Defining a Purchase Order Agreement
A purchase order agreement is a legally binding document between a buyer and seller that lays out the terms and conditions for the purchase of goods and/or services. On the buyer’s end, it serves as an official authorization to purchase products or services from a vendor. And from the seller’s point of view, it acknowledges the sale. This is especially important for businesses with many orders of a similar nature, such as restaurants, which need to track the differences between a dozen orders of chicken breasts and a single order of soy sauce. The purchase order system keeps confusion to a minimum in these cases.
This contract has several principal terms, including: 1) The buyer’s contact information (name, address, email, phone number); 2) The seller’s contact information (name , address, email, phone number, fax number); 3) The date of issuance; 4) The item number for the desired product or service as issued by the seller; 5) Whether this will be a one-time order or a repeated order; 6) Terms of delivery (such as via freight service or on a courier’s truck) and timeframe for expected delivery; 7) The date the buyer needs the goods or service provided by; 8) Any other special terms requested by the buyer (e.g., specific style and material of a garment or equipment not specified by the seller’s materials); 9) The quantity of product/services needed; 10) The price of the product/service (do not forget tax or any fees or surcharges requested by the seller); 11) Whether an invoice needs to be issued; 12) Payment terms; 13) Warranty terms; 14) Shipping terms.
Main Components of a Purchase Order Agreement
A sample purchase order agreement contains numerous components that are critical to the transaction. It is a business document frequently used in supply chain or inventory management, often by organizations that regularly buy and sell goods. While some of these components are required to validly form a contract, such as a description of the goods, others are optional, but are important if the parties want to ensure the terms are clear and can be enforced against any future disputes. This section covers the necessary and optional components of a purchase order agreement.
First, a purchase order agreement should describe the goods or services to be provided. This could include the item number and description. A description of services that could be performed is also appropriate. Second, the agreement should state the quantity to be provided. Common units of measurement include each, ounce, pound, foot and mile, among other options, and surety of the quantity depends on the item of choice. Third, the price for providing the goods or services is imperative, as this is a critical component for the transaction. The price discussed can be a lump sum for a specific order or may reflect the anticipated price each time the item is ordered. Fourth, the delivery terms and conditions should also be included. There are many ways to phrase this or leave it open. In some instances, the buyer may want to be able to instruct the seller when an order is complete. Finally, the payment conditions should be outlined. There are generally two options for payment: upfront payments upon delivery of the product or via invoices at a later date.
Advantages of a Purchase Order Agreement
One of the primary benefits of a purchase order agreement is that it streamlines procurement processes, and it gives both parties a mutual understanding of the types of products or services that are being purchased. When it isn’t immediately clear what has been purchased, clear communication between parties ensures that there is a mutual understanding of the products or services being provided on the order. It creates a record of the organization’s request for the items, which is useful should a dispute arise. The transaction fulfills all contractual obligations for the seller to receive payment and the buyer to receive the goods or services, even when a formal contract hasn’t been signed.
A purchase order agreement is useful for many reasons, including the following:
Purchase order agreements benefit buyers, sellers, and service providers in similar ways.
For buyers, these agreements help eliminate any confusion regarding pricing and terms of the order. By maintaining purchase order agreements, an organization believes that these agreements are valid, as they will seek legal recourse against any seller or provider who does not meet the agreement terms. A purchase order agreement protects the buyer, especially in larger transactions. They serve as proof that the buyer has paid for the product or service and protects them in the event that the order is unfulfilled.
For sellers and service providers, the use of a purchase order helps ensure that they will be paid after provision of services. It provides them with documentary proof that the buyer has approved the order terms and conditions. It is a means of protection in business transactions and assists with cash flow, as it is an agreement that services have been offered at a set price and will be paid for by the buyer. It may also assist with third-party financing, as it verifies specific information regarding the buyer and order.
Creating a Sample Purchase Order Agreement
When it comes to purchase order agreement drafting, the objective should be to clearly communicate expectations between a customer and vendor. The exact manner in which you draft your sample agreement is important, but it’s the concepts underlying the language that will guide your agreement to a successful outcome. Common clauses generally included in purchase order agreements include:
Introduction
In this clause, state the intent of the vendor and customer to do business. This will, in general terms, provide a roadmap to the reader of the agreement into the parties’ mutual goals. Because this is the opening salvo of the agreement, the wording should be clear and not jargon-heavy.
Products and Services to Be Provided
When drafting this clause, you should provide, at a minimum, a description of the products or services to be provided.
Dates and Locations
Include date(s) for performance of the contract and the specific locations in which the products or services will be provided. Generally speaking, you should include all of the locations around the country in which the products will be delivered, unless it’s not reasonable to do so.
Pricing
Be as clear and concise as possible about the pricing on the goods or services to be provided. Yes, things change and prices may need to be negotiated. Your purchase order agreement should contain language that is intended to be a living document so as to account for any changes that might result.
Terms
Delay is a way of life in business. But in your purchase order agreement, terms should include penalties for delay. Just how critical these penalties are will depend on what you are providing and the criticality of those products or services to the success of your customer’s business. Sometimes, your penalties are worse than being late. Make sure that you state your penalties clearly and succinctly. This provides a cap on how unreasonable terms can be. But it also creates an expectation in the mind of the reader.
Limitations of Liability
Sometimes, things simply go wrong. During the purchase order agreement drafting process, you should plan for that risk. One way to do that is to plan to limit your liability to your customer. This isn’t a matter of deceit; rather, it’s a way of ensuring that if the worst turns out to be true, liability is limited. While you may want to seek a bright red line on liability, the reality is that you have to be reasonable with some negotiation. Most people don’t anticipate getting hit by a comet. However, you need not provide for liability for the comet hitting your customer.
Contract Clause
Your purchase order agreement should provide language that the document itself is a contract. State the intention of both parties that the purchase order agreement is intended to be a binding contract between the parties to the agreement.
Governing Law
Much like jurisdiction, you will need to cite what jurisdiction governs any disputes over the purchase order agreement. While this is a contractual agreement, there could be disagreement that arises from the purchase order agreement itself. Having the jurisdiction deciding the purchase order agreement ready to go provides a benefit to you and the customer. It also avoids any confusion during negotiations.
Conducting a legal review of the purchase order agreement
We’ve touched on a few clauses that are common to the purchase order agreement. That is not a comprehensive list. There are many clauses that can be included in your sample purchase order agreement. Before you commit to your language, you should have the agreement reviewed by an attorney. Too often, we see individuals and companies writing agreements without having any word of professional legal counsel. Doing so can put unnecessary risk on your business that could be easily avoided by consulting with a legal professional.
Errors to Avoid in a Purchase Order Agreement
There are a number of common mistakes businesses make when it comes to creating purchase order agreements. One of the most common issues is that they fail to use common, standard terms and conditions which leads to a number of other issues. Obviously, as a business you want to have standard terms and conditions. If you improve one agreement with a vendor and add new protections, you want that to carry over to future purchase orders so that you don’t have to constantly reinvent the wheel. For instance, how frequently do you draft your own confidentiality non-disclosure agreement?
Another area with purchase order agreements is an issue where an entity may use their own terms and conditions but the parties do not go through and agree to and initial them. While the standard purchase order would indicate that there are terms and conditions, if the parties do not review those terms and conditions and initial either to indicate acceptance or initial to indicate rejection, then you could have a disparity between the standard agreements terms and conditions and the purchase order. Obviously , the best way to handle this is to go through and highlight in a standard terms and conditions and initial agreements you agree with and make corrections to or negotiate terms you don’t agree with. For instance, if you have a proposed indemnification clause and you cross out the language you don’t like and you initial your agreement to that reduction, then it’s clear that you’ve already gone through the terms and conditions and you’re in agreement to that reduction. If there was a price match provision that you didn’t initially agree with but later agreed with, you could always initial that and clarify that you’re in agreement with that provision.
But those two are probably the biggest mistakes I see businesses make and the best advice is to just be aware of them and to make sure you mark up a set of terms and conditions, and one party does not just agree to terms and conditions without that party reviewing the terms and conditions and making sure that they truly agree with it.
Sample Simple Purchase Order Agreement
Example Purchase Order Agreement
COMPANY, LLC
AGREEMENT NUMBER: ______________________
The parties to this agreement are:
COMPANY, LLC, whose address is ____________________________________________(Company or Seller).
NAME, whose address is ________________________________________(Buyer).
ACCEPTED BY: _________________________________________________________
THIS PURCHASE ORDER IS ACCEPTED SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS, IN ADDITION TO THE CONDITIONS ON THIS PURCHASE ORDER: (LIST ANY EXCEPTIONS.)
SHIPPING INSTRUCTIONS: THIS ORDER MUST BE COMPLETELY, CLEARLY AND TRULY CONSOLIDATED BY A FACTORY NUMBER AND LOCATION, PER THE MANUFACTURERS SHIPPER, BILL OF LADING, INVOICES, AND INVOICED AT THE UNIT PRICE SHOWN ON THE ORDER. INVOICES MUST CONTAIN ITS ORDER NUMBER, SHIPPER NUMBER, AND FACTORY NUMBER FOR THE SHIPPER LOCATION AND SEQUENCE NUMBER ON THE FACTORY MASTER SHIPPER LIST. SHIPMENTS MUST BE MADE GROUPED BY FACTORY NUMBERS, PER THE SHIPPER USE ONLY LIST, NOT BY INDIVIDUAL FACTORY SHIPPERS. THESE INSTRUCTIONS MUST BE FOLLOWED TO AVOID LOSS OF ORDER DISCOUNTS, AND TO AVOID POSSIBLE RESALE PROBLEMS BY BUYER, IF SHIPPERS ARE THRU EXCESSIVE ON THE INVOICES. FURTHER, in order for buyer to maintain accurate inventory records, it is important that each invoice contain the specific bill of lading number as mentioned above. Further instructions to follow on separate instruction sheet (must be signed and included with this pack).
A PLACE FOR THE CORPORATE SEAL
CORPORATE SIGNATURE
Sincerely,
COMPANY, LLC
Use Cases for a Purchase Order Agreement
Part 4: When to Use a Purchase Order Agreement
A purchase order agreement is often used in business-to-business transactions involving a particular industry or type of product or service. The best example of such an industry is retail, as the nature of most retail transactions is to sell products from a store to a customer. This puts the need for a purchase order agreement into perspective. An order form is useful because it can put together, in one document, all of the requisite product information, the payment terms and delivery information. If it is a basic standalone form, the information is easy to find, and customers can find everything they need in one place.
However, with some businesses, a retail form is not the best option. For example, with real estate related transactions, the scope of the work is not generally known. In this case, a scope of work must be agreed to before the terms of the engagement are established. For example, when ordering products for the renovation of a home, the type and amount of product may not be established until the scope is agreed to. Another option for this type of purchase order is to use multiple purchase order agreements, which would apply to the products ordered first and the more imminent needs of the project. The parties would then be free to continue placing purchase orders for subsequent materials needed. Nevertheless, in this sector, a purchase order agreement is frequently agreed to as a matter of course when the parties need products for a defined scope of work, like the renovation of a home or building.
Thus, it is important when using a retail purchase order agreement, the parties know how long the purchase order will be used and the scope of work involved. The parties should really talk to their vendors and obtain a purchase order that will be used throughout the term of the transaction. The purchase order itself should be adequately descriptive to be useful to the vendor.
In addition, in other industries, the types of goods or services established vary. There are some industries where the scope of the work or type of good is defined relatively quickly and easily. Other sectors employ multiple ways of doing business, which makes them a hybrid or the possibility for them to be a hybrid. Accordingly, purchase order agreements play an important role in facilitating long term and ongoing business relations because the parties can customize them to suit their own purposes.
Legal Requirements and Compliance
When putting together a sample purchase order agreement, it is essential to keep up to date with the latest legal considerations to ensure the form remains valid and legally binding. From clauses relating to intellectual property rights, to the information that must be included in the agreement, there are a range of legal considerations. Depending on where your business is located, you may need to comply with the terms of international trade laws. Equally, when you place an order with a company located in a different country, you should check whether that country demands specific provisions be included in the order. This is the case for United States companies that enter into contracts with companies in other countries . Companies in the US may, for example, need to include provisions relating to terminations and price revisions. There are also terms and conditions that simply must be adhered to in order to prevent legal disputes from arising. For example, some companies demand details of the buyer, such as whether it is a corporation, partnership, or sole trader. It is also common for companies to request a basis for performance (e.g. start and completion dates). Furthermore, clauses concerning warranties, indemnification, and "force majeure" clauses are often required. It is always advisable to have a legal professional review any purchase order agreements your business creates. They can check whether the form meets all legal requirements and do much to ensure compliance with local and industry regulations.