Is purchase order a contract?
Purchase orders (or POs) and their effective usage are a vital component to any successful upstream business. Intention of this post is to provide a brief explanation of the nature of purchase order in order to assist procurement specialists.
So, purchase order is a document, often in a standard company’s format, issued from a buyer to a supplier with a request for an order. Purchase order (or service/job order) can be issued under existing contract where issuance of orders was contemplated in the T&C of the contract and also can be a “stand-alone” transaction.
Once seller accepts a purchase/service order, a legally binding contract is formed between the two parties. Commercial points of such contract are inter alia the items ordered, price agreed, lead time for delivery, any other unit rates or prices mentioned in the order. Legal part of the order is the terms and conditions referenced in the body of the order. Even if applicable T&C are not specified in the order (which may lead to battle of forms), it still should be regarded as a contract – where parties agreed to fulfill particular obligations within particular timelines.
Being very different from a contract, as oil and gas industry defines it, purchase order is rarely viewed as a full-fledged agreement. However, it is important to understand that each order forms a separate contract although often a very small one. There are three major scenarios in which purchase order can be issued: (a) under existing contract, which as a rule means that order is an integral part of such umbrella contract (e.g. contract for supply of chemicals and associated services entails issuance of orders for the particular quantities of chemicals, and all such orders will become part of the main contract); (b) stand-alone purchase orders issued with or without reference to T&C, not attached to the particular contract, will create a separate contractual arrangement; (c) purchase order issued under master service/supply agreements may in some cases be regarded as separate “mini” contracts if master agreement contains relevant wording on this.
In practice, there can be a lot of confusion between types of orders described in (a) and (b), so it is advisable to specify clearly whether an order is issued under existing contract or is intended to be a separate stand-alone deal.
Training "Understanding Contractual Terms and Conditions" 9-10 May 2018