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.