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Contract Formation and Battle of the Forms Under Article 2 of the U.C.C

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Contract Formation and Battle of the Forms Under Article 2 of the U.C.C The IDC Monograph John J. O’Malley Seyfarth Shaw LLP, Chicago Contract Formation and Battle of the Forms Under Article 2 of the U.C.C. Contract formation is the bread and butter of commercial litigation. Indeed, it is routinely the focus of briefing in various stages of commercial litigation. The content of this Monograph provides the basics for your next brief on Illinois law regarding offer, acceptance, and consideration under the Uniform Commercial Code (U.C.C.). It will also review the Illinois cases regarding the “battle of the forms.” U.C.C. Applies to Sales of Goods Illinois adopted the U.C.C. in 1961.1 Article 2 of the U.C.C. applies only to transactions in goods.2 What are “goods” under the U.C.C.? A better question may be what is not. The definition of “goods” is broad. Under the U.C.C., “goods” are: [A]ll things, including specially manufactured goods, which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investments securities (Article 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2-107).3 Sometimes it is obvious that the transaction involves goods. Sometimes it is not. For instance, non-traditional items like mailing lists and demographic information have been considered goods.4 Many contracts, however, are mixed contracts that involve both goods and services. Thus, the first step is to determine if the U.C.C. or the common law applies to the contract. The “predominant purpose” test is used to decide if these “mixed” contracts fall within the scope of Article 2. 5 “Under this test, if the contract is predominantly for the sale of goods, with services being incidental thereto, the contract” is governed by Article 2.6 “Conversely, if the contract is predominantly for services, with the sale of goods being incidental thereto,” the contract is not within Article 2.7 Courts applying this test have found that distributorship agreements and even contracts for sales of businesses as going concerns are U.C.C. contracts.8 A transaction between a patient and pharmacy that dispensed an oral contraceptive prescription was predominantly for healthcare services and not governed by the U.C.C.9 In sum, at this initial stage, critically review the contract and be careful not to assume that merely because the contract includes services that the U.C.C. does not apply. IDC Quarterly Volume 25, Number 2 (25.2.M1) | Page 1 Illinois Association of Defense Trial Counsel | www.iadtc.org | 800-232-0169 Statements or expression of opinions in this publication are those of the authors and not necessarily those of the association. IDC Quarterly, Volume 25, Number 2. © 2015. Illinois Association of Defense Trial Counsel. All Rights Reserved. Reproduction in whole or in part without permission is prohibited. Statute of Frauds The U.C.C. contains its own statute of frauds. It provides: . a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.10 In short, the requirements for a contract for the sale of goods for $500 or more are: (1) a writing sufficient to indicate a contract for sale between the parties exists; (2) the writing is signed by the party against whom enforcement is sought or his authorized agent and; (3) the quantity of goods to be sold is stated.11 The U.C.C. does not require that all the terms of the contract be in writing, only that there is adequate documentary evidence of its existence and essential terms.12 The writing “must indicate that a contract for sale has been made.”13 Documents that merely evidence negotiations do not satisfy the statute of frauds. 14 As such, a written purchase order prepared but never sent by the party against whom enforcement is sought does not satisfy the statute of frauds without written documentation that there was an agreement between the parties.15 The U.C.C.’s writing requirement is relaxed in a few contexts. First, the writing requirement is relaxed when the contract is “between merchants.” “Between merchants” is defined in the U.C.C. to mean the parties “are chargeable with the knowledge or skill of merchants.”16 In such cases, it is enough “if within a reasonable time” of the making of the alleged contract “a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents,” unless the party receiving it objects within 10 days.17 Further, there is an exception to the writing requirements for specially manufactured goods,18 if the party against whom enforcement is sought admits that a contract is made, 19 or when payment or the goods have been accepted.20 The last exception applies only to the goods delivered and differs from the partial performance exception to the general statute of frauds.21 Is there a Contract? Offer, Acceptance, and Consideration It is important to remember that the U.C.C. distinguishes between an agreement and a contract. The U.C.C. defines “agreement” as “the bargain of the parties in fact, as found in their language or inferred from other circumstances.”22 A contract, on the other hand, is defined as the total legal obligation that results from the parties’ agreement. 23 An “agreement” is not necessarily a legally binding contract under the U.C.C., and a “contract” can be less or more than the agreement. 24 For example, a contract is more than the underlying agreement whenever the U.C.C. adds terms to the parties’ bargain such as the implied warranty of merchantability. The contract is less than the agreement when part of it is unenforceable due to the statute of frauds. No specific formalities, forms, or “magic words” are required to make a contract. “A contract for the sale of goods may be made in any manner sufficient to show agreement, including the parties’ conduct that recognizes the existence of such a contract.”25 IDC Quarterly Volume 25, Number 2 (25.2.M1) | Page 2 Illinois Association of Defense Trial Counsel | www.iadtc.org | 800-232-0169 Statements or expression of opinions in this publication are those of the authors and not necessarily those of the association. IDC Quarterly, Volume 25, Number 2. © 2015. Illinois Association of Defense Trial Counsel. All Rights Reserved. Reproduction in whole or in part without permission is prohibited. Importantly, determining if a contract exists is not affected by other statutory requirements. For example, the Illinois Consumer Fraud and Deceptive Business Practices Act requirement to give notice of the right to cancel is not a condition precedent to the existence of an enforceable contract.26 A contract exists if the three basic ingredients are present: offer, acceptance, and consideration.27 If any one of them is missing, a contract does not exist. Thus, when determining if a binding contract exists the court must consider if each of these basic elements is present.28 A. Offer “An offer is an act on the part of one person, whereby he gives to another the legal power of creating the obligation called the contract.”29 While this seems straightforward, in practice, it is not always so clear. Take for example, price quotations. Price quotations are generally not offers because they do not contain all the terms to form a contract. 30 Instead, they are considered “invitations to enter into negotiations or to submit offers.”31 A buyer’s purchase order submitted in response to a price quotation is an offer.32 A price quotation that is sufficiently detailed, however, can constitute an “offer creating the power of acceptance.”33 But, the offeror must intend that the contract exist upon acceptance of the offer. That is, “it must reasonably appear from the price quotation that assent to that quotation is all that is needed to ripen the offer into a contract.”34 “A price quotation that is subject to the seller’s confirmation is not an offer since the buyer’s assent will not consummate the contract.”35 A seller’s attempt to control the terms by requiring “home office approval” of any response can sometimes backfire. In McCarty v. Verson Allsteel Press Co., the seller of a punch press entered into negotiations with the buyer of the machine, eventually submitting a proposal to the buyer.36 The proposal provided that “[a]ll quotations, orders and contracts are subject to acceptance of home office.”37 The seller also included a “Conditions of Sale-Machinery” that provided limitations of liability, warranties, and indemnification of the seller.38 The buyer sent its form purchase order. When litigation arose, the seller argued that its proposal was the offer accepted by the buyer and that the limitations of liability, warranties, and indemnification in the seller’s documents were part of the contract. 39 The court disagreed. In discussing the formation of the contract between the seller and buyer, the court stated: A price quotation, if sufficiently detailed as was the price quotation in the present case, may constitute an offer.
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