Articles

This is the first in a series of articles about areas of contract law that affect the purchase of goods and services. I have titled this series procurement law rather than contract law, because not all of what encompasses the voluminous subject of “contract law” affects procurement.

Definition. Before answering the question “when is a contract not a contract,” let us first define the term “contract.” According to my Law Dictionary, a contract is “a promise, or set of promises, for breach of which the law gives a remedy, or the performance of which the law in some ways recognizes as a duty.”¹ As law professors say, this definition is “black letter law,” meaning it was established eons ago and it is not likely to change. In plain English, it means:

A contract is an agreement (or set of agreements) that is enforceable in court.

Many people call contracts “agreements”; however, I prefer the term contract, because it can mean one or more agreements within the contract. In contract, word “agreement” sounds as though only one agreement was made.

A contract is formed when two or more persons or “parties” (hereafter party) agree to do, or to refrain from doing, something; and each party has some sort of stake in the outcome. In other words, one party cannot provide all the benefits while the other party provides nothing.

Consideration. Each party to the contract must give up something to make the contract happen. A gift would not be a contract because one party would provide the benefit and the other party would provide nothing.² In a sales contract, one party provides the goods or services and the other party provides the money to pay for them. Both parties provide something to make the contract happen (in legalese, each party must “suffer a detriment”). This tit-for-tat is called consideration. Without consideration, there is no contract.

The agreement between the parties must be a true agreement so that the parties have what is called a “meeting of the minds.” This means they both must agree about what is being purchased and paid for.

The process of arriving at an agreement is the offer and acceptance phase, which generally comes first. One party generally makes an offer to sell something, and the other party accepts the offer and forms the contract. In public procurement, offers are made every day, often without much thought by the parties involved. How? Keep reading.

Offer. When a purchaser (buyer, purchasing agent, etc.) solicits bids or quotes, he or she is actually asking for offers. The solicitation (Invitation For Bids, Request For Proposals, Informal Quote Form, etc.) usually tells the bidders under what terms they can make their offers. Public purchasers are fussy about how they want to receive offers, because it is important that they be able to compare the offers as we say, “apples to apples.” So, public purchasers often tell bidders under what terms they can bid. The terms are generally something like:

and so forth. Even though public purchasers tell bidders how they want to receive bids from them, the bids are still offers in every sense of the word.

Acceptance. When the purchaser makes an award to one of the bidders, she is accepting that bidder’s offer and entering a contract.

Elements of a contract. Every contract needs five elements that can be easily remembered with the pneumonic: LOCAL. Legal parties, offer, consideration, acceptance, and legal purpose. If any of these elements are missing, you do not have a contract.

So, when is a contract not a contract? When purchasers think they have a contract, but they really do not, because one of the elements required for a contract is missing. An example is that of blanket purchase orders, also called standing and open orders. Many agencies think these are contracts, but if they are written incorrectly there could be contractual elements missing. Test yourself with this example:

Dorothy, the Purchasing Agent for City of Turner, negotiated with Jose, the manager of Andy’s Hardware, who agreed to give the City a 15% discount off the shelf price for hardware, on all walk-in purchases. Dorothy issued the following purchase order:

Open order for the purchase of miscellaneous hardware at 15% discount off shelf price for all walk-in purchases, from July 1, 2004 through June 30, 2005. No quantity is guaranteed or implied.

Dorothy thought she had a good contract with Andy’s Hardware, until Jose left the company and Todd was hired as the new manager. In an effort to increase profit, Todd sent Dorothy a letter revoking the 15% discount. Dorothy showed her City Attorney the purchase order with Andy’s Hardware, and asked if the discount could be enforced. What do you think?

Were all the elements required for a contract present? Take them one at a time. Were there legal parties? Yes, the City and Andy’s Hardware were legal parties. Was there an offer? Was there an acceptance? We will assume there were an offer and acceptance during the negotiation process. Was there a legal purpose? Yes, it is legal to purchase miscellaneous hardware. Was there consideration?

Let’s look at Andy’s side of the equation first. No matter how much hardware the City might have purchased before Todd revoked the discount, Andy’s Hardware was committed to giving the City a 15% discount; so Andy’s “suffered a detriment.” Remember, both parties must suffer a detriment before you have consideration to form a contract. Let’s look at the City’s side of the equation.

Did the City suffer a detriment? No, the City did not suffer a detriment because the City did not make a commitment to purchase any quantity. In fact, it specifically wrote on the order that it would not guaranty a quantity; therefore, there was no binding contract that could be enforced.

That’s it for this month. If you have questions or comments about this article, please address them to the Editor of CAPPO News, who will forward them to me for response.

¹ Steven H. Gifis, 1991, Law Dictionary, 3rd ed.; Barron’s Educational Series, Inc., Hauppauge, NY 11788
² In later articles, we will address what happens when the receiving party incurs expenses or a “detriment” in anticipation of the gift

Copyright © 2004 by Karen Theriault, Esq., C.P.M.