Purchasing and Supply Chain Management
by W.C. Benton
Chapter Three
The Legal Aspects of
Purchasing
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 Objectives
6. 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 Objectives
11. 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• Recently, the term has been superseded by vice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.
2.
3.
4.
The name of the principal or company is shown on the document.
All parties involved know that the purchasing agent is acting on behalf
of the company or principal.
The agency relation is shown on the document.
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 rejected
3. 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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Quantity
1. Concrete is quoted in
cubic yards.
2. Lumber in board feet.
3. Bales of hay.
4. Barrels of oil.
5. Gallons of fuel.
Quality
• The purchasing
professional must pay
close attention to the
quality term of the
contract. Quality should
not be over specified or
underspecified
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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
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