LEVEL 4

Developing Contracts in Purchasing

and Supply

Characteristics of capital goods

• Long lifecycle

• High cost

Other features of capital goods• The basic purchase price of a capital asset is only one element in the

total costs of acquisition.

• The monetary value of the purchase is high, suggesting a need for specialised techniques of evaluation and control.

• The purchase of a capital item tends to be non-recurring.

• The benefits are often somewhat intangible and difficult to evaluate. For example, a machine may be replaced by a superior model in order to secure quality improvements. How can the value of such improvements be measured in financial terms?

• Negotiations are usually more extended and complex than in other acquisitions.

• Specifications for capital equipment are usually more difficult to draft.

• A team approach is usually needed.

• Buying a capital asset usually means buying a service too.

Costs of a capital purchase

• Basic purchase price

• Costs of delivery, installation and commissioning

• Costs of routine maintenance and periodic overhauls

• Costs of energy and labour involved in running the machine

• Costs of time lost during breakdowns

Lifecycle costing• Determine the operating cycle for the equipment, including factors

such as the interval at which servicing will be required.

• Identify and quantify the factors that affect costs, such as power consumption, average time between failures etc.

• Calculate all costs at current rates and prices.

• Project all costs and disposal value if any to the future dates at which they will be incurred.

• Discount all amounts to today’s values.

• Calculate the total cost in today’s values.

Investment appraisal techniques

• Payback method

• Accounting rate of return

• Discounted cash flow

Service elements in a capital purchase

• Pre-purchase survey by the vendor

• Installation

• Training of operators

• After-sales service

The role of purchasing in the acquisition of capital equipment

1. Performing research to identify potential vendors and to obtain relevant data about them 2. Consulting with referees – ie existing users of products manufactured by the potential suppliers 3. Requesting quotations and evaluating bids, including consideration of price, lead time, operating characteristics, expected useful life, performance criteria, operating costs, recommended spares and maintenance schedules, warranty terms, payment terms and so on 4. Organising and managing discussions and negotiations with suppliers, finalising agreed terms and conditions 5. Awarding contract and placing order 6. Checking supplier’s compliance with agreed terms, eg in submission of drawings, meeting deadlines etc7. Monitoring installation, and performance post installation

Features of retail buying

• Bottom line thinking

• Broad assortment

• Buying against supplier specifications

• Short feedback loop

• Technical complexity

Issues for buyer/supplier debate

• Buyers may seek to encourage standardisation and variety reduction among manufacturers.

• Buyers may put pressure on manufacturers to provide training to personnel handling their goods.

• Buyers may look to suppliers for a contribution to advertising costs.

Role of the retail buyer

• Market research

• Expenditure budgets

• Selection of products and suppliers

• Management of inventory

• Selling activities, eg sales promotions

• Monitoring sales performance

• Evaluating supplier performance

Types of production materials

• Raw materials

• Components and assemblies

• Work in progress

Characteristics of direct purchasing

• The quality of direct purchases has a direct impact on the quality of goods produced.

• Direct purchases frequently need to be stocked, so as to ensure there is no disruption to production operations.

• In terms of supplier relations, direct purchases are more likely to be covered by long-term relationships.

• In many organisations, and especially manufacturers, the cost of direct purchases is a very high proportion of total external spend.

Difficulties in setting MRO stock levels

• In many cases the actual usage of the item will be very low, or even zero in some periods.

• In other cases, the purpose of stocking the part may be to compensate for unwillingness of distributors to do so.

• The numerous items of MRO supplies are subject to very wide patterns of demand.

MRO checklist for purchasing capital equipment1. Ask for all relevant engineering drawings.

2. Request a list of all parts plus a recommended schedule of spares with expected life spans and other details.3. Consider linking the price paid to performance levels actually achieved; shortfalls in performance lead to reductions in price.

4. Plan a first purchase of spares at the time of purchasing the equipment. Consider carefully whether the recommendations of the supplier are more than is likely to be required: avoid overstocking. 5. Agree guaranteed lead times for spares if these are to be purchased from the manufacturer.6. Consider a maintenance agreement with a third party contractor, possibly with the contractor holding stocks of spares.

Distinguishing features of service purchases

• Impracticability of storage

• Lack of inspectability

• Uncertainties in contractual agreements

• Complexity

Service level agreements

• How often is the service to be provided?

• During what hours will the service be carried out?

• What staff will be involved in providing the service?

• How far will the service extend?

• Does the service include special tasks caused by fault of the buyer’s own staff?

• What qualifications are needed by the staff members providing the service?

• What speed of response is expected from the supplier?

• What dispute procedures will be required?

Service quality gaps

• Consumer expectations, ie the gap between what consumers actually expect and what managers perceive that they expect

• Managers’ perceptions of consumers’ expectations, ie the gap between what consumers actually want and what managers lay down in service quality specifications

• Service quality specifications – the gap between what is delivered and what is specified

• Actual service delivery, ie the external communications gap between provider and customer.

Difficulties with service purchases

• Services are intangible.

• Every separate instance of service provision is unique and may or may not be equivalent to previous instances.

• It is hard to assess the many factors comprised in provision of a service.

• A service may be purchased for a long period, during which requirements may change subtly from the original specification.

• The offering from one supplier will inevitably differ from those of other suppliers in a whole range of mostly intangible ways.

Making a success of outsourcing

• Managers should establish a strategy for the proper balancing of management, contracting and consulting.

• Managers should establish a strategy to deal with possible reductions in staff.

• Managers should closely integrate the external suppliers.

• Managers should provide appropriate communication channels.

Questionable assumptions in outsourcing

• The assumption that strategy primarily involves competitive position in the market place.

• The assumption that brand share is defensible without manufacturing share.

• The assumption that design and manufacturing are separable.

• Market knowledge is separable from manufacturing.

Exercise

Managers often outsource in order to improve their competitive advantage by shedding non-core activities. In the examination you may be required to take a critical look at such decisions. Keep an eye open for examples of outsourcing reported in the press or occurring in the organisation you work for. To what extent are these examples motivated by the search for competitive advantage? What problems do they cause (such as lack of control over quality, staff redundancies etc)?

Benefits of outsourcing logistics

• Contracting out frees up resources which can more profitably be devoted to core activities.

• Logistics specialists are well placed to recognise and respond to rising customer expectations.

• Contracting out gives greater flexibility in times of difficulty.

• Buying firms gain access to specialist expertise.

Reluctance to outsource• A firm may be concerned that outside contractors will not give the

required level of service.

• A firm may fear that a large number of separate outside contractors would complicate matters.

• Reluctance may stem from a general policy of wishing to retain control.

Five rights of purchasing

It is the job of the buyer to ensure that:

• materials of the right quality

• are delivered in the right quantity

• to the right place

• at the right time

• for the right price.

And a sixth ‘right’: materials must also be obtained from the right source.

Three levels of strategy

• Corporate strategy is concerned with what business or businesses the organisation is involved in or should be involved in.

• Business strategy determines how each business should attempt to achieve its mission within its chosen area of activity.

• Functional strategy determines how an individual function, such as purchasing, can best support the corporate and business strategies.

Objectives of the purchasing function

• Servicing internal customers

• Cost control

• Ensuring timely supplies

• Risk management

Exercise

Consider your own organisation, or one with which you are familiar. Which departments can be regarded as ‘customers’ of purchasing? To what extent are the activities of the purchasing function designed with the needs of these customers in mind?

Tasks performed by purchasing

• Clerical and administrative tasks

• Negotiating and buying

• Expediting

• Purchasing research

• Management of the function

Why has purchasing become strategic?• Changes in cost base of manufacturers

• Increased use of outsourcing

• Need for world class manufacturing techniques

Why specify branded items?

• It is simple

• Quality and reliability

• Well known components can be a selling point

• May be essential in the case of patented items

Why use performance specifications?

• They are easier to draft.

• They place more responsibility on the shoulders of the buyer.

• They widen the potential supplier base.

Why conformance specifications are less common

• It can be very difficult to draft a comprehensive description of exactly what is wanted.

• Suppliers who conform to the letter of the description are safeguarded in law even if the product supplied does not perform its intended function.

• They may well restrict the potential supplier base.

Basic requirements of a specification

• It should be up to date

• It should contain a detailed technical description

• It should include an estimate of materials requirements

Points covered by a specification

• Performance, ie the basic operating characteristics of the product

• Features, ie the ‘optional extras’

• Conformance, ie the degree to which the product conforms to the buyer’s needs

• Reliability

• Durability

• Serviceability, ie the ease of maintaining the product

• Aesthetics, ie the pleasing appearance of the product

• Perceived quality, ie the reputation of the product

Exercise

Try to get hold of some specifications used by your own firm. To what extent can they be regarded as performance or conformance specifications? Do they perhaps contain elements of both approaches? Do they at any stage use ‘alternative’ techniques (eg specifying a particular part by a brand name)?

Quality characteristics of services

• Reliability

• Responsiveness

• Competence

• Access

• Courtesy

• Communication

• Credibility

• Security

• Understanding

• Tangibles

A specification must reconcile:

• Design considerations of function

• Marketing considerations of consumer acceptance

• Manufacturing considerations of economical production

• Procurement considerations of markets, materials availability, supplier capabilities and cost

Advantages of using specifications

• The process of drawing up specifications is a useful discipline.

• If items are to be purchased from more than one source, the use of conformance specifications may be essential to ensure uniformity.

• Specifications provide useful criteria for measuring the quality and acceptability of materials once delivered.

Disadvantages of using specifications

• It is an expensive process, and almost certainly uneconomic if small value purchases are in question.

• The costs of inspection are greater than if purchasing by brand name is used.

• Specifications can become too firmly embedded: they should be regularly reviewed.

Key performance indicators

• Quality

• Cost

• Timeliness

• Quantity

• Compliance

SMART objectives

• Specific

• Measurable

• Agreed /achievable

• Realistic

• Time-bounded

Four questions in contract law

• Is there a contract in existence?

• Is the agreement one which the law should recognise and enforce?

• When do the obligations of the parties come to an end?

• What remedies are available if either party is in breach of his contractual obligations?

Limitations to freedom of contract

• Some contracts are made on standard terms.

• In some cases there will be implied terms.

• Clauses limiting the liability of a party may not be allowable under the Unfair Contract Terms Act 1977.

Void and voidable contracts

• A void contract has no legal effect on either party – it is just as though no contract exists at all.

• A voidable contract exists unless and until it is brought to an end (avoided) at the option of one of the parties (rescission).

Essential elements in a contract

• Agreement (ie offer and acceptance)

• Consideration

• Intention to create legal relations

• Contractual capacity

• Correct form

A contractual offer:

• must be clear and definite

• must indicate willingness to be bound

• may be made to a person, a class of persons, or the whole world

• must reach the offeree

• must still be open when accepted.

An offer may be terminated:

• by revocation

• by rejection (including a counter-offer)

• by lapse of time

NOT an offer:

• Invitation to treat

• Mere statement of intention

• Statement of price in answer to enquiry

Form of acceptance

• Normally, any form of acceptance is valid

• But offeror may stipulate a particular form

• Silence alone is not acceptance

Exercise

Alan accepted a business offer by posting a letter in a post box in the country. He knew, by reading the local paper, that the postal service in his area had been suspended owing to the ill health of two of the postal workers. The letter never arrived at the premises of the offeror.

Was the offer accepted by Alan’s actions?

You should realise that the postal rule will not apply in this situation as it is not a reasonable method of acceptance. As Alan knows of the suspension in the postal service he cannot reasonably state that he considered this an acceptable way to reply.

Tenders

• A tender is a contractual offer

• May be for a one-off job

• Or it may be a standing offer – then each acceptance completes a distinct contract

Buyer’s obligation under a tender

• If buyer accepts tender, contract is binding

• Not obliged to order anything from successful tenderer, but must not order from anyone else

• Not required to accept lowest tender (or any tender at all)

• Must give due consideration to all compliant tenders

Contractual consideration: three rules

• Consideration must be valuable, but need not be adequate.

• Consideration must be sufficient.

• Consideration must move from the promisee.

Consideration must be valuable

• Must be money or money’s worth

• Need not be adequate for what is bought or sold

• But very inadequate consideration may suggest fraud or duress

Consideration must be sufficient

• Performing a legal obligation is not sufficient

• Nor is a pre-existing contractual obligation

• Past consideration is usually not sufficient

The rule in Pinnel’s case

• Payment of a lesser sum in satisfaction of a greater sum is insufficient – the creditor can insist on the balance

• An exception is ‘accord and satisfaction’

Intention to create legal relations

• Domestic and social arrangements: no intention

• But this presumption may be rebutted

• Commercial arrangements: intention exists

• Letters of intent: not binding

No contractual capacity

• Minors

• The mentally disordered

• Drunkards

Form of a contract

• Normally no need to be in writing

• Exceptions to this general rule:

– bills of exchange, such as cheques

– contracts of marine insurance

– regulated consumer credit agreements, eg hire purchase agreements

– legal assignment of debts

– contracts for the sale or other disposition of land.

Battle of the forms

• Contracts on standard terms

• Whose terms prevail?

• Analyse as offer and counter-offer

• Who fires the last shot?

Privity of contract

• Only the parties to the contract acquire rights and obligations

• This can be overcome by making a contract under seal

• Another way around it is via a collateral contract

Purchases via websites: buyer must be informed

• Technical steps to conclude the contract

• Whether the contract will be filed with the supplier and how it can be accessed

• Technical means for identifying and correcting input errors before the order is placed

Model form contracts• In civil engineering, the standard contracts applied are issued jointly

by the Institute of Civil Engineers (ICE), the Association of Consulting Enginers and the Federation of Civil Engineering Contractors.

• In building contracts, the standard model form contracts are prepared by the Joint Contracts Tribunal (JCT).

• For the supply of mechanical and electrical works, the Institutions of Electrical and Mechanical Engineers in conjunction with the Association of Consulting Engineers have published MF/1 contract terms.

• A new model form contract has been produced by the ICE in an attempt to standardise terms used across the construction industry.

• For carriage of goods by road in the UK, the Freight Transport Association have developed a model form of conditions of carriage.

• The Chartered Institute of Building have recently developed a model form contract for the commissioning of facilities management services.

Common issues in international trade

• 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 overseas seller to the UK buyer?

• What are the rights of a party when goods do not conform to the contract?

An overseas seller has three fundamental legal duties

• To deliver the goods

• To deliver the relevant documentation

• To transfer the property in the goods

The importer has two duties

• To pay the price expressed in the contract of sale

• To take delivery of the goods according to the terms of the contract of sale

Exclusions from the Rome Convention

• Obligations arising under bills of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character.

• Arbitration agreements and agreements on the choice of court.

• The question whether an agent is able to bind a principal to a third party.

Bill of lading• The quantity of the goods received

• The condition of the goods when received

• Marks which clearly identify the goods

• Generally, the terms of carriage

Obligations under Hague-Visby rules

• The shipowner will provide a seaworthy ship, ie a ship that is fit for its purpose.

• The shipper will proceed with due despatch.

• The shipper will proceed taking the direct route to the agreed destination.

• The shipowner will use due care in navigating the ship and carrying the goods.

Payment in international trade

• Payment in advance

• Open account trading

• Documentary methods (including letters of credit and bills of exchange).

Advantages of documentary credit

• As to the seller, under a documentary credit arrangement he has the assurance that he will be paid by the bank within his own country as soon as he presents the stipulated documents.

• As to the buyer, he can raise credit on the strength of the documents from the bank and does not need to have his own funds.

Parties to a cheque transaction

• Yourself (or strictly, the organisation you work for). You draw the cheque and are called the drawer.

• Your bank. We say that the cheque is drawn on Barclays Bank plc, for example, and therefore the bank is the drawee.

• Your supplier, the payee.

Reasons for using arbitration

• The final and binding character of arbitral awards.

• The wide international acceptance it enjoys.

• The neutrality of the forum.

Typical incoterms

• EXW – ex works

• FOB – free on board

• CIF – cost, insurance, freight

• FAS – free alongside ship

• DDP – delivered duty paid

Examples of buyer/supplier conflict• Is it a fixed price contract or has a price escalation clause been

inserted?

• If the supplier delivers late, will the buyer be entitled to end the agreement?

• Who pays the costs of carriage?

• Who bears the risk of accidental loss or damage in transit?

• When is ownership in the goods to pass to the buyer? Does the contract contain a reservation of title clause?

• Has the supplier tried to exclude or limit their liability for breaches of contract?

Kraljic’s grid• Low spend/low risk category – as a routine item the approach

may be to use low maintenance routines to manage the purchase spend.

• High-dependency bottleneck – the objective is one of strategic security.

• Leverage – here the buyer has ‘power’ in the supply market; the buyer might adopt a more ‘traditional’ leverage approach to procurement as a number of competing suppliers can be judged by commercial criteria such as price, quality and delivery. The objective is to secure supply but it is not an area where a long-term relationship of importance is envisaged.

• Strategic – buyer examines the implications of high risk and high value items; the approach could be a more long-term sustainable relationship that will bring benefits through closer supply chain, IT and management processes.

Terms and representations

• If the representation is subsequently included in the contract as one of its terms and if it is then later found to be untrue, the party misled has remedies for breach of the term, as well as for misrepresentation.

• If the representation does not become a term of the contract, the party misled will have remedies only for misrepresentation.

Term or representation? Factors to consider• When the statement was made.

• Whether the statement was reduced to writing after it was made.

• The importance of the statement to the recipient.

• Whether the person making the statement has suggested that the other party checks its validity.

• Whether the person making the statement has special knowledge or skill.

• Where a layman makes an assertion to an expert the statement is unlikely to be a term of the contract.

Exercise

Which of the statements below would be regarded as terms and which would be merely representations?

• A potential purchaser viewed a propery. The owners made several comments about the soundness of the foundations. The sale fell through at the time when the potential purchaser lost his job. One year later the sale was re-activated without any further comments about the foundations being made. It turns out that the foundations were unsound.

• A purchaser of a car wanted to buy a particular model because of its rarity value. It turns out that the car was in fact a much later model.

Exercise (continued)

• When buying diving equipment the purchaser expressed doubt as to whether a particular model of wet suit would be ideal in those conditions and the seller asserted that it was designed specifically with that in mind.• An art dealer spotted what he considered was a rare painting through the window of someone’s private house. He went into the house to enquire if he could buy the painting from the owner and was convinced to buy it when the owner confirmed that the painting was

definitely by that particular artist.

Solution

The first and last would probably be regarded as mere representations. The middle statements would probably be regarded as representations and terms.

Terms may be implied by:

• the nature of the contract (eg employment contract: duties of employer and employee)

• the need for business efficacy (ie to make the contract workable)

• Acts of Parliament (eg the Sale of Goods Acts)

• custom

Conditions, warranties and innominate terms

• A condition is a vital term of the contract, breach of which may be treated by the innocent party as a substantial failure to perform a basic element of the agreement.

• A warranty is a less important term which is incidental to the main purpose of the contract.

• The courts have tried to avoid too rigid a classification of terms on these lines and have recognised an intermediate category described as innominate or intermediate terms: The Hansa Nord (1976).

An exclusion clause is one which:

• totally excludes one party from the liability which would otherwise arise from some breach of contract (such as the supply of goods of inferior quality); or which

• restricts liability in some way; or which

• offers some dubious ‘guarantee’ in place of normal liability for breach of contract.

Validity of exclusion clauses• The common law test is broken down into two parts.

– The clause must be incorporated into the contract and not added after the contract is complete.

– The clause must be clear and precise; any vagueness will be construed against the party who is attempting to rely on it.

• The statutory test is laid down by The Unfair Contract Terms Act 1977 (often known as UCTA 1977).

Limiting liability for negligence

• A person in business cannot exclude or restrict liability for death or personal injury resulting from negligence

• A person in business cannot exclude or restrict liability for negligence causing loss other than death or personal injury unless the exclusion clause is reasonable.

UCTA 1977: guidelines on reasonableness

• The strength of the bargaining positions of the parties relative to each other

• Whether the buyer received an inducement to agree to the term

• Whether the buyer knew or ought to have known of the existence and the extent of the term

• Whether it was reasonable to expect when the contract was made that it would be practical for the buyer to comply with a condition such that liability of the seller would be excluded or restricted if he did not

• Whether the goods were manufactured, processed or adapted to the special order of the customer.

Definitions: SGA 1979

• Seller means a person who sells or agrees to sell goods under a contract for the sale of goods.

• Buyer means a person who buys or agrees to buy goods under a contract for the sale of goods.

Types of sale

• A bargain and sale – where delivery of the goods coincides with the sale

• A sale and delivery – where delivery is made subsequent to the sale

Hire and hire purchase

• A contract of hire of goods arises where the owner merely allows the hirer to have possession of the goods for a specified period.

• A contract of hire purchase is where the owner of goods hires them to another, who then has the option to purchase once all the agreed instalments have been paid.

• Neither is a contract for the sale of goods.

Credit sales and conditional sales• A credit sale agreement is where ownership passes to the

purchaser at the outset although the purchaser is given credit in that he pays for the goods by instalments over a specified period. This is an absolute contract of sale.

• A conditional sale agreement is where ownership of the goods will only pass to the purchaser once he has paid all the instalments. This is a conditional agreement to sell.

Types of goods• Specific goods are goods identified and agreed on at the time the

contract of sale is made

• Unascertained goods are goods not so identified and agreed upon at the time the contract is made.

• Future goods means goods to be manufactured or acquired by the seller after the making of the contract.

• Existing goods are those which are in existence and in the ownership of the seller at the time the contract is made.

Terms as to time

• Stipulations as to time of payment are not deemed to be of the essence of a contract of sale (ie are not treated as conditions) unless a different intention appears from its terms

• Other stipulations as to time, such as dates of shipment, transfer or delivery, are normally treated as conditions, at any rate in commercial contracts, where time is likely to be an important factor.

• A stipulation as to time may be waived, so that thereafter a buyer cannot insist upon a delivery date specified in the contract. However, on giving reasonable notice, the buyer can once again make time of the essence in the contract.

The implied term as to title: s 12At present, whatever a contract may say, the seller is deemed to undertake:

• as a condition, that he has a right to sell the goods; or in the case of an agreement to sell, that, when the property is to pass, he will have a right to sell then

• as a warranty, that the goods are and will remain free from any charge or encumbrance not disclosed to the buyer before the contract is made, and that the buyer will enjoy quiet

possession of them

The implied term as to description: s 13• In a sale by description there is an implied condition that the

goods correspond with the description

• Most sales involve some description, if only to identify the goods, whether they are specific or unascertained

• Where there is uncertainty about the status of a description the test is: did the buyer rely on it?

• A statement which is part of a written advertisement is more likely to be treated as part of the description than one which is made orally in the presence of the buyer

• The buyer cannot usually rely on s 13(3), if he sees the goods before making the contract and it is obvious to him that the description is inaccurate

The implied terms as to satisfactory quality and fitness for purpose: s 14

Two conditions:

• that the goods supplied are of satisfactory quality except in respect of defects specifically drawn to the buyer’s attention before the contract is made, and defects which any examination actually carried out by the buyer before the contract ought to reveal

• in a case where the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, that the goods supplied are reasonably fit for the purpose

The implied term as to sale by sample: s 15

• A sale by sample occurs when the buyer is given the opportunity of examining a small part only of the goods to be bought, but such as to be typical of the whole, in this context usually called the bulk of the goods.

• In a contract for sale by sample there are implied conditions:

• that the bulk shall correspond with the sample in quality;

• that the buyer shall have a reasonable opportunity of comparing the bulk with the sample; and

• that the goods shall be free from any defect rendering them unsatisfactory, which would not be apparent on reasonable examination of the sample: s 15(2).

UCTA 1977: five guidelines for reasonableness

• The strength of the bargaining positions of the parties relative to each other

• Whether the buyer received an inducement to agree to the term

• Whether the buyer knew or ought to have known of the existence and the extent of the term

• Whether it was reasonable to expect when the contract was made that it would be practical for the buyer to comply with a condition such that liability of the seller would be excluded or restricted if he did not

• Whether the goods were manufactured, processed or adapted to the special order of the customer

Implied terms in SGSA 1982• Section 13 implies a term into a contract for the supply of a service

that the supplier will carry out the service with reasonable care and skill

• Section 14 implies a term into a contract for the supply of a service that the supplier will carry out the service within a reasonable time

• Section 15 implies a term into a contract for the supply of a service that the party contracting with the supplier will pay a reasonable charge

Damages for breach of contract

• Where the contract does not make any provision for damages the court will determine the damages payable. Such damages are referred to as unliquidated damages.

• Where a contract provides for the payment of a fixed sum on breach, it may rank as either a liquidated damages clause or a penalty clause. It is crucial to differentiate these as the results are different.

Penalty clausesThere is a presumption that a clause is a penalty clause in any of the following circumstances.

• The sum stipulated is extravagant and unconscionable.

• A single sum is payable on the occurrence of one or more breaches, some trifling, others serious.

• If it is a sum payable for a breach, where the breach is non-payment of money, and the sum stipulated is larger than the non-payment

Guarantees and indemnitiesContrast these two situations

• A and B go into a shop. B says to the shopkeeper ‘Let him (ie A) have the goods. If he doesn’t pay you, then I will’. This is a contract of guarantee: the primary liability is with A, and the secondary liability with B.

• A and B go into a shop. B says to the shopkeeper ‘Let him (ie A) have the goods. I will see that you are paid’. This contract is one of indemnity. B has assumed the primary liability and there is no secondary liability.

Why timing of transfer of property is important

• If the goods are accidentally damaged or destroyed, as the risk may depend on who has the property (ownership)

• If either the seller or the buyer becomes bankrupt, as a bankrupt’s property vests in his trustee in bankruptcy

• If the goods are damaged or destroyed through the negligence or other fault of a third party, as the rights of an owner to claim for loss are different from those of a person who merely has possession

• For the purposes of s 12 SGA 1979, it is only a person who owns goods who can sell them.

• For the purposes of deciding whether an unpaid seller can maintain an action for the price and other remedies.

Principles governing transfer of property

• Property in unascertained goods cannot pass before they have been ascertained

• Subordinate to the first rule, property in goods passes from seller to buyer at such time as the parties intend it to pass

Rules of s18 SGA 1979

Rule 1 In an unconditional contract for the sale of specific goods in a deliverable state the property passes at the time of the contract. Rule 2 In a contract for the sale of specific goods where the seller has to do something to put the goods into a deliverable state, the property does not pass until this has been done and the buyer has notice of itRule 3 In a contract for the sale of specific goods in a deliverable state where the seller has to weigh, test or measure the goods in order to ascertain the price, the property does not pass until this has been done and the buyer has notice of itRule 4 Where goods are delivered on approval or on sale or return the property passes to the buyer:

• when he signifies his approval or acceptance to the seller or adopts the transaction in some other way; or

• if he retains the goods without rejecting them within a fixed or reasonable time.

Rule 5 If the contract is for the sale of unascertained or future goods sold by description, the property passes when goods of that description and in a deliverable state are unconditionally appropriated to the transaction by one party with the assent of the other.

Payment terms

• Under the Sale of Goods Act 1979 (as amended), any time stated for payment is not of the essence unless the contract states otherwise.

• Under the Late Payment of Commercial Debts (Interest) Act 1998, statutory interest of 4% above base rate is automatically payable by the buyer. S8 of the Act, however, allows for contracting out so long as the contract provides for a ‘substantial’ remedy.

The TUPE regulations• The Transfer of Undertakings (Protection of Employment)

Regulations (TUPE for short) apply to situations where an undertaking has a change of owner. This situation must mean that the staff are also transferred.

• Problems may arise in these situations where employees are made redundant and they are hired by the new owner of the undertaking under new terms of employment.

• A ‘relevant transfer’ will involve situations where the ownership of the undertaking changes (eg where the undertaking is sold or is the subject of a merger transaction).

Consultation with workers• The transferor (seller) has to initiate a consultation process with the

affected workers.

• These consultations should take place ideally 28 days before the exchange of contracts (ie the acquisition of the undertaking or its disposal). There is, however, no statutory period for consultation.

• Failure to consult affected employees or workers may mean that the seller could be liable to pay these individuals up to 13 weeks pay.

• Special care should be taken to ensure that all employees or workers are consulted.

• Dismissals connected with the transfer can be justified only on economic, technical or organisational (ETO) grounds.

The 2006 regulations• Revised TUPE Regulations 2006 came into force on 6 April 2006, replacing

the earlier Regulations from 1981. • The scope of the Transfer of Undertakings (Protection of Employment)

Regulations 2006 is wider than that of its predecessor. Both outsourcing and insourcing will be covered by the new legislation.

• There is a new duty for the transferor employer to provide information to the transferee (preferably in writing) about the transferring employees before the relevant transfer takes place.

• The requirement is for the above information to be provided ‘at least two weeks before the completion of the transfer’.

• The Regulations contain special provisions which make it easier for insolvent businesses to be transferred to new employers

• The Regulations provide some freedom for the transferor or transferee to agree variations to contracts of employment before or after a transfer

• The Regulations also clarify the circumstances where it is unfair for employers to dismiss employees for reasons connected with the transfer

Retention of title• A retention of title clause states that the property in the goods will not

pass to the buyer until the seller has been paid in full.

• Such a clause is often called a Romalpa clause after the case of Aluminium Industrie Vaassen BV (AIV) v Romalpa Aluminium Limited (1976).

• Retention of title clauses are effective so as to allow the seller to repossess only if:

• the goods are still in the possession of the buyer, and

• the goods are identifiable (ie they are not mixed with other goods), and

• the goods are in their original state (ie they have not been subjected to any manufacturing process).

Intellectual property rights

• The law provides a range of measures to protect ‘intellectual property’. These laws derive from both common law and statute.

• Technological inventions may be protected by the law relating to patents.

• Products carrying a distinctive design may be protected by the law relating to registered designs.

• The goodwill attaching to a particular mark or logo used by a business may be protected by the law of trade marks and service marks.

• Other protection is afforded by the law of copyright.

Types of insurance• Employer’s liability

• Public liability

• Professional indemnity

• Product liability

Dispute resolution• Mediation

• Arbitration

Advantages of arbitration over litigation• The proceedings are held in private, avoiding publicity of issues which

parties may not wish to be broadcast.

• The parties can choose the individual or organisation to resolve any dispute.

• Arbitration is less confrontational than litigation.

• Aribitration is intended as a single ‘one-stop’ process.

• Arbitration should be speedier and less expensive than litigation.

The basic purchasing cycle

Exercise

The stages identified in the figure are not the only possible analysis of the typical purchasing transaction. Try to think of cases where some of these steps might be telescoped with each other, or eliminated altogether. Try to think, with reference to your own experience, of other stages that might be identified.

Exercise

Design a purchase requisition form for completion by user departments, thinking carefully about the information that should be included and the number of copies that might be needed.

Auditing a purchase transaction

• The goods delivered by the supplier must correspond to what was ordered.

• The goods must be of satisfactory quality.

• The amount charged by the supplier must correspond to the price agreed. This involves checking the supplier’s invoice.

Authorisation procedures• When a requisition is originated it must be signed by an authorised

individual before being passed to purchasing.

• When the purchase order is completed, it must be signed by an authorised person within the purchasing department.

• When the supplier’s invoice is received it is not passed for payment to the accounts department until purchasing staff have carried out checks.

The use of competitive biddingFive criteria for the use of competitive bidding

Four situations in which competitive bidding should not be used

The monetary value of the purchase should be high enough to justify the expense of the method

Situations where it is impossible to estimate production costs accurately

The specifications must be clear and the vendors must have a clear idea of the production costs involved

Situations in which price is not the only important variable

There must be an adequate number of vendors in the market

Situations in which changes to specification are likely as the contract progresses

The vendors must be both technically qualified and keen for the business

Situations in which special tooling or set-up costs are major factors

There must be sufficient time for the procedure to be accomplished

Criteria for eliminating potential suppliers

• Lack of recent experience in the relevant kind of work

• Inadequate financial resources to complete the work

• Inadequate management resources to control the work

• Lack of the required facilities

Open tendering and selective tendering

• Open tendering is more expensive in terms of administration and evaluation costs.

• Open tendering is usually more time-consuming, which may be a problem if deadlines are tight.

• Vendors too find the procedure expensive. Selective tendering means that only suppliers with a fair chance of succeeding are put to the trouble and expense of tendering.

A checklist for tendering1. Determine whether a tendering process is to be used, or whether some other process is preferable2. Determine the type of tendering process to be used – open or selective. 3. Determine a realistic timetable. This should allow reasonable time for all interested parties to prepare their submissions. It should also allow reasonable time for the purchaser to make available any information that is required by the tenderers. 4. Issue invitations to tender. In the case of open tendering this would be by means of a public advertisement. In the case of selective tendering it would be by means of a formal approach to each supplier on the shortlist, but the preliminary vetting should have excluded any that may not be willing to tender for any reason.5. Ensure that full specifications are issued to each potential supplier in identical terms and by the same date. It should be made clear to tenderers that they are to comply strictly with any timetable for submission. 6. Arrange the opening of tenders on the appointed date. Return unopened any tenders received after the due date.

A checklist for tendering (continued)7. List the tenders received and enter the main details of each on an analysis sheet for ease of comparison.8. Analyse each tender and select the best offer from suppliers who meet the tender criteria and who are judged capable of completing the contract to the required standards and within the specified deadlines.

A checklist for analysing tenders1. Establish a routine for receiving and opening tenders, distributing copies as appropriate and ensuring security. 2. Set out clearly the responsibilities of the departments involved. 3. Establish objective award criteria. These may have been set out in the initial invitation to tender, particularly if the contract is subject to statutory control.4. Establish teams for the appraisal of each tender. It will be necessary to ensure that the required team members will be available during the time they are required. 5. Establish a standardised format for logging and reporting on tenders. 6. Check that the tenders received comply with the award criteria.7. Check the arithmetical accuracy of each tender. 8. Eliminate suppliers whose total quoted price is above the lowest quotes by a specified percentage. For example, eliminate any supplier whose quoted price is more than 20 per cent above the average of the lowest two quotes.

A checklist for analysing tenders (continued)9. Evaluate the tenders in accordance with predetermined checklists for technical, contractual and financial details. 10. Prepare a report on each tender for submission to the project manager.

Guidelines for post-tender negotiations• Post-tender negotiation meetings should be conducted by at least

two members of the purchasing organisation.

• The negotiators from the purchasing organisation should have cleared their proposed negotiating strategy with relevant managers or directors before entering the meeting.

• Notes of the meeting should be taken to ensure that a record is kept of the negotiations and conclusions.

• Buyers should conduct the negotiation in a professional and ethical manner.

Procurement directives: four procedures

• Open procedure

• Restricted procedure

• Negotiated procedure

• Competitive dialogue

Debriefing: topics to be covered• Cost• Schedules• Design• Organisation/administration weaknesses• Experience• Personnel• Facilities/equipment• Subcontracting• Cost and schedule control inadequacies• Industrial relations• Quality management• Contract terms• After-sales service

Debriefing:• should not disclose information about other tenderers that could

breach commercial confidentiality

• should not become an argument about rights or wrongs

• should be confined to the unsuccessful bid and the weaknesses that led to its rejection

• should indicate the perceived strengths of the unsuccessful tender

• should conclude by asking for the supplier’s view on the debriefing process.

Procurement directives: remedies for breach

• Suspension of an incomplete contract award procedure

• Setting aside of a decision in an incomplete contract award procedure

• An award of damages (in cases where a contract has already been entered)

E-tendering• E-tendering is the carrying out of the competitive tendering process

using electronic means

• The e-tendering process can include the advertisement of the requirement for goods and services, document production, and much more

• Most e-tendering systems provide additional support such as archiving, document management, early warning of opportunties to suppliers, and maintenance of approved and/or potential supplier lists.

• E-tendering systems enable suppliers in different geographic regions to participate

• The buyer can compare all the tender responses received by copying and pasting the responses into an evaluation spreadsheet

Process efficiencies from e-tenderingProcess efficiencies from e-tendering

• General administration

• Alert for imminent tenders

• Contract notice creation (eg OJEU)

• Opening procedure

• Document preparation (eg expression of interest, invitation to tender)

• Document distribution

• Tender evaluation process

• Supplier enquiries

• Contract award notification (success/failure)

Buying staff gain time for:

• counteracting non-compliant purchasing

• strategic sourcing

• negotiating better contracts

• cost comparisons

• aggregating demand

• supplier development

• high risk/high value contracts.

Benefits of e-tendering for suppliers

• Suppliers are able to see contract renewal dates, tender deadlines, status and the rationale for the eventual award of the contract.

• Suppliers can download and submit electronic tender documents using the time that would have otherwise been spent on postal delivery to complete the response.

• As most e-tendering systems are internet-based, suppliers can easily view and engage in tendering opportunities without being constrained by location.

Disadvantages of e-tendering

• Suppliers are sometimes concerned with the perceived need for technical know-how and specialised equipment.

• Confidentiality is an important issue for both buyers and suppliers.

• There are significant costs involved in the e-tendering process.

Procurement directives and e-tenderingBuyers must guarantee the following:• Electronic signatures relating to tenders, requests to participate and the

submission of plans and projects comply with national provisions • The exact time and date of the receipt of tenders, requests to participate and

the submission of plans and projects can be determined precisely• It may be reasonably ensured that, before the time limits laid down, no one

can have access to data transmitted under these requirements• If that access prohibition is infringed, it may be reasonably ensured that the

infringement is clearly detectable.• Only authorised persons may set or change the dates for opening data

received• During the different stages of the contract award procedure, or of the

contest, access to all data submitted, or to part thereof, must be possible only through simultaneous action by authorised persons.

• Simultaneous action by authorised persons must give access to data transmitted only after the prescribed date

• Data received and opened in accordance with these requirements must remain accessible only to persons authorised to acquaint themselves therewith

Electronic notice systems must include:• The features, the values of which will be the subject of electronic

auction

• Any limits on the values which may be submitted, as they result from the specifications relating to the subject of the contract

• The information which will be made available to tenderers in the course of the electronic auction

• The relevant information concerning the electronic auction process

• The conditions under which the tenderers will be able to bid

• The relevant information concerning the electronic equipment used and the arrangements and technical specifications for connection

What is contract management?• Contract management is the process that enables both parties to a

contract to meet their obligations in order to deliver the outputs required from the contract

• The central aim of contract management is to obtain the goods and/or services as agreed in the contract and achieve value for money

• Contract management is about resolving or easing tensions to build a relationship with the supplier

• Contract management can represent a considerable investment for both the buyer and the supplier

Building blocks of contract management

• The contract – the legal contract between the parties, containing the terms and conditions and the specification of requirement

• The contract management team

• The contract process

• Relationship management

Results of poor contract management• The supplier is obliged to take control, resulting in

unbalanced decisions that do not serve the purchaser’s interests

• Decisions are not taken at the right time – or not taken at all

• New business processes do not integrate with existing processes

• Both buyer and supplier fail to understand their obligations and responsibilities

• There are misunderstandings and disagreements• Progress is slow or there seems to be an inability to move

forward.• The intended benefits are not realised• Opportunities to improve value for money and

performance are missed

Reasons for poor contract management• Contracts are poorly drafted.

• Inadequate resources are assigned to contract management.

• The buyer’s team does not match the supplier team in terms of either skills or experience (or both).

• The wrong people are put in place, leading to personality clashes.

• There is a failure to check supplier assumptions.

• Responsibilities relating to commercial decisions are not clear.

• The buyer fails to measure performance.

• The focus is on current arrangements rather than what is possible or the potential for improvement.

• Risks are not monitored and managed.

Responsibilities of the contract manager: buyer side

• To act as a single point of contact for all commercial and legal correspondence relating to the contract

• To maintain the specification of contract performance measures

• To monitor contract performance and report at overall service level

• To represent the buyer’s interests to the supplier

• To oversee operation of the contract

• To determine and take remedial actions by agreement with the supplier

• To negotiate remedies with the supplier

• To escalate contract problems as necessary

• To maintain/develop revised or modified contract specifications

Responsibilities of the contract manager: supplier side

• To monitor contract performance

• To identify and manage exceptions

• To represent the supplier’s interests to the buyer

• To respond to changing customer needs

• To determine and take remedial actions by agreement with the buyer

• To negotiate remedies with the buyer

• To escalate problems as necessary

• To operate the contract to the specification

Procedures in contract administration• Contract maintenance and change control

• Charges and cost monitoring

• Ordering procedures

• Payment procedures

• Budget procedures

• Resource management and planning

• Management reporting

• Escalation

• Dispute resolution

Document management principles

• Identifying all relevant documentation

• Change control procedures

• Recording the status of documents (current/historic, draft/final)

• Ensuring consistency across documents.

Incentives for suppliers• Guaranteed or fixed levels of capacity

• Revenue sharing, gain sharing, or tariff reduction

• Opportunity for innovation

• Key performance indicators (KPIs) for recognition and reward

Improving supplier performance

• Improved customer satisfaction

• More efficient ways of providing the specified requirement

• Useful additions to the specification

• Eliminating aspects of the requirement that are no longer required

• Use of new technologies that would reduce costs but improve quality of the product or service

• Changes in procedures or working practices

Handling problems• Contract should define procedures for corrective action

• Escalation procedures

• Regular meetings between buyer and supplier

• Towards end of contract period, full review of performance

Key factors in relationship success

• Mutual trust and understanding

• Good communication

• A joint approach to managing performance of the contract

Managing relationships

• Good communication

• Good attitudes and behaviours

• Sharing plans and information

• Learning from mistakes