Purchase orders (POs) are a crucial part of managing supply chain transactions. However, the process can become complex and challenging for buyers, especially when dealing with the “battle of forms.” In this blog post, we will explore the challenges buyers face with purchase orders and the battle of forms, as well as offer valuable tips to navigate these complexities effectively.

Understanding Purchase Orders and the Battle of Forms

A purchase order is a legally binding document that outlines the specific products or services a buyer agrees to purchase from a supplier. It includes essential details such as the type, quantity, price, and delivery schedule of the items or services being procured.

The battle of forms arises when two parties—usually a buyer and a supplier—exchange multiple documents, including quotations, purchase orders, order acknowledgments, and invoices, each containing their own terms and conditions. The challenge arises when these terms and conditions differ, leading to confusion and potential disputes over which terms should govern the transaction.

Challenges Faced by Buyers

Inconsistent Terms and Conditions: As both parties include their preferred terms and conditions in their respective documents, buyers may find themselves in a situation where their purchase order contains conflicting terms from the supplier’s order acknowledgment or invoice.

Legal Uncertainty: The battle of forms can lead to uncertainty regarding which terms govern the contract between the parties. In the absence of a clear agreement, the parties may face legal disputes or delays in the execution of the transaction.

Risk of Miscommunication: The exchange of multiple documents with varying terms can lead to miscommunication and misunderstanding between the buyer and the supplier. This may result in incorrect deliveries, incorrect pricing, or other issues that can adversely impact the buyer’s business operations.

Tips for Navigating Purchase Orders and the Battle of Forms

Establish Clear and Consistent Terms: To avoid confusion and legal uncertainty, buyers should ensure that their terms and conditions are clear, consistent, and comprehensive. This includes specifying which document takes precedence in the event of a conflict, as well as incorporating an “entire agreement” clause to clarify that the purchase order and its agreed-upon terms constitute the entire agreement between the parties.

Streamline Document Exchange: Implementing electronic data interchange (EDI) or a purchase order management system can help minimize the risk of miscommunication and simplify the exchange of documents between the parties. These systems can also help ensure that both parties are working from the same, updated information.

Foster Open Communication: Encourage open and transparent communication with suppliers throughout the purchasing process. Address any discrepancies or conflicts in the terms and conditions promptly, and work together to resolve them before they escalate into more significant issues.

Seek Legal Advice: In cases where the battle of forms presents potential legal risks or challenges, buyers should consider seeking legal advice to ensure that their interests are protected and that they are aware of any potential liabilities or obligations that may arise from the transaction.

Battle of Forms Across Different Jurisdictions

Understanding how different jurisdictions address the battle of forms can provide valuable insights for businesses looking to mitigate risks and navigate the complexities of cross-border transactions.

United States

In the United States, the Uniform Commercial Code (UCC) governs commercial transactions, including the battle of forms. The UCC’s “last shot” rule, under Section 2-207, provides that when parties exchange documents with conflicting terms, the terms of the last document sent before performance begins generally prevail, unless the offer expressly limits acceptance to the terms of the offer.

However, the UCC also provides for the “knockout rule,” which stipulates that when the terms of the exchanged documents materially conflict, neither party’s terms will prevail, and the conflicting terms will be “knocked out” and replaced by UCC gap-filler provisions.

United Kingdom

In the United Kingdom, the battle of forms is typically resolved by the “last shot” rule, similar to the UCC approach in the United States. This rule holds that the party that sends the last document containing their preferred terms, which is then acted upon by the other party (e.g., by delivering the goods or making payment), generally has their terms govern the transaction.

However, the English courts may also apply the “first shot” rule in some cases. This occurs when the initial offer is explicitly conditional upon the acceptance of the offeror’s terms and conditions, and the offeree’s subsequent communication attempts to introduce new terms without the offeror’s explicit acceptance.

CISG

Within the European Union, the battle of forms is regulated by the Convention on the International Sale of Goods (CISG) for countries that have adopted it, and by national laws for countries that have not. The CISG adopts a hybrid approach to the battle of forms, which can be seen as a mixture of the “last shot” and “knockout” rules.

Under Article 19 of the CISG, an acceptance containing additional or differing terms is considered a counter-offer, which must be accepted by the initial offeror for the contract to be formed. If the parties proceed with the transaction without explicitly agreeing on the conflicting terms, the CISG “knockout” rule comes into play. In this case, the conflicting terms are disregarded, and the provisions of the CISG fill in the gaps.

Swedish Law

In Swedish law, the Contract Act (Avtalslagen 1915) governs general contract formation, but there are no explicit statutory provisions addressing the Battle of Forms directly. However, the issue is generally handled through case law and principles developed from general contract law.

a. Offer and Acceptance Model (Mirror Image Rule)

Swedish law generally follows the offer and acceptance model. The buyer’s PO is considered an offer to the seller, and the seller’s order acknowledgment is seen as an acceptance or a counteroffer, depending on whether it agrees with the buyer’s terms.

• If the seller accepts the PO without modifications, the buyer’s terms govern.
• If the seller responds with new or modified terms (counteroffer), Swedish courts will look at which party’s terms were last agreed to (the so-called “last-shot rule”).

b. Last-Shot Rule

Under the last-shot rule, the last party to send their terms without objection from the other party before performance begins usually has their terms prevail. For example, if the seller sends an order acknowledgment with new or different terms, and the buyer does not explicitly object but proceeds with payment or receipt of goods, the seller’s terms might govern.

This can lead to uncertainty and disputes because neither party may be fully aware of which terms apply until a problem arises.

c. Deviation from the Last-Shot Rule

In recent case law, Swedish courts have sometimes favored a more balanced approach, where they consider the negotiations as a whole and may imply reasonable terms to replace conflicting ones, especially if neither party can conclusively prove which terms should govern.

Practical Steps to Mitigate Risks:

• Clear Communication: Ensure that the acceptance of terms is explicitly communicated.
• Master Agreement: Use a master framework agreement or negotiation to clarify terms before engaging in any transactions.
• Immediate Objections: If a party receives conflicting terms in an order acknowledgment, they should immediately reject or challenge them to avoid automatic acceptance.

German Law

In Germany, the Civil Code (Bürgerliches Gesetzbuch, BGB) governs contract formation, and the battle of forms is more explicitly addressed under the principle of conflicting T&Cs (AGB – Allgemeine Geschäftsbedingungen), which are subject to specific rules under the BGB Sections 305-310.

a. Offer and Acceptance Framework

Similar to Swedish law, contract formation under German law also follows the offer and acceptance structure. However, Germany has specific rules regarding standard terms that are incorporated into a contract.

• If a buyer sends a PO with standard T&Cs, these are considered part of the offer.
• The seller’s order acknowledgment may serve as an acceptance or a counteroffer, depending on whether their T&Cs align with the buyer’s terms.

b. Knock-Out Rule (Dissens)

Unlike the last-shot rule found in some other jurisdictions, German law generally follows the knock-out rule when there are conflicting T&Cs. This means that conflicting clauses cancel each other out, and the statutory provisions of the BGB fill the gaps.

• The result is often a contract where both parties’ conflicting terms are replaced by default legal rules under the BGB, particularly in sales law or contractual obligations.

c. Court Approach to Battle of Forms

German courts tend to analyze which T&Cs were clearly communicated and accepted, and they are stricter in applying rules that protect parties from unfair terms. For instance, a party cannot unilaterally impose standard terms without clear notice and agreement. The BGB’s AGB law ensures fairness and transparency in contract terms, providing more protection against unfavorable terms being imposed by one party.

Practical Steps to Mitigate Risks:

• Negotiation of Terms: Explicitly negotiate and agree upon key terms (such as liability, payment, and delivery conditions) before exchanging POs or acknowledgments.
• Knock-Out Rule Awareness: Be aware that conflicting terms may be nullified, leading to default BGB rules applying. Ensure both parties agree on any critical clauses.
• Review and Reject: Promptly review and, if necessary, reject terms sent by the other party to avoid the assumption of silent agreement.

Key Questions to Ask When Joining a New Purchasing Department

As a buyer , it’s essential to understand how to handle the Battle of Forms, which occurs when a buyer’s and a supplier’s terms and conditions (T&Cs) conflict. To help you get up to speed, here’s a guide on the questions you should ask and the steps to take when starting in a new role as a buyer.

1. Understand the Company’s Standard Terms

Before placing any orders, it’s critical to know what your company’s standard terms are. Ask the following questions:

• What are our standard terms and conditions (T&Cs) for procurement?
  • These are the rules and obligations your company includes when sending purchase orders (POs) to suppliers. Make sure you understand them clearly, especially regarding payment, delivery, and liability.
• Where are these T&Cs stored, and how do we ensure they are included with every purchase order?
  • It’s important to know how and when your company’s terms are communicated to suppliers.

2. Learn How to Handle Supplier T&Cs

When you receive an order acknowledgment from a supplier, they often include their own T&Cs, which might conflict with your company’s terms. Make sure you know how to deal with this by asking:

• How do we handle suppliers who send their own T&Cs with order acknowledgments?
  • Find out if there’s a standard process to review, accept, or reject supplier terms.
• Which T&Cs are critical to our business that we should never compromise on?
  • This will help you identify which terms, like payment deadlines or liability, are non-negotiable for your company.

3. Understand the Legal Framework

Different countries treat conflicting T&Cs differently, so it’s helpful to ask about the legal environment your company operates in:

• How do our contracts handle conflicting T&Cs (Battle of Forms) in this jurisdiction?
  • In some countries, like Sweden, the last-shot rule may apply, meaning the last set of terms exchanged before performance is likely to govern. In Germany, the knock-out rule might apply, where conflicting terms are nullified and statutory law steps in.
• Do we operate under any specific legal guidelines for resolving these conflicts?
  • This helps you understand how your company resolves disputes if supplier terms differ from your own.

4. Ask About Negotiating Framework Agreements

One way to avoid the back-and-forth of conflicting T&Cs is by having a framework agreement with suppliers. Ask:

• Do we have framework or master agreements with key suppliers?
  • These agreements set out the T&Cs for all transactions in advance, helping avoid conflicts down the road.
• How do we negotiate and manage these agreements with suppliers?
  • Understanding how to negotiate framework contracts will help you manage supplier relationships more effectively.

5. Clarify How to Handle Conflicting Terms

Conflicting terms often arise when placing orders, and you need to be ready to respond quickly. Ask:

• What should I do if a supplier sends back terms that conflict with ours?
  • It’s important to know how to review these terms, what actions to take, and whether to consult legal or management.
• Who do I escalate issues to when there’s a disagreement on terms?
  • Knowing your company’s escalation process helps avoid costly delays or misunderstandings.

6. Learn About Communication Protocols with Suppliers

Clear communication is essential for preventing disputes. Ask:

• What is the process for communicating with suppliers about terms and conditions?
  • Find out how your company handles formal communications regarding T&Cs, including negotiations and objections.
• How should we respond if a supplier insists on their own terms?
  • This will help you understand the company’s stance on negotiating terms and when to push back.

7. Inquire About the Role of Legal and Compliance

Sometimes legal support is needed, especially if the terms are complex or high-value contracts are involved. Ask:

• How often do we involve legal or compliance teams in procurement processes?
  • Know when you need to escalate issues or involve other departments for assistance.
• Are there any legal resources or training available to help me understand contract law?
  • This will help you build your understanding of the legal aspects of procurement and improve your ability to handle complex transactions.

8. Document Everything

Proper documentation is crucial for tracking decisions and avoiding disputes later. Ask:

• What is our process for documenting communications and changes to contracts?
  • Ensure you understand how to record any agreed changes to terms or conditions, especially when there are conflicts.

By asking these questions and following these recommendations, you’ll be well-prepared to manage the complexities of procurement and contribute effectively to your team.

Conclusion

The challenges posed by purchase orders and the battle of forms can be daunting for buyers, but with careful planning, clear communication, and the right tools, these complexities can be effectively managed. By addressing potential conflicts early on and fostering a collaborative relationship with suppliers, buyers can minimize the risks associated with the battle of forms and ensure a smoother, more efficient procurement process.

As demonstrated, the approach to purchase orders and the battle of forms varies across different jurisdictions. Businesses engaging in international trade must be aware of these differences to mitigate potential legal risks and ensure smooth transactions. It is recommended that businesses seek legal advice to navigate the complexities of the battle of forms in different jurisdictions and establish clear and consistent terms and conditions that account for potential conflicts.

The battle of forms poses a significant challenge under both Swedish and German law, but it can be managed through clear communication, the use of framework agreements, and timely responses to conflicting terms. Understanding the specific legal framework in each country—whether it be the last-shot rule in Sweden or the knock-out rule in Germany—can help companies better navigate these disputes and minimize risk in their procurement and supply chain operations.

Learn more in our basic level course about General Terms and Conditions. Both the tactical and the operative buyer need to understand, and preferable be able to write, an organizations General Terms and Conditions in order manage the commercial risk. In the course we study a real life example.

Information about LHTS Online Procurement courses in Swedish.

Note: Illustration to the blogpost was created by CHAT GPT on Sept 14, 2024.