Legal Issues in Supply Chain Management: A Case Analysis

Introduction

Supply chain management is a field that continues to advance as technological developments and globalization reshape the business environment. Changes in supply chain management are also attributable to the emergence of new global alliances that enable businesses to connect across various aspects of the supply chain (Association for Supply Chain Management, 2018). As supply chain management evolves, business owners, leaders, and managers face a variety of legal and other challenges. Legal, acquisition, and supply chain management issues increasingly characterize the modern supply chain framework. This paper examines a case study involving legal, acquisition, and other issues relating to supply chain management. The issues addressed include contract formation, risk of loss, and tort liability.

Case Scenario

Smith's Imports, a corporation registered in Florida and headquartered in Miami, ordered a shipment of wine worth $10,000 on January 2, 2015, from Cortez Winery in Santiago, Chile. The order was placed electronically through Cortez's website, but the owner of Smith's Imports did not read the terms and conditions despite clicking to agree. Those terms stated that the buyer would be liable for any loss after delivery to the destination. When processing payment — which was due upon arrival of the wine at the Miami port — Smith's Imports' administrative assistant entered incorrect information on the transaction documents, causing the funds to be scheduled for transfer to an olive company in Tuscany, Italy. The wine was eventually shipped but delivered to the wrong warehouse, and Smith's owner waited a week before taking further action because he was on vacation.

Payment for the shipment was ultimately sent to the wrong company, while the misplaced wine turned to vinegar after sitting in the incorrect warehouse for several weeks. U.S. Customs then took charge of the remains of the shipment and hired independent contractors to move it to storage. One of those contractors was injured, requiring 30 stitches and a tetanus shot, after a crate split open due to a design defect. After being notified by U.S. Customs, Cortez filed a lawsuit against Smooth Shipping and Smith's Imports seeking payment and damages for the lost goods. Smith's Imports, in turn, sued Cortez and Smooth Shipping for damages resulting from the loss of sales to retailers, including lost profits. Additionally, the injured independent contractor is planning to file a lawsuit for damages related to his injuries.

Contract Formation and E-Contract Elements

The above scenario illustrates some of the legal, acquisition, and supply chain management issues that arise during the sale of goods. These issues can be resolved using relevant laws, particularly the Uniform Commercial Code (UCC). The UCC is a legal code that provides a framework for international contracts, sales contracts, common law contracts, commercial sales transactions, and guidelines for the sale of services. According to Fullerton & Knowles (n.d.), this code is not applicable to the sale of real estate, contracts incorporating significant labor, service or employment agreements, marriage settlements, or security interests and liens in real estate.

The first step toward addressing the legal issues in this scenario is examining contract formation under applicable law. Since this case involves the sale of goods, determining the existence of a legally binding contract between the parties is essential. Generally, a contract for the sale of goods is an agreement in which the seller transfers or agrees to transfer goods to the buyer for an agreed-upon price. Under the UCC, contract formation occurs once an offer has been made and accepted between the parties. In this case, the contract was formed electronically when Smith's Imports ordered wine from Cortez through Cortez's website using a standard electronic order form.

E-contracts have become common in the modern business environment as more transactions move online. Jain (2016) defines an electronic contract (e-contract) as an agreement that is created and signed in electronic form. Such contracts are sometimes established through a "click to agree" or "I agree" button on a page containing the terms of the agreement. By clicking that button, an e-contract is formed even without a physical signature, as the buyer agrees to pay a certain amount to the seller in exchange for the delivery of a product or service. Therefore, Smith's Imports and Cortez Winery entered into an e-contract despite not signing any physical document. This contract was established when Smith's placed the order electronically and clicked the "I agree" button. The electronic contract between these two parties is valid because it satisfies all elements of a legally binding contract.

The first element of a legally binding contract is an offer — an expression of willingness to enter into an agreement on certain terms, whereby one party makes a promise to do or refrain from doing something. An offer must be made with the intent of becoming legally binding upon acceptance (MacMillan & Stone, 2012). With respect to the sale of goods, an offer occurs when one party promises to provide or deliver goods in exchange for money or something of value. Rai (2019) notes that for e-contracts to be formed, the buyer searches for products or services displayed on the seller's website and selects what to purchase. The website itself does not make the offer but provides an invitation to make one; the customer initiates the offer based on the availability of goods in the shopping cart. In this case, Cortez's website displayed wine products for selection by potential buyers. The offer was initiated by Smith's Imports when owner Rolando Smith placed the wine order.

The second element of a contract evident in this case is consideration — something of value promised in exchange for a particular action or non-action. For a contract to be legally binding, valid legal consideration must exist. Consideration means the parties promise to give and receive something in return (Rai, 2019). In this scenario, Cortez Winery agreed to provide wine in exchange for a monetary payment, while Smith's Imports agreed to pay in exchange for the wine. Because this mutual exchange of value existed, the agreement was not a gift — which is voluntary and unenforceable — but a binding contract.

The third element is acceptance, which occurs once an offer has been made and the legal consideration is deemed suitable. Under the UCC, a binding contract is established once an offer has been made, considered, and accepted. The code permits acceptance in any reasonable manner and medium — for example, sending a response letter, emailing a reply, completing a website form, or clicking an online agreement button. Cortez Winery accepted Smith's offer by agreeing to receive payment upon the shipment's arrival in Miami and by preparing and emailing the Bill of Lading along with invoices to Smith's Imports. In most cases, acceptance of an offer is not effective until it has been communicated to the offering party (MacMillan & Stone, 2012). By emailing the Bill of Lading and invoices, Cortez communicated its acceptance to Smith's Imports.

The final element evident in this case is mutuality, which means the parties understand and agree to the basic terms and substance of the contract (Judicial Education Center, 2020). Both parties intended to create lawful relations relating to the sale of goods and were legally competent to enter into a contract as lawful business entities. Even though the parties had no face-to-face communication, both exercised free and unaffected consent through the click-through process. Smith's Imports' completion of the online form and clicking of the "I agree" button — despite not reading the Terms of Agreement — constituted genuine consent. Cortez Winery demonstrated mutuality by accepting Smith's offer and sending the Bill of Lading and invoices via email, confirming that both parties understood and agreed to the basic terms of the contract.

Conclusion

This scenario illustrates the legal, acquisition, and supply chain management issues that arise in the modern business environment. Although Smith's Imports and Cortez Winery had no face-to-face contact and signed no physical documents, they created a legally binding contract. The contract was established electronically and incorporated all the elements of a valid contract: offer, legal consideration, acceptance, and mutuality. However, the parties' agreement ultimately resulted in the loss of the wine and lawsuits seeking damages. Under UCC § 2-509, Cortez Winery bears liability for the loss of the wine because the goods were not delivered to the destination specified in the contract. Additionally, the injured independent contractor should sue U.S. Customs under the legal theory of negligence for failing to provide a safe work environment.