Is a Purchase Order a Legal Contract?

Do you want to create purchase orders for your business?

But are you aware of its legalities?

Over 66% of small businesses face financial challenges, some of which might be related to the purchasing segment. You need to have an in-depth understanding of the legalities of purchase orders to avoid further financial trouble.

A purchase order is also considered a legally binding contract between the buyer and the supplier once both the parties agree on the terms and conditions of the document.

It represents the first handshake between the parties and builds transparency and trust to ensure the material’s smooth processing to the delivery site.

But what are the terms and conditions of the purchase order?

Is a purchase order a contract?

Let’s find out.

What Is the Contract?

Businesses and contractors create different contracts and purchase orders to formalize the legally-binding relationships with fellow parties. Although both the documents might look similar on the outside, there’s a significant difference.

A contract offers a wider horizon for a legally binding document highlighting an agreement between two parties. It determines the conditions of a personal or professional agreement, like

• The duration of an agreement.
• The value of the service or product.
• A legal obligation not to take action or complete a task.

A contract is of multiple forms and can be written or even oral agreements. A few examples of business contracts can be:

• Employment Agreements
• Real Estate Lease Agreements
• Non-Compete and Non-Disclosure Agreements

A contract is a legal document that binds the parties involved to the set terms and conditions. And if any party disobeys or does not follow the conditions listed, they might face the consequences based on the law.

But what separates a purchase order from a contract?

What Is a Purchase Order?

Generally, a purchase order (PO) is the document that is sent to the seller from the buyer, manufacturer, or distributor to purchase specific listed products. Once the document reaches the seller and they approve the purchase order, it becomes a legally binding contract.

The buyer is legally obligated to pay the amount of the product, and the seller must deliver or produce the product within the specified time. The seller can also reject the purchase order request if they can’t agree to the terms or can’t deliver the required material.

Not every contract can be a purchase order, but every purchase order can be a legally binding contract.

The typical purchase requisition must contain:

• The quantity of product required
• Cost per unit and total cost
• A detailed description or unique value of the product
• Information about the seller and the buyer
• Shipping address and date

Multiple ways are used globally to create professional purchase orders by the purchasing department. We’ll discuss how you can create your purchase orders efficiently in the latter half of the blog.

Once both parties sign the purchase requisition, it becomes a purchase agreement that can’t be broken during the execution of the purchase order approval workflow.

What are Purchase Agreements?

A purchase agreement is a document signed and agreed upon by the seller and buyer. It is a legally binding contract, and the seller can only accept the purchase order by signing the agreement and not by providing the goods.

The purchase agreement is a written expression of the agreed terms by both parties to complete the purchasing process. It helps both parties to build a strong business relationship and removes the significant risk involved in verbal agreements.

Once the seller accepts the PO, they can initiate the delivery and invoice generation process. Purchase agreements and orders work great when the deal is between two large parties or the material involved is of large quantity.

When to Use a PO and When to Use a Purchase Agreement?

Whether you want to use a purchase agreement or a purchase order depends upon the nature of the purchase and the customary practice of the industry.

All real estate transactions are conducted with a purchase agreement, not with a PO. Also, if the nature of the purchase involves a government contract, then the government agency’s policies and rules can also dictate the type of document you need.

You can also use a mix of both the documents if the repeated purchases or deliveries are to be made over time. When you use both the documents, the purchase agreement states the comprehensive terms of the contract, and the purchase order is used to request the delivery as required.

Multiple times, the blanket purchase order is used to state the complete terms used by the buyers to schedule the deliveries. The product supply agreement is used to ensure continuous supply to buyers.

The purchase order can be used for simple and smooth transactions

If there are repeated purchases of the same goods or the purchase is relatively simple, then a purchase order can be used to complete the business transaction. Purchasing office supplies, laptops, computers, or other items on a regular basis can be completed using a purchase order.

The purchase agreement can be used for complex and expensive transactions

When you need more security with your expensive purchase, you can choose a purchase agreement. They are generally used when the purchase request gets complex.

When purchasing a $100,000 piece of machinery that requires support and the complete setup from the seller, you can choose a purchase agreement.

It can act as a master service agreement, but if we boil it down, there’s no clear-cut distinction between which document will be used.

It can act as a master service agreement, but if we boil it down, there’s no clear-cut distinction between which document will be used.

Here are a few basic terms and conditions that must be included in the legal purchase contract.

Terms and Conditions Stated by Both Parties

For every legal purchase agreement, there are rules and conditions agreed on by both parties. But you cannot agree to the PO terms if they violate or instigate the parties involved to violate their respective industry regulations.

Let’s dive into the legal technicalities and get an overview of the important terms and conditions that must be agreed upon for the purchase transaction to process.

1. Agreement and acceptance

The contractor’s agreement and acceptance clause state the entire agreement’s constituents. All the listed terms and conditions, official purchase order, state of work, or other documents constitute the entire agreement.

It states that these terms and conditions bypass all the previous oral or written representations, and there will be no dealing or trade usage until both parties agree upon these terms and conditions.

2. Express warranties

All the goods and services purchased under the seller’s agreement should strictly conform to the buyer’s specifications, drawings, and instructions. It should be of the highest quality with no defects and be safe and fit for the buyer’s intended purposes.

These terms related to the products ensure that the buyer receives the desired quality and quantity of the product. The delivery should be compliant with the rules and regulations of the federal, state, and local laws.

If applicable, the seller should provide a ‘Warranty Period’ in which the requested material should be replaced or repaired if some issues arise within the 12 months from the date of first use of the goods.

3. Price terms

The goods will be delivered as outlined in the purchase order. It should include the delivery cost, and the seller should agree that the price of the goods for the same or similar goods in similar quantities should not be favorable to other buyers.

4. Delivery, transportation, and payment

The material delivery should be done within the time specified in the agreement. If the seller exceeds the agreed delivery dates, the buyer can direct the seller to make expedited routing at their expense.

The transportation should be safe and secure, and the product should not be damaged. If the buyer finds the goods broken or damaged, the payment can be withheld until the agreed terms of the agreement are met.

5. Termination and change

Buyers can terminate the agreement under different conditions if any default arises from the seller, like late delivery or defective delivery of goods, among other factors. The buyer also has the right to terminate the agreement for its sole convenience without any reason.

They are also liable to make desired changes in the purchase order like additions or alterations in the items, quantities, specifications, drawings, destination, or delivery schedules. The seller can renegotiate the price within 30-days of the changes implemented by the buyer.

6. Inspection, acceptance, and rejection

Buyer can inspect the goods during different stages of the purchase process and has the right to enter the seller’s premises reasonably to verify the materials requested. The buyer may ask the seller to submit the quality test and production report or related data for the quality inspection.

It’s up to the buyer to accept or reject the delivery material based on genuine concerns. They can ask for a return, exchange, or completely reject the consignment.

7. Payment adjustment for unperformed or non-conforming work

If the buyer feels that the supplier at any time has failed to comply with requirements of this agreement, the buyer can withhold payments, or back charge amounts to the non-conforming supplier.

Apart from these important terms and conditions, the agreement can have other clauses like Indemnification And Insurance, Remedies, Tools, Bailed Property, Labor Disputes, Ingredients Disclosure, Information And Data, and Miscellaneous.

Once agreed with these terms and conditions, purchase order requirements, and other legal documentation, the seller takes further action to complete the required deliveries.

How to Implement Purchase Orders in Your Process?

You can implement purchase orders in your purchasing process to ensure that your funds are utilized properly and that you have a check on your inventory.

You need to assign designated authorities in your business to handle the purchase order approvals. Based on the requirements of the employees, you can select the authorities.

For example, if the requirement is small, the department head can approve the purchase order and process it further to the purchasing manager and then to the sellers.

But if the requirement is large, then you need higher management authority to approve the purchase services and minimize the risk exposure of the deal.

Once the seller delivers the material and the invoice, your accounts payable representative team needs to cross-check all the documents to approve the payment.

You need to create a professional purchase order workflow based on the business requirements’ amount, category, and importance.

Ensure that your purchase orders follow a standardized template that includes the necessary details for a smooth purchase process.

Avoid using manual purchase order creation and automate the process using a powerful purchase order management system for small businesses.

But it’s difficult to filter the best purchase order management software for your business because of the rising number as the industry is booming at a CAGR of 7.6%.

You don’t need to worry. Our team has filtered the best for your business.

InvoiceOwl Can Handle Your Purchase Order Processing

InvoiceOwl is the leading estimation and invoicing software for contractors and also offers quality purchase order creation and management features.

You can use the powerful template to create professional purchase orders. The software enables you to check the history of your previous purchase order and supplier invoices.

The software also offers to record a credit memo journal entry, reporting, estimates processing, payment processing, invoicing, and other features for contractors.

Access the 14-day FREE trial today for creating well-vetted purchase orders.