Practices that Supplement Contracts
Image by foreverdigital via Flickr
How Many in a Baker's Dozen?
Industry practices and specific relationships may create unwritten contractual terms that bind the parties. This blog has more legal analysis than usual, but read on. Really.
Iowa’s Uniform Commercial Code (UCC) governs transactions in goods. Iowa’s UCC section 554.1303 addresses three principles that may supplement or amend contracts:
- course of performance,
- course of dealing, and
- usage of trade.
Course of Performance: This addresses conduct between the parties in a current contract when:
(b) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.
Course of Dealing: Your prior dealings with a party may create a Course of Dealing, which is an understanding that becomes part of a future contract, even if not specifically stated. To better understand Course of Dealing read St. Ansgar Mills Inc. v. Streit which is a case involving a hog farmer who regularly ordered feed corn from the mill. The mill would either send order confirmations to Streit for signature, or hold the orders for Streit’s signature. Often, turnaround for signatures was a month or greater. The hog farmer called in two orders for future delivery of corn; the mill held the confirmations for a signature. When the farmer returned more than one month later, the price of corn had significantly dropped. The farmer refused to sign the order, stating that the written confirmation had not been delivered within a reasonable time. The Iowa Supreme Court considered prior orders showing Course of Dealing where significant time passed between oral purchase orders and delivery of written confirmations.
Usage of Trade: Some industries work with such similar goods that industry-wide standards and practices develop. To better understand Usage of Trade read C-Thru Container Corp. v. Midland Mfg. Co. which involves a contract between a manufacturer of bottles and a buyer. The manufacture asserted that the buyer did not order a sufficient amount. The buyer asserted that the manufacture did not provide samples to assure a suitable product. The Iowa Supreme Court found that the buyer was allowed to provide evidence of trade practice and could argue that the industry has a standard of providing samples prior to orders.
What does this mean for your business?
1) Know how other businesses handle similar contracts. (Especially if you are venturing into a new industry.)
2) If you want to deviate from a common business practice, get written agreement.
3) Define your business relationships in the same way that you define the actual terms of a contract, with attention to clarity.