Principles of Business



Principles of Business

Section 4: Legal Aspects Of Business

CONTRACT

This is a legally binding agreement between two or more persons that is enforceable by law. The difference between a contact and a social agreement is that the contract:

1) Must be enforceable by law

2) Must give rise to rights and obligations

3) Parties must have the intention and ability to create a legal relationship between

them.

CHARACTERISTICS OF A CONTRACT

1. Offer and Acceptance

An offer has to be made and there must be clear and unconditional acceptance.

These may be done orally, in writing or by conduct.

2. Form or Consideration

This is the price for which one party gets the legal obligation e.g. Charles offers

Mike $5,000 for his car. The money is the consideration.

3. Capacity of the parties

In the eyes of the law the parties must be able to bind themselves to a contract. E.g.

not be insane or underage.

4. Legality

The contract should not be illegal.

5. Good faith

There should be no fraud/undue influence on any party.

6. Genuineness of the consent of parties

All parties should agree and enter of their own free will.

7. Possibility

Parties must be able to carry out their side of the contract.

PARTIES TO A CONTRACT

1. Offeror

This is the person making the offer.

2. Offeree

This is the person accepting the offer.

TYPES OF CONTRACTS

1. Simple contract

This requires no special form and may be written or oral.

2. Specialty contract

This is also called a deed or a contract under seal and must have the following

• Seal

• Signature of parties

• Attestation by one or more witnesses

• Delivered to all parties involved

E.g. Hire purchase agreements, sale of land, insurance contracts, mortgage contracts

3. A contract of record

This is a court judgment requesting parties to abide by a certain obligation.

OFFER VS. INVITATION TO TREAT

An invitation to treat is only a declaration of the intention of a person(s) to make an

offer e.g. an ad on tv./newspaper. However the actual offer is what can be accepted

and what the offeror is bound by.

Counter Offer

This is an alternative offer made by the offeree to the offeror. However it does not

have to be accepted.

RULES OF OFFER AND ACCEPTANCE

1. The offer must be communicated to the other party.

2. The offer may be general but must be accepted by a specific person(s)

3. The offer can be revoked at any time before acceptance unless consideration has been

made to keep the offer open.

4. All conditions must be known to the offeree.

5. Acceptance must be unconditional. If not, a refusal and a counter offer is said to have

been made.

6. Acceptance must be made within a reasonable time.

7. An offer lost in the post is NOT AN OFFER.

7. Acceptance is made when the letter is actually posted.

N.B Offer and acceptance may be communicated in writing, spoken or by conduct

TERMINATION/DISCHARGE OF CONTRACT

1. Mutual agreement

• Satisfaction

• Waiver (parties give up their rights under the contract)

• New agreement formed in place of old

2. Breach

One party breaks his side of the contract.

3. Performance

Contract is fulfilled.

4. Impossibility

• Contract was illegal

• One or both parties find it humanly impossible to comply

5. Death

6. Bankruptcy

7. Time -Non-performance during a specified time period.

Legal Issues

Conditions for a Valid Contract

(Written Contracts)

• It must have a date

• It must be signed, sealed and delivered

• It must be witnessed

• There must be no factual mistakes in it

• Performance time must not lapse

• It must be legal or legitimate

• Performance must be possible

• It must be registered

• It must be reasonable and fair

(Oral Contracts)

• The features must be present, active, enforceable or functional

• Performance must be possible

• Time must not lapse

• No minor, mentally ill or learning disabled person should also be noted

In addition to all the above, the following should also be noted:

1. Any exclusion clauses must be made clear

2. Contract is invalid if goods sold/bought were stolen property, whether buyer was aware of it or not

3. Failure to comply with statutory requirements make the contact invalid

4. If parties become insolvent contract can be voidable/invalid

Cases

1. Case 1 : (Implied conditions)

Patrick offered a house for sale to Peter, who agreed to buy at the stated price. Peter

was however under the impression that the land on which it stood was a part of the

deal. Patrick gave Peter the title deed for the house but not the land. Peter took Patrick to court. What was the likely outcome of the case?

2. Case 2: (Contravention of contract conditions)

Tom bought a new radio on hire purchase (H.P.). He allowed his friend to use it and

it was subsequently damaged and stopped working. Tom returned the radio to the

store, saying that it was still under guarantee and that he wanted either his money

back or a new radio within a week. He did not hear from the company and decided

to sue. What was the likely outcome of the case?

3. Case 3: (Valid/Invalid Contract?)

John, a little boy, exchanged his bicycle with a man for a radio which belonged to

the man’s son. Can John get his bicycle back if his father takes the man to court?

4. Case 4: (Offers not accepted?)

Mr. Peters wrote to Mr. King, offering his car for sale for $2000. At the same time,

Mr. King sent Mr. Peters a letter, offering to buy his car for $1000. King took no

further action. Two days later, Mr. Peters sold the car to Mr. Best for $ 2500. Mr.

King took Mr. Peters to court, saying that their was a contract. What was the likely

outcome of the case?

5. Case 5:

A Barbadian tourist in Kingston, decided to go to Montego Bay by train. He bought

a ticket and decided to leave his luggage. He was given a left-luggage ticket, on

which was printed the conditions that the railway would accept liability up to $50.

When he returned, his bag was missing, the value of which was $500. What can the

tourist claim?

6. Case 6 : (Invitation to Treat)

A dress shop had several items on sale in the show window. A customer liked a particular dress but could not find her size in the store. The one in the show window was her size and she asked the owner to sell her the dress. He said no, saying that it was only a display

7. Case 7: (Offer )

A drug company claimed in its advertisement that by taking three of the company’s pills daily for two weeks, customers would not catch influenza. It offered to pay anyone who did catch the flu, after taking the pills in the manner prescribed, a sum of $100. To show good faith, it lodged money in a bank account to cover payments. A woman took the pills as prescribed and still caught the flu and claimed the $100. The company claimed the advertisement was only an invitation to treat and refused to pay. The case when to court.

What was the likely outcome of the case?

8. Case 8: (Employment)

Joe was sacked by his employer after he refused to climb a 10 metre ladder to clear a blocked drain. Joe was employed by Kingston Motors as a motor mechanic and worked with the business for three years. His work was always satisfactory. His employer argued that he was only asked to perform a reasonable and simple duty and his refusal was against the contract of employment. Joe’s lawyer argued that climbing ladders was not a normal duty for a mechanic and that he had no training or skill in performing this task. To dismiss him for refusing to do it was against the terms of the contract of employment. What do you think the judge decided?

Principles of Business

Section 4: Legal Aspects Of Business

BUSINESS DOCUMENTS

Why Are Business Documents Necessary?

In any organisation where goods and services are being supplied, various documents are needed from the initial stage to the final stage of payment. Documents are needed to ensure the following:

1. To ensure that there is no confusion about what has to take place between the

buyer and supplier.

2. They provide records/proof of activity whish can be used in the future for

activities such as legal matters, competition, discounts etc.

3. They are used to track and purchase stock in a timely manner.

4. They provide information for the accounting process.

DOCUMENTS USED IN TRADE

1. Letter of Enquiry

This is used when a person/organisation wishes to find out information about a

product(s)e.g. prices, specifications etc.

2. Quotation

This is usually issued as a result of an inquiry. It includes:

❖ Prices

❖ Trade discounts

❖ Cash discounts

❖ Description of goods

❖ Transport cost

3. Tenders

These are competitive quotations/estimates submitted under confidential cover by a

number of producers of goods and services. The supplier with the most appealing

tender usually get the contract.

4. Proforma Invoice

This is similar to an invoice but is usually sent before dispatching goods. When

payment is received, the goods are then delivered. This may be used when the seller

may be uncertain about the buyer and if he will receive payment.

5. Invoice

One of the most important documents which goes from the seller to the buyer,

informing the buyer of what he owes. It includes:

❖ Quantity supplied

❖ Individual prices

❖ Total owed

❖ Taxes e.g. VAT( where necessary)

❖ Any terms and conditions

6. Credit note

A document showing a reduction in the amount charged on a previously issued invoice as a result of:

❖ Price charged was too high

❖ Some goods were faulty and returned

❖ Too few goods were delivered

❖ Discount was omitted or too small

7. Debit note

This has the reverse effect of a credit note. It is issued when the original charge was

insufficient or more goods were sent than were invoiced and the buyer kept them.

8. Statement of Accounts

This document is a statement which sums up all the business that has taken place

between the buyer and seller for a certain period. It shows:

❖ Amounts outstanding from previous period

❖ Any purchases (invoices & debit notes)

❖ Any payments (including credit notes)

9. Purchase Requisitions

This is an internal order /request for goods by one department in the organisation

from another. If the order goes to an external organisation, it is then known as a

purchase order.

10. Stock Card

This card shows additions, deductions and the balance of stock/inventory held by

the business. It enables the firm to purchase stock on a timely basis.

11. Cash Discount

This is a cash reduction in price and shown as ‘terms’ on the document (invoice). It

is given to encourage prompt payment.

12. Trade Discount

A discount given to people in the same trade as the seller.

TRANSPORTATION DOCUMENTS

1. Import License

Document issued by an importing government, giving permission to bring items into

the country.

2. Bill of Lading

Document used in the shipping of goods and represents the title to ownership of the

goods. IT shows:

❖ Details of goods

❖ Destination

❖ Terms of shipping

There are 3 copies, one for the exporter, ship’s captain and the importer so that he/she can take possession of the goods.

3. Airway Bill

It serves as a receipt of goods carried by an airline. It is similar to the Bill of lading

but is not a document of title. The sender does not have to get a copy.

4. Certificate of Origin

It shows the country of origin of the goods. It may be required by the importing

country if there is an agreement to give a country favourable tariff rates or ban on

goods.

5. Manifest

This is the summary of all bills of lading and cargo on board the ship.

6. Shipping note

This document is submitted to the Port Authority who receives the goods for

shipping. It indicates what goods are being handed into their care and what ship they

are being loaded onto.

N.B

• CIF-Cost Insurance Freight-All cost paid to the destination

• FOB- Free On Board- Only cost of goods paid

INSTRUMENTS OF PAYMENT

These can be used to facilitate business transaction.

1. Legal Tender

Forms of money accepted by law in the settlement of debt including notes and coins.

2. Cheque

A representation of money on paper, showing the amount to be received and from

whom it is given. Some cheques are crossed to ensure that they are deposited into

a bank account. Important elements on the cheque include:

❖ Date

❖ Name of payee

❖ Correct amount

❖ Signature(s)

3. Money order (Postal)

A document of payment showing the name and address of recipient and the amount.

It is issued at the Post office.

4. Bank draft

The document showing how much the bank will transfer to another bank, on

presentation of the instrument of payment by the receiver. The sender has to first

make the payment to their bank.

5. Debit card

A card which allows an individual to access funds in his/her bank account through

an ATM or a point of sale system

6. Credit card

A card which allows an individual to access funds to purchase goods and services,

while making payments to the issuing company. Interest is usually charged.

WHAT IS DOCUMENTARY CREDIT AND HOW CAN IT BE USED TO FACILITATE BUSINESS

Documentary credit is a document addressed by the importer’s bank to the

exporter’s bank, guaranteeing payment when document s of title are handed over.

The benefits include:

❖ Exporters are more confident in doing business as they are usually ensured payment

❖ There is an increase in the speed of payment transactions.

❖ The buyers appears more reliable, especially if they are unknown to the seller

Principles of Business

Section 4: Legal Aspects Of Business

INSURANCE

Insurance vs. Assurance

An agreement between an insurance company and an individual who wants the

financial protection that compensation will be paid if a particular loss occurs.

Insurance is based on the likelihood of risk occurring even though no one knows

when/if it will occur e.g. fire, flood, theft etc. However, assurance is based on the

fact that the risk is bound to happen e.g. death.

What is insurable risk?

The risk which can be assessed in value or probability can be assessed e.g. fire

hurricane. The opposite is uninsurable risk e.g. you can not take out a policy to

insure gambling debts, fines imposed for speeding etc.

What is pooling of risk?

This is putting all premiums from persons requiring similar insurance together in

one common pool”. This allows for the payment of policies when the need arises.

PRINCIPLES OF INSURANCE

1. Insurable interest

The insured must be the one who will suffer financially if an event occurs. However,

a wife/husband can insure the other person.

2. Utmost good faith

One must be truthful in the declaration of information when seeking insurance. The

company as well should reveal all relevant information about the policy.

3. Indemnity

This is the principle by which the policy-holder will be compensated for losses

incurred. The idea is to restore that person/organization to the place they were

before the loss occurred, i.e. no better or worse off. There should be no:

• Profiteering

• Over-insurance

• Under-insurance

4. Proximate cause

A claim will only be honoured if the loss suffered is as a result of the insured risk

happening e.g. if a house is insured for fire only and is destroyed by flood,

compensation will not be given.

5. Contribution

If there is more than one company involved in the compensation, each will

contribute a portion of the total to prevent profiteering. This is an aspect of

indemnity.

6. Subrogation

Money paid takes the place of the article damaged, which will now be owned by the

insurance company. However, some insurance companies will offer a reduced sum

and allow the person/organization to keep the damage article.

7. Average clause

The insured will be compensated in proportion to how he was originally insured.

E.g. A person insured a house for $100,000 ten years ago and it is now worth

$200,000. Part of the building was damaged and cost of repairs are $ 60,000. He

will only receive$ 30,000 since the insured value is half that of today’s value.

8. Legality

A person cannot insure against his own wrongful acts to avoid responsibility for

damages which may occur afterwards

TYPES OF INSURANCE POLICIES

1. Life Insurance

• Whole life policy - payable on death of insured.

• Endowment policy – specific sum paid at a certain date or on death of policy holder, whichever comes first

2. Marine Insurance

• Cargo

• Hull

• Freight

• Ship owner’s liability

3. Motor Insurance

• Comprehensive: Coverage for both parties in the accident

• Third party: Covers losses of the owner of the other vehicle involved in accident

4. Business Insurance

• Fire

• Burglary

• Goods in Transit

• Bad debt

• Employers’ Liability & Public Liability

• Plate Glass

THE VALUE OF INSURANCE COVERAGE IN FACILITATING TRADE

Insurance can be used to promote, maintain and lower the risk associated with trade in the following ways:

1. It allows traders the comfort of knowing that in the event of loss, they can be

compensated, whether directly or by the company transporting the goods. This is

especially true if trader are sending goods across many miles(land /sea) from one

country to another.

2. It helps individuals to achieve an improved standard of living by allowing persons to

have goods which they might not have been able to get on their own.

3. It provides coverage against personal risks which individuals would not be able to

manage on their own.

4. Some insurance companies provide a source of capital since they may also act as

investors.

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