A Purchase Order – What Is It?
Purchase orders are documents generated between buyers and sellers that state the buyer’s intent to purchase products or services. They are typically created after a seller provides a detailed quote and/or after a verbal agreement has been made between the two parties. Purchase orders are often created in response to a request for purchase order. Sometimes they are generated without the need of a request .
Purchase orders serve as contracts and provide information such as product descriptions, quantities, prices, payment terms, delivery dates, and other specifics regarding the products and services to be supplied.
For larger product orders, a purchase order is often used instead of a quote. A quotation is not an enforceable agreement between the parties. In contrast, an accepted purchase order is a purchase agreement.
The Legal Status of a Purchase Order
The legal status of a purchase order will depend on whether it contains the essential elements of a contract. These essential elements are an offer, acceptance, mutual assent, and consideration.
A contract exists when:
A purchase order is a request for a particular good or service, whereas a contract is an agreement to buy or sell something specific at a certain price. A purchase order contains the offer, but the entire document, including the terms and conditions, is the offer contractually binding both parties. The legally binding offer creates an enforceable promise to enter into the proposed agreement.
A supplier’s receipt of a purchase order is an acceptance of that offer. Although a purchase order does not have to be signed to become an enforceable contract, a supplier’s signing of a purchase order may strengthen the case that an enforceable contract exists.
Under most circumstances, parties must intend to be legally bound by their deal or agreement in order for it to become a valid contract. Parties indicate a mutual intention if they act in a way that indicates they intend to be bound by their agreement.
Contracts require consideration in order to be legally binding. Consideration is the giving or receiving of something of value – payment. A contract does not need to be in writing to be enforceable; an oral contract is acceptable when reaching an agreement.
A purchase order is not a legally binding contract until it is accepted by the seller. Most businesses have standard terms and conditions that apply to all purchase orders they issue. If these standard terms and conditions have not been agreed to by the seller, the seller should send a response to the purchase order, whether to accept it as is or reject it outright.
Whether a contract is or is not formed will ultimately depend on the parties’ actions and will vary on a case-by-case basis.
Contracting with a Purchase Order
Purchase orders are commonly used to initiate business transactions. However, many professionals mistakenly believe that a purchase order will never be legally binding on a business without further contract around it.
This is not entirely true. Under certain circumstances, a purchase order may result in a legally binding contract as a matter of law. A few recent cases are of interest.
In Vector Mfg., Inc., v. Terracom Distrib., Inc., 2011 U.S. Dist. LEXIS 53820 (E.D. Pa. May 19, 2011), Terracom sought summary judgment that a signed purchase order and an e-mail constituted a contract for the sale of goods. Vector sought recovery for breach of contract under article 2 of the U.C.C. Vector argued that the terms of the alleged contract were too vague and indefinite to be enforced, primarily arguing that the parties had not agreed to a quantity term.
The Court disagreed, and denied Vector’s motion for reconsideration. The Court found that the email and purchase order were enforceable as a contract by finding, in essence, that the parties implied a quantity term from a course of performance. The Court relied on Beaver Machinery, LLC v. Marsh & McLennan Companies, Inc., 2010 WL 3738258 (W.D. Pa. Sept. 21, 2010), which held that a contract was formed when legislatively-required insurance was purchased.
The difference between Vector and Beaver Machinery, is the subject matter. In Vector, the agreement was for the purchase of goods. In Beaver Machinery, the agreement was for the provision of services. When it comes to services, a court will likely require that terms be more specifically defined.
In O’Neill v. Estate of Rovner, 2011 U.S. Dist. LEXIS 76366 (E.D. Mich. July 14, 2011), the Eastern District of Michigan granted summary judgment that a contract existed between a residential property owner and a contractor. The Court found that the parties had an enforceable contract because it was clear that (1) the consideration exchanged was the value of the services performed by the contractor, and (2) the subject matter, was the renovation of the owner’s home.
The takeaway from these cases is that whether a purchase order or any other document will result in a binding contract is very fact specific, and will depend on the language in the order and the behavior of the parties.
Purchase Order Terms and Conditions
Purchase orders generally contain several common terms and conditions. The terms and conditions are usually the same or very similar from one purchase order to another. In addition to addressing what products or services are purchased, they frequently include payment terms, delivery terms, and terms addressing whether or not there are any penalties for not complying with the terms and conditions in the purchase order. In some cases, the purchase order states that a party must perform or provide the goods or services by a certain date. In the event of a breach of the agreement (typically defined as not providing the goods or services as ordered or on time), some purchase orders incorporate from the Uniform Commercial Code the provisions that allow the party that did not breach the contract to recover consequential damages (additional damages that were not a direct result of the breach), or some other monetary damages.
What happens when you breach a Purchase Order
While a purchase order is a short and simple document, its legal implications can be complex. The binding nature of a purchase order may pose considerable legal issues to both suppliers and buyers, with ramifications that can extend through various stages of the purchasing process. For example, failure to fulfil a purchase order can result in potential legal liability for either party.
If a seller fails to provide goods and/or services in accordance with a purchase order, the buyer has a claim against the seller for breach of contract, and may seek damages. Generally, a remedy for breach of contract is to place the injured party in the position they would have been had the contract been performed. In the case of a breach of a purchase order, a buyer may seek damages to compensate for the difference between the price agreed to in the purchase order and the market price at the time the good or service was to be provided. If a seller breaches a purchase order, a buyer may also seek to recover consequential damages suffered as a result of the breach of the purchase order. These consequential damages may include, but are not limited to, lost profits, loss of business or loss of opportunity.
While it is generally accepted that there is no duty to mitigate with regard to purchase orders, if the purchaser suffers any foreseeable loss, it may be under a contractual or common law duty to act reasonably to reduce the loss it might otherwise have suffered, unless the terms of the purchase order or applicable provincial law make such a duty impossible . Although mitigation might not technically apply to a breach of a purchase order, a purchaser might still have a duty to mitigate in order to recover consequential damages.
A seller who has breached a purchase order may have a claim against the buyer for failure to mitigate. In some circumstances, if a seller can establish that a buyer has suffered no damages, the seller may be able to claim specific performance from the buyer, or enforce a lien on the products supplied. If the product or service was specially manufactured or modified for the purchaser, and cannot be resold by the seller, the seller may be entitled to a greater claim for damages in the event of a breach of a purchase order.
The purchase order may also provide various remedies, including the recovery of liquidated damages. If a purchase order does not provide remedies, the applicable provincial legislation may apply, which would require the aggrieved party to proceed under the provisions of the provincial Sale of Goods Act (or Business Practices and Consumer Protection Act, if consumer goods). If a purchase order does not contain a dispute resolution clause, the parties may also submit to court in the event of a breach of the purchase order.
Is a Purchase Order legally binding?
To ensure that a purchase order becomes a legally binding contract, it is important that the document is prepared with care. The clearer and more accurate the document, the more likely it is to become a legally binding contract.
One way to prevent arguments about whether the document clearly became a contract is to use clear and simple language. If the parties can understand the meaning of the purchase order without debate, a court would be less likely to determine that the parties failed to create a contract. It may also be useful to explain complicated terms, like price escalation that may occur if there is an increase in the price of raw material over time.
The acceptance of the offer contained in the purchase order must be signed by an individual who is authorized to sign binding documents on behalf of the company. This may include electronic signatures that are either expressly authorized or impliedly authorized. However, if two signatures are required and only one signature is provided, the acceptance arguably would not be binding on the company.
For a purchase order to be binding on the recipient, it is important for the order to be supported by consideration. An order may not be valid unless the buyer expressly agrees to pay and the seller commences performance or renders a detriment. Most purchase orders will include additional terms and conditions. These terms may help to clarify the obligations under the purchase order. If the purchase order references terms and conditions that are not attached, it may be worthwhile to ask the requester for copies of the terms and conditions prior to performance.
When parties are unclear on the terms of a transaction, issues may arise that will need to be litigated. For example, a company may clearly place an order for a material. However, if the order fails to include a specification for that material, the supplier may provide a different specification than the buyer intended to order. This may lead to the court determining whether the order was for a specific type of material.
Purchase Orders Frequently Asked Questions
Frequently Asked Questions about the Legal Binding Nature of Purchase Orders
A. An offer must be clear, with specific terms, and demonstrate an intent to be bound by them. Purchase Orders (POs) usually meet all of these criteria.
A. This will depend largely on the context of how they are used or received.
A. E-mail correspondence might seem informal, but can create binding obligations. When such a message refers to a distinct order, it may be classified as a PO. It’s highly recommended to expressly mark e-mails as either a PO or a quote, as this indicates to the receiving party that it should be considered in a specific way.
A. Just like POs, Quotes should ideally be formatted in ways that signal intent to enter a binding contract if accepted. To avoid ordering mistakes, Quotes should be clearly marked as such, to avoid being misinterpreted as POs.
A. POs are strictly unilateral offers; it’s up to the recipient to accept them.
A. Yes, with certain exceptions. These exceptions include when the PO specifically states it’s non-binding or intended to be accepted in another manner . If it’s a unilateral offer without express conditions for acceptance or rejection, it will be legally enforceable when accepted.
A. When there’s no specified time limit, a PO will remain valid for a "reasonable" period of time. What constitutes a "reasonable" period will, however, depend on the specifics of the scenario. Factors like price fluctuations, demand volatility and industry standards will all play a part in determining the time period of enforceability.
A. The supplier must communicate acceptance of an order in a manner that’s consistent with the terms outlined in the PO, otherwise the PO will not be considered a binding contract.
A. Yes. While there are situations in which electronic signature, approval or acknowledgement of terms will be required, "acceptance" of POs will be deemed as such when a recipient simply accepts the terms without any qualification. When a PO is accepted without conditions, the parties will be deemed to have reached an agreement to the terms outlined therein.
A. A PO will be considered legally binding when words or actions indicate an intent on the part of the seller to enter into a legally binding contract as of the date of the communication.