Battle of the Forms III
Prof. Bill Long 2/1/05
Explaining "Materially Alter"
Thus we have seen that buyer's terms cannot really be "knocked out" by the seller, though the seller can add his/her own terms to the contract. These "additional or different" terms become part of the contract unless timely objection is raised by the buyer. But here is the next big question, a sort of sub-question to the previous one.
Question 4: How Do "Additional or Different" Terms Differ From Terms that "Materially Alter" a Contract?
This question is important because an additional or different term will become part of the contract, while a materially different term will not. Here is where Cmt. 4 and 5 come in. These comments try to list situations which "materially alter" the contract and those that "involve no element of unreasonable surprise" (i.e., are "additional or different" terms). I don't need to quote the comments in detail. An example it gives that materially alters the contract is if the seller tried to negate the standard warranties or one in which there is a demand for payment that is not commercially reasonable or practiced in the trade. An example of terms that do not materially alter the contract would be "fixing the seller's standard credit terms when they are within the range of trade practice (Cmt. 5)." The key seems to be that if something is within normal trade practice it is an additional or different term.
But then, the Cmt tells us that a clause limiting remedies "in a reasonable manner" is an additional or different term. Thus, under the Code's analysis, a limitation of remedy clause in the AF would be an "additional or different term" that would automatically be incorporated into the contract unless objected to by the buyer. Problem is that courts increasingly see limitation of remedy clauses as things that materially alter contracts. Thus, courts are doing something that they are not "expected" to do--disagree with the Official Comment. What is the law now on the issue of whether a seller's limitation of remedy clause in its AF is an "additional or different" term OR "materially alters" the contract? Well, there is no unanimity, but courts lean toward a limitation of remedy clause as a material alteration. [Question: What is at stake in the difference?]
One Other Thorny Problem
What is the rule of law, finally, if both buyer and seller have clauses in their forms that flatly contradict each other? Whose, if either, controls? Here is an example. Let's say that the B has a clause allowing him two years to bring an action for defects and S has a clause in its AF that limits the time for bringing an action to a year. What is the law if the yo-yos or widgets explode, so to speak, at eighteen months? Can buyer successfully bring suit against the seller?
As with many issues in law there appear to be two (or even three) answers. Most courts held, for the first 20 years of the Code, that the buyer's terms would control. One interpretation, which frankly hasn't gained a lot of following, is to distinguish between "additional" and "different" terms and recognize that "different" has dropped out in 2-207(2). This would mean that where there are "different" terms (and a one-year SoL is definitely "different" from a two-year SoL), the clause doesn't apply, and it therefore doesn't become part of the contract. It drops out. Another analysis would have it that a term that specifically contradicts a buyer's term is by its nature a materially alteration--hence it drops out. A third view, gaining in prominence, is that if you have directly contradictory provisions that both ought to drop out and the general statute of limitations of Article 2 should control (2-725). That is, this approach is known as the "knockout rule," and would apply only in circumstances where directly contradictory provisions are at stake.
Defending the "Knockout Rule"
The court that first articulated this rule defended it as follows. It is "supported persuasively by the underlying rationale and purpose behiind the adoption of 2-207...To refuse to adopt the 'knock-out' approach and instead adopt one of the remaining two approaches would serve to re-enshrine the undue advantages derived solely from the fortuitous positions of when a party sent a form (Daitom, Inc. v. Pennwalt Corp., 741 F2d 1569 (10th Cir 1984))." The court might also have mentioned that the assumption behind 2-207(3) is a knockout rule assumption. I really do not need to exposit the text here because, unlike 2-207(2), 2-207(3) has been applauded for its clarity and utility. It 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 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 the other provisions of this Act."
You ought not to lose sleep over the issue of whether the knockout rule is gaining in prominence at the expense of the first-shot rule with respect to 2-207(2) in cases where the PO and AF contradict each other. It is enough, I think, that you are aware of the contours of the issue as I have presented them.
One final issue. The amenders of Art. 2 decided to revamp this provision (good idea!), by separating out the contract from the materially alter issues. If you would like to look at what they do, examine the new Art. 2. But for now, we have to deal with what we have, and that is old Art. 2.
Copyright © 2004-2007 William R. Long