Chapter 16

1. Chapter 16 Purchasing LawIDIS 424Spring 2004

2. Contract - Definition • “A promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” • Restatement (Second) of Contracts, Sec. 1

3. Contractual Relationship • A contractual relationship between two or more commercial entities allows the shifting of risk between the entities in order to obtain the stated purpose of the contract. • A contract is a tool by which individuals establish a private set of rules to govern a particular business relationship.

4. Laws of Agency • Concerned with governing the relationship of principals and agents. • Agent -person or entity who has been authorized to act on the behalf of some other person or entity. • Principal is the corresponding person or entity for whom agents carry out their authority.

5. You may be personally liable if you engage in: • Deception for personal gain while behaving as an agent for the principle firm (includes taking bribes); • Violating the lawful protection of items owned by others, such as patent infringement; • The [mis]use of proprietary information by the unauthorized providing to others; • Violation of antitrust laws; • Unlawful transportation of hazardous materials and toxic waste.

6. Sources of US Law • Written law (legislative branch) • Motor Carrier Act (1980) • Administrative law (executive branch) • IRS, Interstate Commerce Commission • Common law (judicial decisions) • Contract law s based on judicial decisions of cases involving contractual disputes • English and Roman roots

7. Reciprocity • Buying from customers • Cannot threaten to withdraw business if firm does does use your product • However, it is legal to buy from a customer at fair market prices, without economic threat, and without intent of restricting competition

8. Robinson-Patman Act • Prevents price discrimination that reduces competition in interstate commerce • Cannot offer material to competing buyers at a lower price unless • lower distribution. costs entailed • price is offered to meet the legitimate bid of a competing supplier • Unlawful for any buyer to induce or receive a discriminatory price • If supplier has lowest bid, you cannot require them to lower price further

9. Consequential Damages • Product liability now extends to wholesalers and retailers of manufacturer’s product • Purchasing must minimize exposure of their firms to potential product liability by including a waiver • “a manufacturer is strictly liable when an article placed on the market causes injury to a human being”

10. Contracts vs. Agreements • Contract is a type of agreement • Let’s go to the store and buy some potato chips • Contract is an agreement between two or more people to do specified things in exchange for other specified things. • Shirley wants to go to the store to buy some potato chips but she doesn’t have a car. So Shirley says to Rich, “I will pay you a collar to take me to the store to buy some potato chips.” Rich agrees and takes Shirley to the store.

11. Elements of a Contract • Offer • Acceptance • Consideration

12. Offer • A proposal or expression by one person that he or she is willing to do something for certain terms • Betsy goes into Mimi’s wholesale video store and says to Mimi, “I want to buy 1,000 videotapes of the movie “Terminator” from you. I will pay you $15 for each videotape.”

13. Conditional Offers • Betsy goes into Mimi’s wholesale video store and says to Mimi, “I want to buy 1,000 videotapes of the movie “Terminator” from you. I will pay you $15 for each videotape IF you deliver them to my place of business on February 1.”

14. Acceptance • Consenting or agreeing to a contract • Verbal or written forms • Betsy goes into Mimi’s wholesale video store and says to Mimi, “I want to buy 1,000 videotapes of the movie “Terminator” from you. I will pay you $15 for each videotape. • This is an offer to form a contract. Mimi says, “Yes. You have a deal.”

15. Agreement Resulting from Offer and Acceptance • Acceptance • Agreement doesn’t exist until supplier accepts the offer • “Meeting of the minds” • Offer can be held open for three months • Differences must be incorporated into the contract, unless • The buyer alters the intent of the offer • The offerer objects in writing • The offerer states that no other terms will be accepted.

16. Meeting of the Minds • Betsy goes into Mimi’s wholesale video store and says to Mimi, “I want to buy 1,000 videotapes of the action movie “Terminator” from you. I will pay you $15 for each videotape. • This is an offer to form a contract. Mimi says, “I will sell you 1,000 videotapes at $15 a videotape, but all I have is a horror movie called “Texas Chainsaw Massacre.” Mimi’s acceptance does not match Betsy’s offer, so there is no meeting of the minds. • What if Betsy says, “Yes, that’s fine.”?

17. Consideration • “Mutual obligation” • Each party is bound to perform at certain levels, and agrees to carry out their responsibilities • Something of value in the formation of the contract that gives it legal validity. • Is there consideration in Betsy’s and Mimi’s contract?

18. Consideration? • Betsy goes into Mimi’s wholesale video store. Betsy says to Mimi, “I will pay you $20,000 if there is no earthquake in the next 20 seconds.” Mimi says “It’s a deal.” There is no earthquake. Does Betsy now have to pay Mimi $20,000? • Language in contract documents may say “in consideration of the sum of one dollar. . . “ • “in consideration of the promises set forth herein and other good and valuable consideration. . . “

19. Uniform Commercial Code • Beginning in the 1950s, a national editorial board of legal scholars drafted this body of laws concerning business transactions • Intended to make business transactions regular and predictable • Reduce state-by-state variations • Adopted in every jurisdiction except Louisiana and Puerto Rico

20. UCC Articles 1 - General introductory provisions 2 - Sale of goods and products 3 - Transactions in commercial paper 4 - Bank deposits 5 - Letters of credit

21. UCC Articles (cont.) 6 - Bank transfers 7 - Warehouse receipts, bills of lading, and other documents regarding title to goods 8 - Transfers in investment securities 9 - Secured transactions 10, 11 - Technical matters

22. Article Two - UCC • Many legal implications surrounding purchase and sale of goods • Most basic include • Warranties • Risk of loss • Seller’s rights • Buyer’s rights

23. Warranties • Express warranty • Warranty of title • Implied warranty of fitness for use • Implied warranty of merchantability • Item meets standards of trade and is appropriate for use

24. Express Warranty • Warranty written in a contract or sale or that is a verbal affirmation of fact or promise in connection with a deal • Fred’s bakery needs flour, so Fred goes to Lenny’s Flour Power Mill. Lenny says that he has a shipment of Grade A flour ready to sell. Lenny says that the shipment is all Grade A flour, and he gives a sample of the flour to Fred to inspect. The sample is fine Grade A flour. Fred buys the flour, pursuant to a contract of sale for “Grade A flour.” However, when the shipment arrives at the bakery, it is not Grade A flour; it is spoiled and full of worms.

25. Warranty of Title and Against Infringement • A seller generally warrants that the goods he or she is selling don’t have any liens against them • Lenny warrants to Fred that the flour is Lenny’s to sell!

26. Implied Warranty of Fitness for a Particular Purpose • “when the seller at the time of contracting has reason to know of any particular purpose for which the goods are required, and the buyer is relying on the seller’s skill or judgement to select or furnish suitable goods, there is unless excluded or modified. . . an implied warranty that the goods shall be fit for such purpose.” • Fred goes to buy an industrial air-conditioning unit for his bakery. He goes to Mark’s Air-Conditioning Supply Co. Fred describes the size of his bakery, the amount of heat produced by the machinery, how cool he wants to keep the facility, etc. Mark recommends the NotSoHot 1000, and Fred buys it. The machinery turns out to be inadequate: It can’t keep the bakery cool, and it blows out after a few days.

27. Implied Warranty of Merchantability • Unless excluded or modified, “a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.” • Fred’s bakery sells 10,000 glazed doughnuts to Dot. Dot runs a retail business called Dot’s Donut Dollies that sells coffee, doughnuts, and other breakfast items. The doughnuts turn out to have been mistakenly glazed with sale instead of sugar and, as a result, taste disgusting.

28. Risk of Loss • Risk of loss is with the seller until it passes to the buyer • Buyer and seller can agree in their contract as to when in the transaction the risk of loss becomes the buyer’s rather than the seller’s • If the seller is to ship goods by a third-party carrier, but the seller is not required to deliver the goods to a specific place (just to take the goods to the carrier), the risk of loss becomes the buyer’s when the goods are delivered to the carrier.

29. Risk of Loss (cont.) • If the seller is required to ship goods to a specific place, the risk of loss becomes the buyer’s when the goods are delivered to the specific place • If the goods are held by a third party who is responsible for their storage, such as a commercial warehouse, the risk of loss becomes the buyer’s when the buyer receives certain documents of title or the third party acknowledges the buyer’s right to take the goods. • If the goods are defective, the risk of loss does not become the buyer’s unless the defects are fixed or the buyer agrees to accept the defective goods.

30. Seller’s Rights • Right to sue the buyer for the purchase price of the goods if the buyer basically refuses to pay for them • Right to recover reasonable costs and expenses incurred if goods have to be resold • Right to compensation for additional costs and expenses incurred by reason of the buyer’s wrongful conduct

31. Buyer’s Rights • Right to reject defective goods that the seller cannot repair within a reasonable time • Right to sue for breach of contract • Right to revoke acceptance of goods if buyer discovers defects • Right to a court order forcing the seller to deliver the goods (“specific performance”) • Right to recover any extra expense incurred for having to purchase replacement goods from another seller • Right to recover costs and expenses caused by a breach of warranty

32. To Prevent Problems: • Write a good purchase order [and order acceptance form]. • Build a file. • Write letters and save letters. • Use good standard terms and conditions. • Consider calling the seller's attention to the warranties.