The Deceptively Simple Purchase Order
Nearly everyone has seen a purchase order. The one or two pages of generously spaced text seem pretty straightforward. However, what some publishers may not know is that a P.O. is deceptive in its simplicity. Each term of a purchase order has legal and business implications which, when overlooked, can return to haunt you.
The paper-buying process—which formally begins when the buyer (the publisher or the printer) sends a request in the form of a P.O. to the paper supplier—even seems simple. But problems do occur, anywhere from unexpected issues with product quality to delivery issues, taxes and unexpected costs. Being aware of these potential pitfalls and making sure your P.O. addresses them all can save you major headaches, money and potential legal battles.
In addition to the standard (one-time) P.O., the paper industry uses several different purchase order types, including:
• blanket orders (agreements covering specific periods of time),
• confirming orders (agreements confirming orders previously issued by some other means, such as orally or electronically),
• reservation orders (used to reserve mill capacity, but not a firm commitment to buy), and
• trial orders (used to enable buyers to sample a product at little or no charge).
Be certain you are using the correct P.O. type for your project.
In P.O. language, the buyer is the party directly responsible to the supplier for payment. In the paper industry, the buyer and end user may be separate parties, such as the printer buying paper for the publisher (the end user). If the printer is purchasing the paper on behalf of a publisher, the printer is still the buyer. In that case, the publisher will be responsible for paying the printer the price negotiated for the printing project, including the cost of paper purchased by the printer.
As a result, the agreement between the printer and the publisher (often also a P.O.), must take into consideration:
(a) which party will be responsible for purchasing the paper, and
(b) which party will be responsible for adjustments to project costs in the event paper delivery is delayed, or if the paper differs in quality from the agreed upon specifications or is delivered in excessive or insufficient quantities.
If the publisher purchases the paper directly from the supplier, the publisher is the legal buyer and must negotiate the P.O. directly with the supplier.
The supplier is the paper manufacturer. While this may seem obvious, it bears repeating because the involvement of paper brokers, subcontractors and independent distributors in the paper supply industry makes it important for the buyer to specify in the P.O. whether the supplier is authorized to delegate responsibility for all or part of the paper manufacture to a third party.
If the buyer permits the paper manufacturer to subcontract all or part of the manufacturing process to a third party, the buyer should include in the P.O. a statement that places liability on the supplier, not its subcontractors, for fulfilling the order. This way, if the subcontractor fails to perform its obligations under an agreement with the supplier and this causes the supplier to default under its P.O. agreement with the buyer, it's the supplier's responsibility, not the buyers.
THIS ISN'T WHAT I ORDERED!
One of the challenges facing the global paper industry is the lack of accepted, uniform product descriptions. Although PapiNet—a cooperative, international initiative for setting standards in the paper and forest supply chain—has developed an electronic system for standardized paper purchasing, many purchases are still done by fax, phone and mail. Moreover, even if the parties agree upon a single product description, the weight and feel of paper is greatly influenced by the origins of the pulp.
As one printing company executive explained, European papers of the same product description tend to be thinner than their American counterparts. For this reason, he strongly recommends that anyone purchasing paper internationally or from a supplier with whom he has not worked before always require a product sample. He also suggests referencing the sample in the product description in the final, signed P.O.
WHO'S LIABLE WHILE THE PAPER IS EN ROUTE?
Although a P.O. can be enforced against the buyer without a shipping designation, the supplier will generally require it. While the shipping designation would appear to be complete with only the name, address and other contact information of the recipient (generally the printer), an essential ingredient is naming who will be liable for the product while it's in transit. For this reason, it's useful to know the following shipping terms:
• F.O.B. means 'free on board' and refers to the point at which the supplier's liability for the shipped paper ends.
• F.O.B. Place of Shipment means the supplier must, at its own risk and expense, transport the paper to the specified carrier who will then be responsible for safely shipping the paper to the printer.
• F.O.B. Place of Destination means the supplier must, at its own risk and expense, transport the paper to the specified location, e.g., the supplier's dock, the printer's dock.
• F.O.B. Vessel means the supplier must at its own risk and expense load the paper onto the specified vessel. When the buyer uses this shipping term, it must name the specific vessel involved.
• F.A.S. means 'free along side' and requires the supplier only to deliver the paper to the vessel (and not load it) in exchange for a bill of lading, which it then gives to the buyer.
The designation of shipping terms is the buyer's responsibility. Even if the supplier has standard shipping procedures and carriers, the buyer must ultimately approve the shipping method.
WRITING OUT ALL THE DETAILS
Under the Uniform Commercial Code (UCC), which has been adopted by most U.S. states, any agreement between merchants to purchase goods at a price greater than $500 must be in writing. As a result, when the paper purchase price exceeds $500, the P.O. must be in writing to be enforceable, with a few exceptions (addressed later).
The price should specify not only the amount to be paid, but also:
• the currency (for international orders),
• the shipping costs,
• the payment of applicable taxes, and
• any allowable adjustments to cost based on changes either party requests during the manufacture and order-fulfillment process.
Each of these items is negotiable. So, although standard industry practice may be for the buyer to pay applicable taxes, that cost can be allocated to the supplier if the parties agree.
In international orders where the buyer is less familiar with the prevailing tax regime, the parties can agree for the buyer to pay the applicable sales and export taxes up to a set amount, after which any additional taxes will be paid by the supplier. Or, the buyer can specify the nature and amount of taxes it will pay, placing the burden on the supplier, who has greater access to local tax advisors, to accurately identify and pay for any other applicable taxes.
Bear in mind, however, that in many jurisdictions, if export taxes are not paid, the products will not be shipped. So, be certain to work with a broker or supplier experienced with filling international supply orders and ask for references. Finally, the P.O. should state that the supplier must give the buyer a receipt or invoice confirming the payment of applicable taxes.
WHAT IF YOUR PAPER DOESN'T ARRIVE ON TIME?
To ensure on-time delivery, the buyer should confirm the supplier's anticipated capacity around the delivery date and consider building into the P.O. a fee for late delivery or a bonus for on-time or early delivery (provided the printer has sufficient storage for paper delivered early). Because on-time delivery requires coordination of the publisher, printer and supplier (plus any supplier subcontractors), all parties should agree on the delivery date in writing.
An adjustment to the order is itself a contractual agreement, which also should be in writing. There are two ways to approach this. You can anticipate common adjustments and note in the P.O. how they will be handled. Or, if the adjustment is not anticipated, you can use a separate agreement signed by both the buyer and supplier.
AVOIDING A BIND
The most important fact to remember is that, unless you specifically state otherwise, a P.O. is legally binding. In most states, once the parties identify the paper quantity and one or both of the parties "reasonably" relies upon the expectation that that quantity will be supplied, the P.O. may be enforceable, even if it hasn't been signed by both parties or any other details are missing. If you do not want the other party to anticipate receipt or manufacture of the paper quantity specified, it is important to state in writing: "This purchase order is for discussion purposes only and is not binding."
If, on occasion, you accept and pay for paper supplied under an oral agreement, and subsequently switch to the use of written P.O.s, but do not require a signature, a court may infer that it was reasonable for the supplier
to rely upon an unsigned P.O. If you have already delivered an unsigned P.O. that does not contain a non-binding disclaimer, most state laws will permit you to retract the P.O. within 10 days of delivery.
If the supplier has already begun production, or the paper being produced is a special paper useable only by the buyer, then the sooner you retract the order in writing, the better.
The P.O. should contain all of the terms affecting the purchase. To avoid the unintended 'integration' of oral agreements or written messages into the P.O. provisions, the parties should specify that the P.O. contains the parties' "entire understanding" regarding the paper purchase in question.
If the parties want to use a set of additional terms and conditions, such as which law will govern a breach of the purchase order, the parties can "incorporate" a set of terms and conditions, and attach it as an exhibit to the P.O.
YOUR DOLLAR OR MINE?
Because payment terms vary around the world, the payment terms should be identified in the P.O. In North America, payment is generally due within 30 days from the date the paper is available for shipment. Internationally, where the time period from order to receipt can be eight weeks, the parties should identify a date that starts with the actual delivery of the paper to a common carrier.
Specifying a single language in which all parties can communicate is essential for international orders. Otherwise, both parties must agree on who will bear the costs of translating communications into a common language,
particularly where foreign subcontractors are involved. In general, the party seeking the translation should pay the related costs. This enables that party to control the timeliness and quality of the translation. Moreover, translation costs are not likely to constitute a significant portion of a project's total costs. It's better to reserve one's negotiating power for more important provisions.
THE UCC'S VIEW ON JOHN HANCOCK
Although many companies operate without signed P.O.s,—relying instead on oral communications or e-mail messages—a signed P.O. serves as an enforceable contract. But, the enforceability of electronic signatures differs from state to state.
It's important to remember that while laymen may think of a signature as an incursive image of one's name written by one's own hand, the UCC treats signatures in a more basic fashion. Under the UCC, adopted in most states with slight variations, a signature is a symbol one uses with the intent of authenticating a document. As a result, a signature can be a handwritten name or a numerical code used to identify a specific party. Moreover, an ATM password, a nickname or a fingerprint, also can be legally enforceable signatures.
Again, if you do not want a P.O. to be enforceable, do not rely on the absence of a signature. Instead, state on the P.O. that it is not binding.
BEFORE YOU SIGN
And finally, a brief note about brevity: Even brevity has its legal implications. A lot of blank space should send off a warning flag.
Before you sign the P.O., be certain that all of the terms critical to the order's execution or fulfillment have been spelled out. In the event a term is omitted, a court or arbitrator may look to prevailing industry practices to determine what the parties would have done had they negotiated the term. The prevailing industry practices may not be in your best interest.
- Ola L. Clinton
Ola L. Clinton is an attorney with the San Francisco office of Holme, Roberts & Owen LLP where she represents privately and publicly traded companies, including those in the printing and publishing industries, in a variety of business and intellectual property transactions. She can be reached at Holme Roberts & Owen, One Maritime Plaza, Suite 2400A, San Francisco, CA 94111, 415-268-1966, e-mail Ola.Clinton@HRO.com.