These days, countless companies conduct business via purchase orders, rather than requiring signed contracts. This makes sense considering the fast pace of commerce; however, without negotiated and signed contracts, companies are exposed to higher risks and uncertain outcomes in the event disputes arise. There are ways companies can mitigate risks and reduce exposure without slowing down business, one of which is by attaching to purchase orders and other transaction documents the company’s carefully drafted standard terms. Although standard terms do not provide the predictability of outcome or the certainty that risks will be mitigated, companies often fare better when including their standard terms. Despite this relatively simple solution that generally shields companies from potential risks, many companies transact business without standard terms.
The discussion to follow will apply exclusively to business-to-business transactions and will be limited in scope, demonstrating how including standard terms with transaction documents can reduce a company’s risks.
Two common scenarios are as follows:
Scenario 1
Company A issues a purchase order to Company B. Upon receipt Company B sends Company A an order acknowledgment with its completely one-sided and unreasonable standard terms. Company A pays $50 per product and the total invoice amount of $500. Company B’s standard terms provide, in part, as follows:
- “In the event of a breach in warranty, Company B shall be liable to the buyer for repair or replacement of the defective products. This shall be buyer’s sole recourse against Company B and exclusive remedy for breach of warranty claims.”
- “In no event, shall Company B’s aggregate liability exceed the amount Company A paid Company B for the products ordered under this purchase order.”
- “These standard terms set forth Company B’s exclusive remedies.”
- Ohio law applies.
Scenario 2
Company A issues a purchase order with its completely unreasonable and one-sided standard terms. Company B responds with an order acknowledgment (without standard terms). The cost of the products is the same as in Scenario 1. Company A’s standard terms provide, in part, as follows:
- “Seller shall be liable for any and all damages arising from or relating to the defective products. In addition to the remedy set forth above, Company A shall be entitled to remedies available under applicable law or in equity.”
- “These terms and conditions shall be binding on seller and Company A expressly rejects any contrary or additional terms included in any of seller’s transaction documents.”
- Ohio law applies.
In each of the scenarios presented above,
- Company A claims that the products sold by Company B are defective and, as a result of the defective products, Company A incurred substantial damages, in the amount of 10 million dollars. Company A demands that Company B remedy the breach promptly.
- The parties are unable to resolve the dispute amicably, and Company A brings an action against Company B in an Ohio court.
In Scenario 1, an Ohio court (considering only the liability of Company B based on the facts presented) would likely conclude that Company B’s liability to Company A is to repair or replace the defective products.
In Scenario 2, assuming Company A proves that (a) the damages in the amount of $10 million were caused by the defective products and (b) Company took reasonable actions to mitigate the damages, an Ohio court would likely conclude that Company B is liable to Company A for the entire amount of damages in the amount of $10 million.
When disputes between companies conducting business on purchase orders end up before a court, the court’s analysis will be much more complicated and in-depth than presented in this post. The court will very likely assess many legal issues and evaluate a party’s liability, as was the case above. With that said, the fact remains that in business-to-business transactions, companies that include their carefully-drafted standard terms with purchase orders and other transaction documents are generally more likely to mitigate risk and reduce exposure to a much higher degree than proceeding with transactions without standard terms.
As you can see in the scenarios presented above, Company B’s liability was substantially reduced by including its standard terms with its order acknowledgment. On the other hand, in Scenario 2, because Company A’s standard terms were included and Company B had no standard terms, Company B’s liability was $10 million on a $500 order.
Generally, doing business via purchase orders runs smoothly, and when disputes arise, the companies can resolve the disputes amicably. When catastrophes occur or high damages are incurred by a party, however, disputes often end up before a court, and outcomes of court actions are challenging to predict. If your company conducts business on purchase orders and does not yet have standard terms prepared by a lawyer that is tailored to your company, consider engaging counsel to prepare standard terms to protect your company going forward.
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A, and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
