The next case delves into one of the most opaque sections of the Uniform Commercial Code. In his pun filled opinion in Textile Unlimited versus A..BMH, Judge Thomas of the 9th Circuit, had to grapple with the battle of the forms in which two companies send each other form documents with incompatible terms and conditions. The case involved Textile Unlimited, a yarn distributor in California and A..BMH, a yarn manufacturer in Georgia. The two companies regularly did business with Textile buying yarn from A..BMH 38 times. You can see some of Textile's yarn here. Each time Textiles sent a purchase order to A..BMH via a broker, and then A..BMH would send an invoice and an order acknowledgement that contained an arbitration clause stating that any dispute would have to be arbitrated back in Atlanta. On the 39th order, Textile received what it claimed was defective yarn and so it refused to pay. A..BMH set up an arbitration in Atlanta, but Textile sued in Federal court in California to prevent the arbitration from going forward. We're looking at the opinion from the 9th Circuit Court of Appeals, the federal appeals court that covers California and other western states. Judge Thomas must decide whether the arbitration clause is enforceable even if Textile Unlimited never explicitly agreed to it. Let's walk through the key sections of the Uniform Commercial Code Section 2-207, to see how Judge Thomas reaches his conclusion that the arbitration clause is not enforceable because it's not part of the contract between the two parties. Subsection one deals with the basic question of whether there's a contract in this battle of the form context where two companies are sending back and forth forms with conflicting terms. When confronting a 2-207 question, it's important to separately address different routes to whether a contract is formed and separately, what are the terms of the contract if it is formed, 2-207 lays out different ways of forming the contract and different ways can produce different terms. Section one first tells us that an expression of acceptance can operate as an acceptance even if that expression states terms that are additional to or different from those that are offered. That by itself tells us that the UCC rejects the common law's mirror image rule. In the Minneapolis and St. Louis railway case, when the offeree made an expression of acceptance that stated different terms, the expression was considered a counteroffer not an acceptance. But 2-207(1) tells us that non-matching acceptances can operate, they do operate as acceptances and therefore can form contracts. Second, subsection one says that a written confirmation of an earlier oral agreement can also operate as an acceptance even if the confirmation states different terms. So, if a buyer and seller agree orally to a big order on the telephone and then one sends a written confirmation in part to satisfy the statute to frauds, the confirmation can operate as an acceptance even if this confirmation includes different or additional terms. But, subsection one also includes the famous unless clause which tells us that the two ways of creating a contract, the non-matching acceptance route and the non-matching confirmation route, that these two routes are not effective if acceptance is expressly made conditional on assent to additional or different terms. Then last question boils down to whether the offeree's form says that the acceptance is conditional on the offer wars accepting the do or additional terms. If that's the case, then the rioting does not operate as an acceptance but operates merely as a counter offer. In this case, A..BMH, the offeree, had a form that is quite explicit. Seller's willingness to sell yarn to you is conditioned on your acceptance of these Terms of Sale. So, A..BMA's form expressly triggers the unless clause. There is therefore no contract based on 2-207(1). It's interesting to note that in this context, Textile Unlimited's receipt of the yarn wasn't an acceptance of new terms as Judge Thomas notes ''We don't want a rule where whoever sends the last form wins''. So, if subsection one tells us that the contract has been entered into based on the forms, subsection two tells us what the actual contents of the contract are if it is formed under subsection one. It doesn't apply in this case because there was no subsection one formation. But it's worth familiarizing yourself with what the terms would be under subsection two. The first sentence of Subsection two tells us that additional terms are to be construed as proposals for additions to the contract. Remember, the Contract was formed with the non-matching terms but according to the first sentence of Subsection two, those new terms are not included in the contract but are an offer to modify if the other side agrees to this modification proposal. The second sentence however, lays out a different treatment of contracts formed under subsection one that are between two merchants. By default, the new terms on the offeree's form become part of the contract if the formation is between two merchants except under three listed conditions. Number one, the offer expressly limits acceptance to the terms of the offer. Number two, if the additional terms materially change the agreement and number three, if the other side objects. In this case, if there had been a contract formed under subsection one, the arbitration clause would probably have been valid because the parties are merchants and textiles offer didn't expressly limit acceptance to its terms of the offer, and crucially, the court probably would find that the additional arbitration term isn't a material alteration. And finally, Textile Unlimited, never objected to this arbitration clause. Many times, the question of whether non matching terms between merchants come into the contract is going to be governed by the Shakespearean question, to be or not to be. Did the terms materially alter the agreement? Subsection three of 2-207, tells us what happens if there is no formation under subsection one but the parties conduct based on what they do, evidences that they believe they were in a contract. If the parties act as if there is a contract by shipping, and accepting the goods. So, there can still be a contract based on their conduct and secondly, it tells us what terms to apply when we're going to have formation via party conduct, and those terms are going to be governed by what's called the Knock Out Doctrine. So, under the Knock Out Doctrine, we remove any terms on which the two companies forms do not agree, and then supplement what's left over with the default rules from the UCC. As applied to this case, the arbitration agreement is not in both forms and so it would be knocked out, we strike it out, it isn't part of the contract. And so, the court will not enforce it. Subsection three provides both a third route to non matching formation, and a knock out rule for determining what terms will be in the contract. Subjects in three is important, because in a classic battle of the forms, there will not be subsection one formation because the forms will always demand additional assent. So the unless clause will be triggered. The drafters of 2-207 hoped that the knock out rule would put a thumb on the scale in favor of the UCC defaults. Under the common laws mirror image rule, the last form tended to win the battle of the forms. Under the mirror image rule, each riding exchanged between the buyer and the seller failed to form a contract because it was not a mirror image. Each riding was therefore just a counteroffer. The seller forms would often restrict warranties, and the buyers forms would not restrict the warranties. Each non matching form would merely be a counteroffer. The seller would normally then win the battle of the forms because the seller would send the last form with its shipments and the buyer would be deemed to accept this last counter offer by taking physical possession of the goods. So, under the common law and the mirror image rule, the sellers form restricting warranties would normally govern the terms of the contract. But subsection three sought to fix that by saying that, "When the conduct to the parties evidence the formation of a contract, that conflicting terms drop out and the default warranties and other terms would govern whenever there was a disagreement." So, imagine this hypothetical ABC sends an order to XYZ to buy 100 widgets. XYZ sends an invoice and then the goods. The invoice contains a provision saying only "There will be no punitive damages based on this sale." ABC does not say anything about the punitive damages provision. The widgets turned out to be defective, and ABC sues. Are they bound by the punitive damages provision? Well, the answer is probably yes. In this situation, the term concerning the punitive damages is incorporated probably into the contract. First, we see that under subsection one, there is a contract because the non matching invoice operates as an acceptance and XYZ's form doesn't condition its acceptance on ABC's assent to additional terms. So, we have subsection one formation. We then look to subsection two, to find out what the terms of this formed contract are. So, under subsection two, it says that the contracts between merchants, which we have here, the new terms become binding and unless one of the three conditions apply. Well, ABC didn't object and the court likely wouldn't find a material alteration in this prohibition on punitive damages. Since we'll learn later on in the course or actually in contracts to that punitive damages usually aren't allowed in contract cases. So, the new condition is likely to be found to be binding but the big fight again will be to be or not to be, whether that provision was a material alteration. There are three main takeaways from this battle forum's discussion. The first is that, in transactions between merchants, new terms on the offerings form, generally do become, part of the contract unless the offerer objects or they meet these new terms materially alter the agreement, and when the two parties don't ever come to agreement based on the forms, court supply under subsection three of 207, the Knock Out Doctrine. So, the actual contract is any terms that appear on both forms together with the default rules from the UCC. And finally, when analyzing 2-207 separately, it's important that you separately analyze what terms govern, from the question of whether a contract is formed by one of the three routes; the non matching acceptance route, the non matching confirmation route, and the conduct of the parties route.
