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Purchase Order is a commercial document issued by a buyer to the seller specifying the quantity, price, description, quality of goods required, the payment terms, etc. It is the first step and a very integral part of an organization’s procurement process. Purchase Order precedes the Purchase Invoice.
Now, the question arises whether a purchase order is legally binding, and once issued can it be cancelled by any of the parties to a transaction.
So, let me help you address the first question-Whether a purchase order is legally binding or not?
Purchase Order – Legally binding or not?
The issue of a purchase order by the buyer does not itself result in a legally binding contract. A legally binding contract gets executed between the parties to a transaction only on the acceptance of the purchase order by the seller. It provides legal protection to the buyer and seller.
1. From the buyer’s perspective-
So, let me help you understand how does a purchase order legally protects the buyer.
On the acceptance of the purchase order, the vendor or supplier is obligated to deliver the requested goods as stated in the order. He is also compelled to consider the other conditions in the order specifying the description, type, and quality of goods.
Let’s say you order 10 computers for your company from a well-known vendor, paid for the same, but on the delivery date you end up receiving only 8 computers.
In this case, if you have an acknowledged purchase order with you, you will certainly be able to prove that you received less quantity than what you paid for. The purchase order will serve as an on-record legal document for your purchase.
Had you not possessed an acknowledged purchase order, you would have certainly landed up in big trouble.
2. From the seller’s perspective
Purchase Order can be used as a legal document in the court of law by a seller to sue the buyer in case he refuses to pay the agreed amount for the goods supplied. This is possible only because of the legally binding contract status of the purchase order.
3. Trade Finance
Banks and financial institutions facilitate domestic and international trade transactions and provide financial assistance based on purchase orders issued.
To produce the goods as requested by the buyer, the supplier can approach a bank for funds based on the acknowledged purchase order.
In case the supplier does not provide credit terms for payment to the buyer and the buyer does not possess the requisite funds for payment. Then in such a situation, banks or financial institutions accept the purchase order as a legal document for providing financial assistance to the buyer.
Now, let me help you understand the next question asked – Can the Purchase Order be cancelled?
Cancellation of a Purchase Order
To help you understand, whether the cancellation of a purchase order is possible or not, we must consider various situations related to the acceptance and cancellation of the purchase order-
- Situation 1
Can a purchase order be cancelled before its acceptance?
The question to this scenario is yes. As the purchase order has not been accepted by the seller, it can be easily cancelled by the buyer, because it has not yet attained a legally binding status.
- Situation 2
Can the buyer cancel a purchase order after the goods have been delivered to him by the supplier?
–In this scenario, goods have been dispatched and delivered ie. the purchase order has already been acknowledged by the vendor. In such a case, the vendor might not accept a cancellation request as desired by the buyer. Or the vendor may accept your request but may charge some fees for the same.
- Situation 3
Can the purchase order be cancelled by the supplier or the buyer after it is acknowledged as a legal binding contract?
–The purchase order gets a legal binding status only after its acknowledgement by the seller. So, in this case, we will have to consider the terms and conditions laid out in the order.
If the purchase order allows cancellation without fulfilment of any additional terms and conditions, and both the parties mutually decide to terminate the order. Then in such a case, no party shall be liable to sue or be sued in the court of law.
But, if the purchase order does not allow cancellation after its acceptance, it becomes legally binding on the parties to fulfil the requirements stated in the order. If one party does not obey the terms detailed in the order, the other party certainly has the right to sue. The order will be considered to be an on-record legal document if such a situation arises.
As discussed with examples, it is evident that;
- A purchase order is legally binding.
- It can be cancelled considering the terms and conditions listed in the order.