purchase order problems

Selling stuff is good! Most of us get a kick when a customer says ‘Yes, I’d like to buy…” But receiving a Purchase Order is not always a cause for celebration…

Since sales are the lifeblood of the business you might think getting a Purchase order from a customer who wants to buy from you is good news but if you don’t have your commercial processes sorted out, customer Purchase orders can be ticking time bomb, costing your business money every day of the week.

We’ll look at how you can find out whether your business is at risk shortly, but first of all what are the three reasons a customer Purchase order can be hazardous to business health?

The three main sources of what I like to call Purchase Order Pain are:

1. Poor payment terms. Your customer’s purchase terms will usually specify payment terms of sixty days or more.
2. Scary indemnities. Most customer terms expect the supplier to take all of the liability if anything goes wrong in connection with the products or services they’re supplying.
3. No protection for your intellectual property or for the goods that you’re supplying.

Customer terms don’t usually include anything that’s going to protect the supplier, their Intellectual Property Rights or enable you as the supplier to recover your goods if the customer doesn’t pay.

It sounds scary but how do you know if your business even needs to worry about this stuff?

Does your business receive purchase orders from its customers? If the answer is yes, there’s a good chance you’re at risk.

Another question for you. Do you make sure that all of your customers sign up to your terms and conditions before they give you a purchase order?

If you don’t, you’re definitely at risk. But what if you do make sure your customers sign your T’s and C’s first? What if they just issue purchase orders to confirm quantities and enable your invoices to get processed properly?

Provided your terms expressly exclude any terms in the purchase order that might be in addition to or odds with the ones in your agreement, then you are probably risk free.

I use the word ‘probably’ because figuring out which terms apply in each case can be tricky, depending on the precise facts.

What if you send out your T’s and C’s with your quote, the customer verbally accepts them and then sends you a standard purchase order?

You’re at risk.

What about if you send out your quote with your T’s and C’s, they send back their purchase order referring to their terms and conditions and you reply with an author acknowledgement that refers to your T’s and C’s?

You’re still at risk.

Why would that be? After all, you’ve taken time to make a finely crafted set of  terms and conditions for your business, you diligently send them out with every quote and you’ve also taken the time to make sure they’re on your website. You may even send them out with an order acknowledgement every time.

Despite this, you’re at risk of the three main sources of Purchase Order Pain and it’s all down to how contracts are formed.

purchase order log

Under English Law, a contract is made when there’s been an offer e.g. you are offering to sell your goods or services for a particular price subject to your terms, either on your website or in your proposal. Then there has to be acceptance of that offer. If your customers purchase order says ‘We wish to buy the stuff set out in our suppliers proposal, on the suppliers terms as attached to that proposal’ then that would be a clear acceptance of your offer.

In my experience over the last 20 years or so, that almost never happens.

Instead, customers send their purchase order which includes (usually in small print at the bottom) something like  ’This purchase order is subject to customers terms and conditions of purchase available at www.xxxxxxx.com.’

When they send you a purchase order they’re making a counter offer. Rather than accepting the offer you’ve made in your finely crafted proposal, they’re saying ‘I would like to buy the stuff you’ve described in your proposal for this price but on our Terms not yours.’

If you’ve made an offer with your proposal and they’ve made a counter offer with their purchase order, how does the contract actually get made? When does acceptance of the offer happen?

In most businesses, the contract is made when either the customer or the supplier starts acting as though a contract is made – usually when the seller starts delivering the goods.

If you receive a customer purchase order and then ship your goods to them, you’ll be considered to have accepted their counter offer. You will be considered to have accepted their offer to buy your goods at your price but on their terms.

The chances are that their terms will have all three of the main sources of Purchase Order Pain. What if you sent an order acknowledgement when you receive a Purchase order before you deliver? An acknowledgment that says you’re accepting their Purchase order subject to your T’s and C’s?

In theory your order acknowledgement could be considered to put your T’s and C’s back on top of the pile in the Battle of the Forms.

The Battle of the Forms is what the lawyers call this particular style of bun fight over whose terms apply when a contracts made.

It can be described as ‘She (or he) who lobs last, wins….’

The last set of terms and conditions thrown over the wall before the contract is made, are the ones that will apply.

The trouble is it’s often really hard to figure out which set of terms were the last to be sent before the contract is made.

There are many examples of case law which try to answer this question under different circumstances. In one case, three different courts all came to different conclusions based on the same set of facts.

Business Battle

The Battle of the Forms: A term used by lawyers when deciding whose terms apply when a contract is formed.

Also expressed by the phrase ‘He who lobs last, wins…’

In another case, a supplier realizing that it had lost the Battle of the Forms, thanks to its customers purchase order, brought a claim under its customers terms and conditions, only for the customer to argue (successfully) that it’s terms didn’t apply because they were full of errors and they hadn’t actually been signed…

The truth is unless you have a single signed set of terms that’s still valid and in effect at the time you receive your customers purchase order, you are at risk of suffering from the three most common Purchase Order Pains.

You’ll remember these are:

1. Poor payment terms. Your customer’s purchase terms will usually specify payment terms of sixty days or more.
2. Scary indemnities. Most customer terms expect the supplier to take all of the liability if anything goes wrong in connection with the products or services they’re supplying.
3. No protection for your intellectual property or for the goods that you’re supplying.

If you do find yourself selling stuff under customer terms, whenever you start chasing outstanding debts you might be told ‘It’s not over to you yet, our standard payment terms are 60 days (or 90 days, 60 days end of month) or whatever…’

If something did go wrong with your product or service you wouldn’t be able to rely on the limit of liability in your terms to manage your risk. Instead you’re likely to be on the hook to pay for whatever loss or damage the customer might have suffered as a result.

Worse still, your insurance might not even cover the claim if your insurers find out about the indemnity. What about your intellectual property and your goods? If you’re selling software design work graphics or content of some kind, you can pretty much guarantee that your customer will acquire full ownership of the copyright and any other rights as soon as they receive your stuff.

While that might not sound bad, in practice it means that if that if your customer owns that intellectual property, you’re not allowed to use it in your business or for any other clients. Ouch.

How can you avoid these and other sources of Purchase order Pain?

It’s easy.

Get your commercial processes sorted out. Make sure everyone in the business understands what offer and acceptance means so that nobody’s tempted to supply your goods or services simply on the basis of a purchase order.

Have a process for accepting orders that ensures your terms are always on top of the heap in the battle of the forms. How are your current processes? What kind of problems are you currently facing in this area? Get in touch  and we’ll address the most common problems in a future post.

Thanks for reading.

Tiffany Kemp, CEO.