An Order Acknowledgment Can Create a Binding Contract

Your company receives a purchase order from a customer and you send back an order acknowledgment to confirm the order.

But your acknowledgement states payment terms different from those stated in the PO.

Or you acknowledgment adds a warranty disclaimer that is not included in the PO.

Might your acknowledgement be enough to create a contract by acting as the “acceptance” of the PO (which is legally considered the “offer”).

Then what if there is a dispute about that warranty disclaimer or the payment terms? Do we ignore those different or additional terms?

This is what is called the “battle of the forms” problem in commercial law. Thankfully, the Uniform Commercial Code (in California, the Commercial Code) realizes that these situations arise frequently and has rules to help resolve the question of what terms control the agreement between the parties.

One way to protect yourself is to make sure that your acknowledgment states, expressly, that there is no acceptance of the PO unless the different or additional term are agreed to by your customer, the buyer.

But if you did not include that in your acknowledgment form, the general rule under the Commercial Code is that, between merchants, the different or additional term becomes part of  the contract unless certain conditions exist.

If the different or additional term changes the contract in a material way, it is not included in the contract. So, in our example, a different payment term or a disclaimer or warranty would change the contract materially so they would not become part of the contract between you and the buyer.

If the buyer notices the different or additional term and sends a rejection notice of that term within a “reasonable” time, such terms do not become part of the contract.

The point of the Commercial Code is to make commercial transactions flow quickly without getting hung up on differing or additional immaterial contract terms. That’s why the default rule is to allow the acknowledgment to act as the contract acceptance even if it conflicts with the PO in minor ways.

The best protection, for either the buyer or seller, is to make sure that your form of PO or acknowledgment are clear that any material terms you have in there must be accepted by the other side otherwise there is no binding contract.

References: California Commercial Code section 2207.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

Advertisements

About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
This entry was posted in Uncategorized and tagged , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s