June 2002
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
Under New York State law, parties are not required to arbitrate disputes unless there is an expressed, unequivocal agreement to arbitrate. An arbitration clause in a confirmation of a purchase order would constitute a material change to the agreement and would not become part of the contract unless specifically agreed to. However, under the federal law, which applies to contracts affecting commerce between states or foreign countries, agreements to arbitrate are treated in the same manner as any other commercial agreement and may be proven in the same manner as any other contract. In the recent case of Aceros Prefabricados, S.A. v. TradeArbed, Inc., a federal appellate court held that arbitration provisions, which were incorporated by reference in a foreign supplier's confirmation ordersÑbut were never sent to or seen by the contractor nor signed by the contractorÑwere nevertheless enforceable against the contractor.
Background
In December 1999, TradeArbed, Inc., an affiliate of the world's largest steel manufacturer, began exchanging correspondence, primarily in Spanish, with Aceros Prefabricados, S.A., a major Central American contractor, regarding a prospective purchase of steel from TradeArbed. Prior to Jan. 12, 2000, no contract had been formed. A letter of Jan. 12, 2000, written in Spanish, confirmed the orders for steel beams. The parties disputed the proper English translation of the letter. The contractor claimed that the letter stated: "We hereby confirm that the above-mentioned orders will be shipped in the next few days." The supplier argued that the letter instead stated: "The confirmations of the above-mentioned orders will be shipped in the next few days."
The supplier sent three confirmation orders on Jan. 17, Jan. 28 and March 9, 2000. Each confirmation was sent with a cover sheet stating that the confirmation "includes the sale terms and conditions for the [steel]" and the last page of each confirmation order contained the words: "Subject to terms stated on General Conditions of Sale enclosed. Your failure to object to any term within 10 days of receipt of this contract shall be deemed an acceptance by you."
The General Conditions of Sale were not included with any of the three confirmation orders. The General Conditions, however, contained an arbitration provision by which any controversy was to be submitted to arbitration in New York City in accordance with American Arbitration Association rules. The contractor did not sign either the Jan. 17 or March 9 confirmation orders. The contractor did sign, mark "accepted," and return to the supplier, the Jan. 28 confirmation order.
The contractor commenced an action against its supplier for breach of contract in the federal court in New York. The supplier, relying on the arbitration clause, moved to stay the action pending arbitration or to dismiss the action. The contractor argued that the Jan, 12 letter constituted the binding agreement. The contractor also argued that the arbitration clause contained in the confirmation orders was not part of the parties' Jan. 12 agreement. The General Conditions, which contained the arbitration clause, had been incorporated by reference into the confirmation orders but had not been enclosed with the confirmation orders. According to the supplier, the Jan. 12 letter was not the contract. The supplier argued that each of the three confirmation orders constituted a separate binding contract and that the arbitration provisions were incorporated by reference in each of the three contracts.
The District Court denied the supplier's motion, holding that the Jan. 12 letter constituted a binding contract. The court applied New York law and held that the additional terms contained in the three confirmation orders would have materially altered the terms of the Jan. 12 contract and, therefore, did not become part of the agreement. The supplier appealed.
Decision
The federal appellate court held that parties could bind themselves to arbitration provisions contained in a document, which was incorporated by reference, even if the document containing the arbitration was never signed. The court also held that it made no difference whether the Jan. 12 letter constituted a single agreement or the three confirmation orders constituted three separate agreements.
The court reasoned that the Uniform Commercial Code (UCC), adopted by all states except Louisiana, applied to the agreement to purchase goods. Under the UCC, the proposed additional terms became part of the contract unless they materially altered the contract. According to the court, whether an arbitration clause materially alters a contract is a question of fact to be determined by the court on a case-by-case basis. A material alteration is one that would "result in surprise or hardship if incorporated without awareness by the other party."
The contractor did not present any subjective or objective evidence of surprise or hardship. The supplier's vice-president had submitted an affidavit stating that arbitration clauses were commonplace and the norm in the steel industry. The contractor did nothing to rebut that assertion. The court concluded that, in the absence of proof of surprise or hardship, the arbitration provisions proposed in the supplier's confirmation orders became part of the contract even though the contractor never saw them or signed them, and the parties were therefore required to arbitrate their disputes.
Conclusion
If the contractor and supplier had both been located in New York State, the result in this case would have been different. Under New York law, the attempt to incorporate an arbitration clause in a purchase order or confirmation of the order would constitute a material change in the terms, and would not be enforceable unless the parties had expressly and unequivocally agreed to arbitrate their disputes.
Contractors placing orders with material suppliers and manufacturers from outside New York State, however, should be careful to examine the terms and conditions of purchase orders or confirmations of orders. Under the UCC, transactions between merchants may result in a "battle of the forms" in which the unwary party might find that certain provisions, which were never discussed or negotiated, have become part of the contract. In this case, an arbitration clause contained in General Conditions of Sale, which were referred to in the supplier's forms but were never sent to or seen by the contractor, nevertheless became part of the contract. Carefully drafted forms of one's own and attention to the language contained in the opposing party's forms will help avoid the inclusion of contract terms that were never contemplated by one of the parties.
About the author: Mr. Miuccio is a partner in the New York City-based law firm Altieri, Kushner, Miuccio & Frind, P.C. and legal counsel to the Construction Industry Council of Westchester and the Hudson Valley, Inc.