• UNIT 2: CONTRACTS IN BUSINESS OPERATIONS


    Key Unit Competency: To be able to make a valid contract and resolve conflicts in business operations

    Introduction

    The business environment is full of agreements between businesses and individuals. While oral agreements can be used, most businesses use formal written contracts when engaging in operations. Written contracts provide individuals and businesses with a legal document stating the expectations of both parties and how negative situations will be resolved. Contracts also are legally enforceable in a court of law. Contracts often represent a tool that businesses use to safeguard their resources.

    This unit is designed to equip you with knowledge and skills as well as attitudes that will enable you to: make personal and business contracts, handle conflicts in life and business, respect agreements with other people and seek for the appropriate institutions for conflict and dispute resolution.


    Introductory activity

    Referring to laws in business operations and role of standards in business covered in S4, answer the following questions:

    a. What is the importance of laws in business operations?

    b. What is the importance of standards in business operations?

    c. What do you think is a business contract?

    d. Your friend met with a businessperson on a football match who requested her to supply him with beans at a price agreed on from there among the two of them. After delivering 200kgs, she was not paid the full amount of money she had been promised by the businessperson.

    i. Has such a situation ever happened to you? When and what happened?

    ii. What do you think was the mistake your friend did? What should she have done?

    iii. How do we call such a situation?

    iv. Advise your friend what to do so as to be fully paid her money.

    v. What lessons do you learn from the above situation?


    2.1. Business contracts: Meaning and Forms of Business contracts


    Activity 2.1

    Read the following paragraph and answer questions that follow.

    Musabe is operating a micro enterprise in her local home area of Musanze. She wants Mugisha to supply her goods for her business. Musabe says Mugisha can start right away to supply the goods they will discuss other issues later on BUT Mugisha insists he needs an agreement between the two especially on issues such as payment terms, delivery period, quantity and quality, among others.

    a. How do you call the agreement Mugisha insists should be between them?

    b. Do you think Mugisha is right to have the agreement before starting the supply of goods? Give reasons to support your answer.

    c. In which form may the agreement be made between Musabe and Mugisha? Support your answerd. What do you understand by:e. Contract.

    f. Business Contract.

    2.1.1. Meaning of contract and Business contract

    A business contract is a legally binding agreement between two or more persons/businesses to perform an agreed business transaction. It is a legally binding agreement between two or more persons or entities.

    Dealing with contracts is part of running a successful business. You will have a number of business relationships involving some type of contractual commitment or obligation.You may:

    •Be a purchaser of goods and services - as a borrower of money, in rental agreements and franchise agreements
    •Be a supplier of goods and services – retailer, wholesaler, independent contractor
    •Have a partnering agreement with other businesses – partnerships, joint ventures, and consortium.

    Note: •Managing your contracts and business relationships is very important.
              •It is important that you fully understand the terms of a contract before signing anything. You are advised to seek legal and professional advice first.

    2.1.2. Forms of business contracts

    A business contract states the terms and conditions of any business transaction, including product sales and delivery of services. This helps the parties involved to avoid any type of misunderstanding that may arise in the absence of a written contract.

    If you are collaborating with a friend on your new business, then it is all more important to create a written contract. This will help you avoid any misunderstandings and consequently will save you from the rifts that might end your friendship.

    If you have an oral agreement, you might forget some points that you have agreed on verbally with the passage of time. However, with a written agreement, all the terms and conditions are clear at any point in time. Moreover, you can always amend the agreement with the consent of both the parties.

    Contracts can be verbal (spoken), written or a combination of both. Some types of contract such as those for buying or selling real estate or finance agreements must be in writing.

    Written contracts: This refers to the agreement between two or more parties in form of written words for example a property selling agreement, may consist of a standard form of agreement or a letter confirming the agreement.

    Oral/Verbal agreements (gentleman’s contract): These are agreements made between two or more parties by word of mouth or orally for example, telling the person to plough your piece of land without any written note, it relies on the good faith of all parties and can be difficult to prove.

    It is advisable (where possible) to make sure your business arrangements are in writing, to avoid problems when trying to prove a contract existed.

    Regardless of whether the contract is verbal or written, it must contain four essential elements to be legally binding.

    Application Activity 2.1
    Read the following statements and answer questions that follow

    Nkusi wants to lend his car to Niragire for 5,000Frw per day for five days.

    a. Niragire agrees with a handshake to borrow the car from Nkusi and pay the money in witness of Rukundo.
    b. Ntezimana promises to take his girlfriend Bagirishya for an outing to Lake Kivu.
    c. Niyokwizerwa promises to pay 10,000Frw to whoever finds her lost phone.
    d. Kato puts on paper his commitment to provide printing services to Umutoni on agreed terms.
    e. Mutesi promises to pay for her brother’s school fees and puts it in writing.

    Questions:

    Which of the above statements are:

    i. Contracts.
    ii. Not contracts.
    iii. Business contracts.
    iv. Verbal contracts.
    v. Written contracts.


    2.2. Elements of a written contract and a valid contract


    Activity 2.2
    Analyze the sample contract below and answer questions that follow


    Questions
    a. Do you think the above sample is a contract? Give reasons to support your answer.
    b. Name the 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.

    2.2.1. Elements of a written contract

    Written contracts may follow a structure that can include, but are not limited to, the following elements:
    •Details of the parties to the contract, including any sub-contracting arrangements
    •Duration or period of the contract
    •Definitions of key terms used within the contract.
    •A description of the goods and/or services that your business will receive or provide, including key deliverables.
    •Payment details and dates, including whether interest will be applied to late payments.
    •Key dates and milestones.
    •Required insurance and indemnity provisions.
    •Guarantee provisions, including director’s guarantees.
    •Damages or penalty provisions.
    •Renegotiation or renewal options
    •Complaints and dispute resolution process.
    •Termination conditions.
    •Special conditions.

    2.2.2. Essential elements of a valid contract
             

    Contracts can be verbal (spoken), written or a combination of both. Some types of contract such as those for buying or selling real estate or finance agreements must be in writing.

    Regardless of whether the contract is verbal or written, it must contain the following essential elements to be legally binding:

    a. 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.

    b.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.

    c. 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.

    d. 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 old, not bankrupt, not insane, properly registered.

    e. Free Consent: Parties to the contract must agree freely without any of the parties being forced to accept or enter the contract.

    f. Legality/lawful object: The consideration/object of the contract must be legal and not contrary to the law and public policy.g.Possibility of performance: If the contract is impossible in itself either physically or legally, then such contract is not valid and cannot be enforced by law.

    h. 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 court may be able to tell what the parties agreed, then it will be declared invalid.

    Application Activity 2.2
    Assume, you have rental houses at home; Help your parents design a rent-alcontract that will be signed with the tenants. (Refer to elements of written contract)

    2.3. Importance and termination of business contracts


    If you run a business, your business depends on all kinds of relationships: With customers or clients; with employees; with vendors of goods and services; with lenders and property owners, just to name a few. Each party to a business relationship brings to it a set of expectations with respect to what he or she will give and get. A contract is a useful tool for describing and defining the expectations of each party to a business relationship.

    Activity 2.3
    1. Referring to the activities in the previous lessons, do you think it is important to have contracts in business operations? Give reasons to support your answer.
    2. Referring to the Contract for the sale of used car in activity 2 above, what do you think or when do you think the contract may end?
    3. What do you understand by termination of business contract?

    2.3.1. Importance of business contracts

    A written contract plays a vital role in any business transaction. Apart from making the agreement between concerned parties legally binding, contracts can also serve as future references, part of the business’ policies, as well serve as proof in the event of misunderstandings, complaints or disputes needing litigation proceedings.

    Entrepreneurs sign many contracts with suppliers, financiers, workers, customers, transporters and government. A contract is important in the following ways:

    •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 goods on credit because the suppliers are aware that the entrepreneur is bound by contract and therefore will make effort to pay

    •Written contracts are important because it is easy to forget details you have agreed upon verbally and therefore provide a permanent record

    •Contracts may be used by entrepreneurs to convince bankers that the entrepreneur has a business that will generate income so as to obtain loans

    2.3.2. Termination of business contracts

    To terminate a contract means to end the contract prior to it being fully performed by the parties. In other words, prior to the parties performing all of their respective obligations required by the contract, their duty to perform these obligations ceases to exist.

    Most contracts end once the work is complete and payment has been made.

    Contracts can also end:

    •By performance: If the contract is performed and fulfilled as expected under the terms and conditions of the contract and both parties are satisfied, 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 eg 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.

    Application Activity 2.3
    Read the following paragraph and answer 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 good 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.

    Questions:
    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?

    2.4. Types of Common Business Contracts


    Activity 2.4
    Analyze the following statements and answer questions that follows.

    i. You order a meal at a restaurant.
    ii. ‘Lost wallet, brown with One hundred thousand Rwandan francs in it. Return to owner and receive a 10.000Frw reward.’

    Questions:
    a. Which of the above statements is a contract? Support your response.
    b. Concerning contracts, what is the difference between the two statements?

    c. What do you think is the difference between;

    i. Unilateral and bilateral contracts.
    ii. Gratuitous and onerous contracts.
    iii. Simple and adhesion contract.
    iv. Commutative and Aleatory contracts.

    Types of business contracts
    a. Unilateral and bilateral contracts: In terms of the number of people or parties promising an action, bilateral contracts need at least two, while unilateral contracts only obligate action on one part. Unilateral contracts involve only promisor while bilateral contracts involve both a promisor and a promisee.

    A unilateral contract is a contract in which one party makes a promise to whomever takes action as prescribed in the offer

    A bilateral contract is where two parties enter into an agreement where both parties promise to do something.

    b.Gratuitous and onerous contracts: Gratuitous contracts are those of which the object is the benefit of the person with whom it is made, without any profit or advantage received or promised as a consideration for it. A gratuitous contract is sometimes called a contract of beneficence.

    Onerous contracts are those in which something is given or promised as a consideration for the engagement or gift, or some service, interest, or condition is imposed on what is given or promised, although unequal to it in value.

    c. Simple and adhesion contract: A simple contract is one, the evidence of which is merely oral, or in writing, not under seal, nor of record.

    As contracts of this nature are frequently entered into without thought or proper deliberation, the law requires that there be some good cause, consideration or motive, before they can be enforced in the courts. The party making the promise must have obtained some advantage, or the party to whom it is made must have sustained some injury or inconvenience in consequence of such promise; this rule has been established for the purpose of protecting weak and thoughtless persons from the consequences of rash, improvident, and inconsiderate engagements.

    A contract of adhesion refers to a contract drafted by one party in a position of power, leaving the weaker party to “take it or leave it.” Adhesion contracts are generally created by businesses providing goods or services in which the customer must either sign the boilerplate contract or seek services elsewhere.

    d. Commutative and Aleatory contracts: Aleatory contract is a type of contract

    1. whose execution or performance depends on a contingency or an uncertain (random) event beyond the control of either party, and/or

    2. under which the sums paid by the parties to each other are unequal. Most insurance policies are aleatory contracts because the insured may collect a large amount or nothing in return for the premiums paid.

    Commutative Contract is one in which each of the contracting parties gives and, receives an equivalent. The contract of sale is of this kind. The seller gives the thing sold, and receives the price, which is the equivalent. The buyer gives the price and receives the thing sold, which is the equivalent.

    Application Activity 2.4
    Analyze the following statements and answer the questions that follow;

    1. You use your “Tap and Go card” to move from Nyabugogo Taxi park to Remera taxi park.
    2. Payment of insurance premium every month for your new car.
    3. The shop keeper hands you the new IPhone you have just paid for.
    4. You borrow a book from a friend who insists you have to buy an envelope to take it in but it seems not necessary to you.
    5. You continue paying service fee or monthly payments for water connections even when you no longer use the water.
    6. You promise to buy a new dress to your sister.

    With reasons, identify the types of contracts implied in the above statements
    1. ..........................................
    2. ..........................................
    3. .........................................
    4. .........................................
    5. .........................................
    6. .........................................

    2.5. General business contracts: Employment related contract and Leases


    Activity 2.5
    Complete the following statements as used in business contracts using the list of words below.

    1. (Bill of Sale, Agreement for the Sale of Goods, Purchase Order, Warranty, Limited Warranty, Security Agreement, Employment Agreement, Employee Non-compete Agreement, Independent Contractor Agreement, Consulting Agreement, Distributor Agreement, Sales Representative Agreement, Confidentiality Agreement, Reciprocal Nondisclosure Agreement, Employment Separation Agreement, Real Property Lease, Equipment Lease, Franchise Agreement, Advertising Agency Agreement, Indemnity Agreement, Covenant Not to Sue, Settlement Agreement, Release, Assignment of Contract, Stock Purchase Agreement, Partnership Agreement, Joint Venture Agreement, Agreement to Sell Business).

    a. ...................................Transfers ownership of a good from one party to another

    b. ................................... A contract for the sale, may be confirmed by a bill of sale after the transaction goes through.
    c. ......... .............. .......... First official offer made by a buyer to a seller.

    d. ......... ........................Any conditions or actions that would avoid the contract.

    e. ..................... ............Warranty limited to just one or a few parts.

    f. .................................. Contract between a lender and borrower of a loan.

    g. ............................... .... A contract for employment, including details about payment, job responsibilities, etc.

    h. .................................An agreement to not work for a direct competitor for a specified period of time after termination.

    i. .......................................Similar to an employment agreement, but outlines the terms to which the limited work contract applies.

    j. ..........................Outline of the tasks and responsibilities (and compensation in return) for a consulting relationship.

    k. ...........................Defines the relationship with a distributor.

    l. .................................Typically used to define the amount of commission, and how it’s tabulated, for a salesperson. m. ...............................Agreement to not disclose certain information to third parties.

    n. .........................................Non disclosure agreement in which both parties agree not to disclose certain trade secrets.

    o. .....................................Also referred to as a termination agreement, this formally ends the employment relationship.

    p. ...........................A contract to lease office, manufacturing, or commercial real estate between the landlord and the business.

    q. ..........................Agreement to lease equipment for a specified period of time.

    r. .........................Outlines the relationship between the franchisor and the franchisee, such as support, advertising, use of brand, etc.

    s. .................................Establishes the scope of duties to be performed by the agency, duration, payment, etc.

    t. .........................An agreement to transfer risk from one party to another.

    u. .........................One party claiming damages agrees not to sue the responsible party.

    v. ..........................Agreement between two parties to end a lawsuit in exchange for certain concessions (usually cash paid to the plaintiff ).w. ............Typically refers to a release from liability (which are common for businesses where customers assume a reasonable risk of some sort).

    x. .............................A legal transfer of the benefits and obligations of a contract from one party to another.

    y. ...............................Contractual agreement to sell a certain amount of stock to a named individual (often used for stock options at private companies).

    z. ...........................Official agreement among two or partners, including responsibilities of each.

    aa. .............................Lays out the obligations, goals, and financial contributions of all parties involved in a joint venture.

    bb. ................................Documents the terms of a business sale.

    Employment related contract
    While all valid contracts must include certain elements particularly an offer, consideration, and acceptance. There are several different kinds of contracts addressing various business scenarios. Most small businesses will end up using the same kinds of contracts at various times, such as employment contracts or purchase orders, and will become quite familiar with these.

    Some of the more common types of business contracts that you may enter into are included in the following:

    a. Sales-related Contracts;

    •Bill of Sale:Transfers ownership of a good from one party to another.
    •Agreement for the Sale of Goods: A contract for the sale, may be confirmed by a bill of sale after the transaction goes through.
    •Purchase Order: First official offer made by a buyer to a seller.
    •Warranty: Any conditions or actions that would void the contract.
    •Limited Warranty: Warranty limited to just one or a few parts.
    •Security Agreement: Contract between a lender and borrower of a loan.

    b.Employment-Related Contracts

    i. Employment Agreement: A contract for employment, including details about payment, job responsibilities, etc.
    ii. Employee Non-compete Agreement: An agreement to not work for a direct competitor for a specified period of time after termination.
    iii. Independent Contractor Agreement: Similar to an employment agreement, but outlines the terms to which the limited work contract applies.
    iv. Consulting Agreement: Outline of the tasks and responsibilities (and compensation in return) for a consulting relationship.
    v. Distributor Agreement:Defines the relationship with a distributor.
    vi. Sales Representative Agreement:Typically used to define the amount of commission, and how it’s tabulated, for a salesperson.
    vii. Confidentiality Agreement: Agreement to not disclose certain information to third parties.
    viii. Reciprocal Nondisclosure Agreement:Nondisclosure agreement in which both parties agree not to disclose certain trade secrets.
    ix. Employment Separation Agreement:Also referred to as a termination agreement, this formally ends the employment relationship.

    c. Leases

    i. Real Property Lease: A contract to lease office, manufacturing, or commercial real estate between the Property owner and the business.
    ii. Equipment Lease: Agreement to lease equipment for a specified period of time.

    d. General Business Contracts

    i. Franchise Agreement: Outlines the relationship between the franchisor and the franchisee, such as support, advertising, use of brand, etc.
    ii. Advertising Agency Agreement: Establishes the scope of duties to be performed by the agency, duration, payment, etc.
    iii. Indemnity Agreement: An agreement to transfer risk from one party to another
    iv. Covenant Not to Sue: One party claiming damages agrees not to sue the responsible party.
    v. Settlement Agreement: Agreement between two parties to end a lawsuit in exchange for certain concessions (usually cash paid to the plaintiff ).
    vi. Release: Typically refers to a release from liability (which are common for businesses where customers assume a reasonable risk of some sort).
    vii. Assignment of Contract: A legal transfer of the benefits and obligations of a contract from one party to another.
    viii. Stock Purchase Agreement: Contractual agreement to sell a certain amount of stock to a named individual (often used for stock options at private companies).
    ix. Partnership Agreement: Official agreement among two or partners, including responsibilities of each.
    x. Joint Venture Agreement: Lays out the obligations, goals, and financial contributions of all parties involved in a joint venture.
    xi. Agreement to Sell Business: Documents the terms of a business sale.


    Application Activity 2.5
    a. Read the following paragraphs and answer the questions that follow:While walking along the beach, you notice a sign attached to a palm tree that reads, ‘Lost wallet, brown with one million Rwandan francs in it. Return to owner and receive a 100,000Frw reward.’ This picks your interest, and you begin sifting through the sand, turning over seashells, and flipping beach towels in search of the missing wallet. After all, you could use the 100,000Frw claims!

    i. Name the form of contract above.
    ii. Name the type of contract above.

    b. 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.

    i. Was there a valid contract in the paragraph above
    ii. Do you think Kizito is right? Give reasons to support your answer.
    iii. What advice would you give to the person who brought the dog back?

    2.6. Breach of a contract


    Activity 2.6
    Read the paragraph below and answer questions that follows.Kizito offered 10,000Frw for the return of his lost bag, but then he refused to pay because he thought the person who brought the bag back had stolen it.

    Questions:
    a. Was there a valid contract? Give reasons
    b. What do you think is happening in the paragraph?
    c. Do you think Kizito is right?
    d. How do we call the behavior of Kizito in business contracts?
    e. What should the person who brought the bag back do?
    f. How do we call Kizito’s behavior in business?

    2.6.1. Breach of a contract

    Breach of a contract is a legal term that describes a violation of a contract or agreement in which one party fails to fulfill its promises or by interfering with the ability of another party to fulfill its duties. A contract may be breached in whole or in part.

    Most contracts end when both parties have fulfilled their contractual obligations, but it is not uncommon for one party not to completely fulfill his or her part of the contract agreement.

    Breach of a contract is the most common reason contract disputes are brought to court for resolution. In order for a breach of contract to be upheld by a court it must meet all of these requirements:

    i. The contract must be valid; that is, it must contain all the essential contract elements so that it can be heard by a court. If all essential elements are not present, the contract is not valid and there is no lawsuit.
    ii. The accuser must show that the defendant breached the contract.
    iii. The accuser did everything required in the contract.
    iv. The accuser must have notified the defendant of the breach. If the notification is in writing, this is better than a verbal notification.

    Types of breach of a contract
    i. Material breach is a breach that is significant enough to excuse the aggrieved party from fulfilling its part of the contract.
    ii. Partial breach is not as significant, and it does not excuse the aggrieved party from its duties.
    iii. Anticipatory breach: A party may breach a contract by doing, or failing to do, something that shows intention not to complete duties under a contract.

    2.6.2. Defenses to breach of a contract
    A defendant may offer a reason (defense) why the alleged breach is not really a breach of contract. Common defenses against a breach of contract are:

    i. Fraud: Which “knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” The defendant is saying that the contract is not valid because the plaintiff failed to disclose something important or made a false statement about a material (important) fact. The defendant must show that the fraud is deliberate.

    ii. Duress: Which occurs when one person compels another to sign a contract through physical force or other threats. This too invalidates the contract, since both parties did not sign of their own free will.

    iii. Undue influence is similar to duress: In that one party has a power advantage of another and uses that advantage to force the other to sign the contract.

    iv. Mistake: A mistake by the defendant cannot invalidate a contract and take away a breach of contract case. However, if the defendant can prove that both parties made a mistake about the subject matter (a car, let us say), it may be enough to serve as a defense.

    v. Statute of limitations: Many types of cases have a time limit by which a case must be brought. If the defendant can show that the statute of limitations has expired, the breach of contract case may be thrown out. Statutes of limitations are set by individual states. Here is an example of the state statutes of limitations on debt.

    2.6.3. Remedies to a breach of a contract
    If one party is found to be in breach of a contract, the plaintiff has several ways to be made whole; called a remedy. The most common remedy is monetary payment. Some other common remedies for a loss resulting from a breach of contract are:

    i. Damages: Including compensatory damages (to compensate for the actual loss) and punitive damages.

    ii. Injunction: To get a court to require the other party to stop an action that is causing damage.

    iii. Rescission: Sometimes the plaintiff has been so badly damaged by the breach that the injured party is allowed to rescind (terminate) the contract.

    iv. Consequential and incidental damages: Money for losses caused by the breach that were foreseen, that is each side knew at the time of the contract that its breach would cause loss to the other party.

    v. Lawyer’s fees and costs: These are paid if it was clearly stated in the contract

    vi. Liquidated damages: Damages stated in the contract that would be payable if there is any fraud, dishonesty or breach of the contract.

    vii. Punitive damages: Money charged to punish the offending person to discourage them from such behavior.

    viii. Specific performance of the contract: Under certain circumstances, the court may direct the breaching person or business to perform that very obligation which he had promised to undertake.

    Application Activity 2.6

    Analyze the illustration below and answer questions that follow.


    a. Do you think there was a valid contract in the illustration above? Give reasons to support your answer.
    b. Do you think there was a breach of contract in the illustration? Give reasons to support your answer.
    c. With reasons, which type of breach is illustrated?
    d. Suggest the possible remedies for the breach of contract above.

    2.7. Conflicts and disputes in business



    2.7.1. Business disputes and conflicts
    A business dispute is a disagreement over the existence of a commercial legal duty or right, or over the extent and kind of compensation that may be claimed by the injured party for a breach of such a duty.

    Conflicts between business owners and employees typically involve differences of opinion, style, or approach that are not easily resolved. These can lead to hurt feelings and altercations among employees.

    Conflict may occur between co-workers, or between supervisors and subordinates, or between service providers and their clients or customers. Conflict can also occur between groups, such as management and labor, or between whole departments.

    However, some conflicts reflect real disagreements about how an organization should function. If the winner of the conflict happens to be wrong, the organization as a whole could suffer. Some conflicts involve bullying or harassment of some kind, in which case a fair resolution must involve attention to justice.

    In addition, if one party out-ranks the other, the power disparity could complicate resolution even if everybody concerned means well.

    2.7.2. Business conflicts with stakeholders

    a. Conflicts with customers;

    i. Quality of products and services.
    ii. Prices agreed upon and prices charged.
    iii. Calculation of discounts.
    iv. Delivery delays.
    v. Nonfunctional products.

    b.Conflicts with Suppliers;

    i. Non-payment for supplies.
    ii. Non return of containers or packaging materials.
    iii. Sudden cancellation of orders
    iv. Delivery of damaged products.
    v. Delayed deliveries.

    c.Conflicts with Employees/workers;

    i. Non-payment of salaries and wages.
    ii. Illegal termination of employment.
    iii. Discrimination based on sex, race, tribe, religion, etc.
    iv. Poor working conditions.
    v. Absenteeism.
    vi. Misuse of business property and facilities.
    vii. Corruption, embezzlement and theft.
    viii. Unfair dismissal.

    d. Government and its agencies;

    i. Assessment of what and how much to pay.
    ii. Payment of taxes (time and rate).
    iii. Operation of business without valid licenses/documents.
    iv. Environmental degradation.
    v. Tax refunds.
    i. Use of wrong weights and measures.

    Application Activity 2.7
    1. The business deals with many other partners and therefore likely to get into conflicts with them during the numerous business activities. Mention any 3 causes of conflicts between the business and the following partners:

    a. Customers
    b. Suppliers
    c. Employees
    d. Government and its agencies
    e. Society

    2. What are the effects of such conflicts to the business and its operations?

    2.8. Resolutions to conflicts and disputes in business

                                

    Activity 2.8
    Read the following scenario to the participants:

    1. Gilbert is a waiter at a popular restaurant. One Friday night, the busiest time for the restaurant, an impatient customer kept demanding better service – I want to order...Where is my food...Gilbert tried to reassure the customer that the kitchen staff was working as fast as they could. Suddenly the customer stood up and started yelling very loudly at Gilbert, attracting the attention of the other diners.

    If you are the manager of the restaurant, how could you handle the situ-ation?

    2. How are conflicts or disputes resolved (at least 2 arguments for each);
    a. At home.
    b. At school.
    c. By business and customers.

    2.8.1. Conflict resolution process

    Conflict resolution is a way for two or more parties to find a peaceful solution to a disagreement among them. The disagreement may be personal, financial, political, or emotional.

    Conflict resolution skills are a job requirement for many different types of positions. This is because conflict within organizations can reduce productivity and create a difficult work environment, leading to unwanted turnover in staff and reduced morale.

    The Conflict Resolution Processes

    Some conflicts are essentially arbitrary, meaning it does not matter who “wins,” only that the problem is resolved so everyone can get back to work.In any organization, conflicts, both major and minor, may arise.

    These conflicts can cause far-reaching negative effects on the people in a workplace.Absenteeism, high turnover, poor productivity, and even violence can be a result of conflict and contention.

    The resolution of conflicts in the workplace typically involves some or all of the following processes:

    i. Recognition by the parties involved that a problem exists.
    ii. Agreement to address the issue and find some resolution.
    iii. An effort to understand the perspective and concerns of the opposing individual or group.iv. Identifying changes in attitude, behavior, and approaches to work by both sides that will lessen negative feelings.
    v. Recognizing triggers to episodes of conflict.
    vi. Interventions by third parties such as Human Resources representatives or higher level managers to mediate.
    vii. Willingness by one or both parties to compromise.
    viii. Agreement on a plan to address differences.
    ix. Monitoring the impact of any agreements for change.
    x. Disciplining or terminating employees who resist efforts to defuse conflicts.

    2. 8.2. Examples of Conflict Resolution Skills

    The following skills are often important in conflict resolution. The list is not exhaustive, and of course, many more applications of each skill are possible.

    •Assertiveness: A supervisor might take the initiative to convene a meeting between two employees who have engaged in a public dispute. An employee might seek out a person with whom they are having conflict to suggest working together to find ways to co-exist more peacefully.

    •Interviewing and Active Listening Skills: A Human Resources representative might have to ask questions and listen carefully to determine the nature of a conflict between a supervisor and a subordinate.

    •Empathy: A mediator might encourage empathy by asking employees in conflict to describe how the other might be feeling and thinking and how the situation might look to the other party. Empathy is also an important skill for mediators, who must be able to understand each party’s perspective, without necessarily agreeing with either.

    •Facilitation: Managers of rival departments might facilitate a joint brainstorming session with their teams to generate solutions to ongoing points of conflict. Group facilitation techniques can also be used to avoid triggering conflict during group decision-making to begin with.

    •Mediation Skills:A supervisor might guide subordinates who are in conflict through a process to identify mutually agreeable changes in behavior.

    •Creative Problem Solving: A supervisor might redefine the roles of two conflict-prone staff to simply eliminate points of friction. Creativity can also mean finding new win/win solutions.

    •Accountability: A supervisor might document conflict-initiating behaviors exhibited by a chronic complainer as preparation for a performance appraisal. In this way, the supervisor helps establish accountability, since the employee can no longer pretend the problem is not happening.

    2.8.3. Resolution of conflicts in business

    Whether you are involved in a family or neighborhood dispute or a lawsuit involving thousands of dollars, these processes should be considered. They are often the more appropriate methods of dispute resolution and can result in a fair, just, reasonable answer for both of you and the other party. The following processes describe ways to resolve disputes.

    a. Negotiation:Negotiation is the most basic means of settling differences. It is back-and-forth communication between the parties of the conflict with the goal of trying to find a solution.

    You may negotiate directly with the other person. You may hire an attorney to negotiate directly with the other side on your behalf. There are no specific procedures to follow - you can determine your own - but it works best if all parties agree to remain calm and not talk at the same time.

    Negotiation allows you to participate directly in decisions that affect you. In the most successful negotiations, the needs of both parties are considered. A negotiated agreement can become a contract and be enforceable.

    Characteristics of Negotiation:

    i. Voluntary.
    ii. Private and confidential.
    iii. Quick and inexpensive.
    iv. Informal and unstructured.
    v. Parties control the process, make their own decisions and reach their own agreements (no third party decision maker).
    vi. Negotiated agreements can be enforceable.
    vii. Can result in a win-win solution.

    b. Mediation:Mediation is a voluntary process in which an impartial person (the mediator) helps with communication and promotes reconciliation between the parties, which will allow them to reach a mutually acceptable agreement. Mediation often is the next step if negotiation proves unsuccessful.

    The mediator manages the process and helps facilitate negotiation between the parties. A mediator does not make a decision nor force an agreement. The parties directly participate and are responsible for negotiating their own settlement or agreement.

    When you and the other person are unable to negotiate a resolution to your dispute by yourselves, you may seek the assistance of a mediator who will help you and the other party explores ways of resolving your differences. Mediation can be used in most conflicts ranging from disputes between consumers and merchants, property owners and tenants, employers and employees, family members in such areas as divorce, child custody and visitation rights, eldercare and probate as well as simple or complex business disputes or personal injury matters.

    Characteristics of Mediation:

    i. Promotes communication and cooperation.
    ii. Provides a basis for you to resolve disputes on your own.
    iii. Voluntary, informal and flexible.
    iv. Private and confidential, avoiding public disclosure of personal or business problems.
    v. Can reduce hostility and preserve ongoing relationships.
    vi. Allows you to avoid the uncertainty, time, cost and stress of going to trial.
    vii. Allows you to make mutually acceptable agreements tailored to meet your needs.
    viii. Can result in a win-win solution.

    c. Arbitration:Arbitration is the submission of a disputed matter to an impartial person (the arbitrator) for decision.

    Arbitration is typically an out-of-court method for resolving a dispute. The arbitrator controls the process, will listen to both sides and make a decision. Like a trial, only one side will prevail. Unlike a trial, appeal rights are limited.

    The result can be binding if all parties have previously agreed to be bound by the decision. In that case, the right to appeal the arbitrator’s decision is very limited. An arbitrator’s award can be reduced to judgment in a court and thus be enforceable. In non-binding arbitration, a decision may become final if all parties agree to accept it or it may serve to help you evaluate the case and be a starting point for settlement talks.

    A common use of arbitration is in the area of labor disputes - between fire fighters and the city in wage disputes, for example. You will usually be represented by an attorney in arbitration.

    Many contracts have clauses that require that disputes arising out of that contract be arbitrated. If you agree to arbitrate or sign a contract with an arbitration clause, you should understand that the arbitrator may make the final decision and that you may be waiving your right to a trial in court.

    Characteristics of Arbitration:
    i. Can be used voluntarily.
    ii. Private (unless the limited court appeal is made).
    iii. Maybe less formal and structured than going to court, depending on applicable arbitration rules.
    iv. Usually quicker and less expensive than going to court, depending on applicable arbitration rules.
    v. Each party will have the opportunity to present evidence and make arguments.
    vi. May have a right to choose an arbitrator with specialized expertise.
    vii. A decision will be made by the arbitrator which may resolve the dispute and be final.
    viii. Arbitrator’s award can be enforced in a court.
    ix. If nonbinding, you still have the right to a trial.

    d. Litigation (going to court/court interaction): Litigation is the use of the courts and civil justice system to resolve legal controversies. Litigation can be used to compel opposing party to participate in the solution.

    Litigation is begun by filing a lawsuit in a court. Specific rules of procedure, discovery and presentation of evidence must be followed. There can be a number of court appearances by you and/or your lawyer. If the parties cannot agree how to settle the case, either the judge or a jury will decide the dispute for you through a trial.

    If you cannot settle your differences through negotiation, mediation, arbitration or some other means, then you should pursue litigation through the courts with your lawyer.

    Characteristics of Litigation:

    i. Involuntary - a defendant must participate (no choice).
    ii. Formal and structured rules of evidence and procedure.
    iii. Each party has the opportunity to present its evidence and argument and cross-examine the other side - there are procedural safeguards.
    iv. Public - court proceedings and records are open.
    v. The decision is based on the law.
    vii. Right of appeal exists.
    viii. Losing party may pay costs.
    vi. The decision can be final and binding.


    The above processes of resolving conflicts and disputes in business can be applied through some of the following:

    •Trade associations: Where the disputing parties belong to a trade or business association, they may refer the dispute to the association for advice and a solution.
    •Mediation: This is where a neutral and independent third party facilitates communication between the disputing parties for a solution.
    •Refer to agreements: if an agreement or contract is made, then the best way to resolve a dispute is to refer to the contract.
    •Partnership deed or articles of association: Disputes relating to business ownership, management, sharing of profits and issues should be handled by referring to the partnership deed or articles of association.
    •Courts of law: The dispute may be referred to a court of law for arbitration.
    •Negotiation: Disputing parties communicate directly and try to reach an agreement without the costs of a mediator or arbitrator.

    Application Activity 2.8
    1. Analyze the following example of conflicts in business and answer questions that follow.

    a. Leadership Conflict:John has been the sales manager for over a year. His sales reports show an increase in sales and he seems to know how to motivate his reps/agents pretty well.

    However, a few of the reps repeatedly complain about John’s management style. He tends to get very involved with their techniques, calls them out when he thinks they are making a mistake, and does not take criticism himself very well.

    One of the top producing reps/agents complains more than the others, and he is threatening to quit.

    Which techniques will you use to resolve the conflict above?

    b. Work Style Conflicts:Ntaganzwa and Niyigena both work in accounting department. Ntaganzwa was hired a few months ago and Niyigena has been with the company for eight years.Ntaganzwa, while being a proficient worker, tends to wait until the last minute to get his work done. Niyigena works more steadily and keeps on top of her work daily. Niyigena complains that she feels she has to worry now about his work and her own. In addition, because they rely on each other’s tasks, she is uncomfortable with waiting until an hour or so before a deadline when they are forced to collaborate.

    Because of the conflict, Ntaganzwa is missing more work and you suspect it is because he wants to avoid Niyigena and her wrath/anger.

    What Conflict Resolution Strategies will you apply for the Co-Workers?

    Skills Lab Activity 2.9

    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 he 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.

    1. What are some of the essential elements of a valid contract observed in the above case study?
    2. Was there a valid contract in the above case study? Support your answer
    3. What advice do you give to shine business club?
    4. How would you approach the situation or the above problem if it was your business club


    End of Unit 2 Assessment


    1. Analyze the example below and answer 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 ads 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 hands over the keys for the Toyota Carina.

    Questions:
    a. Is there a valid contract in the above example? Referring to the elements of a valid contract, support your response;
    b. Which type of business contract is represented in the example above?
    c. Which form of business contract would you advise Nkusi to sign with Mukarutesi?
    d. What do you think may lead to the contract in the example above to be terminated?

    2. Read the following passage and answer 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 perplexed 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 threatens to evict him if he does not pay his rent.

    Questions:
    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 his property owner to avoid such conflicts again.


    UNIT 1: BUSINESS IDEAS AND OPPORTUNITIESUNIT 3: TAXES IN BUSINESS