Issuance of a purchase order: is it an acknowledgment of debt?

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Don’t issue a purchase order as a simple acknowledgment of an invoice – it may make it look like you’ve acknowledged the debt, which may not be the desired outcome.

Issuing an invoice, or a purchase order in response to an invoice, can seem like a fairly administrative and unimportant task. However, if there is a liability dispute for an amount mentioned in any of these documents, the order in which these documents are issued can have significant consequences.

This turned out to be the case in AMD Resources Ltd v TRS Management Pty Ltd [2021] VSC 202, where the debtor (AMD) used to issue purchase orders after receipt of invoices. In the event of non-payment of invoices issued by a creditor (TRS), TRS underscored this fact by showing that the debt was not the subject of “real litigation”.

What happened next has valuable lessons for companies and entities who wish to avoid arguments arising from their procurement processes.

A service contract leads to a payment dispute

AMD is a mining company with interests in exploration concessions through a joint venture with several other entities, which has been the subject of a dispute following the termination of the relevant joint venture agreement.

AMD had filed an IPO application with ASX in July 2018. It had also retained the services of TRS to provide exploration and lease compliance management services, via an agreement that has terminated on or about January 31, 2018, and another agreement dated June 25, 2018, which was to begin on the date AMD was listed on ASX. The IPO application was, however, withdrawn, which led to further negotiations with TRS.

As a result, the terms of the relationship were hardly set in stone – however, TRS continued to work for AMD between April 1, 2017 and October 2018.

Between March 5, 2018 and June 1, 2018, four invoices were issued to AMD by TRS, all of which were paid. Upon receipt of each invoice, AMD would issue a purchase order for the services described therein and then pay the amount due. However, three invoices issued between July 1, 2018 and October 10, 2018 remained unpaid; purchase orders were issued after two of the three.

On November 28, 2018, TRS issued a legal request for the unpaid invoices. AMD requested that the legal demand be quashed on a number of grounds, including claiming that there was an actual dispute as to the amount and liability of the debt. While the court overturned the legal claim for a number of reasons, the issue of AMD’s purchase orders became a key consideration in determining whether there was a genuine dispute over the debt.

Purchase orders: an acknowledgment of debt, or just a receipt?

TRS argued that AMD could not claim that there was a dispute over the debt since it had, in substance, acknowledged its responsibility through (among other things) issuing purchase orders.

AMD replied that the purchase orders were nothing more than an acknowledgment of receipt and that the supporting documents for the invoices had been duly taken into account before payment was made.

In support of its position, AMD noted that none of the supporting documents for the items indicated in the unpaid invoices had been provided by TRS at the time of receipt of the invoices. TRS did not dispute this, but also noted that it does not have to.

In the affidavit in support of the statutory claim, TRS gave virtually no information about the POs issued and gave no details of AMD’s practice of issuing POs after receipt of the bill and then pay them.

The Court reviewed the provisions of the various agreements that had existed between the parties and noted that there was nothing in them that required that a purchase order be issued before payment became due.

Indeed, according to the Court, the question was whether AMD had made a clear and unambiguous statement about its indebtedness, which would then found a promissory estoppel. Given her finding on other grounds than the legal claim should be dismissed, she did not have to do this investigation – this time. If and when a legal demand is made which corrects the defect of the former, we can expect this to be a significant issue for AMD to deal with.

Processing purchase orders: three important lessons

The seemingly innocuous issue of AMD’s purchase orders raises several important reminders.

First, it is not recommended to use the issuance of a purchase order as a simple acknowledgment of receipt of an invoice – this may give the impression that the debtor has acknowledged the debt, which may not. be the desired outcome, especially if the goods or services received or provided under the invoice were not actually delivered, or were not the goods or services originally requested or expected. It is possible that this argument could have been avoided if, for example, there had been a clause in the agreement between the parties that the purchase order for the works had to be raised. before to an invoice being issued.

Second, if your practice is to issue a purchase order when obtaining goods or services, you need to be certain that the items in the purchase order are goods or services that you actually want to purchase.

Finally, if you are the creditor and it is necessary to issue a legal demand for payment, it is important to ensure that, when making a sworn statement in support of a legal demand, you consider all the elements which support the liability of the debtor for the amount claimed – whether it is a purchase order issued, an email exchange or the like. This can help to avoid any liability dispute for the payment of the legal claim amount.


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