Tax & admin · 30 July 2018

Is a purchase order legally binding?

Remember, when you issue a purchase order you’re making a formal offer to the vendor
Grid Law founder David Walker reflects on a client’s recent legal dispute to clarify a question frequently asked by micro business owners: Is a purchase order legally binding?

This question was the key issue in a dispute I was recently involved in and if you Google the answer, it appears to be a resounding Yes.

However, that’s not strictly correct. A purchase order can be legally binding, but only if it forms part of a legally binding contract.

This was the point we were arguing over. My client (Company A) formed a joint venture with another company (Company B) so they could work in partnership on a project which included the installation of some new equipment in the end user premises.

Company B insisted on receiving a purchase order from Company A so Company A simply sent an email saying words to the effect of Please accept this email as a purchase order for [NAME OF PROJECT] for [CONTRACT PRICE].?

The two companies started work on the project but there were problems from the very outset. Company B seriously let my client down because the quality of their work was poor. They ordered the wrong specification parts for the equipment so it never functioned to its full capacity and their time keeping was atrocious so the project over ran.

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As you can imagine, the whole project was a complete disaster and it’s not surprising the end user refused to pay the full contract price.

As the two companies were working in partnership, my client offered to share the loss with Company B, but Company B wasnt happy with that. Despite all the problems they caused, Company B wanted to be paid in full!

Their justification for this was that my client had issued a purchase order and they believed this was a legally binding contract and conclusive proof they should be paid.

We refused to pay the full amount they were claiming and so they threatened to sue my client for the balance.

Part of my defence was that the purchase order, on its own, was not legally binding. Also, the end user had changed the scope of the project almost straight away and that meant the terms of the contract between my client and Company B also changed. The purchase order was never updated and was therefore it was completely irrelevant.

We werent disputing the fact that the two companies had worked together, but as claimant, the burden of proof was on Company B to prove their case.

In order to win, Company B had to prove what the terms of the contract were, that they had fulfilled their obligations under the contract and as a result they should be paid. They simply couldnt do this and as a result, their claim failed.

So, if you use purchase orders as part of your ordering process, how do you ensure they’re legally binding?

First, you have to remember that using a purchase order isnt compulsory. The most important thing is to have a legally binding contract and there are five essential elements of this:

  • One party must make an offer to the other;
  • The other party must then accept the offer;
  • There must be some form of consideration i.e., payment;
  • The parties must intend to be legally bound by the contract; and
  • There must be sufficient certainty within the terms of the contract.
As long as these elements are all present, it doesnt matter if the contract is made verbally or in writing. However, unless it is a very simple arrangement it’s always a good idea to have a written agreement or use standard terms and conditions of business.

When used properly, a purchase order can help ensure all of these elements are present.

When a purchase order is issued, it is a formal offer from the purchaser to purchase specific products or services on specific terms. It will therefore usually accompany the purchaser’s standard terms and condition of business and will contain the following information:

  • A unique purchase order (PO) number;
  • The names and addresses of the purchaser and vendor;
  • A clear description of the products or services being purchased;
  • The price of the products or services, any delivery fees and VAT if applicable;
  • The delivery date or commencement date of the services; and
  • The payment terms (if they’re not already specified in the terms and conditions).
The vendor can then formally accept the purchase order and a legally binding contract is formed.

Looking back at my dispute, you will see there was another problem with Company A’s purchase order. There wasnt sufficient certainty within it to be a formal offer which Company B could accept.


 
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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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