The UCC and the buying officer's personal liability

Any active purchasing practitioner will likely be most interested in learning about purchasing legislation. The Uniform Commercial Code (UCC), which was created in the United States, is the cornerstone of all laws governing transactions and purchases. Although the UCC is not a federal law in and of itself, it functions similarly to federal law in that it is equally applicable across all states. All transactions involving the selling, acquisition, transportation, security, payment, and storage of goods with values greater than $500 are governed by the UCC. (Legal Information Institute, n.d.). Because of its broad applicability, it is imperative for all purchasing officers to have a detailed knowledge of the UCC’s application and operation more so the circumstances under which they may incur personal liability. Purchasing officers as agents of their employer organizations possess actual and apparent authority to enter into purchase agreements on behalf of the company. Hence, this means that their actions are binding to the company within certain limits and thus imposes an obligation on them to act in the organization’s best interests. Where purchasing officers fail to uphold this responsibility via either misrepresenting themselves, engaging in an illegal and damaging activity or acting beyond the scope of their authority, they accrue personal liability that is actionable by either the seller or the principal.

When a purchasing officer signs a contract with a vendor of goods on behalf of his company, the prevailing assumption is that the officer has the employer’s permission to enter into the contract. The legal authority of a purchasing officer to enter into an agreement on behalf of the organization exists in two forms, which are actual and apparent (Leenders, Fearon, Flynn, & Johnson., 2011). Actual authority refers to the specific power granted by the organization to the purchasing officer, and this may be either oral or in written form. When actual authority is in writing, legal documentation exists, which may help to forestall any legal concerns arising later. Actual authority may take either of two forms, which are express or implied, but in both cases a consensual agreement between the entity and the agent is necessary (Monczka, Handfield, Giunipero, & Giunipero, 2015). When expressed, actual authority entails the agent being told that he has the authority to act on the company’s behalf. Implied actual authority, which is also known as usual authority, arises when an agent engages in actions that are reasonably necessary to facilitate the expression of his or her authority (Leenders, Fearon, Flynn, & Johnson., 2011). The extent to which an agent may exercise implied authority is determinable from the type of business entailed in the transaction. The onus of ascertaining the extent of the agent’s authority falls on the third party who deals with that agent.

Whereas actual authority is predicated on the agreement existent between the company and the agent, apparent authority is dependent on the representation made by the entity to third parties. Apparent authority arises where a seller assumes that an agent or third party has the authorization to act on behalf of the purchasing entity even though that individual has yet to be appointed to such a position (Monczka, Handfield, Giunipero, & Giunipero, 2015). The assumption may arise due to the third party’s circumstantial or verbal representation, for example, the presentation of company stationery or business cards. Consequently, actions that are undertaken based on apparent authority are potentially non-binding from a legal point of view.

Legally, a third party cannot rely solely on a statement made by an agent relating to the extent of his or her powers as a basis for entering into a contract. However, where the purchasing officer has made a false statement with regard to his or her authority to engage in a contract, and this statement is made with the intention of deceit, the officer may be held personally liable (Leenders, Fearon, Flynn, & Johnson., 2011). Similarly, where the natural and probable outcome of the misrepresentation made by the purchasing officer is to mislead the third party, the agent incurs liability. For the misrepresentation made by the purchasing officer to be actionable, it is imperative that it be false in nature or made recklessly in the absence of knowledge about its truth or otherwise (Monczka, Handfield, Giunipero, & Giunipero, 2015). Additionally, it must have been made with the intention of inducing the third party to contract, and the plaintiff must have relied on it and consequently suffered a loss.

An example of this situation would arise where a purchasing officer enters into a contract for the purchase of goods on behalf of his company but he or she lacks the authority to contract and the supplier makes a delivery on the strength of this contract but the company refuses to enforce the contract. In such a circumstance, the supplier may sue the purchasing officer for the tort of deceit seeking damages for any losses directly arising from the tort whether or not they were foreseeable (Leenders, Fearon, Flynn, & Johnson., 2011). Moreover, the agent is also potentially liable since it is apparent that he or she was the actual contracting party as opposed to acting on behalf of his or her employer. Personal liability may also arise on the grounds of a breach of the implied warranty that the agent had the authorization to make the specific contract that he or she attempted to make on behalf of the principal.

Actions performed by purchasing officers in their capacities as company agents are binding to the entity provided that they are encompassed within the scope of the agent’s authority. The binding nature of these actions covers both beneficial and damaging acts. However, where an agent engages in an injurious act without the authority to do so, even if he or she believes that the authority exists, the agent may be held personally liable for that act (Monczka, Handfield, Giunipero, & Giunipero, 2015). Since there is no contract existent between the purchasing firm and the supplier, the supplier cannot ordinarily obtain recourse from the agent’s employer, and such, the remedy is only available from the agent himself. However, in an instance where the supplier had good reason to believe that the agent was acting within the province of his or her apparent authority and was not aware of a limitation existent on the agent’s actual authority, then the principal may be held liable. In such a case, the purchasing officer is evidently at fault, which makes him or her liable to the employer thus opening grounds for litigation for the damaging act.

Where an agent possesses actual or apparent authority from the principal, he or she is entitled to perform actions in the principal’s name and the principal is liable for those actions. However, where the action performed is illegal in nature, the purchasing officer is personally liable even though he or she had authority from and was acting on behalf of the principal (Monczka, Handfield, Giunipero, & Giunipero, 2015). For example, a purchasing officer who purchases hazardous material from a supplier on behalf of his employer but transports this material illegally in an unauthorized vehicle cannot escape liability by claiming that he or she was acting as an agent of his employer. In such a case, if the authorities arrest the purchasing agent, he or she will be held criminally liable for the illegal transportation of toxic material despite the fact that he had authority to do so from his principal.

In law, employers are generally considered liable for actions undertaken by their employees as long as they are done in the ordinary course of employment. Since a purchasing officer is an agent of the organization and thus its employee, the employer may be liable for any damaging actions performed by the agent. However, when a purchasing agent willfully engages in an activity that results in damage to a third party, then the purchasing officer may be held personally liable. An example of such a situation would arise where a purchasing officer who buys land on behalf of his company decides to trespass on to a potential seller’s private property. In this case, the purchasing officer has engaged in a damaging act of his own will and the seller cannot recover from the company. Instead, the purchasing agent may be personally liable for the tort of trespass.

A purchasing officer as an agent of the company is under an obligation to act in the employer’s best interest every time as opposed to pursuing personal benefit. Consequently, when a purchasing agent engages in deceptive acts that are geared at obtaining a personal benefit but are detrimental to the employer, then the employer may sue the purchasing officer for deceit. Such a situation may arise where a purchasing officer is charged with the responsibility of procuring top-quality company uniforms from a supplier at a specified price. However, instead of buying the top-quality uniforms, the purchasing agent accepts to receive a bribe from the supplier and in turn accept lower quality uniforms at the price of the higher quality ones. This action causes the employer to spend more money on replacing the uniforms, which wear out much sooner than expected. When the company uncovers the plot, it decides to sue the purchasing manager for deceit. In this case, the purchasing manager will be liable for the losses incurred by the company due to his deception and pursuit of personal gain.

In any organization, purchasing officers are often privy to a lot of sensitive and confidential information, which they have a responsibility to safeguard. An example of this information is the bid documents supplied by tenderers as well as proprietary information such as software or architectural drawings submitted by bidders during the tendering process (Monczka, Handfield, Giunipero, & Giunipero, 2015). Because of their almost unlimited access to this information, purchasing officers may can often engage in unethical practices such as leaking bid information to competitors to provide them with an unfair advantage or stealing and selling proprietary information. When purchasing officers participate in such actions, they are considered personally liable since this is a breach of trust on their part. A seller who believes that a purchasing officer participated in the theft and sale of their proprietary information may sue him or her for the damages resulting from the loss of economic value occasioned by the leaking of the information.

A purchasing officer may sometimes perform a damaging act that is outside his or her scope of authority in the belief that such an action will ultimately be beneficial to their employer (Leenders, Fearon, Flynn, & Johnson., 2011). For example, a purchasing officer whose authority is limited to the purchase of coal for his employer chances upon a farmer selling a piece of land that is potentially rich in coal deposits, and thus worth a fortune. Recognizing the opportunity, the agent signs a purchase agreement on behalf of the company committing it to buying the land. However, it later turns out that there are no coal deposits and when the agent returns to the company, the manager refuses to recognize the purchase because the company is not ordinarily involved in the acquisition of property. In case the farmer decides to enforce the purchase agreement on the strength of the agent’s apparent authority, the company can choose to sue the agent for indemnification due to the resulting damage or loss. In this situation, the agent will be personally liable because even though he or she believed that the actions were beneficial to the principal, it is a fact that the resultant loss was due to an unauthorized action that was ultimately detrimental to the principal.

Conclusively, the UCC despite not being a federal law serves as the primary guideline governing commercial transactions in the USA. Consequently, it is imperative for any purchasing professional to possess in-depth knowledge of the law and its application. Purchasing officers serve as agents of their organizations and as such, their actions and the consequent personal liability primarily revolve around the principles of actual and apparent authority. Whereas actual authority refers to the specified power of an agent to act on behalf of his principal, apparent authority describes the authority that the agent seems to have from the seller’s perception. The purchasing officer, being an agent, is permanently obligated to employ this authority for the employer’s benefit. Thus, when he or she fails to do this by making false representations; engaging in unauthorized damaging acts; wilfully performing damaging and illegal acts; and acting outside his or her scope of authority, then the agent may be held personally liable for those actions.

References

Leenders, M. R., Fearon, H. E., Flynn, A., & Johnson., P. F. (2011). Purchasing and Supply Management (14th ed.). New York: McGraw-Hill/Irwin.

Legal Information Institute. (n.d.). Uniform Commercial Code. Retrieved June 29, 2017, from https://www.law.cornell.edu/ucc/1/1-103

Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Giunipero, L. (2015). Purchasing and Supply Chain Management (6th ed.). Boston, MA: Cengage Learning.