Published In March 2000
Having clear and complete terms and conditions of a purchase order (PO) or "acknowledgment form" can make the difference between prompt payment from a satisfied customer or claims and litigation. The terms and conditions should disclose the precise requirements of the PO. They should also contain procedural clauses for resolving potential problems. A useful PO sets forth the basic agreement for the goods and includes risk-shifting clauses that take effect when there is default. For reasons that make little sense, contract law in the United States is divided between services and the sale of goods. Generally, construction involves services. In contrast, when an electrical contractor buys goods from a supplier, an entirely separate set of laws applies. What happens when a Maryland broker buys steel from a company in Wisconsin for direct sale to a subcontractor building a new prison in Virginia? Whose law applies? What are the liabilities for defective products? What state's standards take effect? The following is a list of important clauses that should be considered for inclusion in your PO form. Although not comprehensive, these clauses address some of the most significant issues. This information has been generated with reference to the Uniform Commercial Code (UCC). All states have adopted versions of it. While concepts of the UCC are, for the most part, universal, they may not apply, or apply only with modification, in some jurisdictions. You should consult with your attorney before using any of these clauses. Parties All purchase orders should, at a minimum, contain the name, position, and address of the authorized representatives of both parties. These are the persons with the authority to accept the purchase order and agree to modifications. Especially with government agencies (state or federal), lack of authority can render a contract, or a change order, unenforceable. Acceptance Too often, major purchases are made without a signed contract. Electrical contractors often commit tens of thousands of dollars through a telephone conversation. To avoid problems, the PO should state what constitutes acceptance. For example: "Shipment of the goods constitutes acceptance of the terms of this purchase order," or "delivery of the goods constitutes acceptance of the terms of this purchase order." The "acceptance" should also tie the supplier into your terms and conditions. Acknowledgment of order It is not uncommon for an electrical contractor to issue a purchase order to a supplier, only to have the supplier respond with an "acknowledgment" form with different terms and conditions. Under the UCC, all terms and conditions that are the same become a part of the contract, but terms in conflict do not. This "battle of the forms" can be resolved under the UCC by specifying that "acceptance of this order is expressly conditioned on acceptance of the terms and conditions included herein." Alternatively, the purchase order can provide that any changes made to the terms and conditions constitute a counteroffer, which will not be accepted unless agreed to in writing. You need to know the purchase order terms and conditions that govern disputes. Confusion arises if the contractor's PO form provides for mandatory arbitration, while the supplier's acknowledgment form doesn't. In this situation, the governing form has the potential to substantially affect the other party's legal rights and remedies. Read your suppliers' terms! You may be bound by a completion schedule, but your supplier is not. You may be required to adhere to Corps of Engineers specifications, but your supplier is not. Price/payment terms Aside from the base price, the purchase order should state whether the price includes taxes and other related costs. Payment terms should be clear. Make sure you provide for interest on late payments and attorney fees and costs should a collection effort be necessary. Packaging/shipping instructions Special handling procedures should be specifically enumerated. For overseas shipments, identify the agent or shipping company. Be very careful whether the PO is free on board (FOB) or free along side (FAS), as the risk of loss in shipment is radically different. Delivery schedule A delivery schedule may be necessary for large shipments, as opposed to a simple "on or before" delivery clause. Your delivery schedule should be an express part of the agreement. If it references another document such as a construction schedule, that document should be clearly identified and attached to the purchase order. Where you are the supplier, keep your mechanic's lien rights in mind. Separate POs may mean separate lien claims, with different times for filing a lien. Insurance risk of loss FOB shipments differ from FAS shipments for the time of shifting the risks of loss. In FOB purchase orders, the electrical contractor assumes the risk of loss when the goods leave the supplier. In other words, if an electrical contractor has ordered an expensive piece of equipment from a supplier located halfway around the world, the contractor has the risk of loss during shipment. Insurance requirements should be consistent. Consult your brokers. Limitation of warranty Warranties can be express or implied. An express warranty is one specifically mentioned in the purchase order. Implied warranties may arise from statute, prior dealings, or trade usage. The most common legally implied warranties are those of "merchantability" and "fitness for a particular purpose." Both of these warranties can be limited or eliminated, but only under defined rules. Some of these rules require a certain size of typeface in order to limit the warranties. Box the following UCC language: The following is language from the UCC for these implied warranties. §2-314. Implied Warranty: Merchantability; Usage of Trade (1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind… (2) Goods to be merchantable must be at least such as (a) pass without objection in the trade under the contract description; and (b) In the case of fungible goods, are of fair average quality within the description; and (c) are fit for the ordinary purposes for which goods are used; and (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and (e) are adequately contained, packaged, and labeled as the agreement may require; and (f) conform to the promises or affirmations of fact made on the container or label if any. (3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade. § 2-315. Implied Warranty: Fitness for Particular Purpose Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose. Because warranties can have substantial financial effects, care must be taken to define them and limit or expand them if necessary. Your PO should also include the duration of the warranty and the procedure for warranty claims . Limitation of liability While the warranty clause contains the supplier's promises about the product's components or performance, the liability clause defines the supplier's obligations under the warranty. A typical liability clause will limit liability for "repair or replacement" of the faulty or noncomplying product or component. The PO may also reference whether incidental or consequential damages are recoverable in case of product failure. Such damages may include lost profits and damages to reputation. Cancellation or suspension Some purchase orders have a cancellation or suspension clause, or both. Such clauses allow either party to cancel or suspend performance of the PO under certain conditions. Purchase orders containing these clauses typically provide detailed procedures, including written notice and timing requirements. Applicable law/forum selection Choice of law clauses provides that a particular state's law applies to any disputes. Although the UCC increases uniformity in some ways, there could be a substantial difference between one state and another on a particular issue. Forum selection clauses require that disputes be brought in a specific court. Beware of forum selection clauses. If the forum selected is far away from your business, it might be too expensive to bring or to defend a claim in a distant place. Dispute resolution Arbitration is an alternative to litigation. When the parties in their PO select arbitration, the arbitration clause is binding and courts nearly always enforce these clauses. Arbitration is generally less expensive and less time consuming than litigating in court. However, arbitration awards are usually final, with no appeal from a wrong decision. If you are considering inclusion of an arbitration clause in your purchase order, it is advisable to consult with your attorney in advance. Many contractors do not examine the suppliers' purchase orders, beyond ensuring the order for the goods is correct. Even when contractors have their own forms, they are not apt to review them once they are in use. Ignoring the PO terms and conditions is a potentially costly mistake. Pull a PO from your files and look it over, now that you have read this article. I guarantee you will have questions about its usefulness. ITTIG, of Ittig & Ittig, P.C., in Washington D.C., specializes in construction law. He can be contacted at (202) 387-5508, e-mail: USBuildlaw@aol.com, or his Web site, www.ittig-ittig.com.