Purchase Orders Can Create a Binding Agreement

Many people are often confused as to if, and when, a purchase order constitutes a legally binding agreement.

Under many circumstances, a purchase order can form a legally binding agreement.  A legally binding agreement (whether purchase order or by any other name) must contain certain elements:

  • 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.

Business executives must instill in their employees the recognition that purchase orders are legal documents and signing or submitting one places legal obligations on 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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