Purchase Order or Contract?

I’d be grateful for your thoughts on the following question: What determines whether an organization uses a purchase order (with additional terms on the back or separately) when buying  goods or services or instead puts all the terms in a contract?

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

13 thoughts on “Purchase Order or Contract?”

      • That’s a good question, but I doubt it’s haphazard. Why do tech vendors seem to have phenomenal limitation of liability provisions even in B2B contracts? I don’t know, but I doubt it’s accidental.

        I do know that business clients are concerned about time and expense when contracts go through legal. That’s largely by-passed when POs are used. Maybe that dynamic affects various industries in different ways.

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    • Folks, I’m sure you understand, though, that a stand-alone PO is also a contract if it has the essential terms.

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  1. I realized I didn’t answer the question:  Vendors strongly prefer negotiating a master agreement if the total dollar volume from a given customer will be significant — they don’t want to have to review the PO’s T&Cs every time.

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    • Plus, informed sellers are concerned about what will happen to their risk allocation provisions when their forms do battle with the buyers’ forms. Still, I’ve had clients tell me that they can’t get buyers to agree to negotiated terms because they don’t have the leverage to force the issue.

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      • If the buyer won’t agree to negotiated terms, sometimes the vendor has to respond, “sorry, the price we quoted was for our standard T&Cs; either we have to raise the price we quoted, or we can’t do the deal.”  And of course the sales people just love to hear the lawyer make that recommendation ….   

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  2. Ken:

    Often the extent of regulation in both parties industries determines the form of the transaction. We routinely have to reject customers’ attempts to send us purchase orders because the terms in them would violate (or require us to violate) regulations governing our industry.

    Chris

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  3. Some organisations build it into their processes that they cannot pay unless there is a purchase order. This builds in inertia in favour of the purchaser unless the vendor raises the stakes and forces a different process. Not only do you have to engage with “commercial”, you also have to overrule “finance ‘s” standard procedure. Sometimes you end up with a PO with no terms or a cross reference to the terms of the negotiated contract. In the deals you don’t see fully, there is a suspicion that the process is followed even if it introduces inappropriate terms.

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  4. A contract is preferred whenever the terms of the agreement seem to exceed the basic terms associated with a Purchase Order.  The general guideline is where there is significant value, there is significant risk.  Also, risk is a factor when considering low value acquisitions that affect major infrastructure – the risk of loss versus the risk of cost.  Large capital equipment purchases are not contracted; low value service work on sensitive assets will typically be contracted as well. 

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  5. Ken –

    We tier suppliers based on dollar volume, low-end, PO w T&Cs only, mid-level gets a “simple” agreement, top tier gets a full blown MSA. In each of the latter two, a PO (without T&Cs) is used.

    BTW, ever read PO T&Cs? a nightmare of Frankensteinian proportions, emphasis on the one-sided and unreasonable. Good practice, as pointed out above, to specifically exclude their terms from any supply agreement.

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  6. We use PO’s for low risk, low dollar value, short term (< 1 year) purchases of goods.  Where the items at issue require development or customaization, where the term of relationship is expected to be much longer, where we spend over $250k a year, or where the products at issue carry significant risk that could be allocated (product liability or IP), we will try for a supply agreement.  Supply agreements have an added bonus that, if properly drafted, they provide assurance of continuity of supply (or at least contractual obligation as to continuity of supply).  Nothing requires a supplier to accept a naked purchase order, but you can build into a supply agreement an obligation to accept purchase orders that contain no manifest errors, are consistent with the agreement, provide delivery within quoted lead times, don't exceed maximum supply obligation, etc.  And/or you can provide that silence = acceptance. 

    That said, not all of our big ticket, big risk suppliers will agree to do supply agreements.  So we'll try to get buy with long purchase orders (providing delivery dates maybe a year out), plus a quality agreement We are in medical device industry, so our supplier selection and management process for components that go into our products is part of our quality management system, which in turn is regulated by the FDA.  Good contracts is a good part of that, but at minimum we usually need a quality agreement event just with PO relationships.

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