Battle of Forms: Determining the Prevailing Terms in a Contract Formed by the Exchange of Forms

Introduction

An agreement enforceable by law is a contract. A contract usually contains terms and conditions mutually agreed upon by the parties incorporated in a single document. In the event of a disagreement or dispute between the parties, the terms of the contract determine the parties’ rights and liabilities. When a contract between two parties is formed by the exchange of forms containing their respective standard terms and conditions, the issue arises as to which set of terms and conditions governs the contract and will prevail in case of a dispute. While there is no straitjacket formula to resolve this issue, there are well-settled principles of contract law which help determine the terms that will prevail if a contract is arrived at by the exchange of forms.

When two parties contract with each other by exchanging forms containing their respective standard terms and conditions, it gives rise to what is commonly described as a “battle of forms”. An instance of a contract being formed by exchange of forms is when a buyer approaches the seller to supply certain goods; the seller makes an offer to supply the goods on its standard terms and conditions that are shared with the buyer; both parties agree upon the key commercials of the transaction (such as description and quantity of goods, price, the date of delivery of the goods, inspection of goods, etc.); the buyer places an order to purchase the goods accompanied with its own standard terms and conditions; and finally, the seller acknowledges the receipt of the order. Such correspondence and exchange of the forms containing the parties’ respective terms and conditions usually takes place over e-mails.

The formation of contracts by exchange of forms has become an increasingly popular and convenient mode of carrying on business, particularly in cases of sale/purchase of materials and commodities. In such a situation, the question arises as to which party’s terms and conditions will govern the contract. The issue is precipitated when the forms exchanged by the parties state that the terms and conditions that are contrary to the ones stated therein are rejected.

This article examines the legal position in India and the rules propounded by courts in the United Kingdom and the United States of America to resolve such situations.

Position in India

Under Indian law, a contract originates in a proposal, and a transaction to be recognised as a contract must resolve itself into its acceptance.¹ The Contract Act, 1872 (ICA) provides that the offer and the acceptance of an offer must be absolute and unqualified.² An absolute acceptance is a final and unqualified expression of consent to the terms of an offer.³ The Supreme Court of India has held that when an acceptance is made in an unqualified manner, it takes in its sweep the knowledge of the terms of the offer.⁴

Thus, where an offer is accepted fully and unconditionally on the terms on which it was made, then the resulting contract will be governed by the terms and conditions attached to the offer. On the contrary where an offer is not accepted unconditionally and the acceptance conveyed by the offeree alters the terms and conditions of the offer, Indian courts have held that an acceptance with a variation is not an acceptance of an offer but is a counteroffer.⁵

A strict application of the principle that the acceptance of an offer must be absolute and unqualified would render a majority of the agreements intended by the business community to have binding force invalid.⁶ This is more so when a contract is sought to be formed by an exchange of forms. Judicial precedents indicate that the acceptance of an offer is not required to mirror the terms of the proposal. It has been held that the consensus that the law requires must be on the material terms of the contract,⁷ and whether there has been a meeting of the minds between the parties on the material terms of the contract is to be gathered from the expressions used in the correspondence surrounding the formation of the contract.⁸

The Supreme Court judgment in Padia Timber Co. Ltd. v. Visakhapatnam Port Trust⁹ (Padia Timber) is a locus classicus where non-acceptance of a material term i.e. site of inspection of goods, vitiated the formation of the contract. The Supreme Court held that when the acceptor puts in a new condition while accepting the offer, the contract is not complete until the offeror accepts that condition. In Padia Timber¹⁰, when the respondent (Port Trust) filed a suit seeking damages from the appellant (Padia Timber) for having incurred losses on account of the appellant’s failure to supply the goods, the Court held that no contract was concluded between the parties as a condition imposed by the respondent in response to the offer made by the appellant was never accepted by the appellant.

The Delhi High Court in Saarschmiede GmbH Freiformschmiede v. BHEL¹¹ dealt with a battle of forms situation. The defendant (Bharat Heavy Electricals Ltd.) floated an enquiry for the purchase of machinery (invitation to offer) and the plaintiff (Saarschmiede) submitted an offer to supply the machinery. The defendant placed four purchase orders on the plaintiff (interpreted as acceptance by the court) which contained a clause that the purchase orders will be deemed to have been accepted if no communication to the contrary was received in three weeks from the plaintiff. The plaintiff did not send any communication to the contrary to the defendant in three weeks and instead sent an order confirmation beyond three weeks of the receipt of purchase orders from the defendant. The order confirmation contained a different jurisdiction clause from the one mentioned in the purchase orders. The Delhi High Court held that in the absence of the plaintiff having communicated objections to the purchase orders within three weeks, which would have amounted to a counteroffer, a binding contract came into existence on the terms and conditions mentioned in the purchase orders on the expiry of three weeks from the date of the purchase orders. Disputes and differences having arisen between the parties, the Court held that the plaintiff was bound by the arbitration and jurisdiction clause contained in the purchase orders. Thus, in Saarschmiede GmbH¹², the Delhi High Court resolved a battle of forms situation by applying the traditional principles of offer and acceptance.

We will now review some international approaches for resolving battle of form situations.

International approaches

1. Traditional rule: According to this rule, no contract can be said to have been formed if the proposal is not accepted in the same sense as it was offered. The England and Wales Court of Appeal in Butler Machine Tool Co. Ltd. v. Ex-Cell-O Corpn. (England) Ltd.¹³ applied the traditional rule to resolve a battle of forms situation. The seller (the Butler Machine Tool Co. Ltd.) made an offer to the buyer (Ex-Cell-O Corporation) on the terms and conditions printed on the back of the quotation which included a price escalation clause. The buyer placed an order for the goods on the terms and conditions mentioned in their order which contained additional terms and did not have a price escalation clause. The buyer’s order contained a tear-off slip which required the seller to sign an acknowledgement and accept the buyer’s order on the terms and conditions of the buyer. The seller signed the acknowledgement slip but sent it with a letter stating that the order was being accepted as per the seller’s original terms and conditions. The Court of Appeal construed the buyer’s order as a counteroffer rejecting the seller’s offer and the seller’s act of signing the acknowledgement slip as acceptance of the buyer’s counteroffer.

   In Tekdata Interconnections Ltd. v. Amphenol Ltd.¹⁴, the England and Wales Court of Appeal concluded that the traditional offer and acceptance analysis is to be adopted in battle of forms situations, unless the documents passing between the parties and their conduct show that their common intention was that some other terms were intended to prevail.

2. Last-shot rule: This rule provides that the contract is concluded on the terms and conditions of the party that last shared the terms and conditions or fired the “last shot”, if such terms and conditions were not objected to by the other party. In British Road Services Ltd. v. Arthur V. Crutchley & Co. Ltd.¹⁵, a consignment of whiskey was delivered by the plaintiff with a note carrying the plaintiff’s conditions of carriage. The defendant stamped the plaintiff’s note with another note stating that the consignment was being delivered under the defendant’s conditions. It was held that the defendant made a counteroffer which was accepted by the plaintiffs when they handed over the consignment to the defendant. In this case, as it was the defendant which last shared the terms and conditions, or fired the last shot, so to speak, the Court applied the “last-shot” rule and held that the defendant’s terms prevailed over the plaintiff’s terms.

3. Knock-out rule: This rule is primarily applied in the United States. According to this rule, where a contract involves the exchange of each party’s terms and conditions, the contract is concluded on the terms that are common in substance and any contradictory terms are knocked out or rejected. The knock-out rule finds some statutory recognition in Comment 6 of Section 2-207 of the Uniform Commercial Code (UCC)¹⁶.

   In Daitom Inc. v. Pennwalt Corpn.¹⁷ the Court of Appeal for the Tenth Circuit held that the conflicting terms in the seller’s (Pennwalt Corpn.) offer and the buyer’s (Daitom Inc.) acceptance with respect to the period of limitations and applicable warranties cancelled each other out and the provisions of the UCC must be used to supply such missing terms.

   The United States Court of Appeal for the First Circuit in Ionics Inc. v. Elmwood Sensors Inc.¹⁸, was seen adopting the knock-out rule. The Court held that consistent with Section 2-207 and Official Comment 6 of the UCC:

   34. … where the terms in two forms are contradictory, each party is assumed to object to the other party’s conflicting clause. As a result, mere acceptance of the goods by the buyer is insufficient to infer consent to the seller’s terms under the language of sub-section (1). Nor do such terms become part of the contract under sub-section (2) because notification of objection has been given by the conflicting forms.

   The Court ruled that the case was covered by sub-section (3) of Section 2-207 of the UCC which states that:

   24. (3) Conduct by both parties which recognises 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 any other provisions of this Act.

The knock-out rule appears to be a plausible remedy for resolving the battle of forms situations in jurisdictions where the default terms that will replace the “knocked-out” terms are provided in a statute.

Comment

The reality of modern commercial dealings, as the precedents demonstrate, is that not all parties pay proper attention to the standard forms of their counterparties. It is the intention of the parties, manifested from the correspondence and conduct of the parties, which determines the outcome of the battle of forms situations. The golden thread that runs across the battle of forms situations is that there is a very high likelihood of that party’s terms and conditions prevailing which has:

(i) Built safeguards in its set of terms and conditions to minimise the chances of the counterparty’s terms and conditions prevailing over its terms and conditions. For this purpose, the standard terms and conditions of a party can explicitly state that they will be applicable unless any conflicting terms and conditions are mutually agreed upon in writing by the contracting parties. Foreign precedents indicate that it is possible to avoid losing the battle of forms by careful drafting. A case in point is TRW Ltd. v. Panasonic Industry Europe GmbH¹⁹, where the carefully drafted terms and conditions of Panasonic (that excluded the application of any contrary terms unless agreed to in writing) coupled with the fact that TRW’s representative had signed a “customer file” which made a reference to Panasonic’s terms led to the conclusion that the contract was concluded on Panasonic’s terms.

(ii) Managed to convince the counterparty to sign the party’s standard form terms and conditions. A party will then be in a position to argue that its terms and conditions were expressly acknowledged by the counterparty, and, therefore, they should be treated as the governing terms of the contract.

(iii) Promptly raised an objection that a particular term in the counterparty’s terms and conditions is not acceptable to it, implying that there is no concluded contract. A party can identify the key conflicting terms in the counterparty’s terms and conditions and sign a schedule with the counterparty containing the mutually agreed position on such terms.

(iv) Communicated its position on the counterparty’s terms and conditions clearly and precisely during negotiations. Parties should strive for clear communication and ensure that their own terms and conditions are made applicable to the transaction in question. Firstly, any disagreement on the material terms must be promptly and explicitly communicated to the counterparty and a common position should be reached. Secondly, while placing or accepting purchase orders, the party must, in the accompanying correspondence, expressly state and refer to the terms and conditions on which such offer or acceptance is being made. Thirdly, the offer, purchase orders, or invoices should incorporate by reference, or by annexing, the terms and conditions of the party.

It is an age-old adage that law rewards a vigilant party. Consequently, a party should remain mindful of the counterparty’s terms and conditions and the extent to which they contradict its own and also strengthen its own terms to increase the likelihood of them prevailing in the event of a contractual dispute. A party that has gone the extra mile to ensure that its terms and conditions are made applicable to a transaction or has voiced its disagreement to the counterparty’s contradictory terms and conditions, will possess a significant advantage in a battle of forms.