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.

Signatures and other execution formalities

In what circumstances are signatures or any other formalities required to execute commercial contracts in your jurisdiction? Is it possible to agree a B2B contract online (eg, using a click-to-accept process)? Does the law recognise the validity of electronic and digital contract signatures? If so, how are they treated in comparison to wet-ink signatures?

In most circumstances, a signature is required to execute a commercial contract. However, there are circumstances where businesses with existing relationships can be considered to be in agreement when they exchange form contracts or when one business assents, for example via a written correspondence such as an email, because it indicates the business’s agreement.

It is possible to agree to a B2B contract online through utilisation of electronic and digital contract signatures. This was addressed in 2000 when federal legislation enacted the Electronic Signature in Global and International Commerce Act. The e-signature law made electronic contracts and signatures legally binding in the same way a paper contract is a binding document. For e-signatures to be valid and enforceable, the electronic document itself must be valid and enforceable. The electronic document must not be altered in any way. The document must also be signed by all parties. It must also be available to each party as a saveable and printable document that can be retrieved by the parties. An online contract can be challenged in a court of law just as a party would challenge a paper contract, signed and dated by hand. Also, it is presumed the e-signature of an online contract is valid unless it can be proven otherwise.

The Uniform Electronic Transactions Act (UETA) has been adopted by 47 states, and the District of Columbia. The three states that have not adopted UETA (New York, Illinois and Washington) have all adopted similar e-signature laws.