battle of the forms and 2-207 and malden mills and arbitration clause

One of the biggest events in media-world in the late 1990s was the story of the rebuilding of Malden Mills Industries after a terrible fire in 1995. The reason the news media picked up on the Malden Mills story was because of the generosity of the owner in affording wages and benefits to the hundreds of workers put out of work through this catastrophe. We see Malden Mills through a different lens, however, in this case from the Supreme Judicial Court of MA, Commerce & Industry Ins. Co v. Bayer Corp., 742 NE2d 567 (MA 2001). At issue here were the applicability of provisions in both the seller's and buyer's forms that tried to negate each other's provisions.

The Facts and Provisions in the Forms

On Dec. 11, 1995 an explosion and fire destroyed several Malden Mills' buildings. Subsequently, through its insurer, Malden sued Bayer, its supplier of nylon tow, which caused the fire. In other words, the nylon tow had been ordered, accepted and used by the plaintiff. In its purchase orders, Malden (who is the offeror in this contract) had the following arbitration provision:

"Any controversy arising out of or relating to this contract shall be settled by arbitration in the City of New York or Boston as [Malden Mills] shall determine in accordance with the Rules then obtaining of the American Arbitration Association or the General Arbitration Council of the Textile Industry, as [Malden Mills] shall determine."

It also had a section in the "terms and conditions" providing:

"This purchase order represents the entire agreement between both parties, notwithstanding any Seller's order form, whether sent before or after the sending of this purchase order, and this document cannot be modified except in writing and signed by an authorized representative of the buyer."

Bayer, the offeree/seller, prepared invoices with the following language at the bottom of the form in capital letters:

"TERMS AND CONDITIONS: NOTWITHSTANDING ANY CONTRARY OR INCONSISTENT CONDITIONS THAT MAY BE EMBODIED IN YOUR PURCHASE ORDER, YOUR ORDER IS ACCEPTED SUBJECT TO THE PRICES, TERMS AND CONDITIONS OF THE MUTUALLY EXECUTED CONTRACT BETWEEN US, OR, IF NO SUCH CONTRACT EXISTS, YOUR ORDER IS ACCEPTED SUBJECT TO OUR REGULAR SCHEDULED PRICE AND TERMS IN EFFECT AT TIME OF SHIPMENT AND SUBJECT TO THE TERMS AND CONDITIONS PRINTED ON THE REVERSE SIDE HEREOF."

The Suit and Legal Analysis

When Malden sued Bayer in contract and tort, Bayer demanded, according to the arbitration provision in Malden's form, that they submit the claim to arbitration. Ironically, Malden, declined to do so, and so Bayer moved in court to compel arbitration and stay litigation against it.

But rather than miring itself down in the analysis of whether there are additional or different terms here, or whether someone's later terms "materially alter" the terms of the other party, the court decided that since the suit came after the fire, the goods had already been accepted through conduct by both parties. That is, it jumped right to 2-207(3) to explain the problem. Even though they might have had inconsistent provisions in their contracts/purchase orders, the parties had gone ahead with the contract. 2-207(3) provides:

"Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the partie do not otherwise establish a contract."

With this as the starting point, the court went on then to the question of whose terms control when you have a contract established by conduct. The statute provides:

"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," 2-207(3).

Conclusion

Once you conclude that the case is to be decided under 2-207(3), you see that the "contract" consists only of those terms in which the purchase order and acknowledgment form agree. Then, after the extent of this agreement is recognized, you add to it any "supplementary terms" from the rest of the Act. The supplementary terms in mind are primarily what are called the "gap fillers" of the 300 series of Article 2. But, if this is the rule, then Malden Mills' arbitration clause must drop out because such a clause did not appear also in Bayer's form. When it drops out, then, there is no longer an arbitration clause, and the parties are free to litigate. Thus, the final irony in this case is the the clause which Malden wanted (to arbitrate) was attacked by Malden itself and was removed by the court. Though appearance in a court trial is sometimes a bigger "roll of the dice" than appearance at arbitration, in an emotionally-gripping case like this Malden had a much greater shot of a large recovery before a jury than before an arbitrator.

Thus, even if we don't come to precise knowledge of all the contours of 2-207 interpretation, we at least are brought into fascinating issues in the social history of America of the last decade.

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