At first glance, a $35,000 purchase order from a new customer may appear to be nothing but good news. The sales team celebrates the new business, production prepares the order, and finance anticipates another profitable transaction. However, hidden within many purchase orders are contractual pitfalls that can significantly alter the seller’s legal rights, payment protections, and liability exposure.
Recently, one manufacturer learned this lesson the hard way. A sales manager received a purchase order from a prospective customer for approximately $35,000 worth of industrial gears. At the very bottom of the purchase order, in small print, was a web link directing the seller to the buyer’s “Terms and Conditions.” Upon review, those terms overwhelmingly favored the buyer and conflicted with many of the supplier’s own sales policies. The provisions included broad warranty obligations, extended payment rights, expanded return privileges, dispute provisions favorable to the buyer, and language designed to override the supplier’s own terms and conditions.
Unfortunately, these purchase order pitfalls often remain unnoticed until a problem develops. As long as the buyer pays on time and no product dispute arises, neither side pays much attention to the fine print. However, when payment becomes delayed, product performance is questioned, or a return request is made, the buyer may suddenly invoke the purchase order terms that were quietly incorporated into the transaction. At that point, the supplier may discover that it unknowingly accepted these legal obligations far beyond what it originally intended.
This is why credit managers should work closely with both the sales department and company management to carefully review purchase orders before they are accepted. In many organizations, sales personnel are understandably focused on revenue generation and customer relationships. However, credit professionals are often better positioned to recognize contractual pitfalls and inconsistencies that could later affect collections and subsequently, litigation. A purchase order should never be viewed as “routine paperwork,” particularly when the customer attempts to impose terms that conflict with the seller’s own delivery, payment, warranty, or refund policies.
Some of the most important purchase order pitfalls that credit and sales managers should watch out for include:
- Payment terms that conflict with the seller’s invoice terms
- Extended warranty or indemnification obligations
- Broad return or cancellation rights favoring the buyer
- Chargeback provisions or automatic deduction language
- Forum selection or jurisdiction clauses unfavorable to the seller
- Dispute provisions that delay payment obligations
- Acceptance clauses that create unreasonable performance standards
In many cases, problematic terms can be negotiated or clarified before shipment ever occurs. A supplier may issue its own acknowledgment form referencing its own terms and conditions, request modifications to objectionable clauses, or require written confirmation that conflicting provisions are rejected. The key is identifying these pitfalls before the order is processed, not after the account becomes delinquent.
In today’s business environment, credit management extends far beyond simply reviewing financial statements and monitoring accounts receivable aging. Credit professionals must remain alert not only to financial risk, but also to hidden contractual pitfalls that can directly impact collectability and weaken the seller’s position in the event of a dispute. A purchase order should never be treated as “just paperwork.” Buried within the fine print may be terms that substantially increase risk long before a collection problem ever surfaces.
Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
Nancy Seiverd, President
CMI Credit Mediators, Inc.
All Rights Reserved
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