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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

Supp. To CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts Supp. to § 3.37A

Supp. to § 3.37A The Revision of Section 2-207 of the Uniform Commercial Code and the ''Layered'' Theory

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The long-awaited revision of Uniform Commercial Code section 2-207, popularly known as the ''battle of the forms'' section, has been unveiled as part of the 2003 amendments to Article 2. There was little doubt among judges, practitioners and academic lawyers that section 2-207 was in dire need of revision, but drafting the perfect substitute proved considerably more difficult that many had imagined. The difficulties were exacerbated when, halfway through the long revision process, the drafters were confronted with a new line of case law [1] adopting a radically different contract formation theory, the ''layered'' or ''rolling'' contract theory, which diluted the extant section 2-207 and other sections of Article 2. While the revision expressly attempts to avoid the current controversy [2] over the ''layered'' theory, its implications for the new section 2-207 are nevertheless important and are discussed later in this section.

The Underlying Philosophy of Revised Section 2-207

The revised version (R2-207) seeks to cure the pathologies of its predecessor that resulted from its angular statutory language and the sometimes curious judicial constructions of that language.[3] In pursuit of that goal, the underlying philosophy of R2-207 differs from its predecessor in three essential ways: (1) It no longer has any application to contract formation questions, i.e., it applies only after a court determines that a contract has been formed; (2) its exclusive purpose is to define terms of the contract previously determined to have been formed; and (3) it provides greater discretion to courts than its predecessor to determine the operative terms of the contract.

The Separation of Formation Issues

Early in the revision of section 2-207, a decision was made to separate formation issues from the issue of defining the terms of the contract. The final version of R2-207 reflects that separation. Contract formation issues are relegated to the general formation section, 2-204, and the offer and acceptance section, 2-206. The evisceration of the ''mirror image'' rule of contract formation that appears in original section 2-207(1) is now found in a subsection added to revised section 2-206 (subsection (3)):

A definite and seasonable expression of acceptance in a record operates as an acceptance even if it contains terms additional to or different from the offer.[4]

The comment supporting this addition is frugal. It states that this subsection rejects the ''mirror image'' rule, but only where the response to the offer is reasonably understood as an ''acceptance'' and not as a proposal for a different transaction. Presumably, where the response to an offer contains a different negotiated (''dickered'') term such as a different subject matter, price or quantity, the response could not be reasonably understood as an acceptance. There are, however, other situations that present challenges of interpretation, such as whether a given response constitutes a counter offer through the use of certain language. This issue is fully discussed below. The original section 2-207(1) suffered from a lack of comment elaboration on the issue of what constitutes ''a definite and seasonable expression of acceptance,'' the critical condition to the application of the section. The revised version is equally devoid of elaboration, presumably on the footing that this is a matter for wide judicial discretion, which the revision assumes.

Defining the Contract Terms

To further emphasize its separation of contract formation issues, a comment states, ''The purpose of this section is solely to determine the terms of the contract.'' The statement, however, is overinclusive since it could describe a number of issues to which the revision is obviously not intended to apply. In contracts litigation, courts are typically confronted with the determination of which terms of the contract shall be deemed operative. Different interpretations of contract terms require a court to choose the operative term. A court may be called upon to determine whether certain terms will be barred by the parol evidence rule. A term may be inoperative because it is opposed to public policy or because it is unconscionable. The revised section 2-207 does not deal with any of these issues. Its stated purpose of determining the terms of the contract is relegated to deciding whether a term expressed by only one of the parties should become an operative term of the contract.

Another comment is enigmatic: ''This section applies to all contracts for the sale of goods, and it is not limited only to those contracts where there has been a 'battle of the forms.' ''[5] Notwithstanding its popular characterization as the ''battle of the forms'' section, the original section 2-207 was not limited to ''battle of the forms'' situations. Where, for example, an oral contract was followed by the issuance of one form containing terms that were not mentioned in the oral agreement, section 2-207 clearly applied. The ''battle'' in such cases was one between the terms in one form and the terms of the oral contract, but not between two forms. The comment may be attributable to a misconception of original section 2-207 under the ''layered'' or ''rolling'' theory of contract formation created by the United States Court of Appeals for the Seventh Circuit, which is discussed in the text at note 49 below.

Revised Section 2-207: Curing the Pathologies

Having separated formation issues, the language of the revision can afford to be frugal:

Section 2-207. Terms of Contract; Effect of Confirmation.

Subject to Section 2-202 [the parol evidence rule], if (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract are:

(a) terms that appear in the records of both parties;

(b) terms, whether in a record or not, to which both parties agree; and

(c) terms supplied or incorporated under any provision of this Act.

The opening paragraph contemplates a contract being formed (i) by conduct or (ii) by offer and acceptance. The third category (iii) deals with a contract formed in any manner that is followed by a confirmation stating terms that are additional to or different from the terms of the contract being confirmed. Category (iii) is separated from (i) and (ii) by ''or.'' Yet, only (iii) mentions different or additional terms. Absent additional or different terms evidencing a contract formed under (i) or (ii), however, the section would not apply. There is a significant question as to whether there was a need for this opening paragraph. It would appear that the purpose would have been served by a simple statement such as, ''Where a contract has been formed in any manner, the terms of the contract are: ... .'' There was no apparent need for a separate category dealing with confirmations since a confirmation is a ''record'' like any other record. The subsections then appear as truisms. If the only terms that will be deemed operative are (a) terms that appear in both records, or (b) terms that are evidenced by the parties' agreement, whether or not they appear in a record, or (c) terms that are supplied by Article 2, i.e., ''implied'' or ''default'' terms, the revision has clearly indicated the terms that will be included. All others are necessarily excluded. The essential question is, does the language succeed in accomplishing the apparent purposes of the revision?

''Last Shot'' and ''First Shot''

The common law rule requiring an acceptance to be the ''mirror image'' of the offer necessarily required any response to an offer containing any additional or different term to be characterized as a counter offer. In response to a buyer's offer, a seller would commonly add boilerplate warranty disclaimers, substitute remedies including an exclusion of consequential damages, and, perhaps, an arbitration clause or other terms it desired. The buyer would ignore the non-matching boilerplate. The seller would ship the goods and the buyer's acceptance of the goods would be deemed an acceptance of the seller's counter offer boilerplate terms. The seller's terms would prevail simply because the seller fired the ''last shot'' in the battle of the forms.

In its emasculation of the ''mirror image'' rule, original section 2-207 treated a definite expression of acceptance as effective, notwithstanding non-negotiated boilerplate clauses that reasonable parties typically ignore. As seen above, the revision replicates this critical concept in R2-206(3). The original version directed courts in determining the operative effective of variant terms. Between merchants, absent other expressions in the offer, whether the seller's additional boilerplate terms would become part of the contract depended upon whether they materially altered the terms of the offer.[6] The dominance of the offer, however, ignored the fact that boilerplate in either the offer or the acceptance was equally ignored. Sellers could easily become offerors by converting their quotations into offers. The buyer would typically respond to such an offer with the same purchase order the buyer would use in responding to the seller's non-offer quotations. In response to a quote/offer, however, the purchase order became an acceptance, repeating the dickered terms of the seller's offer but failing to address the seller's boilerplate. While the parties rarely paid attention to which party made the offer, under original section 2-207, the offeror prevailed in the ''battle'' because it fired the ''first shot.''[7]

Revised section 2-207 eliminates both the ''last shot'' and ''first shot'' pathologies. It no longer makes any difference which party turns out to have been the offeror or offeree. ''[T]his section gives no preference to either the first or the last form; the same test is applied to the terms in each.''[8]

Counter Offers

To avoid characterizing a definite expression of acceptance as a counter offer simply because it contained different or additional terms in the boilerplate, the creator of original section 2-207, Karl Llewellyn, emphasized that a response to an offer containing such terms should not be characterized as a conditional acceptance (and, therefore, a counter offer) where no reasonable party would regard the response as conditional. A comment to an early draft of original section 2-207 expressed that concept by stating that only a response to an offer that expressly conditioned acceptance on assent to any different or additional terms in the response would be a counter offer. Against Llewellyn's advice, the comment language was moved into the section language of section 2-207(1) where it became the familiar proviso: ''unless acceptance is expressly made conditional on assent to the additional or different terms.'' There was never any intention to change the common law concept of counter offers. Again, the purpose was to avoid finding a counter offer where a reasonable offeror would view the response as an acceptance.

Recognizing this directive, courts were wary of finding a counter offer simply because of language which attempted to create a counter offer by boilerplate clauses introduced by a phrase such as ''subject to'' in the response to an offer.[9] They insisted upon clear language stating that no contract would be formed absent the offeror's assent. To meet this new standard, the lawyers drafting the boilerplate discovered a safe harbor in the statutory language. A boilerplate response stating, ''This acceptance is expressly conditioned on the buyer's assent to any different or additional terms in this form'' became the standard formula for creating a counter offer. While recognizing that such formula language was ambiguous-an expressly conditioned ''acceptance'' was not an acceptance-courts nonetheless felt compelled to recognize the use of statutory language as effective to create the oxymoronic ''ambiguous counter offer.''[10] Yet, to allow a seller's boilerplate to prevail in the ''battle'' simply because the buyer accepted the goods after receiving an ambiguous counter offer would undermine the essential purpose of section 2-207 by rejuvenating the ''last shot'' evil. To avoid the emasculation of section 2-207, courts insisted that the acceptance of the goods in response to an ambiguous counter offer was not an acceptance of the seller's boilerplate terms. Only an express acceptance of the counter offer terms would be sufficient to include such terms in the contract.[11] Absent an express acceptance of the boilerplate terms, a belatedly added section recognized that a contract by conduct was formed that included only the matching terms of the exchanged forms. Non-matching terms were excised and the gaps were filled by Article 2 default terms.[12]

There is no formula counter offer in revised section 2-207 which avoids formation issues, but neither is the situation clearly addressed in the revised formation sections.[13] As suggested earlier, a single sentence in a comment is devoted to the explanation of the language of original section 2-207(1) incorporated into revised section 2-206(3).[14] A comment to revised section 2-207 states:

When one party insists in that party's record that its own terms are a condition to contract formation, if that party does not subsequently perform or otherwise acknowledge the existence of a contract, if the other party does not agree to those terms, the record's insistence on its own terms will keep a contract from being formed under Sections 2-204 or 2-206, and this section is not applicable.[15]

The phrase, ''if the other party does not agree to those terms,'' does not compel the conclusion that the other party's performance alone will not be sufficient to manifest agreement to terms in a record that insists on the inclusion of its terms. The intent, as expressed in another comment to revised section 2-207, is to place a much heavier onus on courts:

By inviting a court to determine whether a party ''agrees'' to the other party's terms, the intent of this section is to recognize the enormous variety of circumstances that may be presented, and this section is intended to give greater discretion to include or exclude terms than was intended for in original Section 2-207.[16]

Another sentence in this comment creates further doubt:

In many cases, performance alone should not be construed to be an agreement to the terms in another party's record by a party that has sent or will send its own record with additional or different terms.[17]

''Many cases'' leaves room for some cases where performance alone will constitute acceptance. The comment suggests a clear illustration. Where a party's record is an offer because it was not preceded by an oral agreement and the offeree does not send any record, such as where a buyer sends a purchase order and the seller simply ships the goods without any record, the offeree's performance in response to such an offer should be recognized as an unambiguous acceptance of the terms of the offer.[18] The comment, however, does not deal with more difficult possibilities. Quaere, does the situation change where the buyer sends a purchase order offer and the seller responds with what a court construes as a counter offer insisting upon its different or additional terms, and then ships the goods, which the buyer accepts? Under revised section 2-207, suppose a seller uses language similar to the formula language of original section 2-207 and then ships the goods. As quoted above, the revised comment may be read to suggest that, where the seller has insisted that its own terms are a condition to contract formation and has subsequently performed by shipping the goods, the only remaining question is whether the buyer has agreed to those terms by accepting the goods.[19] Whether the buyer's conduct would constitute an acceptance under revised section 2-207 is left to courts to decide under ''the enormous variety of circumstances'' in which courts are given greater discretion ''to determine whether a party 'agrees' to the other party's terms.''[20]

It would have been helpful if the revision had expressly rejected any notion of the oxymoronic ''ambiguous counter offer'' that has been recognized under section 2-207 and relegated counter offers only to manifestations that reasonable parties would regard as counter offers-the test in traditional contract law which original section 2-207 had no intention of changing.[21] Even if a counter offer is unambiguous, under current interpretations of original section 2-207, subsequent performance alone by the other party will not be sufficient to accept its terms.[22] Again, only an express acceptance will suffice. It is not clear whether this analysis would continue under the revision. A comment addressing this issue in revised section 2-207 would have been beneficial.

Different vs. Additional Terms

Another manufactured difficulty in original section 2-207 was generated by recognition of a definite expression of acceptance containing different or additional terms in section 2-207(1), although section 2-207(2) mysteriously omits any reference to ''different'' terms. While there are more than plausible arguments that, despite the omission, section 2-207(2) should apply to either additional or different terms,[23] the prevailing view is that ''different'' terms are not addressed in section 2-207(2).[24] This construction produced the ''knockout'' view that only applies, however, where the offer and acceptance contain expressly conflicting terms which are mutually canceled, leaving gaps to be filled by Article 2 implied or default terms. Where a purchase order is silent on terms such as implied warranties or arbitration but the seller's otherwise definite expression of acceptance disclaims warranties or other materially altering terms, the ''knockout'' rule does not apply because there are no expressly conflicting terms. The seller's terms will not become part of the contract under section 2-207(2)(b), notwithstanding the insistence that section 2-207(2) applies only to ''additional'' and not ''different'' terms. This analysis requires the awkward characterization of the seller's terms as ''additional'' rather than ''different.'' The awkwardness is exacerbated by the current notion that where the same silent purchase order is deemed to be an acceptance because the seller was the offeror, the seller's boilerplate terms prevail either because the purchase order, as an acceptance, is not regarded as containing the implied terms it is deemed to include when used as an offer, or, even if the implied terms were recognized in the purchase order, they would be excised as terms that materially alter the terms of the seller's offer under original section 2-207(2)(b).[25]

These difficulties are avoided in the revised section 2-207 by the simple expedient of excluding any terms, different or additional, unless they can be fitted into one of the three categories, (a), (b) or (c). This change not only addresses the mysterious absence of ''different'' in original section 2-207(2), but it also removes the task of attempting to distinguish different from additional terms, which may prove to be a metaphysical exercise under interpretations of original section 2-207.[26]

Merchants vs. Non-Merchants

Where an otherwise definite expression of acceptance contains different or additional terms, original section 2-207 treats them as mere proposals if the contract involves a non-merchant.[27] Between merchants, however, such terms become part of the contract unless the offer expressly limits acceptance to the terms of the offer,[28] the offeror objects to the additional term in its offer or after receiving the acceptance,[29] or the additional term materially alters the offer.[30] Revised section 2-207 avoids any distinction between merchants and non-merchants. The new section 2-207 applies to any buyer or seller of goods, regardless of status.

Material vs. Immaterial Terms

Absent an offer precluding any additional term or notice of objection to such terms, under original section 2-207 an additional term will or will not become part of the contract between merchants depending upon its materiality.[31] While comments suggest illustrations of material and immaterial terms,[32] the case law is not uniform in the application of this dichotomy.[33] With the intention of avoiding this issue entirely, the language of the revised section simply ignores any distinction between material or immaterial terms. Any different or additional term, material or immaterial, in one record will not become part of the contract unless the parties have otherwise agreed to it.[34] The avoidance, however, is not total. A comment suggests, ''In some cases, an expression of acceptance accompanied by one or more additional terms might ... demonstrate the offeree's agreement to the terms of the offer.''[35] Thus, where the parties have agreed on the sale of goods with technical specifications but one party's record contains an immaterial term, a court should find a contract on the technical terms.[36] Where the exchanged records provide for arbitration but are immaterially different, a court could hold that the contract requires arbitration.[37]

Nonverbal Agreement to Additional or Different Terms

Another comment to revised section 2-207 suggests the possibility of the inclusion of different or additional terms absent verbal agreement. An example is a contract for 700,000 nuts and bolts evidenced by both the buyer and seller forms. The buyer's form, however, conditions the sale on a test of a sample of the goods. If the seller sends a sample, such an act could be construed as agreement to the buyer's condition.[38] This is another reflection of the revision's insistence on greater judicial discretion in determining whether a party agrees to the other party's terms.[39]

Trade Usage, Course of Dealing and Course of Performance

The revised version suggests that parties can be bound by a term appearing in the record of only one of the contracting parties if such a term is expected because of trade usage or course of dealing.[40] The notion that a term appearing in a record is made enforceable by trade usage or course of dealing, however, is misleading. The critical definition of ''agreement'' remains unchanged in the revision of Article 1 that includes trade usage and course of dealing as well as course of performance.[41] Terms emanating from trade usage or course of dealing are ''taken for granted'' as terms of the contract ab initio.[42] Such terms do not become part of the contract because they appear in one or even both records of the parties. They become terms of the contract from the moment of formation. They are automatically a part of any contract under Article 2 unless carefully negated.[43] They even survive the most complete, final and fully integrated record of the parties' agreement that would preclude the admission of any other consistent term under the parol evidence rule.[44] They would be part of the contract absent any expression in any record.

Unlike trade usage or course of dealing, course of performance relates to actions occurring after the contract is formed.[45] While course of performance is the strongest evidence of what the parties intended their words to mean, it can also evidence a waiver or modification of the contract terms. An additional term may be included in a contract under course of performance only if it amounts to a modification or waiver of the contract pursuant to the requirements of section 2-209.[46] The parol evidence rule has no application to such post-formation terms and neither does section 2-207. Again, the efficient cause making such a term operative as part of the contract is not its appearance in a record of one of the parties. It is a recognized term exclusively because of the parties' conduct that evidences their intention to change the terms of their contract.

Repeated Sending of Forms as Course of Dealing

Courts have considered the argument that the repeated sending of standardized records may constitute a course of dealing that incorporates the boilerplate terms of such records in a subsequent contract. Under the prevailing view, while the repeated sending of such a boilerplate record may eliminate surprise to the other party when the record is sent as evidence of the latest contract, the recipient has not manifested assent to the boilerplate terms simply because it has received such a record a number of times in the past.[47] Unless the terms in such a record have been previously acted upon in such a fashion as to manifest their acceptance as part of the continuing contractual relationship of the parties, they are not deemed to be part of the contract under a course of dealing rubric. A comment to the revised section 2-207 confirms this view.[48]

The New Section 2-207 and the ''Layered'' (''Rolling'') Contract Theory

The lengthy Article 2 revision process encountered a new challenge beginning in 1996 when the United States Court of Appeals for the Seventh Circuit created a new theory of contract formation, allegedly supported by the extant Article 2. The ''layered'' or ''rolling'' theory applies to merchants and non-merchants alike. It may be illustrated by a simple example. Without the use of any purchase order or other record, a merchant places a telephone order for goods. The goods are shipped and received. The box containing the goods also includes typical seller's boilerplate terms disclaiming warranties and limiting or excluding remedies, as well as an arbitration clause and other terms desired by the seller. The terms state that, absent objection to them within a limited period, the buyer's silence will manifest assent to the terms. In two opinions, the Seventh Circuit arrived at the unsupportable conclusion that the extant section 2-207 had no application to such a contract for the sale of goods since this type of contract evidenced only one rather than two ''battling'' forms.[49] This construction ignored statutory language and case law recognizing that section 2-207 applied where only one form contained different or additional terms.[50] Notwithstanding the pervasive view of commentators that the court's construction of section 2-207 is simply ''wrong,''[51] a number of courts have adopted the ''layered'' theory.[52] The theory not only fails to distinguish the statutory language and case law that requires the application of section 2-207; it necessarily ignores other Article 2 sections as well.

If a seller promises to ship the goods in response to the buyer's telephone order, an oral contract is formed by the seller's promise to ship under original or revised section 2-206(1)(b). The seller's terms delivered inside the box should then be seen as a confirmation of the contract with different or additional terms, a classic situation which subjects the seller's terms to inclusion or exclusion under original section 2-207(2). Even if the seller did not promise to ship the goods during the telephone discussion, its shipment of the goods would clearly constitute an acceptance under section 2-206(1)(b) in either the original or the revised version of that section.[53] The seller's additional terms could also be viewed as an attempt at modification under section 2-209. Any such modification, however, would require the buyer's acceptance, which would not be implied by silence.

The layered theory ignores these sections and proceeds exclusively under the general formation section that allows a contract to be formed in any reasonable manner.[54] With no explanation, the theory insists that the seller is the offeror and, as master of the offer, it may require adherence to its terms.[55] If section 2-206 is simply ignored, the offer is not accepted by the seller's promise or, in the absence of such a promise, the seller's shipment of the goods. The offer is a continuing or ''rolling'' offer that is not accepted until the buyer receives the terms inside the box and fails to object to them within the time prescribed in the ''offer.'' The terms inside the box present the final ''layer'' of the offer, which is said to be accepted by the silence of the buyer. The notion that such silence can be acceptance is diametrically opposed to prior case law as well as any exception to the general rule that silence does not constitute acceptance.[56]

The essential rationale of the layered theory is efficiency and the avoidance of transaction costs in recognition of the universal reality that standard boilerplate terms appear in the overwhelming majority of contracts made in domestic or international trade. Whether the ''standard'' term is a choice of law clause on a cruise line ticket or is any one of a bevy of other boilerplate clauses such as warranty disclaimers, substitute remedies, arbitration clauses or the like that appear in millions of contracts daily, the importance of enforcing these clauses for reasons of efficiency removes the last vestige of the fundamental concept of mutual assent. The old rule that one has a ''duty to read'' such clauses and the failure to read them is no excuse to their enforceability is a snare and a delusion. Boilerplate clauses are not understood, not simply because of their legal density. An understanding would require cognizance of the terms that would apply absent the clause. Even if such a platonic cognizance could be achieved, there is still no point in paying attention to them since they are non-negotiable. The final justification that any egregious clauses would be excised under an unconscionability rubric assumes that unconscionability is a viable doctrine. It is, however, painfully clear that if unconscionability is alive, the body is barely warm.[57]

Among the curiosities of the layered theory, the entire situation presumably changes if the buyer sends a purchase order instead of telephoning its offer to the seller. In that situation involving two forms, a ''battle of the forms'' would ensue and section 2-207 would apply. Such an exchange of forms occurs typically in merchant transactions. Consumers do not have purchase order or other standard forms. Thus, the theory provides the merchant buyer who uses a purchase order form with the protection of section 2-207, but not the merchant or consumer who fails to use a form because the theory only recognizes ''battling'' forms, again, notwithstanding the language of original section 2-207 and case law clearly stating that the section applies when only one form is involved.[58]

The ramifications of the theory present still other possibilities. Again, assuming a telephone order and shipment of the goods with terms inside the box, since no contract has yet been formed, a knowledgeable buyer could notify the seller that it will retain the goods and pay the stated purchase price, but only on condition that the seller's other terms do not become part of the contract. Such a counter offer could provide a similar time for acceptance of the buyer's new terms by the seller's silence.[59]

Presented with this developing theory, the drafters of revised section 2-207 expressly adopted a neutral position. Notwithstanding efforts by the Seventh Circuit to distinguish a conflicting analysis from the United States Court of Appeals for the Third Circuit in the Step-Saver case,[60] the revised section 2-207 recognizes that decision as irreconcilable with the layered theory while expressly refusing to address this conflict.[61] Such forbearance is the likely result of the strained relations between the erstwhile partners responsible for revising the Code, the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI).

The strained relationship is traceable to an aborted effort to include special treatment of software licenses that are neither sales nor goods in a revised Article 2. The software industry had pursued the practice of including ''shrink wrap'' license terms inside software containers to bolster protection through contract theory that was not available under copyright law prior to its amendment. The contract theory, however, was dubious at best. The subsequent appearance of the Seventh Circuit's layered theory that the court applied as general contract law bootstrapped the industry's approach. An effort to codify software licensing law had begun with a ''hub and spoke'' approach to a revised Article 2 that was rejected. A new UCC Article 2B draft was produced to address the situation, but the draft was irreconcilable with any extant draft of a revised Article 2 and the ALI would not support it. NCCUSL renamed the draft of Article 2B the Uniform Computer Information Transactions Act (UCITA). This Act expressly incorporated the layered theory, and was approved by NCCUSL in 1999. In the same year, a draft of Article 2 had been approved by ALI but was rejected by NCCUSL. The critical importance of NCCUSL approval for any modification of Article 2 necessitated reconciliation with UCITA. Since a total reconciliation was impossible, the revised section 2-207 took no position on this issue. While UCITA claims that its version of section 2-207 was inspired by the original section 2-207, it is materially different from both the original and revised section 2-207.[62] UCITA has encountered major resistance to its enactment, which has occurred in only two jurisdictions.[63] The opposition included ''bomb shelter'' legislation in several states to prevent UCITA or similar legislation enacted elsewhere from applying to computer information agreements through choice of law clauses.[64] Confronting the lack of support from the ALI and the American Bar Association as well as opposition from numerous groups, NCCUSL took the unprecedented step of withdrawing UCITA from legislative consideration in the summer of 2003.

The Interaction Between Revised Section 2-207 and the Layered Theory

Though revised section 2-207 expressly avoids any position on the layered theory, it might be assumed that the language of the revision would prompt a court to reject the theory. Since different or additional terms in one record will not become part of the contract, critics of the layered theory may take solace in the hope that courts would find that norm incompatible with the layered theory. Such a hope, however, may be dashed by other language. Under revised section 2-207(b), additional or different terms in one record may become part of the contract if a court otherwise finds ''agreement'' to such terms. The layered theory assumes agreement to terms in only one record by the belated presentation of such terms inside the box and their acceptance through the buyer's silence. A court could conclude that, under the layered theory, the parties had ''otherwise agreed'' to the terms inside the box under section 2-207(b). Thus, just as the layered theory succeeds in eviscerating original section 2-207 as well as other Article 2 sections, in light of its express avoidance of any position on this issue, revised section 2-207 may have no effect on the continuing propagation of the theory, notwithstanding its lack of any redeeming virtue.

At this time, the law in this area is in a state of a considerable uncertainty that threatens the fundamental value of law settlement. By providing courts with ''greater discretion to include or exclude terms'' than courts possessed under original section 2-207 to determine whether a party agrees to the other party's terms in an ''enormous variety of circumstances,''[65] revised section 2-207 invites a perpetuation of this uncertainty. A statutory solution has been expressly avoided. The singular remaining hope is for the appearance of a judicial analysis of landmark proportions that recognizes this dilemma and articulates a fair and cohesive analysis to recognize the value of efficiency while assuring that only fair and balanced boilerplate terms will be enforced.

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1. See § 3.37 of this supplement (discussing ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) ; Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.) , cert. denied, 522 U.S. 808, 118 S. Ct. 47, 139 L. Ed. 2d 13 (1997) ; and related cases, all appearing in paragraph (B) of that section).

2. The text accompanying notes 49-59 infra discusses the ''layered'' theory and describes its controversial elements.

3. For an analysis of the pathologies of original § 2-207, see John E. Murray, Jr., The Definitive ''Battle of the Forms'': Chaos Revisited, 20 J. L. & Com. 1 (2000).

4. R2-206(3), comment 2. For purposes of this § 3.37A of the supplement, revised sections will be identified with a preceding ''R''. In footnotes, a section symbol without the ''R'' will denote original Article 2 sections. ''Record'' is substituted for ''writing'' throughout the amended Article 2 to reflect the inclusion of electronic records as well as traditional writings.

5. R2-207, comment 1.

6. § 2-207(2)(b). The offer could preclude such terms, whether they were material or immaterial, by expressly limiting acceptance to the terms of the offer (§ 2-207(2)(a)), or by objecting to any additional terms (§ 2-207(2)(c)).

7. For an opinion that finds this result to be unacceptable, see Southern Idaho Pipe & Steel Corp. v. Cal-Cut Pipe & Supply, Inc., 98 Idaho 495, 502-03, 567 P.2d 1246, 1253-54 (1977) , cert. denied and appeal dismissed, 434 U.S. 1056, 98 S. Ct. 1225, 55 L. Ed. 2d 757 (1978) . See also McCarty v. Verson Allsteel Press Co., 89 Ill. App. 3d 498, 44 Ill. Dec. 570, 411 N.E.2d 936 (1980) .

8. R2-207, comment 2.

9. Dorton v. Collins & Aikman Corp., 453 F.2d 1161 (6th Cir. 1972) .

10. C. Itoh & Co. v. Jordan Int'l Co., 552 F.2d 1228, 1238 (7th Cir. 1977) , where the court states, ''Since the seller injected ambiguity into the transaction by inserting the 'expressly conditional' clause in his form, he, and not the buyer, should bear the consequences of that ambiguity under Subsection (3).''

11. Id.

12. § 2-207(3). See the quotation from the court's opinion in note 10.

13. §§ 2-204 and 2-206.

14. See the text and quotation at note 4, supra.

15. R2-207, comment 2.

16. R2-207, comment 3.

17. Id.

18. Id. The same comment recognizes that an offeree's unqualified response such as ''I accept'' would demonstrate agreement to the offeror's terms.

19. See the quoted comment in the text at note 15, supra.

20. See the quoted comment in the text at note 16, supra.

21. Nothing in the history of § 2-207 compels the suggestion that conduct cannot manifest acceptance of a counter offer. The only evil to be avoided is the equivocal or ambiguous counter offer, which would not qualify as a counter offer under the Restatement (Second) of Contracts.

22. This interpretation is myopic since the only reason for rejecting performance as an acceptance of a counter offer was based on formula counter offers that were ambiguous. Where a counter offer is unambiguous, there was no reason to require express assent since a party performing in response to a clear counter offer should reasonably understand that the other party is offering performance only on its terms. Courts, however, apparently forgot the rationale for the rule requiring express acceptance of ambiguous counter offer terms. Even unambiguous counter offers can be accepted only by expressed manifestations of assent. A performance acceptance such as the acceptance of goods will be insufficient. See PCS Nitrogen Fertilizer, L.P. v. Christy Refractories, L.L.C., 225 F.3d 974, 979 (8th Cir. 2000) .

23. For example, comment 3 to original § 2-207 states, ''Whether or not additional or different terms will become part of the agreement depends upon the provisions of subsection (2)'' (emphasis added). Original section 2-207(2)(b) excludes additional terms that materially alter the terms of the offer in a contract between merchants. An ordinary dictionary definition of ''alter'' is ''to change; to make different.'' The notion that the drafters of original § 2-207 would deliberately avoid mentioning ''different'' in § 2-207(2) without any comment explanation taxes credulity. There is a plausible argument that the omission of ''different'' was an inadvertent drafting error. See John L. Lutz, More on the Battle of the Forms: the Treatment of ''Different'' Terms Under the Uniform Commercial Code, 15 UCC L.J. 103, 110-12 (1983).

24. For a recent summary of other theories and the adoption of the prevailing ''knockout'' rule, see Richardson v. Union Carbide Indus. Gases, Inc., 347 N.J. Super. 524, 790 A.2d 962 (2002) .

25. See Phillips Petroleum Co. Norway v. Bucyrus-Erie Co., 125 Wis. 2d 418, 425-26, 373 N.W.2d 65, 69 (1985) , rev'd on other grounds, 131 Wis. 2d 21, 388 N.W.2d 584 (1986) .

26. As one court observed, any attempt to distinguish ''different'' from ''additional'' is often a ''hair splitting'' or ''metaphysical'' exercise. Northrop Corp. v. Litronic Indus., 29 F.3d 1173, 1175 (7th Cir. 1994) .

27. § 2-207(2).

28. § 2-207(2)(a).

29. § 2-207(2)(c).

30. Id.

31. § 2-207(2)(b).

32. § 2-207, comments 4 and 5.

33. While disclaimers of implied warranties are treated as material alterations per se (see, e.g., Glyptal Inc. v. Engelhard Corp., 801 F. Supp. 887, 894-95 (D. Mass. 1991) ), the same treatment is not afforded to arbitration clauses (see, e.g., Avedon Eng'g, Inc. v. Seatex, 126 F.3d 1279, 1284 (10th Cir. 1997) ). While some courts have held that limitations of remedy clauses are clear material alterations (see, e.g., Altronics of Bethlehem, Inc. v. Repco, Inc., 957 F.2d 1102, 1107-08 (3d Cir. 1992) ), other courts insist that whether a clause excluding consequential damages is a material alteration must be tested under § 2-719 (see, e.g., Hydraform Prods. Corp. v. American Steel & Aluminum Corp., 127 N.H. 187, 194, 498 A.2d 339, 343 (1985) ).

34. R2-207(a) and (b).

35. R2-207, comment 3.

36. This illustration is found in R2-207, comment 3, where the buyer's purchase order contained technical terms and the seller's response simply stated that the order would be filled promptly but added that it did not make deliveries after 3 P.M. The comment concludes that ''it might be reasonable to conclude that both parties agreed to the technical specifications.'' This example is said to illustrate ''an expression of acceptance accompanied by one or more additional terms.''

37. R2-207, comment 3.

38. Id.

39. Id.

40. Id.

41. The language in § 1-201(b)(3) in the 2001 revision of Article 1 replicates the language in original § 1-201(3).

42. § 2-202, comment 2.

43. Id.

44. § 2-202(a).

45. Definitions of ''trade usage'' and ''course of dealing'' appeared in original § 1-205, while ''course of performance'' appeared in original § 2-208. All three definitions now appear in the 2001 revised Article 1 at § 1-303.

46. Original § 2-208(3), 2001 revised § 1-303(f).

47. See, e.g., Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91, 104 (3d Cir. 1991) . Accord Expeditors Int'l of Washington, Inc. v. Official Creditors Comm. of CFLC, Inc. (In re CFLC, Inc.), 166 F.3d 1012, 1017 (9th Cir. 1999) .

See, however, IAP Worldwide Servs. v. UTi United States, Inc., 2006 U.S. Dist. LEXIS 4766 (E. D. Pa. 2006) concerning the enforceability of a limitation of liability clause where the court suggested that while a course of dealing normally focuses upon actions of the parties with respect to a specific issue that the parties may have encountered in the past such that a fact finder could reasonably infer that the parties have incorporated such course of dealing in their agreement, course of dealing may extend beyond actual past disputes and include evidence that the parties have ratified terms by failing to object to them. The court relied on Pervel Industries, Inc. v. T. M. Wallcovering, Inc., 871 F. 2d 7 (2d Cir. 1989) where a manufacturer had a well established custom of sending confirmations containing an arbitration clause which the buyer either signed or returned without objection. The Pervel court, however, emphasized strong evidence of trade usage in the widespread use of arbitration clauses in the industry involved, the textile industry. See also the discussion of this issue in Puget Sound Financial, LLC v. Unisearch, Inc., 146 Wash. 2d 428, 47 P. 3d 940 (2002) in § 3.37 of this supplement.

48. ''[R]epeated use of a particular term or repeated failure to object to a term on another's record is not normally sufficient in itself to establish a course of performance, a course of dealing or a trade usage.'' R2-207, comment 4. The inclusion of ''course of performance'' in this statement is awkward. Unlike course of dealing or trade usage, which become terms of the contract (unless carefully negated) at the time of formation, course of performance occurs after a contract is formed and can be the strongest evidence of the parties' intended meaning of the express terms of the contract or even operate as a modification or waiver of the contract. Original § 2-208, 2001 revised § 1-303. Even the use of trade usage in this statement is awkward since the argument concerning the repeated use of forms is relegated to course of dealing.

49. ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) ; Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.) , cert. denied, 522 U.S. 808, 118 S. Ct. 47, 139 L. Ed. 2d 13 (1997) . These and other cases in this section dealing with the layered or ''rolling'' theory are discussed in § 3.37 of this supplement.

50. Original § 2-207(1) refers to ''a written confirmation,'' and comment 1 explains that it applies to an agreement reached orally, ''followed by one or both of the parties sending formal memoranda embodying the terms so far as agreed upon and adding terms not discussed.'' The well-known case of Dorton v. Collins & Aikman Corp., note 9, supra , applies a § 2-207 analysis on the assumption that only a single form is involved. See also Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332, 1339 (D. Kan. 2000) , where the court expressly disagrees with the view that § 2-207 applies only where two forms are involved.

51. See, e.g., Robert A. Hillman, Rolling Contracts, 71 Fordham L. Rev. 743, 753 (2002) (''[Judge] Easterbrook was plainly wrong about section 2-207's applicability. Nothing in the text of the section limits it to transactions involving more than one form.''); James J. White, Default Rules in Sales and the Myth of Contracting Out, 48 Loy. L. Rev. 53, 81 (2002) (''When, Judge Easterbrook in ProCD states that Section 2-207 does not apply to transactions that involve only one document, he is wrong.''); John E. Murray, Jr., Contract Theories and the Rise of Neoformalism, 71 Fordham L. Rev. 869, 905, n.193 (2002) (''Even more troublesome is the superficial notion that U.C.C. § 2-207 applies only where there are two conflicting forms, which ignores the UCC's application where a single confirmation containing variant terms follows an oral contract for the sale of goods.'').

52. M.A. Mortenson Co. v. Timberline Software Corp., 140 Wash. 2d 568, 998 P.2d 305 (2000) ; Lozano v. AT&T Wireless, 216 F. Supp. 2d 1071 (C.D. Cal. 2002) ; Rinaldi v. Iomega Corp., 1999 Del. Super. LEXIS 563 (Del. Super. Ct. Sept. 3, 1999) ; Westendorf v. Gateway 2000, Inc., 2000 Del. Ch. LEXIS 54 (Del. Ch. Mar. 16, 2000) , aff'd, 763 A.2d 92 (Del. 2000) ; Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (App. Div. 1998) . See the discussion in § 3.37 of this supplement.

53. Prompt shipment as well as a promise to ship will constitute an acceptance under § 2-206(1)(b).

54. § 2-204(1).

55. It is particularly difficult to accept the court's characterization that the seller is the offeror where the buyer orders goods by telephone. Either the seller agrees to ship during the telephone discussion or, if the seller does not promise to ship but proceeds to ship the goods, the seller is the offeree, accepting the offer in either manner under original or amended § 2-206. Yet, in Hill v. Gateway 2000, Inc., note 49, supra, the Seventh Circuit insisted that the seller was the offeror where the buyer telephoned its order for a computer and the seller accepted the offer by either promising to ship or shipping the product. This fundamental mischaracterization was necessary under the layered theory to support the characterization of the terms inside the box as the last layer of the ''offer,'' which the buyer then must either reject or accept. Finding that the buyer's silence in failing to object within the time prescribed in the ''offer'' constituted an acceptance of the offer, the court manufactured a contract containing the seller's inside-the-box terms.

56. The notion that silence constitutes acceptance under the layered theory does not fall into any of the exceptions to the general rule that silence does not constitute acceptance. See the Restatement (Second) of Contracts, § 69.

57. Courts have failed to develop a cohesive concept of unconscionability. The conventional wisdom takes solace in distinguishing ''procedural'' from ''substantive'' unconscionability, but the distinction lacks utility. See the discussion of Faber v. Menard in §§ 29.4 and 79.4 of the current supplement. There is a tendency to treat unconscionability as nothing more than an ''umbrella'' term for classic abuses of the bargaining process such as fraud and duress. See Northwestern Nat'l Ins. Co. v. Donovan, 916 F.2d 372, 377 (7th Cir. 1990) (Posner, J.).

58. Professor James White finds it ''ironic'' that, under the ''rolling contract theory,'' a merchant buyer will have the advantage of § 2-207, thereby enjoying more favorable treatment than a consumer buyer. James White, ''Default Rules in Sales and the Myth of Contracting Out,'' supra note 51, at 83 .

59. In Cook's Pest Control, Inc. v. Rebar, 852 So. 2d 730 (Ala. 2002) (discussed at § 3.32 of this supplement), Cook's sent the Rebars a form to renew pest control service for a one-year term at a certain price. The form contained an arbitration clause. The Rebars returned the check and the form with an addendum stating that they were not bound to arbitrate disputes. Cook's cashed the check. A subsequent dispute occurred and the Rebars brought their action in court. Cook's claimed the Rebars were bound by the arbitration clause. The court did not mention the ''rolling contract'' analysis but simply held that Cook's had accepted the Rebars' counter offer.

60. Step-Saver Data Sys., Inc. v. Wyse Tech., supra note 47 (discussed in § 3.37 of this supplement), applied original § 2-207 to terms that appeared on the box containing software disks-the well-known ''box-top license'' case.

61. ''The section omits any specific treatment of terms on or in the container in which the goods are delivered. This Article takes no position on whether a court should follow the reasoning in Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1997) (§ 2-207 does not apply to these cases; the 'rolling contract' is not made until acceptance of the seller's terms after the goods and terms are delivered) or the contrary reasoning in Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991) (contract is made at time of oral or other bargain and 'shrink wrap' terms or those in the container become part of the contract only if they comply with provisions such as are contained in § 2-207).'' R2-207, Comment 5.

62. While a comment suggests that UCITA § 204 follows original § 2-207, it does not. It allows a definite and seasonable expression of acceptance with varying terms to operate as an acceptance only if the varying terms do not materially alter the offer. It more closely resembles the United Nations Convention on Contracts for the International Sale of Goods (CISG) treatment in CISG Article 19 than original § 2-207 and it also differs substantially from R2-207.

63. Va. Code Ann. § 59.1-501.1 et seq.; Md. Code Ann. Com. Law § 22-101 et seq.

64. The legislation applies to agreements involving residents or parties with their principal places of business in the ''bomb shelter'' state. See Iowa Code § 554D.104(4); N.C. Gen. Stat. § 66-329 (2003); W. Va. Code § 55-8-15 (2003); 9 Vt. Stat. Ann. § 2463a (2003).

65. R2-207, comment 3.