A purchase order lands on your desk. Most of the terms are good, but that extra item the salesperson promised is missing. You’ll work that out later, right?
Beware. Under many circumstances, a purchase order creates a binding contract.
When is a Purchase Order a Contract?
A purchase order becomes a binding contract when it contains the minimum necessary requirements to be a legally-enforceable contract. Generally, a binding contract contains these provisions:
- An offer to sell or offer to purchase
- Acceptance (express or implicit)
- Express acceptance occurs when you sign the purchase order.
- Implicit acceptance occurs when you accept the goods, pay the invoice, or send the specs for custom goods.
- Identification of the buyer and seller
- Identification of the goods or services, the quantity, and the price
- Time for performance (when the goods or service will be delivered)
Depending upon the type of agreement, there may be other factors required to achieve the bare minimum contract.
If you sign a purchase order containing these elements, you likely have a binding contract.
Purchase Order v. Invoice
The purchase order contains two parts: your request to purchase and the invoice (receipt). In other words, the purchase order describes what you bought. The invoice shows what you paid.
As a simple analogy, when you purchase a product online, you place a particular item in your ‘cart’. This is your purchase order.
Once you hit the ‘submit’ button, you create a purchase order. You and the e-commerce seller now have legal obligations. You have the obligation to pay. The seller has an obligation to deliver.
The invoice is the receipt you receive once the seller collects your payment. You might receive the invoice immediately upon payment. Some sellers send the invoice only after they have shipped your goods.
Tips for managing the PO process.
Recognize that signing or submitting a purchase order creates legal obligations for the business.
Treat purchase orders like contracts.
Did you order the correct product or quantity? Did you buy sufficient quantity? What are you warranties (if any)? Are you bound to minimum quantity requirements?
Designate the person(s) authorized to sign purchase agreements. DO NOT dole out this power to everyone.
Carefully read the legalese and run it by legal counsel if you can. Ignoring the tiny print about warranties, jurisdiction, arbitration, etc. can come back to haunt you.
Purchase Order disputes.
Inevitably, your business will dispute a purchase order.
Maybe you did not authorize the employee to sign it.
Perhaps you didn’t read the terms carefully.
Maybe the seller delivered the wrong product.
The product is on backorder and you need it now so you buy it from another vendor.
What are your options?
Enforcing the terms of a purchase order can be complicated if one (or both) parties add or delete terms on the PO. When that happens, you face a complex legal question of which added terms (if any) control.
Unfortunately, I cannot give you a quick answer without reading your specific agreement. Whether these insertions and deletions are binding depends upon the situation and the law of your jurisdiction.
Litigation rarely is best strategy to handle disagreements over purchase orders. For the average small business or nonprofit organization, it is simply too expensive to fight it out in court. The only one who wins is the attorney.
Instead, try these techniques:
- Educate your staff about the legalities of purchase orders. Implement a procedure for reviewing and approving purchase orders.
- If you already signed the PO, contact the seller and negotiate a change (in price, quantity, delivery date, etc.).
- If the PO contains an early cancellation penalty, consider whether it is economically to your advantage to pay the penalty rather than continuing the contract.
- Accept the goods and resell them. Even though you probably won’t recover your entire purchase price, getting some or most of you money back is better than nothing.
- Check if the seller is registered to do business in your state. Some states, such as Pennsylvania, require businesses to register before they can enforce their contracts in court.
When in doubt, consult an attorney before making any changes to a purchase order or challenging a purchase order.
If you sell of goods or services, it is also beneficial to have an attorney periodically review your template purchase orders.
As always, Concerto Law is here to answer your questions, review your PO, and negotiate changes. Give us a call at (814) 706-1288 or schedule a consultation.