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December 17, 2004 • Vol.26 Issue 51
Page(s) 7 in print issue

Legal Issues In Purchasing
Here’s How To Close The Door To Risk
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If there's one thing that's true about IT managers, it's this: We sure do a lot of buying. Servers, clients, hubs, software, cables, and books on top of books to show us how to use them all.

No matter how the purchasing process works at your company, there are some things that an IT manager needs to keep in mind. Most of these issues are legal in nature and can have a heavy impact on the way you do business with vendors.



The Purchase Order

No matter how small your business, you should never buy any equipment without a purchase order. A PO is a form that gives a vendor the go-ahead to ship his products to you at a specified price. Once it's accepted by the vendor, it becomes a binding contract.

And because it's a contract, your PO should be full of details, the kind that can save your neck if there's ever a conflict. For instance, what happens if you agree to buy 20 desktops, but only 10 arrive and three were damaged in shipping? As the buyer, do you have the right to refuse the whole order, or only the damaged goods? How long does the vendor have to get you the full shipment in an undamaged state? If you have to return some computers, who pays for the return shipping? Make sure you spell out these issues before you need to resolve them, in court or otherwise.

For a complete list of the terms and conditions your PO should cover, see "The Airtight Purchase Order" sidebar.



The UCC

A purchase is a legal act governed by the laws of your state, and 10 to one, those laws are based on the Uniform Commercial Code, a mammoth treatise on commercial law.

The UCC is not a law itself. It's a model code written by experts in commerce and law and approved by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. It has no legal effect unless its provisions are enacted by a state legislature, but to date, 49 states, the District of Columbia, and the Virgin Islands have all adopted the UCC as law. (This leaves only Louisiana, in which the UCC is valid in parts of the state but not others.)

Of the reams of text in the UCC, Article 2, which governs how merchants and clients do business, is crucial. It spells out rules that a court will use to settle a matter if your contract with a vendor is missing a provision that later comes into dispute. For instance, if your PO or contract fails to note your obligations as the buyer when the goods are only slightly defective, the UCC sets out terms that you and the vendor will have to abide by, whether or not you ever discussed them.

It's beyond the scope of this article to give you a deep grounding in the subtleties of the UCC, but if you have any doubts about the vendor you're dealing with, or if you buy goods for your network in quantity, you should consult a lawyer to fine-tune your PO for UCC rules.



Two Stumbling Blocks

Even with an airtight PO and a grounding in the UCC, you still need to avoid two widespread problems in the world of buying and selling.

The first is conflict of interest. No matter who buys goods for your firm, he should be free of any interest that's not helpful to your business. For instance, if your brother is a sales agent for a vendor, be sure to disclose the potential conflict to your CFO or CEO before you buy from him.

Next is the thorny issue of keeping records. As a rule, you should document all the items you buy and resell, including parts and raw materials, by keeping any receipts, canceled checks, and invoices for a period of seven years from the date of purchase. (In fact, many firms hold on to these records even longer.)

But if you're careful to avoid conflicts of interest and hold on to all your paperwork, no matter how small the purchase, you're well on your way to mastering the legal issues of purchasing.

by David Garrett


A Code Of Conduct

As an IT manager, you'll be tasked with buying all kinds of goods for your corporate network, from the largest servers to the smallest cables. Keep these rules in mind to ensure the highest standard of ethics in the buying process:

1. Always strive to find the lowest total cost of any good or service.

2. Stay free of conflicts of interest.

3. Document every purchase with a receipt, PO, or invoice.

4. Work with your accounts payable staff to ensure that payments for goods are made on time and in full.

5. Decline all but the smallest gifts from vendors.

6. Treat vendors with respect if you want them to treat you the same.

The Airtight Purchase Order

Your purchase order is more than a simple form you give to a vendor. It's also a contract that governs how goods are bought and sold, so it's vital to include the terms and conditions of your purchase on the back of the PO or in an attached document that serves as a legal contract.

Your PO should cover:

Services & Deliverables

Delivery

Identification, Risk of Loss & Destruction of Goods

Payment

Warranties

Inspection

Seller's Responsibility for Taxes,

Records

Insurance

Indemnity

Confidentiality

Ownership of Work Product

Noninterference with Business

Termination

Remedies

Force Majeure

Severability

Limitation of Liability

Assignment; Waiver

Nonexclusive Agreement

Notices

Survival of Obligations

Governing Law

Modifications to Agreement

Compliance with Laws

Injunctive Relief
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