Preston J. Leavitt, Ph.D., J.D., C.P.M.
Preston J. Leavitt, Ph.D., J.D., C.P.M., 9609 West Gould Avenue, Littleton, CO 80123-2344, 303/973-2625.
A good contract can protect your company from liability, guarantee the quality of purchased goods and services, and provide remedies if terms and conditions are not met. Purchasing professionals must be familiar with the basic principles of modern business law and understand how these principles affect purchasing decisions and operations.
The contract lies at the heart of all commercial transactions. The rules of contract law are followed in all business agreements except with regard to the sale of goods. These are governed by the Uniform Commercial Code (UCC). The UCC is a compilation and formalization of the accepted practices of the market place. It offers guidelines concerning transactions involving personal property only; it does not apply to contracts for land, personal services, or employment.
Everyone is required by the UCC to manifest good faith, that is, honesty, diligence, care and reasonableness, but merchants are required to exhibit a far higher standard of behavior. They are bound to act with commercial reasonableness and in accordance with accepted standards of the business world. Purchasing professionals fall within this legal definition of merchant and therefore are bound by these higher standards.
A contract is a legally enforceable agreement between two or more parties involving mutual promises to do or not to do something. The essential elements of a contract are: (1) Offer and acceptance, (2) consideration, (3) capacity of the parties to make a contract, and (4) legality of purpose or subject matter. All valid contracts must possess all four of these elements.
Offer and acceptance leads to an agreement or "meeting of the minds" between the parties. The offer is a proposal made by a party called the offeror, with the implication that, if the offer is accepted, the offeror will be bound by contract. The offer must be distinguished from an invitation to negotiate, from a proposal made in jest or under stress, and from a proposal to make a gift. Under the UCC, in contracts for the sale of goods, the contract does not fail if one or more of the terms are left open, so long as the parties intend to make a contract. In fact, the only term absolutely required under the UCC is the quantity term, expressed in general terms.
As the purchaser you are the offeror. Your P.O. constitutes an offer to buy which must be accepted by the offeree, your supplier, before a contract comes into being. An offer remains open until: It is accepted, it is rejected, the time limit specified in the offer is reached, it is revoked, the offeror or offeree dies or goes insane, the subject matter of the offer is destroyed, or action of law makes the subject matter of the offer illegal.
An offer becomes effective when received. Acceptance is effective and a contract formed not when received by the offeror, but when placed in the channel of communication by the offeree. Receipt of the acceptance by the original offeror is not a prerequisite for its effectiveness. This is known as the deposited acceptance rule. Under the UCC there are three ways of accepting an offer: by words of acceptance, by the suppliers act of shipment, and by the promise of shipment.
Consideration is that which is given up by the offeree or that which is gained by the offeror as a result of the offeree's promise. Consideration may consist of money, goods, a forbearance (not doing what one has a legal right to do), or a return promise. Adequacy of consideration is not important, only the fact that it was negotiated and actually paid.
In order to possess the capacity to make a valid, enforceable contract all parties to that contract must possess sufficient knowledge, information, freedom of will, and intellectual capacity to enable them to enter into that contract properly. Circumstances which may affect a party's capacity include: Duress (the threat or the exercise of force); misrepresentation or fraud; insanity (did the signee of the contract comprehend what they were doing?); or minority. A minor is one who is under the legal age to enter a contract that can be held enforceable against them as determined by statute.
Both the objective and the subject matter of the contract must be legal. Illegal contracts include: A contract to commit a crime; a contract that is a violation of statute; a contract with someone unlicensed or prohibited by statute from engaging in a business or profession; a contract contrary to policy; a contract containing an exculpatory clause (an attempt to disclaim all liability for personal injury); corporate contracts which are ultra vires (beyond the authorized powers of the corporation); unconscionable contracts (those against conscience); usurious contracts (those charging an exorbitant rate of interest); and contracts in unreasonable restraint of trade.
The Statute of Frauds identifies those contracts which must be in writing to be legally enforceable. Under general contract law there are five types of contracts which are required by law to be in writing. (1) Any contract for the sale of land or for the interest in land. This written contract must clearly identify the land. (2) A promise by the executor or administrator of an estate to pay the debts of the deceased out of their own assets. (3) A promise to pay the debt of another, provided it is a secondary promise. (4) A contract that cannot possibly be fully executed within a year from the date it is made. (5) Any promise made in consideration of marriage.
The UCC contains three Statute of Frauds provisions. (1) A contract for the sale of investment securities must identify the securities, indicate the number of shares, and reflect the price per share. (2) A contract for the sale of personal property other than goods for $5,000 or more must be in writing. (3) A contract for the sale of goods for $500 or more must also be in writing.
The Parole Evidence Rule states that oral evidence will not be accepted by a court to alter or modify the terms of a written contract. Exceptions to this rule include oral evidence: To show subsequent events; in the event of ambiguity in the contract; where there is a typographical error; when there is the allegation of misrepresentation or fraud; and where the meaning of the contract is unclear.
A warranty is an affirmation of fact or a promise with reference to the subject-matter of a contract. Express warranties are direct guaranties made by the seller. Implied warranties include the warranty of title (what is being sold belongs to seller), warranty of merchantability (goods are fit for ordinary purposes for which such goods are used), and warranty of fitness for a particular purpose (goods are suitable for a particular purpose if the seller knows this purpose).
A basic knowledge of relevant, legal principles is essential for successful purchasing. Proper attention to the legality of the contracting process and the use of the appropriate contract provisions will help ensure effective transactions between buyers and sellers. The purchasing professional should exhibit skill in avoiding legal controversies detecting potential problems before they become realities. And then seeking sound legal counsel whenever necessary.
Dobler, Donald W., and David N. Burt. Purchasing and Supply Management, 6th Edition, New York: McGraw-Hill, 1996, Chapter 30.
Fearon, Harold E., Donald W. Dobler and Kenneth H. Killen, eds. The Purchasing Handbook, 5th Edition, New York: McGraw-Hill, 1993, Section 17.
King, Donald B., and James J. Ritterskamp, Jr. Purchasing Law, 2nd Edition, Englewood Cliffs, NJ: Prentice Hall, 1993.
Leenders, Michiel R., and Anna E. Flynn. Value-Driven Purchasing, New York: Irwin, 1995, Chapter 8.
Schaber, Gordon D., and Claude D. Rohwer. Contracts, 3rd Edition, St. Paul, MN: West Publishing, 1990.