GRADE 10 COMMERCE NOTES
BUSINESS CONTRACTS
A Business contract is a legally binding agreement between two or more parties that creates
an obligation to do or not do particular things.
Businesses sign contracts with stakeholders such as workers, customers, creditors,
suppliers, debtors, banks and many more. Signing contracts is an important element in
business because it provides evidence that the two parties agreed to carry out a business
transaction.
Importance of Contracts in Business
- Contracts reduce business risks by compelling business partners to perform what
they have agreed to do as per contract.
- They specify terms and conditions of business transactions including price,
quantities, quality, date of delivery, etc. This helps the parties involved to avoid any
misunderstandings that may ruin good business relations.
- Encouraging buying on credit: contracts help entrepreneurs to get goods on credit
because the suppliers are aware that the entrepreneur receiving the goods is bound
by the contract and will therefore make all the effort to pay.
- Providing permanent records: written contracts are important because it is easy to
forget details agreed upon verbally. One can always refer to contracts at a later date.
- Contracts enable entrepreneurs’ access to financial assistance. A contract may be
used to convince financial institutions that the entrepreneur has a business that will
generate income in the future to enable him/her pay.
Parties to a valid contract
The parties to a contract are defined as the people or entities involved in a valid contract, as
shown below:
Offeror This is the party or person who makes an offer to another, the
person who first proposes to another
Offered A party or person to whom an offer has been made. He/she has to
accept the offer for a contract to arise
Witness The witness is an optional party to a contract. This is a neutral
person present when the contract is being made whose
responsibility is to help give evidence in case there is a disagreement
between the two contracting parties in future.
Elements of a Valid Contract
For a contract to be valid and therefore enforceable by law, it must have certain elements,
and these are listed below as:
- Intention to be bound by the contract: the intention of a contract should be legal.
The two parties should have intended that their agreement be legal. That is why,
domestic agreements between husband and wife are not taken as valid contracts.
- Offer and Acceptance: an offer is the willingness of a person to do or give
something to someone. In the consumer environment, it is an expression of intent to
purchase. An offer is an essential component of a contract. There must be an offer
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and its acceptance, if there is no offer, there is no contract because there is no
meeting of minds. Again, if there is an offer by one party, but not accepted by the
other party, then there is no “contract”. Until an offer is accepted, it creates no legal
rights and may be terminated at any time.
An acceptance is an expression of intent to fulfil the agreement by the other party, e.g
taking money for a purchase.
For something to be valid as an offer, it must:
i. be made by written or spoken word or inferred by the conduct of parties
ii. be intended as such before a contract can arise
iii. have clear terms (it cannot be vague)
iv. be communicated to the other party
- Consideration: a contract is only valid if both parties have something specific to
give to the other party. The consideration for a contract is the price or reward to be
paid. In other words, consideration is the sacrifice that each party exchanges in order
to secure what they want, thus the agreement must benefit both parties. Most
commercial transactions involve exchange of money for a product or service. If one
has paid for a service and the business does not carry out the task as agreed, then
they have not upheld their consideration and are therefore, in breach of the contract.
- Capacity of the parties: some people cannot make valid contracts. A person is
competent or has capacity to enter a contract if, at the time of making the contract is:
i. Sober and not under the influence of mind-altering drugs or alcohol
ii. Above 18 years of age (not a minor)
iii. Not insane or mentally impaired
iv. If it is a business entity, it should be properly registered
- Consent: parties of the contract must agree freely without any of the parties being
forced to accept or enter the contract. When a person is forced into a contract, or
when there is undue influence on one party, the contract is void.
- Lawful: the consideration or objective of the contract must be lawful. If the
objective of the contract is forbidden, by law or defeats the provisions of another law,
is fraudulent, or involves injury to a person or property or the court regards it as
immoral or opposed to public policy, then it is not a valid contract.
- Possibility of performance: the contract must be capable of performing to be valid
and enforceable by law. In case the contract is impossible in itself either physically or
legally, then such a contract is not valid and cannot be enforced by law.
Guidelines on how to write a contract
- A sample or template made by a professional can be used to develop one’ s own
- Do not use a language you are not sure about. Write clearly.
- Use simple and straight forward words whose meanings are clear
- Make the terms and conditions very clear. Do not make any assumptions
- Ensure that the agreement is legal. The objective is legal, the terms are legal and the
parties have legal capacity to make the contract.
- If the contract is on many pages, sign in the margin of every page so that no page can
be replaced.
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- If you cancel out any word or sentence and replace it, countersign the replacement or
deletion.
- Read every word of the contract and only sign if you are sure you agree with the
contents
- If you are dealing with a company, make sure that the person signing on behalf of the
company is authorised to do so and if possible, let the contract be stamped.
Invitation to Treat Vs Offer
An invitation to treat is merely a supply of information to attempt a person into making an
offer (or an invitation to another person to make an offer). An offer on the other hand is
made when a person shows willingness to enter into a legally binding contract. The offer
only becomes a contract when it is accepted. An invitation to treat cannot be accepted. For
example, to advertise or display goods in a shop window is to invite customers to make an
offer.
The main difference between an offer and an invitation to treat is that an offer leads to a
binding contract on acceptance while an invitation to treat cannot be accepted: it is merely
an invitation for offers.
Examples of invitation to treat, acceptance, offer and consideration
- A buyer sees a birthday cake in a bakery window (invitation to treat)
- The cake has a price label next to it which says the cake is K80.
- The buyer offers the baker K80 for the cake (offer)
- The baker agrees to this amount (acceptance)
- The buyer hands over the money (consideration) and takes the cake.
Never Breach a contract because:
- It damages business reputation
- It ends a good business relationship
- You could be sued and made to pay damages
- Wastes a lot of time in courts of law
- It makes you pay legal fees to lawyers
- Specific performance. Depending on the contract, you could be ordered by court to
perform your obligation under the contract
- Contempt: if you don’t obey the court’s order, you could be held in contempt, fined,
and /or imprisoned
- Of compensatory damage: you could be forced to pay damages to the non- breaching
party
- It costs more. You end up spending more time, money, and energy resolving the
breach than you would have spent performing your obligations under the contract.
REFERENCE
Hamakoko Richard (2015), Senior Secondary Commerce, Grade 10
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