4 Business and the law

Business and the law

Caribbean Business
Chapter Four

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 4 Business and the law

Business and the law

4.1 The entrepreneur
4.2 Three successful entrepreneurs
4.3 Steps in planning a business
4.4 Building a new business: case studies
4.5 Regulations for a new business
4.6 Sources of capital

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 4 Business and the law

4.1 Basic legal principles

Caribbean Business
Chapter Four
Business and the law

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 4 Business and the law

Basic legal principles

● Businesses must operate within the law.
● Settle disputes quickly, amicably and honestly.
● Litigation through the courts should be a last resort.
● Businesses should take legal advice on major decisions.

● Most Caricom countries have legal systems based on English

‘common law’. So do the USA and Canada.
● Suriname , Haiti and Latin America have systems based on the
French Napoleonic Code.

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4.2 Contracts
Caribbean Business
Chapter Four
Business and the law

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 4 Business and the law

These are needed for a contract …

● Offer by one party, acceptance by the other
● Intention to create a contract
● Consideration in return for a benefit
● Capacity by both parties to make a contract
● Genuine consent
● Good faith
● Legality
● Possibility

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Who can make a contract?

● Capacity is the ability to make a contract.
● An adult can make a contract.
● A company can make a contract.
● Minors can make a contract, but only for ‘necessaries’ or for
education.
● An informal group cannot make a contract.

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Must a contract be in writing?

● Most contracts do not need to be in writing.
● An oral agreement is based on word of mouth.
● A contract may be created by the actions of both parties, if they
indicate agreement.
● It is better to have a written contract to settle disputes.
● Some contracts must be in writing, for example hire purchase
agreements.

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Void, voidable or unenforceable?

A void contract never came into existence, such as
● A contract for illegal purposes
● Most contracts with minors
● A contract with no offer, acceptance or consideration
● An oral contract where a written one is needed.

A voidable contract can be overturned by the courts

● If it is based on misrepresentation
● If it was made under duress
● If there was no genuine consent or good faith.

An unenforceable contract conflicts with the legal obligations of the

parties.
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 4 Business and the law

Consideration must be …
● Valuable – but this does not mean worth a large amount.
Consideration may be quite low in value.
● Consideration does not need to be in money, but must give a
clear benefit.
● Must be real and well-defined.
● Must be lawful.
● Must be ‘not in the past’.
● ‘Good’ not ‘valuable’ consideration is used for Deeds of Gift and
some other contracts.

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Invitation to treat, offer, acceptance

● An invitation to treat is a proposal to consider making a contract.
● An offer is a definite proposal by the offeror to create a
contract.
● If the offeree accepts without conditions, a contract is created.
The offeree is the acceptor.
● If the offeree proposes conditions, that is a counter-offer.
● A counter-offer kills the original offer.

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Invitation to treat, offer, acceptance

● Acceptance may be in writing, by word of mouth, or through a
positive action by the offeree.
● An offer may be accepted electronically.
● The offeror can withdraw the proposal at any time before it is
accepted.
● The offeree must be told that the offer is revoked.

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Invitation to treat, offer and acceptance

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 4 Business and the law

These contracts must be in writing

● Life insurance
● Marine insurance
● Bills of exchange
● Hire purchase agreements
● Agreements for sale of goods on credit
● Some other types of contract

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 4 Business and the law

Specialty contracts or Deeds

● Specialty contracts are known as deeds.
● Each country has procedures for making a deed.
● Deeds must always be in writing.
● Deeds must be signed by all parties.
● In most countries, deeds must be witnessed.
● In some countries, deeds must have a seal.
● In most countries, a deed must be delivered.
● In many countries, a deed must be registered.

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Some types of Deed

● Deed of Conveyance – used in most countries to buy and sell
land
● Deed Poll – used to change your name
● Deed of Gift – to give land or property
● Deed of Family Arrangement
● Deed of Easement – gives rights over land
● Deed of Partnership
● Mortgage Deed – needed in some countries

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Termination or discharge through…

● Performance ● Frustration when the
● Agreement contract becomes…
● Accord and ● Impossible
satisfaction after partial ● Illegal
performance ● Breach
● Waiver – both parties ● Repudiation
agree not to proceed. ● Lapse of time
● Release – one party is ● Bankruptcy
released from
obligations. ● Death
● Merger with a new
contract

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4.3 Business documents

Caribbean Business
Chapter Four
Business and the law

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 4 Business and the law

Documents are needed…

To create a clear and permanent record of…
● Orders for goods
● Payments due
● Transport of goods
● Goods held in stock and goods used
● Employees’ work records

… and for many other purposes.

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Why documents are needed

● Managers must track business activity.
● The business needs annual, monthly and weekly accounts.
● Records are legally required for audit, tax and control of money
laundering.
● National insurance records must be available.
● Records are needed on occupational health and safety, control of
hazardous chemicals, and environmental and other issues.

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Electronic documents
● Quicker and easier to prepare
● Some information entered automatically, eg date
● System can refuse incomplete documents
● System can make calculations such as VAT
● Access by any authorized staff member
● Access any time
● Access from any place linked to network
● Less need for storage space
● Information can be backed up in other locations

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Buying and delivering goods

● Letter of enquiry is an invitation to treat.
● A quotation is an offer.
● A purchase order usually creates a contract.
● Acknowledgement of order confirms arrangements.
● Advice note confirms dispatch of goods.
● Delivery note is used for local sales.
● A requisition is used within a business to order supplies.

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Purchase orders include

● Reference number
● Date
● Name and address of supplier
● Goods and quantities ordered
● Delivery date and method requested
● Location for delivery
● Signature

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Invoices
● An invoice is a request for ● An invoice includes
payment. ● Reference number
● Payment may be: ● Date
● On delivery ● Customer details
● On receipt of invoice ● Goods and quantities
● Against statement of supplied
account ● Total cost
● After 30, 90 or 180 days’ ● VAT or other tax
credit ● Customer discount
● Additional charges
● Date for payment

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Debit, credit, pro forma documents

● A credit note details the amount deducted, eg for faulty goods.
● A debit note notes extra payments due.
● A pro-forma invoice is not a true invoice.
● The seller agrees to supply goods at a stated price.
● The pro-forma invoice may be used to value goods for
customs purposes.
● It may be used to request payment before goods are
delivered.

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Statements of account
A regular monthly statement shows:
● Amount owed at start of month
● Additional deliveries during the month
● Payments received
● Any other credits or debits due
● Amount owed at end of month
● Terms of payment and date payment due.

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Stock control is needed to…

● Show the total value of goods held in stock
● Check on goods stolen, damaged or lost from stock
● Signal when stocks are low and a new order is needed from
suppliers
● Ensure that stocks are not too large, tying up funds and storage
space.

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4.4 Transport
documents
Caribbean Business
Chapter Four
Business and the law

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 4 Business and the law

Bills of lading
● Used for transport of goods by sea.
● Acts as receipt for the goods.
● Summarizes shipping contract and shows freight costs.
● Transfers ownership to the consignee.
● Contains information on …
● Shipper or exporter
● Consignee or importer
● Name of vessel and port
● Details and weight of cargo
● Freight charges payable.

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 4 Business and the law

Documentary credit
Bills of lading can be used for documentary credit. The systems
works like this:
● The importer’s copy is sent to a bank.
● The importer pays the bank.
● The bank hands over the bill of lading when it receives payment.
● The importer can then collect the goods.
● The bank sends the funds to the exporter.

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Air waybills
Air waybills are used for goods transported by air. They contain
information such as:
● Shipper’s name, contact details and signature
● Consignee’s name, address, contact details
● Number of packages, contents and weight
● Freight charges and payment details
● Time and date when courier received package.

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 4 Business and the law

4.5 Instruments of
payment
Caribbean Business
Chapter Four
Business and the law

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 4 Business and the law

Payments may be made with…

See Chapter One See this Chapter

● Banknotes and coins ● Bank drafts
● Cheques ● Telegraphic transfers
● Debit cards ● Money order
● Credit cards ● Money transfer service
● Electronic transfer of funds (such as Western Union,
● MoneyGram)
Bills of exchange

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Bank draft
● Also called a manager’s cheque.
● Used to pay for ‘big ticket’ items.
● The customer pays funds to the bank.
● The bank prepares the draft.
● The customer makes a payment with the draft.
● The draft is guaranteed by the bank.
● Overseas payments may take weeks to clear.

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Telegraphic transfer
● Also called electronic funds transfer, or wire transfer.
● The customer fills out a form with:
● Amount to be paid
● Recipient’s name and bank account number
● Name, address and SWIFT code for recipient’s bank.
● Payment is received after a few days.

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Money order
● Prepared by a post office, not a bank
● Used mainly for small foreign payments
● Some Caribbean post offices sell British or US money orders.

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Money transfer services

● Best-known are Western Union or MoneyGram.
● The customer:
● Visits a nearby location.
● Fills out a form, keeping a copy.
● Makes a payment.
● Contacts the recipient.
The recipient can collect the funds after around ten minutes.

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Which method is best?

Speed Distance Cost

Notes and coins Direct Face to face None

Cheques Days National None/small

Debit cards Same day Face to face Small

Credit cards Days Any 3% cost to merchant

Telebanking Direct Usually national None/small

Bank drafts Days Any Small

Bank drafts (international) Weeks Any Small

Telegraphic transfers Days Any More than bank draft

Money order Days Any Small

Money transfer Minutes Any Can be high

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4.6 Insurance
Caribbean Business
Chapter Four
Business and the law

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 4 Business and the law

Pooling of risk works like this…

● A Caribbean country has 80,000 cars.
● In one year, 10,000 will be in an accident.
● The average damage is US$3,000.
● An average driver has a one-in-eight chance of damage
averaging US$3,000.
● In most years, the car will be undamaged.
● If there is a serious accident, the damage can run to as much as
US$500,000.
● With pooling of risk, everyone pays an annual premium to cover
the risk and give security.

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The insurance company…

● Knows the average risk.
● Knows its operating expenses.
● Sets a premium to cover costs and allow a profit.
● Collects a premium from motorists.
● Invests premium income to earn interest.
● Meets the cost if a client suffers an accident.

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Principles of insurance contracts

● Utmost good faith – full disclosure of facts
● Insurable interest – client must risk an actual loss.
● Indemnity – damage usually limited to actual value
● Contribution – with several policies, each company pays for part
of the damage.
● Proximate cause – What is the real cause of the damage? Is it
covered by the policy?

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General insurance
● Coverage against perils such as traffic accidents, fire, medical
expenses and theft
● For vehicles, ‘third party’ insurance is compulsory.
● ‘Comprehensive’ insurance is voluntary.
● If a building is under-insured, the principle of averaging applies.
● A loss adjuster may settle disputes.

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Life assurance
● A whole-life policy allows a one-off payment on death.
● An endowment policy allows a single payment, for example on
retirement.
● An annuity provides a regular income in exchange for a lump
sum.
● Term assurance covers outstanding debt. Mortgage payments
are met if the client is incapacitated.

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 4 Business and the law

Business insurance
● General insurance against perils such as fire
● Marine insurance
● Public liability insurance
● Employers’ liability insurance
● Business interruption insurance
● Fidelity insurance
● Life assurance for key executives

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