Purchase Order Terms and Conditions Prove Crucial in Resolving a Dispute

June 2005

By George W. Ash, Foley & Lardner LLP

When is the last time you reviewed your Purchase Order (PO) Terms and Conditions (Ts&Cs)? Who in your organization reviews the Ts&Cs offered by your customers or suppliers?

Often these documents get exchanged, with each side assuming they know the terms of the deal, only to find out that there was a fundamental misunderstanding between the parties. Or, after a dispute arises, you may discover that a significant concession was made in the Ts&Cs that determines the dispute’s outcome, or makes pursuing a remedy so expensive, difficult or limited that the remedy is of no value.

Pitfalls in Ts&Cs are even more prevalent for government contractors and subcontractors. The government largely dictates the Ts&Cs of its contracts, with little room for the prime contractor to negotiate out unfavorable provisions.

This is not to say, however, that the government does not include clauses that it should not. A savvy contractor that knows what is required can make its life easier by objecting to unnecessary clauses, especially if the contract’s subject matter qualifies as a commercial item. Keep in mind many of the clauses accepted by the prime may have to be flowed-down to its subcontractors and suppliers, creating more burden for both the prime and the sub, and potentially more cost someone will have to absorb.

The worst offender of flow-down overdose is the prime contractor who flows-down everything in its prime contract along with a few extra provisions. Often, these prime contract clauses are incorporated by reference, without even identifying the clauses in question.

For example, the prime contractor may have a provision in its PO Ts&Cs that states: ‘If the first page of this Purchase Order indicates the goods or services being acquired are in support of a U.S. government contract, then Supplier agrees to all clauses included in Buyer’s prime contract, suitably modified to identify the parties.’

With such a provision, you don’t know what’s in the prime contract, what you are agreeing to do, what ‘suitable modifications’ are appropriate and what you are agreeing to flow-down to your subs. Note too, the language does not just flow-down required clauses—it flows-down everything that is in the prime contract, whether it is a required flow-down clause or not.

At a minimum, a contractor should include a provision in its standard PO Ts&Cs that states its offer (or acceptance) is expressly limited to the Ts&Cs contained in its PO, and explicitly rejecting any new or different term offered by the other party, unless it is specifically agreed to in writing. This will either force a negotiation of inconsistent terms or, in the event of a dispute, result in the inconsistent terms being dropped out, with the resulting contract generally consisting of Ts&Cs contained in both parties’ POs. Without this language, you may be bound to the other party’s provisions, even though you never affirmatively agreed to them.

The so-called ‘battle of the forms’ disputes, where each party sends its own Ts&Cs to the other, the Ts&Cs are inconsistent, and both get filed without any discussion, can be very complicated and expensive to resolve. Having a clear understand of what is in your PO and the POs of your customers and suppliers can minimize surprises and expensive litigation.

George W. Ash is a member of the law firm of Foley & Lardner LLP in Detroit, where he specializes in government procurement issues. He may be reached at 313-234-7147.

Note: This update provides information of general interest presented in summary form, and does not constitute individual legal advice.