LECTURE GIVEN AT ESC RENNES IN FEBRUARY 2016

1. Jacques Folon
www.folon.com
Partner Edge Consulting
Maître de conférences
Université de Liège
Professeur
ICHEC Brussels Management
School
Professeur invité
Université de Lorraine (Metz)
ESC Rennes
LAW
Law and contract negotiation
The Legal Aspects of Purchasing
Based on Purchasing and Supply Chain Management
by W.C. Benton

2. 2
Learning Objectives
1. To understand the legal aspects of the purchasing
function.
2. To understand what factors are involved in the
selection of the purchasing manager
3. To understand the extent of the purchasing
professional’s legal authority.
4. To understand how contracts and purchase orders
are legally executed.
5. To understand the essentials of a binding purchasing
contract.

3. 3
Learning Objectives
6. To be able to distinguish between an offer and a non
offer.
7. To learn about the possible outcomes of an offer.
8. To understand the terms of an enforceable contract.
9. To understand the legal implications of leasing.
10. To understand the legal implications of the information
age
11. To learn about the importance of ethics in purchasing.
12. To learn about electronic contracts and signature.

4. 4
The Purchasing Agent
• The purchasing manager is an agent for the firm. The terms
purchasing manager, buyer, and purchasing agent will be used
interchangeably.
• The purchasing manager administers the purchasing function.
• The purchasing function consists of many tasks within the
business entity, including supporting the company with the
required
• (1) materials,
• (2) supplies,
• (3) services.

5. 5
The Title and Duties
Purchasing Agent
The most important task that the purchasing officer is involved
in is representing the company in the development and
negotiation of contracts with third parties.
• The title purchasing agent is a generic legal term defining the
individual who deals with a third party for a company
• Other titles do exist, like
• Purchasing manager
• VP Material
• Supply Manager
• …

6. 6
Legal Status of Purchasing Manager
• From a legal point of view, the following
factors are associated with the appointment:
1. The purchasing manager must be granted the
authority to make purchase contracts.
2. The purchasing manager accepts this contracting
authority.
3. The employer accepts the commitments that were
made by the purchasing manager.

7. 7
Authority of the Purchasing Manager
• The three types of purchasing authority are
1. Express authority
2. Implied authority
3. Emergency authority
• It is strongly recommended that the authority of the
purchasing manager be clearly written and
communicated.

8. 8
Execution Of Contracts
and Purchase Orders
• Purchasing personnel routinely sign purchase orders and
contracts committing the company to the specific terms
and conditions of purchase orders and contracts.
• The purchasing official has no personal liability providing
that the following requirements are met:
✦ The name of the principal or company is shown on the
document.
✦ All parties involved know that the purchasing agent is acting
on behalf of the company or principal.
✦ The agency relation is shown on the document.
✦ The purchasing agent is acting within the scope of his or her
authority for the transaction.

9. 9
Essentials of a Purchase Contract
1. The parties must be capable
2. The subject of the matter must be legal and valid
3. There must be mutual agreement
4. The parties must reach an agreement by offer and acceptance.

10. 10
Invitation To Do Business
• In most instances, the purchasing official initiates an
invitation to do business.
• The purchasing official issues a request for quotation
(RFQ)
• The RFQ is an excellent way for the buying firm to test
the market without making a legal commitment to
purchase.
• The RFQ lacks the intent component.
• When the intent component is missing, the document is
merely an invitation to bid.

11. 11
Offers
• Purchasing agents receive numerous offers on a daily
basis and must be able to identify complete
legitimate offers. The three necessary components of
an offer are:
1. Intent to make an offer
2. Communication of the offer intent
3. Identification of the specific subject matter

12. 12
Counteroffers
• The negotiations process between the buyer and the
seller usually leads to many offers and counteroffers.
• A counteroffer is legally binding if it contains the
components that institute an offer.

13. 13
The Time Limits of an Offer
An offer does is no longer valid if
1. The offer becomes outdated
2. The offer is officially rejected
3. The offer is revoked by the seller before the
acceptance
4. The offer is accepted by the buyer

14. 14
Firm Offers
• The firm offer question should be raised when
quotations are requested.
• Quotations as a result of this RFQ are enforceable.
• It must be made clear to the supplier that any
supplier that submits an offer without this guarantee
will not be considered.

15. 15
Option Contracts
• In case the supplier is unwilling to give the buying
firm a firm offer, the purchasing professional should
attempt to offer the seller an option contract.
The seller will make an agreement to allow the
buyer a specific time limit to make the purchase.
• This option contract is enforceable

16. 16
Bid Bonds
• A bid bond enlists a third party into the transaction.
• The supplier secures a bonding company to guarantee that the supplier
will enter into a contract if they are awarded the contract.
• A bid bond condition is usually motivated by a federal or state
regulation.
• Bonding is used to protect governmental agencies from unqualified
bidders
• An evaluation process is generally put in place to select the awarded
company

17. 17
Promissory offers
• It happens in the construction industry that the
general contractor accepts offers from subcontractors
• in expectation of being awarded a project from a
third party

18. 18
Oral Contracts
• Oral contracts occur everyday.
• Ordering a pizza is an oral contract.
• However, oral contracts have no place in the
professional purchasing arena.
• If a supplier refuses to perform, there is no recourse
for the buyer.

19. 19
TERMS OF A CONTRACT

20. 20
1. Concrete is quoted in
cubic yards.
2. Textile in square feet.
3. Barrels of oil.
4. Gallons of fuel.
• The purchasing
professional must pay
close attention to the
quality term of the
contract.
• Quality should not be over
specified or underspecified
Quantity Quality

21. 21
Price
• The price is determined when the offer is accepted.
• In some cases, price escalation clauses are used in a
contract.
• A price escalation clause is an adjustment that the
seller utilizes in order to compensate for variances at
delivery

22. 22
Delivery Terms
• Delivery terms are closely related to price terms.
• The transportation between the buying and selling
firm is usually considered as part of the price.
• The delivery terms formalize the responsibilities of the
buying and selling firm for delivery of the goods.
• As an example, FOB shipment, means free on board
(f.o.b) at a named place

23. 23
Leasing
• Leasing is becoming more attractive for both
consumers and businesses. Consumers are leasing
automobiles in record numbers.
• One reason for the increase in consumer leasing is the
tax effect of the leased automobile for small
businesses.
• If the automobile is partially used for the business, a
portion of the monthly lease payment is tax deductible.

24. 24
The Legal Impact
of the Information Age
• The Internet has infiltrated every aspect of the
world.
• E-mail has outpaced the postal system as the
primary communication mode in the developed
world.
• Nine-year-old kids are buying and selling through
eBay.
• In some instances, purchasing professionals are
requiring the supplier to meet minimum levels of
connectivity

25. 25
The Impact of the
Information Age
• More and more consumers and businesses are
contracting internationally.
• The legal difficulties of Internet transactions are
apparent.
• During the next decade the case law will be
voluminous.
• Consider the requirements for an offer and legally
binding contract discussed earlier and it should be
apparent that very little of the current law applies.

26. 26
Electronic Contracts and Signatures
• In 1996 the United Nations Commission on International
Trade Law (UNCITRAL) adopted the Model Law on
Electronic Commerce, which offers member states of
the United Nations methods to address barriers to the
use of electronic communications in their commercial
law.

27. 27
Electronic Contracts & signatures
• A secure signature should be such that it can be used
to identify the signer.
• This does not mean that the signature itself must
consist of or include the signer's name. Identification
by reference to other sources of information would be
sufficient.
• Thus, for example, a digital signature may identify the
signer by reference to a certificate issued by a
certification authority.

28. 28
Electronic Contracts & signatures
• A secure signature must be linked to the data message
being signed, in such a manner that if the message is
changed the signature is invalidated.
• Such a linkage may be regarded as a crucial
requirement for a secure signature, since otherwise
the signature could be simply excised from one data
message and pasted onto another.

29. 29
Cryptographic Signatures (PKI)
• Cryptography is the science of securing information.
The technology is based on scrambling information
and then unscrambling it.
• Many businesses consider the cryptographic
signature method known as Public Key Infrastructure
(PKI) as the most secure and reliable method of
signing contracts online.

30. 30
Purchasing and Ethics
• In society, some people are respected based on the amount of
money they have, regardless of the money’s sources and methods
of obtaining it.
• However, in business environments, ethical behavior is the
foundation of trust.
• Purchasing agents may be governed by
• the company’s ethical policies,
• the local Commercial Code
• the equivalent of the Securities and Exchange Commission and
• many other state and local laws.
• Purchasing agents who violate ethical codes could easily go to jail