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Chapter Three: The Legal Aspects of Purchasing

Learning Objectives

  • Understand the legal aspects of the purchasing function.

  • Identify factors involved in selecting a purchasing manager.

  • Recognize the purchasing professional’s legal authority.

  • Understand how contracts and purchase orders are legally executed.

  • Know the essentials of a binding purchasing contract.

Additional Learning Objectives

  • Distinguish between an offer and a non-offer.

  • Learn about possible outcomes of an offer.

  • Understand the terms of an enforceable contract.

  • Explore legal implications of leasing.

  • Recognize the legal implications of the information age.

  • Comply with WBE, MBE, and DBE programs.

  • Emphasize the importance of ethics in purchasing.

  • Learn about electronic contracts and signatures.

The Role of the Purchasing Manager

  • Agent for the Firm: The purchasing manager (also called buyer or purchasing agent) administers the purchasing function, which encompasses acquiring:

    • Materials

    • Supplies

    • Services

  • Primary Task: Represent the principal in contract development and negotiation with third parties.

Title and Duties

  • The term "purchasing agent" is a legal term that denotes responsibility for purchasing actions.

  • Titles such as vice president of purchasing have emerged, but the core role remains the same.

Legal Status of Purchasing Manager

  • Appointment Factors:

    1. Authority to make purchase contracts.

    2. Acceptance of contracting authority.

    3. Employer's acceptance of commitments made by purchasing manager.

Authority of the Purchasing Manager

  • Types of Purchasing Authority:

    1. Express Authority: Clearly defined parameters.

    2. Implied Authority: Authority inferred from actions.

    3. Emergency Authority: Special conditions allowing immediate purchase decisions.

  • Recommendation: Clearly communicate purchasing authority in writing.

Execution of Contracts and Purchase Orders

  • Purchasing personnel sign contracts, committing the company to terms.

  • Conditions to Avoid Personal Liability:

    1. Principal's name on the document.

    2. Third parties aware of the agent's representative role.

    3. Agency relationship indicated on the document.

    4. Agent acts within scope of authority.

Essentials of a Purchase Contract

  1. Parties must be capable.

  2. Subject matter must be legal and valid.

  3. Must have mutual consideration.

  4. Agreement achieved through offer and acceptance.

  • Legal Transaction: Must satisfy all four elements under U.S. Commercial Code.

Offers

  • Necessary Components:

    1. Intent to make an offer.

    2. Communication of the offer intent.

    3. Identification of specific subject matter.

Invitation To Do Business

  • Purchasing officials issue requests for quotations (RFQ) to test the market.

  • RFQs do not constitute offers since they lack intent.

  • Counteroffers: Legally binding when they contain necessary offer components.

Time Limits of an Offer

  • Offers may:

    1. Lapse.

    2. Be rejected.

    3. Be revoked.

    4. Be accepted.

  • Firm Offers: Ensure suppliers understand expectations before quoting.

Option Contracts

  • Option contracts grant buyers a specific time to purchase without pressure.

  • Consideration exchanged ensures enforceability.

Bid Bonds

  • Definition: Bonds securing a contract against noncompliance.

  • Used often in government contracts to protect against unqualified bidders.

Promissory Estoppels

  • Clarifies the expectation in the construction industry for subcontractor bids.

  • Example Case: Court ruled in favor of the prime contractor against a defaulting subcontractor.

Oral Contracts

  • Common in everyday activities (e.g., ordering food) but risky in professional settings.

  • Enforceability limitations exist for contracts exceeding $500.

Terms of a Contract

  • Key Components:

    • Quantity (e.g., cubic yards, board feet).

    • Quality (must be clearly specified).

    • Price and Credit Terms developed upon acceptance.

Delivery Terms

  • Delivery agreements link price with responsibilities.

  • Example: FOB (free on board) specifies delivery terms.

Leasing

  • Increasingly popular for both consumers and businesses due to tax benefits.

  • Partly Business Use: Tax deductions applicable for businesses.

Legal Impact of the Information Age

  • Evolving technology impacts purchasing strategies substantially.

  • International contracting raises unique legal challenges.

Electronic Contracts and Signatures

  • Model Law on Electronic Commerce (1996): Offers frameworks for digital contract execution.

  • Secure Signatures: Must ensure authenticity and integrity linked to data.

Cryptographic Signatures (PKI)

  • Cryptography secures contractual agreements online.

  • Federal E-Sign Act (2000): Enhances enforceability of online contracts.

Purchasing and Ethics

  • Ethical behavior foundational in business environments.

  • Regulatory Compliance: Governed by corporate policies and other laws.

Women and Minority Compliance

  • Government contractors may be required to source from diverse bidders.

  • Certification needed for participating in federal assistance programs.

RFx Terms

  • RFx encompasses:

    • RFI (Request for Information)

    • RFP (Request for Proposal)

    • RFQ (Request for Quotation)

    • RFT (Request for Tender)