Question. Over the course of two years the Supplier and Contractor entered into a series of twelve sales agreements for steel casings, or hollow steel pipe. Pursuant to those sales agreements, Supplier delivered steel casings to Contractor.
The parties do not dispute that their sales agreements constituted valid contracts. Contractor initiated each purchase by sending to Supplier a purchase order including the basic specifications of the steel casings desired. Each of Contractor's purchase order forms included the following clause:
No terms or conditions, other than those stated herein, and no agreement or understanding in any way modifying the terms and conditions herein stated shall be binding upon purchaser, unless mutually agreed upon in writing.
In response to Contractor's purchase orders, Supplier sent two subsequent documents to Contractor: an acknowledgement form, alternately labeled a “Sales Contract” or a “Sale Note,” sent prior to delivery of the goods, and a “Sales Invoice,” sent following the delivery of goods. Each acknowledgement form included the following paragraph:
This contract is made between the buyer and the seller whereby the buyer agrees to buy and the seller agrees to sell the undermentioned [sic] goods subject to the terms and conditions as stipulated hereafter. This contract reflects in its entirety all details as agreed between the parties thereto. Any changes must be in writing and accepted by both parties. Any contract disputes are to be resolved through friendly negotiations. If no settlement can be reached then either party may submit the dispute to arbitration as per the rules of the American Arbitration Association in New York.
Some of the acknowledgement forms also altered other terms contained in Contractor's purchase orders, including changes in the length of the payment term and minor variations in the price and the amount of steel casing to be delivered.
After sending each acknowledgement form to Contractor, Supplier delivered the requested steel casings to Contractor. Contractor accepted each delivery of casings, but it failed to fully pay Supplier the amount due under various invoices.
Does a valid agreement or obligation to arbitrate exist?
answer NO. In this case, there is no dispute that Supplier and Contractor entered into a series of binding sales contracts, and the parties agree that those contracts are governed by New York law and in particular by the Uniform Commercial Code (“UCC”) as adopted by New York. The parties do not, however, agree on the answer to the central question: whether those contracts included an agreement to submit disputes between Supplier and Contractor to arbitration. An arbitration clause appears in the acknowledgement forms Supplier used to confirm Contractor's orders, but not in Contractor's purchase orders. Contractor contends that its purchase orders constituted offers, and that Supplier's acknowledgement forms constituted acceptances of those offers. Supplier argues that its acknowledgement forms were not acceptances of Contractor's offers, but were instead counter-offers that Contractor accepted by performance when it took delivery of the steel casings.
Under New York law, section 2-207 of the UCC governs the formation of contracts when the terms of the parties' writings are not identical. This provision was adopted to alter the common law rule requiring perfect symmetry between the terms of an offer and an acceptance and to resolve the “battle of the forms” problem in a way that better conforms to modern business practices.
Under paragraph (1) of section 2-207, a seller's form response to a buyer's purchase order normally constitutes a “definite and seasonable expression of acceptance” if it repeats the terms of the buyer's order. According to the proviso at the end of paragraph (1), if the seller's response does not state that acceptance is “expressly made conditional” on the buyer's assent to additional terms the seller included, that response operates as an acceptance and a contract is formed. When a contract is formed under paragraph (1), paragraph (2) applies to determine whether the additional or different terms become part of the contract.
If, however, the seller's response is “expressly made conditional on assent” to the divergent terms, then the proviso in paragraph (1) provides that no contract is formed, and instead the seller's response constitutes a counter-offer. To be deemed ‘expressly conditional,’ the seller's invoice must place the buyer on unambiguous notice that the invoice is a mere counteroffer
When the paragraph (1) proviso applies to prevent contract formation, the parties' conduct may nonetheless recognize the existence of a contract, and in that case paragraph (3) of section 2-207 defines the terms of the agreement as those upon which the parties agree together with any supplemental default terms provided elsewhere in the U.C.C.
Supplier argues that its acknowledgement forms were “expressly made conditional on assent” to their additional terms, including the arbitration clause, and thus that they could not have operated as acceptances under section 2-207(1). Supplier asserts that its acknowledgement forms therefore constituted counter-offers, which were subsequently accepted by Contractor's performance. The following two sentences from Supplier's forms are the only likely candidates for Supplier's alleged “express” condition:
This contract reflects in its entirety all details as agreed between the parties thereto. Any changes must be in writing and accepted by both parties.
But these sentences merely purport to characterize the acknowledgement forms as final versions of an agreement that the parties had already reached, rather than expressly requiring assent to additional terms. Supplier's acknowledgement forms thus were not “expressly made conditional” on assent to their additional terms, and in particular to the arbitration clause they included.
The language in Supplier's acknowledgements differs markedly from the express language that courts have found sufficient to establish an “express condition,” for example, a seller's reply to a buyer's purchase order with an acknowledgement form including the following statement, along with an added arbitration provision is enfprceable:
Seller's acceptance is, however, expressly conditional on Buyer's assent to the additional or different terms and conditions set forth below and printed on the reverse side. If the terms and conditions are not acceptable, Buyer should notify seller at once.
It should be noted that even if Supplier's forms constituted counter-offers as it has argued, Supplier could not succeed in incorporating its arbitration clause into the contract. Where, as here, the conduct of the parties indicates that a contract was formed, but the parties' writings do not themselves form the contract, section 2-207(3) applies to provide the terms of the agreement. The parties' writings do not agree on the arbitration clause, and it does not fall under any default provision of the UCC, so section 2-207(3) would exclude the arbitration clause. Supplier's arguments that its forms included some different terms regarding the price and specifications for the steel casings ordered and that Contractor never objected to these variations upon delivery are unhelpful, because Contractor's conduct in accepting the goods only evidences the formation of a contract and Contractor's agreement to certain undisputed terms.
Because Supplier's responsive forms did form a contract under section 2-207(1) despite proposing additional terms, section 2-207(2) applies to determine whether those additional terms became part of the contract. Section 2-207(2) provides that when both the buyer and seller are merchants, the proposed additional terms become binding unless any one of three exceptions applies. The first exception, which is relevant here, excludes additional terms when “the offer expressly limits acceptance to the terms of the offer.”
In each of its purchase orders, Contractor included the clause: “No terms or conditions, other than those stated herein, and no agreement or understanding in any way modifying the terms and conditions herein stated shall be binding upon purchaser, unless mutually agreed upon in writing.” This clause contains clear language expressly limiting acceptance to the terms contained in the purchase order. Supplier's acknowledgement forms thus could not unilaterally impose additional terms without Contractor's written assent.