JacquesFolonwww.folon.com

PartnerEdgeConsulting

MaîtredeconférencesUniversitédeLiègeProfesseurICHECBrusselsManagementSchoolProfesseurinvitéUniversitédeLorraine(Metz)ESCRennes

LAW

Law and contract negotiation

The Legal Aspects of Purchasing

Based on Purchasing and Supply Chain Management by W.C. Benton

2

LearningObjectives

1. Tounderstandthelegalaspectsofthepurchasingfunction.

2. Tounderstandwhatfactorsareinvolvedintheselectionofthepurchasingmanager

3. Tounderstandtheextentofthepurchasingprofessional’slegalauthority.

4. Tounderstandhowcontractsandpurchaseordersarelegallyexecuted.

5. Tounderstandtheessentialsofabindingpurchasingcontract.

3

LearningObjectives

6. Tobeabletodistinguishbetweenanofferandanonoffer.

7. Tolearnaboutthepossibleoutcomesofanoffer.

8. Tounderstandthetermsofanenforceablecontract.

9. Tounderstandthelegalimplicationsofleasing.

10. Tounderstandthelegalimplicationsoftheinformationage

11. Tolearnabouttheimportanceofethicsinpurchasing.

12. Tolearnaboutelectroniccontractsandsignature.

4

ThePurchasingAgent

• Thepurchasingmanagerisanagentforthefirm.Thetermspurchasingmanager,buyer,andpurchasingagentwillbeusedinterchangeably.

• Thepurchasingmanageradministersthepurchasingfunction.

• Thepurchasingfunctionconsistsofmanytaskswithinthebusinessentity,includingsupportingthecompanywiththerequired• (1)materials,• (2)supplies,• (3)services.

5

TheTitleandDutiesPurchasingAgent

Themostimportanttaskthatthepurchasingofficerisinvolvedinisrepresentingthecompanyinthedevelopmentandnegotiationofcontractswiththirdparties.

• Thetitlepurchasingagentisagenericlegaltermdefiningtheindividualwhodealswithathirdpartyforacompany

• Othertitlesdoexist,like

• Purchasingmanager

• VPMaterial

• SupplyManager

• …

6

LegalStatusofPurchasingManager

• Fromalegalpointofview,thefollowingfactorsareassociatedwiththeappointment:

1. Thepurchasingmanagermustbegrantedtheauthoritytomakepurchasecontracts.

2. Thepurchasingmanageracceptsthiscontractingauthority.

3. Theemployeracceptsthecommitmentsthatweremadebythepurchasingmanager.

7

AuthorityofthePurchasingManager

• Thethreetypesofpurchasingauthorityare1.Expressauthority2.Impliedauthority3.Emergencyauthority

• Itisstronglyrecommendedthattheauthorityofthepurchasingmanagerbeclearlywrittenandcommunicated.

8

ExecutionOfContractsandPurchaseOrders

• Purchasingpersonnelroutinelysignpurchaseordersandcontractscommittingthecompanytothespecifictermsandconditionsofpurchaseordersandcontracts.

• Thepurchasingofficialhasnopersonalliabilityprovidingthatthefollowingrequirementsaremet:

✦ Thenameoftheprincipalorcompanyisshownonthedocument.

✦ Allpartiesinvolvedknowthatthepurchasingagentisactingonbehalfofthecompanyorprincipal.

✦ Theagencyrelationisshownonthedocument.✦ Thepurchasingagentisactingwithinthescopeofhisorher

authorityforthetransaction.

9

EssentialsofaPurchaseContract

1.Thepartiesmustbecapable

2.Thesubjectofthemattermustbelegalandvalid3.Theremustbemutualagreement

4.Thepartiesmustreachanagreementbyofferandacceptance.

10

InvitationToDoBusiness

• Inmostinstances,thepurchasingofficialinitiatesaninvitationtodobusiness.

• Thepurchasingofficialissuesarequestforquotation(RFQ)

• TheRFQisanexcellentwayforthebuyingfirmtotestthemarketwithoutmakingalegalcommitmenttopurchase.

• TheRFQlackstheintentcomponent.• Whentheintentcomponentismissing,thedocumentismerelyaninvitationtobid.

11

Offers

• Purchasingagentsreceivenumerousoffersonadailybasisandmustbeabletoidentifycompletelegitimateoffers.Thethreenecessarycomponentsofanofferare:

1.Intenttomakeanoffer2.Communicationoftheofferintent3.Identificationofthespecificsubjectmatter

12

Counteroffers

• Thenegotiationsprocessbetweenthebuyerandthesellerusuallyleadstomanyoffersandcounteroffers.

• Acounterofferislegallybindingifitcontainsthecomponentsthatinstituteanoffer.

13

TheTimeLimitsofanOffer

Anofferdoesisnolongervalidif

1.Theofferbecomesoutdated

2.Theofferisofficiallyrejected

3.Theofferisrevokedbythesellerbeforetheacceptance

4.Theofferisacceptedbythebuyer

14

FirmOffers

• Thefirmofferquestionshouldberaisedwhenquotationsarerequested.

• QuotationsasaresultofthisRFQareenforceable.

• Itmustbemadecleartothesupplierthatanysupplierthatsubmitsanofferwithoutthisguaranteewillnotbeconsidered.

15

OptionContracts

• Incasethesupplierisunwillingtogivethebuyingfirmafirmoffer,thepurchasingprofessionalshouldattempttooffertheselleranoptioncontract.

Thesellerwillmakeanagreementtoallowthebuyeraspecifictimelimittomakethepurchase.

• Thisoptioncontractisenforceable

16

BidBonds• Abidbondenlistsathirdpartyintothetransaction.

• Thesuppliersecuresabondingcompanytoguaranteethatthesupplierwillenterintoacontractiftheyareawardedthecontract.

• Abidbondconditionisusuallymotivatedbyafederalorstateregulation.

• Bondingisusedtoprotectgovernmentalagenciesfromunqualifiedbidders

• Anevaluationprocessisgenerallyputinplacetoselecttheawardedcompany

17

Promissoryoffers

• Ithappensintheconstructionindustrythatthegeneralcontractoracceptsoffersfromsubcontractors

• inexpectationofbeingawardedaprojectfromathirdparty

18

OralContracts

• Oralcontractsoccureveryday.

• Orderingapizzaisanoralcontract.

• However,oralcontractshavenoplaceintheprofessionalpurchasingarena.

• Ifasupplierrefusestoperform,thereisnorecourseforthebuyer.

19

TERMS OF A CONTRACT

20

1. Concreteisquotedincubicyards.

2. Textileinsquarefeet.

3. Barrelsofoil.

4. Gallonsoffuel.

• Thepurchasingprofessionalmustpaycloseattentiontothequalitytermofthecontract.

• Qualityshouldnotbeoverspecifiedorunderspecified

Quantity Quality

21

Price

• Thepriceisdeterminedwhentheofferisaccepted.

• Insomecases,priceescalationclausesareusedinacontract.

• Apriceescalationclauseisanadjustmentthatthesellerutilizesinordertocompensateforvariancesatdelivery

22

DeliveryTerms

• Deliverytermsarecloselyrelatedtopriceterms.

• Thetransportationbetweenthebuyingandsellingfirmisusuallyconsideredaspartoftheprice.

• Thedeliverytermsformalizetheresponsibilitiesofthebuyingandsellingfirmfordeliveryofthegoods.

• Asanexample,FOBshipment,meansfreeonboard(f.o.b)atanamedplace

23

Leasing

• Leasingisbecomingmoreattractiveforbothconsumersandbusinesses.Consumersareleasingautomobilesinrecordnumbers.

• Onereasonfortheincreaseinconsumerleasingisthetaxeffectoftheleasedautomobileforsmallbusinesses.

• Iftheautomobileispartiallyusedforthebusiness,aportionofthemonthlyleasepaymentistaxdeductible.

24

TheLegalImpactoftheInformationAge

• TheInternethasinfiltratedeveryaspectoftheworld.

• E-mailhasoutpacedthepostalsystemastheprimarycommunicationmodeinthedevelopedworld.

• Nine-year-oldkidsarebuyingandsellingthrougheBay.

• Insomeinstances,purchasingprofessionalsarerequiringthesuppliertomeetminimumlevelsofconnectivity

25

TheImpactoftheInformationAge

• Moreandmoreconsumersandbusinessesarecontractinginternationally.

• ThelegaldifficultiesofInternettransactionsareapparent.

• Duringthenextdecadethecaselawwillbevoluminous.

• Considertherequirementsforanofferandlegallybindingcontractdiscussedearlieranditshouldbeapparentthatverylittleofthecurrentlawapplies.

26

ElectronicContractsandSignatures

• In1996theUnitedNationsCommissiononInternationalTradeLaw(UNCITRAL)adoptedtheModelLawonElectronicCommerce,whichoffersmemberstatesoftheUnitedNationsmethodstoaddressbarrierstotheuseofelectroniccommunicationsintheircommerciallaw.

27

ElectronicContracts&signatures

• Asecuresignatureshouldbesuchthatitcanbeusedtoidentifythesigner.

• Thisdoesnotmeanthatthesignatureitselfmustconsistoforincludethesigner'sname.Identificationbyreferencetoothersourcesofinformationwouldbesufficient.

• Thus,forexample,adigitalsignaturemayidentifythesignerbyreferencetoacertificateissuedbyacertificationauthority.

28

ElectronicContracts&signatures• Asecuresignaturemustbelinkedtothedatamessage

beingsigned,insuchamannerthatifthemessageischangedthesignatureisinvalidated.

• Suchalinkagemayberegardedasacrucialrequirementforasecuresignature,sinceotherwisethesignaturecouldbesimplyexcisedfromonedatamessageandpastedontoanother.

29

CryptographicSignatures(PKI)

• Cryptographyisthescienceofsecuringinformation.Thetechnologyisbasedonscramblinginformationandthenunscramblingit.

• ManybusinessesconsiderthecryptographicsignaturemethodknownasPublicKeyInfrastructure(PKI)asthemostsecureandreliablemethodofsigningcontractsonline.

30

PurchasingandEthics

• Insociety,somepeoplearerespectedbasedontheamountofmoneytheyhave,regardlessofthemoney’ssourcesandmethodsofobtainingit.

• However,inbusinessenvironments,ethicalbehavioristhe

foundationoftrust.

• Purchasingagentsmaybegovernedby• thecompany’sethicalpolicies,• thelocalCommercialCode• theequivalentoftheSecuritiesandExchangeCommissionand• manyotherstateandlocallaws.

• Purchasingagentswhoviolateethicalcodescouldeasilygotojail