71 Essentials of contract and legal commitment

Essentials of contract and legal commitment

The buyer and his or her team have conducted the negotiation and the parties have reached an agreement. However, reaching agreement is not the end of the negotiation process by any means. Rather, an agreement merely represents the beginning of the contract’s performance for the item, service or activity covered by the agreement. An important part of executing and following through on a negotiated agreement is loading the agreement into a corporate contract system so that others throughout the organisation have visibility of the agreement.

The terms and conditions of the official contracts should clearly stipulate the rights and obligations of both the supplier and the buying organisation in line with the agreement. A draft document, which can be prepared by either party, is used to confirm both parties’ understanding of their commitments before execution.

The buyer must be aware that a valid contract is a promise or agreement that the law will enforce. To be legally enforceable, a contract must satisfy the following essentials:

1.  Intention: Both parties must intend to enter into a legal relationship.

2.  Agreement: In a dispute, the court must be satisfied that the contracting parties had reached a firm agreement and were not still negotiating. Agreement will usually be shown by the unconditional acceptance of an offer. It is important to determine by whom the offer is made, whether the offer is valid and if it has been accepted. There is an agreement only when the offer is accepted.

3.  Consideration: The definition of consideration is that something of value passes from one party to a second party in exchange for a promise from the second party. The value must be consistent with the second party’s promise. Law of contract is concerned with bargains, not mere promises. Thus, if A promises to give something to B, B will have no remedy if A breaks his promise. If, however, B has undertaken to do something in return so that A’s promise is dependent on B’s, the mutual exchange of promises turns the arrangement into a contract. The consideration must also exist and have some ascertainable value, however slight, otherwise there is no contract.

4.  Form: Certain exceptional types of agreement are only valid if made in a particular way, such as in writing. Thus, conveyances of lands and leases for over three years must be by deed. The absence of written evidence, while not affecting the validity of a contract, may make it unenforceable in the courts. This evidence may be from correspondence or any other documentation made at the time the contract was made or subsequently. Such written evidence must clearly identify the parties against whom the evidence is to be used or by authorised agent.

5.  Definite terms: There will be no contract if it is not possible to determine what has been agreed between the parties. Where essential terms have yet to be decided, the parties are still in the stage of negotiation. An agreement to agree in future is not a contract.

6.  Legality: The definition of a valid contract is that the product or service contracted must be legal and not against public policy. The court cannot enforce a contract that is illegal, e.g., contracts to defraud the Inland Revenue. Immoral contracts, such as agreements to fix prices or regulate suppliers, while not illegal are void unless the parties can prove to the court that their agreement is beneficial and in the public interest.

7.  Capability: Both parties must know what they are doing. This standard clearly eliminates parties who are impaired in any way. Impairment includes an insane person, a confirmed alcoholic and a confirmed drug addict. It is important to acknowledge that these conditions must be confirmed through adjudication.

The final requirement for a valid contract is the mechanics of reaching an agreement. In order to have an agreement, there must be an offer and an acceptance of the offer. If the buying organisation initiates an offer, it is called an ‘offer to buy’. When the sellers initiate an offer, it is referred to as an ‘offer to sell’. Of course, throughout an extended negotiation process, there will be numerous ‘offers’ and ‘counteroffers’.

An ‘offer’ clearly has legal implications. If a person makes an offer, he or she must be prepared to perform if the offer is accepted. The ‘acceptance’ of an offer poses legal obligations. A written contract should immediately follow the ‘acceptance’ of the offer.

Buyers receive numerous offers on a daily basis and it is important that they must be able to identify complete legitimate offers. The three necessary components of an offer are:

1.  Intent to make an offer: The intent to make an offer must be stated clearly. The buyer should require the supplier to submit a written form that states precisely what the supplier ‘offers to sell’ or in the case of the buying organisation, ‘offers to buy’.

2.  Communication of the offer intent: The offer must be communicated to the offeree. The buyer can easily communicate the offer with a purchase order. The seller communicates through a proposal or quotation.

3.  Identification of the specific subject matter: The product or service must be accurately described. Specifications are especially important when the competitive bidding method of pricing is used.
Finally, to complete the negotiation process during the life of an agreement, buyers must let suppliers know if the suppliers are not meeting their contractual requirements. Conversely, it is a supplier’s responsibility to let the buyer know if the buyer is not meeting its responsibilities within the negotiated agreement. Both parties need to work to build upon the success of a negotiation. Carrying out the agreement as agreed upon should reaffirm the commitment of the parties to work together in the future.

 

 

  Reading
Please read about ‘The contract’ on pages 215 – 216 in Chapter 8 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).

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