What is a Purchase Order and how does it work?

A purchase order is a document issued by a buyer to a seller placing an order for goods and services. It serves as a legally binding contract which safeguards the interests of both buyers and sellers. Often commercial disputes will arise where contract terms are ambiguous such that one party alleges that what they have signed is not what was agreed between the parties. In the event of a dispute, a clear and comprehensive purchase order can serve as concrete evidence of the agreed-upon terms.

Key terms of a purchase order

Whilst your purchase order should reflect each business and your specific needs, some of the items we recommend including for your protection in a purchase order include:

1. Identifying information – This includes details of the parties to the transaction, addressees and contact information.
2. Description of the goods/services – This includes providing specific details such as product names, model numbers, quantities for products and the scope, the objectives and any milestones or key performance indicators to be achieved for services.
3. Pricing and payment terms – This includes specifying details such as due dates for payment, late payment penalties and any applicable taxes or fees.
4. Delivery schedule – This includes an agreed timeline that outlines when the goods/services are to be provided.
5. Warranties and guarantees – To the extent that is allowed by law, a purchase order should include details around the warranties or guarantees offered for the goods/services.

Legal protection and clarity

In a recent High Court case the terms of a contract are unclear, external evidence may be necessary to give clarity and effect to the terms of a contract. This essentially means that the court may look to external evidence in a dispute and interpret the contract in a way which does not conform with your idea and understanding of what was agreed between the parties.

Well-defined terms in a purchase order which contain sufficient detail help to prevent misunderstandings, disagreements and ultimately the expense of costly litigation should proceedings eventuate in relation to the contract.

For many businesses, success often hinges on attention to detail, and a well-drafted purchase order is a cornerstone of that success. At Kells we have a team of contract business lawyers who can assist with drafting your purchase order or reviewing and advising on your existing purchase order. We take the time to understand the services or products of your business, providing practical, up-to-date solutions that protect you and your business.

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