General
- Entrepreneurship S2 TG File Uploaded 2/11/21, 15:26
UNIT 2: DRAFTING A VALID BUSINESS CONTRACT
Key Unit Competence: To be able to make a valid contract in business
operations.
Introductory activity
Sam met with a businessperson on a football match who requested him to be
supplied with beans at a price of 500 Frws per kilogram. When Sam delivered
200kgs, he was not paid the full amount of money they had agreed upon.
a) Has such a situation ever happened to you? When and what happened?
b) What mistake did Sam do?
c) Assume you were the one in such a situation, what would you do?
d) What advice would you give to Sam and the businessperson?e) What lessons do you learn from the above situation?
2.1. Meaning and Forms of Business contracts
Activity 2.1
Bayigana operates a small medium enterprise in Huye and wants
Ishimwe to supply his business with goods. Bayigana tells her to start
right away and supply the goods they will discuss other issues later.
She insists that she needs an agreement between the two especially on
issues of price, mode of payment, delivery period, quantity and quality,
among others.
a) How do you call an agreement that Ishimwe insists to be between them?
b) Do you think she is right to have the agreement before starting the
supply of goods? Give reasons to support your answer.
c) In which way/form may the agreement be made between the two?
Support your answerd) What do you understand by the term contract and business contract?
2.1.1 Meaning of contract and Business contract
A contract is a legally binding agreement between two or more parties which
can be enforced by law.
Example in marriage the woman and man make a contract during civil marriage.
The three parties are woman, man and witness will come to testify before thelaw represented by Executive secretary of sector.
Before starting a job, the employer and employee make a contract. In this case
there are two main parties and the law is now represented by official labor law
because it is not possible to make a job contract which is against the labor law.
A business contract is a legal binding between two or more persons/ entities
to perform an agreed business transaction and can be enforced by law. The
day today running of the business involves making contractual obligations withsuppliers, buyers etc.
Example: A farmer can make a contract of supplying chicken to the hotel. In
most cases this contract is written and two parties should sign to that document.
This contract should follow the official law like the right person who represents
the hotel and the farmer should have maturity age. The two parties should sign
with free consent. Once signed it becomes a document which binds the twoparties.
2.1.2 Forms of business contracts
Oral contract is an agreement between two or more parties by use of words.
They are non-written contracts. They rely on the good faith of the parties but
can be difficult to prove. Once the contract is verbal, the wittiness is mandatoryand provides evidence.
Application Activity 2.1
Read the following statements and answer the questions that follow:
- Nkusi wants to lend his car to Niragire for 5,000Frw per day for
five days.
-Niragire agrees with a handshake to borrow the car from Nkusi
and pay the money in witness of Rukundo.
-Ntezimana promises to take his girlfriend Bagirishya for an outing
to Lake Kivu.
-Niyokwizerwa promises to pay 10,000Frw to whoever finds her lost phone.
-Gato puts on paper his commitment to provide printing services
to Umutoni on agreed terms.
-Mutesi promises to pay for her brother’s school fees and puts it inwriting.
Which of the above statements are?
a) Contracts.
b) Not contracts.c) Business contracts.
2.2 Valid contract2.2.1. Parties to a contract
Activity 2.2
1) Analyze the figure below and answer the following questions.
a) Do you think the above sample is a contract? Give reasons to
support your answer.
b) Name the key elements of the written contract above.
c) Do you think the sample above is a valid contract? Support your
response by mentioning the elements of a valid contract in the
sample provided. (If any?)
2) Describe different parties to a valid contract.
3) Kamaliza’s 16-years old son, who looks a bit older, he signed a
contract joining a health club. He has dues of 15000 Frws. Is thiscontract valid?
Parties of contract are persons who can sign the contract. For a contract to be
considered valid, it should include three parties. These are; Offeror/promisor
who makes an offer, Offeree/promisee to whom an offer is made and Witnesswho sees an event happening.
For example, in the above template Mr. John Muhire Offeror/promisor agreesto sell his car to Umugwaneza Nadine Offeree/promisee at 2 millions.
Two parties to contract Offeror/promisor and Offeree/promisee must have
“capacity”, legal ability to make valid contract. Assent of parties is a must. If
either party is deprived, use of his understanding or deemed by law not have
attained consent, then such an agreement shall not bind him. All parties shouldhave should be mature, sound mind and qualified for contract by law.
The information of two parties in contract should be clear, complete and
concise. In any case, the names are not enough, it should be better to include
other information like number of identification card, the location where those
documents are issued. Ensure that all information is well reflected on the
contract. For example in above contract there is a mistake in writing names.
Umugwaneza Nadine who sells the car is not the same Mugwaneza Nadine whosigns the contract. These slit mistakes can disqualify the contract.
Witness is a person who sees an event happening. In a legal contract, a witness
is someone who watches the document be signed by the person they are being
a witness for and who verifies its authenticity by signing their own name on the
document as well. However, if you have a legal document such as a mortgage or
a Will the chances are that you will want a witness to attest to your signature.
Generally, the person you choose to witness a document should have no financialor other interest in an agreement. A neutral third party is the best choice.
2.2.2. Elements of a valid contract
For a contract to be valid and therefore enforceable by law, it must have the
following elements:
Intention to be bound by the contract: the two parties should have intended
that their agreement be legal. Domestic agreements between husband and wife
are not taken as valid
Offer and acceptance: there must be an offer and the two parties must lawfully
come to acceptance leading to a valid contract. Until an offer is accepted, it’s not
a valid contract
Consideration/price: this is the price agreed upon by the parties to the
contract and paid by one party for the benefit received or promise of the other
parties.
Capacity of the parties: the parties to the contract must have contractual
capacity for the contract to be valid, i.e. should be sober, above 18years, not
bankrupt, not insane, properly registered.
Free Consent: parties to the contract must agree freely without any of the
parties being forced to accept or enter the contract.
Legality/lawful object: the object and the consideration of the contract must
be legal and not contrary to the law and public policy.
Possibility of performance: if the contract is impossible to be executed in
itself either physically or legally, then such contract is not valid and cannot be
enforced by law.
Certainty: the terms of the contract must be clear and understandable for a
contract to be valid. If the terms are vague or ambiguous, where even the courtmay not be able to tell what the parties agreed, then it will be declared invalid.
Application Activity 2.2
Imagine if you make a contract without considering the elements of avalid contract, what will happen if the person/ business refuses to pay?
2.3. Importance of business contracts
Activity 2.3
Why is it essential to prepare business contracts?
Referring to the activities in the previous lessons, do you think it is
important to have contracts in business operations? Give reasons tosupport your answer.
In business life, contracts are important because they outline expectations
for both parties, protect both parties if those expectations aren›t met and lock
in the price that will be paid for services. There are so many relationships that
affect the way the business operates such as customers or clients, employees,
suppliers, government, financiers. Contracts are then important in the followingways:
- Contracts reduce business risks by compelling business partners to
perform what they have agreed to as per contract.
- Business contracts specify terms and conditions of business
transactions including price, quantities, quality, date of delivery, etc.
which avoids misunderstandings.
-Contracts help entrepreneurs to get the goods on credit because
the suppliers are aware that the entrepreneur is bound by contract and
therefore will make effort to pay the agreed amount.
-Written contracts act as evidences. They are important because it is easy
to forget details you have agreed upon verbally and therefore provide apermanent record.
-Contracts may be used by entrepreneurs to convince bankers that the
entrepreneur has a business that will generate income so as to obtainloans.
Application Activity 2.3
Demonstrate the importance of business contracts to the schoolbusiness club.
2.4 Designing a contract sample
Activity 2.4Prepare a sample contract with suppliers for your school business club.
2.4.1 Sample of Employee contract
Employee Contract Template:
Employment Contract
This contract, dated on the ____ day of ______________ in the year 20____, is made
between [company name] and [employee name] of [city, state]. This contract
constitutes an employment agreement between these two parties and is
governed by the laws of [state or district].
WHEREAS the employer desires to retain the services of the employee, and the
employee desires to render such services, these terms and conditions are set forth.
IN CONSIDERATION of this mutual understanding, the parties agree to the
following terms and conditions:
Employment
The employee agrees that he or she will faithfully and to the best of his/her
ability to carry out the duties and responsibilities communicated to him/her by
the employer. The employee shall comply with all company policies, rules andprocedures at all times.
Position
As a [job title], it is the duty of the employee to perform all essential job functions
and duties. From time to time, the employer may also add other duties withinthe reasonable scope of the employee’s work.
Compensation
As compensation for the services provided, the employee shall be paid a wage of
___________ [per hour/per annum] and will be subject to a[quarterly/annual]
performance review. All payments shall be subject to mandatory employment
deductions (State taxes, Social Security, Medicare).
Benefits
The employee has the right to participate in any benefits plans offered by the
employer. The employer currently offers
benefits will only be possible after the probationary period has passed.
Probationary Period
It is understood that the first [time frame] of employment constitutes a
probationary period. During this time, the employee is not eligible for paid time
off or other benefits. During this time, the employer also exercises the right to
terminate employment at any time without advance notice.
Paid Time Off
Following the probationary period, the employee shall be eligible for the
following paid time off: • [length of time for vacation] • [length of time for sick/
personal days] • Bereavement leave may be granted if necessary.
The employer reserves the right to modify any paid time off policies.
Termination
It is the intention of both parties to form a long and mutually profitable
relationship. However, this relationship may be terminated by either party at
any time provided [length of time] written notice is delivered to the other party.
The employee agrees to return any employer property upon termination.
Non-Competition and Confidentiality
As an employee, you will have access to confidential information that is the
property of the employer. You are not permitted to disclose this informationoutside of the company.
During your time of employment with the employer, you may not engage in any
work for another employer that is related to or in competition with the company.
You will fully disclose to your employer any other employment relationshipsthat you have and you will be permitted to seek other employment provided
that (a.) it does not detract from your ability to fulfill your duties, and (b.) youare not assisting another organization in competing with the employer.
It is further acknowledged that upon termination of your employment, you will
not solicit business from any of the employer’s clients for a period of at least[time frame].
Entirety
This contract represents the entire agreement between the two parties and
replaces any previous written or oral agreement. This agreement may be
modified at any time, provided the written consent of both the employer andthe employee.
Legal Authorization
The employee agrees that he or she is fully authorized to work in [country name]
and can provide proof of this with legal documentation. This documentationwill be obtained by the employer for legal records.
Severability
The parties agree that if any portion of this contract is found to be void or
unenforceable, it shall be removed from the record and the remaining provisionswill retain their full force and effect.
Jurisdiction
This contract shall be governed, interpreted, and construed in accordance withthe laws of [State, province].
In witness and agreement whereof, the employer has executed this contract
with due process through the authorization of official company agents and withthe consent of the employee, given here in writing.
Employee Signature
Date
Company Official Signature
Source: www.betterteam.com/employee-contract-template
2.4.2. Sample of a sales contract
PRIVATE CAR SALES CONTRACT
The Car Details
Make: Toyota
SOLD FOR:……… frws
Model……… Registration Number…….. Registration document
completed by buyer/seller ..Yes/No . Mileage………. Registration document (V5)
exchanged ....Yes/No .
Additional notes and comments agreed on this sale
SELLER’S DETAILS: Name…………….. Address………………
CERTIFICATE of PURCHASE: I am the undersigned buyer of the above car.
I have purchased it from the seller named above for the amount of cash also
mentioned above (SOLD FOR). This is the final price agreed. I have paid for this
car in full and I am in receipt of this car and all the relevant documents to it. The
Seller above also acknowledges being in full receipt of all the total amount but I
do accept that full title to the car does not fully pass from the seller to purchaser
until all cash is paid. Any cheques will need to be cleared before full title passes
to myself. It is fully understood that this vehicle is sold as seen. I the buyer agree
that I have tried, tested and approved this car as suitable for my personal needs
without any representations, warranties or conditions expressed or implied
whatsoever.
Buyer’s Name:………………………
Buyer’s Address: …………
Buyer’s Signature in agreement: …………
Seller’s Signature in agreement: …………Date: …………
Application Activity 2.4
Assume, your parents have houses to rent at home, help them design arental contract that will be signed by the tenants.
2.5 Termination/discharge of business contracts
Activity 2.5
What do you think would lead you to terminate a contract with your
suppliers?
To terminate a contract means to end the contract. Contract may be terminated
under the following circumstances:
By performance: If the contract is performed and fulfilled as expected under
the terms and conditions of the contract and both parties are satisfied, then the
contract may be terminated.
By agreement: The parties to the contract may freely agree to end the contract
if both consent to end the contract.
By destruction of the subject matter: The contract may be put to an end
when the subject matter of the contract ceases to exist such as being destroyed,
stolen or died.
By operation of the law: The contract may be terminated by law if it is illegal,
if one party becomes bankrupt, insane or dies.
By frustration: A contract can be put to an end when a condition set in hinders
one of the parties from performing his/her contractual obligations.
For convenience: Where the contract allows a party to terminate the contract
at any time by providing notice to the other party for example employment
contract.
Due to a breach: Where one party has not complied with an essential contract
condition, the other party may decide to terminate the contract and seek
compensation for damages.
By lapse of time: If the offeror fails to perform and the offeree fails to take
action within this specified period, then the latter cannot seek remedy through
law. It discharges the contract due to the lapse of time. For example, Ngabo
takes a loan from Kamikazi and agrees to pay instalments every month for the
next three years. However, he does not pay even a single instalment. Kamikazi
calls him a few times but then gets busy and takes no action. Four years later,
she approaches the court to help her recover her money. However, the court
rejects her suit ,since she has crossed the time-limit of three years to recoverher debts.
Application Activity 2.5
1) Read the following paragraph and answer the questions that follow:
Musoni started a business selling general merchandise in his
community. He is renting the place where his business operates. He
buys his goods from a nearby town through a fellow businessperson.
He says he trusts his friend, so they never write down anything when
sending for goods but just gives him the money. He always sells
goods to his customers on credit but rarely make any record of such
transactions. Recently, after some advice from a friend, he contracted
a construction company to build for him a two-roomed building from
where he will shift his shop.
a) Mention some of the mistakes Musoni is doing in his business
activities?
b) What are the likely consequences of Musoni’s actions mentioned
above?
c) What advice would you give to Musoni to avoid the consequences
above and why?
d) What may cause Musoni to terminate the contract with the
construction company?
2)Kizito offered 10,000Frw for the return of his lost dog, but then he
refused to pay because he thought the person who brought the dog
back had stolen it.
Was there a valid contract in the scenario above?
Do you think Kizito is right? Give reasons to support your answer.
What advice would you give to the person who brought the dog back?
Skills lab 2
With reference to the knowledge of Business contracts, design contract
templates to be used in the school business club when dealing with; a)suppliers. b) Customers, c.) Employees of the club, d.) Club members.
End of unit 2 Assessment
1) Read the case study below and answer the questions that follow:
Shine Business club
Shine business club wanted 3crates of soda which they wanted to sell
to their school that was organizing a visiting day. Chantal an active
member of the club having been close to Bizimungu an entrepreneur
dealing in retail business convinced the club to deal with him. The
club paid him and agreed he would deliver the sodas to the club after
three days but unfortunately after the agreed time, he didn’t deliver
the sodas as expected. When the club contacted him for the sodas, he
denied to have entered into any dealing with them that if he did, he
would be having at least a formal document to prove that. The club
reported the matter to the school administration, but it couldn’t help
them since it was not notified of that dealing.
a) What are some of the essential elements of a valid contract
observed in the above case study?
b) Was there a valid contract in the above case study? Support your
answer
c) What advice do you give to shine business club?
d) How would you approach the situation or the above problem if it
was your business club?
2) Analyze the example below and answer the questions that follow:
Nkusi and Mukarutesi are capable adults. Nkusi is in the need for a
new car. it is on a budget, so he scans the classified advertisements
and finds Mukarutesi, who is selling an old Toyota Carina for
2,000,000Frw. Nkusi calls Mukarutesi and offers 1,800,000Frw.
Mukarutesi accepts Nkusi’s offer and they decide to meet. At the
meeting, Nkusi hands over 1,800,000Frw and Mukarutesi handsover the keys for the Toyota Carina.
a) Is there a valid contract in the above example?
b) Referring to the elements of a valid contract, support your
response;
c) Which form of business contract would you advise Nkusi to sign
with Mukarutesi?
d) What do you think may lead the contract in the example above tobe terminated?
3) Read the following passage and answer the questions that follow.
Ntwali started a business selling general merchandise in his community.
He is renting the place where his business operates. Ntwali paid his
property owner three months’ rent in advance but never asked for
receipt. After two months, his property owner says he wants the rent for
the two months. Ntwali is frustrated and tries to remind the property
owner that he paid his rent for three months. The property owner denies
and asks Ntwali for proof of the payment which he does not have. Ntwali
is stuck, does not know what to do while the property owner threatensto evict him if he does not pay his rent.
a) What is the cause of the conflict in the example above?
b) Advise Ntwali on how he can resolve the conflict with the property
owner
c) What are the disadvantages of the form of contract between Ntwali
and the property owner?
d) Help Ntwali design a written contract that he can sign with hisproperty owner to avoid such conflicts again.