COMMERCE & INDUSTRY INSURANCE COMPANY & others [Note 1] vs. BAYER CORPORATION

GREANEY, J. We granted the application for direct appellate review of the defendant, Bayer Corporation (Bayer), to determine the enforceability of an arbitration provision appearing in the plaintiff's, Malden Mills Industries, Inc. (Malden

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Mills), orders purchasing materials from Bayer. In a written decision, a judge in the Superior Court concluded that the provision was not enforceable. An order entered denying Bayer's motion to compel arbitration and to stay further litigation against it [Note 2]. We affirm. the order.

The background of the case is as follows. Malden Mills manufactures internationally-known apparel fabrics and other textiles. On December 11, 1995, an explosion and fire destroyed several Malden Mills's buildings at its manufacturing facility. Subsequently, Malden Mills and its property insurers, the plaintiffs Commerce and Industry Insurance Company and Federal Insurance Company, commenced suit in the Superior Court against numerous defendants, including Bayer. In their complaint, the plaintiffs allege, insofar as relevant here, that the cause of the fire was the ignition, by static electrical discharge, of nylon tow (also known as bulk nylon fiber), which was sold by Bayer (but manufactured by a French business entity) to Malden Mills and used by Malden Mills to manufacture "flocked fabric," a fabric used primarily for upholstery application [Note 3].

Malden Mills initiated purchases of nylon tow from Bayer either by sending its standard form purchase order to Bayer, or by placing a telephone order to Bayer, followed by a standard form purchase order. Each of Malden Mills's purchase orders contained, on the reverse side, as one of its "terms and conditions," an arbitration provision stating:

"Any controversy arising out of or relating to this contract shall be settled by arbitration in the City of New York or Boston as [Malden Mills] shall determine in accordance with the Rules then obtaining of the American Arbitration Association or the General Arbitration Council of the Textile Industry, as [Malden Mills] shall determine."

Another "term and condition" appearing in paragraph one on the reverse side of each purchase order provides:

"This purchase order represents the entire agreement between both parties, not withstanding any Seller's order

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form, whether sent before or after the sending of this purchase order, and this document cannot be modified except in writing and signed by an authorized representative of the buyer."

In response, Bayer transmitted Malden Mills's purchase orders to the manufacturer with instructions, in most instances, that the nylon tow was to be shipped directly to Malden Mills. Thereafter, Bayer prepared and sent Malden Mills an invoice. Each of the Bayer invoices contained the following language on its face, located at the bottom of the form in capital letters:

"TERMS AND CONDITIONS: NOTWITHSTANDING ANY CONTRARY OR INCONSISTENT CONDITIONS THAT MAY BE EMBODIED IN YOUR PURCHASE ORDER, YOUR ORDER IS ACCEPTED SUBJECT TO THE PRICES, TERMS AND CONDITIONS OF THE MUTUALLY EXECUTED CONTRACT BETWEEN US, OR, IF NO SUCH CONTRACT EXISTS, YOUR ORDER IS ACCEPTED SUBJECT TO OUR REGULAR SCHEDULED PRICE AND TERMS IN EFFECT AT TIME OF SHIPMENT AND SUBJECT TO THE TERMS AND CONDITIONS PRINTED ON THE REVERSE SIDE HEREOF."

The following "condition" appears in paragraph fourteen on the reverse side of each invoice:

"This document is not an Expression of Acceptance or a Confirmation document as contemplated in Section 2-207 of the Uniform Commercial Code. The acceptance of any order entered by [Malden Mills] is expressly conditioned on [Malden Mills's] assent to any additional or conflicting terms contained herein."

Malden Mills usually remitted payment to Bayer within thirty days of receiving an invoice.

Based on the arbitration provision in Malden Mills's purchase orders, Bayer demanded that Malden Mills arbitrate its claims against Bayer. After Malden Mills refused, Bayer moved to compel arbitration and to stay the litigation against it [Note 4]. The judge denied Bayer's motion, concluding, under s. 2-207 of

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G. L. c. 106 (s. 2-207) (set forth below) [Note 5], the Massachusetts enactment of the Uniform Commercial Code, that the parties' conduct, as opposed to their writings, established a contract. As to whether the arbitration provision was an enforceable term of the parties' contract, the judge concluded that subsection (3) of s. 2-207 governed, and, pursuant thereto, the arbitration provision was not enforceable because the parties had not agreed in their writings to arbitrate. Finally, the judge rejected Bayer's argument that the plaintiffs should be equitably estopped from refusing to proceed under the arbitration provision.

1. This case presents a dispute arising from what has been styled a typical "battle of the forms" sale, in which a buyer and a seller each attempt to consummate a commercial transaction through the exchange of self-serving preprinted forms that clash, and contradict each other, on both material and minor terms.

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See 1 J.J. White & R.S. Summers, Uniform Commercial Code s. 1-3, at 6-7 (4th ed. 1995) (White & Summers). Here, Malden Mills's form, a purchase order, contains an arbitration provision, and Bayer's form, a seller's invoice, is silent on how the parties will resolve any disputes. Oddly enough, the buyer, Malden Mills, the party proposing the arbitration provision, and its insurers, now seek to avoid an arbitral forum.

Section 2-207 was enacted with the expectation of creating an orderly mechanism to resolve commercial disputes resulting from a "battle of the forms [Note 6]." The section has been characterized as "an amphibious tank that was originally designed to fight in the swamps, but was sent to fight in the desert." White & Summers, supra at s. 1-3, at 8 [Note 7]. Section 2-207 sets forth rules and principles concerning contract formation and the procedures for determining the terms of a contract. Id. at 9. As to contract formation, under s. 2-207, there are essentially three ways by

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which a contract may be formed. Id. at 19-20. See also JOM, Inc. v. Adell Plastics, Inc., 193 F.3d 47, 53 (1st Cir. 1999) (JOM). "First, if the parties exchange forms with divergent terms, yet the seller's invoice does not state that its acceptance is made 'expressly conditional' on the buyer's assent to any additional or different terms in the invoice, a contract is formed [under subsection (1) of s. 2-207]." Id. at 53. "Second, if the seller does make its acceptance 'expressly conditional' on the buyer's assent to any additional or divergent terms in the seller's invoice, the invoice is merely a counteroffer, and a contract is formed [under subsection (1) of s. 2-2071 only when the buyer expresses its affirmative acceptance of the seller's counteroffer." Id. Third, "where for any reason the exchange of forms does not result in contract formation (e.g., the buyer 'expressly limits acceptance to the terms of [its offer]' under s. 2-207(2)(a), or the buyer does not accept the seller's counteroffer under the second clause of s. 2-207[1]), a contract nonetheless is formed [under subsection (3) of s. 2-2071 if their subsequent conduct - for instance, the seller ships and the buyer accepts the goods - demonstrates that the parties believed that a binding agreement had been formed." Id. at 54.

Bayer correctly concedes that its contract with Malden Mills resulted from the parties' conduct, and, thus, was formed pursuant to subsection (3) of s. 2-207. A contract never came into being under subsection (1) of s. 2-207 because (1) paragraph fourteen on the reverse side of Bayer's invoices expressly conditioned acceptance on Malden Mills's assent to "additional or different" terms [Note 8], and (2) Malden Mills never expressed "affirmative acceptance" of any of Bayer's invoices. See id. at 53. In addition, the exchange of forms between Malden Mills and Bayer did not result in a contract because Malden Mills, by means of language in paragraph one of its purchase orders, expressly limited Bayer's acceptance to the terms of Malden Mills's offers. See G. L. c. 106, s. 2-207 (2) (a); JOM, supra at 54.

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Although Bayer acknowledges that its contract with Malden Mills was formed under subsection (3) of s. 2-207, it nonetheless argues, relying on language in both JOM, supra at 55, and official comment 6 to s. 2-207 of the Code, I U.L.A. 378 (Mastered. 1989), that the terms of the contract are determined through an application of the principles in subsection (2) of s. 2-207. Under this analysis, Bayer asserts that the arbitration provision became part of the parties' contract because it was not a "material alteration," and to include the provision would cause no "surprise or hardship" to the plaintiffs. This analysis is incorrect.

Bayer ignores the significance of the method of contract formation in determining the terms of a contract. See White & Summers, supra at s. 1-3, at 19-20 (discussing three routes of contract formation under s. 2-207, and noting "the terms of any resulting contracts will vary, depending on which route to contract formation a court adopts"). Where a contract is formed by the parties' conduct (as opposed to writings), as is the case here, the terms of the contract are determined exclusively by subsection (3) of s. 2-207. 2 R.A. Anderson, Uniform Commercial Code s. 2-207:14, at 568; s. 2-207:28, at 574-575; s. 2-207:47, at 584; s. 2-207:146, at 640 (3d ed. rev. 1997) (Anderson). Official comment 7, which Bayer overlooks, expressly directs as much. See 1 U.L.A. s. 2-207 official comment 7, at 378 (Mastered. 1989) ("In many cases, as where goods are shipped, accepted and paid for before any dispute arises, there is no question whether a contract has been made. In such cases, where the writings of the parties do not establish a contract, it is not necessary to determine which act or document constituted the offer and which the acceptance. . . . The only question is what terms are included in the contract, and subsection [3] furnishes the governing rule"). Under subsection (3) of s. 2-207, "the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter." G. L. c. 106, s. 2-207 (3). In this respect, one commentator has aptly referred to subsection (3) of s. 2-207 as the "fall-back" rule. See 1 T.M. Quinn, Uniform Commercial Code Commentary and Law Digest par. 2-207[A][14], at 2-134 (2d ed. 1991). Under this rule, the Code accepts "common terms but rejects all the rest." Id. at 2-135. While this approach "serves to leave many matters uncovered,"

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terms may be filled by "recourse to usages of trade or course of dealing under [s.] 1-205 or, perhaps, the gap filling provisions of [s.s.] 2-300s." Id. See also Anderson, supra at s. 2-207:78, at 602 (" 'supplementary terms' authorized by UCC s. 2-207[3] include those that may be established by a course of dealing, course of performance, and usage of the trade").

Contrary to Bayer's contentions, subsection (2) of s. 2-207 is not applicable for several reasons. First, subsection (2) instructs on how to ascertain the terms of a contract when the contract is formed either by the parties' writings or by a party's written confirmation of an oral contract, situations not present here (the parties' contract was formed by their conduct). See 1 U.L.A. s. 2-207 official comments I and 2, supra at 377. See also Anderson, supra at s. 2-207:28, at 574-575; s. 2-207:30, at 576; s. 2-207:160, at 647. Second, the rules set forth in subsection (2), concerning how the terms of a contract between merchants are determined, apply only when the acceptance or written confirmation contains "additional or different terms," a situation also not present here (Bayer's invoice is silent concerning how to resolve disputes). See I U.L.A. s. 2-207 official comment 3, supra at 377. See also Anderson, supra at s. 2-207:160, at 647-648. In addition, official comment 6, read in its entirety [Note 9], does not support Bayer's argument because the comment expressly applies to a situation where there are "conflicting" terms. Id. There are no provisions in Bayer's invoices that "conflict" with Malden Mills's arbitration provision because the invoices do not contain any provision stating how the parties intend to resolve their disputes. See White & Summers, supra at s. 1-3, at 15 (official comment 6 not applicable when

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term appears in first form, but not in second; there are no terms that "conflict").

Bayer argues that this case is governed by the language in JOM, supra at 54, stating that "[t]he terms of [the parties' contract formed by the parties' conduct] would then be determined under the 'default' test in s. 2-207(3), which implicitly incorporates the criteria prescribed in s. 2-207(2)" (emphasis supplied). We disagree. As discussed above, the criteria in subsection (2) determine what "additional or different terms" will or will not be part of a contract that is formed by the exchange of writings. Where the writings do not form a contract, subsection (3) states its own criteria - "those terms on which the writings agree" plus any terms that would be provided by other Code sections. One cannot turn to subsection (2) as another Code section that would supply a term when, by its express provisions, subsection (2) simply does not apply to the transaction.

Thus, the judge correctly concluded, under subsection (3) of s. 2-207, that the arbitration provision in Malden Mills's purchase orders did not become a term of the parties' contract. The arbitration provision was not common to both Malden Mills's purchase orders and Bayer's invoices. Bayer properly does not argue that any of the gap-filling provisions of G. L. c. 106, apply. Because Bayer concedes that it never previously arbitrated a dispute with Malden Mills, we reject Bayer's claim that the parties' course of dealing requires us to enforce the arbitration provision.

Bayer also cites Pervel Indus., Inc. v. T M Wallcovering, Inc., 871 F.2d 7 (2d Cir. 1989), in arguing that industry custom and usage favors enforcing Malden Mills's arbitration provision. That case, however, is not helpful to Bayer. The court upheld the existence of an enforceable arbitration agreement because the manufacturer had "a well established custom of sending purchase order confirmations containing an arbitration clause," and the buyer, who had "made numerous purchases over a period of time," received "in each instance a standard confirmation form which it either signed and returned or retained without objection." Id. at 8. Although Bayer never objected to the arbitration provision in Malden Mills's purchase orders, as we have previously explained, no agreement to arbitrate ever arose due, in part, to the expressly conditional language appearing in paragraph fourteen of Bayer's invoices, and to the lack of an

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arbitration provision in its invoices. It is significant also that Bayer did not provide the judge with any evidence of industry custom and usage. We decline to conclude that industry custom and usage favors enforcing Malden Mills's arbitration provision.

The strong presumption of arbitrability, and the Federal and State policies favoring arbitration, see Bureau of Special Investigations v. Coalition of Pub. Safety, 430 Mass. 601, 603 (2000); Carpenter v. Pomerantz, 36 Mass. App. Ct. 627, 630 (1994); Loche v. Dean Witter Reynolds, Inc., 26 Mass. App. Ct. 296, 300 (1988), cannot reasonably be applied here. No adequate satisfaction exists of the Federal Arbitration Act's [Note 10] requirements of the existence of a "written [arbitration] provision in a contract," or "an agreement [to arbitrate] in writing," 9 U.S.C. s. 2 (1994), nor of the Massachusetts Uniform Arbitration Act's similar requirements of a "written [arbitration] agreement" or "a[n] [arbitration] provision in a written contract," G. L. c. 25 1, s. 1. The parties' forms never established a written contract; Malden Mills's arbitration provision did not integrate into the contract by reason of the parties' conduct; and they did not otherwise agree to arbitrate. See Quirk v. Data Terminal Sys., Inc., 379 Mass. 762, 768 (1980).

2. The judge correctly rejected Bayer's argument that the plaintiffs should be equitably estopped from refusing arbitration. Bayer has not shown that the plaintiffs intended to be bound to the arbitration provision in the absence of a final written contract with Bayer. Cf. Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 839 (7th Cir. 1981) (finding it inequitable "to permit [the plaintiff] to both claim that [the defendant] is liable to [it] for its failure to perform the contractual duties described in the . . . agreement and at the same time deny that [the defendant] is a party to that agreement in order to avoid arbitration of claims clearly within the ambit of the arbitration clause"). Bayer has not established any inequity in having to proceed to trial rather than to arbitration [Note 11].

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See Cleaveland v. Malden Sav. Bank, 291 Mass. 295, 297 (1935).

3. Bayer may be right that the drafters of the Massachusetts version of the Code did not intend that s. 2-207 should provide "an avenue for a party to strike the terms of its own purchase documents." Bayer, however, cannot ignore the fact that the use of its own boilerplate invoices contributed to the result that Bayer now finds problematic. The order denying the motion to compel arbitration and to stay litigation is affirmed.

So ordered.