Topic #4

LEGAL ASPECTS OF A BUSINESS

Contracts – a legal binding agreement between two or more persons (parties) for something to
be done or given in return for a benefit.

Parties to a Contract

• Offeror – Person making the offer

• Offeree – the person/s to whom the offer is made
• Acceptor – the offeree after accepting the offer

OFFER AND ACCEPTANCE

Offer – the indication by one party to another that they are willing to make a proposal and be
legally bound to it.

Acceptance – when the offeree willingly agrees to the offer made and is willing to create a
contract. Acceptance can be communicated by:

1. Written Acceptance
2. Verbal Acceptance
3. By conduct

Before an agreement becomes legally binding ACCEPTANCE must take place

MERE AGREEMENT – an agreement by parties but there is no intent to create legal relations.

TERMS

1. Counter offer – a new offer made based on the previous offer

2. Consideration – the benefit both parties obtain from the contract
3. Void Contract – cannot be enforced by the law as the undertaking is illegal

ELEMENTS REQUIRED FOR A CONTRACT TO BE VALID

The following elements must be present for a contract to be valid.

1. Offer – something must be offered

2. Acceptance – should be done legally
3. Legality – parties must be over 18 years
4. Capacity of the parties – parties must be in an appropriate state of mind when entering
into a contract
5. Contracts must be enforceable by the law
Topic #4

TYPES OF CONTRACTS
1. Simple contracts – doesn’t need any special form but can be written, spoken or
implied by the conduct of parties. These are contracts we enter into every day.
2. Speciality Contracts – these are more serious contracts which must:
• Be in writing
• Be signed by the parties involved
• Have a witness in some cases
• Present a copy of the contract to the parties involved

Eg ; Mortgage Agreements, sale of Land, hire purchase plans

TERMINATION OF CONTRACTS

A contract may come to an end due to the following:

1. Death – of any one of the parties involved has died

2. BREACH OF CONTRACT – where one party fails to carry out their part of the contract
should come to an end
3. BY AGREEMENT – both parties agree that the contract should come to an end
4. By Performance – the contract has been fulfilled

BUSINESS DOCUMENTS

Businesses need to document their daily transactions because:

1. Disputes among suppliers and customers can be reduced

2. Able to easily detect any fraud by employees
3. Information about customers and suppliers can be obtained easily
4. Information can be given to other institutions in time of need

DOUCUMENTS USED BY BUSINESSES

1. LETTER OF INQUIRY – a document sent to a supplier by a potential customer asking

for details about a product.
2. QUOTATION – a formal statemet of promise by the potential supplier to supply goods
requested at a given time and price. It gives details about any additional charges and
required terms of payment.
3. ORDER FORM – a form used to place an order, usually from a manufacturer or
wholesaler
Topic #4

4. DELIVERY NOTE – a written document from the supplier to the customer which
accompanies the goods
5. PRO FORMA INVOICE – bill sent to the buyer when the supplier requies payment in
advance of delivery.
6. INVOICE – bill sent immediately after the goods have been dispatched. The invoice will
have:
• Quantity supplied
• Price per unit
• Total amount owed
• Terms of payment
• Discount given
• E&OE (Errors and Omissions Expected) means the supplier at a later date

7. DEBIT NOTE – a note issued to adjust the account and increase the amount owed by the
customer. A debit note is issssued when:
• The seller is undercharged by the buyer
• More goods than were ordered were sent and the buyer keeps it
• Transport costs were not included

8. CREDIT NOTE – a note used to adjust the accounts and reduce the amount owed by the
customer
A credit note might be used when:
• A higher price was charged
• Discounts were left out
• damaged goods were returned

9. STATEMENT OF ACCOUNT – a document that gives the total amount owed by a

customer, usually at the end of the month.

10. STOCK CARD – a stock or inventory control document that list available quantities of a
good. Updates are made when deliveries are made.

11. PURCHASE REQUISITION – this is generated in a business, where departments

inform the purchasing department of items needed.

TRANSPORT DOCUMENTS

When are goods are transported internationally a number of documents are required by
government.
Topic #4

1. BILL OF LADING – a document representing ownership of the goods when goods are
sent by ship. It shows the destination of the goods and details.
2. AIRWAY BILL – similar to the bill of lading but is used when goods are transported by
air. It serves as a receipt for goods carried by air.
3. IMPORT LICENCE – issued by the government of the importing country giving
permission for the import of certain goods.
4. EXPORT LICENCE – issued by the government of the exporting country giving
permission for the export of certain goods in sertain quantities
5. INSURANCE CERTIFICATE – document which indicates that the goods being
transported are insured.
6. CERTIFICATE OF ORIGIN – document that indicates the country of origin and
materials that the goods are made from.

INSTRUMENTS OF PAYMENT

The following are instruments used by the business when making payment for goods.

1. CHEQUE – a written instruction to the bank to transfer a certain amount of money to the
account of the payee. All cheques must have:
• The date it is made out
• Payee’s name – person or company the cheque is paid to
• The amount to be transferred in words and numbers
• Account number

TYPES OF CHEQUES

• OPEN CHEQUE – one that is not crossed and can be cashed at the bank anytime or
deposited into an account.
• CROSSED CHEQUE – has two parallel lines drawn on the face of the cheque, cannot be
payable over the counter but must be deposited into an account

2. MONEY ORDER – a form of payment sent by banks or post offices and is cashed upon
receipt
3. BANKER’S DRAFT – an instruction by one bank to make a payment to another bank
on behalf of a customer
4. BILL OF EXCHANGE – a payment method used in International Trade that allows the
importer a period of credit.
5. DEBIT CARDS – issued by banks, a plastic card allowing individuals to make payments
based on the amount of money in their account.
Topic #4

6. CREDIT CARDS – issued by banks to make purchases until a certain limit and
payments are made to the bank with interest.

ELECTRONIC BANKING

1. STANDING ORDER – an instruction given to a bank to make a regular payment to

another account at a specified time
2. TELEGRAPHIC MONEY ORDER – an electronic means of transferring money from
one bank to another. (usually overseas)
3. INTERNET BANKING – payments can be made via the internet such as transferring
money

DOCUMENTRY CREDIT

A letter from the buyer’s bank which guarantees that payment will be made to the seller.

INSURANCE AND ASSURANCE

INSURANCE – a promise of financial compensation in the event that a risk takes place. This
risk could or could never occur.

ASSURANCE – a promise of financial compensation for a risk that is bound or known to happen
eg :

PRINCIPLES OF INSURANCE

Insurance must be based on the following principles:

1. INDEMITY – the person taking out the insurance will be compensated for the loss
incurred to restore damaged property to their former position.
2. CONTRIBUTION – if a person insures one property with a few companies and a risk
occurs, only one payment will be given as all companies will come together and give one
payment.
3. INSURABLE INTEREST – the person taking out the insurance must be the owner of the
property. YOU CANNOT INSURE YOUR NEIGHBOUR’S HOUSE.
4. UTMOST GOOD FAITH – all vital facts must be given by both the person taking out the
policy as well as the company.
Topic #4

TYPES OF INSURANCE POLICIES

LIFE ASSURNCE CONSIST OF:

1. Whole Life Assurance – provides payment after the death of the insured.

2. Endowment Policy – provides payment to the insured after a given number of years, or in
the event of death.

BUSINESS INSURANCE

1. FIRE INSURANCE – these policies provide compensation in the event of damage caused
by fire.

2. MOTOR VEHICLE INSURANCE – a legal requirement for all owners of vehicles to

provide coverage in the event of an accident.

3. EMPLOYER’S LIABILITY INSURANCE – ensures and covers the safety of employees

on the compound.

4. FEDILIITY INSURANCE – covers the theft or loss due to fraud by the business’s own
employees.

5. CREDIT INSURANCE – this covers loss due to the business caused by failure of
customers to pay debts.

6. GOODS IN TRANSIT INSURANCE – this covers for loss or damage of gods whilst
they are being transported.