Meaning and Practical Use of Trade Contract Documents PI, PO, OC | Global Trade Word

Documents Needed for Trade Contracts: Meaning and Practical Use of PI, PO, and OC

 

Like any contract, a trade agreement also requires various documents. Due to spatial and temporal constraints, trade contracts often require more procedures and documents than typical agreements.

Today, let's explore the meanings of the most commonly used documents: PI (Proforma Invoice), PO (Purchase Order), and OC (Order Confirmation), and further examine their practical applications.

Referring to the Incoterms 2020 can greatly assist in structuring contract terms.

What is Incoterms? Incoterms 2020 Summary Sheet | Global Trade Word

 

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Understanding the Stages of Trade Contract

 

To properly understand the aforementioned documents, it's crucial to grasp the sequence of a trade contract. The general flow and documents used in a typical trade transaction include:

1. Consultation and Negotiation: Negotiating trade conditions between the buyer and seller.
2. Issuance of PI (by Seller): The seller issues a Proforma Invoice to specify the trade conditions to the buyer.
3. Issuance of PO (by Buyer): Based on the PI or quotation, the buyer issues a Purchase Order to order goods or services.
4. Dispatch of OC (by Seller): The seller confirms the received PO and dispatches an Order Confirmation indicating agreement with the order.
5. Completion of Contract and Progress: Once the OC is agreed upon by both parties, the contract is completed, and production/delivery of goods or services takes place.

 

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Understanding the types, meanings, and practical applications of these documents:

 

PI (Proforma Invoice): Meaning and Use of Estimate Invoice

PI, short for Proforma Invoice, is a document issued by the seller. It resembles a final invoice and includes details such as the names of the parties, items, quantities, and prices.

In a previous blog post, Commercial Invoice (CI) was discussed concerning shipping documents. Essentially, an invoice, regardless of its type, refers to a transaction statement including details and amounts. Thus, a Proforma Invoice can be interpreted as an estimate invoice.

In practice, the PI often replaces a quotation and is issued, with minor changes, as an invoice. In contracts involving a PI, it's common to issue a PI instead of a quotation, followed by the issuance of a PO (Purchase Order), which essentially confirms the purchase conditions. While a quotation is a proposal for purchase conditions, the PI practically confirms these conditions.

 

PO (Purchase Order): Meaning and Use of Order Form

PO stands for Purchase Order, a document generated by the buyer. It serves as an acceptance document for proposals and orders goods or services from the seller.

Practically, the PO is effective upon co-signature by both contracting parties and plays the role of a contract. Therefore, careful review and scrutiny are essential in its preparation and signing. Although originally prepared by the buyer, there are cases where the seller annotates and modifies the document sent by the buyer, essentially making a counteroffer. If the buyer does not object, the buyer's signature can constitute contract effectiveness.

However, POs are not always generated for every transaction. In simple purchase orders, the buyer may sign a PI or quotation instead of issuing a formal PO.

 

OC (Order Confirmation): Meaning and Use of Order Confirmation

OC, short for Order Confirmation, is a document prepared by the seller after the completion of a purchase contract. It serves to confirm the contract details and is primarily for the seller's reference.

The reason for expressing it as "prepared" is that, in practice, the seller is not obligated to create an OC. Often, the absence of an OC does not affect the contract. However, in international trade, where friction can occur, an OC issued by the seller can significantly reduce buyer errors and prevent disputes, thus becoming a crucial tool in building mutual trust.

 

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Practical Significance and Use of Contract Documents

 

As mentioned earlier, while these documents are among the "most commonly" used, none of them are "obligatory" to be prepared. Trade transactions, being characterized by both formal and informal contracts, can be concluded with the mutual consent of the parties, and as long as goods and payments are properly received, transactions can proceed smoothly.

Contracts can be concluded with only a PO and a PI, or even with a wire transfer without a separate purchase agreement (!). However, in trade transactions involving significant amounts of money and complex document work, exchanging these documents goes beyond mere formalities. It serves as an essential process to prevent potential disputes and, moreover, to build trust between parties.

 

A posting might help you to understand more about it.

 

Meaning of COO, CI, PL, MSDS - Let's Learn About Shipping Documents | Global Trade Word

 

For a Successful Contract, Understanding and Utilizing the Purpose of Required Documents at Each Stage Is Crucial.