The law is both imaginary and complex, yet affects each and every one of us on a daily basis on a number of different levels. In the business world, the law takes on new meanings and new forms as commercial exchange is guided by their principles. The purpose of this essay is to examine the legal aspects of procurement and how this idea can shape the different aspects of trade and commerce.
To accomplish this task, this essay will address procurement from a standpoint of a procurement manager at a large company. In this scenario, the chief financial officer (CFO) of the company, recently addressed the need to cancel the remainder of an order that would not be needed by the company. The CFO is interested in the legal ramifications of this action and has requested a report on the legal concerns he has concerning this action.
This essay will explain the processes behind procurement which will include discussions about the basics of contract law, agency law, the Uniform Commercial Code (UCC) and the Federal Acquisition Regulations (FAR). The essay will also distinguish between the rules of public contracts with the government and the private contracts that are much more common and experienced by most people on a daily basis. This essay will conclude by recommending a position for the company to take on this issue and offer some guidelines on some of the future considerations of the action.
Project Procurement Basics
Project procurement is a process used to acquire goods and services for an interested party. Project procurement is also dependent on the objectives and goals of the project of which it supports. It is a fundamental part of project management because it is crucial to the success of the project that procurement activities are appropriately planned and executed; hence, project procurement planning and strategy development are vital to the implementation and successful outcome of a project.
Procurement management is very important to understand in gaining a larger meaning to these processes. Procurement management involves planning and acquiring the product or services from sources, choosing the correct source and eventually closing out the contract It is important for procurement managers to know the processes involved by becoming knowledgeable about the contract terms and conditions and negotiation the best position for the organization (Brown, 2009).
Public vs. Private
Before analyzing the CFO's procurement question, it is important to understand what type of contract this request was issued under. Public and private sectors have different rules regarding procurement and contract law. Public sector project procurement supports projects funded and developed to meet the objectives of government, including the provision of public goods and services to the population. These public sector projects such as the building of roads, bridges, dams, electric power plants, hospitals, schools, ferries, etc. can be donor funded, government funded, a combination of both, or funded through public private or public-public partnerships; however, regardless of their funding arrangement, their distinguishing factor is that the purpose these projects serve is entirely public.
Private sector project procurement focuses on procurement activities that satisfy the requirements of projects done for private sector entities, such as small, medium or large businesses and corporations, and which are primarily profit-making in nature given that their main objective is the monetary benefit of the owners or shareholders of the business.
Larson (2010) described a contract in the following way: " a contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire." The general rule is that minors and insane persons cannot enter contracts. There are also occasions when intoxicated persons do not have the legal capacity to enter contracts.
When performing an analysis of basic contract law, five questions must be asked:
1) Was a contract formed?
2) If a contract was formed, what type of contract was formed?
3) Was there a breach of contract?
4) If the contract was breached, what remedies are available to the non-breaching part?
5) Does the statute of limitations bar an action for breach of contract?
The exception to these general rules is when a contract has been fully or partially performed, and the circumstances necessitate recognition of a contract to avoid an unjust result. However, more important than this exception is the modern (UCC) concept that a contract can be found to exist where there was nothing more than an exchange of correspondence between the parties. (Gabbard, 1996).
A contract may be unenforceable as a result of mistake, fraud, duress or undue influence. Mutual mistakes on the part of all parties may invalidate a contract when it involves a material or major aspect of the contract. When mistakes are identified it is important that they are considered in the opposing strategy as well. A mistake regarding a trivial or insignificant matter, or mistake by one of the parties, will not invalidate a contract in most cases, but is extremely important to have a detailed account of all transactions and lawful exchanges.
Most courts recognize two types of contracts. These two types are known as express contracts and implied contracts. When an agreement is arrived at by words, oral or written, the contract is express. Implied contracts are shown by the surrounding circumstances that demonstrate that a contract exists as a matter of tacit understanding. The enforceability of a contract implied is based on an implied agreement and not on whether a party has received something worth any value.
In contracts implied in law, liability attaches by the procedure of law upon a person who receives benefits that he is not entitled to retain. Contracts implied in law are not true contracts, but quasi-contracts, that courts impose to prevent unjust improvement. This article will only apply to express contracts and implied in fact contracts.
A breach of contract exists when there is a failure, without legal excuse, to perform according to the terms of a contract. A breach must be a material breach and must not be merely of a minor nature. A failure to perform a minor part of the contract is not considered a material breach. Fraud occurs when one of the parties intentionally misrepresents a material fact with intent to defraud, and the other party justifiably relies on that misrepresentation. Duress occurs when someone is coerced into entering a contract. When one party has an advantage over the other party and gross unfairness is used to get the other party to enter the contract, unconscionability occurs. Undue influence occurs when a person in a close or trust relationship with another takes advantage of the other person. Contract law varies from state to state and details of state law must be included in examining any type of legal case.
According to Rasmussen (2001), " agency deals with situations in which one person the principal, uses another person the agent to act on his behalf. Sometimes the acts of the agent are attributed legally to the principal, sometimes not. Delineating the conditions under which each is true are what make up the law of agency. " This is an important aspect of contract law to understand because of the way it assigns responsibility and liability in terms of the business contracts. Agency law gives the organization a different framework to view the procurement cancellation through. Much like sports and games, the law is also fluid and seeks to take opportunities when they are presented. If a legal argument can be made from an agency law point-of-view, it should be explored as a viable option in protecting the interests of the CFO and the organization itself.
The Uniform Commercial Code is a very verbose and complex set of rules and definitions that apply to commercial conduct and rules. According to Kent (nd), " the nine articles of the UCC is a set of laws governing the sale of goods, leases of goods, negotiable instruments, bank deposits, fund transfers, letters of credit, bulk sales, warehouse receipts, bills of lading, investment securities and secured transactions." This is a large encompassing document that has direct impact on this particular procurement issue since the UCC must be followed by all attorneys in who practice law in the United States.
The Federal Acquisition Regulation is an enormous set of rules that apply to government agencies that make purchases. The regulation promotes as its purpose, " The Federal Acquisition Regulations System is established for the codification and publication of uniform policies and procedures for acquisition by all executive agencies. The Federal Acquisition Regulations System consists of the Federal Acquisition Regulation (FAR), which is the primary document, and agency acquisition regulations that implement or supplement the FAR."