Chapter 15

Legal and Ethics

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 Key Questions Addressed in
Chapter 15
• How can we assure that the legal record
reflects the commercial agreement?

• How can we confirm the legal record?

• How can we assure that supply personnel deal

ethically and in conformance with regulatory
requirements as well as organizational values?
 Law of Agency

• Gives legal status to supply personnel

• Gives the authority as an agent of the
organization to attend to the business of
supply in accordance with the instructions
given by his or her employer
– Typically instructions are a job description

• Rationale for title: Purchasing Agent (not

commonly used any more)
 Legal Authority of the Buyer as
an Agent of the Employer
• Actual authority
– Express authority: the acts the agent is expressly and directly authorized to
perform
– Implied authority: all other authority that is necessary, usual, and proper to
carry through to completion the express authority
– Third party role: the duty of the third party to ascertain the scope of an
agent’s authority

• Apparent Authority
– created when the words or actions of the principal (employer) lead a
reasonable person to believe that authority has been granted
– the authority a buyer appears to have

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 Maverick Buying and
the Law of Agency
• Employees who are not legal agents have no
actual authority
• Maverick buying refers to these employees
acting as if they had authority (ordering from
suppliers)
• An employer confers apparent authority when
such goods are received and the company
pays
 Personal Liability of the Buyer
• Makes a false statement concerning authority with intent to
deceive or when the misrepresentation has the natural and
probable consequence of misleading
• Performs a damaging act without authority
– Even though believing they have such authority

• Performs an act which is itself illegal

– Even on authority from the employer

• Willfully performs an act which results in damage to anyone

• Performs a damaging acts outside the scope of authority
– Even though the act is performed with the intention of rendering the
employer a valuable service

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 Uniform Laws

• A uniform body of law governing the sale of

goods within a country and between countries
minimizes the risks associated with the
acquisition process and facilitates fair and
efficient trade
– USA: Uniform Commercial Code (UCC) with
adaptations at the State level
– Canada: Commercial Law Strategy
– International: UN Convention on Contracts for the
International Sale of Goods (CISG)
 Purpose of Uniform Laws
• Provide a set of rules for making and interpreting
contracts
• Clarify rights, obligations and remedies of parties to
the contract
• Provide a more efficient and economical way to buy
and sell raw materials, commodities, and
manufactured goods
• Provide buyers and sellers a framework within which to
mold their contracts to their specifications
• Reduce uncertainty and doubt about which rules apply
• Reduce disputes

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 A Valid Contract Is Based on Four
Factors
1. Competent parties - either principals or
qualified agents

2. Legal subject matter or purpose

3. An offer and an acceptance

4. Consideration (bargained-for exchange)

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 Three Options for PO Terms
and Conditions (Ts and Cs)
• Boilerplate or a framework agreement
– Includes complete terms and conditions applied to any transaction
• Specific Ts and Cs
– Includes detailed terms and conditions applying to that specific order
• Basic Items
– Includes only the basic items necessary for a valid offer and depend on the
provisions of the UCC for proper legal coverage

The supply manager should rely on the company’s legal counsel to

determine the policy to be followed

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 Purchases Made Orally—
Statute of Frauds
• Normally there must be some written notation if
the price of the order for the sale of goods is
$500 or more

• If the seller supplies a memorandum which is not

in accordance with the buyer’s understanding of
the oral order, he or she must give a notice of
objection to the supplier within 10 days of receipt
of the memorandum to preserve his or her legal
rights

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 The Buyer Has Three Options When
Delivery Fails to Conform to the Contract
1. Reject the whole shipment
2. Accept the whole shipment
3. Accept part of the shipment and reject the
balance

The goods may be late, may be delivered in the

wrong quantity, or may fail to meet
specifications

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 Four Types of Warranties
• Express warranty
– affirmation of facts, promises, description, sample, or
model pertaining to goods that are subject of negotiation
• Implied warranty of merchantability or usage of trade
– the goods fit the ordinary purpose for which goods of that
description are used in the trade
• Implied warranty of fitness for a particular purpose
– the seller, at the time of contracting, has reason to know
any particular purpose for which the goods are required
• Warranty of title and against infringement
– no liens or patent or copyright infringement

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 Common Law
and the Purchase of Services
• The UCC does not address contracts for services
• Common law governs the purchase of services
– contracts solely for services
– contracts wherein services and goods are bundled and
the service portion equals more than 50 percent of
the value of the contract
• Common law develops over time as courts make
decisions on a case-by-case basis, developing
what is known as “case law”
 Common Law System

• Flexibility
– Changing conditions make decisions inapplicable except as analogy
– Courts turn to other English-speaking (common law) judicial
experiences

• Stability
– General acceptance of certain authoritative materials
– When courts fail to address changing conditions, statutes are enacted
that supersede common law
– In statutory interpretation, courts have recourse to the doctrines of
common law
 Implications
for Supply Managers
• Common law
– provides general guidelines for contracting for services
– does not stipulate performance obligations
– no set of rules to govern performance
• Services contract
– must ensure each and every performance requirement
and expectation is clearly defined
– start with performance-based specification or
statement of work (SOW) with clear performance
obligations
 Types of Services Contracting
Methods
• Service level agreements (SLA)
• Milestone deliverables
• Time and materials (T&M)
• Volume of service (VoS)
• Cost and cost plus

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 Typical Provisions in Service
Contracts
• Request for renegotiation
• Dispute resolution
• Termination for cause
• Termination for convenience
• Clauses related to on-premise service delivery
• Clauses related to professional services
– Key personnel - Work product
– Warranty - Indemnification
– Independent contractor - Nondisclosure
- Subcontractor
 E-Commerce and the Law
• Uniform Electronic Transactions Act (UETA)
– Validates the use of electronic records and electronic signatures

• United Nations Commission on International Trade Law

(UNCITRAL)

• The Electronic Commerce Enhancement Act

• Electronic Signatures in Global and National Commerce Act

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 Intellectual Property (IP)

• Refers to creations of the mind: inventions,

literary and artistic works; designs; and symbols,
names and images used in commerce (World Intellectual
Property Organization—www.wipo.int)

• Protected in law through

– Patents
– Copyright
– Industrial designs
– Trademarks
 Product Liability
• Refers to liability of any or all parties along the
manufacturing supply chain for damage caused
by that product
• Includes
– the manufacturer of component parts
– an assembling manufacturer
– the wholesaler
– the retail store owner
• Liability suits filed over inherent defects in
products that harmed consumers
 Growing Importance of
Product Safety and Liability
 Government regulations/oversight increase and
judicial interpretations of laws favor plaintiffs
 Lawsuits, large settlements, greater public awareness
 Regulations/oversight are reduced or eliminated
leading to lax control within/among supply chains
 Large product recalls

 Global supply chain growth; difficulties managing

safety/ quality across borders and legal/regulatory
systems
 Increase in the risk of harm to consumers
 Strict Liability

• The defendant is liable when it is shown that

the product was defective

– No amount of care on the part of the

manufacturer exonerates it from its legal liability if
it is demonstrated that the product was defective
 Three Types of Product Defects

• Design defects
– a product may perform its function but is
inherently dangerous due to a design flaw

• Manufacturing defects
– occur during construction or production

• Defects in marketing
– improper instructions and failures to warn
consumers of latent dangers in the product
 Alternative Dispute Resolution

• Any means of settling disputes outside of the

courtroom, including
– Arbitration
– Mediation
– Internal escalation

• Provide an opportunity to reach negotiated

settlements and maintain working
professional relationships
 Commercial Arbitration
• Is your clause in proper form under appropriate
arbitration laws?
• Does your clause express the will of the parties or
is it ambiguous?
• Does your clause ensure impartial arbitrators?
• Does your clause provide method of naming
arbitrators?
– Refer to rules of an association
– Safeguard against deadlocks or defaults

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 Mediation

• A less formal alternative to litigation than

arbitration
• Mediators are individuals trained in negotiations
• Bring together opposing parties to attempt
resolution
• Each party can accept or reject the proposal
• Used for a wide range of case types
 Internal Escalation

• First resolution attempt: purchaser and sales rep

• Second attempt: their supervisors
• Continues up the chain of command
• Final round: top executives of both organizations
• If they fail to agree, pursue other forms of dispute
resolution