CONTRACTS - 03.04.2020

Can you be bound by an unauthorised employee?

Case facts

In Athena Brands Ltd v Superdrug Stores PLC , the senior brand manager of Athena (A) emailed a buyer at Superdrug (S) asking them to confirm that the business would buy a specified minimum quantity of A’s goods over a twelve-month period. S’s buyer e-mailed back saying “please go ahead”. When S didn’t place sufficient orders, A sought to recover losses of over £900,000. S defended on the basis that its buyer didn’t have the authority to bind the company nor was a specific purchase order placed.

The decision. The court ruled that the buyer had been held out by S as entitled to negotiate and conclude purchase contracts on its behalf and S had not communicated any limitations on the buyer’s authority to do so to A. Nor had A acted unreasonably by assuming the buyer was authorised to confirm the minimum quantity, as S had previously entered into a similar arrangement in relation to another of A’s products. S was therefore contractually bound by its buyer’s agreement to buy the minimum quantity specified in the emails.

Practical steps

In today’s world, communication happens at the speed of light. Orders can be made in passing over the phone, via email or even through texting. But as this case demonstrates, foregoing formal confirmation of an order can lead to problems.

Tip 1. Ensure your company’s ordering procedures include the requirement to complete a purchase order (PO). The PO should include a unique number for tracking it through the system as well as the type of item, quantity and agreed upon price. The more information you require on the PO, the more effective it will be.

Tip 2. If buyers ever refuse payment, the seller remains protected because of the legally binding contract status of the PO document. For the buyer to have similar protection, it’s important to get a PO confirmation from the supplier or their acceptance of the order. Ensure you have procedures to track this acceptance.

Tip 3. You should have robust PO terms and conditions covering all relevant scenarios including details such as when you can cancel a PO. Communicate these to your suppliers.

Tip 4. Where informal emails are being exchanged prior to sending a PO or creating a formal contract ensure that they are clearly marked to prevent the accidental creation of a binding contract. Phrases as simple as “this is not a binding contract” or “Subject to contract” in the header of the email will certainly help with any arguments later.

Tip 5. Make sure that all your employees, particularly those with titles such as “buyer”, understand the importance of following the company’s internal processes for entering into contracts on behalf of the company including the requirement for a purchase order. Prepare a presentation and create a take-home document for which explains the correct way to raise a PO.

Tip 6. Undertake internal checks to ensure that the buyers are following the correct purchase order procedure. Follow up with the buyers where you identify that these aren’t being followed.

For sample purchase order terms and conditions, visit http://tipsandadvice-financialcontroller.co.uk/download (FC 12.07.09).