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Objective 1 Explain the concept of a contract

What is a contract?
A contract is a legally binding agreement between at least 2 persons which governs
the rights and duties among its parties. A contract is enforceable by law, which
means if either of the parties does not abide by the contract, the other party may
take legal action.

Objective 2 Identify the type of contracts

There are generally two types of contracts, they are:
1. Simple contracts
2. Speciality contracts

Objective 3 Describe the characteristics of a simple contract

What are simple contracts?
Simple contracts do not need a written deed. Examples of simple contracts are
They
may be oral, written or implied.

Characteristics include:
a) Offer and acceptance The offeror is bound in a contract if someone accepts.
Acceptance is the agreement made to accept the terms and conditions in the
contract.

b) Competence of parties Parties should be adults of sound mind.

c) Intention to create legal relations For contracts, the intent is to enter a legally
binding agreement.

d) Consideration A promise or action made by one party for the promise or action
made by another.
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Objective 4 Describe the characteristics of a speciality contract

What are speciality contracts?
Speciality contracts must be in writing. Examples are the sale of land, insurance
and mortgages.

The law of contracts requires a deed for the formation of certain agreements such
as the sale of land, the leasing of land for more than 3 years and higher purchase
agreements.
Characteristics include:
a) The contract must be signed by both parties and sealed

b) A deed or contract must be delivered by the offeror

Objective 5 Explain the conditions under which offer and acceptance are
communicated
An offer can be made to a specific person or the work at large. It can oral, implied or put
into writing.
An offer must be communicated to the offeree. An offer can either be revoked or
withdrawn before acceptance by the offeree.
Should the offeree change the terms of the agreement, this is called a counteroffer and
is equal to a rejection of the original offer and is not a legal acceptance. It is then left up
to the offeror if they will accept the new terms presented in the counteroffer by the
offeree.

The offer and acceptance process:

An acceptance by law exists when the offeree agrees to all terms and conditions
laid down by the offeror.
An acceptance must be made in the manner stated by the offeror.
An offer must be accepted within a stipulated time period.
An acceptance made through the post office is effective once the letter is posted.
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An acceptance made through the telephone, fax machine or any modern

instantaneous means of communication is only complete when received. NOT
when transmitted.

Objective 6 Explain ways by which contracts may be terminated or discharged

The termination or discharge of contracts means that the contract has been
brought to a successful end.

Methods of discharge:
1. Breach one party breaks the contract by failing to carry out their side of the
agreement.

2. Agreement both parties agree to cancel the contract before it is completed.

3. Performance one party is not performing up to standard to their side of the

agreement.

4. Impossibility if one party was required to do something prohibited by law, then

the original contract was illegal.

5. Lapse of time by not meeting the deadline, the contract is then terminated.

6. Death one party might die and cause termination to the contract. However, if

contract regardless of the

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Objective 7 Case Studies

A case study is an in-depth study of an event.
what occurred.

Mary and Jake have been neighbours for the past 6 months. Mary is occupied at a firm
that is quite a distance away from the neighbourhood and has trouble reaching work. One
day, Jake noticed that Mary waits long to find transportation. Jake then asks Mary if she
would like him to drop her off at her job.

For the past two weeks, Jake has been dropping Mary off at her job as often as he can.
On one Tuesday morning, whilst expecting Jake, Mary did not see him and was not able
to reach work on time.

Mary was furious and decide to complain to Jake, who has been sick for the past few days.
Mary then decided to not pay Jake and take him to court for not abiding by his word.

Questions:
(1) Did Mary have a contract with Jake?
(2) What would happen if Mary took Jake to court?
(3) Differentiate between an agreement and a contract.

Answers:
(1) Mary did not have a contract with Jake, rather she had an offer from Jake which
she accepted and they both agreed on.

(2) If Mary takes Jake to court, more than likely the court will not take up the case as
a contract that is enforceable by law.

(3) An agreement is a social arrangement between persons, whereas a contract is a

legally binding agreement enforceable by law.
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Objective 8 Explain why documentation is necessary for business transactions

Documentation is necessary for many reasons. Proper documentation keeps important
records and information that can help ensure efficiency, confidence and expectations.
Some reasons are:
a) For providing a written record between one firm and another between the firm
and its customers or between departments to prevent confusion something in the
future.

b) As proof of activity which can be used in the future as a record that such

c) For providing important statistical data for firms to carry out various calculations
for taxation and auditing purposes

d) The government may require proper documentation from a firm to satisfy

requirements for their taxation and auditing process
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Objective 9 Preparing business documents for various purposes

Business documents include:
1. Pro Forma Invoice
This is a special type of invoice sent by a supplier at the request of a prospective
purchaser.

Fig 4.0 An example of a Pro Forma Invoice

2. Stock Card
Once the goods are received, the stock cards are updated or new ones are added.
The stock card provides information and data on the:

Maximum and minimum levels of items in stock

Amounts of stock received
Amounts of stock issued
Re-order levels
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Fig 4.1 An example of a Stock Card

3. Purchase Requisition
A requisition form helps to control the movement of the stock. It informs the
organization of how the stock is used and by whom they are used.

Fig 4.2 An example of a Purchase Requisition form

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4. Statement of Accounts
A statement of accounts has to be prepared and sent when the payment of goods

over a set time period.

Fig 4.3 An example of a Statement of Accounts

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Objective 10 Evaluate the principles upon which insurance is based

What is insurance?
Insurance deals with compensation for the loss of property in events such as
natural disasters and vehicle accidents.

What is assurance?
Assurance, on the other hand, refers to events that must happen such as death.

The concepts of insurance:

a) Pooling of risks To offset the possible effect of loss, all those at risk can
contribute a relatively small sum of money called a premium. This expense is
contributed to a pool operated by the insurance company.
The result of cooperating with others in this way is that risks are spread between
the many people and organizations that have contributed to the pool.
For this reason, insurance is sometimes said to be the pooling of risks.

The agreement between the insured and the insurer is known as the policy.

b) Subrogation This is an aspect of indemnity and means that the insurer takes the
place of the insured. It gives the legal right to a third party to collect debt/damage
on behalf of the insured.
For instance, if your car was completely wrecked in an accident, the insurance
company would compensate you and keep the wrecked car.

c) Proximate cause This principle states that a claim would only be honoured if the
loss suffered is a direct result of the insured risk happening.
For instance, if a person insures his car against fire only, but it was destroyed by
flood, then he cannot seek compensation from the insured company.

d) Indemnity This refers to compensation for losses sustained. It is to restore the

person to where they were before the loss. This does not apply to life insurance or
personal accident insurance, since no money can compensate for the loss of a limb
or potential death.
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e) Utmost good faith This principle states that the insured must give all appropriate
information about the thing or person being insured. By doing so, the insurer can
accurately assess the premium.

f) Contribution Insurers come together to compensate the insured. They also

ensure that no profit is made by the insured.

g) Insurable Interest To prevent persons from profiting from insurance, an

insurance company will insure against a risk only if the insured would suffer against
the insured event.

Objective 11 Explain the various types of insurance policies

There are 2 main categories of insurance:
Life insurance
Non-life insurance

1. Life insurance this gives protection against loss caused by death.

There are two main types of policies to address this. One is a whole life policy,
where the premium must be paid as long as the insured person is alive or up to the
age of 60
The other policy is an endowment policy for which the premium must be paid for
a stipulated time.

Both whole life and endowment policies may be with or without profits. Premiums
not paid when due cause the policy to collapse and becomes void.
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2. Non-life insurance insurance non-related to life or death (e.g. cars, ships and
cargo).

The types of policies associated with non-life insurance include:

a) Marine insurance provides cover for the vessel and cargo in cases of loss
and damage while travelling from one port to another.

b) Third-party motor insurance a person wishing to drive on the roads must

at least have third party motor insurance. The third party is seen as anyone
who may suffer injury as a result of an accident caused by the vehicle. The
other two parties are the insurance company and the owner of the other
vehicle involved.

c) Comprehensive policy this covers all risks listed in the policy which

loss of or damage to personal possessions in the vehicle.

d) Aviation insurance covers the aircraft against damage by accident and the
operators against claims from injury or death from passengers, crew or third
parties.