Chapter 14: PURCHASE ORDER

CHAPTER 14

Purchase Order

ONCE THE BUYER knows the goods being offered for sale, the price, and the sale conditions, the buyer may submit an order—commonly known as a purchase order, or P.O.—to the seller. In effect, a purchase order is an offer to buy. No contract is formed until the order has been accepted by the seller. Standard clauses are often printed on the reverse side of the purchase order. The parties should be careful that the standard clauses attached to the purchase order are not in conflict with any conditions that the seller has placed on the sale. Conflicting clauses should be renegotiated and changed before the parties sign the contract.

Sample Contract: Purchase Order (front side)

[buyer’s letterhead] Purchase Order No: [number] Dated: [date] Issued to: [name and address of seller] We are pleased to place the following order, subject to the conditions appearing on the reverse of this purchase order: Model Number Description Quantity Price/Item Total Price [list] [list] [list] [list] [list] Subtotal Tax Shipping Total Price

Terms of Shipping and Delivery: [specify, including import and export costs and documentation, destinations, delivery times, and insurance requirements]. [signature of buyer]

Sample Contract: Purchase Terms (reverse side)

CONDITIONS OF PURCHASE ORDER

The Purchase Order on the reverse side is conditioned on the following terms. 1. ACCEPTANCE. The Seller is deemed to have accepted the Offer made in this Purchase Order by confirming to the Buyer in writing the Order and the Delivery Date. 2. DELIVERY. The Buyer has set its own production schedule in reliance on the delivery period specified in this Purchase Order. If delivery is delayed, the Buyer will incur substantial losses. By initializing this clause, the Seller expressly

acknowledges that the delivery period is material to this contract and that any delay will be considered a breach of the contract. If delivery is delayed, the Buyer has a right to cancel this Purchase Order, to purchase replacement Goods from another source, and to hold the Seller accountable for resulting losses. ______(initials) COMMENT: The seller will usually request a more flexible delivery period so that any delays will not be a breach of contract. In contrast, the buyer usually has plans to use the goods, and therefore will want a fairly accurate estimate, if not an exact date and time. These two positions are in conflict, and the parties will have to negotiate a compromise. The delivery clause provided here is strictly against the seller, and it should be modified to reflect the negotiated agreement of the parties. 3. PRICE AND PAYMENT TERMS. The price for the Goods must not be higher than the price last quoted or charged to the Buyer, unless the Buyer otherwise consents in writing. Payment will be net 30 days. The Buyer will be allowed a discount of [number] percent for transmitting payment within 30 days of the billing date. COMMENT: If the seller has not allowed an incentive for early payment, the buyer may request one. Again, this clause will have to be negotiated between the parties. It should not conflict with payment terms offered by the seller. 4. QUANTITIES. If the Seller is unable to ship the quantity of Goods ordered, the Seller must notify the Buyer before shipment. The Buyer then has a right to cancel the entire contract, accept substitute goods, or accept the reduced quantity. The price will be adjusted to reflect the Goods actually received. 5. INSURANCE. The Seller will insure all Goods shipped. COMMENT: If shipping terms are included in the purchase order, it would be wise to detail there the responsibilities of the parties regarding insurance on the goods. This clause could then be eliminated. In any event, the parties should agree to the amount of insurance, the point at which the risk of loss will transfer to the buyer, and the extent to which either party will be a beneficiary of the other’s insurance. 6. SHIPMENT DOCUMENTATION. As evidence that the Goods have been shipped, the Seller will transmit to the Buyer the invoice for the Goods and the carrier’s signed express receipt or bill of lading. The Seller will further prepare complete customs documentation required for exporting and importing the Goods.

7. TITLE TO DRAWINGS AND SPECIFICATIONS. If the Buyer has supplied drawings and/or specifications to the Seller, the Buyer, retains at all times, title to them. The Seller undertakes to use them in connection with this Purchase Order only and to hold them in confidence. No disclosure of them will be made to any person or entity other than the Seller’s employees, subcontractors, or government inspectors. When this Purchase Order is complete, or at any time the Buyer requests, the Seller will promptly return all drawings and specifications to the Buyer. COMMENT: Always remember to protect your intellectual property. Disclosure of designs, trademarks, plans, trade secrets, and similar properties could result in loss of your exclusive rights. You should include a nondisclosure clause and an express statement of title to your intellectual property.

8. SELLER’S WARRANTIES. The Seller warrants that the Goods delivered are free from defects in material or workmanship and conform strictly to the Buyer’s specifications, drawings, or samples, if provided. This warranty remains in force after all inspections, deliveries, acceptances, and payments have been made for the Goods.

9. INSPECTIONS. The Buyer is entitled to inspect the Goods on the Buyer’s premises. The Buyer is entitled to reject any Goods that do not conform to this Purchase Order and to return them to the Seller at the Seller’s expense. At the Buyer’s request, the Seller will replace the Goods returned. COMMENT: When goods are shipped long distances, it is often wise to inspect them for conformance before shipping and for damage and loss after shipping. If the buyer cannot personally inspect the goods before shipping, there are companies that will provide an objective inspection. Be certain that you receive written certification of the results if a third party conducts the inspection. 10. ASSIGNMENT. No assignments or delegations are allowed under this Purchase Order by either party without the prior written consent of the other party. Any attempted assignment or delegation without prior consent will be void. COMMENT: If the parties prohibit all assignments or delegations of rights, they will not be able to enforce such a clause. The law implies a right to assign or delegate. However, the parties may limit these rights, such as by requiring prior consent.

11. CREATION OF CONTRACT. If the Seller accepts this Purchase Order without alteration, deletion, or addition to any provisions, the parties will have a contract that binds both of them. Alterations, deletions, or additions to any provisions will be considered a counteroffer, and the Buyer’s acceptance will be required to form a binding contract. COMMENT: It is wise to control the creation of your contract by a clause similar to the one shown here. When the parties are merchants, the alteration of a provision that is immaterial to the contract does not necessarily constitute a counteroffer. It can be an acceptance, resulting in a binding contract. If you are unhappy with the alteration, you are then stuck with arguing whether the alteration affects a material provision, which is an imprecise standard and will vary depending on the interpreter. 12. GOVERNING LAW AND FORUM. This Purchase Order is to be interpreted in accordance with the law of [country]. Any disputes between the parties must be resolved in a forum located in [country]. COMMENT: Both parties may prefer their own law and forum for the resolution of disputes, and this clause will therefore need to be negotiated. Be certain to come to an agreement; if this clause conflicts with the seller’s clause, the forum is likely to ignore both of the provisions. Remember, there are also good reasons for choosing the law and forum of the other party’s country. That law may be more developed or more favorable to you. There may be an expedited procedure, and enforcement will be easier if you can avoid the process of presenting a foreign judgment for recognition.