What You Don't Know About Purchase Orders Can Bite You

Contractors: there may be trouble brewing in your everyday purchase of equipment and materials. It’s possible you just don’t know it yet. For example, that construction contract you signed last week bound you to a scope of work, specifications, a schedule and a two-year warranty. You are bound to comply with the schedule or face liquidated damages for delays. When you go to buy the materials or equipment you need to perform the contract, does your supplier have to meet the letter of the specs, produce according to the general contractor’s schedule, or match the two-year warranty? Maybe not. What happens to you then?

As a contractor, you need to be aware of the body of law governing purchase orders. Under the statutes called the Uniform Commercial Code (“UCC”), state legislatures have created a unique set of rules for contracts for the sale of “goods.” Those rules are in Article 2 of the UCC, which has been adopted in most states, including Minnesota. Article 2 is hardly new. You have been living with the UCC every day for decades and just may not have realized how important it could be.

The UCC rules were developed to more realistically reflect how businesses operate from day-to-day. The drafters of the UCC thought it should not take a 10 page contract to buy a truckload of pipe. The UCC rules have worked successfully to simplify contracts for half a century in many ways, but in the construction world, they sometimes lead to surprises.

As noted above, Article 2 applies to the sale of “goods.” Goods are things that you buy that are moveable when they are sold – this includes things like pipes, valves, controls and your portable generator. All the common materials and equipment that you need to buy to do your work qualify as goods. To buy them you normally use a simple and brief contract generally called a purchase order. Where contractors face problems is when the purchase order contains terms that vary significantly from their obligations under a construction contract. That purchase order can also be affected by so-called “gap filler” terms that govern the purchase order by virtue of Article 2. These terms are implied by operation of law in order to fill gaps that frequently exist in common contracts for the sale of goods.

For example, consider a situation where a supplier contracts with you for some valves you need for your construction job. These valves may be a predesigned product the supplier already makes, and not necessarily the exact product the engineer had in mind when he or she wrote the specifications. The supplier may be unwilling to produce to the contractor’s specifications when those have only been communicated after production has already begun, which can make performance on the construction job difficult to say the least.

Also, if the product does not come right off the shelf, there is probably a production cycle before it will be available. If you need the product by a certain time, it’s possible it may not even be manufactured by then. You had better consult your purchase order! If the supplier did not commit to delivery by a date certain, you may not have the product until long after you needed it.

The UCC says that, unless you agree otherwise, the time for delivering your product is a “reasonable time under the circumstances.” A production cycle may be just one of those “circumstances.” This is one of those gap filler terms that might not even be in the small print on your purchase order, but it is part of the UCC in recognition of the reality that not every product is instantly available. Now look back at the “liquidated damages” clause in your construction contract. If the delay in receiving the product(s) causes a delay in your performance, and a claim for liquidated damages is made, who do you think is going to be asked to pay?

The supplier did not sign your construction contract and may not be bound by your schedule or the liquidated damages clause unless it agreed to be. You are potentially caught between two contracts that do not line up – you may not be able to shift the liquidated damages to the supplier. The lesson is, make sure that you have a clear delivery time in your purchase order if that is going to be critical to your performance under the construction contract. If you wait until the last minute to order materials that are not “off the shelf,” you may face an expensive surprise.

There are many more of these potential surprises under the UCC. If you have additional questions, the Real Estate Litigation and construction lawyers at Larkin Hoffman welcome your call.