification, breach or cancellation Corporation, Plaintiff-Appellee, thereof, except as to quality, shall be v. settled by arbitration. . . . The JORDAN INTERNATIONAL COMPANY, Defendant-Appellant. After the steel had been delivered by Jordan and paid for by Itoh, Riverview advised Itoh that the steel coils April 4, 1977 were defective and did not conform to the standards set forth in the agreement between Itoh and Riverview; for SPRECHER, Circuit Judge. these reasons, Riverview refused to pay Itoh for the steel. Consequently, Itoh brought the instant suit against The sole issue on this appeal is whether the district Riverview and Jordan. Itoh alleged that Riverview had court properly denied a stay of the proceedings pending wrongfully refused to pay for the steel; as affirmative arbitration under Section 3 of the Federal Arbitration Act, defenses, Riverview claimed that the steel was defective 9 U.S.C. s 3. and that tender was improper since delivery was late. Itoh alleged that Jordan had sold Itoh defective steel and had I made a late delivery of that steel.

C. Itoh & Co. (America) Inc. (“Itoh”) submitted a Jordan then filed a motion in the district court purchase order dated August 15, 1974 for a certain requesting a stay of the proceedings pending arbitration quantity of steel coils to the Jordan International under Section 3 of the Federal Arbitration Act, 9 U.S.C. s Company (“Jordan”). In response, Jordan sent its 3. The district court concluded that, as between Itoh and acknowledgment form dated August 19, 1974. On the Riverview, the issue of whether the steel coils were face of Jordan’s form, the following statement appears: defective was not referable to arbitration because of the “quality” exclusion in the arbitration provision of the Seller’s acceptance is, however, contract between Itoh and Riverview. Since arbitration expressly conditional on Buyer’s assent would not necessarily resolve all the issues raised by the to the additional or different terms and parties, the district court, apparently assuming arguendo conditions set forth below and printed on that there existed an agreement in writing between Jordan the reverse side. If these terms and and Itoh to arbitrate their dispute, denied the stay pending conditions are not acceptable, Buyer arbitration. In the district court’s opinion, sound judicial should notify seller at once. administration required that the entire litigation be resolved in a single forum; since some of the issues those One of the terms on the reverse side of Jordan’s form was relating to quality between Itoh and Riverview were not a broad provision for arbitration.1 Itoh neither expressly referable to arbitration, this goal could only be assented nor objected to the additional arbitration term in accomplished in the judicial forum. Jordan’s form until the instant litigation.

Itoh also entered into a contract to sell the steel coils It is from this denial of a stay pending arbitration that that it purchased from Jordan to Riverview Steel Jordan appeals. Corporation, Inc. (“Riverview”). The contract between Itoh and Riverview contained an arbitration term which . . . . provided in pertinent part: III 11 The arbitration clause provides: Any controversy arising under or in connection with the contract Having concluded that the district court had no shall be submitted to arbitration in New York City in accordance discretion under Section 3 of the Federal Arbitration Act, with the rules then obtaining of the American Arbitration 9 U.S.C. s 3, to deny Jordan’s timely application for a Association. Judgment on any award may be entered in any stay of the action pending arbitration if there existed an court having jurisdiction. The parties hereto submit to the agreement in writing for such arbitration between Jordan jurisdiction of the Federal and State courts in New York City, and notice of process in connection with arbitral or judicial and Itoh, the remaining issue is whether there existed such proceedings may be served upon the parties by registered or an agreement. certified mail, with the same effect as if personally served. 1 . . . . in current commercial transactions, the terms of the offer and those of the acceptance will seldom be identical. IV Rather, under the current “battle of the forms,” each party typically has a printed Section 2-207, Additional Terms in Acceptance or form drafted by his attorney and Confirmation, provides: containing as many terms as could be (1) A definite and seasonable expression of envisioned to favor that party in his sales acceptance or a written confirmation which is sent transactions. Whereas under common within a reasonable time operates as an acceptance law the disparity between the fine-print even though it states terms additional to or different terms in the parties’ forms would have from those offered or agreed upon, unless acceptance prevented the consummation of a is expressly made conditional on assent to the contract when these forms are additional or different terms. exchanged, Section 2-207 recognizes that in many, but not all, cases the parties do (2) The additional terms are to be construed as not impart such significance to the terms proposals for addition to the contract. Between on the printed forms. . . . Thus, under merchants such terms become part of the contract Subsection (1), a contract . . . (may be) unless: recognized notwithstanding the fact that an acceptance . . . contains terms (a) the offer expressly limits acceptance to the terms additional to . . . those of the offer . . . . of the offer;

(b) they materially alter it; or Id. at 1166. See also Comment 2 to Section 2-207; Air Products & Chemicals, supra ; John Thallon, supra. And it (c) notification of objection to them has already been is now well-settled that the mere presence of an additional given or is given within a reasonable time after notice term, such as a provision for arbitration, in one of the of them is received. parties’ forms will not prevent the formation of a contract under Section 2-207(1). See, e. g., Dorton, supra ; (3) Conduct by both parties which recognizes the Valmont Industries, supra ; Just Born, supra ; John existence of a contract is sufficient to establish a Thallon, supra ; In re Barclay Knitwear Co., supra ; In re contract for sale although the writings of the parties Tunis Manufacturing Corp., supra ; Mystic Mills, supra ; do not otherwise establish a contract. In such case the Air Products & Chemicals, supra. terms of the particular contract consist of those terms on which the writings of the parties agree, together However, while Section 2-207(1) constitutes a sharp with any supplementary terms incorporated under departure from the common law “mirror image” rule, any other provisions of this Act. there remain situations where the inclusion of an additional term in one of the forms exchanged by the Under Section 2-207 it is necessary to first determine parties will prevent the consummation of a contract under whether a contract has been formed under Section 2- that section. Section 2-207(1) contains a proviso which 207(1) as a result of the exchange of forms between operates to prevent an exchange of forms from creating a Jordan and Itoh. contract where “acceptance is expressly made conditional on assent to the additional . . . terms.” In the instant case, At common law, “an acceptance . . . which contained Jordan’s acknowledgment form contained the following terms additional to . . . those of the offer . . . constituted a statement: rejection of the offer . . . and thus became a counter- Seller’s acceptance is . . . expressly offer.” Dorton, supra, at 1166. Thus, the mere presence of conditional on Buyer’s assent to the the additional arbitration term in Jordan’s additional or different terms and acknowledgment form would, at common law, have conditions set forth below and printed on prevented the exchange of documents between Jordan and the reverse side. If these terms and Itoh from creating a contract, and Jordan’s form would conditions are not acceptable, Buyer have automatically become a counter-offer. should notify Seller at once.

Section 2-207(1) was intended to alter this inflexible The arbitration provision at issue on this appeal is printed common law approach to offer and acceptance: on the reverse side of Jordan’s acknowledgment, and This section of the Code recognizes that there is no dispute that Itoh never expressly assented to 2 the challenged arbitration term. establish a contract.” As the court noted in Dorton, supra, at 1166: The Court of Appeals for the Sixth Circuit has held [W]hen no contract is recognized under that the proviso must be construed narrowly: Subsection 2-207(1) . . . the entire transaction aborts at this point. If, Although . . . (seller’s) use of the words however, the subsequent conduct of the “subject to” suggests that the acceptances parties particularly, performance by both were conditional to some extent, we do not parties under what they apparently believe the acceptances were “expressly believe to be a contract recognizes the made conditional on (the buyer’s) assent to existence of a contract, under Subsection the additional or different terms,” as 2-207(3) such conduct by both parties is specifically required under the Subsection sufficient to establish a contract, 2-207(1) proviso. In order to fall within notwithstanding the fact that no contract this proviso, it is not enough that an would have been recognized on the basis acceptance is expressly conditional on of their writings alone. additional or different terms; rather, an acceptance must be expressly conditional Thus, “[s]ince . . . [Itoh’s] purchase order and . . . on the offeror’s assent to those terms [Jordan’s] counter-offer did not in themselves create a (emphasis in original). contract, Section 2-207(3) would operate to create one because the subsequent performance by both parties Dorton, supra, at 1168. In Construction Aggregates Corp. constituted ‘conduct by both parties which recognizes the v. Hewitt-Robins, Inc., 404 F.2d 505 (7th Cir. 1968), this existence of a contract.’ ” Construction Aggregates, supra, court found that an acceptance came within the ambit of at 509. the Section 2-207(1) proviso even though the language employed in the acceptance did not precisely track that of What are the terms of a contract created by conduct the proviso. Under either Construction Aggregates or under Section 2-207(3) rather than by an exchange of Dorton, however, it is clear that the statement contained forms under Section 2-207(1)?7 As noted above, at in Jordan’s acknowledgment form comes within the common law the terms of the contract between Jordan and Section 2-207(1) proviso. Itoh would be the terms of the Jordan counter-offer. However, the Code has effectuated a radical departure Hence, the exchange of forms between Jordan and from the common law rule. The second sentence of Itoh did not result in the formation of a contract under Section 2-207(3) provides that where, as here, a contract Section 2-207(1), and Jordan’s form became a has been consummated by the conduct of the parties, “the counteroffer. “(T)he consequence of a clause conditioning terms of the particular contract consist of those terms on acceptance on assent to the additional or different terms is which the writings of the parties agree, together with any that as of the exchanged writings, there is no contract. supplementary terms incorporated under any other Either party may at this point in their dealings walk away provisions of this Act.” Since it is clear that the Jordan from the transaction.” Duesenberg & King, supra, s and Itoh forms do not “agree” on arbitration, the only 3.06(3) at 73. However, neither Jordan nor Itoh elected to question which remains under the Code is whether follow that course; instead, both parties proceeded to arbitration may be considered a supplementary term performance Jordan by delivering and Itoh by paying for incorporated under some other provision of the Code. the steel coils. We have been unable to find any case authority At common law, the “terms of the counter-offer were shedding light on the question of what constitutes said to have been accepted by the original offeror when he “supplementary terms” within the meaning of Section 2- proceeded to perform under the contract without objecting 207(3) and the Official Comments to Section 2-207 to the counter-offer.” Dorton, supra, at 1166. Thus, under provide no guidance in this regard. We are persuaded, pre-Code law, Itoh’s performance (i.e., payment for the however, that the disputed additional terms (i.e., those steel coils) probably constituted acceptance of the Jordan terms on which the writings of the parties do not agree) counter-offer, including its provision for arbitration. which are necessarily excluded from a Subsection (3) However, a different approach is required under the Code. contract by the language, “terms on which the writings of the parties agree,” cannot be brought back into the Section 2-207(3) of the Code first provides that “(c)onduct by both parties which recognizes the existence 77 If a contract had been formed by the exchange of forms of a contract is sufficient to establish a contract for sale between Jordan and Itoh, it would have been necessary to look although the writings of the parties do not otherwise to Section 2-207(2) to ascertain the terms of that contract. 3 contract under the guise of “supplementary terms.” This We are convinced that this conclusion does not result conclusion has substantial support among the in any unfair prejudice to a seller who elects to insert in commentators who have addressed themselves to the his standard sales acknowledgement form the statement issue. As two noted authorities on Article Two of the that acceptance is expressly conditional on buyer’s assent Code have stated: to additional terms contained therein. Such a seller obtains a substantial benefit under Section 2-207(1) It will usually happen that an offeree- through the inclusion of an “expressly conditional” seller who returns an acknowledgment clause. form will also concurrently or shortly thereafter ship the goods. If the If he decides after the exchange of forms that the responsive document (sent by the seller) particular transaction is not in his best interest, Subsection contains a printed assent clause, and the (1) permits him to walk away from the transaction goods are shipped and accepted, without incurring any liability so long as the buyer has not Subsection (3) of Section 2-207 comes in the interim expressly assented to the additional terms. into play. . . . (T)he terms on which the Moreover, whether or not a seller will be disadvantaged exchanged communications do not under Subsection (3) as a consequence of inserting an agree drop out of the transaction, and “expressly conditional” clause in his standard form is reference to the Code is made to supply within his control. If the seller in fact does not intend to necessary terms. . . . Rather than close a particular deal unless the additional terms are choosing the terms of one party over assented to, he can protect himself by not delivering the those of the other . . . it compels goods until such assent is forthcoming. If the seller does supplying missing terms by reference to intend to close a deal irrespective of whether or not the the Code. . . . buyer assents to the additional terms, he can hardly complain when the contract formed under Subsection (3) Duesenberg & King, supra, s 3.06(4) at 73-74. Similarly, as a result of the parties’ conduct is held not to include Professors White and Summers have concluded that those terms. “contract formation under subsection (3) gives neither party the relevant terms of his document, but fills out the Although a seller who employs such an “expressly contract with the standardized provisions of Article Two.” conditional” clause in his acknowledgement form would White & Summers, supra, at 29. undoubtedly appreciate the dual advantage of not being bound to a contract under Subsection (1) if he elects not Accordingly, we find that the “supplementary terms” to perform and of having his additional terms imposed on contemplated by Section 2-207(3) are limited to those the buyer under Subsection (3) in the event that supplied by the standardized “gap-filler” provisions of performance is in his best interest, we do not believe such Article Two. See, e. g., Section 2-308(a) (“Unless a result is contemplated by Section 2-207. Rather, while a otherwise agreed . . . the place for delivery of goods is the seller may take advantage of an “expressly conditional” seller’s place of business or if he has none his residence”); clause under Subsection (1) when he elects not to Section 2-309(1) (“The time for shipment or delivery or perform, he must accept the potential risk under any other action under a contract if not . . . agreed upon Subsection (3) of not getting his additional terms when he shall be a reasonable time”); Section 2-310(a) ( “Unless elects to proceed with performance without first obtaining otherwise agreed . . . payment is due at the time and place buyer’s assent to those terms. Since the seller injected at which the buyer is to receive the goods even though the ambiguity into the transaction by inserting the “expressly place of shipment is the place of delivery”). Since conditional” clause in his form, he, and not the buyer, provision for arbitration is not a necessary or missing should bear the consequence of that ambiguity under term which would be supplied by one of the Code’s “gap- Subsection (3). filler” provisions unless agreed upon by the contracting parties, there is no arbitration term in the Section 2-207(3) . . . . As noted above, there is no written arbitration contract which was created by the conduct of Jordan and provision included in the contract created under Section Itoh in proceeding to perform even though no contract 2-207(3) when Jordan and Itoh proceeded to performance. had been established by their exchange of writings. Accordingly, for the reasons stated in this opinion, the decision of the district court is affirmed.