PRINCIPLES OF BUSINESS
SECTION 4: LEGAL ASPECTS OF BUSINESS
Definition and Concept of a Contract
A contract is a legally binding agreement between two or more parties that
establishes rights and obligations, outlining what each party must do or
refrain from doing, with both parties exchanging or promising something of
value.
Characteristics of a Contract
Contracts display the following key characteristics:
1. Offer: A clear and definite proposal made by one party (the offeror) to
another (the offeree) with the intention of forming a legally binding
agreement. The offer must be clearly communicated and certain.
2. Acceptance: The offeree agrees to the terms of the offer without
modifications. Acceptance must match the offer exactly and be
communicated clearly to the offeror.
Counteroffer: If the original offer is declined and modified, the
counteroffer becomes a new offer, nullifying the initial one.
3. Consideration: Something of value exchanged between the parties,
such as money, goods, services, or a promise. Consideration is
essential for the contract to be enforceable.
4. Intention to Create Legal Relations: The parties must intend for
their agreement to be legally binding and accept the legal
consequences of failing to fulfill their obligations.
5. Competence of Parties/Capacity: The parties must be legally able
to enter into a contract, meaning they must be of legal age, mentally
sound, and free from undue influence.
Types of Contracts: Simple and Specialty
1. A simple contract is a simple agreement between two or more parties,
which may be verbal, written, or implied by the conduct or actions of
the parties’ involved. A simple contract must have the following
characteristics: Offer and acceptance, competence of parties, intention
to create legal relations and consideration.
2. A specialty contract or a deed is a more complex and formally written
agreement which requires a legal document that must be signed by
both parties to accept its terms and conditions, sealed or stamped,
witnessed and must be delivered by hand to the offeree.
Offer and Acceptance Communication
Offer and acceptance are communicated through written, verbal, or
implied means. An offer must be clearly expressed by the offeror and
made known to the offeree before it can be accepted. Acceptance, in
turn, must be clearly communicated to the offeror, either in writing,
verbally, or through actions that indicate agreement.
Discharge or Termination of Contracts
Contracts may be discharged or terminated in several ways:
1. Performance – A contract is discharged by performance when both
parties fulfill their contractual obligations as agreed.
2. Breach – A contract is discharged by breach when one party fails to
fulfill their contractual duties, allowing the other party to terminate the
agreement and seek remedies.
3. Agreement – A contract can be discharged by agreement when both
parties mutually decide to end the contract through methods such as
rescission, novation, or accord and satisfaction.
4. Impossibility – A contract is discharged by impossibility when
unforeseen events (e.g., natural disasters, legal changes, or
destruction of subject matter) make it impossible to perform the
contract.
5. Lapse of Time – A contract is discharged by lapse of time when the
period specified for performance expires, or the time allowed under the
Statute of Limitations runs out, making enforcement impossible.
6. Death – A contract may be discharged by death if the contract
involves personal services that cannot be performed by another
person, or if one party’s death makes performance impossible.
Importance of Documentation in Business Transactions
- Proof of the transaction - Documentation is essential for business
transactions because it provides evidence of the transaction,
ensuring accuracy, accountability, and legal protection in case of
disputes or audits.
- To monitor business performance - In cases of a business
transaction, for example, buying inventory, selling a product or even
paying employees wages, documentation is necessary to keep a
record of expenses, profits and sales. By tracking these details,
owners and managers can access up-to-date information and
monitor the functioning of their business, allowing them to assess
its progress and make informed decisions in the future.
NOTE: LOOK AT BUSINESS DOCUMENTS
Principles of Insurance
The following principles guide insurance:
a) Pooling of Risks – The process in which many policyholders
contribute premiums to a common fund, which is then used to
compensate those who experience covered losses.
b) Subrogation – The legal right of an insurer to recover the amount
paid for a claim from a third party responsible for the loss.
c) Proximate Cause – The primary or most direct cause of a loss that
sets off a chain of events leading to the damage or claim.
d) Indemnity – A principle ensuring that an insured party is
compensated only to the extent of their actual loss, preventing
financial gain from insurance claims.
e) Utmost Good Faith – The obligation for both the insurer and
insured to disclose all relevant facts truthfully when entering an
insurance contract.
f) Contribution – When multiple insurers cover the same risk, they
share the claim payment proportionally to avoid overcompensation.
g) Insurable Interest – The legal requirement that the policyholder
must suffer a financial loss if the insured event occurs, ensuring they
have a legitimate reason for insurance.
h) Loss Minimisation – The duty of the insured to take reasonable
steps to prevent or reduce losses, even after an insured event occurs.
How Insurance Facilitates Trade
Insurance facilitates trade by reducing financial risks and providing
security to businesses. It helps minimize losses by compensating for
damages caused by unforeseen events such as theft, fire, or natural
disasters, ensuring business continuity. By offering protection against
risks, insurance encourages investment, as businesses and individuals
are more willing to expand operations, knowing they are safeguarded
from potential financial setbacks. Additionally, insurance facilitates
credit by increasing lenders' confidence; banks and financial
institutions are more likely to provide loans to businesses with
insurance coverage, as it reduces the risk of default. Overall, insurance
plays a crucial role in creating a stable and secure environment for
trade and economic growth.
NOTE: LOOK AT THE TYPES OF INSURANCE POLICIES
