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Crushing Terms & Conditions

This life lesson in contract law comes from a rock crushing contract in North Dakota and the related North Dakota Supreme Court decision issued on September 30.

BNI Coal engaged RTS Shearing to crush rock that BNI unearthed at its coal mine near Center, North Dakota.  BNI issued two purchase orders to RTS, both of which stated in bold letters: BNI Coal, LTD’s Standard Terms & Conditions apply for a copy of the Terms & Conditions contact BNI Coal, LTD.

RTS never asked BNI for a copy of the Terms and Conditions. Instead, RTS  set about merrily crushing rock for BNI, and getting paid.  For reasons not explained in the opinion, RTS left the BNI coal mine without completing the quantities set forth in the two purchase orders.  Later, RTS asked if it could return and complete the purchase orders, and BNI said no – BNI was exercising the right to unilaterally cancel the purchase orders as stated the following provision from its Terms and Conditions of Contract:

BNI Coal shall have the right to cancel or suspend by written notice, in whole or in part, the Contract.  Except in the case of termination for breach, allowance will be made for normal and reasonable expenses incurred by the Seller or Contractor prior to the notice of cancellation, but BNI Coal will not be liable for any charges or expenses incurred by Seller or Contractor in advance of the normal or reasonable lead time necessary to meet scheduled delivery dates nor for any expenses, charges or liability incurred subsequent to the giving of notice of cancellation.

This is a reasonable variation of the fairly common Termination for Convenience provision in many contracts.  Perhaps RTS did not think so, because RTS sued BNI for breach of contract.  RTS challenged the inclusion of the T&Cs based on the document title being different than that identified in the purchase orders, some of the content did not specifically apply to rock crushing and was completely inapplicable to the parties’ transaction, and the parties never discussed the T&Cs at the time of contracting.  “So what?  None of that matters,” said the ND Supreme Court.  “ . . . a party can assent to contractual terms, of which it was not aware, when the party fails to read the contract or to request to see terms and conditions incorporated into a contract.”  

My Take, Part I of III:  Purchase orders are not just pieces of paper the accounting department needs for billing and payment; they are contracts.  They should be taken just as seriously as you would a 20 page contract.  If there is a reference to terms and conditions, these days usually posted on one party’s website, download them, save them, date them.  Do not ignore them; you do so at your own peril.  Ask yourself this question – if the other party is not falling all over themselves to send me their Terms & Conditions -why not? Then read them.  Negotiate them where needed.

My Take, Part II of III: Less obvious from this contract is whether an accrual based taxpayer in RTS’ shoes can recognize revenue on the uncompleted portion of the work under a contract with termination for convenience language.  No.  I encountered this issue while representing an NYSE listed asbestos abatement company which had been awarded a multi-year contract to abate Enron’s office building in Houston in the 1990s.  Abatement of the large spaces was very profitable, while abatement of the small spaces lost money.  Ever clever, Enron’s contract did not actually obligate itself to use the asbestos abatement company for all spaces.  Based on that, Enron cherry-picked the spaces to abate, and my client was losing money on the contract.  Worse, my client had recognized revenue for the entire building in a prior accounting year and, once they correctly understood the contract, had to go back and restate their earnings.  Accountants and auditors need to read the T&Cs also.

My Take, Part III of III: There is a chapter in Swim With the Sharks Without Being Eaten Alive by Harvey Mackay, the Twin Cities envelope magnate, entitled: “When a Man with Experience and No Shirt Meets a Man with a Shirt and No Experience, the Man with the Experience Gets the Shirt and the Man with the Shirt Gets the Experience.”  I do not seem to be able to recall the rest of the chapter.  Like many of Mackay’s chapter titles, the title says it all.  It is a good read for anyone negotiating deals.

May you find joy in what you do and who you are with.