Friday, February 18, 2011

Negotiation - Thoughts on Purchase Orders Issued Under Contracts

Many contracts are structured in a manner where the contracts make no firm commitment to purchases and simply function as a pre-agreed set of terms for if and when purchases actually occur. The actual commitment to purchase under the contract and resulting responsibilities occur when a Purchase Order is issued.

Most purchase order language describes the method by which Purchase Orders may be made, with issues regarding cancellations, rescheduling and flexibility dealt with elsewhere. Orders of precedence may also address the order of precedence given to Purchase Order terms in comparison with the other documents.

In negotiating purchase order provisions Suppliers usually have two concerns.
1.     They do not want to be bound to accepting orders for unlimited volumes and may want to limit purchase order volumes to an agreed forecast. The simple reason for this is they have limited capacity and don’t want to be liable for failing to perform if there isn’t sufficient capacity to deliver.
2.     They are always concerned about additional or differing terms being added to a Purchase Order that could slip past them, so in most cases they will either want to have obligations only for those purchase orders that are accepted in writing by them, or that do not contain additional or differing terms.

Getting written acceptance of a Purchase Order can be an administrative nightmare. Most companies also have standard acceptance forms that may contain different terms that would set off a “battle of the forms” problem where agreement isn’t reached.

If you are dependent upon the Supplier to perform each time you place an order, the last thing you want is for the purchase orders to be subject to their acceptance. If they don’t accept you won’t get delivery and there is nothing you could do about it.

To deal with a Supplier’s concerns about volumes you could propose that you agree upon a volume forecast and as long as the volumes you order are within the agreed forecast they must accept them. You could further agree that for any volumes in excess of the agreed forecast, that they will use reasonable efforts to fulfill them. By using a reasonable efforts standard of commitment they wouldn’t be liable for not delivering them, they would only be liable if they failed to use reasonable efforts to try to fulfill the order.

To deal with the Supplier’s concerns about additional or differing terms, you could define what the parties agree will constitute an additional or differing term and require that those must be accepted in writing.  For example if the Contract had a specific delivery location specified and the delivery term was origin based (with Buyer assuming all costs), should the Buyer need to get approval from the Supplier if they specify a different location?  My opinion is that if the additional or different term doesn’t impact their ability to perform or create an additional cost or potential liability, they shouldn’t need the right to approve them. If the Supplier won’t agree to having changes be made by purchase order one way to deal with it is to include options within the agreement in the individual sections where you may want to specify something different in the PO.  For example, in the Delivery section you could say something to the effect that:
“Buyer may in its Purchase Order specify different ship to locations provided that there is no additional cost to the Supplier”.

When the definition of the Contract includes purchase orders that are placed under the agreement, you have both potential for conflict and you can have additional or differing terms being added.  One way to avoid conflict is to specifically exclude all pre-printed terms on the reverse side of a hard copy purchase order or any standard purchase order terms transmitted with an electronic order. If you have additional or differing terms you want those to have priority and that needs to be addressed in the Order of Precedence by giving the highest priority to the terms on the face of the Purchase Order that do not require acceptance by the Supplier or that have been mutually agreed in writing by the Supplier when their agreement is required.

No comments:

Post a Comment