Header Image

metropolitan tier 2

Corporate Law

THE BEST LAW FIRMS IN AMERICA

-U.S.News/World Report (2020)

news

Purchase Orders: Terms and Conditions

August 20, 2020

Frank P. Nagorney and Brent M. Buckley

This is the first in a four-part series of advisories covering the importance of understanding purchase order terms and conditions.

Purchase Orders ("POs") have become a significant concern during COVID-19 as many companies are looking to modify existing contractual relationships. This includes how to defer and/or cancel existing POs, change pricing, and/or warranties and indemnification.

The Battle of the Forms

Every PO should contain terms and conditions that govern the obligations between the buyer and seller to the transaction. Typically, a PO will include language to the effect that the "PO is subject to the terms and conditions on the reverse side, and any conflicting warranties, terms and conditions proposed by seller are rejected unless specifically accepted by buyer." Thus, when a seller accepts a PO without modification, the terms and conditions specified in the PO apply to the transaction. However, if the seller responds to buyer with a Purchase Order Acknowledgement ("POA") which contains seller's own terms and conditions, and later fulfills the PO without any objection from the buyer, then whose terms govern the transaction? This is where the battle of the forms begins.

Under the Uniform Commercial Code, a confirmation sent within a reasonable time operates as an acceptance even if it states additional or different terms from those already offered or agreed upon, unless the acceptance is expressly made conditional on further agreement to the additional or different terms. 

For example, a buyer issues a PO that provides for a one-year fixed price on the goods being purchased, and delivery of those goods are made per an agreed-upon schedule. The seller accepts the terms, with the addition of a "force majeure" clause excusing any delivery failure due to strikes or other events outside of the seller's control. The buyer accepts seller's additional terms. During the year, the seller's supply chain is disrupted by a strike at a key supplier, resulting in late deliveries and a spike in costs. What happens?

Under the force majeure clause, the seller is excused from shipping during the supply chain interruption. However, since the seller did not negotiate the inclusion of a price adjustment clause, it has few options. Depending on the nature of the relationship with buyer, the seller can (a) absorb the price increase at a possibly significant loss; (b) try to negotiate new terms with the buyer; or, (c) default on the contract and "face the consequences."

The Bottom Line

The importance of reviewing understanding, and/or negotiating PO terms and conditions can often avoid "the consequences", when attention to detail can minimize and avoid oftentimes needless expenses as well as losses of revenue, customer disputes, reputational damage, and possible litigation. In short, understand your PO -- it is a contract, so many terms can typically be negotiated.

In Part II of this series, we will examine product warranties.