Procurement & Suppliers: Paying Attention to Terms & Conditions to Keep Supplier Relations Postitive
Editor's Note: Today's blog is by our great friend, Chuck Intrieri where he gives us a fantastic example of how Procurement and Suppliers can enhance Supplier Relations by navigating the "Battle of the Forms."
Battle of the Forms: Will You Win, Lose or Draw?
If your business receives or issues purchase orders or invoices for products or services on a regular basis, you may have encountered a situation where both the Buyer, i.e. a procurement professional in your supply chain and Seller, or the more often known as the supplier, have issued forms with different terms for the same transaction. In the legal world, we call this situation a “Battle of the Forms.” In the real world, it can lead to delays and confusion, and, in the worst cases, prolonged and protracted litigation, resulting in bad supplier relations. As I’ve mentioned in previous articles supplier relations are an essential component of a sustainable and functional supply chain.
Often, when forming a contract, one party makes the offer, whether by invoice, credit application or otherwise, and the other party accepts or rejects the offer by signing the credit application, simply paying the invoice, or by doing nothing. When that happens, there usually is no Battle of the Forms as both parties have agreed to the identical terms for the transaction. However, in many circumstances, the supplier will send an invoice that contains one set of terms, while the procurement professional will issue a purchase order which contains additional or different terms. Naturally, a supplier relations conflict exists. The question becomes, is there a contract at all, and if so, whose terms govern – the Buyers or the Suppliers?
Contract Negotiation Enhancing Supplier Relations
When these supplier relations problems arise, they often end up in court. For example, in one Indiana case, Tyler Pipe Industries, Inc. (“Buyer”) and Maxon Corp. (“Seller”) were negotiating over two piping units to be manufactured by the Seller. The process began when the Seller submitted a price quotation to the Buyer stating the estimated cost to produce the two piping units. The Buyer then sent a purchase order affirming its intention to purchase the two piping units to be manufactured by the Seller. However, the Buyer’s purchase order also contained various terms and conditions that were not included in the Seller’s quotation. One of the Buyer’s additional terms stated that the Seller warranted that its products would be free from defects and that the Seller would not insert additional contract terms and conditions inconsistent with the terms and conditions listed on the Buyer’s purchase order unless the Buyer expressly accepted the new terms and conditions.
The Seller went forward and manufactured and shipped the two piping units, accompanied by an invoice. The invoice contained more additional terms and conditions yet. Seller’s additional terms stated that Seller’s products would be free from defects and would perform as promised when installed and operated correctly. Moreover, the invoice also contained a non-liability condition that stated the Seller would not be liable for any injury or damages.
Neither party paid sufficient attention to the terms and conditions that were attempting to be imposed by the other party’s forms, and apparently, both sides thought the terms of the deal were as they had proposed in their form. The problem arose some time later when one of the piping units exploded and caused injury to the Buyer.
After the explosion, the Buyer demanded that the Seller pay all the costs associated with the repair of the piping units, refund the purchase price the Buyer paid for the piping units, and pay all the fees related to the personal injuries sustained by the Buyer. The Buyer’s position was that the warranty against defects in its form governed the situation and that the Seller was liable. Not surprisingly, the Seller’s position was that it was not liable because of the non-liability condition contained in its form.
The Battle of the Forms Continues in the Court Room
After several years of litigation and after both sides spent tens of thousands of dollars on attorneys’ fees, the Indiana Court of Appeals found that the parties did indeed have a contract. The Court conducted a very complicated and thorough analysis in determining which terms and conditions applied and which did not. In the end, the Court found that the Buyer had never expressly accepted the Seller’s additional term and condition stating it would not be liable for any injury or damages. This dispute presents a classic Battle of the Forms example. The Seller attempted to materially alter the contract by adding contract condition despite the Buyer’s invoice provision stating that no new terms or conditions could be entered into the contract absent the Buyer’s express consent. As a result, the Buyer won both the costly Battle of the Forms and the war because of its prudent invoice provision requiring that the Buyer expressly accept any additional or different terms.
It is important to note not the particular outcome of this example, but rather that it was the Court who ended up writing, or re-writing, the contract because the parties were trying to impose different terms and conditions on each other. There are many other cases and contexts in which the Battle of the Forms issue has played out in court proceedings and arbitrations. In many of these cases, the parties spend hundreds of hours of their own time as well as tens of thousands of dollars on attorneys’ fees and wait several years for the opportunity to have the court or arbitrator tell them whether or not a contract existed, and if one did exist, what the terms were. Obviously, every prudent businessperson wants to avoid such a time-consuming and expensive problem.
Moral of the Story: Know Your Forms
To prevent the Battle of the Forms issue, the first step is to examine how you do business as well as review the forms you use, or if you do not use forms, the manner in which you sell or buy goods or services. For instance, if you are the Seller of goods or services and you want the contractual terms in your form to control the entire sales process, your liability or any other specific business concerns you may have, your form should have a provision in it which makes acceptance by the Buyer “expressly conditional on the Buyer’s assent to only the terms set forth in the Seller’s contract.” If, on the other hand, you are the Buyer, and you want your terms to control the purchase, your liability or any other specific business concerns you may have, you must state in your form/purchase order that your acceptance is expressly conditional on the Seller’s agreement to the additional or different forms set forth in the Buyer’s (your) form.
There are many variations to this problem. If the parties cannot agree, they are letting a court decide what their contract is. The bottom line is, THE FORMS THAT YOUR CUSTOMER OR SUPPLIER SENDS TO YOU CAN CHANGE THE TERMS YOU THOUGHT APPLIED.
If you have any questions concerning whether or not your form says what is needs to say to avoid Battle of the Forms, have your attorney take a look. Nothing you or your attorney can eliminate the risk of the Battle of the Forms and subsequent litigation; however, to minimize that risk, the first step is to closely examine your forms and the way you do business to reduce the chances of an issue like this to occur.