Purchases as principal: Overview, definition, and example
What is "purchases as principal"?
Purchases as principal refers to a situation where an individual or entity buys goods or services for their own account, rather than on behalf of another party or as an intermediary. In other words, when a business purchases items as principal, it assumes full ownership and responsibility for the purchased goods or services, and it is the final buyer in the transaction. The purchaser does not act as a broker or agent, but as the ultimate buyer, and is directly involved in the transaction.
For example, if a company buys raw materials for manufacturing, it is making the purchase as principal because it intends to use or resell the materials itself, not as a representative for another party.
Why is "purchases as principal" important?
Purchases as principal are important because they establish the legal relationship and obligations between the buyer and the seller. When a business buys goods or services as principal, it has the right to make decisions about the use, resale, and management of the products, while also assuming the risks and responsibilities associated with those products, such as payment and liability.
For businesses, understanding the distinction between purchasing as principal versus acting as an agent or intermediary is important for accounting, liability, and the fulfillment of contractual obligations. Being the principal in a transaction often means that the company will be directly responsible for the goods, and it will have control over how they are used or sold.
Understanding purchases as principal through an example
Imagine a retail store purchasing a bulk order of electronics from a supplier. The store buys the electronics with the intention of reselling them to customers in its store. In this case, the store is purchasing the products as principal because it is the ultimate buyer, assumes the risks associated with owning the electronics, and will control the resale process.
In another example, a wholesaler buys products in large quantities from manufacturers. The wholesaler resells these products to retailers but initially purchases them for its own account, assuming full responsibility for the goods once they are acquired. The wholesaler, therefore, acts as the principal in the purchase, not as an intermediary.
An example of a "purchases as principal" clause
Here’s how a purchases as principal clause might appear in a commercial contract:
"The Buyer acknowledges and agrees that all purchases made under this Agreement will be made as principal, and not as an agent or intermediary for any other party. The Buyer assumes full ownership, responsibility, and risk for the goods upon completion of the purchase."
Conclusion
Purchases as principal occur when a business buys goods or services for its own account, assuming full responsibility and control over the purchased items. This is an important concept for businesses to understand, as it affects legal and financial obligations, such as ownership, liability, and accounting. For businesses involved in purchasing goods or services, clearly defining whether they are acting as principal ensures that all parties understand their roles, responsibilities, and risks in the transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.