Once you have determined that you have a valid contract, it is important that you follow it. That means that you must determine the terms of your contract. Sometimes that is not as straightforward as it might appear.
The worst case scenario is that you have an oral contract. Three months later when a dispute arises, no one will remember exactly what was said. Even worse, one or both parties may lie. If you are a party to an oral contract, think about confirming its terms in an email or letter. If not, just keep your fingers crossed.
Many contracts for the sale of goods are formed by one business sending a purchase order to another. Sometimes, the business receiving the purchase order may return an acceptance to the original sender but which includes additional contract terms, such as a disclaimer of warranties.
Generally, additional terms included in an acceptance do not become part of the contract unless the acceptance is expressly conditioned upon acceptance of the additional terms.
However, in the sale of goods, and when both the seller and the buyer are merchants, the additional terms become part of the contract unless one of the following is true:
- The original purchase provided that no additional terms would be accepted.
- The new terms seriously alter the already agreed upon terms.
- The recipient of the additional terms objects to them shortly after receipt.
A merchant is a person who ordinarily deals in goods of the kind being bought or sold. Thus, a car dealer is a merchant with respect to cars, but not with respect to appliances.
Hopefully, your contract is a written agreement signed by both parties which contains a clause stating that it is the full understanding of the parties concerning the transaction.
However, even in that case, determining its terms can be unexpectedly difficult. For instance, consider a contract to buy and sell 1,000 doors, but which does not specify whether they must be solid or hollow inside.
Is the seller obligated to provide 1,000 doors that are solid, hollow, or some combination?
If a written contract is silent with respect to any particular issue, it can be supplemented by the following:
- Course of performance: the history of the parties’ dealings with each other with respect to the same contract or transaction.
- Course of dealing: the history of the parties’ dealings with each other with respect to other contracts or transactions.
- Customary practice: the customary practices of the parties’ industries or trades.
These sources of supplementation are listed in order of precedent. In other words, course of performance trumps or outweighs course of dealing, and course of dealing trumps or outweighs customary practice.
If the seller has provided the buyer with all solid doors in previous transactions, then course of dealing would impose upon the seller the obligation to provide all solid doors.
However, assume this shipment of 1,000 doors is only one of three shipments that are part of one contract. If the buyer has previously accepted hollow doors, then course of performance dictates that the buyer must accept hollow doors for this shipment.
Thus, course of performance controls over course of dealing.
Other sources of supplementation to watch for include:
- Warranties implied in any sale of goods, such as the warranty of merchantability and maybe the warranty of fitness for a particular purpose.
- Oral warranties made before or during the time of entering the contract.
- Clauses in the contract that incorporate other contracts between third parties, which should always be a red flag.
If you aren’t sure of a contact’s terms, and you can perform under either possibility without significant additional expense, ask the other party for a written clarification.
Printed in Four Rivers Business Journal (Paducah Sun), May 24, 2012.