Issuing a purchase order: does it amount to an acknowledgement of debt?

By Nick Josey, Scott Sharry
13 May 2021
Don't issue a purchase order as a mere acknowledgement of receipt of an invoice – this can give rise to the impression that you have acknowledged the debt which may not be a 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 dispute over the liability for an amount referred to in one of those documents, the order in which these documents are issued can have significant consequences.

This proved to be the case in AMD Resources Ltd v TRS Management Pty Ltd [2021] VSC 202, where the debtor (AMD) had a practice of issuing purchase orders following receipt of invoices. When it failed to pay invoices issued by a creditor (TRS), TRS pointed to that fact in demonstrating that the debt was not the subject of a "genuine dispute".

What happened next has some valuable lessons for businesses and entities wanting to avoid arguments arising from their procurement processes.

An agreement for services leads to a dispute over payment

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

AMD had applied to the ASX for an IPO in July 2018. It had also retained TRS to provide exploration and tenement compliance management services, via an agreement which was terminated on or about 31 January 2018, and a further agreement dated 25 June 2018, which was to commence on the date that AMD listed on the ASX. The IPO application however was withdrawn, leading to further negotiations with TRS.

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

Between 5 March 2018 and 1 June 2018, four invoices were issued to AMD by TRS, all of which were paid. Upon receiving each of the invoices, AMD would issue a purchase order for the services outlined therein, and then pay the amount owing. However three invoices issued between 1 July 2018 and 10 October 2018 were left outstanding; purchase orders had been issued after two of the three.

On 28 November 2018, TRS issued a statutory demand for the unpaid invoices. AMD applied to set aside the statutory demand on a number of grounds, including asserting that there was a genuine dispute as to the amount of, and liability for, the debt. While the Court set aside the statutory demand for a number of reasons, AMD's issue of purchase orders became a key consideration in determining whether there was a genuine dispute about the debt.

Purchase orders: an acknowledgement of the debt, or merely of receipt?

TRS argued that AMD couldn't claim there was a dispute about the debt given that it had, in essence, acknowledged its liability through (amongst other things), the issue of purchase orders.

AMD countered that the purchase orders amounted to no more than acknowledgement of receipt only, and that the supporting material for the invoices was properly considered prior to payment being made.

In support of its position, AMD noted that none of the supporting documentation for the items stated in the outstanding invoices was provided by TRS at the time the invoices were received. TRS did not dispute this, but also noted it did not have to do so.

In the affidavit supporting the statutory demand, TRS gave almost no information about the purchase orders as issued, and did not go into any detail as to AMD's practice of issuing purchase orders following receipt of the invoice, and then paying them.

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

In effect, said the Court, the question was whether AMD had made a clear and unambiguous representation about its indebtedness, which would then found a promissory estoppel. Given its conclusion on other grounds that the statutory demand should be set aside, it did not have to make that inquiry – this time. If and when a statutory demand is issued that cures the defect of the first one, we can expect this to be a significant issue for AMD to deal with.

Dealing with purchase orders: three important lessons

The seemingly innocuous issue of the purchase orders by AMD raises several important reminders.

First, it is not good practice to use the issue of a purchase order as a mere acknowledgement of receipt of an invoice – this can give rise to the impression that the debtor has acknowledged the debt, which may not be a desired outcome, especially if the goods or services received or provided under the invoice were not actually provided, or not to be the goods or services originally requested or anticipated. It is possible that this argument could have been avoided if, for example, there had been a proviso in the agreement between the parties that the purchase order for the works needed to be raised prior to an invoice being issued.

Secondly, if your practice is to issue a purchase order when obtaining goods or services, you should be certain that the items contained within the purchase order are goods or services that you actually wish to purchase.

Finally, if you are the creditor and it is necessary to issue a statutory demand for payment, it is important to ensure that, when swearing an affidavit in support of a statutory demand, you consider all matters that support the debtor's liability for the amount claimed – whether that be a purchase order issued, an email exchange or similar. This may assist in heading off any challenge to liability for payment of the amount in the statutory demand.

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