Battle of the Forms, Arbitration, and a Flooded Production Line
On March 3, Buyer, a Mississippi manufacturer, calls Seller, a Tennessee parts supplier, and agrees to buy 1,200 Grade A industrial pumps at $210 each, delivery May 1, net 30. Same day, Seller emails a one-page 'Order Confirmation' that includes a clause requiring all disputes to be arbitrated in Nashville and disclaiming all warranties. Buyer emails a purchase order that states 'any dispute will be litigated in Hinds County, Mississippi, under Mississippi law' and says nothing about warranties. Neither party signs. Seller ships 1,150 pumps on May 1; 30 are Grade B. Buyer accepts and installs all of them. Three weeks later, one Grade B pump fails, flooding Buyer's production line and causing $40,000 in damage to other equipment. Buyer notifies Seller the next day and sues in Mississippi state court. Seller moves to compel arbitration and argues the warranty disclaimer limits recovery.
1. Is there an enforceable contract, and which terms govern? Analyze under UCC Articles 1 and 2.
Read the worked answer
There is an enforceable contract. The March 3 phone call was a definite offer and acceptance: the parties agreed on goods, quantity, price, delivery, and payment. The writings do not defeat formation. Under UCC § 2-207(1), Seller's confirmation was a definite expression of acceptance even though it added terms. Under § 2-207(2), the additional terms are proposals between merchants unless they materially alter the contract, are objected to, or were already objected to. The arbitration clause is a material alteration because it waives a jury trial and changes the forum; Buyer's purchase order expressly objected by requiring litigation in Hinds County. The warranty disclaimer is also material and was not agreed to.
Under § 2-207(3), the conflicting terms drop out and the contract consists of the terms on which the writings agree plus UCC gap fillers. Mississippi law supplies the rest. The result is a contract for 1,200 Grade A pumps at $210, with no arbitration clause and no effective warranty disclaimer.
2. Can Seller compel arbitration?
Read the worked answer
Seller's motion to compel arbitration should be denied. The FAA requires enforcement of arbitration agreements, but it does not create an agreement. Whether the parties agreed to arbitrate is a question of state contract law, and here the UCC's battle-of-the-forms rule governs. Because the arbitration clause was a material alteration and Buyer objected, it never became part of the contract. The clause cannot be enforced as a term of the parties' agreement.
Seller might argue that Buyer accepted the pumps, and that acceptance implies assent to the confirmation. But course of performance cannot manufacture consent to a term that was expressly rejected in the purchase order. The same reasoning defeats the warranty disclaimer. The court should compel nothing and let the Mississippi action proceed.
3. What damages can Buyer recover for the 30 nonconforming pumps and the flood?
Read the worked answer
Buyer accepted the pumps by installing and using them after a reasonable opportunity to inspect, but acceptance does not bar damages for nonconformity. Buyer gave timely notice the day after the failure, satisfying UCC § 2-607(3). For the 30 Grade B pumps, Buyer can recover the difference between the value of Grade A pumps as accepted and the value of Grade B pumps, plus incidental and consequential damages under §§ 2-714 and 2-715.
The flood damage to the production line is damage to other property and is recoverable if it was foreseeable that a defective pump could fail and cause water damage. The cost of repairing or replacing the failed pump itself may be direct economic loss; whether it is recoverable depends on whether it is consequential or direct, but the other-property damage is clearly recoverable. Buyer cannot revoke acceptance if it has substantially used the goods and cannot return them, but it may keep the pumps and offset damages. The warranty disclaimer is ineffective, so the UCC's implied warranties supply the standard.