This article is written by Amay who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.
Table of Contents
Introduction
When there is a commercial contract between commercial industries, it often happens that the parties involved in the contract prefer to carry out the contract on their own standard terms and conditions because they have framed their standard terms to have an undue advantage. But the problem arises when there is a clash of the standard terms and it becomes difficult to understand whose standard terms were agreed to. This can be explained with reference to an example, A wants to buy a product X from B, so B sends an offer to A with standard terms of contracts attached. A on receiving the offer, sends a reply to B, agreeing to buy product X at the price mentioned but also sends the standard terms of the contract with which A would like to be bound. Then it happens that B sends the product along with new terms and conditions and A accepts the product and remains silent on the new terms and conditions.
Then later when there is a dispute between the parties on any issue, the party like in the above situation says that there was only agreement to buy the product but there was no agreement to the terms of standard terms which the other party had proposed. This situation is called the battle of forms.
The basic idea for parties to work according to their standard terms is that it saves time and helps them in reducing litigation expenses as they are well versed with the standard terms. But the battle of forms creates circumstances that counter the intention of having standard terms, thus it is necessary for businesses to come up with a quick fix for this situation.
Solutions to tackle the problem of the battle of forms
- Last shot rule-
The literal meaning of this rule is what has been established and is used to sort out the matters relating to the battle of forms. Under this rule, it is usually the party that fired the last shot wins and their terms and conditions are considered to be the terms and conditions of the contract. This means that the party which sends the last offer for terms and conditions and that offer is not explicitly rejected by the other party, becomes the terms binding the contract.
This rule came into existence by following the already established principles of offer and acceptance. The principles of acceptance state that acceptance can be implied by conduct and need not be implicit. Thus when one party sends new terms and conditions, and there is no express revocation or rejection of terms and conditions, then it is believed that there is implied acceptance to the new terms.
This last shot rule is applied in England in cases of the battle of forms. This is because England follows the rule that an acceptance is not an acceptance unless the terms proposed are the same that are being agreed to by the parties and that the agreement is given in the same sense. But it often does happen that there is no clear agreement given, thus then the implications have to take place and an implied acceptance has to be made the terms of the contract agreed to. A similar incident was in the case of Butler Machine Tool Co. v. Ex-Cell-O Corp. where this last shot doctrine was applied to reach a conclusion of which terms are going to govern the contract. In the case mentioned above, Butler Machine Tool Co made standard terms which included a clause for price variation and Ex-Cell-O Corp made another standard term that did not have the clause of the standard term. Then Butler Machine Tool Co sent a reply saying that they agree to the terms and conditions mentioned in the slip, and after a few days there being no reply from the other side, Butler Machine Tool Co sent goods which were accepted by Ex-Cell-O Corp. Later when there was a dispute in relation to the amount payable by Ex-Cell-O Corp, the court applied the last shot rule and held that the terms of the seller i.e. Butler Machine Tool Co will apply to the contract.
In the shock cushioning seat case, the judges accepted the last shot rule as a valid rule for solving the situation of the battle of forms. The judges in the case explained the rule as ‘the party which exchanges the last document of terms before the contract is performed by both the parties. Another case for last shot doctrine is Magellan International v. Salzgitter Handel. In this case, judges applied the last shot rule and held that all the documents which were exchanged before the exchange of the last document, were all counteroffers. Here we see how the mirror image rule has given birth to the last shot rule.
Another important factor that has to be taken from this case is the fact that Lord Denning who was part of the bench which gave the order in this case, has in many other cases said that the last shot rule is now out of date. He suggested that the overall exchange of documents between the parties have to be looked into to see the intention and then compare them to the terms agreed on by the last shot rule, and then if the terms were reconcilable, then the same should be done and where the parties have agreed to material clauses, those clauses should remain the same. If the terms are such that there is no conciliation possible, then the court will find the middle grounds to the same.
The last shot rule is also followed by the United Nations Convention on Contracts for the International Sale of Goods (UNCISG). This is followed due to the application of the general rules of the contract. UNCISG deviates from the last shot rule to some extent and by following Article 19(2) of CISG, the rule becomes that if the last standard terms which were sent before acceptance of the goods, did not affect the material terms of the agreement, then the new terms will not be considered. But if the final shot terms alter the material terms, then the last shot rule applies as it is. Section 3 of the same article defines material terms and the definition is so wide that eventually at least one material term is affected and the traditional last shot rule becomes applicable.
In Northrop’s case Justice Posner of the United States of Appeal, in his judgment criticized the common law doctrine of last shot rule to conclude or resolve a battle of forms situation. He criticized the doctrine due to its rigid approach. He said that according to the last shot rule, if there is a discrepancy amongst the standard terms submitted by the party, then no contract could be entered into by the parties even if the differences in the standard terms were such that they could be resolved by the parties.
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Knock Out rule-
Under this rule, there is a presumption of the terms of the contract that are accepted will form the terms of the contract. According to this rule, when there are different standard terms that are offered by the parties and when some of the terms proposed are similar and some are not, the terms that are similar for the terms that remain binding on the contract and the differing terms knock each other out and are replaced by regular rules of law. This is the general essence of the knock-out rule. This rule has been applied in many countries but they apply it a bit differently. For example in America, the terms which are in the second or subsequent reply, and do not contradict the terms in the initial document are called ‘additional terms and the terms that are contradicting to the terms of the initial document are called ‘differing terms’. The Uniform Commercial Code of America provides that if the parties that are contracting are not merchants then the additional and differing terms will not become part of the agreement. But if both the parties are merchants, then the additional and differing terms of second documents will apply if there is no explicit intention in the initial document that limits the acceptance of the party that sent the initial document to its terms only. This rule even applies in France and Germany.
An important case where this rule has been used is the Powdered milk case. Here the court in Germany said that by execution of terms of the contract, the parties have given their assent that they agree to be bound by the terms which are not contradictory in nature and have agreed to be bound on the essential ingredients. In this case, the judges said that the contradictory terms are invalid and would be governed by the rules of CISG. Another instance where the knock-out rule was applied was in the case of Les Verreries de Saint Gobain, SA v. Martinswerk GmbH. This was a case in France and was not the conventional application of the rule. In this case, there was a difference of opinion between the parties on material terms, but the judges instead of holding the contract as invalid validated it by applying a knock-out rule.
UNIDROIT Principles of International Commercial Contracts (1994) and Principles of European Contract Law (1998) also follow the knock-out rule. Both of them have separate articles that mention the battle of forms and resolve the battle of forms. They both allow either of the parties to convey to the other party that they are not ready to be bound by the terms of the contract, either in advance or later, but without undue delay.
This knock-out rule is seen as a legitimate solution to the problem of the battle of forms and unlike the other solution suggested or used in a few areas, i.e. last shot rule, the knock-out rule is accepted widely and has not been under much criticism.
Why knock out the rule over the last shot rule?
In this chapter, the discussion will revolve around why the last shot rule is not the most viable solution to the problem of the battle of forms and why the knock-out rule is a better alternative to the problem of the battle of forms.
A wants to buy a product X from B, so B sends an offer to A with standard terms of contracts attached. A on receiving the offer, sends a reply to B, agreeing to buy product X at the price mentioned but also sends the standard terms of a contract with which A would like to be bound. Then it happens that B sends the product along with new terms and conditions and A accepts the product and remains silent on the new terms and conditions. The last shot rule would approach the situation in a way as to understand the acceptance of the product by the buyer to amount to an agreement enforceable by law. Thus the seller being the last person to fire the shot, the terms of the seller would become binding on the buyer. The unfairness in this is that there was no meeting of minds amongst the parties. It cannot be said that the buyer intended to be bound by the terms of the contract, the terms of contract which the buyer was against being implanted.
Germany at earlier times used the last shot rule, but later they shifted to the use of knock out rule. The primary reason for doing this was that the judges felt that the rule gave undue advantage to the sellers as they were the party that would usually be the one with the opportunity to fire the last shot in the series of standard term documents.
This finding of the judges in Germany was not inaccurate. It is always or most of the time the situation that the seller would send the product that the buyer wanted to contract for and along with this, the seller would also send a document of standard terms and conditions to which the buyer will not accept but wouldn’t say anything about as the buyer would have received the product.
Another problem that this last shot rule creates is that it spoils the relationship between the parties that are contracting, and in a corporate and capital world, it is necessary to not strain business relations. The usual reason for the straining of relationships amongst parties is that, both the parties being aware of the application of the law when there is a situation of the battle of forms, the parties will try to be the party that fires the last shot. In this tussle for the last shot, the parties start to have some animosity or dislike for the other party. This will make the parties less inclined to work with each other in the future. The fact that will play in each party’s mind would be that if the opposition party can be so adamant at such an early stage, then what will be the reaction of the party when there is a dispute after the contract has been formed.
The reason why parties enter into a contract is though self-centered but the premise of this is built on mutual agreement. By applying the last shot rule, the law looks at the contract to be something that is only going to benefit a particular party and be disadvantageous to the other. The basic rule that is applicable in the last shot rule is that the offer and acceptance should be the mirror image of each other. Unless the standard term documents of the parties do not exactly match, there can be no conclusion of the contract.
There can be a situation that the parties have reached an agreement with respect to the important terms, like the quality, quantity, date of delivery, price, etc, but have not decided on a minor matter because of which they cannot enter into a binding relationship. This is the perfect example of a situation where though the parties want to enter into a legally binding contract, still due to the stringent approach of the last shot rule, the parties cannot enter into a contract.
Thus the last shot rule fails in enforcing the reason behind an agreement i.e. mutual agreement between parties and it also prevents the formation of a contract though there is a mutual agreement and intention to form a legally binding agreement. This is a huge criticism of the last shot rule. At one end it enforces binding contract on parties that do not have the intention to enter the contract with the other party on the terms decided by the lat shot rule, and on the other hand, the same rule prevents parties from entering into a binding contract when they want to enter into a contract.
One of the reasons behind using standard terms of the contract is that it saves the time of the parties and reduces their costs. But when a battle of forms situation arises, all these reasons which are mentioned for the use of standard terms are not fulfilled if the last shot rule applies.
It is at first sight or at plain sight understood that the last shot rule helps in keeping the transaction costs low as it provides a fixed way for the businesses to approach and creates fixed rules which make law predictable which helps in regulating the conduct of the parties. If there is proper knowledge of the terms that are going to govern the contract, then it is also easier for the parties to come up with ways to limit its liability.
If it is known by the parties that the law in the area is made in such a way that the party that sends the document of standard terms last will be the one who dictates the contract, then the parties will keep on sending their documents of terms and conditions one after the other. There is no sure way that the party could follow to be the last party to send the document of terms and conditions. Thus parties keep on sending documents. Some may argue that businesses, being sensible, will try to sort out the differences. But it has been noticed that this is not the case because businesses being sensible know that if they mess up the terms and conditions of the contract, then they are keeping their businesses open to vulnerability. They understand that there is no need to play legal games as a mistake can cost them a fortune and can be disastrous for their company. The constant sending of documents of terms may also lead to a situation where the party loses interest in contracting and they believe that in the absence of good faith amongst the parties it is better not to have a legal relationship as it may lead to long and expensive litigation. Thus in some cases, the last shot rule will recoil disadvantage to the parties more than the benefit it shoots.
Another major issue with the last shot rule is that it gives parties incentive to keep on sending the documents of terms. The parties being aware that the party that sends the last document before the commission of the sales will be the party that would control the contract. Thus parties to maximize their own profits create terms and conditions to be such that they get the maximum profit, even if it means exploiting the other party to the fullest. Thus only the profit made by one party goes up and the net or cumulative profit of both the parties together suffers.
Some might argue that the market forces that play in the real world would not let anything like this happen and would force the parties to draft the contract in such a way that the mutual interest of the parties prevails.
The argument stated above suffers from two shortcomings or uncertainties. The first shortcoming is that the argument assumes that the parties read each other’s terms and conditions before sending the new document of terms and conditions. This does not happen in businesses as there are no incentives for the business people in reading and understanding the terms. Understanding and elaborating and then even understanding the repercussions of a particular term out of the terms of the document provided by the other party consumes a lot of time and even a lot of money. There is also a need to get legal advice when a new document of terms is received by the party and this adds on to the expenses. Thus the parties do not read the other party’s proposal and just send their own terms. Even if it is assumed that the terms proposed would help in reducing costs incurred by both the parties and thus there is an incentive to read the document, this is also not beneficial for the parties as the benefits that might be reaped by agreeing to those terms is usually less than the costs incurred to get legal advice and to find the proper understanding of the terms. Thus even in best-case scenarios, there comes out to be no incentive in reading the terms and conditions provided by the other party.
Knock out rule does not have to face these problems to the extent the last shot rule has to. Knock out rule involves that when there are conflicting terms in documents stating the terms and conditions of the party, the contract that becomes binding on them is the one that has similar and non-conflicting terms.
If the parties have reached an agreement on the material terms like the nature of the product, the quality of product, the quantity, date of delivery, etc, then it is sufficient to conclude that the parties are at a stage where they can enter into a contract with each other. Unlike the last shot rule, the parties here having intention to enter into a contract can actually enter into a contract even if there are differences in respect to other terms of the contract. Thus this rule values the belief of trust and mutual understanding among the parties. Here the parties will not have to be consumed in the endless battle of documents as opinions of both sides matter. The parties can continue to have good relations.
The knock-out rule also reduces the costs substantially as there is no longer a need to have constant legal advice to draft new sets of documents for terms and conditions. The court by itself decides judiciously on matters where there are contradicting provisions involved. The knock-out rule keeps the spirit of a contract intact and does not lead to a heartless game of sending contracts endlessly in which only one party can benefit.
Thus applying to knock out rule in the situation of the battle of forms leads to amicably resolving of situation, at least as compared to the last shot rule; and the knock out rule even reduces the overall costs that the parties had to incur in order to reach an agreement with the true intention of reaching an agreement. This shows that a last shot rule is no longer a viable option that can be used when faced with the problem of the battle of forms; and that there is a need to let go of this method so that modern contracts that look at mutual benefit and not just on self-enrichment. This method does not leave room for a particular party to be in a more advantageous position as compared to other parties. Thus the parties stand equally when the law has to be applied.
Conclusion
India being a common law country follows the mirror image rule which requires the offer and acceptance terms and conditions to be exactly the same and unless they are exactly the same, there can be no rise to a contract enforceable by law. This holds true even if the parties have reached a stage where there are only minor differences that should not affect the contract as a whole. India when dealing with the situation of the battle of forms, uses the last shot rule which provides that the party sends the last document of terms and conditions before the execution or before the acceptance of goods by the buyer, without saying anything about not being bound or rejecting the documents of terms, will be the document of terms which will bind the contract.
This last shot rule (as discussed above in the research article) is inferior and is no longer the most viable solution to the problem of the battle of forms. There are better methods available to overcome the same problem and this solution is used in other countries where earlier last shot rule used to be applied but was replaced with this superior rule (knock out rule) which has upheld the integrity of a contract and its values in an ordered society. This rule provides that those terms which are in conformity with each other should become the standard terms and conditions of the contract and the contradictory terms will knock each other out. These terms which were knocked out would be replaced by reasonable terms and these terms would be decided by the court. Though this principle brings in intervention which is against the idea of a contract, this is better than giving just a single party to draft the terms of the contract that will bind both the parties. But all this depends upon the precondition that the parties have been able to reach a conclusion and a point of agreement on material terms of the contract.
Thus through this article, the author has suggested that India should move away from the old rule of last shot rule and should adopt a more consistent approach to the battle of forms in way of knock out rule which fulfills the intentions of both the party and allows both parties to have a say in the contract to which they are equals.
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