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CHAPTER 19
Contract management and performance
measurement
Objectives of this chapter
• To provide a comprehensive introduction to contract law
• To examine approaches to the measurement of performance efficiency in procurement
in relation to its stage of evolution
• To consider the mechanisms of contract management
• To relate procurement performance to the stage of development
• To consider the benefits of measuring performance
• To consider the role of procurement as the intelligent customer
• To analyse the basic questions in ‘best practice’ benchmarking
• To evaluate reporting systems and the information that should be included
• To consider service level agreements
• To consider the role of risk management
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
• BA
• HM Prison Service (HMPS)
• O2
• Ford
• Cummins Engines
Best Practice Boxes
• Contractual management of risk
Figures
• Figure 19.1 Battle of the forms
• Figure 19.2 Battle of the forms
• Figure 19.3 Supportive performance measures
• Figure 19.4 Smart performance pyramid
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This chapter contains a most comprehensive overview of contract law and the supporting legal
cases.
Contract law
Definition
A contract is an agreement between two or more parties which is intended to be enforceable by
the law.
The law of contract is concerned with four basic questions
• Is there a contract in existence? The answer depends on the presence or absence of five
essential elements: Agreement (offer and acceptance), consideration, intention to create
legal relations, contractual capacity and correct form.
• Is the agreement one which the law should recognise and enforce? Some contracts will be
wholly or partly invalid at law because of a vitiating factor, such as illegality, mistake or
misrepresentation, which means that consent has not really been given – there is not
consensus ad idem (agreement as to everything).
• When do the obligations of the parties come to an end? The most common method of
termination of a contract is when each party performs his contractual obligations.
• What remedies are available if either party is in breach of his contractual obligations? The
usual remedy is dames (monetary compensation).
Essential elements in a binding contract
For a contract to exist and to be legally binding, five essential elements must be present. These
are:
• Agreement (i.e. offer and acceptance)
• Consideration
• Intention to create legal relations
• Contractual capacity
• Correct form
Implied terms in the Sale of Goods Act 1979
The implied term as to title: S12
At present, whenever a contract may say, the seller is deemed to undertake:
• As a condition, that he has a right to sell the goods.
The condition that the seller has a right to sell is most useful to a buyer when a seller turns out
not to have been the true owner of the goods: Rowland v Divall (1923).
A claimant who had bought a car and used if for some months then discovered that it had been
stolen and returned it to the actual owner.
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The degree of fitness required is, of course, a question of fact. But the goods must be fit at the
time of sale, and not merely capable of being made so, for instance, by washing: Grant v
Australian Knitting Mills (1936).
Underpants contained a chemical which could be removed by washing.
Held: These goods were not of satisfactory quality.
There is some overlap between satisfactory quality and fitness for purpose. Satisfactory quality
is defined in terms of fitness for purposes for which goods of the appropriate class are
commonly bought. But the buyer may explain to the seller a particular purpose for which he
requires the goods. Then if the seller contracts with him, he is in general liable under S14 (3) if
the goods are not fit for that purpose.
If the buyer is going to use the goods for a purpose for which they are commonly used (e.g. hot
water bottle to be used to keep a person warm) then he need not specifically state to the seller
the purpose to which he intends to put the goods: Priest v Last (1903).
They buyer did not state the use of a hot water bottle for normal purposes. The hot water bottle
leaked.
Held: This did not prevent the buyer from successfully suing for breach of the condition that the
goods were fit for their purpose: the seller was presumed to have sold the bottle for normal use.
If the buyer is going to use the goods for a particular (unusual) purpose or there are unusual
circumstances then he must notify the seller of this in order to obtain protection under S 14 (3):
Griffiths v Peter Conway Ltd (1939).
The buyer was allergic to a Harris tweed coat which was perfectly fit for a normal person.
Held: There was held to be no breach of condition of fitness for purpose as the buyer had not
told the seller of the special circumstances (i.e. her sensitivity to such fabric).
The implied term as to sale by sample: S 15
A sale by sample occurs when the buyer is given the opportunity of examining a small part only
of the goods to be bought, but such as to be typical of the whole, in this context usually called
the bulk of the goods.
In a contract for sale by sample there are implied conditions:
• That the bulk shall correspond with the sample in quality
• That the buyer shall have a reasonable opportunity of comparing the bulk with the sample
• That the goods shall be free from any defect rendering them unsatisfactory, which would
not be apparent on reasonable examination of the sample: S15 (2).
The test under S15 (2) is one of ‘reasonable examination’ of the sample and not one of thorough
examination: Godley v Perry (1960).
A boy of six bought a catapult from the defendant’s news agency shop and damaged his eye
when it broke in his hands as a result of having been indifferently manufactured. The catapult
was part of a quantity bought by sample from a wholesaler and the defendant’s wife had tested
the sample beforehand by pulling back its elastic.
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Held: While the defendant was liable to the boy in damages for the catapult being neither fit for
its purpose not of satisfactory quality, the defendant could also himself claim against the
wholesaler because the defect of the goods could not be discovered by reasonable examination
of the sample (S 15).
Implied terms in the Supply of Goods and Services Act 1982
Section 13 implies a term into a contract for the supply of a service, where the supplier is acting
in the course of business, that the supplier will carry out the service with reasonable care and
skill.
The ideas was clarified by Lord Denning in the case of Greaves & Co v Baynham Meikle and
Partners (1975): ‘The law does not usually imply a warranty that the professional man will
achieve the desired result, but only a term that he will use reasonable care and skill. The surgeon
does not warrant that he will cure the patient. Nor does the solicitor warrant that he will win the
case. But when a dentist agrees to make a set of false teeth for patient, there is an implied
warranty that they will fit his gums.’
Section 14 implies a term into a contract for the supply of a service, where the supplier is acting
in the course of business and where the time for the service to be carried out is not fixed by the
contract, but is left to be fixed in a manner agreed by the parties or by a course of dealing, that
the supplier will carry out the service within a reasonable time.
Section 15 implies a term into a contract for the supply of a service where the consideration for
the service is not determined in a manner agreed by the parties or a course of dealings, that the
party contracting with the supplier will pay a reasonable charge.
Students should familiarise themselves with:
1) The elements required for a legally binding contract
2) Supporting cases for the above elements
3) Remedies for breaches of contract
4) Legislation containing implied terms
5) Dispute Resolution
This chapter has many examples of performance measurement criteria. Traditionally too much
focus was on the measurement of inputs into the supply chain. Whilst this was of enormous
importance, it was often at the expense of measuring outputs or effectiveness.
Effective contract management will measure both over the life cycle of the contract.