Contracts Quick Tip: Counteroffer and Battle of the Forms

Counteroffer and battle-of-the-forms issues frequently pop up on law school exams and on the bar exam. Keeping a few key principles in mind will help you analyze these issues from start to finish.

Negotiating parties typically engage in a lot of back-and-forth before forming an enforceable contract. To correctly analyze a contracts fact pattern, you must be able to identify which communications operate as an acceptance and form a binding contract.

The first step to any contract-formation fact pattern is to identify the governing law. Contracts for nongoods or services are governed by the common law of contracts. Contracts for goods, however, are governed by the Uniform Commercial Code (UCC) to the extent that it displaces the common law. Because the UCC differs from the common law in the type of response that operates as an acceptance of an offer, the UCC definitely displaces the common law on this point. Identifying the correct governing law is therefore key.

Under the common law’s mirror-image rule, a response to an offer must precisely match the offer’s terms to operate as an acceptance. Aside from mere suggestions or inquiries, any difference between the offer and the response makes the response a rejection and counteroffer. The rejection terminates the offer, and the counteroffer restarts the contract-formation process, presenting terms that the recipient is free to accept or reject. 

When evaluating whether a response adds terms not contained in an offer, be sure to consider the offer’s express and implied terms. If the response merely adds terms that were already impliedly part of the offer, the response is an acceptance, not a rejection and counteroffer. 

The UCC’s rule is more flexible than the mirror-image rule. Under the UCC, a response to an offer doesn’t have to match the offer’s terms precisely in order to operate as an acceptance. Rather, under U.C.C. 2-207, if an offeree’s expression is otherwise valid as an acceptance but contains terms additional to or different from those in the offer, a contract forms. However, if the offeree’s response is expressly conditioned on the initial offeror’s assent to the additional or different terms, the offeree’s response is a rejection and counteroffer, not an acceptance. In that case, no contract forms unless the initial offeror assents to the additional or different terms.

To spot a response that’s conditional on the initial offeror’s assent to the additional or different terms, watch out for words like “but only if” in the fact pattern. For example, “I accept your offer, but only if you will agree to a price of $100 instead of $50.”

The above framework will help identify whether a binding contract has formed. But what exactly did the parties in a contract for the sale of goods agree to if the offer and the acceptance don’t match? The answer depends first on whether all the contracting parties are merchants. A merchant is someone who deals in the goods of the kind being bought or sold or who by occupation holds himself out as having knowledge or skill particular to the type of goods or type of transaction involved.

If at least one contracting party is not a merchant, any different or additional terms in an acceptance are treated as proposals for addition to the contract. Proposals don’t automatically become part of the contract. Rather, proposals become part of the contract only if the offeror expressly agrees to them.

If all contracting parties are merchants, the next question to ask is whether the acceptance is proposing terms additional to those in the offer or different from those in the offer. In general, the rules here are intended to facilitate commerce between merchants. Because many merchants use form contracts, the analysis here is sometimes called “the battle of the forms.”

Additional terms are not addressed in the offer at all. The offer is silent on additional terms, and the acceptance adds them. For example, if the offer says nothing about a delivery date but the acceptance contains a delivery date of March 15, the delivery date is an additional term.

If all contracting parties are merchants, the default rule for additional terms flips—additional terms automatically become part of the contract unless one of three exceptions applies. First, additional terms won’t become part of the contract if the offer expressly limits acceptance of the terms of the offer. Second, additional terms won’t become part of the contract if they materially alter the contract. Third, additional terms won’t become part of the contract if the offeror objects within a reasonable time.

Different terms are addressed in both the offer and the acceptance. For example, if the offer specified a delivery date of March 1 but the acceptance states a delivery date of March 15, the delivery date is a different term. Under the knockout rule, any different terms in the offer and acceptance are knocked out of, or removed from, the resulting contract. Any gaps in the contract left by knocking out different terms are filled by implication. The knocked-out terms can be implied by fact, with evidence of trade usage in the industry, or by the parties’ course of dealing in prior transactions. Alternatively, they can be implied by law with the UCC’s gap-filler terms.

From your first day of law school to your final day of practice, Quimbee is there to help you succeed. Get up to speed with counteroffers, battle of the forms, and a host of other contract-law issues with essential video lessons, essay practice exams, and multiple-choice questions. And don’t forget to explore the Quimbee Bar Review+ features students across the country rely on to help them pass the bar exam on their first attempt.