Wednesday, September 7, 2011

Contracts: The Battle of the Forms.

Under common law contracts (ie, those contracts involving services rather than the sale of goods), the "mirror image rule" applies. In other words, if "x" makes an offer to "y" then "y" can only accept that offer by mirroring the terms offered by "x." "Y" can not add or omit terms while attempting to accept, otherwise "y" has made a counter-offer, rather than a valid acceptance.

But all that changes under the UCC. Under the UCC, the "mirror image rule" is abandoned. This means that if the contract is one in which the subject matter is the sale of goods, then it's possible that "y" can accept on terms that are different from the terms offered or add additional terms to those that were offered, and those terms might be included in the contract as an acceptance to the offer. To determine whether, under the UCC, these additional or different terms are included, you must analyze as follows:

First determine whether the parties contracting are merchants. If either party is a non-merchant then a contract will be formed based on the original terms and the new terms will be a mere proposal for the other party to accept or reject.

But, let's now assume the contract is between merchants. If "x" and "y" are merchants, and "y" attempts to add additional terms to the offer by "x," those terms will become part of the contract UNLESS, they materially alter the contract, "x" expressly limited acceptance to his terms, or "x" objects to the additional terms of "y" within a reasonable time.

Assume, again, that the contract is between merchants, but this time, rather than adding additional terms, "y" attempts to add different terms from those offered by "x" (ie, the terms, rather than adding to, contradict the terms of "x"). In such a situation, there is a split of authority over whether these different terms in the acceptance become a part of the contract. Some courts treat different terms as they treat additional terms (as discussed above), and the above test applies. Other courts follow what has been called the "knockout rule." This rule states that conflicting terms in the offer and acceptance are knocked out of the contract and the terms instead are provided by the UCC.

In summary, first determine whether you're dealing with the common law, or the UCC. If the common law, or if it's a non-merchant situation under the UCC, apply the "mirror image rule." If it's a UCC question involving merchants, decide whether the offeree has attempted to add additional or different terms to the offer. If additional, apply the rule above, if different either the rule above applies, or the different terms are knocked out, so that the UCC will fill in the gaps.

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