Court: New Mexico Supreme Court; March 22, 1993; New Mexico; State Supreme Court
The case involves a dispute between Gardner Zemke Company and Dunham Bush, Inc. regarding a contract for the sale of air-conditioning equipment (chillers) under the Uniform Commercial Code as adopted in New Mexico. Gardner Zemke, acting as the general contractor for a Department of Energy project, issued a Purchase Order that included a one-year manufacturer's warranty and required compliance with specified standards. Dunham Bush responded with a preprinted Acknowledgment that included extensive warranty disclaimers and stated that its terms governed the agreement, interpreting Gardner Zemke's Order as a counteroffer.
After the chillers were delivered and payment was made, Gardner Zemke discovered that the equipment did not meet specified requirements, leading to additional installation costs. Problems were reported with two chillers, prompting Gardner Zemke to request warranty repairs. Dunham Bush offered limited warranty services contingent upon a DOE purchase order for potential non-defect issues, which Gardner Zemke rejected, asserting that the DOE's warranty was still valid.
The DOE eventually engaged an independent contractor for repairs, incurring costs that led to a $20,000 withholding from Gardner Zemke's contract. Gardner Zemke subsequently brought a breach of contract action against Dunham Bush, alleging failure to meet project specifications and warranty service obligations. In summary judgment motions, the trial court ruled in favor of Dunham Bush, deeming its Acknowledgment as a counteroffer with controlling warranty limitations. The Supreme Court of New Mexico found merit in Gardner Zemke's challenge and remanded the case for further consideration.
Gardner Zemke sought interlocutory appeal following the denial of a partial summary judgment. In a December 1991 bench trial, the court determined that the Acknowledgment constituted a counteroffer, which Gardner Zemke accepted by silence, and ruled that under the warranty provisions, Gardner Zemke was not entitled to damages. On appeal, Gardner Zemke argues two points: 1) the trial court incorrectly ruled the Acknowledgment as a counteroffer, and 2) it demonstrated breach of contract, warranty, and damages.
The excerpt references Karl N. Llewellyn’s perspective on Article 2 of the Uniform Commercial Code (UCC), particularly Section 2-207, noted for its complexity and significance in modern commercial transactions. Section 2-207(1) states that an acceptance may include terms that differ from the original offer unless the acceptance is conditioned on agreeing to those additional terms. Gardner Zemke contends that since the Acknowledgment did not explicitly condition acceptance on assent to the new terms, it should be regarded as an acceptance rather than a counteroffer.
The common law "mirror image" rule, which required acceptance to match the terms of the offer precisely, is contrasted with the UCC's approach aimed at adapting contract law to contemporary business practices. The trial court's classification of the Acknowledgment as a counteroffer aligns with the common law perspective, but the UCC's intent was to innovate beyond that framework.
The common law mirror image rule, which required that acceptance of an offer must exactly match the terms of the offer, is rejected by Section 2-207 of the Uniform Commercial Code (UCC). This section allows for a document that responds to an offer and claims to be an acceptance to be treated as an acceptance even if it includes additional or different terms, provided the essential contract terms are agreed upon. A response will be considered a counteroffer only if its terms significantly differ from the original offer or if acceptance is expressly conditioned on agreement to the additional terms.
Dunham Bush argues that its Acknowledgment explicitly conditions acceptance on agreement to the additional terms listed, citing language from the Acknowledgment that states acceptance is subject to terms on its reverse side and includes a clause indicating that failure to object to the terms within five days constitutes acceptance of those terms. Dunham Bush references the First Circuit case Roto-Lith, which held that a response containing materially altering conditions constitutes a counteroffer, thus binding the other party upon acceptance of the goods.
However, the court expresses reluctance to adopt the Roto-Lith approach, noting that it aligns more with common law principles that Section 2-207 aims to circumvent. The court points out that Roto-Lith has faced substantial criticism and has not been embraced in the context of the UCC. Instead, the court maintains that the analysis in Roto-Lith does not align with the intended flexibility of Section 2-207(1) and declines to follow its precedent.
The analysis emphasizes the interpretation of Section 2-207 of the Uniform Commercial Code, particularly in the context of the Dorton v. Collins Aikman Corp. decision. The Sixth Circuit's ruling stated that for acceptance of an offer to be considered 'expressly conditional,' it must clearly indicate the offeree's unwillingness to proceed unless the offeror agrees to the additional or differing terms. The court underscored that mere exchange of forms with conflicting terms does not automatically create a counteroffer. It affirmed that the determination of whether an acceptance is conditional depends on the commercial context and mutual understanding of the parties involved. Official Comment 2 to Section 55-2-207 is referenced to support the notion that a contract can be recognized as formed based on commercial understanding, considering the parties' interactions and evidence of prior dealings. Ultimately, the inquiry should focus on whether the offeror could reasonably believe a contract had been formed within the commercial context, necessitating a fact-specific analysis.
The analysis suggests that while there is no strict rule for applying Article 2, it emphasizes the importance of considering the commercial context of transactions and the parties' reasonable expectations. The trial court's evaluation did not fully address the necessary factors to determine whether the Dunham Bush Acknowledgment acted as a counteroffer. Consequently, the case is remanded for further consideration. If the trial court finds that the Acknowledgment constituted an acceptance, it must then decide which terms govern the exchange of forms.
The Gardner Zemke Order stipulates that the manufacturer must replace or repair defective parts within the first year at no extra cost. In the absence of warranty terms in the Order, express and implied warranties arise by law. The Dunham Bush Acknowledgment specifies a limited warranty for one year, with obligations strictly tied to repair or replacement, and explicitly disclaims other express and implied warranties.
Most legal interpretations agree that Section 2-207(3) applies only if no contract is established under Section 2-207(1); however, some courts, like in Westinghouse Electric Corp. v. Nielsons, have disagreed and applied different sections. The statute clearly states that 'additional' terms fall under Section 2-207(2), but there is ongoing debate regarding the treatment of 'different' terms, as Section 2-207(2) does not mention them, raising questions about their applicability.
Terms labeled as 'different' versus 'additional' significantly influence the legal inquiry regarding their incorporation into contracts. One perspective asserts that despite omissions, 'different' terms should be evaluated under Section 2-207(2), supported by Comment 3, which indicates that the acceptance of such terms hinges on the provisions of Subsection (2). Proponents argue the ambiguous distinction between 'different' and 'additional' terms lacks practical purpose, as seen in case law like Steiner v. Mobile Oil Corp. and Boese-Hilburn Co. v. Dean Machinery Co. Consequently, it is concluded that the Dunham Bush warranty terms do not integrate into the contract, allowing the Gardner Zemke warranty and Article 2 warranties to prevail.
Conversely, some scholars, including Duesenberg and King, suggest that the confusion surrounding 'different' and 'additional' terms arises more from judicial interpretation than statutory language. They argue that 'different' terms cannot form part of the contract under the statute's plain wording, as an offeror's address to a subject implicitly rejects any variance proposed by the offeree.
A third viewpoint emerges from Comment 6, which posits that conflicting clauses in confirmations imply mutual objection, thus negating such terms. This interpretation suggests that conflicting 'different' terms cancel each other, leaving the original agreed terms and applicable code provisions intact. Nonetheless, criticisms of Comment 6 highlight its limited applicability and potential misinterpretations, with some jurisdictions, including the Tenth Circuit, accepting this analysis despite its flaws.
The court favored an approach that cancels out conflicting warranty terms between the parties, allowing Article 2 of the Uniform Commercial Code (UCC) to govern. This decision aligns with the intent of Section 2-207 and the principles of fairness, good faith, and conscionable conduct as outlined in the UCC. The third analytical approach, which relies on Comment 6, was adopted as it provides a balanced resolution, avoiding the pitfalls of favoring either party based solely on the sequence of forms exchanged. Although conflicting warranty provisions will be nullified, the possibility exists for the Code to supply a term akin to one that was rejected, which is considered fair by the Code's drafters. The court did not address the second issue raised by Gardner Zemke and ordered that if a contract is deemed formed under Section 2-207(1) upon remand, the warranty provisions of Article 2 will prevail. Additionally, it noted that the government retains the right to offset a specific amount from other contracts. The court acknowledged that while Official Comments do not have legal force, they provide essential guidance for understanding the UCC.
