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legal aspects of purchasing

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legal aspects of purchasing

  1. 1. Jacques Folon www.folon.com Partner Edge Consulting Maître de conférences Université de Liège Professeur ICHEC Brussels Management School Professeur invité Université de Lorraine (Metz) ESC Rennes LAW Law and contract negotiation The Legal Aspects of Purchasing Based on Purchasing and Supply Chain Management by W.C. Benton
  2. 2. 2 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.
  3. 3. 3 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 11. To learn about the importance of ethics in purchasing. 12. To learn about electronic contracts and signature.
  4. 4. 4 The Purchasing Agent • 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, • (3) services.
  5. 5. 5 The Title and Duties Purchasing Agent The most important task that the purchasing officer is involved in is representing the company in the development and negotiation of contracts with third parties. • The title purchasing agent is a generic legal term defining the individual who deals with a third party for a company • Other titles do exist, like • Purchasing manager • VP Material • Supply Manager • …
  6. 6. 6 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 this contracting authority. 3. The employer accepts the commitments that were made by the purchasing manager.
  7. 7. 7 Authority of the Purchasing Manager • The three types of purchasing authority are 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.
  8. 8. 8 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: ✦ 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.
  9. 9. 9 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 agreement 4. The parties must reach an agreement by offer and acceptance.
  10. 10. 10 Invitation To Do Business • In most instances, the purchasing official initiates an invitation to do business. • The purchasing official issues a request for quotation (RFQ) • 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.
  11. 11. 11 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
  12. 12. 12 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.
  13. 13. 13 The Time Limits of an Offer An offer does is no longer valid if 1. The offer becomes outdated 2. The offer is officially rejected 3. The offer is revoked by the seller before the acceptance 4. The offer is accepted by the buyer
  14. 14. 14 Firm Offers • The firm offer question should be raised when quotations are requested. • 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.
  15. 15. 15 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. • This option contract is enforceable
  16. 16. 16 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 • An evaluation process is generally put in place to select the awarded company
  17. 17. 17 Promissory offers • It happens in the construction industry that the general contractor accepts offers from subcontractors • in expectation of being awarded a project from a third party
  18. 18. 18 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.
  19. 19. 19 TERMS OF A CONTRACT
  20. 20. 20 1. Concrete is quoted in cubic yards. 2. Textile in square feet. 3. Barrels of oil. 4. 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
  21. 21. 21 Price • 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
  22. 22. 22 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
  23. 23. 23 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.
  24. 24. 24 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
  25. 25. 25 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 the case law will 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.
  26. 26. 26 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.
  27. 27. 27 Electronic Contracts & signatures • 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.
  28. 28. 28 Electronic Contracts & signatures • 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.
  29. 29. 29 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.
  30. 30. 30 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 may be governed by • the company’s ethical policies, • the local Commercial Code • the equivalent of the Securities and Exchange Commission and • many other state and local laws. • Purchasing agents who violate ethical codes could easily go to jail