Purchase Orders Can Create a Binding Agreement

Updated:  January 28, 2020

 Does a purchase order create a legally binding agreement?  A purchase order lands on your desk.  Most of the terms are good, but that extra item the salesperson promised was omitted from the order, but you’ll work that out later.  This is just a request to purchase, right?

Beware.  Under many circumstances, a purchase order can create a legally binding agreement.  This can occur when the purchase order contains these provisions:

  • Offer (to provide a good or service),
  • Acceptance (this can be express (i.e. signing the PO) or implicit (accepting the goods and paying for them)),
  • Identification of the buyer and seller (again, this can be implied through delivery and acceptance of the goods/services),
  • Identification of the goods/services, quantity, and price,
  • Time period for performance (again, express or reasonably implied),
  • And, depending upon the type of agreement and good or service involved, there may be other factors required to achieve the bare minimum contract.

The above items are the essential terms to create a binding agreement.  Your purchase order may include many additional terms, such as warranties, mandatory purchase requirements, and liability waivers.

Business executives must instill in their employees the recognition that purchase orders are legal documents.  Signing or submitting one creates legal obligations for the business.  More often than not, the purchase order contains a page (or more) of densely printed legalese regarding warranties, liability, limitations on service, and other important terms.  These terms should be carefully read and understood by the authorized manager or discussed with legal counsel prior to submission to the vendor.

In a dispute regarding the enforcement of a purchase order, the answer can be complicated when one (or both) parties add or delete terms on a purchase order.  You may have read about the “statute of frauds”, the “battle of the forms”, or the “knock-out rule”.  These legal terms and their application depend upon the conduct of the parties and the law currently in effect, but at their most basic level, these terms dictate how to interpret which changes are binding and whether the changes prevent the creation of a legally binding agreement.

When in doubt, consult an attorney before making any changes to a purchase order.  If you are the provider of goods or services, it is also beneficial to have an attorney periodically review your template purchase orders.

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