Diploma in Procurement & Supply

Negotiating and Contracting in Procurement and Supply

Session 2 Legal Issues

Session Learning Outcomes

On completion of this session you should be able to:

  Assess the legal issues that relate to the creation

of commercial agreements with customers or suppliers

 

Syllabus reference 1.2

Legal issues

– Commercial agreements are legally binding – Contractual disputes may need to be settled

through legal process– Settlements for breach of contract can be high

Caveat emptor

– The legal principle of procurement – ‘Let the buyer beware’– The onus is on the purchaser to carry out proper

checks when entering into contracts– Purchasers must also take reasonable care

when creating and managing commercial agreements

Elements of a legally binding contract

– Offer – Acceptance– Consideration– Intention– Capacity

Agreement

OfferTo be valid, an offer must be:-– A definite, unequivocal or unambiguous

statement of willingness to be bound in contract – An offer that the offeror intends to be bound by – Be communicated successfully to the offeree, in

such a way that he/she is aware of it– ‘Open’ (still in force) when the offeree accepts it

Is the offer ‘open’ for acceptance?– If the offer is stated only to be open for a specific

time period, it will ‘lapse’ after the expiration of this time

– If the offer was made subject to a condition, it will ‘lapse’ on failure of that condition

– An offer can be revoked at any time before it has been accepted

– An offer is terminated by a counter offer– An offer is terminated by rejection

Offer or invitation to treat?An invitation to treat is not an offer. The following represent an invitation to treat:-– An advertisement for a contract opportunity– A supplier’s price list– A price stated on a supplier’s website– A price tag on an item in a shop

– Acceptance should be communicated – Any form of acceptance is valid, whether oral,

written or inferred from the conduct of the parties, ie acceptance by performance

– Unconditional acceptance leads to agreement– An unconditional acceptance of an offer implies

that any stipulated terms and conditions are acceptable

Acceptance

– ‘Consideration’ is something of value– The law is not concerned with the actual value

involved, provided something of value is exchanged or promised that is sufficient

– Consideration must not relate to something which the party is already obliged to do

– Consideration cannot relate to past actions

Consideration

Intention

– Both parties must have the intention to create a legally binding contract

– In commercial transactions, for example between purchasers and suppliers, the presumption is that the parties intended to create a legal relationship

Capacity relates to the ability, legally, to enter into a contract, either directly or as an ‘agent’ on behalf of another party. Some considerations:-– Minors – in the UK the ‘age of consent’ to be legally bound by a contract is

18 years– Mental disorder – people suffering from mental illness are unlikely to have

the capacity to enter into a legally binding contract– Ultra vires – contracts which are not connected to the main activities of a

company (as set out in the company’s Memorandum of Association) may not be legally enforceable

– Authority – the parties entering a contract must have the authority to commit to the contract, for example to act as an agent of behalf of another party

Capacity

Terms and conditions

– For a contract to be valid it is not necessary to have terms and conditions

– It is, however, prudent to ensure that terms and conditions are always in place (and agreed with the supplier) on every contract

Battle of the forms

– The ‘battle of the forms’ only applies where there is not prior agreement between the parties to adopt mutually accepted terms and conditions

– Where terms and conditions have not been agreed, the principle of ‘who fires the last shot’ applies

– Usually the supplier wins this battle

Here is a typical process. Imagine the purchaser and supplier have not agreed specific terms and conditions (Ts&Cs).– The purchaser sends an enquiry to the supplier, making

reference to the purchaser’s Ts&Cs– The supplier replies with a quotation, including its TS&Cs– The purchaser places the order and again refers to its own

Ts&Cs– The supplier acknowledges receipt and again refers to its TS&Cs– The supplier despatches the goods and issues a delivery note

which again states its Ts&Cs– Finally, the supplier issues its invoice which refers to its Ts&Cs

Precedence of contract terms - the battle of the forms

Avoiding the battle of the forms

– The battle of the forms creates uncertainty and may leave the purchaser at risk

– The purchasing organisation should seek to eliminate uncertainty by ensuring that its terms and conditions have been accepted as part of the contract

– This can be achieved by ensuring that the supplier is signed into an agreement to always supply to the purchaser’s terms and conditions

– The different parties to the agreement might have different interpretations of what was agreed

– Misunderstanding may lead to conflict and contractual disputes

– May to lead to potentially agreeing to disadvantageous terms

– Lack of written terms against which compliance and performance can be measured

– Lack of transparency and audit trail for contract award decisions

– Lack of ‘evidence’ in the event of litigation

Risks of oral contracts

Misrepresentation

– Misrepresentation arises where one party to a contract enters into a contract because of information provided by the other party which transpires to be false

– Contracts may become voidable (ie rescinded)– Uberrimae fidei (of the utmost good faith) – the

non-disclosure of material facts can be significant in some contracts (eg a contract for insurance)

International trade transactions

There are many considerations for purchasers when transacting internationally, for example:- – Jurisdiction, ie whose legal system will be used in

the transaction?– Language issues– Different taxation systems– Fluctuating exchange rates– Different customs and practice, including

documentation

Incoterms

– Commercial terms published by the International Chamber of Commerce (ICC)

– Widely used in international commercial transactions – Primarily concerned with establishing which party is

responsible for specific activities, costs and risks relating to the transportation and delivery of goods

– Intended to remove uncertainty arising from potentially different interpretation of the rules, customs and practices in different countries around the world

The Vienna convention

– The United Nations Commission on International Trade Law (UNCITRAL) has devised a framework to provide at least a degree of harmonisation in international trade transactions

– The framework has not been adopted by all of the world’s trading nations

– It does however attempt to address a number of key issues for importers and exporters

– When does an offer or acceptance become effective in an international trade transaction?

– When do title, property and risk (in the goods sold) pass from the supplier to the purchaser?

– What are the rights of either party if the goods do not conform to the contract as agreed?

The Vienna Convention – key issues

What to do now

When you’ve worked through all the learning materials and associated reading relating to this session, follow the link below to assess your learning