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.