Supply Chain Survival Series: Key Statutory Default Terms (Article #5)

Newsletter

8.16.2022

In our previous article, we discussed the infamous “Battle of the Forms,” where conflicting terms in buyers’ and sellers’ purchase orders, invoices, and order confirmations can result in neither side’s terms governing their agreement. This article will look at some of the key provisions commonly found in parties’ standard terms and conditions that, when canceled out and replaced by UCC default terms, can result in your company doing business on far different terms than you may have thought.

Limitations on Liability.

Sellers—and some buyers—are keenly interested in limiting their liability in any transaction, and that’s why any well-written terms and conditions will include a conspicuous provision (often in ALL CAPS) limiting liability related to the transaction. Commonly, such provision will state that a party is not liable for certain types of damages (e.g., indirect, incidental, consequential, punitive, exemplary, special, etc.). Many of these provisions go on to state that the party’s total liability arising out of the relationship or transaction is capped at a certain dollar threshold (or perhaps capped at amounts received over a certain number of prior months). It is not hard to see why these limitations on liability are so important: every company wants to know and control in advance their exposure should something go wrong. But what happens under the Battle of the Forms? As an example, ABC Corp. includes robust limitations of liability in its standard terms and conditions of sale and offers to sell a product to XYZ Corp. XYZ sends payment to ABC Corp. along with XYZ’s standard terms and conditions of purchase, which state that no limitations on ABC’s liability (including any cap on ABC’s potential liability) will apply to XYZ’s purchase of the product. ABC Corp processes the payment, never looks at XYZ’s terms and conditions, and ships the product. Now you have a Battle of the Forms, with conflicting terms on limitations of liability. As discussed in our previous Article, in most jurisdictions, when there are different or conflicting terms, the terms cancel each other out and UCC default terms will apply. Under the UCC, the types of damages described above are often recoverable, and there is no cap on any party’s potential liability. Thus, in our example, XYZ Corp. would be allowed to recover the full amount of any damages incurred notwithstanding the fact that ABC’s standard terms and conditions expressly included a cap on its liability and expressly disclaimed consequential or incidental damages¹—which are often far greater than the cost of the product.

Implied Warranties.

Just as sellers should be limiting their financial exposure in their terms and conditions, sellers also want to limit their liability for certain types of claims, including express and implied warranties.

Many parties have provisions in their standard terms and conditions that expressly disclaim any and all warranties with respect to the products being sold unless specifically stated otherwise (e.g., many parties will offer limited warranties to their customers that the product being sold is free from defects in materials or workmanship). This disclaimer of any and all warranties is critical because there are a number of implied warranties provided for under the UCC²—that is, warranties that apply even if the seller does not explicitly state so in its terms and conditions unless expressly excluded by the seller. The implied warranties under the UCC include:

Warranty of Title and Against Infringement (UCC § 2-312): This warranty provides that (a) the title conveyed will be good, and its transfer rightful; and (b) the goods will be delivered free from any security interest or other lien or encumbrance (unless the buyer had knowledge of it at the time of contracting). In addition, this warranty provides that, if the seller is a merchant regularly selling that type of goods, the goods will be delivered free from any rightful claim by a third party that the goods infringe on the third party’s intellectual property rights.
Implied Warranty for Merchantability (UCC § 2-314): This section of the UCC provides that a warranty that the goods will be “merchantable” is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. For a good to be merchantable, the good must (a) pass without objection in the trade under the contract description, (b) in the case of fungible goods, be of fair average quality within the description, (c) be fit for the ordinary purposes for which such goods are used, (d) run, within variations permitted by the parties’ agreement, of even kind, quality and quantity within each unit and among all units involved, (e) be adequately contained, packaged, and labeled as the parties’ agreement may require, and (f) conform to the promises or affirmations of fact made on the container or label (if any).
Implied Warranty of Fitness for Particular Purpose (UCC § 2-315): This warranty provides that, where the seller of goods at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is an implied warranty that the goods will be fit for such purpose.

One can easily see how these warranties, particularly the implied warranties of merchantability and fitness for particular purpose, can be the source of significant disputes between buyers and sellers, and thus why most sellers have terms and conditions of sale that expressly disclaim such warranties. However, what may surprise some sellers is that, in the Battle of the Forms scenario, the above warranties provided for in the UCC would end up applying to the parties’ contracting relationship. These warranties constitute default or statutory terms that apply in situations when conflicting or different terms in the Battle of the Forms negate each other. Thus, sellers should be mindful of this potential risk when engaging in the Battle of the Forms with a buyer, as the protections that a seller may believe it has in its standard terms and conditions may not always apply, which can result in far more exposure than intended.

Attorneys’ Fees:

The final area discussed in this Article where a Battle of the Forms can significantly disrupt parties’ expectations is with respect to the payment of attorneys’ fees in litigation. Often one party includes a prevailing party provision that shifts fees to the winner in any legal dispute. If the other side has a conflicting provision (or no attorney’s fees provision) and end up in a Battle of the Forms scenario, the fee-shifting provision would likely not apply. In most jurisdictions, the default rule for payment of attorneys’ fees in a dispute is that each party will be responsible for its own attorneys’ fees and that, absent a clear statute or contractual agreement stating otherwise, a party’s attorneys’ fees are not recoverable from another party in a dispute even if the party seeking recovery for attorneys’ fees is the prevailing party. Attorneys’ fees can be a significant source of leverage when the counter-party does not perform, especially where the underlying dispute may involve little in the way of monetary damages. This is why many parties will include provisions allowing for the recovery of such fees if they prevail in a dispute. However, as discussed above, parties need to use caution before assuming that they will be able to recover attorneys’ fees in a dispute because, if the Battle of the Forms results in conflicting or different attorneys’ fees provisions cancelling each other out, there may be no ability to recover attorneys’ fees under the default rules of most jurisdictions.

The above scenarios are certainly not the only situations where a Battle of the Forms analysis can significantly alter the legal framework applied to a dispute between contracting parties. However, given how limitations of liability, warranty claims, and attorneys’ fees can impact a dispute, parties should pay close attention to these issues if they spot a potential Battle of the Forms situation, and consult with an attorney to understand how these issues impact their decision making.

With that, we move to the next article, which will cover additional default terms imposed by the UCC in certain situations.