Purchase orders are contracts too

For reasons that I do not understand, most contractors do not think of purchase orders as “contracts.” Often, they purchase equipment and materials for jobs using forms that look as if they bought them at an office supply store. In fact, they actually look as if they are the same forms that the office supply store uses Construction attorney when it buys paper clips, with terms such as “sold to” “date” “description of goods” “sales tax” and “total.” To these contractors, such forms are fine, because they are being used just for purchase orders and not for contracts.

I do my best to gently point out that a purchase order is a contract, just as much as a subcontract. The only distinction between a subcontract and a purchase order is that a purchase order should be used when only goods are being acquired, and there is no labor involved. It needs almost all of the same terms that you would put in a subcontract. After all, a defective pump or motor can cause as much damage to your customer’s premises as defective installation of that pump or motor. The only exception should be those terms that would apply to the labor component of a scope of work — such as worker’s compensation insurance, immigration status verification, dual gate/pickets, etc.

There are two reasons that you want a complete set of terms and conditions in your purchase order. The first is that you can be liable for mistakes made by a supplier just as easily as those made by a subcontractor. Therefore, you want your purchase order to cover topics such as:
● Incorporation by reference of whatever documents govern your contract.
● Required participation in whatever disputes process you have to go through (including arbitration, lawsuit in the state where the project is located).
● Clarification of who is responsible for goods while in transit.
● Payment terms, such as pay-whenpaid or pay-if-paid, retention, etc.
● Requirements for lien waivers (attaching your actual form is a good idea).
● Schedule for delivery including any interim dates for submittals.
● Your rights in the event of a default, including the right to purchase substitute goods or demand correction of mistakes.
● Indemnification for tax liabilities and lawsuits from third parties who say that the failure of the vendor’s product damaged them.
● Liability insurance to cover that indemnification agreement.
● A requirement that you get an insurance certificate and an additional insured endorsement prior to accepting delivery of the goods.
● Exclusion of all other terms (such as vendor’s order acknowledgment form) from your agreement.

The second reason you want to have all these terms in writing is that if you don’t have a written agreement, the Uniform Commercial Code will fill in the gaps with terms that may not at all reflect what you would have wanted in your deal. For example:

If your contract does not say that “time is of the essence,” your vendor would only be obligated to make a good faith effort to deliver, and you would not be excused from paying even if the goods are late [U.C.C. § 2-309(1)].

If your contract does not have a specific warranty provision, the UCC would insert one — a warranty of “merchantability” (meaning that the items are as good as items of their kind normally can be expected to be) — and possibly a second — a warranty of “fitness for a particular purpose,” if you can prove that the vendor knew exactly how you were going to use the items and led you to believe that these were the right ones [U.C.C. §§ 2-314 - 2-315].

If your contract does not say that it can only be accepted according to its terms, and no other terms will be permitted, the UCC would allow counteroffered terms to be added to which you might not have agreed [U.C.C. § 2-206].

This is because the goal of the drafters of the Uniform Commercial Codes enacted in all states is, first and foremost, to make commerce flow more smoothly by encouraging the enforcement of transactions. The goal is not necessarily to protect the buyer, although a number of the UCC terms might end up working to your benefit.

Having advised you to develop your own terms and insist that the supplier accept them, I have to also acknowledge that many manufacturers will not sell their products on any terms but their own, which likely include a limited warranty (such as one year from start-up or 18 months from delivery, whichever is sooner) and a limitation of liability (such as limited to replacement of goods or refund of purchase price, at the vendor’s option).

Since often all the major sources of equipment have similarly worded and limited terms, you may not have much choice except to accept them, although you will never know on what you can get them to concede unless you try. If you know that you can’t get a vendor to accept the same terms that your customer is asking you to accept, you at least have the chance to go back to the customer and get a “carve out” for a particular product from the general contract terms.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421- 4800, e-mail to [email protected].