Purchasing Law and Ethics: Chapter 15

Supply Management and the Law
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
Legal Authority and Personal Liability of the Purchasing Manager
Laws of agency
Legal authority
Personal liability
Laws of Agency
Govern relationship between principals and agents
Person or entity who has been authorized to act on behalf of some other person or entity
Corresponding person or entity for whom agents carry out their authority
Legal Authority
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
Personal Liability
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
Personal Liability 2`
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
Appropriate Contractual Language for Agency Relationship
buyer’s name] on behalf of [buyer’s company] or
[company name] by [buyer’s name
Sources of Personal Liability
Damaging and illegal activities without authority of company
Outside scope of authority
Deception for personal gain
Violating lawful protection of items owned by others
Contract Law
Essential elements of contract
Competent parties/mutual assent
Legal subject matter
Elements of Contract Law
Proposal or expression by one person that he/she is willing to do something for certain terms
Contract does not exist until offer is formally accepted (verbally or written)
Meeting of the minds
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
Elements of Contract Law 2
Something of value in formation of contract
Form of mutual obligation
Acceptance 2
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
Form of mutual obligation
Willingness to give up something of value to other party
Mutual promises
Express or implied
Competent Parties/Mutual Assent
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
Legal Subject Matter
Performance of party may not be unlawful to be enforceable
If contract is lawful but some terms aren’t, unlawful terms are thrown out
Request for Quotation (RFQ)
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)
Major Parts of a P.O.
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
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
Boilerplate Terms
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
Oral vs. Written Contracts
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
Cancellation of Orders
Cancellation for default
Cancellation for convenience of purchaser
Anticipatory breach
Cancellation by mutual consent
Cancellation for Default
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
Anticipatory Breach
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
Cancellation by Mutual Consent
Doesn’t automatically result in legal action
Mutual consent creates new contract nullifying earlier one
Parties may negotiate any potential loss between parties
Breach of Contract
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
Liquidated damages
Determines any costs and damages to injured party
Being “made whole”
Bring purchaser back to position where he/she would have been
Types of Damages Allowed
Money plaintiff actually paid to defendant
Money plaintiff lost because he/she relied on defendant’s commitment to contractual obligations
General Damages
Equal to difference between value of purchased goods at time of delivery against goods’ value at time of specified delivery
Consequential Damages
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
Liquidated Damages
Those damages that result if terms of contract are not fulfilled and are typically defined prior to breach under terms of contract
Downtime of assembly line due to late shipment
Acceptance and Rejection of Goods
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
Acceptance and Rejection of Goods 2
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
An Effective Acceptance Process
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
An Effective Acceptance Process 2
If goods are not inspected until used, maintain stock rotation system
Consider using P.O. language that defines reasonable time for inspection and acceptance
Honest Mistakes
Generally, honest mistakes by single party will not void contract
Requires careful consideration of all circumstances
Mutual mistakes may not necessarily invalidate the contract
Uniform Commercial Code (U.C.C.)
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”
U.C.C. Articles
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
U.C.C. – Article 2 – Sales Contracts
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
Basic Elements of Article 2
Transportation terms and risk of loss
Seller’s rights
Buyer’s rights
Electronic Contracts and Signatures
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
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
Express Warranty
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
Implied Warranty
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
Goods meet standard of the trade and appropriate quality for ordinary use
Warranty of Title
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
Warranty of Infringement
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
Suggestions for Warranty Protection
Write good P.O. and order acceptance forms
Build file
Write letters and save letters
Including e-mails
Use good standard terms and conditions
Transportation Terms
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
Risk of Loss
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
Domestic Delivery Terms
Describe responsibility for …
Selection of carrier
Payment of freight bill
Method by which title of goods will be passed from seller to buyer
F.O.B. shipping point (or F.O.B. origin)
F.O.B. destination (or F.O.B. delivered)
F.O.B. Shipping Point
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
F.O.B. Destination
Seller …
Is responsible for payment of transportation costs
Buyer assumes title of goods at its own shipping dock
Freight Claims Process
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
Seller’s Rights
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
Buyer’s Rights
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
Patents and Intellectual Property
Types of intellectual property in U.S.
Trade secrets
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
Patent Indemnification Clauses
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
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
Trade Secrets
a.k.a. confidential information
Broad category of intellectual property
Formulas, supplier and customer lists, procedures, and training programs
Characteristics of a Trade Secret
It is economically valuable
It is not generally known
It is kept as secret
Requirements for Trade Secrets
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
Other Laws Affecting Purchasing
Laws affecting antitrust and unfair trade practices
Laws affecting global purchasing
Antitrust and Unfair Trade Practices
Sherman Antitrust Act (1890)
Federal Trade Commission Act (1914)
Clayton Antitrust Act (1914)
Robinson-Patman Act (1936)
Laws Affecting Global Purchasing
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”)
Set of moral principles or values guiding our behavior
In business, ethical behavior is use of recognized social principles involving justice and fairness
Rules of Ethical Behavior
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
Pressures Toward Unethical Behavior
Supply management has control over large sums of money
Sellers may use unethical means to influence purchase decision
Risks of Unethical Behavior
Unethical act may also be illegal
Personal risk to buyer’s professional reputation
At minimum, buyer may lose his/her job
Personal bankruptcy
Types of Unethical Behavior
Personal buying
Accepting supplier favors
Sharp practices
Financial conflicts of interest
Giving preferential treatment to suppliers who are also customers
“I’ll buy from you if you buy from me.”
Restraint of trade issues
Personal Buying
Supply management department purchases materials or goods for personal needs of its employees
Accepting Supplier Favors
At what point does gift represent showing appreciation vs. attempt to influence future buying behavior?
Gifts from potential suppliers are particularly questionable
Sharp Practices
Exaggerating problems
Requesting bids from unqualified suppliers solely to drive down prices from qualified suppliers
Gaining information unfairly through deception
Financial Conflicts of Interest
Buying companies typically require disclosure by buyers having significant personal financial interest
Similar to insider knowledge in buying and selling stocks
Personal Conflicts of Interest
Dealing with a company that …
Employs close relative(s)
Has been approached by buyer for employment
The buyer has approached for future employment
Influence and Ethics
Power that somebody has to affect other people’s thinking or actions by means of argument, example, or force of personality
Positive Influences
Sharing data when being involved early in design issues
Cross-functional team being involved in comparative analysis of competing suppliers
Negative Influences
Inappropriate sharing of confidential or proprietary information with suppliers
Accepting gifts, entertainment, or meals as reward for decision favorable to supplier
ISM Code of Professional Ethics
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
ISM Code of Professional Ethics 2
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
Supporting Ethical Behavior
Closer buyer-supplier relationships
Ethical training
Developing consistent behavior
Internal reporting of unethical behavior
Preventive measures
Corporate Social Responsibility
Idea that organizations and institutions have obligation to society that extends beyond compliance with regulations in considering broader effects of their actions
ISM Principles of Social Responsibility
Financial responsibility
Human rights
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
Encourage diversity within your own organization
Proactively promote diverse employment practices throughout supply chain
Encourage your own organization and others to be proactive in examining opportunities to be environmentally responsible within their supply chains, either “upstream” or “downstream”
Ethics 2
Be aware of the publication ISM Principles and Standards of Ethical Supply Management Conduct
Abide by your organization’s code of conduct
Financial Responsibility
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
Human Rights
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
Promote safe environment for each employee in your organization and supply chain
Each organization is responsible for defining “safe” internally
Environment and Sustainability
End-to-end measures
Going green may be great source of talent
Which of the following is not a form of sharp practice?
Withholding information during a negotiation.
The ____ is typically considered a/an ____ for the organization.
purchasing manager/buyer…..general agent
Which of the following is not one of the actions a firm can take to enhance ethical behavior?
Wiretapping and security cameras.
____ 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.
Corporate social responsibility
____ stems from the instructions and granting of authority to the purchasing manager via the job description provided by the employer.
Actual authority
____ 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.
____ deals with the role of managers as individual representatives acting on behalf of their organizations.
Agency law
____ essentially determines the nature of agreements that are enforceable and create legal rights between the parties.
Contract law
____ 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.
General damages
A/An ____ is a person or entity who has been authorized to act on behalf of some other person or entity.

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