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Executed Agreements: The Easy Path
Let’s take the ideal scenario first. If the buyer and seller have executed (or otherwise accepted and performed under) a written agreement, the terms of that agreement govern. In that case, the delivery term (e.g., DDP, EXW, FOB, etc.) within the agreement applies and determines which party is responsible for payment of tariffs.
Battle of the Forms: A Primer
A more complicated, but very common, scenario occurs when parties exchange their own self-favorable terms and conditions without ever executing a document. For example, a buyer sends a purchase order for goods to the seller and in return the seller sends an order acknowledgement to the buyer, each containing the respective party’s standard terms and conditions, but neither party ever signs a writing. The result is a “battle of the forms” issue under Article 2 of the Uniform Commercial Code (UCC).
In a battle of the forms, the content of the exchanged forms dictates which terms are incorporated into the final agreement. Any terms the parties agree on (i.e. those which are the same in each form) are incorporated into the agreement. But what about conflicting or additional terms?
Conflicting Terms
The UCC dictates that when battling forms contain conflicting terms, those terms are “knocked out” of the final contract and any resulting gaps are filled with UCC default terms, known as “gap-fillers,” if such terms are available in the code.[1] When gap-fillers are not available, and the parties cannot agree to a term, it is likely then up to a court to determine what term to insert.
Additional Terms
Additional terms (those which are not contained in and/or do not conflict with terms in the other party’s form) may become part of the final contract, unless (a) the offer contains an express limitation to its terms, (b) the additional terms materially alter the agreement[2] or (c) a notice of objection to the additional terms has been or is given within a reasonable time.[3] Whether additional terms become part of the final contract often depends on which form contains language stating that it is expressly conditioned upon the other party’s acceptance of, and is limited to, the terms contained therein and/or that any additional or different terms are rejected.
Let’s look at some example scenarios:
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Scenario 1: The initial offer (such as a buyer’s purchase order) contains express limiting language like that mentioned above.
- When a written confirmation is sent in return (such as a seller’s order acknowledgement), a contract is formed, but any additional or different terms contained therein will not become part of the final contract.
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Scenario 2: The seller’s order acknowledgement contains the express limiting language, instead of the buyer’s purchase order.
- A contract is formed, and the additional and different terms contained in the order acknowledgement become part of the contract, unless the buyer objects in a reasonable time or the additional terms materially alter the agreement.
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Scenario 3: Both the purchase order and the order acknowledgement include express limiting language.
- The order acknowledgement is considered a counteroffer, so no express written contract is formed.
- However, the parties can still establish a contract through conduct that recognizes the existence of a contract (such as the seller shipping and the buyer accepting the goods). If that occurs, then any different or additional terms in the battling forms are not part of the final agreement – only terms that matched in both forms are included.
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Scenario 4: Neither the purchase order nor the order acknowledgement contains express limiting language.
- The order acknowledgement – even if containing additional or different terms – constitutes acceptance, thus a contract is formed.[4] Any additional terms become part of the final agreement, unless the other party objects in a reasonable time or the additional terms materially alter the agreement. Any conflicting terms are knocked out and may be replaced by gap-fillers.
Battle of the Forms: What Delivery Term Wins?
In each scenario discussed above, any terms the parties agreed upon in the battling forms become part of the final agreement. For example, although uncommon, if the battling forms contain the same delivery term (i.e., both specify EXW (Incoterms 2020)), then that delivery term applies, even with respect to contracts formed through conduct (such as Scenario 3 above).
Conversely, if each party’s terms and conditions contain a different delivery term (e.g., EXW vs. DDP), the conflicting delivery terms would be knocked out of the final agreement.
The UCC provides some gap-fillers for delivery responsibility. If all delivery terms are knocked out, the UCC provides that the place of delivery is the seller’s place of business.[5] In that event, the buyer is responsible for transportation of the goods and would consequently be responsible for any tariffs imposed subsequent to the seller’s tender.
If some form of delivery by the seller is required or authorized by the agreement, the UCC requires the seller to put the goods in the possession of a carrier “and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case.”[6] As a result, courts would likely look to course of performance, course of dealing and/or trade usage to determine who has delivery (and as a result, import/tariff) responsibility.[7] For example, if prior to the contract in question, or if in prior deliveries under the contract in question, the seller had always been responsible for delivering the goods to the buyer’s destination and paying all costs associated, then an adjudicator may likely find the seller has the obligations associated with delivery.
But what if only one of the battling forms contains a delivery term, making it an additional term in a battle of the forms scenario? Let’s revisit our four scenarios discussed above to see in which situations the delivery term would become part of the final contract.
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Scenario 1: Recap: The purchase order contains the express limiting language, so any additional terms contained in the order acknowledgement will not become part of the final contract.
- Does the sole delivery term become part of the final contract?
- Delivery term is in the purchase order: yes.
- Delivery term is in the order acknowledgement: no.
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Scenario 2: Recap: The order acknowledgement contains the express limiting language, so additional terms contained therein are part of the contract.
- Does the sole delivery term become part of the final contract?
- Delivery term is in the purchase order: yes*.
- Delivery term is in the order acknowledgement: yes*.
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Scenario 3: Recap: Both the purchase order and the order acknowledgement include a version of the express limiting language, so any additional terms in either document are not part of the final agreement.
- Does the sole delivery term become part of the final contract?
- Delivery term is in the purchase order: no.
- Delivery term is in the order acknowledgement: no.
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Scenario 4: Recap: Neither the purchase order nor the order acknowledgement contains an express limiting statement, so additional terms become part of the final agreement.
- Does the sole delivery term become part of the final contract?
- Delivery term is in the purchase order: yes*.
- Delivery term is in the order acknowledgement: yes*.
*Unless the other party objects in a reasonable time or the additional terms materially alter the agreement
In any scenario above where the delivery term is not part of the final agreement, a gap filler is needed and the UCC provides that the place of delivery is the seller’s place of business with the buyer responsible for delivery costs, including tariffs. However, if the contract contemplates that seller will make delivery, a court would likely look to the course of dealing, the course of performance or trade usage to determine the appropriate delivery responsibilities to include in the final agreement.
Takeaway
Navigating tariff responsibility through unexecuted ordering documents and standard terms and conditions can be convoluted. Contracting parties should understand the complexities that come with relying on unsigned agreements when both parties exchange standard terms and conditions.
It is often beneficial to both buyers and sellers to include express limiting language and an objection to any additional terms in their standard terms and conditions. If that language is not included, each party should take extra care to review any terms and conditions they receive from the counterparty and make a seasonable objection where necessary. That approach then may necessitate a commercial resolution, which will avoid litigation and should be memorialized in a signed agreement between the parties.
Particularly with allocating the costs associated with new, higher, or additional tariffs or customs duties, as best practice, contracting parties should state which party is assuming the import and tariff obligations – preferably through clear contract language in a signed agreement – in order to avoid confusion, reduce risks and ensure a smoother transaction.
[1] See U.C.C. § 2-207(3).
[2] While the UCC itself does not explain what constitutes a material alteration, comment four to Section 2-207 of the UCC states that material alterations are terms that “result in surprise or hardship if incorporated without express awareness by the other party” and provides a list of examples. U.C.C. § 2-207 cmt. 4 (AM. LAW INST. & UNIF. LAW COMM’N 2002).
[3] U.C.C. § 2-207(2).
[4] U.C.C. § 2-207(1).
[5] U.C.C. § 2-308.
[6] U.C.C. § 2-504.
[7] U.C.C. § 2-308 cmt. 4.
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