Purchase Order: How To Not Get Sued & All Other Legal Concerns

Quite a few things can go wrong. However, if you and your supplier agree on what action should be taken in such situations, the chances of the two of you seeing each other in court are eliminated. Make sure you have thought of every possible situation, and how you and your buyer should act in this situation; then, write these down under the Terms and Conditions section in your Purchase Order.

To make things easier, we have created our own checklist of situations for you to run through before you draft your Purchase Order.

Delay or backorder: Should the buyer be able to delay payment, or the seller forced to offer a refund if payment was required upfront? Should the buyer be able to cancel the order if the requested goods aren’t available at the prescribed time?

Non-payment: Will the supplier be able to seize goods already delivered or refuse to deliver future shipments? Will the supplier give a specific amount of time before seeking legal recourse? Would the parties prefer to submit to an often cheaper form of resolution than litigation, like mediation or arbitration?

A term of the contract is broken (For example, goods delivered are not as described): Do the parties agree to give the offending party time to fix the mistake? Will breaching any term allow the other party to rescind (or cancel) the contract? Will the buyer be given the option to amend the contract to only include a portion of the goods?

Lack of clarity over which laws govern the contract: The laws concerning contracts vary depending on the country and legal jurisdiction. Knowing which laws apply to you when entering an agreement gives you a better idea of the legal options available to you and can affect what you decide to include or not include in your Purchase Order. If a legal venue is not listed in the PO (For example, Orange County, California, USA), the venue will be decided based on legal principles the parties have no control over. Which means you may face litigation in a venue with laws unfamiliar to you, especially if the parties live in different countries.

Insurance: There are a number of different insurance policies that a business may choose or be required to acquire. Including product liability for any products they distribute or manufacture that may be defective and if they experience a situation covered in their policy then an insurance payout may be appropriate. However, if the offending party if guilty of breach of contract, insurance is probably not going to help (Since the Alaskan case of Olympic, Inc. v Providence Washington Insurance Co., the law has generally decided that insurance does not cover liabilities arising out of breach of contract. Instead of being treated as an accident, which insurance usually covers, breach of contract is seen as a business risk within the control of the offending party. Imagine if you agreed to sell someone a car for $3,000 and accepted payment, but, before the delivery was made, you got a more lucrative offer and decided to go with that. You now owe the original buyer $3000 because of events entirely within your control).

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But Why Go Through All This Trouble?

If something untoward happens, and you haven’t accounted for it in your Purchase Order, you may be taken to court for it. In such a situation, you will have to gather additional evidence to support your claim in a court of law, and will be successful only if the Law agrees with you.

But on the other hand, making a PO as specific, and comprehensive — to the extent that it accounts for every situation and condition — as possible saves you the expense and anxiety of avoiding litigation because the offending party is less likely to drag a case through court if it’s clear they are in the wrong.

Let’s Look At This In Practice

Now, we will examine how the aforementioned situations can actually play out; let’s consider a legal situation involving a hypothetical Purchase Order. We will look at this case from both the buyer and the supplier’s perspective:

Jason sends a Purchase Order to Office Furniture Inc. requesting 30 units of their mahogany brown Executive style desk for his office, at a total price of $10,000. Office Furniture Inc. delivers 30 desks to Jason. Jason accepts delivery and distributes the payment amount but then notices that the desks don’t match the description of what he ordered. He calls and explains the situation to a manager at Office Furniture Inc.

Buyer’s position: If Jason is right and the desks don’t match the description, Office Furniture Inc may have to refund his purchase price of $10,000 and may be liable for any damages Jason has suffered as a result (unless the contract allows for another remedy such as Office Furniture Inc having further time to correct the mistake).

Jason can sue for damages and these damages could include the cost of not being able to do business for however long it takes Office Furniture Inc. to correct the mistake. This is because Jason needed a substantial number of desks and receiving the wrong ones may have caused him to incur other expenses such as finding replacements elsewhere or delaying work in his company until he could find suitable workstations.

If Jason incurs damages as a result of this alleged breach of contract but does nothing to mitigate his damages, the law says that any monetary award he is given may be lessened as a result, so Jason should also make steps to remedy the situation as best he can even without the supplier’s assistance. It is not enough for him to file a suit and wait while he continues to incur damages.

Jason will, of course, have to provide evidence of the contract stating the color and style, and of the delivered desks not matching that description. It is his duty as the potential claimant to prove everything is as he is alleging it to be.  If he is right, the law says he has a strong case and there is little the buyer can do to avoid responsibility.

Supplier’s position: Since the supplier — Office Furniture Inc — is not the one filing a suit, they are under no legal obligation to prove anything. However, they will likely present evidence if they choose to present a defense. If the description of the desk is listed in the Purchase Order, and no changes are made prior to accepting the Purchase Order, or there is no provision that the supplier may deliver a similar item if one is out of stock, and the desks delivered really do not match the description in the PO, then there is no obvious defense for the supplier.

Alternatively, if the description in the PO is insufficient and lacks specifications like color, size to corroborate the buyer’s claim, and the parties were, instead, relying on something written separately (For example via email, or discussed over the phone), the supplier then has a better chance at succeeding in this case. Oral contracts and written discussions are more difficult to present as evidence of a binding agreement.

In any event your legal position should be discussed with an attorney. This should not be taken as legal advice.

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