Does your purchasing group use a standard purchase order without any additional terms and conditions? Or, does your Purchasing team receive acknowledgements from suppliers that change your original offer and include their company’s Sales Order terms and conditions? If you answered ‘yes’ to either of these questions, you probably can take action to reduce risks.
Lost Time, Lost Money
Without sufficient protection, when making a purchase order contract, you can end up failing to get the product or service that you need, when you need it, and driving up costs. Likewise, your company could end up in litigation.
Take late deliveries from suppliers. These actions cause disruption, lost time, and typically increase costs across the board to the company. If product is arriving late, your team may have to work overtime to finish a customer’s order, or you may have to ship the product by air freight to meet the customer’s deadlines.
The same case can be made for indemnification. If you purchase a product from a company for resale, and you aren’t indemnified when selling to a third party (by including special terms and conditions to the purchase), then you may later be liable for any defects and issues from those defects that your customer experiences.
The Fundamentals to a Purchase Order Contract
For a purchase order contract to be valid and enforceable, the contract must contain certain elements:
- Agreement, and this comes about by the exchange of an ‘offer’ and then the ‘acceptance’ of a purchase order
- There must be consideration or mutual obligation
- Both parties must be agents and ‘competent’ in the eyes of the law, and
- The contract must be for a lawful purpose
Also, it is important that all purchases over $500.00 be in writing to be enforceable.
Contract Terms and Conditions
It is important to note that we’ve barely scratched the surface when talking about purchase order contracts. The reason for this is that the ‘offer’ and the ‘acceptance’ can have many additional terms and conditions.
Therefore, it is important to ensure that your company develops its own ‘complete’ set of terms and conditions for both for the purchase and sale of products.
Finally, to protect themselves, it is extremely important for both ‘offeror’ and the ‘offeree’ to read through, understand, and agree to all contract terms and conditions before signing a contract.
The Bottom Line
It is important to ensure that companies agree and form purchase order contracts. Contracts are formed by ensuring that there are certain elements present when a contract is formed, i.e., an offer and acceptance, consideration, agency and competency. Any contract over $500.00 must be in writing. Finally, to protect themselves, companies should develop their own set of contract terms and conditions, both for the sale and the purchase of products and services. Finally, it is necessary to carefully review all contract terms and conditions before completing any written contract.
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