Transcript Contractual Law

Chapter 15
Contract Management
IDIS 424
Spring 2004
1
The Contracting Process
Request for Quotation
Supplier’s Proposal
Negotiation
Contract Building
Contract Award (P.O.)
Contract Administration
2
Request for Quotation
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Standard terms and conditions of the transaction
Quantity / conditions of delivery
End use of the item
If customized - review with legal counsel
If competitive bid, manner and time period in which
bids evaluated
Services - not covered under UCC
Review seller’s acknowledgements carefully
RFQ is not an offer, but request for price and
availability
3
The Purchase Order Contract
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UCC can be relied on to cover all important
terms except:
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A description of the parties involved
A description of the basic subject of the
contract and statement of work including dates
A clearly definable or determinable quantity
PO is not a contract - is an offer, which
becomes a contract when accepted
4
Purchase Order Terms
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Fixed prices and quantities (incl. taxes)
Buyer’s right of inspection and rejection
Right to make spec./ design changes
Holding buyer harmless - patent infringement
Supplier’s right to assign contract to third party
Instructions re: risk of loss
5
Boiler Plate Terms
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Statement of credit and payment terms
Identification
Packing and Preparation
Statements of Warranty
Shipment quantities / dates
Assignment of seller’s rights
Arbitration clause
Sometimes - right to cancel unshipped portion
6
Limit Liabilities and Indemnity!
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“Limit liability” = hold harmless
“Indemnify” = exempt”
In acknowledging a purchase order, a supplier
may impose the following clause:
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“The parties agree that the buyer’s sole and
exclusive remedy against the seller shall be for the
repair or replacement of defective parts, etc.. . . the
buyer agrees that no remedy, including but not
limited to, incidental damages, for any lost profits,
etc., shall be available to him/her.”
7
Pricing
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Contracts do not need to specify a price to be
valid (avoid this practice if possible)
Escalation clause - indexed to a commodity
index
Price at time of delivery
Surcharges
Cost-plus scenario
Progressive prices
8
When to Negotiate
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Many variables affect price, quality, and service
Business risks cannot be predetermined
Early supplier involvement in new product
development
Contracting for supplier’s productive capacity
Tooling and setup are large percentage of cost
9
When to Negotiate
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Long lead-times (price adjustment clauses)
Many engineering changes
Thorough analysis of make or buy involved
No other competitive supplier
10
Conflicting Terms
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Typewritten insertions in a contract or purchase
order take precedence over printed items.
Handwritten insertions supersede typed or
preprinted items.
A conflict between a spelled out number and one
that is a different numeral is resolved in favor of the
number that is spelled out.
Conflicts between terms and clauses are resolved in
favor of the one appearing first in the document.
Ambiguities are interpreted against the party
inserting the term in question.
11
Blanket Orders
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Should contain terms and conditions
Cover several shipments into the future
Releases should not have terms and conditions
If purchase orders are issued, then it should be as a
release against blanket order
12
“Battle of the Forms”
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Seller acknowledges receipt by transmitting a
standard form with conflicting terms and conditions
Buyer’s terms are superseded
Supplier may send volumes of printed
acknowledgements with differing terms
Supplier can change price on an issued PO
How to cope?
13
“Battling the Battle of the Forms”
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Include reconciliation of purchase order terms
in agenda of negotiable items
State that “offer is accepted when
acknowledgement form is received”
Conduct = shipment and acceptance of goods
Establish procedures for larger commitments
Use good judgement!
Involve affected functional members
14
Accepting Orders Occurs
When:
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After a reasonable opportunity to inspect the
goods, the buyer signifies that the goods are
conforming or that he will take them in spite of
non-conformity
buyer fails to make an effective rejection. . .
does not occur until the buyer has had a
reasonable opportunity to inspect them
does any act inconsistent with the seller’s
ownership
15
Purchaser’s Acceptance
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After point of acceptance, purchaser
cannot send back goods unless supplier
consents
Purchaser’s obligations
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Prove goods did not conform to contract
Notify supplier of breach of contract
16
Acceptance - Example
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A buyer and a supplier have been doing
business for several years. During the pas t
year, approximately one-third of the shipments
from the supplier arrived a week or so late, but
the buyer accepted them without serious
complaints. In the eyes of the law, these
acceptances by the buyer may well have set a
precedent which waives the buyer’s rights to
timely delivery on future contracts!
17
To Prevent Problems:
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Stamp"Received Subject to Inspection, Count,
and Testing".
PO Terms and conditions
Inspect upon delivery.
Stock rotation
Define “reasonable time” (check with people in
trade)
Good internal reporting
Production equipment clause
Software and services - define “acceptable”
18
Contracts and EDI
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Signed contract will not accompany EDI
transmission
Need a separate contract with key terms:
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PO’s transmitted electronically
Authorize 3rd party network to interchange data
Identify shipment and receiving locations
Return functional acknowledgements of documents
Company terms of condition, are made applicable to
all electronic POs
Specified duration of contract
Responsibility for third party network cost
Document transaction standards
19
Cancellation of Orders
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Cancellation for default
Cancellation for convenience of
purchaser (anticipatory breach”
Cancellation by mutual consent
20
Liability for Breach of Contract
 Occurs
when someone cannot or will not
perform their contract obligations and there is
no valid or legal justification or excuse for this
failure
 Mimi’s wholesale video store and Betsy now
have a valid contract. Betsy has promised
to buy 1,000 videotapes for $15 apiece, and
Mimi has promised to deliver them to
Betsy’s place of business on February 1.
However, Mimi never shows up.
21
Breach of Contract?
On January 1, Betsy and Mimi’s wholesale video store form a
valid contract. Betsy promises to buy 1,000 videos for $15
apiece, and Mimi promises to deliver them to Betsy’s place of
business on December 31, almost a year later. However, on
January 2, Mimi calls Betsy and tells her that she won’t deliver
the tapes, because she has suddenly decided to close her
business and move to Japan. Betsy runs a retail video
business, and with this particular store Betsy has to plan her
inventory well in advance. Therefore, long before December 31,
Betsy calls another wholesaler. Betsy has to pay the other
wholesaler more than she agree to pay Mimi for the videotapes,
so Betsy now wants to sue Mimi. Can she sue?
22
Damages
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Actual damages - losses that are real, known, or can
be estimated
Punitive damages - extra money over and above
actual damages must be paid by the losing defendant
to the plaintiff as punishment for the defendant’s
particularly bad behavior
23
Calculating Actual
Damages
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Restitution - Money the plaintiff actually paid to the
defendant in connection with the contract
Reliance - Money that the plaintiff lost because he or
she was relying on the contract, depending on the
defendant to live up to the defendant’s obligations
under the contract
Expectancy - Money the plaintiff was hoping to gain
from the contract
24
Back at Mimi’s Store. . .
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Mimi’s wholesale video store and Betsy had a valid contract.
Betsy promised to buy 1,000 videotapes for $15 apiece, and
Mimi promised to deliver them to Betsy’s place of business.
Betsy gave Mimi $2,000 as a downpayment on the delivery.
Betsy also spent $5,000 building new shelves in her retail video
store to hold the tapes. Finally, Betsy expected to make a profit
of $20,000 after expenses from selling and/or renting the tapes
to her customers. However, Mimi never delivers the tapes, and
Betsy sues for breach of contract. What damages is she entitled
to?
25
Other Clauses
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Penalty Clauses (Illegal!)
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Should be called “incentive clauses” or
“liquidated damages”
Difference - documentation of reasonable
relationship between expectations and clauses
Governing Clause - state where law will
interpret
Forum Clause - describes where legal
action will be brought
Exculpatory clause
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Enforcing a Contract
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Unconscionable Contracts
Fraudulent Contracts
Statue of Frauds
Illegal Contracts
Lack of Capacity
State of Limitations
Violation of Consumer Protection Laws
27
Intellectual Property
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Cannot rely on UCC to cover:
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Patents
Trademarks and Service marks
Copyrights
28
Patents
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Gives holder exclusive rights to profit from the
use of “any new and useful process, machine,
manufacture or composition of matter or any
new and useful improvement thereof.”
Utility patents - protects substantive, functional
nature of a new invention, and gives the holder
17 years of exclusive rights
Design patents - protects ornamental, nonsubstantive creations for 14 years
29
You cannot patent:
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Newly discovered scientific principles
New ideas or mental processes
Newly discovered elements or other natural
substances
New methods of conducting business
Items that should be protected under other
federal laws, such as writings
30
Patent Infringement
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Patent holder can sue if the other party does one
of two things:
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Uses the patent holder’s invention without the patent
holder’s consent
Uses technology that is marginally different from
the patent holder’s new invention but is, in essence,
equivalent
31
Types of Patent Infringement
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Direct infringement - illegally using or selling a
machine or invention
Active inducement to infringement - aiding and
abetting another party’s act of patent
infringement
Contributory infringement - cooperating in the
sale of components of the patented machine,
device or other items
32
Patent Indemnification Clauses
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Supplier assures that the goods being contracted
for do not infringe on any other party's patents.
Right to require the supplier to defend any
patent infringement suit itself.
Purchaser retains the right to have its own
attorneys involved in defense of any lawsuit
concerning patent infringement
33
Trademarks and Copyrights
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Trademark: “Any word,name, symbol,
device,or any combination thereof used to
identify goods
Copyright - Affords protection for creators of
original works
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Rights of reproduction, preparation of derivative
works, public distribution, performance, and
display
Ownership - life of author + fifty years
34
Trade Secrets
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Information which is
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economically valuable
not generally known
kept as a secret
Nondisclosure agreement or trade secrets
clause
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GET IT IN WRITING!
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Contract is NOT a physical thing, but a relationship which
exists between parties
Written document is only evidence of the contract
Verbal contracts are just as binding as a written one in
court
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When reduced to writing, written evidence supersedes all
prior oral evidence
For sales transactions > $500, contract must be reduced to
writing to be enforceable
All data to be included should appear above agent’s
signature
36
Contract Conflict Resolution
Action
Legal Action
Description
File a lawsuit in a federal/state/local court.
Non-legal actions
Arbitration
Use of an impartial third party to settle a contractual dispute
Mediation
Intervention by a third party to promote settlement, reconciliation,
or compromise between parties involved in a contractual dispute.
“Mini-trial”
An exchange of information between managers in each
organization, followed by negotiation between executives from
each organization.
“Rent-a-judge”
A neutral party conducts a “trial” between the parties, and is
responsible for the final judgement.
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Arbitration
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Arbitration - renders a final decision which
is binding
Can have an arbitration clause which
reserves right to appeal
Higher Authority clause - “you may not go
to arbitration until two levels of higher
authority have reviewed the dispute”
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Issues to Consider
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State of Limitations (2 yrs - UCC, 4 yrs Contract law)
Status of relationship
Desired Outcomes
Level of Involvement
Level of Emotion
Speed of resolution
Information requirements
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Litigation Considerations
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Going through state or federal courts
should be decided by lawyers (based on
previous cases)
Issue should be >$50K if considering
federal course
Services not governed by UCC
Better to process litigation under UCC
rather than general contract law (stricter)
40
Fixed Price Contracts
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Firm fixed price
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No price adjustment due to supplier's cost
experience
Fixed-price with Economic Price
Adjustment Contracts
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Recognize economic contingencies, such as
unstable labor or market conditions
EPA recognizes both inflation and deflation
Cost elements include RM, components, and
direct labor
41
Fixed Price Contracts
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Fixed-Price Redetermination
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Fixed price for initial contract period with
an upward or downward redetermination at
a stated time.
42
Incentive Arrangements
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Applied to motivate the supplier to
improve cost, schedule or other
parameters
Target cost = most likely cost
Target profit = "fair and reasonable"
Sharing arrangement = how to share
cost responsibility
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Incentive Arrangements
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Fixed-price Incentive contract
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Final amount the supplier receives is
limited by the ceiling price
Cost-Plus-Incentive-Fee Arrangement
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Incentive in the form of sharing above and
below target cost
 Below
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target customer(75) / supplier (25),
Above target customer (87.5) / supplier (12.5))
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Cost-based Contracts
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Cost reimbursement
Customer agrees to reimburse all
allowable costs, but no fee is paid.
 Often used for contracts with educational
institutions
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45
Cost-based Contracts
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Cost sharing
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Customer agrees to reimburse supplier for a
predetermined portion of the allowable costs
Supplier agrees to absorb part of costs in the
expectation of subsequent compensating benefits
(i.e. right to sell to other firms)
Often used for procurement of basic and applied
research
46
Cost-based Contracts
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Time and Materials
Buy labor at fixed hourly rate that includes
direct labor, indirect costs and profit, and
materials at cost.
 Often used for repair and overhaul services
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Cost-based Contracts
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Cost-Plus-Fixed-Fee Arrangement
Buyer agrees to reimburse supplier for ALL
allocable, allowable, and reasonable costs
incurred during performance of contract
 Used in high-risk projects, such as
research or exploratory development
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Cost-based Contracts
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Cost-Plus-Award-Fee Arrangement
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Award fee based upon periodic evaluations
of ongoing supplier performance
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Contract Writing Guidelines
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Generic Terms
Incorporation by Reference
Negotiable Clauses
Notices
Order of Precedence
Purchase Order
Scope of Work
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Contract Writing Guidelines
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Signatures
Small Value Contracts
Statement of Work
Warranty
51
International Contracts
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Typically governed by CISG standards
Okay for buyer and seller to agree that CISG
not govern the contract
Governing law clause - addresses government
to settle dispute
Currency exchange clauses can be used to
identify “trigger points”
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Service Contracts- IS Systems
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The length of the proposed agreement;
The role of company growth or downsizing;
Service provider defaults or contract
amendments;
Data security;
Control of outsourcing costs; and
Control of information systems operations.
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Service Contracts
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Independent contract clause - states that any
on-site suppliers are acting as an independent
contractor and not as an employee of the
company
If accident occurs due to contractor negligence,
company will not be liable
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Issues to Consider
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Level of Service
Price
Acceptance criteria
System Implementation
Control Procedures
Requirements
Can add a clause that requires service to be
considered as goods under UCC Section 2
55
Capital Equipment
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Do not use FOB
Rely on title, risk of loss and warranty (after
first $1)
Supplier should be responsible until
installation is complete and machine is
operating properly
Warranty begins once machine is operating
56
Furniture / Tooling
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Should be marked as property of . . .
To avoid problems recovering goods at a
supplier’s warehouse, identify all tooling,
etc.
Avoids having to go to court if supplier
goes into bankruptcy
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Longer-Term Contracting
58
Supplier Contracting
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Firms often enter into longer-term
agreements with the suppliers they expect to
do business with over an extended period of
time
Longer-term agreements are
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Legal contracts between two or more parties
that are expected to be in effect for a time
period greater than a year, and which usually
address a greater range of price and non-price
issues than shorter-term or standard “boilerplate” agreements
59
Supplier Contracting
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Issues to consider when determining the
appropriate type of contract -
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Market uncertainty
Industry practices
Desired length of the agreement
Outcomes sought from the agreement
Relationship between contracting parties
Process or technological uncertainty
Supplier’s impact on cost or other performance
variables
Total dollar value of the agreement
Cost versus priced based approaches (recall the
portfolio matrix approach)
60
Supplier Contracting
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Growth in Longer-Term Contracting-
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The percentage of longer-term contracts to
total contracts has increased 50% since
1990, from 24% of total contracts to 36%
currently
The dollar value of purchases represented
by longer-term contracts has increased
almost 47%, from 34% to 50% of total
Source: Monczka and
Trent, Purchasing and Supply Management:
purchase
dollars
Key Trends and Changes, 1998
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Supplier Contracting
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Enter a longer-term agreement only
after answering the following question!!!
What benefits can a longer-term
agreement provide that are not
available with
conventional purchase
agreements?
62
Supplier Contracting
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What are the benefits a firm hopes to
attain by pursuing longer-term purchase
agreements?
Let’ discuss!
63
Supplier Contracting
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What are the risks to longer-term
contracting?
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__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
__________________________
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Supplier Contracting
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So, you think longer-term contracts are
just purchase contracts with a longer
time frame? Well, consider a single
contractual issue called price/cost…..
How was I to know?
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Supplier Contracting
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Consider the contract possibilities relating to
price/cost-
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Firm fixed price
Fixed price with escalation/de-escalation formulas
Fixed price with re-determination
Fixed price with incentives
Cost plus incentive fee
Cost-sharing
Time and materials contract
Cost plus fixed fee
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Purchasing Ethics
67
Ethical Behavior
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Use of recognized social principles
involving justice and fairness throughout
our business relationships.
An ethical buyer treats sellers in a just,
decent, fair, honest, and fitting manner.
Following a code viewed as fair by those
within the profession, as well as the
community.
68
Rules of Thumb
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Buyer must commit his or her attention and
energies for the organization's benefit
rather than personal enrichment at the
expense of the organization.
A buyer must act ethically towards
suppliers or potential suppliers
Uphold the ethical standards set forth by
the purchasing profession
69
Pressures for Purchasers
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Have control over large sums of money
Pressure on sales people to sell!
Easy to justify behavior
“What’s wrong with a free lunch?”
70
Risks of Unethical Behavior
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Legal risk
Personal risk
Company risk
71
Perceived Ethical Issue
Confronts Buyer
Organizationa
l Environment
Personal
Experiences
Cultural
Environment
Variables Affecting
Buyer’s Ethical
Perspective
Industry
Environment
Judgement Rendered
by Buyer
Buyer Behavior
72
Types of Unethical Behavior
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Reciprocity
Personal Buying
Accepting Supplier Favors
Sharp Practices
Financial Conflicts of Interest
73
Reciprocity
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Giving preferential treatment to suppliers
who are also customers
Can take on a coercive nature
Can hurt morale of supplier’s purchasing
dept.
Federal Trade Commission Rules
74
Personal Buying
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Purchasing dept. purchases material for
the personal needs of its employees
“Trade diversion laws” in some states
Exceptions: safety shoes, hats, gloves,
special tools
“Gray area”
75
Accepting Supplier Favors
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Most common ethical infraction
Giving preferential treatment and privileged
information in return
What may a buyer accept from a supplier?
76
Sharp Practices
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Willful use of information
Exaggerating problems
Requesting bids from unqualified suppliers
Gaining information unfairly
Sharing information on competitive bids
Not compensating for design work
Taking unfair advantage of financial situation
Lying or misleading
77
Financial Conflicts of Interest
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Buyer awards business to a supplier
because the buyer, buyer’s family, or
relatives have a direct financial interest in
the supplier
Avoided if employees required to detail
investments in outside companies
Serious breach of ethics
Similar to an executive buying or selling
stocks with inside knowledge
78
NAPM Code of Ethics
1. To consider, first, the interest of your company in all
transactions and to carry out and believe in its established
policies
2. To be receptive to competent counsel from your colleagues and to be
guided by such counsel without impairing the dignity and
responsibility of your office
3. To buy without prejudice, seeking to obtain the maximum value for
each dollar of expenditure
4. To strive consistently for knowledge of the materials and processes of
manufacture, and to establish practical methods for the conduct of
office
5. To subscribe to and work for honesty and truth in buying and selling,
and to denounce all forms and manifestations of commercial bribery
79
NAPM Code of Ethics
6. To accord a prompt and courteous reception, so far as conditions will
permit, to all who call on a legitimate business mission
7. To respect your obligations and to require that obligations to you and to
your concern be respected, consistent with good business practice
8. To avoid sharp practice
9. To counsel and assist fellow purchasing managers in the performance
of their duties, whenever occasion permits
10.To cooperate with all organizations and individuals engaged in
activities designed to enhance the development and standing of
purchasing
80
Survey of Supplier Favors
Exhibit 7
Supplier Favors and Acceptance
Description
Lunches
Dinners
Holiday Gifts
Event Tickets
Trips to Supplier's Plant
Food and Liquor
Golf Outings
Advertising Souvenirs
Discounts on personal
Purchases
Small Value Appliances
Clothing
Vacation Trips
Large Appliances
Loans of Money
Automobiles
Offered to
Buyers(1)
83%
67%
67%
57%
51%
46%
43%
26%
Accepted by
Buyers(2)
75%
51%
47%
38%
30%
25%
25%
26%
Acceptable to
Buyers(3)
68%
48%
43%
37%
31%
28%
28%
72%
24%
19%
11%
10%
4%
3%
2%
9%
7%
6%
2%
.4%
0%
.4%
11%
6%
7%
2%
1%
1%
1%
N=236 respondents
(1)
(2)
(3)
Percentage of survey respondents indicating a particular item had been offered by
a supplier
Percentage of survey respondents indicating they had actually accepted a
particular item
Percentage of survey respondents indicating that acceptance of a particular item
did not pose an ethical problem
Source:
Center for Advanced Purchasing Studies 1988
81
Supporting Ethical Behavior
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Develop a Statement of Ethics
Top management commitment
Closer buyer-seller relationships
Ethical training and education
Develop consistent behavior within a firm
Internal reporting of unethical behavior
82