Contract Laws in Respect of Purchasing in Retail Business - Research Paper Example

 Introduction Contract law is an integral part of any business and proper understanding and appreciation of the law leads to smooth functioning of the business with undivided attention to the core business by the management of an enterprises.  We have identified the business of Retails Stores in consumer durable goods, and the signs of the revival of economy augur well with the disposable income of the middle income group people expected to rise over a period of time. The contract laws with reference to the retail store for selling consumer durable goods, such as appliances, business equipments, electronic equipments, sports accessories, home furnishings and fixtures, etc., are discussed in respect of the contemplated new business.   The objective of any business is to minimize the business’ liabilities to customers, and maximizing its rights against them.  In the same breath, it is also understandable that the business under consideration, i.e. retail store would be interested in protecting its position from the angle of purchasing of the goods for the efficient and profitable functioning of the business. There are oral as well as written contracts and the applicability of civil law and general law of obligation in this regard.       Retail Business Purchase of anything in bulk quantities by the business, whether for consumption or retail purposes enter into contracts with the suppliers, which stipulates price, quantity, delivery schedule, payment procedure, penalty for late delivery, quality, etc.  The problems in respect of quality, service, etc. faced by the consumers are applicable to retailers also.  But, the consumer durable goods are put into use by the consumers immediately after the purchase, and this is the main difference compared to the retailers or dealers who would not be in a position to verify theperformance of the goods immediately after purchase.  There is a time lag in purchase of the goods and its use.  It is in this regard, the nature of the transaction differs.  Another important aspect is the mechanism of redress of grievances, because, as a business you may not enjoy the same buying rights and protection as an individual consumer. Oral and written contracts It is to be understood that in the case of business of retails stores, as well as majority of the business undertakings in the society, they deal with both the type of contracts, oral and written in their business.  In the case of supplies to them from the manufacturers or wholesale agents, the transactions are taking place usually based on contracts, either long term contracts covering supplies over a period of time or contracts for specific supplies from the specific suppliers.  However, in the retail perspective, it is mostly oral in nature, mainly because of the size of the transaction.  Therefore, balancing this discrepancy in dealing would be carefully avoided, if the burden of service, redress of grievances or repair and replacement of the product are shifted to the supplier with suitable clauses in the contract, reiterating the intermediary nature of the trade to the suppliers, based on the practical considerations, and to the consumers about the limitations in the nature of their responsibility. Purchase and Sales functions in retail In view of the above, the rights and obligations on the part of the retail stores as a purchaser and seller should be studied carefully.  Consequently, the terms and conditions of the contract for the purchase of goods from the manufacturer or supplier should be paid more attention in the business.  On the other hand, precaution in respect of sales is also necessary to avoid disputes with the consumers.  Usually, the showrooms of the companies which manufacture consumer durables incorporate various terms and conditions in the invoice itself elaborately, to avoid problems at a later date, because, the invoice is the basic document with which the consumer approaches the show room with the problems in performance of the products.  Therefore, needless to say, that the terms and conditions for the sale of these products by the dealer should, to the minimum extent reflect that of the suppliers, for sale through their show rooms.  For example the repairs, replacement of the parts, free service, warranty conditions, etc. of the company allowed for sale through the showroom should automatically be available to all the sales made through the retails stores also.  It is also important that the products are sold by the company at the same price, at least not at a lesser price, compared to the price at which the retailer sells the product.  These are the finer details of the business which should be covered in the contract for the successful retailing.   The invoice is a commercial document.  Inter alia, the invoice should contain the rate of tax, the amount of tax payable and company registration details i.e. GST, Vat, etc. (both the buyer’s and seller’s if required).  Terms and conditions of sale of a consumer durable company (The One Stop Phone Shop) cover various aspects such as specification, price, terms of payment, risk, warranty, replacement, exchange, liability, refund and general terms and conditions with reference to various legislations in this respect.  This is to avoid unnecessary litigations, and in the event of a dispute to ensure that the interest of the company is protected or the liability is limited. Contract Laws Treitel, G.H. defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed". (2007, p8)   The offer should be clear without any ambiguity with reference to the description, price, delivery and payment, because, the person who makes an offer is bound by this action to the other person on his acceptance and becomes liable for execution of his part of the contract. The acceptance establishes a binding relationship to the contract. Every offer received should be scrutinized thoroughly to verify whether all the aspects of these conditions, for example, mode of delivery, CIF or FOB, date of payment, specification of the material, type of service, etc., are properly covered without any scope for ambiguity, before acceptance.  Lacunae in the offer occurred due to oversight could be made up in the acceptance by making it conditional by mentioning the correct details to avoid wrongful interpretation. Offer and acceptance could be decided by the behavior of the parties and the circumstances attached to it, and such implied contracts could be relevant in the case of retail sales.  For example, delivery of batteries on regular intervals at a customer’s place is an implied contract. However, it is always better that the delivery accompanies with the bill and gets acknowledged, because, if the knowledge of delivery could not be proved, there exists no liability. A contract which is implied in law is a quasi contract.  Oral contracts can be binding; but, are not enforceable when statutes require it to be in writing.  If the offer specifies a method of acceptance explicitly, for example, "by registered post, and by that method only": see Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975), it must be complied with for valid acceptance. However, written notes, letters or memorandum or series of documents which contain all material terms of the contract and signed, are accepted in lieu of contract in certain cases.  However, it is always advisable to ratify such documents subsequently.      Purchasing Consumers have certain implied rights in purchase of goods or services, which could not be excluded whether there is written contract or not.  There are also provisions in this respect specifically in the Unfair Contract Terms Act.  In view of this condition, as a retail store, it is very important to ensure that the supplier is not encroaching into these privileges in the terms and conditions for the supply of products to you, because you are not entitled to these privileges available to the consumers.  Implied contractual rights are also applicable to services, hiring, hire purchases and exchanges in part.  However, under the Consumer Credit Act 1974, exemption is available to a sole trader, within a partnership or as an unincorporated association.  Under this act the sole trader is treated as an 'individual'. The Act extends consumer credit regulation to business lending where the amount of the credit or hire agreement is £25,000 or less.  This is useful where there are credit arrangements with the suppliers.  The concept of ‘Buyer Beware’ should be kept in mind in business to business contracts whether the contract is implied or formal. In case of doubt as to the terms and conditions of the supplier seek legal help without hesitation before accepting the offer. The seller may include some ‘exclusion clauses’ to limit their liability for substandard products, products inconsistent with the specification of materials used, etc.  It is also possible they try to exclude losses due to negligence by their employees or sub-contractors with cleverly worded clauses.  If these are not allowed to creep into the contracts covering the initial supplies, it would be helpful in the smooth functioning of the business in the long run. Purchase Orders “A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the PO is accepted.” (Dobler, Donald W; Burt, David N, 1996, p.70)  The important clauses which should be covered in the purchase order are separately discussed in this paper. Sales  The consumers have implied contractual rights, and some of which are capable of overriding the terms of written contracts, under certain circumstances. However, the scope of their rights could be increased, if your liabilities are not defined properly within the frame work of law.  The clauses that could be incorporated in this regard are separately discussed in this paper Surety A surety or guarantees in finance, is a promise by one party (the guarantor) to assume responsibility for the debt of another, and it arises when the principal fails in performance of the obligations under the contract.  It is a standard practice in business to insist on surety when the goods are sold on credit, and it is enforceable only if it is recorded in writing and signed by the surety and the principal. The Unfair Contract Terms Act  It is an important piece of legislation intended to protect the interests of the parties especially from the exclusion clauses in the business-to-business contracts, since the trade should be free from restrictions to enter into contracts between businesses.  The UCTA stipulates a number of restrictions.  Inter alia, the following clauses which seek to limit liability are important. Under Sections, 2-(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence. 2-(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness. 5-(1) In the case of goods of a type ordinarily supplied for private use or consumption, where loss or damage— (a) arises from the goods proving defective while in consumer use; and (b) results from the negligence of a person concerned in the manufacture or distribution of the goods, liability for the loss or damage cannot be excluded or restricted by reference to any contract term or notice contained in or operating by reference to a guarantee of the goods. The decision with regard to reasonableness usually falls under the purview of the courts, in general, in case of disputes. Breach of Contract: A failure by a party to perform an obligation under a contract is called breach of contract. The remedies available are in the form of Un-liquidated damages, Liquidated damages and equitable remedies of Specific performance or Injunction. One can challenge the exclusion clause on the grounds that it was unreasonable under the Unfair Contract Terms Act 1977, provided there is scope for such action. If the quality of the products supplied is not up to the standard or the specification, broken or damaged, you're entitled to reject the goods under the Sale of Goods Act, subject to the exclusion clauses as per the contract and its admissibility under UCTA 1977. Similar rights are available for services also. If the service has not been undertaken as per the terms of the contract, you are entitled to demand rework or have it done by others and claim the cost from the original supplier. In Thake v. Maurice (1984, p.678-9) an assurance by a surgeon that a vasectomy would render a man "irreversibly sterile" was held to mean that objectively this was the result he was contracting to produce. When - although the procedure was properly carried out - the claimant's wife fell pregnant, it was held that the surgeon had breached his obligation, as objectively interpreted. In the case of Specific performance the court orders the defendants to execute their part of the contract to restore the rights of the complainant under the Law of Contract. The concept underlying specific performance is to put the parties to the contract, in the position, has the contract been completed as per the original intention of the parties. Important clauses to be covered in Purchase Order Purchase order is a legal and valid offer.  Subject to the stipulations as contained in the Unfair Contract Terms Act, a purchase order properly covering all the eventualities and accepted by the supplier constitute a contract.  The following clauses in this connection are important, but the circumstances obtained in a particular case may demand more, and as such other pertinent ones may have to be covered. Purchase Order Number, date with Phone number address, etc., for communication. Product Number, Description of the product, model, etc. Quantity, Delivery schedule, lot size, shipping instructions, etc Item wise Unit price, total price, CIF/FOB, taxes, etc. Terms of Payment including dates, mode of payment Apart from the above basic details, which are in any way covered, the purchase order should clearly mention about the clauses with reference to the following, for proper execution of the orders to protect your business interest. Packing instructions Insurance, if not included in the price Warranty: Under ‘product liability’ not only the manufacturers, but also the distributors, suppliers and retailers are held responsible. If the retail store has no recourse to the manufacturer or supplier by way of contractual obligation, his position becomes precarious in such cases.  Therefore, it is important to note that the ‘product liability’ should be shifted to the manufacturer/supplier as the case may be in the normal course, and covered without any ambiguity in the contract. Indemnity: It should be noted that In the UK, the various clauses ingeniously incorporated in the contracts with the consumers won’t stand in the court of law. The business are barred from making the consumers to indemnify on unreasonable grounds as per the Unfair Contract Terms Act 1977 s4, in connection with the breach of contract or negligence. Samples: It is important to preserve the samples for comparison with the regular supplies. Quality parameters, tolerance levels, etc Inspection modalities, return of the rejected goods, etc Excess and short deliveries, Rejections and replacements Debit notes or credit notes for adjustments in variations in quality, quantity, prices, services, etc. Service terms and conditions related to the products (whether service at the customers’ place or other specified place) Compensation clauses, liquidated damages, cancellation and termination of the contract, court jurisdictions, etc. with reference to non delivery, rejections, physical damages, delay in delivery or service, etc. Important clauses to be covered in the Invoice to retail customers Invoices cover some of the basic details such as quantity, price, etc.  However, clauses covering the following important aspects should be taken care of by way of proper documentation, preferably by way of attachment which is forming part of the invoice. The delivery should be properly acknowledged by the buyer by getting his signature on delivery memo or invoice itself with date and rubberstamps wherever necessary. Terms of payment should be clearly indicated.  Clause such as ‘Cheques are subject to realisation’, ‘goods once sold cannot be taken back under normal circumstances’ etc. should be clearly mentioned in the invoice. Installation charges, if it is not included in the price, should be mentioned. Interest if any applicable in the case of sale on credit basis or delay in making payment should be specified along with the rate of interest, period, etc. Cost of special delivery as per the requirement of the customer, if any, should be indicated. Terms and conditions in respect of warranty, repairs to the products, replacement of parts, service etc. wherever applicable should be documented properly.  The products dealt with are consumer durable goods where improper use of the products, accidental damages, use in abnormal working conditions, damages due to over load of electricity, repair in violation of the terms and conditions, negligent use in water or rain, failure to follow the instructions, etc. are normal.  Therefore, the terms and conditions should clearly specify the scope to avoid complications. The literature with regard installation, maintenance, safety, warranty certificate etc. should accompany with the invoice, and a checklist may be prepared for this purpose and used. Liability: Liability on account of indirect or consequential economic loss could be taken care of to the extent possible within the frame work of law, if the terms and conditions are suitably phrased and included in the invoice or in a separate attachment forming part of the invoice. Anything in writing and properly signed, for example acknowledgements, receipts, signature as a token of delivery etc., which act as a reference for day to day use are important in the business transactions. In addition, these records may also be useful in the event of disputes in future with the client, and act as evidence in the court of law as the courts treat them as contract.  Therefore, it is always preferable to cover such contingencies in writing to avoid legal disputes as to its liability.  In respect of sales where the contractual terms between the buyer and the retails stores are mostly implied, extra care should be taken to ensure that anything which is not normal, but agreed to with the customer as a special case, should have a back up by way of something in writing to this effect.  At least, mere email confirming the arrangement to the client may come to your rescue in exigencies.       In this internet era the electronic contract and electronic signature are also legally valid and admissible in the court of law.  Therefore, it is important to be careful in respect of offers and acceptance in relation to online business, and preserve the records for the minimum required time to fall back on, whenever necessary      Conclusion Contract laws in respect of purchasing need special attention in retail business. The protection available under law to the consumers is not directly available as such to the business to business transactions. Therefore, you must be in a position to secure the benefits available to the consumers, so that you can shift the responsibilities of repairs, replacement and service to the distributing agencies or the manufacturers. However, it is also important to follow the general good practices of trade in respect of clients also. The judiciary system in a country encourages public to approach the courts for compensation in the event of economic loss suffered by them. The benefit doubt in the cases would be disposed off in favor of the consumers to give signal to the public about their statutory rights. The transactions with the consumers are covered under ‘implied contracts’, and treated at par with ‘written contracts’ with their underlying contractual obligations. Since the liabilities in general, arising out of these contracts cannot be limited, care should be taken to limit the liabilities to the extent possible, by following certain procedures and documentation in this regard. References Curtis v. Chemical Cleaning and Dyeing Co [1951] 1 KB 805  Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases (Sixth ed.). Singapore: McGraw-Hill.   Treitel, G.H., 2007. The Law of Contract, (2007) 10th ed. Sweet & Maxwell Ltd Hadley v Baxendale (1854) 9 Exch 341 L'Estrange v. Graucob [1934] 2 KB 394  Leigh Ellis (2008), Remedies for Breach Of Contract - UK Law. Viewed on 23 April 2010 http://www.articlealley.com/article_577398_18.html Liverpool City Council v. Irwin (1918) 1 KB 592 Merrill v. Navegar, Inc. (2001) 26 Cal. 4th 465  Simpson v L and NWR (1876) 1 QBD 274 Thake v. Maurice (1984) 2 All ER 513 The One Stop Phone Shop, TERMS AND CONDITIONS OF SALE, Viewed on 23 April 2010, http://media.onestopphoneshop.co.uk/pdfs/OSPSp2.pdf Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975) 119 Sol. Jo. 370. Read More