Enforceability of Purchase Orders

by Charles H. Van Gorder

The common element of the relationship between manufacturers and retailers in any industry is the purchase order. A primary purpose of any trade show is to expose retailers to products that will be available for the up-coming season, and to solicit orders for those products. The purchase order is the key means for accomplishing the underlying goal of the trade show - the sale of product.

Manufacturers  & Retailers
The manufacturer must plan production for the up-coming season to order raw material determine production schedules and labor requirements. Decisions must be made regarding what products will be produced, the quantity of each product to be produced, and the sizes. colors and other variations of the products to be made. Production decisions also influence marketing strategies. Pre-season orders may also be an important source of funds for covering production costs. For these reason, pre-season orders are a critical element in a manufacturer's planning.

The retailer uses a trade show to learn about new products and make decisions about which products will meet the demands of their customers. Pre-season orders allow a retailer to determine the mix of goods that will be available for sale and to nail down the cost of inventory. Pre-season purchasing often entails significant price discounts and permits advance marketing planning.

Purchase Orders
Purchase orders serve the needs of manufacturers and retailers; each relies on their enforceability when making significant commitments for production or purchasing stock. Unfortunately, manufacturers and retailers have each been known to back away from confirmed purchase orders. Manufacturers can be left with substantial surplus inventory if a purchase order is canceled. A manufacturer's pre-paid production costs are suddenly in danger of not being covered if orders are canceled or payments are not received when due. Excess inventory may not be sold at the contract price as there may be an insufficient demand for the product once pre-season purchasing has been completed. Retailers who find their orders canceled due to product unavailability are forced to scramble for substitute products which may not meet their marketing demands (even if available). The price for such late-ordered goods may also be substantially higher than the original contract price.

The Uniform Commercial Code - Article 2 Sales
The problem of enforcing the terms of a purchase order may seem insurmountable. With manufacturers and retailers being located in different states throughout the country, what are the legal rights of each party when a sales contract is breached? The answer lies in the Uniform Commercial Code, a set of laws adopted in virtually every state to provide a standardized basis for enforcing the rights of those involved in interstate commerce. Article 2 of the UCC deals with the sale of goods between "merchants"- including manufacturers and retailers. The information listed below summarizes many of the most important provisions of Article 2 of the UCC. This information is only an introduction to these legal concepts, and manufacturers and retailers should contact their own legal counsel for advice of how the law in their state may differ. Being aware of the underlying legal basis for purchase orders can be quite helpful in negotiating appropriate terms and understanding the parties' obligations and remedies under these contract.
Contract Formation

A purchase order should contain all of the essential elements of the contract between the parties. These elements should include quantity and quality of the goods ordered, express warranties, price, delivery terms, risk of loss prior to buyer's acceptance and method and timing of payment. Both parties should sign the contract, documenting mutual acceptance of the contract. Between merchants, acceptance of an offer does not have to be in writing, nor does it have to accept all of the terms of an initial offer. A past manner of dealing between merchants may be viewed as establishing the terms of a sales contract. The best practice, however, is to have the entire contract writing, specifying all of terms that have been agreed-upon. Where the parties modify the terms of the original contract, such modification should be in writing and signed by both parties. These precautions will help minimize the potential for future disagreement on the terms of the contract and whether those terms had been accepted by all parties. Note that offers may be non-revocable for a specified or "reasonable" period of time, or until accepted by the buyer. A contract may also provide that it may not be rescinded by either party.

Warranties
The law generally requires the seller to own the goods being sold, free of any encumbrances or liens. The law imposes upon the seller an implied warranty of merchantability: the goods must meet the contract description, be of fair average quality within that description, be fit for the ordinary purposes for which such goods are used, and conform with any promises on the container or label. Where a seller knows a product is required for a particular purpose and the buyer is relying on the seller's judgment to select a suitable product, the seller is held to have guaranteed the product is "fit" for that particular purpose. In addition to the implied warranties, the parties are free to agree to any other express warranties. The use of product descriptions or samples may be deemed a warranty that the goods being sold will conform to such descriptions or samples. 

Buyer's Rejection of Goods
The buyer has the right to inspect the goods at any reasonable time and place, and in any reasonable manner, before having to accept or reject such goods. A contract can specify whether partial or full payment must be made prior to such an inspection; a buyer has the right to a refund should the goods subsequently be rejected. Where a buyer partially or completely rejects a shipment of goods, the seller must be promptly notified of the rejection. The buyer must store non-perishable goods so the seller can recover them, subject to the seller's reasonable instructions. In the absence of such instructions, the buyer may store the goods, ship them back to the seller or sell them on behalf of the seller, all at the expense of the seller.

The seller may request in writing that the buyer provide a full and final statement of all claimed defects. A failure of a buyer to notify a seller of curable defects, or to provide a requested listing of defects, constitutes acceptance of the goods. If the time for the seller's performance has not expired, the seller generally has the right to notify the buyer that the defects will be cured, and to timely deliver conforming goods. If the seller reasonably believed the buyer would accept non-conforming goods, additional time may be permitted for the seller's delivery of conforming goods.

 
Buyer's Acceptance of Goods
A buyer is deemed to have accepted goods if they are not rejected after a reasonable opportunity to inspect and reject them. Once the goods are accepted, the buyer is obligated to pay the full purchase price. In the event the buyer accepts goods known to be nonconforming goods, the buyer may not thereafter reject those goods unless there was a reasonable assumption the seller would cure the defects in a timely manner. In limited circumstances, a buyer may revoke an earlier acceptance of goods. This may be done when a nonconformity has not been timely cured, or if the nonconformity was unknown at the time of acceptance and the buyer's failure to discover the nonconformity was due to the difficulty of discovery or the seller's assurances that the goods were conforming. Any claimed nonconformity must substantially impair the value of the goods.  

Seller's Remedies
A buyer's breach of contract generally will be involve repudiation of the contract, wrongful rejection of conforming goods, wrongful revocation of acceptance or nonpayment of the purchase price. Where a buyer breaches a sales contract, the seller has several available remedies. If the goods have not yet been manufactured, the seller may either complete manufacture or sell the goods in an unfinished state. Where there is a breach before the buyer's acceptance of goods, the seller may resell the goods in a reasonable manner, thereafter suing the buyer for any resulting monetary losses. A seller may also sue the buyer for any profits lost as a result of the buyer's breach. In addition to lost profits, a seller is entitled to recover for incidental damages such as the cost of stopping delivery, of storage and shipment of the goods and any resale of the goods. Where a buyer simply fails to pay for the goods following delivery, a seller may be able to reclaim possession of the goods.

A buyer's breach of contract permits a seller to withhold delivery of goods in shipment or to be delivered at a future date. Under certain circumstances, where a seller reasonably believes a buyer will breach a contract, the seller can cease its own performance under the contract. Following a buyer's breach, the seller may cancel the contract and is entitled to recover any incidental expenses caused by the buyer's breach. Where a buyer fails to make a scheduled installment payment, the seller may suspend performance under the contract until adequate assurance of performance is received. 

Buyer's Remedies
A seller's breach of contract may include repudiation of the contract, failure to deliver the goods or delivery of nonconforming goods. Most often, when a seller fails to deliver conforming goods, the buyer has the right to seek substitute goods from another source, thereafter suing the original seller for any increase in the cost of the goods.  The buyer may also recover incidental damages such as costs incurred for the receipt, inspection, storage and transportation of nonconforming goods, the expense of obtaining substitute goods and other reasonable expenses connected with the seller's breach. Unlike a seller, a buyer is also entitled to consequential damages, including any losses suffered by the buyer as a result of seller's breach, and any injury to person or property resulting from any breach of warranty.