Define the terms and conditions of your business

January 18, 2010
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Business is all about relationships — all the more so for a family-owned business.

It seems that often family-owned businesses have customer and vendor relationships that are as long-standing and informal as the family relationships. But just as we counsel our clients to use contracts to help define the internal organizational structure and relationships of a family-owned business, we also must take care to define our relationships with long-time customers and vendors, because we never know when the next generation, a buyer, or a new business philosophy in the organization may strain those informal relationships.

The purchase order. Your business relationship with vendors and customers is largely defined by the purchase order. You probably already appreciate the need to be clear in your purchase orders to communicate types, quantities and agreed prices for products or services, but did you realize that the purchase order forms a contract? 

When you get a purchase order, do you look at all the terms and conditions that go with it? Do you verify whether the person sending that purchase order was authorized by the company to enter into a contract? And what happens if you or your vendor has trouble fulfilling the terms of the purchase order?  Of course, you will try to talk through the issue and find an agreeable compromise, but what relationship had you already struck with that purchase order?

The Uniform Commercial Code: Michigan has enacted the Uniform Commercial Code which, in part, governs the terms of sales of goods. An important part of that body of law is the purchase order. Contracts for the sale of goods over $1,000 must be in writing to be enforceable. Purchase orders are commonly used to create that written contract and should contain, at a minimum, such basic terms as identifying who must pay, who must provide the goods, where the goods should be delivered, how the goods should be invoiced, the price and quantity of goods to be delivered, the terms of delivery, and, let’s not forget, the terms of payment.

Most purchase orders are relatively short, often just a single page, so many basic terms and conditions are provided by the Uniform Commercial Code to the extent those issues aren’t specifically agreed upon by the parties. Yet, often, parties include general terms and conditions in the proverbial “fine print” on the back of the forms or on a page buried deep inside their Web site.

Is that fine print really part of your agreement? Here’s a lawyerly answer: It depends.

Sometimes the law will treat a purchase order as an offer to enter into a contract, which may contain whatever terms and conditions the offeror wants to include. The person receiving that offer can accept it, reject it, or make a counter-offer. On the other hand, sometimes an offer has already been made in things like quotations or proposals, which may contain their own terms and conditions. Now the purchase order may be considered an acceptance of that offer.  

Why does it matter who makes an offer and who gives an acceptance? Because the Uniform Commercial Code has rules to resolve these criss-crossing forms, and those rules distinguish between the offer and the acceptance. 

The battle of the forms: If one business makes an offer on its form, with its terms and conditions, and the other accepts the offer, but adds its own terms and conditions, the Uniform Commercial Code drafters have recognized the situation creates a virtual “battle of the forms.” 

Section 2-207 of the Uniform Commercial Code, and not a “special guest referee,” will help resolve this kind of “battle.” But the first lesson, whether you are offering or accepting, is to consider carefully what terms are really being proposed and how flexible you are willing to be about getting the terms you want.

Generally, the terms put in the acceptance will become part of the contract unless there is one of three situations:

The offer forbids additional terms.

The new terms would materially alter the deal.

The offeror promptly objects to the new terms.

Some thoughts to take back to the office: So what does all of this mean for your family’s business? Make sure your purchase order’s terms and conditions aren’t just whatever was pre-printed on the form that you bought at OfficeMax or the terms that worked for your business in the previous generation, but are really the terms and conditions that fit your business today. 

Consider posting your terms and conditions on the Internet. It can be a convenient and cost-effective way of establishing the terms and conditions that work for your business.

Pay attention to the terms and conditions contained in the offers or acceptances you receive. Watch for things like “agreements to jurisdiction” and “governing law in other states” that may make it cost-prohibitive to even enforce your rights. 

For frequent customers and vendors, you might consider longer term agreements that set out mutually agreed terms and conditions. This can be a great way of cementing good relationships and avoiding a battle farther down the road by taking the time up front to discuss the terms and conditions that will help your relationship be long and fruitful for many years (and, hopefully, generations) to come.

Don’t rely on this brief article as the last word on the legal issues relating to your purchase orders. If you are uncertain what terms are in your agreements or what terms you want for your agreements, contact your attorney to be sure the deal is right for your family and your business. You know what they say about that ounce of prevention …

The success of your relationships within your family, within your business, and with your vendors and customers depends on mutual understanding and expectations. Don’t miss the opportunity to better define the terms and conditions of your business with your customers and vendors so you can make them better customers and vendors for years to come.

Anthony Pearson is a shareholder of the Grand Rapids law firm of Rhoades McKee practicing in its Business Law Section.

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