Tag Archives: UCC

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Mirror Image Rule vs. Last Shot Rule

Depending on the industry, a certain percentage of business is conducted vis-à-vis signed contracts. However, my observation is that much of commerce is conducted by the seller submitting its quotation (with its terms of sale), the buyer submitting its purchase order (with its terms of purchase) and neither signing the other’s form. This is an effective practice, but what happens when both parties have not signed the same document? How do you know what the terms of the agreement are? Unfortunately, it is difficult to answer these questions until after the fact.

Battle of the forms

During contract negotiations, each party typically exchanges its form which contains very different terms from the other’s form. In fact, it is common for numerous forms to be exchanged with competing terms and no final contract to which the parties have agreed to all the terms is ever signed.

General contract law

Traditional contract law requires that an offer and an acceptance to that offer be exchanged in order for a contract to be formed. In the real world, the issues are: What happens if the offer and acceptance contain different terms? Has a contract been formed? If so, whose terms control?

Two approaches have evolved over the years to address these issues:

1.      Mirror image rule

The mirror image rule requires the offer to be accepted “as is” for a contract to be formed. Once an offer is accepted, the parties have a legal agreement. If the party accepts the offer but changes one term, a contract does not exist under the mirror image rule. Rather, the acceptance with the changed term becomes a counteroffer to be accepted or rejected by the other party.

In the context of commerce, if the buyer submits a purchase order with its standard terms and conditions, and the seller accepts it but submits its own standard terms and conditions that are significantly different, there is not a contract under the mirror image rule.

In that common scenario, the contract is formed when the parties begin performance.

2.      The last shot rule

Under the last shot rule, however, the acceptance does not necessarily have to match the offer word for word. In the example above, if the buyer submitted its purchase order with full payment and the seller accepted by sending its own terms and conditions, then the seller’s “acceptance” becomes a counteroffer with its terms and conditions applied. The buyer’s payment constitutes acceptance by performance and, since the seller’s form was the last document to be sent, it constitutes the contract under the “last shot rule.” In other words, the last shot rule provides that the last document sent before performance is the governing document.

The Uniform Commercial Code (UCC) overrules both the mirror image rule and the last shot rule, which will be discussed further in our next blog.

If you need assistance understanding if a contract has been formed or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.

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How Does the CISG Differ from the UCC?

Hopefully you have read our previous blog titled “Contracts for the Sale of Goods & the CISG.” This blog will focus on some of the key differences between the United Nations Convention on the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC). When the CISG is applied, the parties often make inaccurate assumptions regarding the existence of a contract between them. For example:

  • The contract may be declared invalid due to its indefiniteness if neither the price nor a formula for calculating the price is set forth. This can be fatal to the contract under the CISG but not under the UCC. If the court must determine the price under the CISG, it will declare the price to be the price charged at the time of conclusion, not the reasonable price standard at the time of delivery that is applied under the UCC.
  • Under the CISG, a revocable offer becomes irrevocable when the offeree mails its acceptance or if the offeree relies on the offer. This gives rise to a potential claim for full contractual damages rather than simply a reliance interest or other quasi-contractual or equitable remedy.
  • If the offer sets a deadline by which it must be accepted, under the CISG the offer is irrevocable until that date. In contrast, the UCC provides that an offer is revocable until it is accepted, with certain strict exceptions.
  • The CISG, in contrast to the UCC, doesn’t require the contract to be in writing or meet any other requirements as to form. In fact, the CISG allows a contract to be proved by any means, including witness testimony.
  • Under the CISG, if the offer and acceptance do not match perfectly (which often occurs when each party uses their own standard forms), the acceptance will be treated as a counter-offer which is often deemed accepted by performance of the contract. This can result in the seller’s terms being applied to the purchase and sale under the CISG, which should be motivation for buyers to opt-out of the CISG. Under the UCC, only the terms that both parties have agreed to will be included in the contract.

Finally, U.S. businesses have a better understanding of what to expect under the UCC because there is extensive case law interpreting it. To ensure that the UCC applies to your international contracts for the sale of goods, make sure your contracts specifically and explicitly exclude the CISG.

To ensure that your contract provides you with the most protection available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.

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Contracts for the Sale of Goods & the CISG

If you have not heard of the United Nations Convention on the International Sale of Goods (CISG) and you conduct business in different countries, you need to read this blog! Many American businesses are shocked when they learn that the CISG and not the UCC may be the applicable law to their contracts when dealing with out of country suppliers/ customers. The CISG has been ratified by the United States, making it qualify as American federal law (and therefore pre-empting state law). Thus, unless the CISG is specifically excluded from a contract that falls within its scope, it (and not the UCC) is the applicable law.

What type of contract falls within the CISG’s scope? In short, any agreement for the sale of goods between parties who have their place of business in different countries that are parties to the CISG (CISG Parties). Determining a parties “place of business” is not always easy. For instance, a US buyer that enters a contract for goods manufactured overseas with a distributor incorporated and with offices in the US may be within the CISG’s scope. Additionally, the CISG can apply in the domestic sale of goods if the parties’ places of business are not in the same country. This would occur in the case of an agreement between a US buyer and a foreign seller for goods to be delivered from the seller’s US store or warehouse.

In determining if a contract is for the sale of goods, it does not have to be solely for the sale of goods. The agreement must concern “predominantly” the sale of goods and not services. This means that an agreement for the sale of goods to be manufactured can fall within the CISG’s scope. An exception can occur if the buyer supplies a “substantial” portion of the materials necessary to manufacture the goods. Additionally, the sale of stocks, investment securities, negotiable instruments and money do not fall within the scope of the CISG.

If the parties want to ensure that the CISG does not apply to their contract, they must include an express statement excluding its application. The statement must be more than saying the contract will be governed by a specific state’s law because the CISG is considered state law. Thus, the contract should specifically declare that the CISG does not apply to the contract.

If the parties wish to opt-out of certain provisions of the CISG but not others, the contract must specifically outline the partial opt-out terms. Also, if the parties to a contract for services or for a mix of goods and services wish to opt-in for the CISG to be applied, they are generally allowed to do so by specifically stating so in the contract.

For more information regarding how the CISG differs from the UCC, please read our next blog or contact Leslie S. Marell to schedule your initial consultation.

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Should Your Contract be Fully Integrated?

When you have a written contract and a dispute arises, often one party will claim that the contract meaning is different than what it says. In an effort to prove their claim, the party typically attempts to submit external evidence to alter or add to the agreement. However, Article 2 of the Uniform Commercial Code (UCC), which is applicable to all contracts for the sale of goods, prevents the use of external evidence where the parties executed a fully integrated contract.

A fully integrated contract is one that provides that it is the “final written expression” of the parties’ agreement and no prior discussion or agreement can be invoked to add or change the agreement A fully integrated contract will contain a clause entitled “Entire Agreement” or “Integration” and usually appears at the end of the document.

The Seventh Circuit recently tackled this issue in the case of Druckzentrum Harry Jung GmbH & Co. KG v. Motorola Mobility, LLC, 774 F.3d 410 (December 18, 2014). The Druckzentrum contract contained a provision that stated the contract was the full understanding of the parties and it superseded everything else. However, Druckzentrum wanted to present extrinsic (outside) evidence as proof that the parties intended there would be exclusivity, even though the contract contained no such mention of exclusivity.

In applying § 2-202 of the UCC, the Seventh Circuit determined that the use of extrinsic evidence to explain or enhance the contract was prohibited. Druckzentrum argued that its extrinsic evidence fell within the exception in § 2-202(b), which permits evidence of consistent additional terms. The Court ruled that the exception does not apply if the contract is states that it is wholly integrated.

Druckzentrum made an additional attempt to fit within the § 2-202(b) exception by arguing that the contract was not fully integrated since it included other documents by reference. However, the Seventh Circuit held that because the contract specifically incorporated certain documents, any documents not specifically incorporated where necessarily excluded. As a result, the court ruled against Druckzentrum on summary judgment.

IMPORTANT TAKEAWAY:

Most business contracts contain entire agreement clauses. When negotiating and signing your contract, it’s important to ensure that all deal points discussed be included into the final contract and that the language accurately reflects the deal. Otherwise, you will have a difficult time introducing evidence of other terms or conflicting terms if a dispute arises.

To learn more about fully integrated contracts or how we can assist you with other business-related matters, contact Leslie S. Marell today.

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Shipping Terms in Your Commerce Contracts

Shipping terms used in domestic commerce in the United States are defined by the Uniform Commercial Code (UCC), as adopted by each individual state. However, the UCC terms (as they currently stand) are inadequate for international transactions because they do not deal with responsibility for exporting and importing as well as who loads and unloads the goods at the various points throughout delivery and who pays for which points of delivery. . If you are an importer, your shipping terms should be defined by referring to the “Incoterms,” which is a registered trademark of the International Chamber of Commerce (ICC). The ICC drafted the Incoterms and continues to update and revise them every 10 years, with the latest version having been published in 2010.

Incoterms are used by exporters and importers in nearly every trading country worldwide and they define the primary obligations of the exporter and importer in relation to the shipment of goods in international transactions. There are 11 very specific delivery terms in the Incoterms all of which precisely define who is responsible for transporting, loading and unloading from the seller’s facility, the port of export and the port of import, insuring, and complying with exporting and importing regulations..

There is no such detailed definition of the terms of delivery within the UCC  The “F.O.B. term deals with the issue of risk of loss and freight charges. People routinely modify the term to add language such as F.O.B, Origin, Freight Prepaid & Charged Back.” The additional language is not defined in the UCC; rather it is ‘defined” by industry usage.

The 11 Incoterms do not require additional statements. As soon as the seller quotes the buyer “EXW ABC Facility in Houston, TX, USA-Incoterms 2010”, both parties know that the seller is saying that any freight charges, forwarding fees and customs clearance are the Buyer’s responsibility.

It is important that you understand the distinctions between the 11 delivery terms of the Incoterms 2010. It is also important that you have similar discussions with your supplier as to which delivery term will apply and then ensure that this term I’m convinced that you need a “cheat sheet” listing all the responsibilities included as part of your purchase order. I’ve created a graph identifying the buyer’s and seller’s obligations within the 11 Incoterms and will be happy to email it to you if you send me an email to Leslie@marell-lawfirm.com.

Our next blog will provide you a brief summary of some of the Incoterms you will want to be familiar with. However, this can be a very complex area of the law and you should obtain legal counsel when participating in international trade. Contact Leslie S. Marell for assistance in understanding domestic shipment terms under the UCC and international shipment terms under the Incoterms.