EXPLAINING THE BATTLE OF THE FORMS IN ACTION

EXPLAINING THE BATTLE OF THE FORMS IN ACTION: Adversarial Boilerplate Language and the Consequential Damages Penalty Default Rule Ryan D. Griffee Pepperdine University School of Law I thank Professor William H. Henning, University of Alabama; Professors Robert J. Pushaw and Robert Anderson, Pepperdine University; and David L. Duncan, Ph. D. Candidate at Rutgers University for their feedback on drafts and support in developing and writing this paper. I also thank Professors Fahad Khalil and Jacques Lawarrée at the University of Washington for introducing me to game theory. Finally, I would like to thank my fiancée for her encouragement.

Agenda Goals Battle of the Forms and 2 -207 Defining Adversarial Boilerplate Language Keating’s Paper Theses Penalty Default Rules Model Overview Looking Forward Conclusion

Practical Goals Show that adversarial language should be construed as a strategy used by parties to get to the U. C. C. gap fillers. � (Not, as some courts have suggested, an attempt to have one’s cake and eat it too). Show that Negotiations are not always necessary, the Battle of the Forms can be efficient.

Battle of the Forms Buyer sends a Purchase Order to Seller, Seller sends an Acknowledgment Form, Parties perform as if a contract exists: Seller sends goods, Buyer pays for them. Conflict arises: � Forms do not match. Big question: Which terms apply? Look to U. C. C. § 2 -207.

U. C. C. § 2 -207. Additional Terms in Acceptance or Confirmation. (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: � (a) The offer expressly limits acceptance to the terms of the offer; � (b) They materially alter it; or � (c) Notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under

Adversarial v. Reasonable Boilerplates Boilerplate Language: Non-Immediate Terms Battle of the Forms and Negotiations� Adversarial Boilerplate Language (A): � Reasonable Boilerplate Language (R): � Buyers: Subsection (2)(a) and (c) conforming Sellers: Subsection (1) proviso-conforming Not including Adversarial Boilerplate Language Party drafts both types with preferential terms Take It or Leave It. Only one form (2 -207 doesn’t apply): � Adversarial (A): one-sided terms � Reasonable (R): accommodating terms �

Keating’s Paper Academicians’ Concerns: � The Current Section 2 -207 Is Too Technical, Arbitrary, and Uncertain in Its Outcomes; � The Default Terms to Which Section 2 -207 Directs the Parties Are Too Favorable to the Buyer and May Not Be Terms That Either Side Would Have Chosen in an Arms-Length Bargain; � The Current Section 2 -207 Encourages Parties to Draft Completely One-Sided Forms.

Keating’s Paper Academic Assumptions: � The Battle-of-the-Forms Provision Is a Significant Issue for Companies That Buy and Sell Goods; � When Companies Do Engage in the Battle of the Forms, They Do So Because It Is Efficient; � Parties Uniformly Draft Their Forms to Be as One. Sided as Possible in Their Favor; � Nobody Reads the Forms.

Keating’s Paper Interviewees’ Observations: � One reason the battle of the forms is not very common is that some mega retailers (e. g. Wal-Mart) are so powerful that they can make one-sided, “take it or leave it” contracts; � People prefer a straightforward, quick defaulting rule to get to the U. C. C. gap-fillers; � Parties actually do read the boilerplate language in certain situations; � If there is a term negotiated in boilerplate language, it would primarily be on one thing: Consequential Damages.

Theses Keating’s observations are consistent with a game -theoretic approach to the battle of the forms. Results of U. C. C. § 2 -207 are not as unpredictable as detractors might like to think. � Boilerplate drafters should use adversarial language to get to the Battle of the Forms Nash Equilibrium: It does not add ambiguity, It is strategically responsible. The reason parties negotiate away from the NE of the Battle of the Forms: � Consequential Damages, within the U. C. C. gap fillers, are a Penalty Default Rule.

Penalty Default Rule? What is a Penalty Default Rule? �A back-up plan you won’t like, encouraging behavior ex ante. � It’s a stick, not a carrot. � An inefficient default term courts will apply ex post to encourage negotiation ex ante

Penalty Default Rule Example Negotiating which movie to see with your spouse. � You want to see Repo Men with Jude Law. � Your spouse wants to see Bounty Hunter with Jennifer Aniston and Gerard Butler. � To encourage negotiation you add a losing default: Let the babysitter decide Of course, you know: she will inevitably choose the latest installment of the Twilight Saga: New Moon

Movie Game Movie Night: Your way**= 0 Negotiate: (N, N) = (1, 1). Spouse’s way**= 0 No Movie: {(R, N), (N, R)} = (0, 0). Babysitter’s way: (R, R) = (-1, -1). Spouse 1 Negotiate Refuse Spouse 2 Negotiate Refuse H. T. T. M. (1, 1) Repo Men ( 2, 0) Bounty Hunter (0, 2) New Moon* ( -1 , -1) *Result of the Penalty Default Rule, If negotiations fail, let the babysitter decide. ** You’ll never get your way, but your spouse won’t either.

Back to Business When negotiating is not efficient � Players exchange forms Forms have a sunk cost This allows lower value transactions to move forward which wouldn’t be possible without the battle of the forms. Are the U. C. C. gap fillers the battle of the forms equilibrium?

Simplified Battle of the Forms

Alternatives ? Two ways to get out of the Battle: � Uneven bargaining power: take-it-or-leave-it scenario � Benefit of the bargain worth cost of negotiation: negotiation scenario Recall: � In contracts between parties with similar negotiating power, we find that they do not include consequential damages in their functionally complete, negotiated contracts. � The Gap Fillers provide Consequential Damages. � If forms are exchanged, but one non-immediate term is negotiated, the term negotiated usually regards Consequential Damages.

Summary The gap-fillers are a mostly efficient NE, which parties reach in the battle of the forms by including adversarial language in their standard forms. One part of the gap-fillers default has been contracted around ex ante, consequential damages, this term is a penalty default rule. Nevertheless, it is a mistake to look at the whole of the gap fillers and think of them as a punishment for ambiguity or greediness.

Looking Forward Could any of this be empirical tested? Look at differences between the states in applying U. C. C. § 2 -207(2): � In States that apply the knock-out rule and gap fillers: � In States that differ in applying subsections (2) and (3): � Less proviso-conforming language ? More consequential damages negotiations? More proviso-conforming language? Less consequential damages negotiations? What differences in drafting if different terms included in (2)? Does a consolidation of market share correlate to decrease in 2 -207 cases? � � We may be able to find evidence that big buyers are causing a decrease in the battle-of-the-forms situations. Survey of Big box purchase orders versus others.

Conclusion When drafters create boilerplate language for their clients, they must take the relative bargaining power of their client into consideration. For most drafters, their clients will be better off in the battle-of-the-forms situation if their boilerplate includes adversarial language. � Courts should appreciate the efficiency sought in the battle of the forms and the strategy necessary to survive the battle of the forms. Consequential Damages – as a gap filler in the UCC constitute a penalty default rule in contract law. � If there is a signaling game present, it exists in negotiating consequential damages and moving away from the gapfiller, subsection (3) equilibrium.