Are Purchase Orders Enforceable Contracts?

They can be. The Uniform Commercial Code provides that a contract for the sale of goods may be made in any manner sufficient to show agreement, and that “an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods.” In MidAtlantic International Inc. v. AGC Flat Glass North America Inc., a federal court in Norfolk examined whether purchase orders reflected an enforceable contract between the parties and concluded that they did.

MidAtlantic supplied Spanish dolomite to AGC under a contractual relationship that their predecessors began in the late 1990s. At the end of each calendar year, AGC sent MidAtlantic a purchase order providing a rough estimate of its needs for the coming year. AGC supplemented the annual purchase order with monthly orders that were more exact. Each purchase order set forth requirements and conditions for the delivery of the product and contained the price and quantity of the product, details regarding how the agreement could be cancelled, shipment requirements and other details necessary for both sides to understand how the transactions were to occur. The quantity of dolomite was occasionally altered via email and phone between the parties. Additionally, the purchase orders provided requirements for the chemical composition and physical properties of the product. For example, the maximum allowable levels of iron, silicon dioxide and acid insoluble particles were specified, and no acid insoluble particle was to be coarser than 30 mesh.

Via letter in January 2008, MidAtlantic requested that a “take or pay clause” be added to the parties’ agreement which would require AGC to pay for any dolomite remaining in the warehouse should AGC decide to stop purchasing dolomite from MidAtlantic. The letter also stipulated that AGC would continue to buy dolomite until at least December 31, 2010 at a set price. dolomite.jpgAGC signed the letter on October 10, 2008. Before AGC signed the letter, MidAtlantic repeated its request that AGC adopt the take or pay clause, and it marked up a past purchase order and sent it to AGC reflecting the proposed change. In December 2008, MidAtlantic emailed AGC noting that the 2009 order had not incorporated the requested change. AGC subsequently altered the purchase orders to reflect the take or pay provision.

In 2011, AGC rejected any future purchases of dolomite from MidAtlantic and refused to pay for the product remaining in MidAtlantic’s warehouse contending that it did not meet the 30 mesh requirement. The parties’ dispute wound up in the United States District Court for the Eastern District of Virginia, which was called upon to determine whether the purchase orders comprised the agreement between the parties. AGC argued that the purchase orders contained the terms of the agreement between the parties whereas MidAtlantic argued that the terms of the contract could be found in initial documents exchanged in 1997 and 1998, the course of dealing between the parties, the Certificates of Analysis (“COAs”) detailing the chemical composition of the dolomite, and the 2008 letter. MidAtlantic argued that the purchase orders and the 30 mesh requirement were not part of the contract and that the purchase orders were at best only confirmatory memoranda.

The court noted that a purchase order submitted by a buyer is generally deemed to be an offer which may be accepted by the seller’s action. MidAtlantic’s argument would require the court to reject a complete and unambiguous written document that contains all of the necessary information for the completion of the sale in favor of a vague composite of writings, letters, oral agreements and course of dealings. Additionally, MidAtlantic’s conduct supported a finding that the purchase orders constituted the contract: MidAtlantic repeatedly requested that the take or pay provision be incorporated into the purchase orders and could not explain why it so insisted if the purchase orders did not bind it in any way.

MidAtlantic argued that the COAs did not contain the 30 mesh requirement and that if the purchase orders constituted the contract, the contract would be self-contradictory or incomplete. However, the court found that nothing in the COAs contradicted the 30 mesh requirement, and since the purchase orders referenced the COAS, the purchase orders were not incomplete.

Under the UCC, evidence of a prior agreement or of a contemporaneous oral agreement may not contradict but may supplement or explain a final writing. Accordingly, the late 1990s document exchanges and course of dealing would be relevant to explain or supplement but not contradict a written term. The court refused to ignore the express written provision of the 30 mesh requirement in favor of early dealings and a general course of dealing that was silent as to the requirement.

Accordingly, the court held that the purchase orders were offers that MidAtlantic accepted when it engaged in performance based on the requirements and specifications set forth in the orders. The 30 mesh requirement was unambiguously a part of the purchase orders and since the purchase orders embodied the contract, the 30 mesh requirement was a part of the contract.

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