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Purchase Orders: Can They Be Legally Binding?
Written by Zahida Shah, Silverback Commercial Law Services
What is a Purchase Order?
A purchase order is a commercial document whereby one business lets a supplier know they intend to buy goods from them.
This is the reverse of an invoice because it is a list of items the business intends to buy and will include information such as the price and quantities they wish to purchase.
A Purchase Order will contain key information such as:
- Purchase Order number
- The date the Purchase Order was issued
- Goods and Services the Buyer requires
- The required quantity of those Goods and Services
- The agreed price
- Delivery costs and details
- Payment Terms
- Other Terms and Conditions
Why use a Purchase Order?
Purchase Orders can be useful documents for both parties.
- Spend Control
- For the Buyer, a Purchase Order is important for spend control, and can act as a check and balance to ensure purchases are within allocated budgets. This enables the Buyer to forecast its outgoings at an early stage rather than waiting for invoices to determine their expenditure. They will therefore have a more accurate picture of their financial position at any given time.
- Promote Prompt Payment
- For the Supplier, Purchase Orders can be matched to the corresponding invoices and delivery notes, which should promote prompt payment.
- Record Keeping
- For the Buyer, it can be a vital part of record keeping because there will usually be a Purchase Order number allocated to each purchase. This will help a Buyer to keep track of exactly what they intend to purchase, at what price and when.
- For the Supplier, this should assist in accurately supplying those exact items and thereby minimise Supplier errors and scope for disputes.
- Avoid Disputes
- For the Supplier, with a well drafted Purchase Order, Suppliers can avoid unnecessary (and common) disputes from Buyers over whether Goods/Services were authorised, which often leads to delayed payment.
- For the Buyer, it offers some assurance that an invoice received will reconcile with the Purchase Order. Should there be errors or disputes they are easier to reconcile and rectify as there is a coherent record of the agreement.
What does the Purchase Order process look like in a typical transaction?
- A Buyer will raise a Purchase Order after the parties have agreed a price
- A Buyer will send the Purchase Order to the Supplier
- The Supplier then accepts the Purchase Order, if it can fulfil it (and it becomes legally binding)
- The Goods/Services are provided by the Supplier
- The Supplier raises an invoice with reference to the Purchase Order Number
- The Buyer matches up the Invoice and Purchase Order Number
- The Invoice is processed and paid
Record Keeping Document or Legally Binding Document?
In its simplest form, a contract is formed if there is an offer, acceptance, consideration and there has been an intention to enter into a legally binding agreement.
The Purchase Order fits in right at the start; it is an offer from the Buyer/Supplier to purchase/supply a goods or services at a certain price.
A Purchase Order is a legally binding document only once it has been accepted by both parties. It is effectively a contract between the Buyer and Seller for goods for the price and terms agreed within.
A Supplier could raise a Purchase Order and send it to their Buyer customer, and this would act as a notification of the Buyer’s legal obligations to pay the agreed amount.
As a Buyer you would need to be aware that, when you receive a Purchase Order, you are obliged to pay the amount on it. If amounts or quantities are incorrect, these should be challenged immediately, and a new Purchase Order must be issued to protect your position.
2. Terms and Conditions
Purchase Orders often contain Terms and Conditions, so it is very important to consider these before accepting the Order.
Quite often, Suppliers will have a Trade Credit Account Agreement with their Buyers, to which its standard Terms and Conditions apply to ‘all purchases’. Accepting a Buyer’s Purchase Order, which contains the Buyer’s Terms and Conditions, could effectively incorporate these additional Terms into the Contract.
In most cases, these might not be contradictory to your own Terms and Conditions as a Supplier but, without checking, you raise the risk of entering a legally binding contract to which these new terms apply.
For example, the standard payment terms in your Trade Credit Account Agreement could be overridden by the Purchase Order, extending the time the Buyer has to pay an invoice.
3. Third Party Purchase Orders
Proceed with caution where Purchase Orders indicate that they are on ‘behalf’ of another party.
These Purchase Orders usually stipulate that a third party should be invoiced, rather than the Buyer.
If an invoice becomes overdue, and further credit control action is required, this brings some ambiguity to whom the parties to the contract are. It is generally these sorts of disputes that lead to unpaid invoices and proceedings which can be costly and time consuming.
4. No Purchase Order, No Payment’
As a Supplier, you may receive a request for all invoices to contain a Purchase Order Number or they will not be paid.
Therefore, in order to encourage swift payment, and reduce the burden on your credit control function, it is vital to keep an accurate record of all Purchase Order Numbers, and to use these on your invoices, where possible.
However, should you not be able to locate a Purchase Order or Number, you should still issue invoices. There is no need to immediately write off or credit such invoices, particularly where you can prove that you have completed your contractual obligations by providing the goods/services in question.
By doing so you will have put the Buyer on notice that payment for goods/service is due. You will have also started the clock running and may be entitled to additional charges such as interest and compensation.
Purchase Orders can be highly beneficial to both the Buyer and Supplier in terms of record keeping. Purchase Orders can also assist a Buyer to control and forecast spending, and assist a Supplier with prompt payment of invoices.
A business must ensure the Purchase Order is properly worded and the information contained within them is considered and agreed by all parties, whether they receive them or issue them.
It is good business practice, and vital for general credit management from a Supplier perspective, to regularly review ways of improving your system in respect of Purchase Orders and additional transactional documents such as invoices and Proof of Delivery.
For further assistance in respect of the legal implications of your invoices, or for further advice on how Silverback Law can best support your business, please contact Vishal Mahay, Head of Commercial Litigation on 0844 967 2700 or email email@example.com
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