Legal Aspects of Buying

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Chapter 16
Purchasing LawIDIS 424Spring 2004
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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

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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.

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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.

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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 misuse of proprietary information by the
  unauthorized providing to others
• Violation of antitrust laws
• Unlawful transportation of hazardous materials
  and toxic waste.

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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

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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

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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

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Consequential Damages

• Product liability now extends to wholesalers and
  retailers of manufacturers 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

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Contracts vs. Agreements

• Contract is a type of agreement
• Lets 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 doesnt 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.

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Elements of a Contract

• Offer
• Acceptance
• Consideration

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Offer

• A proposal or expression by one person that he or
  she is willing to do something for certain terms
• Betsy goes into Mimis 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.

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Conditional Offers

• Betsy goes into Mimis 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.

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Acceptance

• Consenting or agreeing to a contract
• Verbal or written forms
• Betsy goes into Mimis 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.

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Agreement Resulting from Offer and Acceptance

• Acceptance
• Agreement doesnt 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.

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Meeting of the Minds

• Betsy goes into Mimis 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. Mimis
  acceptance does not match Betsys offer, so there
  is no meeting of the minds.
• What if Betsy says, Yes, thats fine.?

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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 Betsys and Mimis
  contract?

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Consideration?

• Betsy goes into Mimis 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 Its 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.
  . .

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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

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UCC Articles

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

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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

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Article Two - UCC

• Many legal implications surrounding purchase and
  sale of goods
• Most basic include
• Warranties
• Risk of loss
• Sellers rights
• Buyers rights

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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

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Express Warranty

• Warranty written in a contract or sale or that is
  a verbal affirmation of fact or promise in
  connection with a deal
• Freds bakery needs flour, so Fred goes to
  Lennys 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.

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Warranty of Title and Against Infringement

• A seller generally warrants that the goods he or
  she is selling dont have any liens against them
• Lenny warrants to Fred that the flour is Lennys
  to sell!

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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 sellers 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 Marks
  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 cant keep the bakery cool,
  and it blows out after a few days.

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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.
• Freds bakery sells 10,000 glazed doughnuts to
  Dot. Dot runs a retail business called Dots
  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.

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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 buyers rather than the sellers
• 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 buyers when the goods are delivered
  to the carrier.

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Risk of Loss (cont.)

• If the seller is required to ship goods to a
  specific place, the risk of loss becomes the
  buyers 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 buyers when the buyer receives certain
  documents of title or the third party
  acknowledges the buyers right to take the goods.
• If the goods are defective, the risk of loss does
  not become the buyers unless the defects are
  fixed or the buyer agrees to accept the defective
  goods.

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Sellers 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 buyers
  wrongful conduct

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Buyers 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

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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.