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Supply Management and the Law

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Contract law Determines nature of agreements that are enforceable and create legal rights between the parties Agency law Deals with role of managers as individual representatives acting on behalf of their organization

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Legal Authority and Personal Liability of the Purchasing Manager

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Laws of agency Legal authority Personal liability

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Laws of Agency

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Govern relationship between principals and agents Agent Person or entity who has been authorized to act on behalf of some other person or entity Principal Corresponding person or entity for whom agents carry out their authority

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Legal Authority

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General agent may sign contract and commit his/her company to its terms and conditions Buying company must delineate its instructions to individual buyers clearly and succinctly Place limits on how much can be obligated by each individual buyer Fiduciary obligation to employer

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Personal Liability

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Standard Acting in best interests of employer Subject to criminal or civil lawsuits Actual authority Apparent authority Actual authority Stems from instructions and granting of authority by employer via job description Apparent authority That authority seller perceives to be available

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Personal Liability 2`

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Purchasing manager can exceed his/her actual authority, but employer is still liable for performance of contract Employer may seek legal action against individual buyer personally Exceeding both authorities may involve legal action by employer, seller, or other third party

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Appropriate Contractual Language for Agency Relationship

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buyer's name] on behalf of [buyer's company] or [company name] by [buyer's name

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Sources of Personal Liability

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Damaging and illegal activities without authority of company Outside scope of authority Deception for personal gain Violating lawful protection of items owned by others

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Contract Law

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Essential elements of contract Offer Acceptance Consideration Competent parties/mutual assent Legal subject matter

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Elements of Contract Law

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Offer Proposal or expression by one person that he/she is willing to do something for certain terms Acceptance Contract does not exist until offer is formally accepted (verbally or written) Meeting of the minds

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Acceptance

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Can be in any manner and by any medium of acceptance Through promise of acceptance By supplier's performance of terms and conditions of contract Terms on P.O. vs. terms on order acknowledgement Always review supplier's acceptance

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Elements of Contract Law 2

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Consideration Something of value in formation of contract Form of mutual obligation

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Acceptance 2

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Supplier's terms will automatically become part of contract unless: They substantially or materially alter original intent of offer Buyer objects to supplier's acceptance terms in writing P.O. explicitly states that no alteration of terms is acceptable

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Consideration

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Form of mutual obligation Willingness to give up something of value to other party Mutual promises Express or implied

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Competent Parties/Mutual Assent

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Must not have engaged in any fraudulent activities when formulating agreement Own free will - no force or coercion Willingness to enter into agreement and be bound by terms

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Legal Subject Matter

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Performance of party may not be unlawful to be enforceable If contract is lawful but some terms aren't, unlawful terms are thrown out

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Request for Quotation (RFQ)

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Quantity and conditions of delivery Description, specifications, and end use of item Review by legal counsel (if customized) Description of manner and time period for bid review (if competitive bid)

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Major Parts of a P.O.

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Fixed prices and quantities Including taxes Buyer's right of inspection and rejection Right to make specification/design changes Holding buyer harmless, patent infringement Shipment quantities/dates Assignment of seller's rights Arbitration clause Right to cancel unshipped portion

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Price

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Single most important element of entire contract Open pricing Lack of agreement on price doesn't mean agreement is unenforceable Both parties must intend to make binding contract with price open

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Boilerplate Terms

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Standard terms and conditions Usually preprinted on back of forms Make sure you read and understand supplier's boilerplate terms Never assume! Challenge terms in writing that you don't want to accept

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Oral vs. Written Contracts

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Written document is not the "contract" Only hard evidence of existence of contract Written document supersedes all previous oral evidence Under U.C.C., contracts must be written for goods > $500 or if for longer than 1 year

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Cancellation of Orders

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Cancellation for default Cancellation for convenience of purchaser Anticipatory breach Cancellation by mutual consent

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Cancellation for Default

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One of the parties fails to live up to terms and conditions of contract Supplier's actions Late deliveries Failing to meet product specifications Otherwise failing to perform to terms of contract

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Anticipatory Breach

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Purchaser is liable for any resulting injury to supplier Supplier should not be called upon to incur any loss Avoid language on this in any purchase contract

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Cancellation by Mutual Consent

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Doesn't automatically result in legal action Mutual consent creates new contract nullifying earlier one Parties may negotiate any potential loss between parties

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Breach of Contract

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Seller is obligated to deliver goods according to contract's terms and conditions Purchaser is obligated to accept and tender payment for goods according to terms of agreement

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Damages

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Liquidated damages Determines any costs and damages to injured party Being "made whole" Bring purchaser back to position where he/she would have been

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Types of Damages Allowed

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Restitution Money plaintiff actually paid to defendant Reliance Money plaintiff lost because he/she relied on defendant's commitment to contractual obligations

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General Damages

answer

Equal to difference between value of purchased goods at time of delivery against goods' value at time of specified delivery

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Consequential Damages

answer

Those expenses incurred by purchaser because goods were not delivered when expected or as specified Must be defined prior to breach under terms of contract

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Liquidated Damages

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Those damages that result if terms of contract are not fulfilled and are typically defined prior to breach under terms of contract Example Downtime of assembly line due to late shipment

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Acceptance and Rejection of Goods

answer

U.C.C. allows partial acceptance and rejection of remainder for cause After acceptance ... Seller's rights increase Purchaser's rights decrease Once acceptance occurs, only recourse is to make claim against seller Obvious defects Easily discovered during physical inspection Latent defects Not easily discovered during physical inspection

question

Acceptance and Rejection of Goods 2

answer

Once goods have been accepted, purchaser has two obligations Purchaser must carry burden of proof that goods did not conform to terms and conditions The purchaser must, within a reasonable time after discovery, notify seller of breach or lose chance for remedy

question

An Effective Acceptance Process

answer

Receiving department should stamp all receipts of goods "Received subject to inspection, count, and testing" P.O. terms and conditions should indicate that all receipts are subject to inspection, count, and testing Goods should be physically inspected as quickly as possible Ideally - immediately upon delivery

question

An Effective Acceptance Process 2

answer

If goods are not inspected until used, maintain stock rotation system Consider using P.O. language that defines reasonable time for inspection and acceptance

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Honest Mistakes

answer

Generally, honest mistakes by single party will not void contract Requires careful consideration of all circumstances Mutual mistakes may not necessarily invalidate the contract

question

Uniform Commercial Code (U.C.C.)

answer

All states, except Louisiana, have now adopted U.C.C. U.C.C. does not apply in international contracts "Caveat emptor" ("Let the buyer beware") U.C.C. is "gap-filler"

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U.C.C. Articles

answer

Sales of goods and products Warehouse receipts, bills of lading, and other title documents Note: Only Articles 2 and 7 apply to purchasing and other supply chain transactions

question

U.C.C. - Article 2 - Sales Contracts

answer

If seller makes offer in writing, seller has to live up to it for the period of time stated Verbal agreements, when confirmed in writing and if no objection is made, are valid Conflict between buyer's P.O. terms and seller's acknowledgement terms will generally be resolved according to parties' prior conduct

question

Basic Elements of Article 2

answer

Warranties Transportation terms and risk of loss Seller's rights Buyer's rights

question

Electronic Contracts and Signatures

answer

Uniform Electronic Transactions Act (UETA) - 1999 Adapts "paper and pencil" concepts to electronic commerce Electronic record defined Record created, generated, sent, communicated, received, or stored by electronic means Electronic Signatures in Global and National Commerce Act (ESIGN) - 2000 Contract or signature "may not de denied legal effect, validity, or enforceability solely because it is in

question

Warranties

answer

Promise or representation made by seller, which, if necessary, can be legally enforced U.C.C. types Express warranty Implied warranty Other types Warranty of title Warranty of infringement

question

Express Warranty

answer

Any affirmation of fact or promise made by seller to buyer which relates to goods and becomes part of basis of bargain creates express warranty that goods shall conform to affirmation or promise It is not illegal for sellers to exaggerate merits of their products during sales pitch

question

Implied Warranty

answer

Fitness for use When seller at time of contracting has reason to know of any particular purpose for which goods are required, and buyer is relying on seller's skill or judgment to select or furnish suitable goods Merchantability Goods meet standard of the trade and appropriate quality for ordinary use

question

Warranty of Title

answer

Indicates that supplier warrants that it has title to goods and that they are not stolen or subject to any security interest or liens Buyer needs to take necessary steps to ensure proper transfer of title and ensure that seller has right to sell product

question

Warranty of Infringement

answer

Supplier's guarantee that goods do not illegally infringe on another party's patent protection If they do infringe, costs and penalties are extremely severe Contract must have adequate patent indemnification language to prevent this

question

Suggestions for Warranty Protection

answer

Write good P.O. and order acceptance forms Build file Write letters and save letters Including e-mails Use good standard terms and conditions

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Transportation Terms

answer

Bill of lading Most common and singularly important shipping document Describes origin of shipment Provides specific directions for carrier Delineates transportation contract terms Routing instructions for carrier Description of goods being transported Number of items with corresponding commodity descriptions Prepaid vs. collect Prepaid - freight bill is presented on effective date of shipment Collect - freight bill is presented on effective date of the delivery

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Risk of Loss

answer

Remains with seller unless: Buyer and seller agree in contract as to when in the transaction risk of loss becomes the buyer's responsibility Remains with seller unless: If seller is required to ship goods to specific place, risk of loss becomes buyer's when goods are delivered to specific place

question

Domestic Delivery Terms

answer

Describe responsibility for ... Selection of carrier Payment of freight bill Method by which title of goods will be passed from seller to buyer Types F.O.B. shipping point (or F.O.B. origin) F.O.B. destination (or F.O.B. delivered)

question

F.O.B. Shipping Point

answer

Purchaser ... Is responsible for payment of transportation costs Assumes title of goods at supplier's shipping dock Is responsible for filing any freight damage claims

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F.O.B. Destination

answer

Seller ... Is responsible for payment of transportation costs Buyer assumes title of goods at its own shipping dock

question

Freight Claims Process

answer

Must be filed within 9 months of date of actual or reasonable date of delivery Carrier has 30 days from receipt of claim to respond Must notify claimant whether or not claim will be paid within 120 days If claim is unresolved within 120 additional days, carrier must notify claimant of reasons for not settling every 60 days

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Seller's Rights

answer

Right to sue buyer for purchase price of goods if buyer basically refuses to pay for them Recover reasonable costs and expenses incurred if goods have to be resold Receive compensation for additional costs and expenses due to buyer's wrongful conduct

question

Buyer's Rights

answer

Reject defective goods that seller cannot repair within reasonable time Sue for breach of contract Revoke acceptance of goods if buyer discovers defects Seek a court order forcing seller to deliver goods

question

Patents and Intellectual Property

answer

Types of intellectual property in U.S. Patents Copyrights Trade secrets

question

Patents

answer

Agreement between inventor and U.S. federal government Entitled to exclusive rights to make, use, and/or sell invention for life of patent Patent life is 20 years from filing date

question

Patent Indemnification Clauses

answer

Indemnification, which seeks supplier's assurances that goods being contracted for do not infringe on any other party's patents Right to require supplier to defend any patent infringement suit itself

question

Copyrights

answer

Designed to afford protection for persons who create original works such as books, software, songs, and films Generally good for life of author plus 50 years Does not require formal application Automatically assumed

question

Trade Secrets

answer

a.k.a. confidential information Broad category of intellectual property Examples Formulas, supplier and customer lists, procedures, and training programs

question

Characteristics of a Trade Secret

answer

It is economically valuable It is not generally known It is kept as secret

question

Requirements for Trade Secrets

answer

Can apply to any information that supplier provides to buyer in normal course of doing business Supplier must make it known to buyer that information is proprietary and confidential

question

Other Laws Affecting Purchasing

answer

Laws affecting antitrust and unfair trade practices Laws affecting global purchasing

question

Antitrust and Unfair Trade Practices

answer

Sherman Antitrust Act (1890) Federal Trade Commission Act (1914) Clayton Antitrust Act (1914) Robinson-Patman Act (1936)

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Laws Affecting Global Purchasing

answer

United Nations Convention on Contracts for International Sales of Goods (CISG) Foreign Corrupt Practices Act International Anti-Bribery Act Various anti-boycott legislation Customs-Trade Partnership Against Terrorism (C-TPAT) Non-Intrusive Inspection Techniques Automated Targeting System National Targeting Center Secure Freight Initiative ("10 + 2")

question

Ethics

answer

Set of moral principles or values guiding our behavior In business, ethical behavior is use of recognized social principles involving justice and fairness

question

Rules of Ethical Behavior

answer

Must not accept outside gifts or bribes Must not be tempted or influenced by unethical practices of salespeople Must not have personal financial arrangements with suppliers

question

Pressures Toward Unethical Behavior

answer

Supply management has control over large sums of money Sellers may use unethical means to influence purchase decision

question

Risks of Unethical Behavior

answer

Unethical act may also be illegal Personal risk to buyer's professional reputation At minimum, buyer may lose his/her job Personal bankruptcy Jail

question

Types of Unethical Behavior

answer

Reciprocity Personal buying Accepting supplier favors Sharp practices Financial conflicts of interest

question

Reciprocity

answer

Giving preferential treatment to suppliers who are also customers "I'll buy from you if you buy from me." Restraint of trade issues

question

Personal Buying

answer

Supply management department purchases materials or goods for personal needs of its employees

question

Accepting Supplier Favors

answer

At what point does gift represent showing appreciation vs. attempt to influence future buying behavior? Gifts from potential suppliers are particularly questionable

question

Sharp Practices

answer

Exaggerating problems Requesting bids from unqualified suppliers solely to drive down prices from qualified suppliers Gaining information unfairly through deception

question

Financial Conflicts of Interest

answer

Buying companies typically require disclosure by buyers having significant personal financial interest Similar to insider knowledge in buying and selling stocks

question

Personal Conflicts of Interest

answer

Dealing with a company that ... Employs close relative(s) Has been approached by buyer for employment The buyer has approached for future employment

question

Influence and Ethics

answer

Influence Power that somebody has to affect other people's thinking or actions by means of argument, example, or force of personality

question

Positive Influences

answer

Sharing data when being involved early in design issues Cross-functional team being involved in comparative analysis of competing suppliers

question

Negative Influences

answer

Inappropriate sharing of confidential or proprietary information with suppliers Accepting gifts, entertainment, or meals as reward for decision favorable to supplier

question

ISM Code of Professional Ethics

answer

Consider, first, the interest of your company in all transactions and carry out and believe in its established policies Be receptive to competent counsel from your colleagues and be guided by such counsel without impairing the dignity and responsibility of your office Buy without prejudice, seeking to obtain maximum value for each dollar of expenditure Strive consistently for knowledge of materials and processes of manufacture and establish practical methods for conduct of your office

question

ISM Code of Professional Ethics 2

answer

Subscribe to and work for honesty and truth in buying and selling, and denounce all forms and manifestations of commercial bribery Accord prompt and courteous reception, so far as conditions will permit, to all who call on legitimate business mission Respect your obligations and require that obligations to you and to your concern be respected, consistent with good business practice Avoid sharp practice

question

Supporting Ethical Behavior

answer

Closer buyer-supplier relationships Ethical training Developing consistent behavior Internal reporting of unethical behavior Preventive measures

question

Corporate Social Responsibility

answer

Idea that organizations and institutions have obligation to society that extends beyond compliance with regulations in considering broader effects of their actions

question

ISM Principles ofSocial Responsibility

answer

Community Diversity Environment Ethics Financial responsibility Human rights

question

Community

answer

Provide support and add value to your community and those of your supply chain Encourage members of your supply chain to add value in their communities

question

Diversity

answer

Encourage diversity within your own organization Proactively promote diverse employment practices throughout supply chain

question

Environment

answer

Encourage your own organization and others to be proactive in examining opportunities to be environmentally responsible within their supply chains, either "upstream" or "downstream"

question

Ethics 2

answer

Be aware of the publication ISM Principles and Standards of Ethical Supply Management Conduct Abide by your organization's code of conduct

question

Financial Responsibility

answer

Become knowledgeable of, and follow, applicable financial standards and requirements Apply sound financial practices and ensure transparency in financial dealings Actively promote and practice responsible financial behavior throughout supply chain

question

Human Rights

answer

Support and respect protection of international human rights within organization's sphere of influence Encourage your organization and its supply chains to avoid complicity in human or employment rights abuses

question

Safety

answer

Promote safe environment for each employee in your organization and supply chain Each organization is responsible for defining "safe" internally

question

Environment and Sustainability

answer

End-to-end measures Going green may be great source of talent

question

Which of the following is not a form of sharp practice?

answer

Withholding information during a negotiation.

question

The ____ is typically considered a/an ____ for the organization.

answer

purchasing manager/buyer.....general agent

question

Which of the following is not one of the actions a firm can take to enhance ethical behavior?

answer

Wiretapping and security cameras.

question

____ is the idea that organizations and institutions have an obligation to society that extends beyond compliance with regulations in considering the broader effects of their actions.

answer

Corporate social responsibility

question

____ stems from the instructions and granting of authority to the purchasing manager via the job description provided by the employer.

answer

Actual authority

question

____ is defined as the power that somebody has to affect other people's thinking or actions by means of argument, example, or force of personality.

answer

Influence

question

____ deals with the role of managers as individual representatives acting on behalf of their organizations.

answer

Agency law

question

____ essentially determines the nature of agreements that are enforceable and create legal rights between the parties.

answer

Contract law

question

____ are equal to the difference between the value of the purchased goods at the time of delivery and the goods' value at the time of specified delivery.

answer

General damages

question

A/An ____ is a person or entity who has been authorized to act on behalf of some other person or entity.

answer

agent

Purchasing Lawand Ethics: Chapter 15 – Flashcards

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