The Nature of Purchase Orders
A purchase order is a commercial document that is part of the procurement process in a transaction, serving as an offer from a buyer to a seller, indicating types, quantities, and agreed prices, among other terms and conditions. A purchase order may also contain legal terms and conditions, such as governing law, confidentiality, indemnification, and insurance, which would be terms of the purchase order and/or a pre-printed form on which it is transmitted. Since a purchase order is a reflection of an agreement between a buyer and seller, it is often, but erroneously, referred to as a contract, when it is actually evidence of an agreement, not the contract itself. A purchase order is commonly used as a point of reference in the course of negotiating a full contract, as it often can be the first document exchanged between the parties. It may also be used as the vehicle for communication of the terms that memorialize that agreement.
Purchase orders are "buy-sell contracts," which means that once the seller acknowledges the terms of the purchase order , a contract has been formed. When the purchase order is submitted to a supplier or vendor, it is typically electronically generated and issued online through purchasing software and a computerized procurement system. However, a purchase order may also be paper based. A computerized purchase order may then be printed and sent to the vendor in paper form. Although the receipt of a purchase order may validate the contract terms that the vendor has provided in the quote or proposal phase of the procurement process, the buyer should continue to negotiate if there is something in the purchase order that is not consistent with the vendor’s proposal. A purchase order may be the result of an RFP, if the RFP is accepted, or a quotation, if the quotation is formally accepted. On the supplier’s receipt of the purchase order, specifically if the procurement process is the result of a RFP, further evaluation and negotiation may occur and the supplier may indicate that it will ship the goods or provide the services based on consent to certain changes in the purchase order from the buyer.
Legally Defined Purchase Orders
In legal terms, a purchase order is an offer to buy the goods or services listed in the document. Contracts are traditionally defined as agreements between two or more parties that create legally enforceable obligations. Contract law has typically viewed contracts as a written or spoken agreement, based on intention, which is exchangeable and can be enforced under local laws. However, the system of contract formation used in modern contract law systems is significantly different from the traditional conception of a contract.
Acceptance, whether in a verbal contract or in writing, must be agreed upon by both parties. However, the definition of acceptance is not how an offeror would define it. Legally, acceptance is defined as "an outward act whereby a person agrees to be bound by an offer . . . ." So long as this acceptance is manifested, the agreement is accepted (and becomes a contract) without any further activity needed by the offeror.
Purchase orders have been recognized by courts as being valid and binding contracts. But, if these orders are not created properly, by including the necessary terms, or they are altered, the aspect of acceptance might not exist and a purchase order can then be deemed to be an offer. The difference between an offer and a contract is that an offer merely proposes to enter into a contract upon acceptance, whereas a contract is a present obligation to do something.
For example, a business might send an order to buy 20 units of a specific product for $30 each. The acceptance of the buyer would occur when he sends an acknowledgment back to the seller that he will purchase the goods at the price listed. This communication back to the seller could be a fax, email, or even a signature on the original purchase order. After this acknowledgment, a contract exists and "a contract containing terms for the future performance of the contract is created."
On the other hand, if that acknowledgment is not done, then the contract has not been formed. In this case, the original purchase order does not create any enforceable obligations on the seller. The offer has yet to be accepted. For further clarity on this, please examine UCC ยง 2-206.
What Constitutes a Legally Binding Purchase Order?
As with any contract, there must be clear terms that satisfy a two-part test that shows the parties intended to enter into the contract at the time the contract was formed and there is enough information to determine a breach, the performance, and the applicability of an appropriate remedy.
Generally, the components of a purchase order include the following:
- (1) Seller: An identification of the seller (name and contact details);
- (2) Buyer: An identification of the buyer (name and contact details);
- (3) Item: A description of the goods being purchased;
- (4) Price: The amount of money the buyer is obligated to pay the seller for the goods;
- (5) Delivery: An identification of the time and place for delivery;
- (6) Additional Terms: Any special instructions or information about the purchase (e.g., how to invoice, insurance coverage, returns, risk of loss, making of claims, warranties, set offs, indemnification, and limitations of liability).
Distinctions between Purchase Orders and Invoices
While they can be easily confused at first, the major difference between a purchase order (PO) and invoice is that the former results in a legally binding agreement to supply goods or services and also serves as a notification for financial records that a purchase has occurred. An invoice, however, is a request for payment – one that does not mean that the signers of the document now have a legal obligation to pay. For example, if a person were to simply take their receipt for goods or services and call that their invoice, the person receiving that receipt would not be bound to pay for those products or services; simply receiving the receipt would not constitute a binding agreement. It is the same with purchase orders and invoices; only invoices are issues in response to POs, and thus are not a legally binding agreement like POs.
Legal Consequences of Accepted Purchase Orders
"Acceptance" of purchase orders under Wisconsin law occurs when there is a manifest intent by both parties to be bound. In this context, evidence of any conduct of the offeree, not inconsistent with an intention to accept, which acts as if it has accepted the offer, can constitute acceptance.
Ordinarily, an order omitting some of the terms included in the offer is a counter-offer, but insignificant omissions or insertion of additional terms in an order usually do not change the contract. (An exception to this general rule is when the offer limits acceptance to the terms of the offer. In that case, an order calling for terms differing from those of the offer is treated as a counter-offer.)
A purchase order which does not complete all the terms of the offer may nevertheless be accepted by conduct if other acts of performance are done in furtherance of the proposed transaction . Terms omitted from the offeree’s order and supplied by the offeror in later correspondence will not be considered as modifying the contract unless both parties intend the "second writing" to be a counter-offer or amendment to the contract. If nothing is said of the omitted terms, the contracting parties will each be held to the terms of the earlier communication. The rationale is that failure to mention the contradicting terms in such circumstances would be deemed inadvertent and they would be absorbed into the terms of the earlier writing.
In short, where there are conflicting terms between the two writings, the later contract writing controls only when it is clear that both parties intend such writing to alter their contract.
When an Accepted Purchase Order is Not Legally Binding
There are certain limited circumstances in which a purchase order may not be binding on a party or considered an acceptance of an offer. In some jurisdictions, a purchase order will only constitute an acceptance if it contains all of the essential terms of an offer, such as quantity, price and time for payment and delivery. However, in other jurisdictions, the purchase order need not contain all of the essential terms in order to be binding. Instead, the remaining terms may be sufficiently clear so that it is reasonable to believe that the contract is complete.
Another circumstance in which a purchase order may not be binding is where the acceptance contained in the purchase order is conditional, such as the inclusion of a condition language pertaining to government approval or financing. In these circumstances, it is necessary to seek legal advice as to the binding nature of such documents.
The above circumstances may also vary by jurisdiction. For example, in New York, a material variance between a purchase order and an offer may operate to void the purchase order contract as an acceptance.
Further, remember that while a purchase order may not be binding under a particular contract law doctrine, the parties may still be bound by other agreement(s).
How to Enforce a Purchase Order as a Contract
To enforce a purchase order as a contract under the common law, the supplier must ensure that it does not accept the purchaser’s standard terms and conditions of sale. When this happens, the supplier has the advantage over the purchaser in that the standard trade terms may contain a jurisdiction and governing law provision.
Accordingly, in the event of a dispute, the supplier can sue and enforce a purchase order made on its terms, irrespective of the jurisdiction in which the purchaser is operating. A good example of this is where a South African supplier of products enforces the purchase order (and the conditions of sale) by suing the defaulting purchaser in terms of the standard terms and conditions of sale made and signed with North American laws and the relevant courts.
On the issue of breach and any remedies available in that event, the position is as follows: when an enforceable agreement has been created, the normal breaches and remedies under the common law would apply. For example, in the event of a breach, there is the normal right to cancel the agreement and/or claim damages. Often a party may simply wish for the supplier to deliver the goods or the purchaser to pay the required purchase price and so the common law principles apply to enforce that remedy.
A simple agreement drafted duly by the supplier can go a long way if there is a concern that the purchaser will not honour any agreements made. By ensuring that there are no conflicts with the purchaser’s standard terms and conditions of sale, a purchase order may be enforceable as a contract, with clear and obvious remedies available upon its breach.
How to Write Legally Robust Purchase Orders
The purchase order should be clear, concise, and unambiguous. This does not mean it should be exhaustive. The goal is to get the parties to agree on the "stuff," and leave additional items for negotiation, or as may be addressed elsewhere in the larger transaction (e.g., in a lease or other similar agreement). Trying to cover every conceivable option in the purchase order can be both counter-productive and may render it non-binding. For example, if the purchase order tries to address a dispute resolution procedure, service termination rights, and performance milestones, it may be deemed a series of separate contracts. If so, the requirement for the writing and signature may be deemed not satisfied.
Accordingly, questions such as the following should be considered:
Decide whether it is important to retain the option for competitive bidding, i.e., the right to issue a purchase order solely at the discretion of the purchasing party at the time of performance. If so, add a statement reserving the right.
Use the word "may" when describing options. This indicates that the decision is discretionary, but may still impose certain requirements if chosen (which could be important for determining future performance) and also sets an external context that can be relied upon by both parties. For example , if the purchase order states that "Purchaser may reserve the right to extend the Term if ordered by Purchaser in writing at least 90 days prior to the expiration of the Term," it indicates that the order will not require written notice and that oral notice is sufficient if the Term is not renewed.
If service or performance will be provided by a specific individual or within a specific timeframe, include the name of the individual and/or the specific dates to confirm those particulars.
If you want a particular provision to survive any termination or expiration of the purchase order, include a survival clause and list those provisions.
Depending on the nature of the transaction, take special care to retain the right to delegate or assign the obligations under the purchase order, and include an exception to this right if required or appropriate to perform the original contract terms.
If possible use a mutually-agreeable title for the purchase order. If uniformity is not acceptable, at least state on the face of the purchase order (or header), "Notwithstanding any headings on the face of and elsewhere, this agreement is a purchase order."
If the purchase order is to be filed in a court proceeding or arbitration, consider having a signature page or acknowledgement block to eliminate the need to have referenced provisions repeated on the signature page.