The Legal Aspects of Public Procurement
“The Legal Aspects of Public Procurement”
As presented by Mr. Ed Pabor, CPPO, C.P.M.
Highlights of the NIGP Seminar, provided by Patty Huling, CFE, CLEA, CPPB
I was recently awarded a scholarship which allowed me to participate in a very informative, three-day NIGP seminar on the Legal Aspects of Public Procurement held in Mesa this past April. Had it not been for the generosity of the AZ Chapter of the NIGP, my attendance at this event would not have been possible. As a result, I would like to share some of the highlights from this thought-provoking event with the Chapter Membership.
Our Instructor was Mr. Ed Pabor, of Eugene, Oregon. Ed has over (27) years of Procurement Management experience and additional expertise in the manufacturing of electronics, heavy equipment, semiconductor equipment, pulp and paper products, and the aerospace industry. Ed believes that “working within the parameter of purchasing law and being a good steward of public funds are the main priorities in public procurement”.
Mr. Pabor provided each attendant with a copy of the NIGP sourcebook “The Legal Aspects of Public Procurement, Second Edition” by Michael Flynn, Esq. Kirk Buffington, CPPO, C.P.M., MBA (Copyright 2010, by the NIGP, Inc.). In addition, all attendees received an amazing variety of case law studies, handouts and other reference materials which succinctly illustrated how Court Case Law differs from one jurisdiction to another…. Just when you think you know how the court will rule on a case, the unexpected occurs!
The seminar provided an in-depth review of the United States Legal System, relative procurement and Anti-Trust Laws and a detailed review of the Uniform Commercial Code as a basis for analyzing a variety of contract disputes during classroom discussions. Because the course materials are of a highly detailed-nature, it will be impossible to do justice to the knowledge gained during a three day seminar in this short article. However, some of the points I personally found most interesting will be provided here for your consideration.
It was established that a contract can be either an oral or written agreement. However, to be a binding agreement it must be proven that the following criteria has been met:
· An Offer has been extended by one party and then Accepted (through words or conduct) by the other party, indicating that both parties have agreed to the same terms
· Under common law, the offer must have Definiteness to be enforceable as an agreement. In other words, the offer must specify material facts regarding the subject, including price, quantity, quality, duration, and payment terms. Without specific terms in place the offer become too vague to constitute an agreement or indicate that a “meeting of the minds” has been met.
· A vital element in the Law of Contracts is Consideration or something of value shared between two parties indicating a mutual commitment (such as a payment in exchange for a good or service).
· Mutuality of Obligation extends the idea of “consideration” one step further… it refers to an exchange of promises that will be acted on in the future rather than immediately. Because this element refers to a future event, the critical point is that “both parties must be bound or neither one is bound to perform”. Neither party is legally bound until the other party performs their end of the bargain.
· Because Contracts require a “meeting of the minds” certain parties are clearly ineligible to bind an agreement (for example, children under the age of 18, mentally incapacitated and intoxicated individuals). In the public procurement sector, the capacity to bind is contingent on the parties authority to act as agent on behalf of the principal. As a result, contracts can only be bound between Competent Parties.
· A contract may only be enforced if it has been entered into for a Legal Purpose. In general, the Courts will not enforce an agreement that violates statutory law or public policy. The Court’s involvement in enforcing an “illegal” contract is dependent on the type of violation of law involved and the requirements of applicable statutes or ordinances.
A basic rule for interpreting contractual disputes in Court is to rely on the “plain, ordinary and popular meanings of the words used” to identify the intent of both parties to the agreement. As a result, Courts may “make reference to a common usage dictionary” in making these kinds of determinations regarding intent. Additional factors affecting a Court’s decision-making process includes the following:
· The Courts will assume that all provisions in a contract have meaning and a purpose and will be considered accordingly in determining the intentions of the parties.
· The Courts will review ambiguous contract terms within the context of any verbiage found in headings, margins, recitals, preambles and/or any verbiage that has been “struck” from the document in making an assessment on the intention of the parties.
· In those circumstances in which there are ambiguous contract terms that are open to more than one interpretation, the Courts will usually interpret the contract in favor of the party which did not author the agreement, particularly in those instances where there is an imbalance of power between the two parties.
· In interpreting ambiguous contract terms, written documentation will take precedent over any oral testimony.
· Courts will always interpret ambiguous terms with the goal of carrying out the intentions of both parties to the contract.
The Parol Evidence Rule represents a limitation to the Court’s ability to interpret a Contract. The Parol Evidence Rule states that if a contract is the “final and complete agreement” between two parties, no external information may be used in determining the meaning of the contract. Essentially, only the language contained in the contract itself may be considered in determining the meaning. However, if the contract is not the “final and complete agreement” the Court will consider external evidence in determining the intended meaning of the contract’s terms and conditions.
The Act for the Prevention of Fraud and Perjuries which was passed by the English Parliament in 1677, requires certain promises and agreements to be evidenced in writing. That law, later evolved into what is now called the Statute of Frauds, became common law in the United States, although court decision and state legislatures have enacted their own versions of it. As a result, it has been mandated that the following types of agreements must be evidenced in writing:
· The sale of land, or interests in land
· Agreements in consideration of marriage
· Debts paid “out of pocket” by an estate administrator on behalf of a deceased person
· Personal debt paid by one person on behalf of another
· Contracts to be performed more than a year after effective date (including leases)
· Contracts for the sale of goods valued in excess of $500 (in accordance with the U.C.C.)
The Uniform Commercial Code (or U.C.C.) – with the advent of the “industrial revolution and the ability to travel and communicate on a National level, the mechanics of conducting a simple business transaction either involved a maze of local customs or remained completely unregulated. It became apparent that a uniform business transaction law would make the business of buying and selling more predictable, more efficient and less risky”. The Uniform Code of Commercial Law was published in 1951 and essentially incorporated the common law of commercial transactions into a uniform law consisting of 10 articles, which was later adopted in whole (or part) by all 50 states.
Article 2 of the U.C.C. provides guidance on contracts for the purchase of goods (services are excluded) and serves as the default governance for any commodity purchases which lack a formal, written contract. The U.C.C. is revised every two years according to case law changes and sets the standard by obligating both the buyer and seller to observe fair and reasonable business practices in contracting. There are more provisions in the U.C.C. to protect the seller from the buyer and protection is also extended to the citizen, as a consumer. Article 2 addresses a myriad of issues which clarify disputes ranging from authority to contract, various warranties, rights in accepting and rejecting goods, remedies for breach of contract, liquidation, compensation and further guidance for contracts with missing terms (which default to the U.C.C. as the standard).
Mr. Pabor shared personal expertise, industry standards, profound insights and even a few humorous stories! For example:
1. A buyer’s first duty is to be a good steward of taxpayer dollars… we serve as commodity managers and stewards of funds – not paper pushers. A Buyer should be proud to be a Public Procurement Professional, and as a personal goal should strive to generate as much cost savings for their agency as possible (i.e., the norm in private industry is to generate annual cost savings with a value equivalent to the cost of their salary).
2. Writing good bid specifications is critical! The purpose of bid specifications is not solely to obtain the least expensive items, but to purchase the desired quality at the most competitive price. For example: the 1986 Challenger disaster was caused by the quality of the “O” rings… the “O” rings were purchased according to the specs, but the specs just weren’t good enough.
3. The importance of understanding your market… critical in obtaining the best value:
· 5 to 15% is the standard cost for transporting commodities – goal should be 5%
· Transport by rail is 1/3 cheaper, whereas by truck is typically 3 times more expensive
· Contractors commonly add approximately 20% to their costs to compensate for bad specs and the resulting cost disparity
· With software purchases, the source code (i.e., the code which is readable by the human eye and gets the computer to function) is usually copyright protected. Therefore the entity should negotiate the placement of the source code in an escrow account established by the licensee to protect the entity from potential loss of use should the licensor go bankrupt or terminate the contract.
· Software Maintenance Agreements should be capped at no more than 5% of the cost, and should become effective after training is complete (not installation).
4. Acceptance of an offer can be finalized by words or conduct. However, conduct can contradict the contract and makes the words meaningless. Conduct then become mutual and establishes what is acceptable - you give up your contractual rights when your conduct does not support the contract!
5. Be the Yogi (bear) Buyer! Not your average Buyer:-)!
Case Studies in Procurement Law
The final chapter of the text book features actual contract disputes decided at either a trial court or appellate court level. Therefore, they are only applicable and binding to the specific district or circuit in which the case was decided. Regardless, a couple of the cases in particular touched on topics that most procurement professionals have probably already encountered in some shape or form. For example:
When do additional terms on a Purchase Order represent an unenforceable, material change to the contractual relationship between buyer and seller?
The textbook cites a case where a school is destroyed by a fire which was traced to flammable insulation materials. Therefore, the school filed for damages against the manufacturer of the product, Insulfoam. However, the manufacturer of Insulfoam argued in Court that the supplier of the materials used in the creation of Insulfoam was negligent and should cover the school’s loss.
The supplier of the raw materials pointed out that their Purchase Order confirmation (located on the reverse side of the P.O.) contained indemnification language which holds them harmless from “any and all claims of whatsoever nature, including but not limited to injuries to Buyer’s or Seller’s employees or to third parties (including death), or for damages to the property of Seller, or to the property of Buyer, or of third parties, caused by, arising directly or indirectly from…..any use of said materials”
Would the Supplier’s hold harmless clause be eligible for incorporation into the original contract under the Uniform Commercial Code? The express indemnification located on the supplier’s Purchase Order would appear to protect them from Insulfoam’s implied indemnification; however the real issue is whether the hold harmless clause was a “material alteration” of the party’s primary agreement.
According to the text, the “test for materiality is whether the newly introduced clause would result in a surprise or hardship to the non-assenting party”. As a result, the Courts ruled that the Supplier’s hold harmless clause was a material alteration of the original contract (reference the U.C.C. Section 2-207 (2) (b)) and therefore the clause is not enforceable as a matter of law.
Under the Law of Agency provisions, when does “implied authority” constitute real authority in a contract for the purchase of goods under the U.C.C.?
In this case, the Vice-President of a wholesale furniture chain gave verbal instructions to one of their new buyers to procure the “best value” fabric from the fabric wholesalers. The Buyer conducts market analysis and discovers that the industry standard is to make a six month commitment for fabric purchases. Accordingly, he awards a contract to one of the suppliers for a six-month term.