Legal Environment of Business and Risk Management

We will begin to explore the legal framework that underpins business. This section aims to equip you with a comprehensive understanding of contract law, which is a fundamental aspect of business operations. You will study the meaning and elements of contract such as offer, acceptance, consideration, capacity and so on. Again, types of contracts, including vitiation of contracts and how to discharge a contract will be learnt.

This will help you to analyse contractual issues and develop your understanding of how you might enter into contract with other parties in real-world business environments.

Key Ideas

• Contract: Is an agreement between parties which can be enforced by law.

• Elements of contract: These are the essentials that constitute a valid contract e.g. offer and acceptance.

• Promise: A declaration by one party to another that something will be done to create a binding obligation.

• Valid contract: Legally binding agreement that meets the essential elements of a contract.

• Reformation: It is where the court modifies a contract to reflect the original intention of the parties.

• Discharge of contract: An action taken by parties to terminate a contract.

To begin, we will look at what the term “contract” means from a legal point of view as it applies to business. We will then break this down to look at the different elements that make up a contract agreement.

Meaning of Contract

Human beings by nature need to interact to co-exist. In the course of these engagements or interactions, we may trade-off wants and needs and make promises where one person provides or makes promises to do (or not) a particular thing in exchange for another. In effect, there is an agreement based on the promises made by both parties which may or may not be fulfilled. These engagements or promises brought about the Law of Contract to govern the efforts to achieve and perform voluntary agreements.

A contract is a legally binding agreement between two or more parties that is enforceable by law. It is where two or more parties make mutual exchange of promises to perform an act. That is, each party agrees to do, or not to do, something in exchange for a benefit.

For example, a contract can be a sale agreement where one party promises to make available goods or services, and the other party promises to pay for them.

The term contract was defined by Sir Frederick Pollock (1876) as “an agreement, consisting of the exchange of promises which is recognised by law as giving rise to enforcement rights and obligations.”

Differences Between a Contract and a Promise

It is important to state that a contract is different from a promise. A contract is a legally binding agreement between two or more parties that creates mutual obligations enforceable by law. A promise can be defined as a voluntary declaration or assurance made by one party to another, committing to perform a specific action, fulfil an obligation, or refrain from doing something. It is often based on trust, moral obligation, or personal integrity.

Contracts are enforceable by law. If one party fails to fulfil their obligations, the other party can seek legal remedies such as damages or specific performance (where a court decides that the party in breach of the agreement must fulfil its duties). Promises, in general, are not enforceable by law unless they meet the criteria of a contract (i.e. has an offer, acceptance, consideration and mutual intent to be bound etc).

Shown below is a table summarising the differences between a contract and promise.

Table 2.1: Differences between a contract and promise No. Contract Promise

1. A contract can be enforced by in the law court.

A promise may be a simple statement which cannot be enforced by the law.

2. It includes consideration which should be something of value e.g.

money.

It mostly lacks consideration; in most cases, no monetary value is attached to it.

3. It has specific terms, conditions and obligations to be performed.

Promises made, in most instances, have no terms and conditions.

No. Contract Promise

4. A good contract must be written and signed by the parties involved.

It can be a verbal or written; it may not be signed.

5. It should be a legally binding agreement.

It is not necessarily legally binding Elements of a Contract In order for a contract to be legally binding it must include the following as a minimum;

offer, acceptance, consideration, capacity and legality. Each element will be looked at in detail over the next two lessons.

1. Offer and Acceptance:

Agreement is reached when two or minds meet on a common purpose. It is made up of offer and acceptance. When an offer made by one party is accepted by another party there is an agreement also as 'consensus ad idem'.

An offer made by one party may be the beginning of contract if the offer is accepted by another person.

An offer is a clear and definite proposal made by one party (the offeror) to another (the offeree) indicating a willingness, or readiness, to enter into a contract on certain terms.

On the other hand, acceptance is an unqualified agreement to the terms of the offer.

The offeree must communicate their acceptance to the offeror and must mirror the terms of the offer made.

An offer can be oral, written or implied by conduct; it must be clear, definite and unequivocal; it may be specific or general, just in the case of (Carlill vs. Carbolic Smoke Ball Co.), and it must be communicated to the offeree before it can be accepted.

Every contract starts with an offer; if a party makes no offer, there is no contract.

Table 2.2: Sample cases and judgements Case details Judgement

Example: Tailor vs Laird 1856 Case details Judgement A seaman named Tailor (the plaintiff) navigated a ship that was deserted in the middle of the sea, home to the owner (Laird

– the defendant), without his prior notice and insisted on a fee. The owner of the ship (Laird – the defendant) refused to pay, and the seaman sued.

The court ruled that Taylor (plaintiff or seaman) could not claim a fee since the owner (Laird/owner or defendant) was not informed of the services and therefore could not accept or reject to pay the fee.

The court relied on the fact that Tailor did not make any offer to Laird for his acceptance before navigating the ship back home, and therefore, the contract was void.

Example: Hyde vs Wrench (1840) Wrench offered to sell his farm to Hyde for GH¢ 1,000.00. Hyde agreed and responded, saying, “I accept your offer, but I want you to reduce the price by GH¢ 50.00. Wrench refused to sell the farm at the reduced price, and Hyde decided to sue Wrench for specific performance.

As the response Mr. Hyde gave was a counteroffer (new price), he was not accepting the offer. Wrench’s original offer was terminated, and there was no contract.

The consensus or mutual assent:

The consensus is otherwise known as a “meeting of the minds,”. It is when both parties to the contract have a common understanding and agreement on the essential terms of the contract. This ensures that both parties understand each other regarding the contractual expectations and obligations.

For example, Kareweh agrees to construct living room furniture for Gyamfi for GH¢6,000. They discuss and agree on the actual type of furniture to be constructed, the timeline and the payment schedule. In this example, both Kareweh and Gyamfi have a mutual understanding and agreement on the furniture’s specifics, indicating mutual assent.

Table 2.3: Sample cases and judgements

Example: Raffles vs. Wichelhaus (1864) Case details Judgement

Example: Raffles vs. Wichelhaus (1864) Raffles and Wichelhaus/ entered into a contract for the sale of cotton to be shipped from Bombay to Liverpool. The agreement specified that the cotton would arrive on a ship called “Peerless.” However, there were two ships named “Peerless,” each departing at different times. Raffles intended the cotton to be shipped on the earlier “Peerless,” while Wichelhaus expected it to arrive on the later “Peerless.” When the cotton arrived on the earlier ship, Wichelhaus refused to accept and pay for it.

The court held that there was no consensus (meeting of two minds) or mutual assent because both parties had a different understanding of a key term of the contract

— the ship “Peerless.” Without a mutual understanding or “meeting of the minds” regarding this essential term, the contract was deemed void and unenforceable.

Court Judgment:

The case of Raffles v. Wichelhaus illustrates the importance of mutual assent in contract formation. A contract is valid only when both parties share a common understanding of the essential terms. If there is a significant misunderstanding, as in the case of the two ships named “Peerless,” mutual assent is not achieved, and the contract cannot be enforced.

2. Intention to Create Legal Relations:

The parties to a contract must explicitly or implicitly make their intention known to each other for the contract to be enforceable or legally binding. By declaring their intentions, each party allows the court to enforce the contract and uphold their obligations in case of a breach.

In business transactions, the intention to create legal relations is generally presumed, whereas in social or domestic arrangements, it is usually not. For

example, promises made between family members, such as a husband promising his wife a birthday gift, typically do not result in legally binding contracts.

In summary, the agreement between the parties must be subject to legal action if any issues arise.

Table 2.4: Sample cases and judgements

Example: Balfour vs. Balfour (1919) Case details Judgement

Example: Balfour vs. Balfour (1919) Mr. Balfour was a civil engineer working for the government in Ceylon (now Sri Lanka).

During his leave in 1915, he and Mrs. Balfour returned to England. Mrs. Balfour had developed rheumatic arthritis and was advised to stay in England for her health. As Mr. Balfour was about to sail back, he promised to send Mrs.

Balfour £30 a month until she could return to Ceylon. They later drifted apart, and Mr. Balfour wrote to Mrs. Balfour suggesting they remain apart. Mrs. Balfour sued him for the monthly payments. She initially received a decree nisi and alimony from a lower court judgment.

Mr. Balfour appealed the case in 1919.

The appeal court held that there is a rebuttable presumption against an intention to create a legally enforceable agreement when the agreement is domestic. The court ruled that there was no intention to create a legal relationship in this case. Therefore, the agreement was not legally enforceable.

The court noted that since the promise was a social agreement, it did not constitute a valid offer.

3. Certainty of Terms:

Certainty of terms refers to the clarity of a contract’s terms and conditions. The terms of the contract must be clear, certain and unambiguous. All essential elements such as price, quantity, quality and timing must be specified. This supports mutual assent or consensus in the contract agreement.

Certainty of terms ensures that there is no confusion about the obligations and rights of each party. For instance, Efua contracts with a builder to construct a two- bedroom house for GH¢180,000. Detailed information about the construction materials, design specifications, completion date and payment milestones were all properly understood and agreed by both parties. The clarity and specificity of the terms ensure that both Efua and the builder understand their obligations, reducing the potential for disputes.

Table 2.5: Sample cases and judgements

Example: Scammell vs Ouston (1941) Case details Judgement Ouston agreed to buy a van from Scammell and, in exchange, to trade in an old van and pay the balance on “hire-purchase terms.”

The contract did not specify the details of the hire-purchase terms, such as the duration of payments, interest rates, or the total amount payable. Scammell and Ouston later disagreed on these terms, leading to a dispute.

The court held that the contract was void due to uncertainty. The lack of specific and clear terms regarding the hire-purchase arrangement meant there was no consensus on the essential elements of the contract.

Without clear and unambiguous terms, the contract could not be enforced.

Scammell vs. Ouston case is an example that highlights the necessity for certainty in the terms of a contract. A contract is only enforceable when all essential elements are clearly defined and agreed upon by both parties. Ambiguities or omissions in critical terms like price, quantity, quality and timing can render a contract void due to uncertainty. This ensures that both parties fully understand their obligations and rights, preventing confusion and disputes.

Activity 2.1

Meaning and Elements of a Contract

Organise yourselves into groups of not more than five. In your groups, read the following scenario and answer the questions that follow.

Your school decided to display a notice for students on the board that there will be a send-off party for students moving up to Year 3. It was stated on the notice that the senior house master has been duly informed, and students should pay their send-off party registration fee of GH¢40.00 to Master Paha. Yinemi, a Year 3 student, quickly organised the said amount and paid it to the master responsible. However, on the party day, the hall was filled to capacity and Yinemi was turned away from the party as the hall was overcrowded and additional people would jeopardise health and safety.

1. Discuss whether Yinemi and the school had a contract and what elements are present in the contract, if any. (Your discussion should highlight the difference between a contract and a promise)

2. Deliberate on whether Yinemi is entitled to a refund and compensation for not being allowed to participate in the send-off party.

3. Make a Flipchart or PowerPoint presentation of your responses and share this with your colleagues in class for discussion and feedback.

Activity 2.2

Meaning and Elements of a Contract

Organise yourselves into groups of not more than five. In your groups, read the scenario below and answer the question that follows.

Two friends, Babra and Baba, decided to embark on a holiday trip to Paga to visit the crocodile pond in the Upper East region for two days. They agreed to share the cost of the holiday trip, which was estimated to be GH¢3,000.00. Later, Babra decided not to go on the trip due to some personal engagements.

Question for group discussion Is there a legally binding contract between Barbra and Baba? Justify your answer with reference to the intention to create legal relations.

Activity 2.3

The Meaning and Elements of a Contract

Carry out further research on the meaning and elements of contracts covered in this lesson.

You could complete this online or by discussing the issue with a subject expert. If possible, you could arrange a discussion with a professional or teacher specialising in this area to support this task. Consider the following questions:

1. Discuss the meaning of Contract.

2. Differentiate between a contract and a promise.

3. Discuss the following elements of a contract.

a. Offer and Acceptance.

b. Mutual Assent.

c. Intention to Create Legal Relations

d. Certainty of Terms.

Write down the key points from your research, or on the outcomes oof your discussion if you were able to arrange this.

1. Prepare a report and present it to your teacher for review You can use the table below to help you prepare the report

a. Meaning of contract

b. The differences between:

Contract Promise

* * * * * * * * * * * *

c. The elements of contract:

i. Offer and acceptance

ii. Mutual assent

iii. Intention to Create Legal Relations.

iv. Certainty of Terms.

Comments (if any)

Activity 2.4

Extension activity Read the case study and answer the questions that follow. This activity has been designed for you to complete in your own time.

Case Study: The Digital Marketplace Contract Dispute

Kwame and Ama are entrepreneurs in Ghana. Kwame runs a business selling handmade furniture online, while Ama manages an interior design company. They met at a local business conference and discussed a potential partnership where Kwame would supply custom-made furniture for Ama’s clients. They exchanged emails discussing the terms of the agreement.

In an email from Ama to Kwame, Ama expresses interest in purchasing a variety of custom-made furniture items over the next year. She mentions an initial order of 20 dining tables at GHS 1,000 per table, with delivery in three months. Ama states that if the initial order is satisfactory, she will place further orders for chairs and other items.

In response to Ama’s email, Kwame confirms the price and delivery timeline for the dining tables. He also mentions that he will provide a 10% discount on future orders if Ama is happy with the initial batch. Kwame states that a formal contract will be sent for Ama’s signature.

In a follow-up email from Ama to Kwame, Ama agrees to the terms and asks for confirmation of the exact specifications and materials for the dining tables. She also requests a sample table to be delivered within a month for approval before the bulk order is completed.

A month later, Ama receives the sample table and is dissatisfied with the quality of the materials used. She emails Kwame, expressing her concerns and requesting changes. Kwame responds, saying that the materials used were agreed upon and that any changes would incur additional costs and delay delivery.

Ama argues that the exact specifications were not clearly defined in their email exchange and insists that the contract terms need to be renegotiated. Kwame believes that they have a binding contract based on their email agreement and that Ama is obliged to proceed with the order under the original terms.

Questions:

1. Critically evaluate the role of “offer and acceptance” in the formation of the contract between Kwame and Ama. Was there a clear offer and acceptance?

Provide reasons for your conclusion.

2. Analyse the concept of “mutual assent” in this case. Do you think both parties had a clear mutual understanding of the contract terms? Justify your response with examples from the email exchange.

3. Examine the importance of “intention to create legal relations” in this scenario. Did Kwame and Ama demonstrate a clear intention to be legally bound by their agreement? Support your argument with evidence from the case study

4. Discuss the element of “certainty of terms” in the context of the dispute over the material quality. Were the terms of the contract sufficiently certain and clear? How might the lack of clarity affect the enforceability of the contract?

5. Reflect on how digital communication (e.g., emails) impacts the formation and interpretation of contracts. What challenges arise from using emails to form contracts and how can these challenges be mitigated?

Answer the questions in your exercise book or as a typed report and share with your teacher for feedback.

Activity 2.5

Self-Assessment Answer at least one of the following questions to support the review of your learning from this lesson:

1. Summarise the meaning of a contract.

2. Differentiate between the terms “contract” and “promise”.

3. Explain the following elements of a contract:

a. Offer

b. Acceptance

c. Mutual assent

d. Legal relations

e. Certainty of terms.

This lesson continues to explore the elements of a contract and focuses on consideration and capacity.

Consideration Consideration is something of value that can be exchanged by the parties involved in a contract. It is the price (money, goods, promises, acts, etc) paid by one party to secure the obligation of the other party in a contract. Valid and enforceable contracts must be supported by consideration. This implies that each party to the contract must provide something of value in return for the benefit received.

Consideration can be classified as executed (action performed), executory (action to be performed), or past (previously given). In law, past consideration is not enforceable in a court. Valid consideration must be legal, real and sufficient (and not past).

Table 2.6: Sample cases and judgements Case details Judgement

Example: Glassbrooke v. GCC (1925) During a coal mine strike, the police were duty-bound to protect the mine and proposed mobile units for protection. The mine owner requested stationary police on the premises and promised to pay for this extra service.

The police complied, but the mine owner later refused to pay, arguing that the police were simply performing their public duty.

The court held that although the police were required to provide protection, they had discretion in how it was provided. Since the police went beyond their normal duties by stationing officers on the premises instead of using mobile units, the extra protection was considered good consideration. Therefore, the mine owner was obligated to pay for the additional police protection as promised.

Example: Dunlop Vs Selfridge (1915)

A producer of tires agrees to supply to a retailer at a discounted price, provided the retailer did not resell the tires below a certain price, the retailer agreed, and contract signed. Later, Selfridge did not act as he promised, and Dunlop sued him.

The court conceded that Selfridge’s (retailer’s) promise not to sell below a certain price is a consideration, was bargained for and cannot be past. Therefore, the court rule in favour of the manufacturer of the tires (Dunlop).

Types of Consideration in Contracts

₁. Executed Consideration: This type of consideration is where one or both parties to the contract have already performed its part of the contract at the time the contract is made. For instance, Jemima agrees to pay GH¢40.00 to Chalpan if she delivers a book titled Business Management to him. Jemima immediately delivers the book and Chalpan is yet to pay or fulfil his part of the contract (to pay GH¢40.00). The consideration (the book delivery) is executed by Jemima.

Table 2.7: Sample cases and judgements

Example: Carlill v. Carbolic Smoke Ball Co. (1893) Case details Judgement

Example: Carlill v. Carbolic Smoke Ball Co. (1893) The Carbolic Smoke Ball Company advertised that they would pay £100 to anyone who used their product according to the instructions and still contracted influenza. Mrs. Carlill used the smokeball as directed but contracted influenza and sued the company for the £100.

The court held that there was a binding contract because Mrs. Carlill had performed the required act (using the smokeball and contracted influenza), which constituted executed consideration. The company’s promise to pay £100 was enforceable because it was a unilateral contract completed by Mrs. Carlill’s actions.

Smoke Ball Co. (1893)

The court held that there was a binding contract because Mrs. Carlill had performed the required act (using the smokeball and contracted influenza), which constituted executed consideration. The company’s promise to pay £100 was enforceable because it was a unilateral contract completed by Mrs. Carlill’s actions.

2. Executory Consideration: Executory consideration is consideration that is to be provided at a future date. For instance, if Aje promises to pay Ajewa GH¢50 next month if she agrees to deliver a book to him next week. Both Aje’s and Ajewa’s promises are executory since the actions are to be performed in the future.

Table 2.8: Sample cases and judgements

Example: R vs. Clarke (1927) Case details Judgement The government of Western Australia offered a reward for information leading to the conviction of certain criminals. Clarke provided the information but admitted he had forgotten about the reward at the time he gave the information.

The court held that Clarke could not claim the reward because his information was not provided in exchange for the reward offer; he had no intention to accept the offer at the time he provided the information.

This case highlights that both promises (the government’s offer and Clarke’s information) must be executory and intended to be exchanged.

3. Past Consideration: Past consideration is something that was provided before the agreement was made. Generally, past consideration is not valid because it was not given in exchange for the promise. For instance, Adwoa helps Yaw move his furniture and a week later, Yaw promises to give Adowa GH¢50 for their help. Since Adwoa’s help was provided before Yaw’s promise, it is considered past consideration and is generally not enforceable.

Table 2.9: Sample cases and judgements Case details Judgement

Example: Re McArdle (1951)

Case details Judgement Mrs. McArdle made improvements to a house and, after the work was done, the beneficiaries of the house signed a document promising to pay her for the improvements.

The payment was never made and Mrs.

McArdle sought to enforce the promise.

The court held that the promise to pay was not enforceable because the consideration (the home improvements) was past consideration, provided before the promise was made. Past consideration is not valid consideration in forming a contract.

Example: Roscorla V.s Thomas (1842)

Roscorla sold a boat to Thomas for £50.

After the sale, Thomas insisted and promised to pay an additional £10 if Roscorla would sail the boat to a particular port for him.

Meanwhile, Roscorla had already sailed moved the boat to the said port before the promise or discussion for the additional £10.

The main question here was if Thomas’s promise to pay £10 enforceable at the law court?

The court held that Roscorla’s past action of sailing the boat to the port earlier was not sufficient consideration for Thomas’s promise. Therefore, the court ruled in favour of Thomas.

These cases and examples illustrate the different types of consideration and the conditions under which they are enforceable in contract law.

Capacity to Contract

Contractual capacity is the legal ability of a person, (which in contract could be either an individual or corporation), to enter into a binding contract. Generally, parties are free to enter into any contract they desire unless they lack the capacity to do so. The law prohibits certain individuals from entering into contracts, these persons include:

Individuals under the age of 18 are referred to minors and are not capable of entering into a contract unless it is in the case of necessities. As an exception, minors are allowed to enter into contracts for necessities (such as books, clothing, food and shelter), beneficial contracts (like education and apprenticeship) and beneficial contracts of service.

Example of a case: Nash vs. Inman (1908 Nash, a seamstress, entered into a contract with Inman, a learner and minor, to sew eight waistcoats. Inman later refused to pay, and Nash sued him.

Case Judgement: The court ruled that the waistcoats were luxuries, not necessities and therefore, the contract was void and unenforceable. If the waistcoats had been limited to one or two, the court might have enforced the contract, as it would have constituted necessities, for which Inman had the contractual capacity to enter into.

1. Those who are intoxicated or drunk.

2. Third parties - persons who are not directly involved in the contract (privity of contract).

3. Nationals of a country at war with the contracting country.

4. In some jurisdictions, undischarged bankrupts have limited capacity to contract.

5. Individuals who are mentally incapacitated.

Example of a case: Hart vs O’Connor (1875) Daniel O’Connor, while suffering mental ill health, sold their farm to William Hart for £1,500 . Hart was aware of O’Connor’s mental state but went ahead with the sale contract.

The family of O’Connor challenged the sale, insisting that he (O’Connor) lacked capacity to enter into a contract.

Court Judgement: The court ruled in favour of the family of O’Connor. That is, the contract was void since O’Connor did not have capacity to enter in to contract and Hart had knowledge of O’Connor’s mental capacity. As such, it was judged that Hart must return the farm to O’Connor.

Activity 2.6

Consideration and Capacity to Contract

Organise yourselves into groups of no more than give. your groups, read the case study and answer the questions that follow.

The Comic Book Case

John Sakyi is a 17-year-old high school student studying English literature. He recently came across a valuable collection of vintage comic books. He decides to purchase the collection from a local seller, Mr. Ananse, for GH¢500, using the savings he made from the upkeep money given to him by his parents. They draft a simple agreement where Mr. Ananse promises to sell the comic books in exchange for the payment with a one-year warranty. John is excited and decides to lend one of the comics to his friend Naa Dede, who accidentally damages it before the one- year warranty could expire. John then returns the damaged comic book back to Mr.

Ananse asking for a partial refund, but Mr. Ananse refuses. John is now unsure if his contract with Mr. Ananse is legally binding and whether he has any grounds for a refund for the damaged comic book.

Questions for Discussion:

1. Was there valid consideration in the agreement between John and Mr.

Ananse? Justify your answer. (Your answer should include a definition of the term “consideration”)

2. Would the damaged condition of the comic book affect the consideration in this contract? Explain your reasoning.

3. Given John’s age, does he have the legal capacity to enter into this contract?

Justify your answer. Consider the concept of “capacity to contract” and the categories of “persons” who are prohibited by law from entering into contracts in your response.

4. Based on John’s age and the situation, is the contract enforceable? Provide reasons for your answer.

Task:

Write a summary of your responses for presentation to the class using a manila card or flip chart. Allow your classmates to feedback on your presentation.

Activity 2.7

Consideration and Capacity to Contract

In pairs, review the case study and its related questions then complete the task that follows.

Mukapee’s land saga Mukapee is a 22-year-old whose mental capacity is impaired due to a head injury.

He inherited land worth GH¢300,000.00 located in a prime area in Accra, Ghana from his late father. Mukapee decided to sell this land and Mawuli, who was aware of Mukapee’s limited mental capacity, proceeded and bought the land for GH¢30,000.00 and the ownership of the property was transferred to him. Later, Mukapee decided to challenge the sale of the land to Mawuli insisting that he (Mukapee) lacks capacity and the consideration offered was inadequate.

Questions for Discussion

1. What constitutes consideration in the case above?

2. Is the consideration executory, executed, or past? Justify your answer.

3. Do each of the parties in this example have the legal capacity to enter into the contract? How do you justify your decision?

Task Prepare a presentation of your answers to the questions. This could be in the form of a slide show (PowerPoint) or a written report to the class for feedback and discussion.

We are going to continue with the learning of the elements of contract. In the first lesson of this week, we are going to explore the remaining elements of contract. These are;

1. Legality

2. Formalities

3. Possibilities of Performance

1. Legality: Legality is a fundamental element of a valid contract, ensuring that the contract’s subject matter and terms are lawful and do not violate public policy and law. For a contract to be enforceable, it must have a legal purpose. Legality of contract includes:

a. Legal Purpose: This is a concept that looks at whether the object or purpose of a contract is recognised by law. The contract must be formed for a lawful purpose. Contracts formed for illegal activities, such as kidnapping, fraud, and so on are void and cannot be enforced in a court of law. For example, a contract to sell illegal drugs or to rape would be considered void due to illegality (the purpose is illegal).

b. Contracts Involving Regulated Activities: Certain activities such as gambling, insurance, financial services and healthcare are heavily regulated, and contracts related to these activities must adhere to specific legal requirements. Such contracts must meet regulatory standards and often require that parties involved in those businesses or activities are licensed or granted permits to deal in those activities or businesses.

c. Compliance with Laws and Regulations: The parties intending to enter into a contract should look at the terms and performance of the contract to ensure that they comply with applicable laws and regulations. That is the subject matter of the contract should not violate the local, state and federal laws that govern it. For example, a contract involving the sale of alcohol must comply with liquor licensing laws and regulations.

d. Public Policy: The contract the parties are entering into must not be contrary to public policy. Even if a contract is not illegal, it can still be unenforceable if it goes against established societal values and norms. Contracts that restrain trade, promote unethical behaviour, or involve unfair or unconscionable terms can be deemed against public policy and thus unenforceable. An example is a non-compete agreement that is excessively restrictive in terms of duration or geographic scope, which may be invalidated by courts for being against public policy.

Example of a case: Elliot vs Richardson (1870) Elliot agreed and entered into a contract with Richardson and lent £200 to Richardson to finance a betting transaction which was not sanctioned by the law.

Richardson failed to pay, and Elliot sued him.

Court Judgement: The contracted was void as it promoted illegal gamming.

Consequences of Illegality: If a contract is found to be against public policy or illegal, it is typically void and unenforceable. Neither party can enforce the contract or seek damages for breach of contract. Courts generally refuse to assist either party in recovering any benefits conferred under an illegal contract, following the principle of “in pari delicto” (both parties equally at fault).

Severability: There are instances where, if a specific provision of a contract is illegal, the courts may sever the illegal part and enforce the remainder of the contract, provided that the illegal provision does not go to the essence of the contract. This is known as the doctrine of severability, and it is applied to preserve the enforceable parts of a contract while discarding the illegal elements.

2. Formalities: Formalities of a contract refer to the specific requirements and procedures that must be followed for certain types of contracts to be legally valid and enforceable. While many contracts can be formed orally or through informal means, some contracts require adherence to specific formalities, which can include written documentation, signatures, witnesses and notarisation.

Here are the key aspects of formalities in contract law:

a. Written Contracts: Some contracts must be in writing to be enforceable.

Examples of those contracts include sale of land, credit sale, contracts that cannot be performed within one year, contracts for the sale of goods over a certain value, and so on. This requirement is often dictated by statutes, such as the Statute of Frauds.

b. Signatures: A written contract typically needs to be signed by the parties involved to indicate their agreement to the terms. Today, electronic signatures are also generally accepted as valid.

c. Witnesses: There are contracts that require the presence of witnesses to attest to the signing of the document. This is common in wills, certain real estate transactions and other important legal documents.

d. Compliance with Statutory Requirements: Certain statutes and regulations impose formal requirements for specific types of contracts.

Failure to comply with these requirements can render a contract void or unenforceable. For example, consumer protection laws may require specific disclosures or written agreements for certain types of consumer transactions.

e. Notarisation: Some contracts may require notarisation and involve a public notary who verifies the identities of the witnesses to and the parties signing the contract. This provides an additional level of authentication and is often required for documents related to real estate transactions, powers of attorney and certain affidavits.

Example of a case: Lee vs Showmen’s Guild of Great Britain (1952).

Lee verbally went into a contract with the Guild and agreed to lease a property to them (Guild) for an amount. Later, the Guild took over the ownership of the land and refused to pay. Lee was worried and frustrated and then took court action against the Guild.

Court Judgement: The agreement was unenforceable due to the lack of a written contract and signature. Contracts concerning lease should be in writing and signed.

3. Possibilities of Performance: Possibility of performance refers to whether a contract’s obligations can be really performed. That is to say, for a contract to be valid and enforceable, it must be possible for the parties to fulfil or perform their respective obligations under the terms of the agreement. Possibility of performance includes:

a. Physical Possibility: The obligations or tasks required by the contract must be physically possible to perform. In this light, a contract to perform a task that is impossible due to physical laws would not be enforceable. An example would be a contract to produce cobbles from a source that only contains sand.

b. Legal Possibility: The performance of the contract must be legal. Contracts requiring actions that are illegal or against public policy are not enforceable.

For instance, a contract to sell illegal drugs or to engage in illegal activities like smuggling goods would be void.

c. Factual Possibility: The circumstances surrounding the contract must allow for its performance. If an unforeseen event (natural disaster – heavy flooding) affects the subject matter, it makes performance impossible, the contract might be voided under the doctrine of impossibility or frustration.

For example, if a musician is contracted to give a concert and the venue is destroyed by fire some few hours before the performing date, performance would be factually impossible.

d. Economic Feasibility: While economic feasibility is not strictly a legal requirement, it affects the likelihood of performance. If the costs of performance become prohibitively expensive, it may impact the contract’s viability. For example, a supplier may contract to provide materials at a fixed price, but if the cost of materials skyrockets due to an unforeseen market condition, fulfilling the contract might become economically impractical.

Example of a case: Taylor vs Caldwell (1863) Taylor and Caldwell entered into a contract where Caldwell agreed and hired his music hall to Taylor for a concert. Days before the concert was due to be staged, the hall was destroyed by fire. Taylor approached Caldwell and sued him for breach of contract.

Court Judgement: Was Caldwell liable for breach of contract? No, the contract was discharged due to impossibility of performance.

All three concepts: legality, formality, possibility of performance and are critical components of contract law as they ensure that agreements are lawful, properly formed and enforceable realistically.

Activity 2.8

Elements of Contract

1. Organise yourself into groups of no more than five. In your groups, discuss the following elements of contract

a. Legality of contract.

b. Formalities of contract.

c. Possibility of performance.

2. Include examples of the activities or factors and how they would affect the validity of a contract.

3. Summarise the key points of your discussion in a table format and make a presentation to your colleagues for feedback and discussion.

You can use the table below to support your work A. Legality of contract.

B. Formalities of contract.

C. Possibility of performance.

Activity 2.9

Elements of Contract

Organise yourselves into groups of not more than five. In your groups, read the case study below and answer the questions that follow.

Ogrey Catering Services

Madam Ogrey is an entrepreneur who runs a small catering business. She recently received an offer from Mr. Bottles, the owner of a local club, to provide catering services for a private party he is hosting next month. They verbally agree on the price, menu and date. However, during their discussions, Mr. Bottles mentions that he wants some special ingredients that are difficult to source legally in their country and suggests using cheaper, imported substitutes. Madam Ogrey is hesitant but decides to proceed, hoping to fulfil the contract requirements and boost her business’s reputation. However, she soon finds that her suppliers cannot deliver the required ingredients by the agreed date, making it nearly impossible to fulfil Mr. Bottle’s specific requests.

Questions for Discussion:

1. Based on Mr. Bottle’s request for specific ingredients, does this contract have any legal issues that could affect its enforceability? Consider the meaning of “legality” and its importance in your answer.

2. If Mr. Bottle’s request involves sourcing ingredients that are illegal to import, what impact would that have on the contract’s validity?

3. Given that Madam Ogrey and Mr. Bottle only made a verbal agreement, does this fulfil the formal requirements for a valid contract? Justify your answer considering “formalities” of contract.

4. Since the suppliers cannot deliver the specific ingredients on time, is it still possible for Madam Ogrey to perform under the agreed terms?

Task:

Type your responses as a report in MS Word format and present it to your teacher for review and feedback.

Type of Contracts

There are four main types of contracts:

Types of

contract Express Implied Bilateral Unilateral

Figure 2.1: Type of Contracts

1. Express Contracts: Express contracts are binding agreements where the terms are explicitly stated by the parties, either verbally or in writing. For example, a written agreement to purchase a car specifying the price, delivery date and other terms. It is characterised by clear and specific terms; mutual understanding; can be easily proved and enforced.

2. Implied Contracts: These are agreements that are indirectly created by the actions, conduct, or circumstances of the parties, indicating a mutual intention to contract or imposed by law to prevent unjust enrichment even if there is no intention to form a contract. For example, a patient receiving treatment from a doctor implies an agreement to pay for the services. It is characterised by not being explicit in a stated form but inferred from behaviour or situation.

3. Unilateral Contracts: This is a type of contract where one party makes a promise to provide consideration in exchange for the other party’s performance.

For example, a reward contract where one party promises to pay if the other party finds a lost item. It is characterised by only one party making a promise;

the contract is formed when the other party performs the act or work expected.

4. Bilateral Contracts: For this contract to be valid, both parties must exchange mutual promises. The offeror makes an offer, and the offeree accepts it to begin a contract. For example, a job offers where the employer promises to pay, and the employee promises to work. It is characterised by mutual obligations; the contract is formed when promises are exchanged.

Classifications of Contracts

Contracts can be classified based on their performances and enforceability.

1. Contracts based on Performance:

a. Executed Contracts: Parties to a contract are expected to perform their obligations (work) as stated in the contract. Contracts are considered executed when all parties have fulfilled their contractual obligations. For example, a completed sale of goods where payment has been made and goods have been delivered. The contract is executed when it is fully performed; nothing remains to be done by either of the parties involved in the contract.

b. Executory Contracts: An executory contract is when some or all of the contractual obligations (works) are yet to be performed. For example, a lease agreement where future rent payments are still due may be referred to executory contract. Executory contracts are characterised by ongoing performance; future obligations remain.

2. Contracts based on Enforceability:

a. Valid Contracts: A valid contract is one that meets all the essential contract elements such as offer, acceptance, consideration, legality, capacity, consent, etc and is enforceable by law. An example of a valid contract is a legally binding sales contract. It is characterised by being legally binding and enforceable by law; if terminated the parties involved can seek legal remedy for breach of the contract.

b. Void Contracts: This is a contract that is legally invalid as it lacks one or more essential elements or it involves illegal activities, making it unenforceable from the beginning due to a fundamental flaw. For example, a contract for illegal drug sale. It is characterised by activities that are not legally binding and would be treated as if it never existed. Another example is when a minor enters into a contract, it is referred to as a void contract.

c. Voidable Contracts: A contract that is voidable is one that is valid and enforceable until one of the parties to the contract choses to cancel it due to defects such as misrepresentation. A voidable contract is considered valid at face value but can be voided or terminated by one party if he or she realises that the contract contains some mistake(s). For example, a contract signed under coercion. The party that is affected has the option to enforce or void the contract.

d. Unenforceable Contracts: This is a contract which is valid in essence but cannot be enforced due to technical reasons, such as not being in writing when required by law. For example, an oral agreement for the sale of land, which typically must be in writing. It is characterised by situation when it cannot be enforced in court due to specific legal deficiencies.

Example of a case: Redmond vs Fahey (1916) Ellen Redmond, a spinster, transferred her property to her nephew, Fahey. Later, Redmond alleged undue influence. She insisted, and proved, that Fahey coerced her into signing the deed (contract) and sued Fahey to recover the property.

Court Judgement: The court held that there was undue influence rendering the contract voidable. That Fahey’s actions constituted coercion to exploit Redmond’s vulnerability and Redmond’s consent was not freely given; she was entitled to the property.

Activity 2.10

Types and Classifications of Contract

Working in pairs, identify and explain each of the types of contracts. Compare your responses with another pair for feedback.

Activity 2.11

Types and Classifications of Contract

Working in groups, read the case study and answer the questions and task that follow.

YINTIMA COMPANY LIMITED

Yintima Company Limited, a manufacturing firm, is located in Bolgatanga, in the Upper East Region of Ghana. Yintima Ltd. intends to put up additional office structures. The company hires Sharp-Sharp Contractors to build a new office building for them. The contract, which has a price of One Million Ghana Cedis is stipulated to be completed within 18 months with a payment term of 50% upfront and 50% upon completion. The contract documents have a termination clause which allows either party to terminate the contract after 30 days’ notice. After 15 months, Sharp-Sharp Contractors faced financial difficulties and could not complete the contract on schedule.

Questions for Discussions

1. Is the contract enforceable against Sharp-Sharp Contractors? Justify your answer.

2. Explain if Yintima Ltd can claim damages for breach of contract?

3. What are Yintima Ltd.’s options regarding contract termination?

4. How would you classify this contract if Sharp-Sharp Contractors had completed the project but with defects?

Task:

Summarise your responses in the form of a short report and make a poster presentation to the class for review

Explanation of Vitiation of Contracts

In contract law, vitiation is the act of a contract becoming void or voidable. It refers to a situation where a contract becomes invalid or unenforceable due to factors that undermine its integrity. These defects can affect or weaken the legitimacy of the contract and make it void or voidable (unenforceable).

Vitiating factors are factors which affect the validity of a contract. The key ones have been summarised in the table below.

Table 2.10: Key Factors Leading to Vitiation

Vitiating factor Description Example Undue influence This is a vitiating factor that usually occurs when one party exerts excessive pressure or influence over the other, often exploiting a position of power or trust.

A caregiver pressures an elderly person into changing their will in the caregiver’s favour.

Misrepresentation This happens when one party provides false or misleading information or omits crucial facts, leading the other party to enter into the contract.

It is where the other party enters into a contract based on incorrect assumptions or reliance on the wrong information given.

A seller falsely claims that a car has never been in an accident to persuade a buyer to purchase it.

Duress / coercion It is a situation where one party is forced or threatened into entering the contract against their free will.

A person is threatened with physical harm unless they sign a contract.

Mistake This is where both parties share a fundamental misunderstanding about a key aspect of the contract.

Both a buyer and a seller mistakenly believe that a painting is an original when it is actually a replica.

Illegality The contract involves actions that are illegal or against public policy.

A contract for the sale of prohibited drugs or the murder of a person.

Lack of capacity One or more parties do not have the legal capacity to enter into a contract, such as being a minor, mentally incapacitated, or intoxicated/drunk.

A contract signed by a minor without the necessary legal exceptions.

Frustration A contract may be vitiated when an unforeseen event makes it impossible to perform the contract. When a contract is frustrated, it is automatically terminated, and the parties are released from their obligations.

A person buys a piece of land after they were assured it was suitable for building a house.

Later, they discover that the land is actually a protected wetland where construction is prohibited Contract may be vitiated when an unforeseen event makes it impossible to perform the contract. When a contract is frustrated, it is automatically terminated, and the parties are released from their obligations.

In summary, vitiation of a contract refers to the invalidation or nullification of a contract due to defects such as misrepresentation, duress, undue influence, mistake, lack of capacity, or illegality. These defects undermine the contract’s integrity, making it unenforceable or voidable.

Consequences of Vitiation of Contracts

Vitiation of a contract means there are fundamental problems that render the contract unenforceable. Listed below are the most common consequences when contracts are vitiated:

1. The contract becomes void or voidable: Voidable or void contracts are treated as if they never existed. Neither party is bound by its terms, and they have no obligations to each other under this contract. A voidable contract is initially valid and enforceable but can be declared void by one of the parties if he or she chooses to do so. Usually, the affected party (e.g. the misled party) has the right to void the contract.

2. Rescission: This is the cancellation of the contract, with the aim of restoring the parties to their original positions before the contract was made. Any benefits or money exchanged under the contract are returned to the respective parties.

This process aims to undo the contract as if it never happened or existed.

3. Compensation for losses: There are instances where the injured party suffering from the vitiation may be entitled to compensation for losses incurred. A court may award damages to the affected party to cover any financial losses resulting from entering into the invalid contract.

4. Release from obligations: This is a situation where both parties are released from any future obligations under the contract. They no longer have to perform any duties or tasks stipulated in the invalidated contract. Usually, both parties must agree to release one another.

5. Legal consequences: Depending on the nature of the defect (e.g., fraud, misrepresentation), there may be legal consequences for the party at fault. The legal consequences may be to face legal actions, penalties, or other sanctions as determined by the court.

6. Specific performance: The court may order specific performance, which is an order requiring the party to perform their contractual obligations in the event of a breach of contract

7. Reformation: The court may reform the contract to reflect the parties’ true intentions. If these were not clear at the time of contract, this, can lead to facilitation by the courts to set the terms and conditions again for the parties.

Activity 2.12

Vitiation of Contracts and its Consequences Imagine a person buys a house based on the seller’s false claim that the house is free from structural defects.

Later, the buyer discovers significant issues with the house’s foundation.

This case is subject to vitiating factors that affect the validity of the original contract.

1. What you think are the consequences of vitiation in this example?

2. Engage in a discussion with your classmates on the consequence of vitiation in this example. How do you and your colleagues justify your answers?

3. Take notes of the discussion in your workbooks.

4. Try to think of three other examples of how and why a contract could be vitiated and analyse the consequences for the parties involved.

Activity 2.13

Vitiation of Contracts and its Consequences

1. Research the answers to the following questions.

a. In what ways can a contract be vitiated?

b. How does misrepresentation lead to the vitiation of a contract?

c. Explain the difference between a void and a voidable contract.

d. What are the consequences for the parties involved when a contract is vitiated due to duress?

e. Evaluate the effectiveness of rescission as a remedy for vitiation of contract and suggest alternative remedies that can be applied and the circumstances in which each would be appropriate.

2. Prepare a report on your findings and submit it to your teacher for review and feedback. Make sure to acknowledge your sources of information where necessary

Activity 2.14

Vitiation of Contracts and its Consequences Working in small groups, analyse the following case study.

HECTOR DEVELOPERS LIMITED

Madam Sena, a 62-year-old retiree, signed a contract with Hector Developers to build an extension on her house. The contract price was GH¢200,000, with a completion date of 12 months. Madam Sena paid a 50% deposit upfront.

The company was recommended to Madam Sena by her grand-daughter who encouraged her to sign the contract without thoroughly reading it because she knew the owners. There were unfair clauses in the agreement stating that Madam Sena would forfeit her deposit if she terminated the contract. Hector Developers started the construction without obtaining necessary building permits. Two months on, Madam Sena discovered the unfair clause in the contract and the lack of building permits.

Questions for discussion:

1. What is the impact of Madam Sena’s grand-daughter’s influence on her decision to sign the contract.

2. Can Madam Sena terminate the contract due to undue influence?

3. Is the contract vitiated by the unfair clause?

4. Can Madam Sena recover her deposit?

Task Summarise your responses and make a poster or PowerPoint presentation to the class for review.

Activity 2.15

Self-Assessment Answer at least one of the following questions to support the review of your learning from this lesson.

1. Analyse the factors which lead to vitiation of contracts.

Discharge of contract can be simply referred to as the ending of a contract. It is the termination of a contract which means that all parties to the contract have been released or freed from their obligations and responsibility created in the contract.

There are several ways contracts may be discharged and some of them include:

Ways to Discharge a Contract

₁. Performance: Performance as a way of discharging a contract refers to the fulfilment of contractual obligations by one or all parties in the contract. For

example, you hire the services of a bricklayer to build a house for you, and the builder was able to complete the job to your satisfaction. This means, the contract is discharged by performance.

2. Breach: Breach of a contract is if one party fails to fulfil their obligations and the breach is significant enough to justify termination. For instance, if a bricklayer does not complete the house as specified in the contract, the other party may consider the contract discharged due to breach.

3. Agreement: This is a situation where the parties agree to end the contract, either by mutual consent or by creating a new contract that replaces the old one.

For example, if both parties agree to cancel a contract for a service that is no longer needed, the contract is discharged by agreement.

4. Frustration: Discharge of contract by frustration is when an unforeseen event makes it impossible to fulfil the contract and neither party is at fault. For

example, if a musician is contracted to entertain people at a particular concert venue which on the day is flooded due to heavy rain, the contract is discharged by frustration.

5. Operation of Law: In some cases, legal events can automatically discharge a contract, such as bankruptcy or changes in the law that make the contract illegal. For instance, if a new law prohibits mining at a particular place or forest, the contract is discharged by operation of law.

6. Novation: This is where the original contract is replaced by a new contract, with the agreement of all parties involved, effectively discharging the original contract. For example, if a tenant transfers their lease to a new tenant and the landlord agrees, the original lease is discharged by novation.

Activity 2.16

Discharge of Contracts

Consider the following scenario:

You have contracted a seamstress to make you two new sets of school uniform. They have completed the work; you have collected the uniform and paid her the amount agreed.

What would happen to the contract?

Form a pair with a colleague and discuss your answer on how this contract has been discharged.

Create three alternative versions of this scenario that would lead to the contract being discharged in another way and record these in your workbooks.

Share your responses as part of a wider class discussion.

Activity 2.15

Discharge of Contracts

1. In groups, consider the following questions:

a. What does the discharge of a contract mean?

b. What can lead to the discharge of contracts?

c. How does the discharge of a contract by performance differ from discharge by agreement?

d. What does it mean for a contract to be discharged due to frustration? Give an example.

e. What are the legal effects of discharging a contract due to a breach?

f. What are the obligations of the parties to a contract when a contract is discharged?

g. What is the impact of the discharge of a contract by novation on the original contracting parties and the new party?

h. What are the conditions under which a contract can be discharged by operation of law? Provide examples of such conditions.

2. Assign a set of questions to each member of the group to research and answer.

3. Collate your responses in a short report and share with the group as a reference sheet to support the revision of your learning in this lesson.

Activity 2.16

Discharge of Contracts

In groups, analyse the case study and answer the questions that follow.

Mr. Asigri, an event planner, entered into a contract with Mr. Frimpong, a musician, to perform at a wedding reception. They agreed on a performance date, specific songs, and payment terms. However, several issues arose as the event date approached:

1. Mr. Asigri completed all preparations for the event, but Mr. Frimpong notified him a day before the event that he was unwell and could not perform. Mr. Asigri had already paid him half of the agreed amount as a deposit.

2. Mr. Asigri managed to find a replacement musician, but he now wants to claim damages from Mr. Frimpong for breaching their contract by cancelling at the last minute.

3. Mr. Frimpong proposes to Mr. Asigri that instead of paying back the deposit, he will perform at a different event for him in the future. Mr. Asigri is considering this offer as an alternative arrangement.

4. On the day of the wedding, severe weather caused a citywide power outage, makes it impossible to hold the reception as planned. Mr. Asigri and Mr.

Frimpong are now unsure if the contract is still binding or if it has been “frustrated” by this unforeseen event.

5. Mr. Frimpong recently declared bankruptcy due to financial struggles. Mr.

Asigri wonders if this could affect his ability to fulfil any future agreements.

6. Mr. Frimpong suggests that his friend, another skilled musician, could take over his responsibilities and perform at Mr. Asigri’s next event, if he agrees.

Questions for Discussion:

a. How does Mr. Frimpong’s inability to perform due to illness impact Mr.

Asigri’s rights under the contract?

b. What remedies might Mr. Asigri pursue due to Mr. Frimpong’s breach, and what could he claim in terms of damages?

c. Would Mr. Asigri’s acceptance of Mr. Frimpong’s offer to perform at a future event constitute an agreement to discharge the original contract? Justify your answer.

d. How might the principle of frustration apply to discharge the contract between Mr. Asigri and Mr. Frimpong?

e. Given Mr. Frimpong’s bankruptcy, does Mr. Asigri have grounds to consider the contract discharged?

f. If Mr. Asigri agrees to have Mr. Frimpong’s friend perform at their next event, would this constitute a novation? Justify your answer.

Task:

Make notes on the groups’ responses to each of the questions you’ve discussed.

Summarise your responses on a flip chat and present this to the class for discussion and feedback.

Activity 2.17

Self-Assessment Answer at least one of the following questions to review your learning from this lesson.

1. Explain the term “discharge of contract”.

2. Identify the ways in which a contract can be discharged.

3. Discuss how a contract can be discharged.

4. Write short notes on Sumptor vrs Hedges (1898)

In todays’ fast changing business environment, uncertainties are inevitable.

Organisations face numerous risk that can impact their operations, finances and reputations. Thus, our study of business risk and risk management is important for us as potential business leaders and decision makers. Understanding business risk, risk management and insurance is very important as it is the basis for strategic planning and operational endurance in business. This section will examine the meaning of business risk, its types, how to manage business risk, meaning of insurance and its principles as well as explain the types of insurance, insurance policies and importance of insurance.

Key Ideas

• Business risk: These are unfavourable outcomes that affect an organisations’ operations, finances and reputation.

• Insurance: This is a financial protection plan that transfers risk from the insured to the insurer.

• Risk management: This is a systematic process to identify, assess and prevent, as well as monitor risk to minimise potential losses.

Business risk is a possible threat to a business that can have a significant impact on an organisation’s financial performance, growth and long-term sustainability. Effective risk management involves identifying, assessing and mitigating these risks to minimise potential losses and maximise opportunities. It is therefore important for learners to be aware of the risks associated with businesses as well as develop skills in how to manage these risks for the survival and growth of businesses.

Meaning of Business Risk

Business risk refers to the potential for financial loss or harm to an organisation’s assets, reputation, or profitability due to uncertainties and unexpected events that affect its operations. For example, a company may face reduced sales and profitability during a recession or lose assets due to a fire outbreak.

Types of Business Risk

Types of business risk include:

1. Market risk: Changes in market conditions, demand, or competition can lower the profits and fortunes of a company

2. Credit risk: Default or non-payment by customers or debtors can affect the operations of business.

3. Operational risk: Disruptions to business operations, such as supply chain issues or technology failures.

4. Financial risk: Risks related to financial management, investments, or funding.

5. Strategic risk: Risks associated with poor business strategy, planning, or decision- making.

6. Compliance risk: Non-compliance with laws, regulations, or standards can have an adverse effect on the operations of business due to sanctions and other legal actions against the business

7. Cybersecurity risk: Risks related to data breaches, hacking, or other cyber threats.

8. Environmental risk: Risks related to environmental factors, such as natural disasters or climate change.

9. Political risk: Risks related to political instability, changes in laws, or government actions.

10. Reputational Risk: These are risks related to damage of a company’s reputation, affecting customer trust and loyalty. For example, negative publicity about a company can damage its reputation.

Meaning of Risk Management

Risk management is the process of identifying, assessing and taking steps to minimise or control potential problems that could negatively affect an organisation or project.

This involves understanding what risks exist, how likely they are to happen and what impact they could have, then taking actions to prevent or reduce these risks.

How to Manage Business Risk

These are some effective ways to manage business risk:

1. Risk Assessment and Analysis: Systematically scanning to identify all potential risks that could affect the business and assessing the potential impact and likelihood of the occurrence of each risk.

2. Diversification: Diversify the range of products or services offered to reduce dependence on any single revenue stream. Expand the business into different markets or geographical regions to spread risk.

3. Insurance: Transfer risk to insurance companies to mitigate potential losses by insuring the business against risks such as theft, accidents, injuries, fire and other natural disasters.

4. Risk Avoidance: Businesses can manage risk by totally eliminating or avoiding risky activities or investments.

5. Risk Mitigation: Implement controls and safeguards to reduce risk likelihood or impact. Prepare for natural disasters, cyber-attacks and other emergencies with detailed recovery procedures.

6. Strong Internal Controls: Develop clear policies and procedures to ensure consistent and efficient operations. Regularly conduct internal and external audits to identify and rectify weaknesses.

7. Legal and Regulatory Compliance: Ensure compliance with laws and regulations relevant to the business and implement programmes to ensure adherence to legal requirements and industry standards.

8. Implement Technology and Cybersecurity: Utilise technology to enhance efficiency and reduce operational risks as well as implement robust cybersecurity practices to protect against breaches and cyber-attacks on the business database.

9. Financial Management: Institute effective financial management systems and control in order to maintain adequate cash reserves to handle unexpected expenses or downturns. Also, monitor and manage debt levels to avoid over- leveraging and financial strain.

Activity 3.1

Meaning of risk Take part in a group discussion with your peers on the meaning of risk. In your groups consider:

1. Times when you have faced risk and how you managed this. What was the outcome?

2. Examples of risk in business. You may use digital tools such as tablets to research the different types of risk to support your discussion.

Brainstorm the outcomes of your discussion and share as part of a wider class discussion.

Activity 3.2

Business Risk, Its Types and How to Manage It

1. Organise yourselves into groups of not more than five. In your groups, analyse the scenario below and answer the questions that follows:

MFS JEWELLERY is a business located in Nyamebekyere and owned by Ms Akua Anuonyam. MFS is known for the quality and affordability of its jewellery. However, the owner is worried about possible risks affecting her business.

One evening a fire breaks out in the shop due to an electrical fault. The fire damages the jewellery, equipment and disrupts operations. Meanwhile, a competitor, “BE YOU JEWELLERY” is offering discounts to the customers of MFS.

As a business consultant:

a. Identify and analyse the risks faced by MFS.

b. Recommend strategies to manage the risks faced by MFS.

2. Record your answers on a flip chart and present your findings to the class.

Activity 3.2

Self-Assessment Answer at least one of the following questions to support the review of your learning from this lesson:

1. Explain the term “business risk”.

2. Summarise the types of business risk.

3. Explain the concept of risk management.

4. Discuss ways of managing business risk.

Meaning of Insurance

Insurance is a financial protection plan between an individual or organisation (the insured) and an insurance company (the insurer) in which the insured pays regular premiums in exchange for the insurer’s promise to compensate them for specific financial losses or damages that may occur under certain conditions.

Principles of Insurance

Insurance operates on several fundamental principles that ensure fairness, reliability and legal enforceability. Understanding these principles helps in grasping how insurance works and why it is structured in certain ways. These are summarised in

Table 3.1.

Table 3.1: Principles of Insurance

Principle What does this mean? Example Utmost Good Faith (Uberrima Fides) Both the insurer and the insured must act honestly and disclose all relevant facts.

When applying for health insurance, the applicant must disclose any pre-existing medical conditions truthfully.

Insurable Interest

The insured must have a financial interest in the subject matter of the insurance.

This means they must suffer a financial loss if an insured event occurs.

You can insure your own house against fire, but you cannot insure your neighbour’s house because you do not have an insurable interest in it.

Indemnity Insurance is meant to restore the insured to their original financial position before the loss occurred, without allowing them to profit from the insurance.

If your car is damaged in an accident, the insurance will cover the repair costs, but not more than the car’s value.

Contribution If the insured has multiple insurance policies covering the same risk, they cannot claim the full amount from each policy.

Instead, each insurer will contribute to the loss proportionately.

If you have two health insurance policies, both insurers will share the cost of the medical expenses proportionately.

Subrogation After compensating the insured for a loss, the insurer acquires the legal rights to pursue recovery from third parties responsible for the loss.

If your car is damaged due to another driver’s negligence, your insurer can pay for the repairs and then seek reimbursement from the negligent driver or their insurer.

Principle What does this mean? Example Loss Minimisation/ Mitigation The insured must take reasonable steps to minimise the loss or damage to the insured property.

If a pipe bursts in your home, you are expected to take immediate action to stop the water flow and minimise damage, such as turning off the main water supply Causa Proxima (Proximate Cause) The cause of loss must be closely connected to the event covered by the insurance policy.

The insurer is liable for losses directly resulting from the insured risk.

If an insured ship sinks due to a storm (covered peril), the insurer will compensate for the loss, but if it sinks due to improper maintenance (not covered), the insurer may deny the claim.

Activity 3.3

Principles of Insurance

Take part in a class discussion on the meaning of insurance and the principles that underpin its use.

Record your own definition of key terms in your workbooks to include;

1. Insurance

2. Premium

3. Claim

4. Indemnity

5. Subrogation

6. Proximate cause

Activity 3.4

Principles of Insurance

1. Organise yourselves into groups of not more than five. Your teacher will assign a scenario to you that involves insurance claim.

2. Assign roles within your group and perform your role play for the class.

3. Observe others’ role plays and make notes on how they illustrate the principles of insurance.

4. Take part in a wider class discussion to feedback on each other’s performances.

Activity 3.5

Meaning of Insurance and Its Principles

1. In pairs, read the case below Mr. Amoah-Frempong is married with three children and is troubled about securing the family’s financial future. Mr. Amoah-Frempong’s friend recently passed away due to a short illness, leaving his family with major financial burdens. This urged Mr. Amoah-Frempong to consider insurance options.

As an insurance consultants help Mr. Amoah-Frempongs to understand the following:

a. The concept of insurance.

b. The principles of insurance and how it can affect the financial insurance decision he wants to take

2. Present your answers in a book to your teacher for feedback.

Activity 3.5

Self-Assessment Answer at least one of the following questions to support the review of your learning from this lesson so far:

1. Explain the meaning of insurance.

2. State the principles of insurance.

3. Describe the principles of insurance.

Insurance is a crucial aspect of financial planning and risk management. It provides protection against unforeseen events and financial losses. Understanding the various types of insurance and insurance policies is essential for both individuals and businesses.

This section will explore the different types of insurance, and the policies associated with them, focusing on their importance and relevance in the Ghanaian context.

Types of Insurance and Insurance Policies

Figure 3.1: Types of insurance at a glance.

1. Life Assurance is a type of insurance that provides a financial benefit to a designated beneficiary upon the death of the insured person. Life insurance serves as financial protection for the insured person’s family or dependents in the event of their death. It helps ensure that loved ones are financially supported after the insured’s passing. Key policies under life insurance are:

a. Term Life Insurance: This policy provides coverage for a specified term, such as 10, 20, or 30 years. If the policyholder dies within the term, the beneficiaries receive a death benefit. It is typically more affordable than permanent life insurance.

b. Whole Life Insurance: This policy offers lifelong coverage with a fixed premium and a cash value component that grows over time. It combines a death benefit with a savings component.

c. Endowment Policies: These policies pay out a lump sum after a specific term or upon the policyholder’s death, whichever comes first. They are often used as a savings vehicle for future financial goals

2. Health Insurance is a type of insurance coverage that pays for medical and surgical expenses incurred by the insured individual. Health insurance covers various medical costs, including hospitalisation, doctor visits, surgeries, prescription medications and laboratory tests. Some plans include coverage for preventive services such as vaccinations, screenings and wellness visits. Again, other health insurance plans provide coverage for mental health services and treatment for substance abuse disorders. Some policies under Health Insurance are:

a. Individual Health Insurance: Covers medical expenses for illnesses and injuries for an individual or a person. It can include hospitalisation, outpatient services and prescription drugs.

b. Group Health Insurance: Typically provided by employers, this policy covers a group of people under one contract. It often offers broader coverage and lower premiums compared to individual health insurance.

c. National Health Insurance Scheme (NHIS): In Ghana, NHIS provides basic healthcare coverage to citizens, aiming to make healthcare accessible and affordable.

3. Property Insurance is a type of insurance that provides financial reimbursement to the owner or renter of a structure and its contents in the event of damage or theft. This insurance protects the physical structure of the property, including the home and attached structures (e.g., garage, porch). Also, it covers personal belongings inside the property, such as furniture, appliances, clothing and electronics. Some policies include:

a. Homeowners’ Insurance: Covers damages to a home and its contents due to risks like fire, theft and natural disasters. It also provides liability coverage for accidents that occur on the property.

b. Renters’ Insurance: Protects tenants against loss or damage to personal belongings within a rented property. It may also include liability coverage.

Figure 3.2: Picture illustrating property insurance https://www.shutterstock.com/image-vector/house-insur- ance-business-service-isometric-icons-363496262

4. Automobile Insurance is a type of insurance coverage that provides financial protection against physical damage or bodily injury resulting from traffic collisions and other incidents involving vehicles. This insurance covers bodily injury and property damage that the insured driver causes to others. It includes legal defence costs if the insured is sued. Also, it pays for repairs or replacement of the insured vehicle if it’s damaged in a collision with another vehicle or object. It covers damage to the insured vehicle from non-collision incidents, such as theft, vandalism, fire, hail, or hitting an animal. In addition, it protects the insured driver if they are involved in an accident with a driver who has insufficient or no insurance coverage. Some policies under this are:

a. Third-Party Insurance: Mandatory in Ghana, this policy covers damages and injuries caused to third parties in an accident. It does not cover the policyholder’s vehicle.

b. Comprehensive Insurance: Provides coverage for both third-party damages and the policyholder’s vehicle. It includes protection against theft, fire and other risks.

Figure 3.3: Picture illustrating automobile insurance https://www.shutterstock.com/image-vector/car-insurance-business-character-icons-template-260811437

5. Business Insurance encompasses various types of insurance policies designed to protect businesses from financial losses related to unexpected events or risks.

Insurance Policies under business are:

a. General Liability Insurance: Covers legal expenses and damages resulting from claims of bodily injury, property damage, or personal injury caused by the business’s operations, products, or services.

b. Property Insurance: Protects business property, including buildings, equipment, inventory and fixtures, against damage or loss due to fire, theft, vandalism, or other covered perils.

c. Commercial Auto Insurance: Provides coverage for vehicles used in business operations, including liability for bodily injury and property damage caused by business-owned vehicles.

d. Workers’ Compensation Insurance: Covers medical expenses, lost wages and rehabilitation costs for employees injured or ill due to work-related

activities. It also provides benefits to dependents of workers who die from work-related incidents.

e. Business Interruption Insurance: Compensates for lost income and helps cover operating expenses if a covered peril (such as fire or natural disaster) disrupts business operations.

f. Professional Liability Insurance (Errors & Omissions Insurance):

Protects professionals (e.g., doctors, lawyers, consultants) against claims of negligence, errors, or omissions in services provided to clients.

g. Cyber Liability Insurance: Covers expenses related to data breaches, cyberattacks and other cyber threats that result in loss of data, business interruption, or liability to third parties.

Figure 3.4: Picture illustrating business insurance https://www.istockphoto.com/vector/central-bank-money-policy-for-inflation-or-interest-rate-balance-be- tween-profit-and-gm1325397752-410435980?searchscope=image%2Cfilm

6. Travel Insurance is insurance designed to protect travellers from financial losses and assist with medical expenses incurred during domestic or international trips. It covers trip cancellation or interruption costs due to illness, injury, or natural disasters. Travel Insurance further includes coverage for extra expenses like accommodations and meals due to travel delays caused by weather or airline issues. The policy types under travel insurance are:

a. Single Trip Insurance: Provides coverage for medical expenses, trip cancellation, lost luggage and other risks associated with a single trip.

b. Multi-Trip Insurance: Offers coverage for multiple trips within a specified period, usually a year. It is ideal for frequent travellers.

Figure 3.5: Picture illustrating travel insurance https://www.shutterstock.com/image-photo/travel-insurance-transportation-aviation-concept-top-721313806 Key Components of an Insurance Policy An insurance policy is a contract between the insurer and the insured, outlining the terms and conditions of the coverage. Some key components of an insurance policy include:

1. Policyholder Information: Details of the person or entity purchasing the insurance, including name, address and contact information.

2. Insurer Information: Details of the insurance company providing the coverage.

3. Coverage Details: A description of the risks covered by the policy, including the scope and limits of coverage.

4. Premium: The amount the policyholder must pay for the insurance coverage, including payment frequency (e.g., monthly, annually).

5. Deductible: The amount the policyholder must pay out-of-pocket before the insurer pays for a covered claim.

6. Policy Term: The duration of the coverage, specifying the start and end dates.

7. Exclusions: A list of risks or events not covered by the policy.

8. Claims Process: Instructions on how to file a claim, including required documentation and timelines.

9. Policy Renewal: Information on how to renew the policy at the end of the term.

10. Cancellation Terms: Conditions under which the policy can be cancelled by either the insurer or the policyholder.

Activity 3.6

Key Components of Insurance Policy

1. Copy the table below into your book.

2. Study the description of insurance terms in the table which are key components of insurance policies.

3. From the list of insurance terms provided below the table, choose the insurance term that best fits each description and write it in front of the description at the terminology column of Table 3.2.

Table 3.2: Components of an Insurance Policy

S/N DESCRIPTION TERMINOLOGY

The rules and conditions under which either the policyholder or insurer may end the policy, along with any applicable fees or notice periods.

Step-by-step instructions on how to make a claim, including necessary forms, required information, and submission deadlines.

The period for which the insurance is active, specifying the exact start and end dates of the coverage.

The identifying information of the insurance company that is offering the protection, including its name and contact information.

The cost the policyholder must pay to maintain the insurance, along with the schedule of payments (e.g., monthly, quarterly, yearly).

Guidance on extending the coverage at the end of the policy term, explaining renewal options and any steps required.

A summary of what is protected under the policy, outlining the types of risks, limits, and any conditions of the coverage.

The personal or business details of the individual or entity buying the insurance, such as their full name, address, and contact details.

The portion of a claim the policyholder is responsible for paying before the insurance company begins to cover the remaining expenses.

Specific conditions or events that are not included in the policy, detailing what is not covered by the insurance.

I. Policyholder Information

II. Insurer Information

III. Coverage Details

IV. Premium

V. Deductible

VI. Policy Term

VII. Exclusions

VIII. Claims Process

IX. Policy Renewal

X. Cancellation Terms

Activity 3.7

Types of insurance Organise yourselves into groups of not more than five. Your teacher will assign a type of insurance to each group from the list below:

a. Life insurance

b. Travel insurance

c. Property insurance

d. Health insurance

e. Business insurance

f. Automobile insurance Research your assigned type of insurance, including its scope and the different kinds of policy available.

Prepare a short presentation on your type of insurance and deliver this to the class for discussion and feedback.

Activity 3.8

Types of Insurance and Insurance Policies

1. Mr. Thomas Musah is ready to take out insurance cover for his family and transport business. Mr Musah has a wife and two children at Senior High School and his elderly mother also lives at home with them. His transport business has a fleet of six vehicles and delivers goods across the Eastern and Central regions. As an insurance agent guide him to understand the different types of insurance available to his business and family.

2. Write down your response and make a PowerPoint presentation to your colleagues in class for feedback.

Activity 3.9

Principles of Insurance

1. Organise yourselves into groups of not more than five. Your teacher will assign you a scenario that involves either applying for insurance and negotiating cover or making a claim.

2. Assign roles within your group and perform your role play for the class.

3. Observe others’ role plays and make notes on how they illustrate the principles of insurance.

4. Take part in a wider class discussion to feedback on each other’s performances.

Activity 3.9

Principles of Insurance in Real life

1. Your teacher may invite an industry expert to the class to talk to you about insurance and provide insight on how the principles you have learned are applied in real world.

2. Think of some questions you would like to ask them and record them in your workbook.

3. If a professional is not able to come to the school, you could speak to a career officer or guidance teacher to find out more about working in this field.

Activity 3.10

Self - Assessment Answer at least one of the following questions to support the review of your learning from this lesson:

1. Discuss the types of insurance

2. Discuss insurance policies and key components of insurance policies.

Importance of Insurance

The importance of insurance cannot be overstated. It provides essential financial protection, promotes peace of mind and plays a vital role in risk management. Listed below are some of the key reasons why insurance is important both for business and life in general.

Table 3.2: Importance of Insurance

Reason Explanation

Peace of Mind Having insurance coverage offers peace of mind, knowing that there is a safety net in place for various risks. This sense of security allows individuals to focus on their daily activities without constantly worrying about potential financial setbacks.

Risk Management Insurance is a critical tool for managing risk. By transferring the financial burden of potential losses to an insurance company, individuals and businesses can mitigate the impact of unforeseen events. This is particularly important for businesses that face risks such as property damage, liability claims and business interruptions.

Encourages Savings Some insurance policies, like life insurance and certain health insurance plans, have a savings component. These policies not only provide coverage but also help in building a financial corpus over time, encouraging disciplined saving habits.

Legal Requirements In many cases, insurance is a legal requirement. For example, auto insurance is mandatory in most countries to ensure that drivers can cover the costs associated with accidents. Similarly, employers are often required to provide workers’ compensation insurance to protect employees in case of work-related injuries.

Social and Economic

Stability Insurance contributes to the overall stability of society by providing a mechanism to cope with losses. It helps maintain economic stability by preventing individuals and businesses from falling into financial distress due to unexpected events. Insurance companies also play a significant role in the economy by investing premiums in various sectors, thereby fostering economic growth.

Support for Education For educators, understanding insurance can help in teaching learners about financial literacy and risk management. By incorporating lessons on insurance into the curriculum, teachers can prepare learners to make informed decisions about their financial futures.

Challenges/Limitations of Taking Insurance Policies

While insurance provides essential protection against various risks and uncertainties, it is important to be aware of its challenges and limitations. Some of the challenges and limitations of insurance include:

Table 3.3: Challenges/Limitations of Taking Insurance Policies

Challenge or

limitation Explanation Cost of Premium Insurance premiums can be expensive, particularly for comprehensive coverage or policies with lower deductibles. This can make it challenging for individuals and small businesses to afford adequate insurance. Insurance premiums can increase over time due to factors such as inflation, increased risk, or claims history, making it difficult to maintain consistent coverage.

Coverage Exclusions and

Limitations Insurance policies often contain exclusions that outline specific situations or events that are not covered. These exclusions can leave policyholders unprotected in certain scenarios. For example, health insurance may have limits on certain treatments or procedures and property insurance may have caps on the amount reimbursed for damages.

Complexity of

Policies Insurance policies can be complex and filled with legal jargon, making it difficult for policyholders to fully understand the terms and conditions. The process of filing a claim can be complicated and time-consuming, requiring extensive documentation and communication with the insurer.

Moral Hazard and

Adverse Selection

The presence of insurance can sometimes lead to riskier behaviour by policyholders, who may feel less incentivised to avoid losses because they are covered by insurance. Insurers may face adverse selection, where individuals with higher risk are more likely to purchase insurance, leading to a pool of policyholders that is riskier than the general population.

Delayed Payouts The time it takes for insurance companies to process claims and make payouts can be lengthy, causing financial strain for policyholders who need immediate assistance.

Lack of Flexibility Insurance policies may lack flexibility in terms of coverage options and may not adapt well to changing circumstances or needs of the policyholder. Some policies may have stringent renewal terms and changes in the policyholder’s health, lifestyle, or risk profile can affect their ability to renew coverage.

Challenge or

limitation Explanation Fraud and Misrepresentation Fraudulent claims and misrepresentation by policyholders and sometimes insurers can lead to increased costs for insurers, which are often passed on to consumers through higher premiums.

Insurers themselves may sometimes engage in unethical practices, such as misleading marketing or denial of legitimate claims, which can erode trust in the insurance industry.

Activity 3.11

Challenges/Limitation of Insurance

1. Copy the table into your book

2. Study the statements which relate to the challenges or limitations of taking out insurance policies.

3. In the column with the heading “AGREE/DISAGREE”, write “AGREE” if the statement is true about the challenges of taking insurance or “DISAGREE” if the statement is false about the challenges of taking insurance

Table 3.4: Challenges/Limitation of Insurance

STATEMENT AGREE/

DISAGREE a Once you sign up for a policy, you can’t change or cancel it.

b Insurance premiums can be high, making policies unaffordable for some.

c Insurance only benefits the wealthy and is inaccessible to average people.

d Policyholders can lose coverage if they miss premium payments.

e Insurers may dispute claims based on minor policy technicalities.

f Insurance policies automatically cover any personal belongings without listing them.

g It takes decades for any insurance policy to pay out a claim.

h There can be high surrender charges if you cancel a policy early.

i Only very high-income earners qualify for life insurance.

j Waiting periods may apply before coverage kicks in, especially for new policies.

STATEMENT AGREE/

DISAGREE k Premiums may increase over time, especially with age or health changes l Insurance does not cover natural disasters.

m Policies often come with exclusions, leaving certain risks uncovered n Insurance policies cover absolutely every type of loss without exceptions.

o Some policies have strict eligibility criteria, excluding certain individuals.

Activity 3.12

Benefits and Limitations of Insurance

Read the following case study and analyse the benefits and limitations of the insurance chosen by SunPower Solutions.

Working in groups, summarise the benefits and limitations in this case and present your reasoning to the class for discussion and feedback.

Case Study: SunPower Solutions

Background: SunPower Solutions designs and installs solar panels for residential and commercial properties. They have decided to take out a comprehensive business insurance policy to cover potential risks, including property damage, liability, and business interruption.

Policy: SunPower Solutions chose a policy that included:

1. Property Insurance: To cover damage to their office and equipment.

2. Liability Insurance: To protect against claims of injury or damage caused by their services.

3. Business Interruption Insurance: To cover lost income if their business operations were disrupted.

Incident: In 2023, a severe storm caused significant damage to their office and warehouse, resulting in a temporary halt in operations. The storm also damaged several solar panels that were ready for installation.

Activity 3.13

Self-Assessment Answer at least one of the following questions to support the review of your learning in this lesson:

1. Discuss the importance of taking out insurance policies

2. Analyse the challenges and limitations of insurance policies.