Lecture 8 - Legal Issues in Creating Commercial Agreements MW(1).pptx

business relationship

1. Commercial Relationship Management (CRM) Module PS4S39 Lecture Legal Issues in Creating Commercial Agreements

2. Contents Elements of a binding commercial agreement Invalid & incomplete agreements Issues in offers & acceptance Standard terms of contracts The implications of international law

3. The Purchasing Cycle

4. Elements of a legally binding agreement In order for a contract to exist & to be legally binding, certain elements must be present: Agreement – the exchange of offer & acceptance Consideration – each party must suffer some loss or ‘detriment’ in return for benefit received Intention to create legal relations – each party must acknowledge that if ca dispute arises, the matter can be taken to a court of law to decide the matter Contractual capacity – each party must be legally able to enter into a contract

5. Acceptance of the offer Any form of acceptance is valid, whether oral, written, or inferred from the conduct of the parties Silence alone is not acceptance: there must be some sort of action by the acceptor It is the responsibility of the offeree to ensure that the acceptance is properly and clearly communicated to the offeror Acceptance is an unconditional assent (‘yes’) to all the terms of an offer.

6. Consideration to render a promise actionable Two main rules on consideration : Consideration must be valuable – (it must have some monetary value), but need not be adequate – (Re: Thomas v Thomas, 1842) Consideration must be sufficient - in the sense that it is recognised by the law Past consideration – e.g. money already spent on a project, directly related to the present activity in which consideration is being exchanged, is not valid consideration – Re: McArdle (1951) Where a person is already obliged to do something by law, or as an existing contractual duty - the discharge of the additional duty will not amount to consideration. Re. Stilk v Myrick (1809 )

7. Intention to create legal relations Both parties must intend that the agreement between them is intended to be legally binding i.e. a court of law can decide if there is a dispute C ommercial agreements - Strong presumption parties intend agreements to be legally binding This can be challenged if the opposite intention is clearly expressed in the agreement itself, e.g. in the form of a clause stating that ‘any agreement entered into shall not give rise to any legal relationship, but is binding in honour only – Re . Jones v Vernon’s Pools Ltd (1938) Collective agreements e.g. agreements between trade unions & employer are not presumed to be legally enforceable, but binding in honour only.

8. Capacity to contract There MUST be a legal capacity (ability) between both parties for a contract to be valid Most individuals have this automatically on their own behalf – except minors (under 18s), mentally disordered & those under the influence of drugs or alcohol C ontractual capacity of the business organisation A corporation is a recognised legal ‘person’ or ‘entity’ & can therefore make contracts in its own name Who has capacity to enter into contracts on ‘behalf of a business’? Only people with ‘absolute capacity’ are the owner (sole trader), partners, directors or agents with formally delegated powers to act on the company’s behalf The position of employees is less clear C ontracts should be entered into by individuals who have clear delegated authority. An employees ‘apparent authority’ may be greater than their actual authority (e.g. what their job title implies)

9. Risks of contracting through oral contracts Differing recall parties having different perceptions or recall of precisely what was agreed Disadvantagou s terms Commitment to inappropriate or disadvantageous terms ‘Mistake’ in contract: that is, lack of genuine agreement V oiding of a contract because of mistake or ambiguity of contract terms M isunderstandings and contractual disputes No written terms against which compliance and performance can be measured Lack of transparency and audit trail for contract award decisions

10. Invalid & incomplete agreements A contract maybe ‘vitiated’ (flawed) by a number of factors: Mistake, misrepresentation, duress or undue influence, or illegality In such cases the contract is either void or voidable: Void - having no legal effect on either party as though no contract was ever formed Voidable – either party can make the contract void Rescission (rescinding) – of a contract is an equitable remedy: A remedy at the discretion of the court, based on the principle of fairness Rescission can mean a formal order of court or act of one party to the contract in cancelling or ‘avoiding’ the contract This simply sets aside the contract as if had never existed, returning both parties to their exact pre-contract positions

11. Misrepresentation The representation must have induced the contract. The innocent party cannot cancel the contract if: They knew the representation was false They did not rely on the representation The representation was made after the contract formation Statements of opinion are not normally misrepresentation Look at Misrepresentation Act 1967

12. Mistake & Duress and undue influence Mistake - describes a situation in which one or more of the parties end up bound by a contract to which they did not intend to commit. If the mistake is genuine, the contract can be voidable, or remedy may be provided by the courts. Duress & undue influence – applies if pressure is placed on one party to agree a contract, in such a way that it does not therefore reflect the true intentions or wishes of both parties. Since one party has not freely consented to the agreement, the contract can be voidable.

13. The principle of caveat emptor & “let the buyer beware” ‘While a degree of exaggeration about the value of goods is an accepted element of the process, representations which are too “wide of the mark” run the risk of being beyond what is reasonable and can be seen as dishonesty.’ ‘When faced with a formula prepared by your supplier, do not rely simply upon its market knowledge. Do your own research, and if you disagree with the supplier’s figures, ask to see the supporting evidence’ – “caveat emptor” – i.e. “let the buyer beware”. E nsure all pricing or market information on which it is based is accurate and up to date, and if you need to include estimated values, do so in good faith: don’t incorporate information which you know or suspect is incorrect.’

14. Legality Legality may be another issues that renders the contract void The courts will NOT uphold a contract, if its purpose, intent or effect is contrary to statute law (i.e. Acts of Parliament, or legislation), or common law. Such a contract is simply unenforceable You cannot sue a party with whom you have committed a crime - e.g. in competition law and other complex legal areas (e.g. price fixing agreements) or equal opportunities law.

15. Issues in offer & acceptance This part focuses on some key legal issues surrounding offer & acceptance which impact on the practical conduct of negotiation and contracting with suppliers.

16. What constitutes a valid offer? It must be a definite, unequivocal or unambiguous statement of willingness to be bound in contract. It must be communicated successfully to the offeree, in such a way that he is aware of it. It must be ‘open’ (still in force) when the offeree accepts it. A ‘mere invitation to treat ’ is not an offer!

17. Is the offer ‘open’ for acceptance? If the offer is stated only to be open for a specific time period , it will ‘lapse’ after the expiration of this time – the duration of the offer If the offer was made subject to a condition , it will ‘lapse’ on failure of that condition An offer can be revoked at any time before it has been accepted An offer can be terminated by rejection .

18. Counter-offers Acceptance is an unconditional assent (yes) to all terms of an offer If the ‘offeree’ attempts to change the terms of the offer or qualify its effectiveness in anyway, this is taken as a rejection of the offer and the presentation of a counter-offer, must be accepted by the other party to form a contract – Re: Hyde & Wrench (1840)

19. Invitations to treat and negotiate A request for quotation or invitation to tender is not an offer to buy The display of goods in a shop is not an ‘offer’ (to sell) An advertisement to sell goods is not an offer in itself In an auction or e-auction situation, the advertisement of the ‘lot’ is an invitation to treat.

20. Quotations and statements of price A statement of price in answer to an enquiry is NOT an offer, merely a supply of information Ref. Harvey v Facey (1893) In response to a request for information, it is typical for a purchaser to be given a quotation This request is clearly not an offer, but depending on facts, the quotation could be construed as an offer capable of acceptance To be construed as an offer, it must be detailed and specific enough to be capable of acceptance simply by saying ‘yes’. If there are other matters that still need clarification, then a quotation is probably not an offer. An offer would be deemed to have been made when an order form which refers to the quotation is submitted by the buyer.

21. Tenders A tender is an offer to supply specified goods or services at a stated cost or rate A buyer is not obliged to accept the lowest-price tender, or to accept any of the tenders offered, however: If the buyer states in the invitation to tender that they will accept the lowest-price tender, then they are bound to do so – Re. Harvela Investments Ltd v Royal Trust Company of Canada (1986) The buyer is obliged to ‘give due consideration’ to tenders received, provided that they arrive by the stated deadline & comply with the requirements of the invitation to tender – Re. Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council (1990)

22. Standard terms of Contract Most commercial ‘concerns’ do not go to the trouble of drafting a special contract for every purchase or sell goods & services. Instead they rely upon standard terms. Most organisations will draw up their own ‘standard contract terms’ and will seek to ensure that these terms are accepted by other firms with whom they deal.

23. Risks of contracting on supplier terms Some areas where buyers & sellers have opposite interests: - Is it a fixed price contract has 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? If the supplier delivers goods which do not match the specification, or which are not satisfactory quality, will the buyer be able to reject them & claim damages? Will the supplier try to exclude or limit their liability?

24. The risk to the buyer if contracting on the suppliers standard terms? The buyer might: - Increase risk and costs It would be ideal to transfer these or share them with the supplier? C ost uncertainty , where ideally the supplier should be responsible for cost management & cost related risk? Poor quality goods Receive goods which are faulty or of poor quality, incurring significant waste & failure costs & be unable to recover damages from the supplier? Payment terms disadvantageous payment or credit terms, e.g. interim payment or short credit periods, where the buyer ideally would like to support their own cash flow via extended terms? Poor contract/supplier management May lack contractual tools with which to motivate & manage supplier performance, in the absence of effective penalties & remedies for poor performance?

25. The battle of the forms (contracts) Send acknowledgement copies of all enquiries Send acknowledgement copies of all purchase orders Negotiate contracts with suppliers, agreeing specific terms and conditions Check any revised terms or conditions (counter-offers) which may be attached to supplier documentation Stamp delivery notes ‘goods received on buyer’s terms and conditions’ on receipt of goods.

26. The implication of international law Supplier relations increasingly take place on an international & global context which give rise to particular sets of legal difficulties, such as: Which countries law will govern the contract? - In whose courts any contractual dispute will be heard? Other examples of related areas for consideration are transport modes, import documentation, INCOTERMS 2020, payment methods / letter of credits.

27. INCOTERMS 2020 INCOTERMS refer to the set of international rules for the interpretation of the chief terms used in foreign trade contracts covering transportation: First published by the International Chamber of Trade in 1936 (now the International Chamber of Commerce - ICC) and recently amended in 2020. The reason for revision is to ensure that they represent current practice. These terms can help reduce difficulties encountered by importers & exporters.

28. Incoterms Definition Definition: “The Incoterms 2010 rules are standard sets of trading terms and conditions designed to assist traders when goods are sold and transported”. Each Incoterms rule specifies: the obligations of each party (e.g. who is responsible for services such as transport; import and export clearance etc) the point in the journey where risk transfers from the seller to the buyer Incoterms help to clearly define the seller and the buyers responsibilities when transporting goods.

29. INCOTERMS 2020 Incoterms® 2020 - ICC - International Chamber of Commerce (iccwbo.org) Incoterms® 2020 Explained - The Complete Guide | IncoDocs

30. A summary of INCOTERMS 2020

31. Factors to consider Collection of goods from seller Transport from sellers factory to port Export documentation and taxes Transport by air, land or sea Import documentation and taxes Transport from port to final destination Insurance if required, depending on value and risk

32. Ex Works EXW The red shows the responsibility for the Seller and yellow the Buyer. This rule places minimum responsibility on the seller, who make goods available, suitably packaged, at the specified place, usually the seller’s factory or depot. The buyer is responsible for loading the goods onto a vehicle (even though the seller may be better placed to do this); for all export procedures; for onward transport and for all costs arising after collection of the goods. Also insurance In many cross-border transactions, this rule can present practical difficulties.

33. CIP Can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage to the named place, and also for insuring the goods. Delivery of the goods takes place, and risk transfers from seller to buyer, at the point where the goods are taken in charge by a carrier S eller is obliged to arrange for insurance for the journey, the rule only requires a minimum level of cover, which may be commercially unrealistic. Therefore the level of cover may need to be addressed elsewhere in the commercial agreement