Will You Get What You Purchase When You Need it? The Value of a Well-Drawn Purchase Order

Once upon a time, in a land far-far away, a material supplier is called for materials. Delivery date is confirmed. The date comes and goes with no materials, or the materials arrive and are of the wrong type or in the wrong quantity. Whether you are a developer, a contractor, or a subcontractor, the ending to this story is not that of a classic fairy tale. Time is money, and delays cause construction parties to hemorrhage money, whether through delayed draws, delay damages, or even lost opportunities. Construction and development is the epitome of risk. You take this risk every day, gladly, because you are proud to build America; to create something, perhaps the most meaningful something in peoples’ lives: their home. And we need you to. With risk there is rewards, but the key to a sure bottom line and stress reduction is mitigating risks that are easy to reduce. One such easy target is the use of a written purchase order form that is well-drawn.

At its most basic level, a purchase order brings clarity. Sure enough it can, if well drawn, also be a binding contract with the supplier, but at bottom it clarifies certain critical terms: product, quantity, price, delivery location, and delivery date. We are all human, and all make mistakes. We forget or misunderstand. Telephone calls are great for personal connections but do little to prevent mistakes. Emails sometimes help, but emails do not have a dedicated location for important purchase terms, nor do they contain any standard terms and conditions. Humans are inundated with emails every day. They are often treated informally, and therefore do not get the precise and prompt attention they may deserve. A purchase order, on the other hand, has dedicated fields for important information such that the preparer overlooks nothing. Additionally, a purchase order, being a formal instrument, is immediately observed by recipients as something they must review precisely and promptly. Purchase order forms can be completed by hand, generated by word processor templates, accounting software, or construction management platforms, so there is little reason not to utilize them.

At minimum, a purchase order, to be remotely effective, must contain all the material terms identified above, plus specific language that ensures the terms you pick govern the relationship, not those of the material supplier. However, not all purchase order forms are made alike. Content appropriate for your company’s business model may not be appropriate for another. Content decisions can be made at the outset as a form is being tailored just for you. Content options include, among many other things: payment terms, shipping method, specifications, incorporation of specific contract documents, risk of loss, indemnity, warranty, insurance, liquidated damages, changes, termination, inspection, testing, acceptance, limit of liability and cancellation.

Lest you still believe you do not need a purchase order, or that that your purchase order form is good enough, consider the following real-life problems that did not lead to fairy tale endings, at least for someone. In story number one, Buyer, from Nebraska and Seller, from Florida had an ongoing relationship whereby Buyer called Seller to place an order for various products. In return Seller provided an invoice with Seller’s terms and conditions, including a venue and choice of law provision and a warranty disclaimer. Id. Buyer having accepted the delivery and paid the invoice in full later found the goods to be defective. Id. Unable to resolve the dispute, Buyer filed suit in Nebraska for, among other things, breach of contract, breach of implied warranties, and breach of express warranties. Id. Seller successfully transferred the case Florida based on the venue and choice of law provisions of the invoice. Id. This outcome could have been avoided with a well-drawn purchase order.

In story number two, Buyer utilized a standard purchase order containing basic terms and conditions and no limitation on additional or different terms. Seller’s invoice on the other hand, was well-drawn and contained a limitation of remedies provision that prevented liability for incidental or consequential damages. Upon delivery, Buyer found the equipment to be defective and filed suit seeking a refund, incidental and consequential damages, and lost profits stemming from the defective equipment. Id. at 451. The court granted summary judgment in favor of Seller asserting that Buyer’s exclusive remedy was repair or replacement of the equipment or a refund of the purchase price based on the limitation of remedies provision in Seller’s invoice. Id. at 452.

In story number three, Buyer, who had a well-drawn purchase order with a liquidated damages clause, placed an order with Seller. See generally, Option Wireless, LTD, v. Openpeak, Inc., 2012 WL 6045936 (S.D. Fla. Dec. 5, 2012). In response to the purchase order, Seller sent its standard invoice with various terms and conditions, including a damage limitation clause. Id. at *9. After paying for and accepting the goods, Buyer discovered the goods were defective. Because of the delay in processing replacements, Buyer was hit with liquidated damages from its customer. Buyer sued Seller seeking to recover those damages. Since the Buyer had a well-drawn purchase order, the court ruled in favor of the Buyer, permitting recovery of damages. Id. at *9.

A well-drawn purchase order template requires carefully crafted language that your construction lawyer can create for you. Good construction lawyers know their place. They know that risk cannot be entirely eliminated from construction and development, but they know many cost-effective ways to curtail risk through the implementation of well-drawn documents and processes.