LEGAL ASPECTS OF A BUSINESS

CONTRACT

 A contract a specific legal binding agreement between two or more people in which
there is an agreement to do something in return for a benefit [consideration].

 A contract is enforceable by law- this means if the other party does not abide by the
contract, the other party may take legal actions.

PARTIES TO A CONTRACT

 Offeror- the person who made the offer

 Offeree- the person to whom the offer is made
 Acceptor – the offeree who has accepted the offer

CHARACTERISTICS OF A SIMPLE CONTRACT

 The essential elements of the formation of a valid and enforceable contract are listed
below. A contract is void or voidable [cannot be enforced by law] if one or more of the
following features are lacking

1. Offer and acceptance

2. Consideration
3. Legality
4. Competence of the parties/Capacity

1. OFFER AND ACCEPTANCE

 A contract is formed when an offer has been unconditionally accepted. The means that all
terms of the agreement must be accepted by both parties.

The Offer

 This is an indication by one party to the other that they are willing to make a proposal and
to be legally bound by it

Rules Governing an Offer

i. The offer must be communicated to either to a specific person or to the general public
 E.g. - Golda offers to sell her bracelet to Tomora, this is an offer made to a specific
person
 E.g. - Golda advertises that the first person who comes to her house on a specific
date and time
 Will be able to buy the bracelet, this is an example of an offer made to the general
public.

ii. An offer can be expressed in writing, oral or implied

E.g. - if you went to the dentist for some treatment, you are agreeing in principle to pay
for the treatment, if you are handed a bill and refuse to pay , you would be in breach of a
contract

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Acceptance

 Acceptance is when the offeree [the person to whom the offer was made] agrees to the
terms of the offer made by the offeror

Rules Governing an Acceptance

i. Acceptance must be communicated:

 written- that is effective from the time
 verbal- that is when a seller says ‘okay I accept your offer
 by conduct e.g. when a shop owner puts your jeans in your bag and accepts your
money

ii. Acceptance must be unconditional/unqualified.

The offeree cannot introduce a new term to the contract. E.g. if a seller offers a used car
for sale, you cannot say ‘I accept your offer on the condition that all tyres are replaced’,
this is not acceptance, but you have created a counter offer.

NB: a counter offer is when the offeree changes the term of the agreement and it is
equal to the rejection of the original offer and is not legal acceptance.it is left up to
the offeror if he/she will accept the new terms presented by the offeree.

iii. Acceptance must be within an agreed time – however if no time period is stated, it must
be done within a reasonable period.

iv. Acceptance made through the post is effective once the letter is posted.
E.g. an acceptance letter lost in the post and which never reaches the offeror is still valid,
since a contract existed from the time of posting by the offeree.

Invitation to Treat

 An invitation to treat is not an offer, it is an invitation to make an offer

 This is a situation where an offeror invites other parties to make him an offer

Examples of Invitation to Treat

 An auctioneer’s request for a bid
 goods on display in a shop or store with a price tag
 property advertised for sale
 an advertisement in the newspaper

2. Consideration

 Consideration is the benefit received by both parties either in the form of cash,
goods or services. E.g. a promise to dig someone’s garden in exchange for repairs to
a washing machine is a valid contract
 Consideration must be real, that is well defined, it should be able to convert to cash
 Consideration should be lawful since an unlawful act would be void [cannot be enforced
by law]

3. Competencies of Parties [ Capacity of Parties]

 Competencies of parties or capacity in law means that the persons are eligible to enter
into a contract.

 The following groups are not eligible to enter contracts: Minors ( those less than 18
years) drunks , insane persons, prisoners

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4. Legality

 All forms of contract must conform to the laws of the land. E.g. if Joe pays Michael $500
,000 to deliver a tonne of marijuana and Michael fails to carry out his side of the contract,
then Joe cannot get the courts to force Michael to carry out his side of the agreement.

 Illegal contracts include: contracts to commit wrongs or crimes or contracts involving

sexual immorality

TYPES OF CONTRACT

A Simple Contract

 It may written, oral or implied by conduct

 Consideration is an important element in a simple contract
 Examples: Hiring a taxi, entering a store to purchase items, life or general insurance
[written contract]

A Speciality Contract

 Speciality contracts are also called a deed or contract under a seal

 Speciality contracts apart from being written must be :
 Signed –signed by both parties
 Sealed – seal imprint is put on the document
 Delivered – all the parties to the contract must have a copy of the document
 Examples: mortgage agreements, land or property sales, hire purchase agreement

WAYS IN WHICH CONTRACTS MAY BE TERMINATED

 A contract may be discharged or terminated when one of the parties is released from their
contractual obligation.

Methods of Discharge

 By breach- one party breaks the contract by failing to carry out its side of the agreement
 By agreement- both parties agree to cancel the contract before it is completed
 By performance- both parties carry out their side of the agreement
 By frustration- one or both parties being unable to meet their obligations because of
circumstances out of their control
 Lapse of time- failure of a party to carry out its side of contract within reasonable time
 By renunciation – one party carries out a portion and fails to carry on any further
 By death – one party may die
 By bankruptcy – one party may become bankrupt

Breach of Contract

 Breach of Contract is a refusal of one party to fulfil the obligation of the contract
 When one party breaches a contract the innocent party is entitled to some form of
compensation.
 Where there is a breach of contract the innocent party must be paid for damages, that is,
compensation must be given to the innocent person in the form of cash

INSURANCE

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 Insurance is a promise for financial compensation for a risk that may or may not occur such
as accidents, theft, fire. Unexpected events may occur at times when individual cannot
afford to restore themselves.

Insurable and Uninsurable Risk

 Insurable risk are events that the insurance company will be able to calculate and charge
customers a premium. e.g. fire

 Uninsurable risks are events that the insurance company will not be able to calculate and
charge customers a premium e.g. you cannot insure if a business will be successful or not.

The Insurance Contract

 An insurance policy is a document sent by the insurer to the insured which states what has
been agreed between the two parties.
 Insurance policies may be obtained through an agent working for a particular company or
through brokers selling insurance for a number of different companies.
 Insurance can be provided by insurance companies, underwriters and the government.

POOLING OF RISK

 The pooling of risk is where people faced by same events, come together to protect
themselves.
 Every person or business faced with a risk pays a small amount of money called a
premium to the insurance company, to compensate for losses suffered by themselves and
others.
 If a home-owner loses his house due to the risk of fire, instead of one person bearing the
loss, it is shared by several persons of a large group.

VALUE OF INSURANCE IN LOWERING RISK ASSOCIATED WITH BUSINESS

1. It provides financial protection and compensation if a risk occur e.g. fire

2. It provides business confidence and peace of mind, that is, people will invest their money in a
business without the fear of losing it
3. It is an invisible export, which brings revenue/foreign exchange to a country, this helps to
improve the country’s balance of payment position

THE PRINCIPLES OF INSURANCE

The four principles of insurance include:

1. Indemnity 2. Utmost good faith 3. Insurable interest 4.Proximate cause

INDEMNITY

 This means to restore the insured to where he or she was before the loss or damage
occurred. This principle does not apply to life assurance since no money can compensate
death
 The principle of indemnity is not to make a profit from a loss, but you receiving a fair
compensation

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Rules Governing Indemnity

(i) Subrogation

 This is where the insurer after being compensated, surrenders the right of ownership to
the insurance company

 E.g. if your car was completely wrecked in an accident, the insurance company would
compensate you, but they would take the wreck to ensure that you do not sell the wreck
and make a profit.

(ii) Contribution
 This occurs when more than one insurance company is liable for the loss, the amount of
loss is shared in proportion by different insurance companies

 E.g. If you have insured your car with two different insurance companies and your car
was stolen, the two insurance companies would contribute half the value of your stolen
car and buy you a new car, so you are fully compensated. You cannot get a car from
each insurance company

UTMOST GOOD FAITH

 This principle states that the insured must give all relevant information about the thing or
person being insured, he/she must be truthful. Failure to give accurate information may
mean the insurance company may refuse to pay on the claim

 Note: The insurance company must also give all relevant facts about the policy

INSURABLE INTEREST

 A person cannot take out an insurance policy to protect property in which they do not
have insurable interest
 E.g. you cannot insure your neighbour’s house, it is not yours and you will lose nothing

PROXIMATE CAUSE

 The insurance company can only pay out compensation if the loss suffered was caused by
the risk covered in the policy

 E.g. if a person insures his house against fire but it was destroyed by flood, then he
cannot expect to get compensation from the insurance company

TYPES OF INSURANCE POLICIES

(i) Life Assurance
(ii) Non – life (Business Insurance)

LIFE ASSURANCE POLICIES

 Life assurance is a promise of financial compensation for events that must happen such as
death. Life assurance is the insurance of people’s life or health. It is a form of savings
plan which benefits the dependants of the assured.

 The principle of indemnity cannot be applied under this coverage as no amount of money
can restore a person back to life.

(i) Whole Life Policy

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  Provides payment after the death of the insured, the spouse or dependent should
benefit from this policy.

(ii) Endowment Policy

 Allows a sum of money to be paid, payable at a certain age or on death of the policy
holder, whichever comes first.
 Upon maturity, if the insured survives the period covered by the policy, then he receives
a lump sum of money.

(iii) Term Policy

 This is used by persons who need a mortgage on their home, in the event of death,
the policy is used to pay off the mortgage.

BUSINESS INSURANCE POLICIES

1. Fire Insurance

 Covers both domestic and business premises and their contents. It also includes
explosions, flood, burglary
 Premiums paid depend on the type of building, its layout, nature of the
contents[flammable]

2. Liability Insurance

(i) Public Liability: provides coverage for firms which may have to pay claims for injury to
persons caused by their negligence.

(ii) Employer’s Liability: provides coverage for employee’s having accidents on the job, all
businesses are required by law to have such a policy.

(iii) Fidelity Bond: this is where insurance companies will compensate against theft by
employees.

(iv) Product liability: it provides coverage to a business if a customer takes legal action as a
result of unsafe goods being supplied by the business.

3. Motor Vehicle Insurance Policies

(i) Third Party Policy: covers death or injury caused to other road users apart from the
insured on the road , plus damage to other people’s property.

(ii) Third party, theft and fire insurance: this covers the damage to other people’s property
plus the owners’ car through fire or theft.

(iii) Comprehensive Policy: this includes third party, fire and theft, damage to the insured
vehicle, personal injury to the driver and loss of possessions in the vehicle

4. Consequential Loss: covers loss of profit as a business would have earned if the business
was still operating.

5. Goods in transit or goods in transit coverage for loss/theft of goods or cash being
transported.

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6. Personal accidents: covers injuries to a person that prevents you from working

7. Marine insurance: covers damage to the vessel, the cargo (damaged goods) and the ship
owner’s liability, that is, coverage for injury of passengers/crew or collision with another
vessel.

8. Aviation insurance - covers aircraft against damage or death of passengers or crew.

THE IMPORTANCE OF RECORD KEEPING

 Business documents are the official documents used in a business to help keep track of
all official and unofficial business transactions.

Business documents are important because:

 they make the communication process possible and are used for reference purposes e.g. if
a customer queries a bill the filed copy can be used in clarifying any queries
 governments require proper documentation for taxation and auditing purposes
 they provide a written record between a firm and its customers e.g. receipts, invoices
 it prevents business persons from forgetting important information to be used in the
performance of their various task
 it saves time since relevant information can be located easily and can be extracted if
needed

PREPARING COMMON BUSINESS DOCUMENTS

Pro-forma Invoice

 A Pro-forma Invoice-is a bill sent to the buyer when the supplier requires payment in
advance of delivery when the buyer is not well known by the seller. It is sent when
 the buyer is not well- known by the seller
 when certain goods are sold on a trial basis to the customer who has the option to
return the goods if they do not wish to purchase them
 used in import/export trade to assist in the calculation of customs duties and other
fees

The Invoice

 The invoice lists the goods purchased and informs the buyer of the amount owed to the
seller
 It contains the: quantity supplied, price per unit, total amount owed, invoice number,
buyer’s order number, terms of sales, E & OE [errors and omissions expected] means the
supplier has the right to correct any errors at a later date

Statement of Account

 Is a summary of all transactions made between the buyer and the seller during the month
and it reminds the customer that payment is due.
 It enables the customer to compare the records kept by the seller with his own

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  It contains: balance owing at the beginning of the month, the amount of invoice issued,
debit or credit notes issued, the net amount owing at the end of the month

Purchase Requisition Forms

 This is a business document that is used within an organization when goods are
needed from the stock room.
 The purpose of the document - it helps to control the movement of stock
it informs the firm on how stocks are used and by whom, it gives information on what
persons need and the quantity

Stock Card

 Document that keeps information about the stock such as records of stock received and
issued and the balance at any given time
 It contains: minimum and maximum levels of stock , amount if stock received, amount of
stock issued, re-order levels

Credit Note

 A document sent to a buyer if he has been overcharged due to: faulty or damaged goods
that have been returned , goods are supplied in smaller quantities than shown in the
invoice, discounts were left off the invoice, too much charged for transport

Debit Note

 A document sent to the buyer if he/she is undercharged due to : some delivered items are
not on the invoice , pricing errors made on the invoice , the buyer has kept samples that
were sent by the seller, transport cost omitted