Business and the Law
Topic Four

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The Concept of Contracts

A is contract is defined as an agreement that is enforceable by law. This will mean that a contract will have legal implications for the parties involved in or who enter into a contract. An agreement is not legally binding and therefore neither of the parties is liable if anyone breaks the agreement. There is a difference between a contract and an agreement. A contract is a written or verbal agreement between two or more parties that is enforceable by law. On the other hand, an agreement is a written or verbal contract between two or more parties that is not enforceable by law. All contracts are an agreement, but all agreements are not contracts.

Characteristics of a Contract or things that lead to Validity of Contracts

There are certain features that make an agreement a contract which are as follows:

  • There must be offer and acceptance – the offerer is the party who makes the offer and the offeree is the person that the offer is being made to. There must a clear offer and clear acceptance for a contract to be binding.
  • Consideration - this is the price or object of value paid or given by one party for the promise of the other.
  • The capacity to contract – parties to the contract must be an adult such over 18 years, of sound mind, not under the influence of drugs or incarcerated.
  • There must be the absence of force, misrepresentation or fraud – there should be no force by one party for the other to sign the contract.
  • A contract must be legal the intention of the transactions that leads to a contract must be legal.

Differences of Contracts – a Simple Contracts and Specialty Contracts

A simple contract can be made orally, in writing or by the implications deemed from the actions of the parties.  A specialty contract must be signed by the parties sealed with a company seal and finally it must be delivered.

The following are some examples of specialty contracts:

  • Mortgages and leases for over three years.
  • Contracts of insurance.
  • Hire purchase agreements.
  • Transfer of company shares.

Difference between an Offer, an Invitation to Treat and Acceptance

An offer is made when a person shows a willingness to enter into a legally binding contract while an invitation to treat is merely a supply of information to tempt a person into making an offer.  The latter is an action inviting other parties to make an offer to form a contract.

Termination of Discharge of Contracts

Contracts may be terminated for the following reasons:

  • Performance – this means that after the parties have duly completed the terms and requirements of the contract, the contract can be deemed to have been terminated.
  • Frustration or dissatisfaction – this means that if something goes wrong through no fault of the parties to the contract that make one party unable to perform the contract, the contract can be terminated.
  • Lapse of time - if the time limit set for the contract to be executed  by both parties has been passed.
  • Mutual agreement – if both parties to the contract mutually agreed for its termination.
  • Death of a party – if one of the parties to the contract has died, this is cause for the termination of the contract.
  • Breach of contract - when one of the parties to the contract defaults or does not perform his part of the contract, this is cause for the termination of the contract.

Business Documents

There are several business documents that we need to become familiar with such as follows:

Letter of Enquiry – such letter is sent by persons who wish to be informed of goods and services that the business is offering and their prices.

Quotation – the business may send a quotation to the buyer which is a statement of the transaction to the prospective buyer.

Catalogue - is a booklet with a brief description and pictures of articles for sale with their prices.

Order letter – if there is an interest to purchase an item in the catalogue then an order letter is sent requesting goods to be supplied.

Delivery note – this is a note that must be signed by the person receiving the items ordered. This is proof that goods were delivered. A copy of the delivery note is given to the buyer.

Consignment note – this is a note that is sent when the firm does not have its own transportation. A transport company is paid to deliver the goods.  A consignment note will be prepared by the consignor (the sender) and given to the transport company.  It contains information about the destination of goods and the name of the consignee (the receiver).

Invoice – An invoice is a bill sent with goods delivered with the amount to be paid for the goods.  Invoices may also be sent after goods have been delivered.  An invoice itemizes a transaction between a buyer and a seller.   

Pro forma Invoice is a temporary invoice. It is used in cases where funds are being borrowed from financial institutions to purchase items. The institution may request a pro forma invoice as proof of items to be purchased when the loan is disbursed. 

Credit note - is issued to a customer when there has been an overcharge on an invoice when goods have been returned because of damage or refunds  requested for goods not received. 

Debit note - is sent to a customer whenever there is an undercharge or omission on the invoice.

Instruments of Payments

Traditionally, payment for goods and services took the form of cash.  In modern times, this has changed where there are now more instruments of payments.  Instruments of payments are as follows:

Cheques - a cheque is an order to the bank to transfer payments from an individual’s account (the payer’s/drawer’s account) to credit another individual’s account (the payee’s account) or to pay the payee on presentation of that cheque.

Standing Order/Banker’s Order - this allows regular monthly payments to be made from a customer’s bank account to a named payee. The customer must complete and sign a standing order form instructing the bank to make payments.

Credit Cards/Debit Cards - A credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A debit card is issued against a customer’s account balance and is therefore not a loan.

Postal Order – is a financial instrument usually intended for sending money through the mail. It is purchased at a post office and is payable at another post office to the named recipient.

Money Order - these can be purchased from a bank or a post office. They can be used to make payments locally or overseas, as they are made out in the currency in which they are to be paid.  The payee will cash the money order at his bank.

Bank Draft - this is a cheque that is used to make payments overseas. Bank drafts are obtained for a fee from a bank and are made out to a named payee in foreign currency.

Bill of Exchange - this is used to pay for goods bought overseas on credit. It is an order in writing from an exporter to an importer requiring payments of a certain sum of money at a fixed future date. 

Letters of Credit/ Documentary Credit - this is a sent from an importer’s bank to an exporter guaranteeing payment to the exporter for goods to be supplied. The exporter must present a clean bill of lading, certificate of origin and a certificate of insurance to the importers bank.

Insurance and Assurance

Insurance is a means of protection from financial loss.  Insurance is generic for all types of insurance and assurance.  However, insurance differs from assurance in that insurance covers risks that may occur such as theft, fire and accident and assurance covers events that will occur such as death.

Insurance Principles

Insurance is based on certain principles in order for the concept of insurance to effectively work.  These principles are a follows:

Indemnity - the concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. The compensation is supposed to place the insured in his original position and nothing more.  It means that the insured must not profit from the transaction. 

Insurable interest – the insured must have a vested interest in what is being insured. For example, someone is not allowed to insure his neighbour’s house.

Utmost Good Faith – the insured must be truthful concerning the information pertaining to the policy contract.

Proximate Cause - The damage caused must be close or proximate to the event insured against.  For example, if someone has an accident policy that includes death occurring as a result of an accident, this person will not be compensated if death is caused by disease.

Subrogation – Subrogation is the right for an insurer to legally pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid by the insurance carrier to the insured for the loss. 

Importance of Insurance to Businesses

If the business suffers any form of loss, the business may take a long time to recover. Insurance is therefore very important to the business community.

Commercial insurance protects small business owners from the damaging effects of financial liability arising from specific circumstances. It is important to carry at least four general types of insurance when engaging in trade and commerce: liability, property, employment and auto. Insurance is crucial to financial and organizational stability because liability can quickly lead a business and its owners into bankruptcy.

The importance of liability insurance stems from the range of financial risks that can arise from litigation, including legal action from customers, suppliers or other business partners. General liability insurance covers obligations resulting from negligence, personal injury, damage to property and a host of other risks. Product liability insurance covers claims of injury or personal harm caused by defective or unsafe products.   Commercial property insurance covers the costs of fire, water and hail damage, as well as vandalism and other criminal acts.  Workers' compensation policies - cover the cost of paying out workers' compensation claims in the event an employee is hurt on the job.

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