UCC 2‐207 Formation Charts

For each of the following scenarios, assume that the buyer is a merchant (e.g. Diapers.com), sending an order form to the seller (e.g. Huggies) who is also a merchant, that the offer did not expressly condition acceptance upon the terms of the offer, and that the buyer did not object to the terms of the seller’s acknowledgment form within a reasonable time.

Article 2 Acceptance Containing: Additional Terms That Do Not Materially Alter the Offer

Huggies Diapers.com Acceptance/ Resulting Contract? Offer/Order Form Acknowledgment •Item: Size 5 Overnight •Item: Size 5 Overnight •Yes, the seller's Diapers Diapers acknowledgement form is a •Quantity: 100 Cases •Quantity: 100 Cases definite and seasonable •Price: $100 per case •Price: $100 per case expression of acceptance, so the parties have a contract •Delivery: Buyer's Warehouse, •Delivery: Buyer's Warehouse, despite the addition of a term 7/1/14 7/1/14 charging interest for overdue •Buyer shall pay 2% interest invoices in the on all overdue invoices acknowledgment form. The contract consists of all of the terms in the acceptance, including the term providing for reasonable interest on overdue invoices, as such terms are common and do would not cause surprise or hardship on the offeror.

•Note that, at , the acceptance containing an additional term would have been deemed a counteroffer, and thus there would be no binding contract upon the seller's acceptance unless the buyer accepted the counteroffer, either expressly or through physical acceptance of the goods.

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UCC 2‐207 Contract Formation Charts Article 2 Acceptance Containing: Additional Terms that Materially Alter the Offer

Huggies Diapers.com Acceptance/ Resulting Contract? Offer/Order Form Acknowledgment •Item: Size 5 Overnight Diapers •Item: Size 5 Overnight Diapers •Yes, the seller's •Quantity: 100 Cases •Quantity: 100 Cases acknowledgement form is a •Price: $100 per case •Price: $100 per case definite and seasonable expression of acceptance, so •Delivery: Buyer's Warehouse, •Delivery: Buyer's Warehouse, the parties have a contract 7/1/14 7/1/14 despite the addition of an •All Disputes Between the clause in the Parties Shall be Resolved acknowledgment form. Through Binding Arbitration However, since the arbitration clause would take the offeror by surprise and cause the offeror hardship, it would "materially alter" the offer and not become part of the parties' agreement. The contract would consist of all the terms except the arbitration clause.

•Note that if it were the custom in the diaper industry to resolve disputes through arbitration (as is the custom, for example, in the steel and textile industries), then the addition of an arbitration clause could not be said to take the offeror by surprise and the term would not be deemed a material alteration of the offer (thus becoming part of the parties contract).

•Also note that, at common law, the acceptance containing an additional term would have been deemed a counteroffer, and thus there would be no binding contract upon the seller's acceptance unless the buyer accepted the counteroffer, either expressly or through physical acceptance of the goods.

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UCC 2‐207 Contract Formation Charts Article 2 Acceptance Containing: Different Terms

Huggies Diapers.com Acceptance/ Resulting Contract? Offer/Order Form Acknowledgment

•Item: Size 5 Overnight Diapers •Item: Size 5 Overnight Diapers •Yes, the seller's acknowledgement •Quantity: 100 Cases •Quantity: 100 Cases form is a definite and seasonable •Price: $100 per case •Price: $100 per case expression of acceptance, so the parties have a contract despite the •Delivery: Buyer's Warehouse, •Delivery: Buyer's Warehouse, different in 7/1/14 7/1/14 the acknowledgment form. Under •The parties agree that all actions or •The parties agree that all actions or the majority position, the contract proceedings arising in connection proceedings arising in connection would consist of those the terms on with this Agreement shall be tried with this Agreement shall be tried which the and litigated exclusively in the State and litigated exclusively in the State agreed, but the forum selection and Federal courts located in the and Federal courts located in the clauses would "Drop Out" of the County of New York, State of New County of San Francisco, State of parties' contract. Since there is no York. California. UCC provision regarding forum selection, normal civil procedure rules would apply in determining where the action or proceeding would take place. In New York, courts would reach a different conclusion, however, treating the "different" forum selection clause as if it was an "additional" term under 2‐207(2). Since the different forum selection clause would take the offeror by surprise and cause the offeror hardship, it would "materially alter" the offer and not become part of the parties' agreement. The contract would consist of the terms in the buyer's offer, including the buyer's forum selection clause.

•Note that, at common law, the acceptance containing a different term would have been deemed a counteroffer, thus there would be no binding contract upon the seller's acceptance unless the buyer accepted the counteroffer, either expressly or through physical acceptance of the goods.

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UCC 2‐207 Contract Formation Charts Article 2 Acceptance Containing: Different PDQ Terms

Huggies Diapers.com Acceptance/ Resulting Contract? Offer/Order Form Acknowledgment •Item: Size 5 Overnight •Item: Size 5 Overnight •No, because the seller's Diapers Diapers acknowledgement form •Quantity: 100 Cases •Quantity: 100 Cases contained a different price •Price: $100 per case •Price: $110 per case (PDQ) term, and therefore cannot be considered a •Delivery: Buyer's •Delivery: Buyer's definite expression of Warehouse, Warehouse, acceptance. Therefore, 7/1/14 7/1/14 neither party may be found liable for breaching this attempted contract if a dispute arises before either party partially or fully performs.

•Note that, at common law, the acceptance containing a different term would have been deemed a counteroffer, and thus there would be no binding contract upon the seller's acceptance unless the buyer accepted the counteroffer, either expressly or through physical acceptance of the goods.

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UCC 2‐207 Contract Formation Charts Article 2 Acceptance Containing: Different PDQ Terms, But Conduct of the Parties Recognizes the Existence of a Contract

Huggies Conduct By Both Diapers.com Acceptance/ Resulting Contract? Parties Recognizes the Offer/Order Form Acknowledgment Existence of a Contract •Item: Size 5 •Item: Size 5 •No, because the •However, if the buyer Overnight Diapers Overnight Diapers seller's physically accepted •Quantity: 100 Cases •Quantity: 100 Cases acknowledgement the 100 cases of •Price: $100 per case •Price: $110 per case form contained a diapers and began different price (PDQ) selling them despite •Delivery: Buyer's •Delivery: Buyer's term and, therefore, the fact that the offer Warehouse, Warehouse, cannot be considered and acceptance 7/1/14 7/1/14 a definite expression contained a different of acceptance. PDQ term, the Code Therefore, neither would recognize the party may be held existence of a liable for breaching contract through the this attempted conduct of the parties contract if a dispute (even though the arises before either writings did not party partially or fully otherwise establish a performed. contract). The terms of that contract •Note that, at would consist of common law, the those terms on which acceptance the offer and containing a different acceptance agree, the term would have different price terms been deemed a would drop out, and counteroffer, thus UCC 2‐305 would there would be no serve as a gap‐filler binding contract upon imposing "a the seller's reasonable price at acceptance unless the the time for delivery." buyer accepted the counteroffer, either expressly or through physical acceptance of the goods.

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UCC 2‐207 Contract Formation Charts Below is the text of section 2‐207, which may help you understand why there is disagreement among legal scholars and courts as to how “different” terms contained in a definite and seasonable expression of acceptance should be treated. Look, in particular, at how section 2‐ 207(1) states how a definite and seasonable expression of acceptance containing either “additional” or “different” terms can create a contract. Then notice how section 2‐207(2) addresses how to treat “additional” terms. However, section 2‐207(2) says nothing about how “different” terms should be treated, and there are no other sections of the Code on point. New York essentially takes the position that the drafters made a and meant to have 2‐207(2) apply to “additional or different” terms. The majority of courts, however, apply the knock out rule to different terms. That is, the different terms cancel each other out, and the resulting contract consists of those terms on which the offer and acceptance agree, as well as any relevant “gap fillers” under the Code (similar to an analysis under 2‐207(3) under the Code).

Section 2‐‐207. 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 Act.

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UCC 2‐207 Contract Formation Charts

Was there a "definite" and "seasonable" expression of acceptance?

Yes. No.

Were there any additional or different terms in the acceptance? No contract was formed. Yes. No.

Was the acceptance expressly conditioned on assent to the A contract was formed additional or different terms in the acceptance? based on the offeror's terms.

Yes. No.

A contract was not formed (unless the offeror A contract may have been formed. How expressly assented to the additional terms). should you treat additional or different terms in the acceptance?

Additional Different terms. Terms. If the dispute is under NY Was the offer expressly conditioned law, return to Was the offer expressly upon assent to its terms? the additional conditioned on assent to terms its terms? analysis. No. Yes.

No. Yes. Are both parties merchants? A contract was formed based on the offeror's Yes. No. terms and the additional Did the offeror object to the additional terms are mere Did the term within a reasonable time proposals. different A contract was terms relate formed based on to PDQ? the offeror's terms The parties have Yes. No. and the different a contract. terms are mere However, proposals. between non‐ Did the additional term merchants, "materially alter" the Yes. offer? additional terms The parties contained in an have a No. acceptance are contract No. treated as mere without the Yes. proposals that additional The parties do must be term. not have a The parties have a contract expressly contract consiting of those terms on accepted by the The parties because there which the offer and offeror before have a contract there can be The parties have a acceptance agree. The becoming part and the no "definite" contract without the different terms "drop out" of the parties' additional term acceptance additional term. and are replaced by any agreement. in the with different relevant "gap fillers" which acceptance is PDQ terms. the Code may or may not included in the provide. contract.

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Risk of Loss Scenarios

The UCC puts risk of loss on the party who is in the best position to bear that risk (i.e. the party who most likely has taken precautions to protect the goods from loss by insuring them). The Code lists several scenarios that identify when risk of loss transfers from a seller to a buyer.

Seller Buyer

1) When the goods are held by a bailee (e.g., a warehouse) and the goods are to be delivered to the buyer without being moved or shipped, then risk of loss passes to the buyer a reasonable time after a buyer’s receipt of a bill of lading or the bailee otherwise notifying the buyer of the buyer’s right to take possession of the goods (that is, the buyer has a reasonable time to get the goods under 2‐509(2)(c)). A “bill of lading” is simply a document issued by a carrier acknowledging its receipt of certain goods, which typically identifies the seller/sender of the goods, and to whom, if anyone, the goods should be delivered. The bill of lading is, in essence, a receipt for the goods, a contract for shipping the goods, and documentary of title to goods. If a seller negotiates a carrier’s bill of lading to a buyer, then the buyer has title to the goods, such that the carrier must turn over the goods upon the buyer’s presentation of the bill of lading. So if the seller ships its goods by a carrier to a third‐party warehouse, then receives payment from the buyer, and turns over the bill of lading to the buyer allowing the buyer to take possession of the goods, risk of loss will transfer from the seller to the buyer once the buyer has had a reasonable time to get the goods from the warehouse (since the buyer has title at this point, the reasonable time will not be very long, rather, it will be just enough time to allow the buyer to take possession of the goods and/or insure them).

2) Under a “shipment” contract (where the goods are to be delivered to the buyer, but the contract does not require the seller to do anything other than make arrangements for shipping by a carrier), risk of loss transfers to the buyer when the seller delivers the goods to a carrier. For example, a contract that is F.O.B. seller’s place of business.

3) Under a “destination” contract (where the seller is required to deliver goods to a particular destination), risk of loss transfers to the buyer when the goods are tendered to the buyer, enabling the buyer to take possession. For example, a contract that is F.O.B. buyer’s place of business.

4) When the buyer is to pick up the goods from a merchant’s place of business, then risk of loss does not pass to the buyer until the buyer takes possession of the goods. If the seller is not a merchant,

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Risk of Loss Scenarios then risk of loss passes upon tender of delivery. For example, if you purchase goods from a merchant (in class we used the example of a suit), and elect to pick them up at a later date, then risk of loss does not pass to you (the buyer) until you take possession of the goods.

Note that there is a limitation on recovering damages when specific goods have been identified and are totally destroyed through no fault of either party before risk of loss passes to the buyer. With the goods being destroyed, the Code impliedly rescinds the contract allowing the buyer to recover any deposit (restitution damages), but the buyer cannot assert a claim for expectation damages for the buyer’s lost bargain. So, if we refer back to the example from class, in which the buyer purchased two $1,000 suits from the merchant seller for a sale price of $100 each, the buyer paid for the suits but elected to pick them up at a later date, and the suits were destroyed in a fire at the merchant’s store, the risk of loss would still be on the seller since the buyer had not taken possession of the suits, but the buyer could only recover the $200 he paid for the suits, not the value of his lost bargain (the $2,000 value of the suits he would have received had suits not been destroyed).

5) When a seller ships non‐conforming goods, then risk of loss remains with the seller until cure or acceptance of the non‐conforming goods. For example, even if a buyer and seller have entered a contract that is F.O.B. seller’s place of business (where risk of loss would normally pass to the buyer when the seller delivers the goods to a carrier, number 2 above), if the seller ships non‐ conforming goods and the goods are destroyed while in the carrier’s possession, the risk of loss would still be on the seller because the goods were non‐conforming.

6) If after acceptance, the buyer properly revokes acceptance, the risk of loss is on the seller to the extent of any deficiency in the buyer’s insurance. For example, if computers purchased by the buyer were fitted with faulty processors that the buyer could not have noticed upon inspection (they were a latent defect), and the buyer revokes acceptance, but the goods are destroyed prior to the exchange of the goods for a return of the purchase price, the seller will bear the risk of loss to the extent of any deficiency in the buyer’s insurance. Note that a buyer cannot attempt to revoke acceptance after the goods have been lost or destroyed (that is, the buyer must have notified the seller of his intention to revoke acceptance prior to the loss of the goods).

7) When conforming goods are identified to the contract and the buyer repudiates before risk of loss has passed to the buyer, then for a commercially reasonable time the risk of loss is on the breaching buyer to the extent of any deficiency in the seller’s insurance. For example, consider a contract that required the seller to manufacture 40,000 pounds of plastic pellets and to send them to the buyer at a rate of 1,000 per day. After manufacturing the pellets, the seller requested instructions regarding where to begin shipping the pellets, but the buyer sent no instructions. After storing the pellets for over 40 days, the seller sent a letter to the buyer explaining that it could not store the pellets indefinitely and requesting immediate shipping instructions. The seller claimed that the instructions would be forthcoming, but they never came, and within a month, the goods were destroyed in an accidental fire at the warehouse. In this scenario, a court found the buyer had repudiated the contract by not sending the shipping instructions under the terms of the contract, and found that the risk of loss was on the buyer to the extent the seller’s insurance coverage on the 40,000 pellets had expired.

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Sample Bill of Lading

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