What Are Invoices and Contracts
Invoices and contracts, while both being documents used for business transactions, serve different purposes in the world of commerce. An invoice is more of a convenience, used to show the amounts due to service providers. A contract, on the other hand, can have important legal ramifications. To understand why an invoice is not a legally binding contract (even if it contains some contractual clauses), it is important to understand what each document is.
The point of an invoice is to list the goods received or the services performed and to specify how much the recipient needs to pay. Invoices not only keep payment information, but also provide a summary of the terms of the service. For instance, many invoices still specify the terms of payment (30 days, for example) . Some invoices will even specify that by signing the invoice, the other party agrees to the terms listed. In either case, an invoice is a form of documentation of goods delivered or services performed in exchange for payment.
A contract is much lengthier than an invoice and usually more specific. Contracts specifically describe the duties of each party for the entire course of a business transaction, including penalties for breaching those duties. Importantly, contracts always clearly state the expectations for each party.
Essentially, an invoice is much more of a summary than is a contract. Invoices can make the terms of services and payments known, but they do not go into extensive detail. Contracts go into detail, listing every expectation. With this in mind, invoices are not legally binding.
Elements of a Contract from a Legal Perspective
To recap, most types of contracts require an offer, acceptance and consideration but, in certain situations, there is a limited form of contracting called "estoppel by conduct" which does not require consideration, and may only require an offer and acceptance. The existence of a contract and any disagreement over its terms will ordinarily be purely a question of fact.
Judges are generally reluctant to declare that an invoice (which is often a pro forma list of items/services and their cost) is a contract, even if the order was placed over the telephone because this finding imposes legal obligations on both parties which may have been unforeseen. Modern commercial practices favour the use of invoices to avoid the need for under or overpayments by making it clear which goods/services have been provided or ordered and at what price. In short you cannot simply describe an invoice as a contract as there are legal principles involved, even if the parties do treat the invoice as a contract.
Essential elements
The critical question is whether there has been a "consensus ad idem" – a meeting of the minds of both parties, the essential elements of which are – (i) offer, (ii) acceptance (iii) intention and (iv) consideration – sometimes the fourth element can be dispensed with.
An offer is a proposal made with the intention to create a legal obligation between the parties, having regard to the provisions of the offer. Acceptance is a positive, unconditional agreement to its terms. Intention is a willingness by the parties to assume legal liability for a particular obligation (as opposed to moral liability). Consideration is the benefit or detriment that influences the parties in making the agreement and constitutes their reason for entering into the contract.
In essence a contract is just an agreement which the law will enforce. The essence of what makes a valid contract is known as "consideration". Therefore, in a contracting situation (whether verbal or written) unless you are vigilant, and understand the fundamental principles, you can easily find yourself bound by a contract, potentially with unexpected burdens.
Does an Invoice Satisfy Contract Terms?
The answer to this question differs depending on the context and the specific invoice in question. On its face, an invoice may not look like a contract, but it is a manifestation of the intention of at least one party to be bound by the terms of the invoice.
In many ways, an invoice is a request for payment of services rendered or goods sold, rather than an actual invoice. Some may not even refer to themselves as invoices, rather a request for payment. Invoices by their nature can be informal, but they often contain sufficient contact information to identify the parties to a transaction and descriptions of the services performed or goods sold.
This point is important because it is possible for an invoice to be deemed a contract or a portion of a contract. Invoices are part of the paper trail of your interaction with a particular individual or business. According to Practical Law Company, the purchase order is part of a contract, even if not labeled as such, with the invoice being the performance of that contract. In this case, the contract is the offer from one party and acceptance by the other. If there is an agreement on the stated price, product, delivery time, quality, and quantity then this is a legally enforceable contract even though neither document was entered into specifically as a contract.
It is also possible for an invoice to be treated as a contract when it includes specific conditions or details. A contract exists even if not all details are included. If the parties intend a future action to be a fulfillment of a contract, it is possible for that future action to be deemed a contract. Part of the issue is that contracts are often formed via exchanges between the parties. For example, if you created and emailed an invoice to a customer, your customer replying with a payment is expressly acceptance of the terms of the contract. Your customer can include alterations to the invoice and the invoice may include additional conditions. Each case differs and the parties could have entered into a contract prior to the invoice. The essential element is consideration, or payment.
Invoices can drastically alter obligations and expectations between parties. In some instances, the details listed in an invoice may make it a contract.
What Circumstances Make an Invoice a Contract
There are some clauses that could even convert an invoice into a legally binding contract. Specific language that is included in an invoice can transform it from a simple informal document detailing what a person owes a service provider into an agreement between them.
An invoice might state that acceptance is made through payment and, in that case, if a person pays it, there is a bilateral agreement. Similarly, if an invoice says that acceptance is made by acceptance, and the individual accepts just those terms, it’ll still be treated as a binding contract. If the terms are not accepted, then one party could simply refuse to pay the invoice.
Clearly there are some instances where plain meaning of review will not determine whether or not an invoice is a contract. In addition to the clauses mentioned above, others include an agreement to arbitrate, forum selection clause , waiver of judge or jury and disclosure language. A description of services provided can indicate agreement as well. While legal questions concerning assent may be answered, there are still challenges with the issue of whether or not there was consideration.
Sometimes an invoice will serve a dual purpose as an order confirmation or acknowledgement receipt. If a supplier’s invoice is accepted without objections, the order referenced is then treated as an offer. So long as the offer is clear, complete, and specific in its terms, and there is a full acceptance, this can lead to a binding contract.
On the other hand, if an invoice is not clear, this does not prevent the parties from creating a contract. According to the Restatement Second of Contracts, a contract may be formed in any manner sufficient to show mutual assent. What elements go into an enforceable contract can vary by state, but generally speaking, an offer and acceptance must be present, along with a meeting of the minds on the essential terms.
What Are the Possible Legal Drawbacks
Businesses that blindly treat invoices as contracts, without a deeper analysis first, risk liabilities and obligations that they may not have intended to incur. Suppose a service provider sends an invoice to a customer and states a fee for services rendered and a payment due date. A company that signs the invoice without further review may find that it would later be held to the terms as if it had signed a contract. Even where all of the other contract formalities are fulfilled, such as the constituent elements of offer, acceptance, and consideration, the law may still require consideration of an additional factor: whether the invoice was intended to be accepted as a final expression of the parties’ agreement and therefore governed by the Statute of Frauds requiring a subsequent signature to bind the party to the contract. The additional factor is identified by the court in Roth Steel Products v. Sharon Steel Corp., 205 F.3d 740 (6th Cir. 2000), as the "intent test" requiring "the resolution of whether the party allegedly bound by a contract actually intended to bind itself by the contact at issue." Roth Steel Products, 205 F.3d at 744.
Other courts when confronted with Roth Steel’s "intent test" have posited that the test creates ambiguity, for example where a subsequent writing is contemplated, because the party signing the invoice may intend the contract to be binding and effective upon some future event despite a lack of signature. See, Roth Steel Products v. Sharon Steel Corp., 139 F.3d 587, 590 (6th Cir. 1998).
The determinative issue is whether by the invoice alone the signator intends the transaction to be final or whether the parties contemplate further discussion. In many cases, the parties intent is for the invoice to bind the signator to the underlying transaction, even where the transaction is subject to additional terms and conditions, or even where the signator expressly states that the invoice does not constitute a contract.
Best Practices for Your Company
So how can a company protect itself from unintentional contracts? Given that it is a business’s job to know the law and the types of documents it can be bound by, we recommend that you not use an invoice to create a contract. Rather, continue your practice of having separate documents that you intend to be contracts and invoices that serve their main purpose — to request payment for goods or services rendered. Follow these best practices when creating and sending an invoice.
- DON’T include terms and conditions, warranties or disclaimers in an invoice. An invoice is about money. A new contract requires consideration from both parties and the inclusion of certain terms that make it a legally binding agreement. Rather than adding contract language to an invoice, include terms and conditions on a service order or sales agreement that customers sign before you deliver your goods or services.
- DO clarify that an invoice is not a contract. Include a statement at the top of your invoices that states this fact.
- DO keep invoices separate from any other documents. If you need to send a document to initiate a new transaction or to request payment, send that document rather than including those terms in the invoice document.
- DON’T send invoices that include statements such as "paid" or "receipt." Seek payment instead by sending separate notices for those specific purposes rather than through an invoice.
- DO distinguish for customers if a price is an estimate or if the quoted or listed price for a good or service will change. This will help mitigate a customer’s claim that there was an offer to enter into a contract between you and the customer.
- DO send invoices WITHIN the invoice date. For example , if your invoice sample date is Dec. 31st, you should not send an invoice with that same date on the next day, Jan. 1st. Using different dates for invoices that are part of the same transaction will demonstrate to a judge or jury that you treated each transaction separately.
- DON’T make frequent updates to an invoice. You may believe a payment wasn’t properly made or a customer didn’t give you approval for an amount you charged. Or you may have remediated a customer’s complaint by offering a refund or credit without entering into a formal contract. You should not make frequent changes to an invoice. A judge will deem that to be part of the contract, which means you might have a harder time showing how and when a customer should pay you. A judge will not allow you to pick and choose evidence that helps your legal argument and ignore other evidence that may not be favorable to your argument.
An invoice is just that — a request for payment. An invoice is not a contract unless your actions indicate that it is intended to be a contract, such as sending the customer additional documents with the invoice requesting that the customer sign them and return the documents to you before delivering the goods or services you provided.
Keep contract terms and invoice terms separate. Any effort to bury important contract terms about timing, services covered, warranties, limitations of liability, payment terms, choice of law, venue and dispute resolution in an invoice will leave you exposed to the customer’s selection of a forum to file a lawsuit against you.