Winning the battle of the forms 

Every credit manager has seen it at least once: a customer submits a payment order with terms lined out that differ from previous agreements. These situations are tricky to navigate, with credit managers reevaluating a customer’s creditworthiness through the lens of these new terms all while wondering if the customer is allowed to break the old agreement.

Why it matters: Despite all the careful negotiating at the onset of the relationship, a salesperson’s signature on a purchase order that a customer has surreptitiously added new terms to carries the potential to upend previous agreements sending the credit department spiraling.

“Treat every purchase order as a potential counteroffer from a customer until you’ve confirmed otherwise,” said Christopher Ng, managing partner at Gibbs Giden Locher Turner Senet Wittbrodt LLP (Westlake Village, CA). “The first question isn’t ‘do we ship?’ but rather ‘do we already have a signed agreement with this customer?’ If you have a signed credit application or master agreement that incorporates your terms and conditions, the purchase order is generally just an ordering document, but only if no one from your company signs it. That’s a big caveat. Signing the buyer’s purchase order can override your master agreement.”

Even with a signed agreement in place, purchase orders still need to be reviewed as they can erode any protection from the initial agreement. “If the purchase contains different or additional terms such as extended payment terms, indemnity language, a forum clause or a price-escalation prohibition, you should object in writing before you ship,” Ng said. “The objection should reference the existing credit or master agreement, identify the specific nonconforming terms, expressly reject them under UCC § 2-207 and reaffirm that your terms and conditions continue to have control. Better yet, ask the customer to confirm in writing that your terms govern the order.”

A purchase order typically goes straight to your sales team, so it is critical that credit works with their sales department to ensure they know what to look out for in the language. “Train your sales and order-entry people to notice the red flags such as anything that says ‘supersedes any prior agreements,’ references to the buyer’s web-hosted master agreement, fixed delivery dates with liquidated damages or unusual warranty or indemnity language and route those POs to credit or legal before anyone acknowledges or ships,” Ng said. “And remind everyone, repeatedly, that the most expensive signature in the company is the one a salesperson puts on a buyer’s purchase order to close a quarter-end deal.”

Without a signed agreement between your company and the customer, there is a risk of entering into battle of the forms territory. There are three steps credit managers should take to protect their company:

1. Don’t auto-acknowledge or auto ship an order until the purchase order is carefully reviewed.
2. Reach out to your customer to formally deny the unofficial change in terms. “Issue your own written order acknowledgment, on your letterhead, with your terms and conditions attached or referenced by URL, and with explicit language objecting to any different or additional terms in the buyer’s purchase order,” Ng said.
3. Document everything including the date and the method of your objection.

“The best thing you can do is make sure you’ve signed agreements with your customers that reference your terms and conditions of sale and your credit terms,” said Harry McLaughlin, CCE, CICP, credit operations manager for Continental Tire the Americas (Fort Mill, SC). “Our salespeople don’t sign purchase orders, so a customer can change whatever they want. If we have a signed document that says these are the terms and will not be changed except for in writing, it’s the best way to protect ourselves.”

At times, credit managers may see a customer trying to change terms as an opportunity to renegotiate the agreement to find equitable terms that allow them to maintain the relationship without exposing their company to too much risk. “I always try and help the sales team come to the middle ground with the customer,” said Ryan Steiner, corporate credit manager for Olympic Steel (Bedford Heights, OH). “If a customer wants to go from 30-day terms to 60-day terms, we might say, ‘Hey, can we meet in the middle at 45 days?’ And then we might offer an early payment discount.”

In these situations, it is important to work with your sales team because they are often in closer contact with the customer with a better understanding of their circumstances. “The sales team considers their payment history and looks at their margins and decides if they have wiggle room,” Steiner said. “At times, sales will say, ‘no, we don’t want to extend those terms,’ and I always tell them they can make us the bad guy with the customer if they need to.”

The bottom line: Ultimately, when it comes to battle of the forms, internal policies and procedures dictate how effectively and swiftly companies respond to abrupt changes in terms.

“The single biggest predictor of who wins a battle of forms isn’t whose lawyer drafted the better terms and conditions; it’s whose internal discipline holds up,” Ng said. “The best-drafted terms and conditions in the world won’t save you if a salesperson signs the buyer’s purchase at quarter-end, or if an accounts payable clerk silently accepts net 90 for six months or if a credit application gets stale because no one updated it after the customer reorganized. Treat your forms, your training and your enforcement habits as a single system and audit it annually. The credit department’s job isn’t to win battles; it’s to make sure the battle never happens.”