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SECTION 4
The Legal Aspects of Business

Concept of a Contract
A contract is an agreement that is enforceable by law. A contract therefore has legal
implications for the parties who enter into a contract. A mere agreement is not
legally binding and therefore neither of the parties is liable if anyone breaks the
agreement.

What makes a contract different from an agreement?

A contract requires not only an agreement between parties but also something of
value must be passed from one party to the next to make the contract binding. For
example, you offer to sell a friend your used text books for $1000.00. After inspecting
your textbooks the friend agrees and pays $1000.00. The $1000.00 paid here is the
consideration i.e. something of value that is passed from one party to the next.
Consideration is the price paid for a promise. You promised to let your friend have
your textbooks if he paid $1000.00. This $1000.00 makes the agreement
binding. You are therefore obligated to deliver the books to your friend and cannot
decide to sell the books to someone else or to ask for a higher price.

Your neighbor asks you to mow his lawn after which he will pay you $200.00.
You accept this offer and mow the lawn. The work done here is an act of forbearance.
You are giving something of value to your neighbor to receive payment for the
job. The consideration in this case is the work done by you. It is the price that
you have paid for the promise to be paid money for the job. Consideration
passes from promise to promise.

Characteristics of a Simple Contract

There must be offer and acceptance.- The offerer is the party that 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- is the price paid by one party for the promise of the other. Thus
if one party promises to provide goods or services, something of value must be
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given in exchange. This may be in the form of money, goods, services or it may be an
act of forbearance.
The capacity to contract – Parties to the contract must be over 18 years, of sound
mind, not under the influence of drugs or incarcerated.
There must be no force, misrepresentation or fraud. Persons should not be forced
to sign a contract e.g. blackmail. They should not be lied to e.g. giving the wrong
year of a car. Fraud may involve forging someone’s signature.
There must be an obvious intention to create legal relations. This is based on the
actions of the parties e.g. offer, acceptance and consideration.
A contract must be legal- thus, agreements made between parties concerning illegal
drugs and any other illegal activity is not a contract.

Differences Between A Simple & A Speciality Contract

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,
for example with a company seal and finally it must be delivered.
Examples of specialty contracts include:
1. Mortgages and leases for over three years
2. Sale of land
3. Contracts of insurance
4. Hire purchase agreements
5. Transfer of company shares
6. Assignments of copyright

Difference Between An Offer & An Invitation To Treat

An invitation to treat is not an offer but an invitation to bid or bargain for an item. For
example, at an auction persons may bid on various items presented. An invitation to
treat also occurs also when goods are advertised for sale in the media or in shop
windows. Goods in a shop window or goods advertised are not an offer by the owners
of the goods but are technically an invitation for interested persons to make an offer.

Difference Between An Offer & An Invitation To Treat

An invitation to treat is not an offer but an invitation to bid or bargain for an item. For
example, at an auction persons may bid on various items presented. An invitation to
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treat also occurs also when goods are advertised for sale in the media or in shop
windows. Goods in a shop window or goods advertised are not an offer by the owners
of the goods but are technically an invitation for interested persons to make an offer.

Conditions Under Which Offer And Acceptance Are Communicated

An offer must be very clearly made. An offer can be made to one person, a group or to
the whole world. For example, offering a reward for a lost wallet is an offer to anyone
finding the wallet. In cases where there is a counter-offer the original offer is no
longer valid. A counter offer is an implied rejection of the original offer. Foe example:
John offers to sell Paula a laptop for $10,000. Paula subsequently offers him $8000.00
as she thought $10,000 was too expensive. Paula has rejected John’s original offer and
has made a counter-offer of $8,000.
Acceptance must also be clear. In the case of a counter offer a clear acceptance to the
new offer must be identified.
Contracts may be made orally, in writing or they may be implied.
Oral Contracts
Are based on what the parties said. For example, asking someone to wash your car for
payment
Written Contracts
Both offerer and offeree must sign the contract document
Implied Contracts
Implied Contracts are made by the observed actions of the parties involved. For
example, someone who sits at a table in a restaurant and places an order has implied
that he will pay for the food that will be served.

Ways In Which Contracts May Be Terminated

Contracts may be brought to an end:
(a) By performance of the parties i.e. each party completing his/her obligations as
stipulated by the contract.
(b) By frustration i.e. an event through no fault of the parties that make one party
unable to perform the contract. For example: if one party suffers a prolonged illness
which makes him unable to perform the contract.
(c) By lapse of time i.e. if the time limit set for the contract to be executed by both
parties has been passed. For example, sellers of real estate usually require that the
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buyers pay the full balance on the property within a certain time period after the initial
down payment has been made.
(d) By the mutual agreement of all parties.
(e)If one of the parties become bankrupt after the contract has been signed.
(f) By changes in law i.e. where a legal contract is rendered illegal through changes
in law.
(g) By notice e.g. some firms require that employees give at least one month notice
when resigning their positions.
(h) If one party dies.
(i) By breach of contract-When one party defaults on his part of the agreement i.e.
he/she does not perform his/her part of the contract.

Validity Of Contracts
Mr. Larry was delighted to see a 50% discount on his favourite brand of shoes at a
shoe store 15 miles away. He took sometime off from work to travel to the store. When
he arrived at the store he was told that that the brand advertised was sold out but he
could choose from other brands available. Mr. Larry was very angry and requested
that he be refunded his travelling expenses.

Is the owner of the store obligated to refund Mr. Larry his travelling expenses?
Answer
The advertisement appearing in the newspaper is not an offer by the store but an
invitation to treat. Therefore readers were being invited to make an offer for items
advertised. The owners of the store are therefore in no way obligated to Mr. Larry.

Hope stopped at a convenience store on her way home to purchase a few items. She
handed the cashier her credit card and was surprised when she was told that it
declined. She apologized and explained that she did not know why her card declined
but she will call the bank in the morning. Susan further explained that she had just
enough cash with her to get home and so she could not pay for the goods. The cashier
was very angry and asked the manager to intervene. The manager insisted that she
pay for the goods.

Is Sandra obligated to pay for the goods?

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Answer
Sandra has entered into a contract with the convenience store. She made the offer at
the cashier counter when she presented the goods to be cashed. The cashier accepted
the offer by cashing the goods. In this situation it is up to the manager of the
convenience store to accept Hope’s apology.

Why Documentation Is Necessary In Business Transactions

Business documents provide information needed for the business to function
efficiently. Information is required for accounting purposes to ascertain whether
profits or losses are being made. Documents are also needed as evidence for example
orders placed for goods and payments made. Documents also provide information on
commodities in stock and prices.

Business Documents For Various Purposes

(a) Letter of Enquiry is sent by persons who wish to be informed of what goods and
services and the prices of these that a company offers for sale.
(b) The company may resend either a quotation or a catalogue

A catalogue -is a booklet with a brief description and pictures of articles for sale.
Since a catalogue is costly, some companies opt to send a quotation instead. A
quotation- lists all the goods in stock along with their prices.
(c) If there is an interest to purchase an item in the catalogue then an order letter is
sent requesting goods to be supplied.
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The following three documents (items d, e & f) accompany goods delivered.

(d) Delivery Note 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.
(e) Consignment note 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).
(f) An Invoice is a bill sent with goods delivered. Invoices may also be sent after
goods have been delivered.

Terms 5% 30 days – A Discount of 5% will be given if the customer pays within 30

days. E & OE – means errors and omissions, i.e. if any mistakes were made on the
invoice the company will make the correction.
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(g) 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. It may also be sent with goods not ordered and in this instance is a form of
advertising. If the customer is interested in the items sent, an actual invoice is sent.
(h) Credit note is issued to a customer when there has been an overcharge on an
invoice due to faulty arithmetic, when goods have been returned because of damage or
refunds requested for goods not received. A credit note is printed in red.
(i) Debit note is sent to a customer whenever there is an undercharge or omission on
the invoice.
(j) Statement of Account is a document from a supplier to a customer outlining all
the transactions carried out over a particular period. A statement is usually sent
monthly.
(k)A receipt is given for cash payment.
(l) Stock cards are used to keep a record of all stocks entering and leaving the
stockroom. This procedure ensures that stock level do not fall below a minimum
resulting in the depletion of stocks.

Information On Transport Documents

a. Import License
This document gives a business permission to import goods into a county. It is used by
governments to restrict the importation or to limit the amount of certain goods
imported. Quotas are sometimes used to protect local industries as they specify the
quantity of certain goods importers are allowed to import.
b. Certificate of Origin
This document states the country in which the goods were manufactured. This is
important for Caribbean countries as goods from other Caribbean countries enter duty
free. Goods imported from outside the region are taxed.
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c. Shipping Note
This document provides details about the goods to be shipped, e.g. type and number of
items and the destination of the goods.
d. Bill of Lading
The Bill of Lading is a contract of carriage between the seller of the goods (exporter)
and the shipping company transporting the goods. It is also a document of title as a
copy must be presented by the importer before he can claim the goods.
It includes the following information: The number of packages, the weight of each
piece, the contents, the port of departure and destination, the name of the ship, the
senders name and address and receivers name and address
e. Dirty Bill
If the words dirty are added to the bill of lading, then the goods delivered are
damaged.
f. The Airway Bill
This document is used when goods are transported by air. It contains similar
information as the bill of lading. It is not a document of title and the consignee named
need not have a copy to collect the goods.
g. Insurance Certificate – (Marine Insurance)
This document provides protection for the goods being shipped against loss or damage
at sea.
h. Bill of Sight
This document is completed if for any reason the documents required for importing
goods are not available. It is completed giving details of the consignment and method
of transportation.

Instruments Of Payment
The instrument used to make payments will depend on the sum of money being paid
and whether the transaction is a local or an external one.
Cheques
A cheque is an order to the bank to transfer payments from an individual’s account
(the
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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.

Credit Transfer
A customer of a bank may use this system by instructing the bank to transfer money
from his account to an account at any other bank.
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

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This allows the card holder to make payments by simply presenting the card to the
seller. 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
Postal orders are cheques issued in specific values by a post office. The value of each
postal order is printed on it and a price depending on its value is paid for each. The
postal order will be sent to the post office of the payee as designated by the payer.
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.
Telegraphic Money Order
The sender must first pay the sum to be sent over the counter of the post office. A
telegram is sent to the payee informing him to collect money at his local post office. He
must present proof of his identity.
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. The time period allowed is normally three months.
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.
Irrevocable Letter of Credit
Once an exporter receives this letter of credit the importer cannot cancel payments for
goods to be supplied without the exporter’s permission.

Insurance And Assurance

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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 e.g. theft, fire, accident etc., and
assurance covers events that will occur such as death.
The parties to the insurance contract are the insurer (the company offering
protection) and the insured (the person seeking protection). Payments are made
by the insured for this service. The price charged for insurance is called a
premium. The contract is known as the policy.

Insurance Principles
The purpose of insurance is to compensate persons insured who suffer loss. It is based
on the principle of indemnity, that is, to restore the insured to his/her original
position before he/she suffered loss. Insurance therefore as a principle neither makes
the insured worse off or better off than before loss was incurred. For example, if Mr.
Green suffered damages valuing $500,000 subsequent to a fire at his home, he will be
compensated exactly $500,000 to repair his house.
Principles of Insurance
Indemnity-Restoring the insured to his/her original position
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.

Contribution – This principle prevents persons insuring identical risks on the same
property with several companies and thus profiting if they suffer loss. For example, an
individual may insure his car with three insurance companies hoping to be
compensated by all three. He will not succeed as the insurance companies will each
only pay a portion of the claim.
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Average Clause – This clause sets a limit to the size of the compensation, which
depends on the proportion of the true value of the asset paid up by the insured. For
example, a homeowner insures his/her home for $100,000 which is half the true value
of $200,000.

His house was partially destroyed by fire on the insurance company for $50,000 worth
of damage. The insurance company only paid him $25,000 as he was only insured for
50% of the true value of the house presently.

Subrogation -This is an extension of the principle of indemnity, that is, the insured
should be reinstated to his/her exact position before the loss. For example, if a vehicle
is totally wrecked and the insurance company pays the insured the value of the car, the
wrecked vehicle will be claimed by insurance company.

How does insurance Work?

How are insurance companies able to pay its clients large sums of money to
compensate them for loss? They operate on the basis of risk pooling. Premiums from
large numbers of persons with the same risks are pooled and only those who suffer loss
are compensated. The insurance company can predict the percentage of losses based
on past data. The premiums charged are based on the number of losses predicted plus
the cost to operate the business and profits to be realized. For example, a particular
insurance company may insure one thousand persons for risk against car theft. Only
two percent of those insured may suffer loss and therefore the insurance company can
afford to assist those persons.

Types Of Insurance Policies

[Link] Assurance
(a)Whole Life Assurance
Payment will be made upon the death of the insured. The beneficiaries of the insured
will be paid.
(b) Endowed Assurance
Payments are made at the end of specific periods. The Endowment policies may be
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paid at the end of twenty or thirty years or at the age of retirement. If death occurs
before the end of the endowment period insured, then the beneficiaries of the insured
will be paid.
[Link] and Business Insurance
(a) Fire Insurance
Covers loss or damages to assets by fire
(b) Burglary Insurance
Covers loss due to goods stolen and damages to property caused by theft
(c) Bad Debts Insurance
Covers debts that cannot be collected
(d) Plats Glass Insurance
Covers the replacement of shop windows as well as any injury to staff and customers
that may be caused by its breakage
(e) Fidelity Guarantee Insurance
This protects a firm against loss due to the misappropriation of funds by employee,
customers or other persons.
(f) Employers’ Liability Insurance and Public Liability
Covers injury incurred by staff or visitors on a business location due to the negligence
of the firm, e.g., customers slipping on a wet floor.
(g) Motor Insurance
Third party – Only third parties e.g. passengers are covered. The driver and car is not
covered.
Comprehensive – Covers loss due to damages to the driver and third parties.
(h) Marine Insurance
This policy covers loss due to damages of ships and cargo at sea.

Importance Of Insurance To Businesses

Entrepreneurs invest a wealth of resources into the start-up and continuous operation
of a business. If the entrepreneur suffers any form of loss such as fire or burglary etc.
the business may take a long time to recover. Insurance is therefore very important to
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the business community. The principle of indemnity ensures that an entrepreneur

receives enough compensation to continue the business with minimum effects.