Thursday, October 27, 2011

Purchase orders under agreements

Should the Purchase Order become part the Agreement or should the Agreement become part of the Purchase Order? What happens when a supplier wants to exclude purchase order terms.

When you write an agreement that contemplates the use of purchase orders such as a blanket or master agreement would do,that raises a number of issues within the negotiation. Suppliers will always be concerned with the fact that there could be additional or different terms included in the purchase order that could slip through. Most purchase orders seldom require the supplier’s written acceptance. Many get sent and acknowledged electronically. If the purchase order is made part of the agreement, it functions as a later agreement between the parties on the subject matter and could wind up amending the agreement unless you required that al amendments be signed in writing.When you write an agreement that is silent with respect to purchase orders, you would need to incorporate the agreement by reference into the purchase order each time you issue a purchase order. If you failed to do that, only the terms contained on the purchase order would apply.

I believe that you can meet both parties concerns if the Purchase Order clause and the Order of Precedence clause are properly constructed. Here’s how:

1) In the definition of Agreement you would include the purchase order as being part of the agreement but limit that to only the purchases covered by that purchase order. This makes it clear that the intent of the parties is not to amend the Agreement. If you agreement already required any amendment to be in writing between the parties that part out not be needed For example:

“Agreement shall mean this Agreement and any other documents referenced in this agreement. Any unique or different terms contained in a Purchase Order shall apply solely to the purchases made under that Purchase Order.”

2) To address the concerns the supplier has about something slipping through as part of the Purchase Order section I would add language that specifically disclaims any additional or different terms in either the buyer’s purchase order or the supplier’s acceptance (as it could go both ways),

From that disclaimer I would carve out two things.

I would carve out any terms that comply with a valid supplier quote. This means that if the supplier offered a better price, lead time or payment terms, etc. in the quote those terms would apply for purchases made using that quotation even though they were different than the terms in the agreement.
I would also carve out any terms in the purchase order that simply don’t need agreement by the supplier in writing. For example, for ex-works delivery terms you shouldn’t need approval on the ship to location specified in the P.O. If you provided forecasts that were already agreed, you shouldn’t need to have mutual agreement as to quantity as long as the order is within the forecasted quantity. An example of that type of clause could be

“Purchase Order means Buyer’s authorization, in either tangible or electronic format, for Supplier to conduct transactions under this Agreement. Except for orders that comply with a valid supplier quotation or terms listed below where agreement of the parties is not required,
any additional or differing terms contained on the Purchase Order or in Supplier’s acceptance shall not apply unless specifically accepted in writing by the parties. The following purchase order terms do not require written agreement: a) Delivery dates with lead-times that are equal to or greater than the agreed lead-time, b) any quantities specified where buyer and supplier have agreed upon forecasted amounts and the order is within the forecasted amount, c) any changes to ship to location if Buyer is purchasing the item ex-works.”

3) In the Order of Precedence section you would have the precedence say something like::
Order of Precedence
In the event of any conflict in these documents, the order of precedence will be:
1. Those P.O. terms that were mutually agreed in writing by the parties and those terms listed on the P.O. do not require mutual agreement in writing by the parties in accordance the definition of Purchase Order, then to
2. the Agreement.

If you had other documents that are part of the agreement such as a statement of work, specifications and drawings, and other documents, those document should also be listed in the order of precedence or their order of precedence. If you fail to do that those documents will have the same precedence as the document it was incorporated into..

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