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Ahead of the Curve Auto Supplier Blog

November 20, 2020

Is the Purchase Order the Entire Contract? Not Always.

Many automotive suppliers often feel like they have no negotiating power with OEMs, and that they must accept the OEM’s purchase orders and terms and conditions to win the business. And those suppliers may be correct. However, simply because a supplier doesn’t have a lot of leverage does not mean that it should unilaterally disarm during contract negotiations. So what can a supplier do to “arm” itself during these negotiations? A recent federal court decision reinforces that the first, and perhaps most important, step is to ensure that your quotation has enough detail, and terms and conditions of sale, so you can potentially argue it is the offer to contract, and the purchase order was a mere acceptance.
 
Synergen Inc. v. FCA USA LLC, 2020 WL 1333425 (E.D. Mich. March 23, 2020), involves a dispute between FCA and its supplier regarding whether fuel pumps supplied to FCA were defective. FCA argued that its purchase order, terms and conditions and related documents comprised the entire contract between the parties, and that the dispute should be governed by only those FCA documents. To support its position, FCA argued, among other things, that the purchase order documents were “offers” under controlling law, that the supplier accepted those offers by performing and that all of the terms contained in the quotation were expressly rejected.
 
The court did not believe it was so clear that the purchase order documents constituted the entire agreement. Specifically, the court recognized that while a purchase order typically constitutes the offer to contract, a supplier’s quotation may be deemed the offer when it is “sufficiently detailed” and contains all of the essential terms, so that if the customer accepts the quotation, the deal is finalized. To determine whether the quotation may be the offer, courts will look to whether it contains key terms such as a description of the product, price, quantity and terms of payment. The quote in Synergen contained these items and also incorporated the supplier’s terms and conditions of sale.
 
As a result, the court found that a jury will need to sort out and decide what documents constituted the contract:
 
  • Was the quotation the offer or just an invitation to offer?
  • Was the purchase order the offer or an acceptance of the quotation?
  • Was the purchase order a counteroffer with different terms that was accepted when the supplier performed?
 
Automotive attorneys recognize these “battle of the form” arguments; they can be intricate, fact-specific and complex. And, they can be difficult arguments to lay out to a jury, but nevertheless, the Synergen case remains pending and will go to trial unless it is resolved earlier. There is no doubt that FCA could still convince a jury, through documentary evidence (such as contemporaneous emails) and witness testimony, that the parties understood FCA’s purchase order documents to constitute the entire contract. But, that can be a long and expensive road. The fact that the supplier survived FCA’s effort to short-circuit the case certainly increases the likelihood that the case will be resolved on more favorable terms to the supplier.
 
So, then, what are the key takeaways for suppliers?
 
  1. Prepare quotations that are detailed enough so that they can be accepted without any further negotiation.
  2. Ensure that the quotation contains, among other things, a description of the product, a quantity term (or that the contract will be a requirements contract), pricing and shipment terms.
  3. Ensure that the quotation refers to your terms and conditions of sale. Too many suppliers do not have sales terms, or do not refer to them in their quotations, because they assume they will not be part of the ultimate contract. That is not necessarily true.
  4. Ensure that contemporaneous writings, such as emails, reflect the view that the quotation is the offer that if accepted will finalize the supply arrangement, and not just an invitation for the OEM to make an offer.
 
Warner’s Automotive Industry Group keeps current on the ever-changing legal landscape, and how it affects the automotive industry. If you have questions or concerns related to contracts or any other supply chain issue, please contact Michael Brady or your Warner Automotive Industry Group attorney.

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