Purchasing and Supply Chain Managementby W.C. Benton

Chapter ThreeThe Legal Aspects of

Purchasing

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Learning Objectives

1. To understand the legal aspects of the purchasing function.

2. To understand what factors are involved in the selection of the purchasing manager

3. To understand the extent of the purchasing professional’s legal authority.

4. To understand how contracts and purchase orders are legally executed.

5. To understand the essentials of a binding purchasing contract.

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Learning Objectives6. To be able to distinguish between an offer and a

non offer.

7. To learn about the possible outcomes of an offer.

8. To understand the terms of an enforceable contract.

9. To understand the legal implications of leasing.

10. To understand the legal implications of the information age.

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Learning Objectives11. To understand how to comply with women

business enterprise (WBE), minority business enterprise (MBE), and disadvantaged business enterprise (DBE) programs.

12. To learn about the importance of ethics in purchasing.

13. To learn about electronic contracts and signature.

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The Legal Aspects Of Purchasing

• The purchasing manager is an agent for the firm. The terms purchasing manager, buyer, and purchasing agent will be used interchangeably.

• The purchasing manager administers the purchasing function.

• The purchasing function consists of many tasks within the business entity, including supporting the company with the required (1) materials, (2) supplies, and (3) services.

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The Title and Duties-Purchasing Agent

The most important task that the purchasing officer is involved in is representing the principal in the development and negotiation of contracts with third parties.

• The title purchasing agent is a generic legal term.

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The Title-Purchasing Manager

• Recently, the term has been superseded by vice president of purchasing, vice president of materials management, and vice president of supply management.

• From a legal standpoint, the term purchasing agent accurately defines the individual who deals with a third party for a principal

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Legal Status of Purchasing Manager

• From a legal point of view, the following factors are associated with the appointment:

1. The purchasing manager must be granted the authority to make purchase contracts.

2. The purchasing manager accepts the contracting authority.

3. The employer accepts the commitments that were made to the purchasing manager.

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Authority of the Purchasing Manager

• The three types of purchasing authority are express authority, implied authority, and emergency authority.

1. Express authority 2. Implied authority 3. Emergency authority

• It is strongly recommended that the authority of the purchasing manager be clearly written and communicated.

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Execution Of Contracts and Purchase Orders

• Purchasing personnel routinely sign purchase orders and contracts committing the company to the specific terms and conditions of purchase orders and contracts. The purchasing official has no personal liability providing that the following requirements are met:

1. The name of the principal or company is shown on the document.2. All parties involved know that the purchasing agent is acting on behalf

of the company or principal.3. The agency relation is shown on the document.4. The purchasing agent is acting within the scope of his or her authority

for the transaction.

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Essentials of a Purchase Contract

1. The parties must be capable

2. The subject of the matter must be legal and valid 3. There must be mutual consideration

4. The parties must reach an agreement by offer and acceptance.

In summary, under the U.S. Commercial Code, an agreement is a legal transaction that requires all four components given above. The absence of any of the components results in an unenforceable agreement in a court of law

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Offers

• Purchasing agents receive numerous offers on a daily basis and must be able to identify complete legitimate offers. The three necessary components of an offer are:

1. Intent to make an offer 2. Communication of the offer intent

3. Identification of the specific subject matter

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Invitation To Do Business• In most instances, the purchasing official initiates an

invitation to do business. The purchasing official issues a request for quotation.

• The RFQ is an excellent way for the buying firm to test the market without making a legal commitment to purchase.

• The RFQ lacks the intent component. When the intent component is missing, the document is merely an invitation to bid.

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Counteroffers

• The negotiations process between the buyer and the seller usually leads to many offers and counteroffers.

• A counteroffer is legally binding if it contains the components that institute an offer.

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The Time Limits of an Offer

1. The offer may lapse 2. The offer may be rejected3. The offer may be revoked 4. The offer may be accepted

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Firm Offers

• The firm offer question should be raised when quotations are requested. This approach gives the supplier equal opportunity to consider the risks before quoting.

• Quotations as a result of this RFQ are enforceable. It must be made clear to the supplier that any supplier that submits an offer without this guarantee will not be considered.

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Option Contracts• In case the supplier is unwilling to give the buying

firm a firm offer, the purchasing professional should attempt to offer the seller an option contract.

The seller will make an agreement to allow the buyer a specific time limit to make the purchase. Consideration will pass from the offeree to the offeror in return for a firm commitment.

• This option contract is enforceable because of the payment of the $ 1,000 consideration.

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Bid Bonds

• A bid bond enlists a third party into the transaction.

• The supplier secures a bonding company to guarantee that the supplier will enter into a contract if they are awarded the contract.

• A bid bond condition is usually motivated by a federal or state regulation. Bonding is used to protect governmental agencies from unqualified bidders

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Promissory Estoppels

• The construction industry is unique in that the general contractor accepts offers from subcontractors in expectation of being awarded a project from a third party

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Promissory Estoppels (Example)

• There is a famous case in which a prime contractor solicited a telephone bid from a paving contractor.

A paving subcontractor failed to perform after the prime contractor was awarded the project. The court ruled in favor of the prime contractor

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Oral Contracts

• Oral contracts occur everyday. Ordering a pizza is an oral contract. However, oral contracts have no place in the professional purchasing arena. If a supplier refuses to perform, there is no recourse for the buyer.

• The courts are silent on enforcing oral contracts that exceed $500

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TERMS OF A CONTRACT

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1. Concrete is quoted in cubic yards.

2. Lumber in board feet.3. Bales of hay.4. Barrels of oil.5. Gallons of fuel.

• The purchasing professional must pay close attention to the quality term of the contract. Quality should not be over specified or underspecified

Quantity Quality

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Price and Credit Terms

• The price is determined when the offer is accepted. In some cases, price escalation clauses are used in a contract.

• A price escalation clause is an adjustment that the seller utilizes in order to compensate for variances at delivery

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Delivery Terms

• Delivery terms are closely related to price terms.

• The transportation between the buying and selling firm is usually considered as part of the price. The delivery terms formalize the responsibilities of the buying and selling firm for delivery of the goods.

• As an example, FOB shipment, means free on board (f.o.b) at a named place

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Leasing

• Leasing is becoming more attractive for both consumers and businesses. Consumers are leasing automobiles in record numbers.

• One reason for the increase in consumer leasing is the tax effect of the leased automobile for small businesses.

• If the automobile is partially used for the business, a portion of the monthly lease payment is tax deductible.

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The Legal Impact of the Information Age

• The Internet has infiltrated every aspect of the world. E-mail has outpaced the postal system as the primary communication mode in the developed world.

• Nine-year-old kids are buying and selling through eBay.

• In some instances, purchasing professionals are requiring the supplier to meet minimum levels of connectivity, which is not easily done

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The Impact of the Information Age

• More and more consumers and businesses are contracting internationally. The legal difficulties of Internet transactions are apparent.

• During the next decade, I expect the case law to be voluminous. Consider the requirements for an offer and legally binding contract discussed earlier and it should be apparent that very little of the current law applies.

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Electronic Contracts and Signatures

• In 1996 the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Commerce, which offers member states of the United Nations methods to address barriers to the use of electronic communications in their commercial law.

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Electronic Contracts• A secure signature should be such that it can be used to

identify the signer. This does not mean that the signature itself must consist of or include the signer's name. Identification by reference to other sources of information would be sufficient.

• Thus, for example, a digital signature may identify the signer by reference to a certificate issued by a certification authority.

• A secure signature must be linked to the data message being signed, in such a manner that if the message is changed the signature is invalidated. Such a linkage may be regarded as a crucial requirement for a secure signature, since otherwise the signature could be simply excised from one data message and pasted onto another.

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Cryptographic Signatures (PKI)

• Cryptography is the science of securing information. The technology is based on scrambling information and then unscrambling it.

• Many businesses consider the cryptographic signature method known as Public Key Infrastructure (PKI) as the most secure and reliable method of signing contracts online.

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The Federal Electronic Signatures in Global and National Commerce Act (ESGICA)

• The federal Electronic Signatures in Global and National Commerce Act (ESGICA), or E-Sign, went into effect on October 1, 2000.

• The law made online contracts for a variety of business transactions more clearly enforceable.

• The law will allow businesses to satisfy their obligation to provide legally required notices to buyers and sellers by sending notices electronically, once respondents provides consent for such online communication.

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Purchasing and Ethics• In society, some people are respected based on the

amount of money they have, regardless of the money’s sources and methods of obtaining it.

• However, in business environments, ethical behavior is

the foundation of trust.

• Purchasing agents are governed by the company’s ethical policies, the Uniform Commercial Code and the Securities and Exchange Commission and many other state and local laws.

• Purchasing agents who violate ethical codes could easily go to jail

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Women and Minority Compliance

• Government contractors, under certain conditions must award subcontracts to minority or disadvantaged bidders.

• Several Fortune 500 companies have implemented measures to encourage purchasing managers to purchase from a variety of diverse suppliers.

• To be eligible to participate in some federal programs, a company must be certified as at least one of the following:– Women-owned business – Minority-owned business