Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

In the United States, the Uniform Commercial Code (UCC) generally governs commercial agreements (such as supply contracts for the sale of goods and services), and has been codified by each state, with some states making modifications to certain UCC requirements. Thus, both state statutes and common law concerning commercial contracts vary among states, so a careful analysis of the state law governing the contract is recommended.

Generally, absent an agreement to negotiate in good faith, there is no such obligation for parties to negotiate a contract in good faith. Some parties may execute a preliminary agreement - such as a term sheet or letter of intent - as part of their negotiations before entering into a formal written contract, especially for more complex transactions. Often, such preliminary agreements include a provision that expressly states that the parties agree to negotiate the deal points within the term sheet or letter of intent in good faith. Some states will enforce these agreements to negotiate in good faith, while other states have held such provisions to be unenforceable. Some courts that have enforced such an obligation in a preliminary agreement do not necessarily find that the duty assumes exclusive negotiations, and other courts have further stated that the term sheet or letter of intent should be detailed and include a ‘framework’ for the court to determine whether the duty has been breached.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

A ‘battle of the forms’ arises in the United States when, rather than preparing a single contract for the sale of goods, the offeree and offeror each send the other party what they consider to be their respective standard terms and conditions. Of course, such terms tend to be inconsistent - and more favourable to each respective party - resulting in a conflict over which party’s terms will govern the contractual relationship. When such a conflict occurs, as a general rule, no contract is formed because each communication is considered a counter-offer, not an acceptance of the other party’s terms. A ‘conditional acceptance’ is a type of counter-offer that purports to ‘accept’ the other party’s offer, but only with additional or different terms. Most states require express language for a conditional acceptance. In this situation, approval by the other party remains necessary to form a contract.

The UCC has a ‘merchant rule’ for commercial contracts between merchants. Under the UCC, the additional terms will automatically become part of the contract unless the offer expressly limits acceptance to the terms of the offer; the additional terms materially alter the agreement; or one of the parties has notified the other party that it objects to the additional terms (or notified the other party within a reasonable time). Most state courts have held that this merchant rule applies just to additional terms and does not include different or inconsistent terms; instead, the different or inconsistent terms are cancelled out and replaced by the ‘gap-filling’ provisions under the UCC (such as provisions for the course of performance and the time and place of delivery). Other states will treat the additional terms and inconsistent terms in the same way; thus, the different terms become a part of the contract between merchants unless one of the exceptions listed above applies. A review of state-specific laws and court interpretations is recommended to determine how the state has adopted the UCC’s rule.

Language requirements

Is there a legal requirement to draft the contract in the local language?

There is no obligation in the United States to draft commercial contracts in English; however, the vast majority of both domestic and international contracts are prepared in English. A review of state-specific laws is recommended if entering into a consumer contract. Some states, such as California, may require certain consumer contracts to be translated into another language.

Online contracts

Is it possible to agree a B2B contract online?

Yes. In the United States, a legally binding contract generally does not need to be in any particular form. With some exceptions, commercial contracts may be formed electronically and are subject to the Electronic Signatures in Global and National Commerce Act at a federal level, and the Uniform Electronic Transactions Act as adopted by all states except for Illinois, New York and Washington. These laws authorise electronic signatures in most commercial and business transactions, subject to certain exceptions. The terms of the contract must be accessible for review, and it is recommended that the full text be provided (such as via a click-to-accept scroll box).