Four Tips to Help Avoid Surprises in Purchase and Sales Order Terms and Conditions

The fast pace of modern business leaves little time to be careful about fine print legal terms, but glossing over purchase and sales order terms and conditions can lead to severe consequences for your business. Whether your business is acting as a supplier or a customer, consider these tips to help avoid unexpected issues should a sale or purchase not go as planned or hoped:

1. Do not assume that your own favorable terms and conditions will apply to a sales or purchase transaction, even if your terms and conditions clearly reject all terms and conditions from the other side. Efforts to automatically reject the other side’s terms and conditions usually do not work when you still go forward with the transaction. Minimize the risk from the other side’s terms and conditions by making sure your terms fill as many gaps as possible.

Generally, the Uniform Commercial Code (the “UCC”) governs product sales in the United States. Under the UCC, if acceptance of a transaction is not made conditional on the acceptance of any terms and conditions, acceptance with additional terms within a reasonable time operates as acceptance; and the additional terms are construed as proposals for additional terms for the contract between the parties. These additional terms automatically become part of the contract between the parties unless

1. the offer expressly limits acceptance to the terms of the offer,
2. they materially alter the offer, or
3. notification of objection to them has already been given or is given within a reasonable time after notice of the additional terms.

The textbook “battle of the forms” rules outlined above are often the focus of a law school contracts class covering the UCC. For most sophisticated businesses today, though, these rules increasingly cease to apply, because each side is making the transaction conditional on the other side accepting their terms, which throws out the traditional “battle of the forms” exercise. In this situation, the language of each side’s terms and conditions indicates there is no intention of buyer and seller to enter into a contract. Nevertheless, their actions indicate otherwise. The buyer and seller still proceed with the order. The buyer still pays and the seller still ships. In this situation, the UCC knocks out all conflicting provisions between buyer and seller terms, and then fills in any resulting gaps with default terms of the UCC to create the terms of the contract between the two parties. Because the UCC only strikes out conflicting provisions from the other side’s terms and conditions in this situation, the worst-case scenario is for unfair provisions from the other side to apply because you failed to address an issue in your own terms. To help protect against that scenario, consider adding language making the default UCC terms apply to the transaction unless otherwise specified. By doing so you have addressed all issues that the UCC does, making it much harder for the other side to sneak in an unfair provision that you failed to address. Your preferred language may not prevail through this strategy, but at least it yields somewhat “middle of the road” provisions that the UCC generally provides by default to buyers and sellers in the absence of written terms to the contrary.

2. Do not overlook terms and conditions available online. Make sure your sales and purchasing personnel regularly check for web links on purchase orders and order confirmations before shipment or payment.

It is hard to miss paragraphs upon paragraphs of legalese on the back or second page of a purchase order; those are easily flagged for a contracts manager or lawyer to review before proceeding with an order. Easier to miss is a short statement indicating that terms and conditions of purchase are available at a customer’s web page.  Although many are not aware, online terms and conditions can indeed be incorporated by reference in a purchase order or sales order confirmation and be binding on the other side of a business transaction. 

Completing an order or payment without awareness of these terms and conditions can lead to unexpected obligations, especially should the transaction go wrong. Make sure you are training the staff authorized to make and process orders to look for web addresses on order forms and confirmations; and make sure that someone is actually reviewing the other side’s terms and conditions if they are available online.  Also, do not assume that these terms and conditions will remain static.  You should be checking for changes on the online purchase or sales terms and conditions before proceeding with each new order. 

3. If you are selling a product and want only to provide a limited warranty, make sure your disclaimer of implied warranties is conspicuous and correctly disclaims the right warranties.

Absent proper disclaimer, there are four implied warranties under the UCC that “merchants” – this term includes a person who deals in goods of the kind being sold –are implied to have given under any sale of goods to a buyer:

• warranties of merchantability (i.e., warranties that the product sold is of at least average quality, fit for the ordinary purpose for which it is intended, adequately contained, adequately packaged, and adequately labeled);
• warranties of fitness for a particular purpose (i.e., warranties that the product sold is fit for the customer’s known purpose for buying the product);
• warranties of title (i.e., warranties that the product is free and clear of any encumbrance); and
• warranties of non-infringement (i.e., warranties that the product sold does not infringe on another party’s intellectual property rights)

Although the UCC was originally designed to provide reasonable implied terms fair to both sides, it now has become market practice for at least the first two implied warranties (merchantability and fitness for a particular purpose) to be specifically disclaimed and replaced by an express, definite warranty with a set duration. The UCC, however, has specific rules about how a seller may disclaim these implied warranties.  Under the UCC, a disclaimer of implied warranties must be conspicuous (e.g., capitalized letters, bold typeface, italicized letters, a different color or a combination of the foregoing) and must specifically mention the implied warranty being disclaimed.  There are other, less reliable ways to disclaim implied warranties, including

1. by stating that the good is “AS IS”, “WITH ALL FAULTS”, or “AS IT STANDS”,
2. by the buyer asking for an opportunity to inspect thoroughly the goods before contract formation, or
3. by the seller demanding that buyer examine the goods thoroughly before contract formation.

However, explicit disclaimers are the most effective means to avoid implied warranties as a seller.  

4. When pushing out updated terms and conditions, make sure all the right staff know and can easily provide new terms and conditions for every future sales or purchase transaction.

Old habits die hard. Large organizations with decentralized units often have staff members acting autonomously.  This autonomy, while generally good for business, sometimes leads to stale terms and conditions going out to customers or suppliers because an employee is unaware of changes.  The best drafted terms and conditions do you no good if your staff is not using them for orders. 

Similarly, one of the more important post-closing assimilation steps to take with an acquired line of business is to update its sales and purchase procedures. Making sure inherited staff adjusts to using your terms and conditions is an important post-closing step that businesses often overlook.