DISTANCE

LEARNING CENTRE
AHMADU BELLO UNIVERSITY
ZARIA, NIGERIA

COURSE MATERIAL

MASTER IN BUSINESS ADMINISTRATION (MBA)

BUAD 808: BUSINESS AND COMPANY LAW

 COPYRIGHT PAGE
© 2016 Distance Learning Centre, ABU Zaria, Nigeria

All rights reserved. No part of this publication may be reproduced in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise without the prior permission of the
Director, Distance Learning Centre, Ahmadu Bello University, Zaria, Nigeria.

First published 2016 in Nigeria

ISBN:

Published and printed in Nigeria by:

Ahmadu Bello University Press Ltd.
Ahmadu Bello University,
Zaria, Nigeria.

Tel: +234

E-mail:
 COURSE WRITERS/DEVELOPMENT TEAM
                                OLOWU, Daudu Yini Malachy    (PhD) (Subject Matter Experts) 
                                              Sandra Ekpot 
                                        Prof. Abiola Awosika       (Subject matter Reviewers) 
                                                                     Halima Shuaibu 
                                                   Yusuf Musa          (Language Reviewer) 
                 Ibrahim Otukoya       (Graphics) 
            Prof. Adamu Z. Hassan       (Editor 
 
 QUOTE
“Open and Distance Learning has the exceptional ability of meeting the challenges of the three
vectors of dilemma in education delivery – Access, Quality and Cost”
- Sir John Daniels
 TABLE OF CONTENT
Title Page ---------------------------------------------------------------------------------------------
Copyright----------------------------------------------------------------------------------------------
Quote--------------------------------------------------------------------------------------------------
Table of Content-------------------------------------------------------------------------------------
1.0 Course Information---------------------------------------------------------------------------
2.0 Course Description----------------------------------------------------------------------------
3.0 Course Introduction--------------------------------------------------------------------------
4.0 Course Outcomes-----------------------------------------------------------------------------
5.0 Activities to Meet Course Objectives----------------------------------------------------
6.0 Grading Criteria and Scale------------------------------------------------------------------
7.0 Course Structure and Outline--------------------------------------------------------------
8.0 Discussion Forum------------------------------------------------------------------------------
8.1 Topical Discussions------------------------------------------------------------------------------
8.2 Discussion Questions---------------------------------------------------------------------------
9.0 Study Modules---------------------------------------------------------------------------------
9.1 Module 1: Basic Concepts and Tools -----------------
Introduction-----------------------------------------------------------------------------------
9.1.1 Objectives----------------------------------------------------------------------
9.1.2 Study Sessions--------------------------------------------------------------------
9.1.2.1 Study Session 1: Introduction (Law, its Administration and Enforcement)
9.1.2.2 Study Session 2: Dispute Settlement
9.1.2.3 Study Session 3: Law of Contract
9.1.2.4 Study Session 4: Sale of Good
9.2 Module 2: Internal and External Influences on Consumer Behaviour -------------
Introduction----------------------------------------------------------------------------
9.2.1 Objectives------------------------------------------------------------------
9.2.2 Study Sessions------------------------------------------------------------------
9.2.2.1 Study Session 5: Agency and Employment
9.2.2.2 Study Session 6: Hire Purchase
9.2.2.3 Study Session 7: Instrument Negotiable and Notes
9.2.2.4 Study Session 8: Insurance
 9.3 Module 3: Consumer Decision Making ------------------------------
Introduction----------------------------------------------------------------------------
9.3.1 Objectives----------------------------------------------------------------------
9.3.2 Study Sessions--------------------------------------------------------------------
9.3.2.1 Study Session 9: Business Organisation
9.3.2.2 Study Session 10: Torts of Importance to Business
9.3.2.3 Study Session 11: Labour Relations
9.3.2.4 Study Session 12: Preventive and Regulatory Law
9.3.2.5 Study Session 13: Internet and International Law
10.0 Further Reading-------------------------------------------------------------------------------
11.0 Glossary-----------------------------------------------------------------------------------------

 
 
 
 
 
 
 
 
 
 
 
 
 
 PREAMBLE
Welcome to Business Law (BUAD 808)! I look forward to a rewarding time with
you. Every business manager needs to be aware of the legal environment in which
his/her business operates. The ability to welcome both change and development in
the legal environment is a key asset to today’s successful managers and businesses.
This course will introduce you to the important principles found in business law by
discussing such topics as laws of contract, agency, partnership, corporate,
securities, torts (antitrust), bankruptcy, intellectual property and other important
legal issues. This course will be of interest and useful to those of you who intend to
become professional managers, advisors to executive managers, board members, or
board advisors such as management consultants and investment bankers. It will
also be useful for those who would like a greater knowledge and understanding of
laws relating to business and commerce. Please note that the course will
concentrate primarily on English/Common law with some discussions on Nigeria
Legal System.

1.0 COURSE INFORMATION

Course Code: BUAD 808
Course Name: Business & Company Law
Credit: 3 Credit Units
Year of Study: One
Semester: First

Lecturer’s Information
Instructor: OLOWU, Daudu Yini Malachy (PhD)
Office Hours: Available any time from 7:00 – 4:00 GMT Mondays – Fridays.
Please e-mail me with any questions and I will respond within 48 hours.
Phone: +2348037019973, +2348059942852
E-mail: malaolowu@gmail.com

2.0 COURSE DESCRIPTION

Business Law as a course has set a standard for an easy-to-learning subject that
provides you with the tools for understanding the legal environment of business.
The course goes well beyond merely covering legal principles, rules and
regulations affecting business but offers insights into the Nigeria Legal System
new developments and trends that will greatly affect the future of businesses. The
course begins by investigating the essential features of law, fundamental
classifications of law, primary sources of law, hierarchy of Nigeria Courts and the
constitutional underpinnings of the Nigeria Legal System. A brief discussion
follows, of the predominant schools of legal philosophy in existence today, after
considering law of contract, agency, sale of goods and hire purchase. Then, this
discussion is followed by an introduction to company law, powers and functions of
Directors, and taxation laws. We will turn our attention to how law promotes
orderly change. The course closes by introducing you to the importance of
practicing preventive law, such as, sales and consumer protection law, personal
and real property protection law, and intellectual property protection law.

3.0 INTRODUCTION TO THE COURSE

Law is the cement of our society and also an essential medium of change and
development. The knowledge of law increases ones understanding of business and
public affairs. Its study promotes accuracy of expression, logical reasoning, facility
in argument and skill in interpreting the written word, as well as some
understanding of social values. It is of wider relevance than most Arts or Social
Science subjects. Its practice and application does, of course, call for much routine,
carefulness, and it is unexciting; and it is for you to decide whether you think you
are temperamentally suited to it. Law is an important component of our society; it
reflects the history, values and the current problems shaping our society. A good
understanding of the environment we work and the society we live in requires a
basic comprehension of the nature and function of our legal system. As future
managers, the need to understand the legal system has grown in importance. This is
reflected in the tremendous increase in the use of lawyers in our organisations and
society and the corresponding growth in their numbers. From the foregoing, it is
imperative for businessmen to have good knowledge of the principles of business
law notwithstanding of having legal staff. This course introduces and explains the
principles of business law in a clear and easy to understand ways.

4.0 COURSE OUTCOMES

Business Law focuses on applying, reinforcing and extending law concepts,
principles, rules, regulations and techniques through readings, courts decided cases
studies, and secondary research. This course is charged with addressing the
following objectives:
1. Integrate knowledge from the core areas of law and business.
2. Apply business law to business processes and business growth.
3. Communicate effectively, both orally and in writing using logical reasoning.

These objectives will be achieved through presentations, individual assignments,

and group work. The effectiveness at achieving these objectives will be assessed
through tests and evaluation of your performance with regard to presentations,
discussions, written work, and assignments. Getting somewhat more specific, the
primary aim of this course is to review, deepen, and broaden your understanding of
Business Law practices, and to allow you to gain experience in applying these to
real world problems.

After studying this course, you should be able to:

1. Link the essential feature of business laws to business practices.
2. Understand the constitutional underpinnings of the Nigeria Legal System.
3. Analyse the predominant schools of legal philosophy in existence today.
4. Appreciate how law promotes orderly change in business practices.
5. Appreciate the importance of practicing preventive law.

5.0 ACTIVITIES TO MEET COURSE OBJECTIVES

Our interest in this course is to understand how Business Law is structured and the
various principles regarding its relationships to business practices and their
important implications for managers. Group discussions will be run primarily as a
seminar with emphasis on discussing assigned readings, cases or other
assignments. Course materials/resources will provide the basis for much of the
work in this course. Each week course materials/resources will be provided with a
list of articles and court decided cases to be read along with required tasks and
case-related questions. You will be required to read and be fully prepared to
discuss the appropriate issues, view the cases in the course materials/resources
differently and to discuss each case from different perspectives to enhance the
quality of the study. Your participation will be judged by your contribution. The
weekly assignments are contained in the material below and responses to each
assignment as indicated are to be submitted accordingly. Also, tutorials will be
arranged within the two weeks on campus activities in which questions will be
clarified to enable you understand fully what you’ve learnt.
 6.0 GRADING CRITERIA AND SCALE
6.1 Grading Criteria
Grades will be based on the following Percentages
Individual assignments 10%
Group assignment/Discussion Question(s) 10%
Discussion Topic participation 10%
Quizzes/Other assignments 10%
Semester Examination 60%
TOTAL 100%

6.2 Grading Scale

A = 70 - 100
B = 60 - 69
C = 50 - 59
F = <49

As you work on your research in this course and throughout your

graduate programme, here are some examples of open education
resources that will serve you well:

Open education resources

OSS Watch provides tips for selecting open source, or for procuring free or open
software.

SchoolForge and SourceForge are good places to find, create, and publish open
software. SourceForge, for one, has millions of downloads each day.

Open Source Education Foundation and Open Source Initiative, and other organisations
like these, help disseminate knowledge.
Creative Commons has a number of open projects from Khan Academy to Curriki where
teachers and parents can find educational materials for children or learn about Creative
Commons licenses. Also, they recently launched the School of Open that offers courses
on the meaning, application, and impact of "openness."

Numerous open or open educational resource databases and search engines

exist. Some examples include:

 OEDb: over 10,000 free courses from universities as well as reviews of colleges and
rankings of college degree programmes
 Open Tapestry: over 100,000 open licensed online learning resources for an
academic and general audience
 OER Commons: over 40,000 open educational resources from elementary school
through to higher education; many of the elementary, middle, and high school
resources are aligned to the Common Core State Standards
 Open Content: a blog, definition, and game of open source as well as a friendly
search engine for open educational resources from MIT, Stanford, and other
universities with subject and description listings
 Academic Earth: over 1,500 video lectures from MIT, Stanford, Berkeley, Harvard,
Princeton, and Yale
 JISC: Joint Information Systems Committee works on behalf of UK higher education
and is involved in many open resources and open projects including digitising British
newspapers from 1620-1900!

Other sources for open education resources

Universities

 The University of Cambridge's guide on Open Educational Resources for Teacher

Education (ORBIT)
 OpenLearn from Open University in the UK

Global

 Unesco's searchable open database is a portal to worldwide courses and research

initiatives
 African Virtual University (http://oer.avu.org/) has numerous modules on subjects in
English, French, and Portuguese
 https://code.google.com/p/course-builder/ is Google's open source software that is
designed to let anyone create online education courses
 Global Voices (http://globalvoicesonline.org/) is an international community of
bloggers who report on blogs and citizen media from around the world, including on
open source and open educational resources

Individuals (which include OERs)

 Librarian Chick: everything from books to quizzes and videos here, includes
directories on open source and open educational resources
 K-12 Tech Tools: OERs, from art to special education
 Web 2.0: Cool Tools for Schools: audio and video tools
 Web 2.0 Guru: animation and various collections of free open source software
 Livebinders: search, create, or organise digital information binders by age, grade, or
subject (why re-invent the wheel?)

Legal help

 New Media Rights is trying to help digital creators use public domain or open
materials legally. They have guides on how to use free and open software materials
in various fields.
 7.0 COURSE STRUCTURE AND OUTLINE
7.1 Course Structure/Study Guide
STUDY
WEEK/DATE MODULE SESSIONS ACTIVITY
Weeks 1 & 2 RESUMPTION, REGISTRATION, ORIENTATION & REVIEW OF COURSE SITE
1.Study the course material of this session
Study Session 1: 2.Watch the video of this study session
Introduction to the 3.Listen to the audio of this study session
Law 4. Read Law for Business by Barnes, A. J.,
Dworkin, T. M. & Richards, E. L. and find out
Week 3: why predictability and adaptability are both
desirable in a body of law.
Week 4: Study Session 2: 1.Study the course material of this session
Dispute Settlement 2.Watch the video of this study session
3.Listen to the audio of this study session
4. Read: Metal Container (W.A.) Ltd. v.
Iyomifokhai (1959) L.L.R. 130 and Western
Nigeria Trading Co. v. Ajao (1965) N.M.L.R.
MODULE 1 178 for court problems and proposed solutions.
Week 5: Study Session 3: 1.Study the course material of this session
Law of Contract 2.Watch the video of this study session
3.Listen to the audio of this study session
4. Review of uploaded response to last week’s
INDIVIDUAL
ASSIGNMENT REMARKS
You are to write a 2-page paper on an Discussion Topic(s) shall be
area of sources and types of law that is of uploaded weekly while
interest to you and submit the thesis to Discussion Question(s)
the assigned forum where all participants is/are presented in the
will interact and pass comments to add to appropriate sections.
our knowledge. Assigned forum, where all
participants will interact and
pass comments to add to our
knowledge will be indicated
in the weekly upload.
Visit http:hg.org/adr.html. For
information about alternative dispute
resolution. Explain two types of ADR
and why these mechanisms are
increasingly being used. Explain the
basic idea behind the adversary system,
and what are some of its drawbacks?
Explain how appellate procedure does
differ from trial procedure.
1. With the aid of decided cases, discuss
the rules which apply to the acceptance of
an offer.
The decision established in the ruling in
 discussion question(s).
Week 6: Study Session 4: 1.Study the course material of this session
Sale of Goods 2.Watch the video of this study session
3.Listen to the audio of this study session
4. Access and study:
http://www.law.upenn.library/ulc.html.
Week 7: Study Session 5: 1.Study the course material of this session
Agency and 2.Watch the video of this study session
Employment 3.Listen to the audio of this study session
4. Visit the ABU Virtual Library or any library
of your choice and access any book on Business
Law in Nigeria and read the topic ‘Law of
Agency’
the case of Adam v Lindsell should it be
jettisoned in Nigeria or not.
2. HMJ Consultancy Ltd. writes to
appoint Isaac as a manager of the
company on a salary of N3.5 million per
annum. Isaac replies accepting the offer
and requested additionally that he should
be provided with a chauffeur-driven car.
HMJ Consultancy Ltd. later offered the
position to another candidate on the
waiting list after the interview. When
Isaac heard about the development, he
quickly informed the company that he
was willing to take the employment
without an official car. In the meantime,
the other candidate had accepted the offer
of HMJ Consultancy Ltd. Isaac is
planning to sue HMJ Consultancy Ltd.
for a breach of contract. Advise Isaac.
The site visited this week has all uniform
model laws and is a source of information
concerning possible future changes in the
contract of sale of goods. In your journal,
define the contract of sale of goods and
distinguish it from other contracts. Based
on your understanding, explain the issues
that are likely to affect its future changes.
Share your journal entries in the
designated forum.
In your journal:
Discuss the duties which an agent owes
to his principal.
“The doctrine of undisclosed principal is
anomalous, unjust and inconsistent with
elementary principles of contract”.
Discuss.
Week 8 Study Session 6: 1.Study the course material of this session
Hire Purchase 2.Watch the video of this study session
3.Listen to the audio of this study session
5. Visit the ABU Virtual Library or any other
library and access any book on Business Law in
MODULE 2 Nigeria or any book on Law of Business and
read the topic or chapter on ‘Hire Purchase’.
Week 9: Study Session 7: 1.Study the course material of this session
Instrument 2.Watch the video of this study session
Negotiable and 3.Listen to the audio of this study session
Notes 4. You are to access any of the following two
websites:
www.law.cornell.org/topics/negotiable/html. &
www.law.cornell.org/topics/banking/html of
your choice or the home page of Nigeria Bar
Association section of Business Law.
5. Review of uploaded response to last week’s
discussion question(s).
Week 10: Study Session 8: 1. Study the course material of this session
Insurance 2.Watch the video of this study session
3.Listen to the audio of this study session
4. You are to gather information, either from
precedence cases or from the statutes on
condition and warranties, and liabilities of
Principal and Agent in contract of insurance.
Week 11:
M I D S E M E S T E R
Week 12: Study Session 9: 1. Study the course material of this session
Business 2.Watch the video of this study session
Organisation 3.Listen to the audio of this study session
4. Visit the ABU Virtual Library or any library
of your choice and access any book on Business
Law in Nigeria or any book on Law of Business
and read the topic or chapter on ‘Business
MODULE 3 Organisation’.
Identify and discuss the three broad
reasons for the adoption of the hire
purchase system.
Distinguish between the tests for implied
and apparent authority. How does the
liability of the agent exercising implied
authority differ from the liability of the
agent exercising apparent authority?
From any of the two websites you visited
this week, identify and explain the
various kinds of benefits and formal
requirements of negotiable instruments.
With the aid of decided cases, discuss the
rules which govern the acceptance of
negotiable instruments.
With the aids of decided cases or statutes,
compare and contrast the conditions and
warranties as well as the liabilities of the
Principal and Agent in the contract of
insurance.
B R E A K
Discuss the principal factors that should
be considered in determining which form
of business organisation to use.
Musa entered into a five-year
employment contract with ABUCONS, a
company owned by ABU, Zaria. During
Musa employment, ABUCONS owned
some assets; however, it maintained
separate corporate and financial records

Week 13 Study Session 10: 1. Study the course material of this session
Torts of Importance 2.Watch the video of this study session
to Business 3.Listen to the audio of this study session
4. Read chapters 1-4 (pages 1-90). The Nigeria
Law of Torts by Kodilinye and Aluko.
Week 14: Study Session 11: 1. Study the course material of this session
Labour Relations 2.Watch the video of this study session
3.Listen to the audio of this study session
4. Visit the ABU Virtual Library or any other
library and access any book on Business Law in
Nigeria or any book on Law of Business and
read the topic or chapter on ‘Labour Relations’.
5. Review of uploaded response to last week’s
discussion question(s).
Week 15: Study Session 12: 1. Study the course material of this session
Preventive and 2.Watch the video of this study session
Regulatory Laws 3.Listen to the audio of this study session
4. Visit the ABU Virtual Library or any other
library and access any book on Business Law in
Nigeria or any book on Law of Business and
read the topic or chapter on ‘Internet and
International Laws’.
Week 16: Study Session 13: 1. Study the course material of this session
Internet and 2.Watch the video of this study session
International Laws 3.Listen to the audio of this study session
at ABU’s corporate offices. Because
ABUCONS often operated with a “zero
bank account” it frequently required
loans from ABU. When Musa was fired
from his position he sues ABU
(ABUCONS sole shareholder) for breach
of contract. Is ABU liable for
ABUCONS’s financial obligations to
Musa?
Explain the maxims ex turpicausa non
oritur action and in pari delicto portiorest
conditiodefendantis.
Explain what you understand by tortious
liability.
Highlight and discuss the future
challenges before the courts on the
“passing off” and “trade libel”
Draw from your own work experience or
an organisation that you have study,
discuss the pros and cons of having a
more diverse workforce. Is there a gap
between the principles underpinning the
labour relations examined in this study
unit? If there is a difference explain why.
From your own experience or on what
you have studied, if you hire a real estate
broker to sell your house, what must the
broker normally do to earn a
commission?
In your journal, explain the sources of
Internet and International Laws in the
Nigeria Legal System. How do they
differ from English Laws Jurisdiction
 over online activities?
Week 17 & 18
ON CAMPUS ACTIVITIES/TRAINING/TEACHING/ TUTORIALS

Week 19 REVISION

Week 20 & 21
SEMESTER EXAMINATION
7.2: Course Outline
MODULE 1
Study Session 1: Introduction (Law, its Administration and Enforcement)
Study Session 2: Dispute Settlement
Study Session 3: Law of Contract
Study Session 4: Sale of Good

MODULE 2
Study Session 5: Agency and Employment
Study Session 6: Hire Purchase
Study Session 7: Instrument Negotiable and Notes
Study Session 8: Insurance

MODULE 3
Study Session 9: Business Organisation
Study Session 10: Torts of Importance to Business
Study Session 11: Labour Relations
Study Session 12: Preventive and Regulatory Law
Study Session 13: Internet and International Law

8.0 DISCUSSION FORUM

You will be required to participate in two types of discussions:
 Group discussions with emphasis on discussing assigned readings, cases and
assignments.

19
  Individual participation: Each week's resource materials with a list of articles
to be read along with required tasks and case-related questions will be
provided. You will be required to read and discuss the appropriate issues.

8.1 Topical Discussions

These are weekly topics raised by me on a weekly basis. The topics will centre on
contemporary issues and/or current events in the discipline.

8.2 Discussion Question(s)

These are pre-determined topics to be assigned to you or in groups and you will be
required to develop a thesis around the topics, submit the thesis to an assigned
forum where you and all the other participants will interact and pass comments in
order to add to the knowledge or move the conversation forward.

20
 9.0 STUDY MODULES
9.1 MODULE 1
Introduction
English law as a source of Nigerian business law was an offshoot of Nigeria’s
historical colonial link with Britain. The Britain colonists came to Nigeria with
their own commercial practices and laws which were relatively more sophisticated
than the indigenous system. For instance, the concepts of modern company law or
wage earning employments were virtually unknown in Nigeria before that period.

The received English laws governed the new commercial law concepts, principles,
rules, practices and relationships which developed in Nigeria thereafter. The
implication of this for our discussion in this module is that, references will be made
to English authorities from time to time as the need arises. We cannot fully
understand the role of law in our business circles without first identifying its
functionality and fundamental nature. This module introduces the process notion
by considering what is meant by a legal system. The module ends with an
introduction to the basic functions served by law such as: means of dispute
settlement, principles and nature of law of contract as well as the nature of sale of
goods.

Business Law is basically concerned with the various aspects of law regulating the
relationship between different people involved in a commercial transaction. It is a
broadened aspect of Law of contract as it cannot be brought into existence without
the presence of all the requirements for a valid contract between persons and/or
groups of persons.

21
Business law is a subject that is difficult to define. It however encompasses the law
that applies to business and includes but is not limited to contract, company law,
agency, sale of goods, banking, intellectual property, competition law, taxation
law, insurance law and Hire purchase law.

Commonly, the practice of Business Law is influenced by the general legal context
that prevails in England, subject to our local interpretations and applications. There
is no particular statute that regulates and guides the commercial law practices in
Nigeria save for the different statutes that regulate each
of the component aspects of law that make up
commercial law and particular reference in this respect
shall be made to the Sale of Goods Act and Hire
Purchase Act being the major components of the law
that shall be discussed hereunder while others such as
the Banking and other Financial Institutions Act companies and Allied Matters
Act, and Insurance Act compliment it.

9.1.1 Objectives
At the end of the module, you should have:
1. Reviewed the course and familiarize yourself with the meaning, sources,
types and scope of business law.
2. Adequate knowledge of the means of dispute settlement, procedure, court
problems, proposed solutions and recognised that business law is inherent in
the practices governing commercial transaction.
3. Understood the definition, purpose, principle, nature and scope of the law of
contract as well as classification of contracts.

22
4. Understood the title, sale by description, quality and fitness for purposes,
merchantable quality and sale by sample as well as explain the importance
unascertained goods and specific goods.

23
 9.1.2 STUDY SESSIONS
9.1.2.1 STUDY SESSION 1: Introduction (Law, its Administration and
Enforcement)
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. The Meaning of Law
B. The Rule of Law
C. Schools of Legal Thoughts
1. Legal Positivism: Law as Sovereign Command
2. The Natural Law:
D. Nature of Law
E. Types of Law
F. Sources of Law
G. What is business Law?
H. The Scope of Business law
J. Organisation of the Court
K. The Received English Law
L. Personnel of the Court
Summary
Discussion Questions
References/Further Readings

24
Introduction
Welcome to study session one. In this study session, you will understand that the
meaning of law has been described by many jurists.
However, there is no unanimity of opinion regarding the
definition of law. The difficulty is partly because the word
is used in different ways. It contains, however, the
concepts of orderliness, universality and objectivity. It is
concerned with behaviour and not with causes, and either
contains an element of inevitability, e.g. scientific laws, such as the laws of
gravity, or of sanction, divine laws.

Learning Outcomes
At the end of this session, you should be able to:
a. Know the meaning of Law
b. Explain the Sources and Types of Law
c. Understand the Scope of Business Law
d. Discuss the Functions of Business Law

A. The Meaning of Law

According to A Dictionary of Basic Legal Terms, law is “the regime that
orders human activities and relations through systematic application of the
force of politically organised society, or through social pressure, backed by
force, in such a society." This definition of law, while true, is too abstract
and long for our needs. We should therefore think of law in more basic
terms as rules that govern and guide actions and relations among and
between persons, organisations, and governments. This is the short and
easily understandable definition that we will use. Law, then, must consist of a
25
set of rules which are known or readily discoverable by those who must obey them.
It is, of course, a maxim of English law that “ignorance of the law is no defense.”
However, this does not mean that each citizen is expected to know all the rules
which are in force – which is clearly impossible – but that knowledge of them is
available, since they are all published. The citizen, therefore, must have a general
idea of the principles upon which English law is built, e.g. rights of property,
person, contract, and he must be prepared to consult an expert in law for finer
points, when necessary. A permitted defense of ignorance of the law would,
clearly, make the administration of justice impossible.

“No man can read the thoughts of another” is a principle of wide application in
law. Clearly, no authority can impose sanctions upon the thoughts of its subjects,
although in some societies in the past this has been attempted. The law will
recognise motives but only as far as they are apparent and can be imputed from the
actions following them. In other words, it is with actions, and not with thoughts
and feelings, that law is concerned.

It is essential, if law is to operate efficiently, that it should operate only within an

area controlled by an effective government. This may vary for different laws, since
there may be different authorities operating within the same area, e.g. state law and
federal law in the United States of America, and bylaws of local authorities in
England – but, nevertheless, the principle of territorial limits is preserved. If a
government loses control of an area of its territory, in that portion its law will not
prevail. It is the duty of the government of the area concerned to make its laws
effective by establishing a judicial machinery for the investigation of alleged

26
breaches of the law and for the enforcement of the law by sanctions, i.e. penalties
or rewards designed to influence the human will to conform to the law.
Although it is not an essential component of law, in most
civilised countries it is regarded as fundamental that the rules
of law should apply to all citizens alike. This principle of
impartiality is one of the principles of natural justice which
has influenced English law in particular.

ITQ: What is a law?

ITA: A law consist of a set of rules which are known or readily discoverable by those who must
obey them.

B. The Rule of Law

The rule of law is an essential doctrine of the British constitution. It is not a written
code of rules but a general principle implicit in the common law which the courts
will apply, unless some statute can be quoted modifying its application. It has three
important aspects:
a. No person can be punished except for a definite breach of the law,
established in the ordinary law courts of the land.
b. No person is above the law and everyone must bear the legal consequences
of his own acts, i.e. there is equality before the law.

There is an absence in the UK of any special body of courts to try cases where the
citizen is in conflict with the government unlike in France where litigation between
citizens and state officials is dealt with by special administrative courts It is often
said that it is from the principle of the rule of law that all forms of British liberty
personal liberty, liberty of speech and of the press, liberty of meeting and

27
discussion are derived. During the 20th Century the growth of the welfare state
was necessarily accompanied by a huge increase in legislation and a corresponding
increase in the state's interference in the lives of individuals. To this extent the rule
of law may seem to have been eroded, but it is still valid and of importance.

ITQ: What is an essential doctrine of the British Constitution?

ITA: The rule of law is an essential doctrine of the British constitution.

C. Schools of Legal Thoughts

There are different schools (or philosophies) concerning what law is all about.
Philosophy of law is also called jurisprudence, and the two main schools are legal
positivism and natural law.

1. Legal Positivism: Law as Sovereign Command

As legal philosopher John Austin concisely put it, “Law is the command of a
sovereign.” Law is only law, in other words, if it comes from a recognised
authority and can be enforced by that authority, or sovereign - such as a king, a
president, or a dictator - who has power within a defined area or territory.
Positivism is a philosophical movement that claims that science provides the only
knowledge precise enough to be worthwhile. But what are we to make of the social
phenomena of laws? We could examine existing statutes - executive orders,
regulations, or judicial decisions - in a fairly precise way to find out what the law
says. For example, we could look at the posted number of passengers in a
commercial bus according to FRSC regulation on most Nigerian highways and
conclude that the “correct” or “right” number is no more than fourteen passengers
in a Homa bus. Or we could look a little deeper and find out how the written law is
usually applied. Doing so, we might conclude that fourteen passengers are

28
generally allowed by road Marshals, but that occasionally someone gets ticketed
for carrying the fourteen in some States. Either approach is empirical, even if not
rigorously scientific. The first approach, examining in a precise way what the rule
itself says, is sometimes known as the “positivist” school of legal thought. The
second approach - which relies on social context and the actual behavior of the
principal actors who enforce the law - is akin to the “legal realist” school of
thought.

Positivism has its limits and its critics. Suppose a group seizes power in a
particular place and commands that women cannot attend school and can only be
treated medically by women, even if their condition is life-threatening and women
doctors are few and far between. Suppose also that this command is carried out,
just because it is the law and is enforced with a vengeance. People who live there
will undoubtedly question the wisdom, justice, or goodness of such a law, but it is
law nonetheless and is generally carried out. To avoid the law’s impact, a citizen
would have to flee the country entirely. During the Taliban rule in Afghanistan,
from which this example is drawn, many did flee.

The positive-law school of legal thought would recognise the lawmaker’s

command as legitimate; questions about the law’s morality or immorality would
not be important. In contrast, the natural-law school of legal thought would refuse
to recognise the legitimacy of laws that did not conform to natural, universal, or
divine law. If a lawmaker issued a command that was in violation of natural law, a
citizen would be morally justified in demonstrating civil disobedience. For
example, in refusing to give up her seat to a white person, Rosa Parks believed that
she was refusing to obey an unjust law.

29
2. The Natural Law:
This school of thought emphasises that law should be based on a universal moral
order. Natural law was “discovered” by humans through the use of reason and by
choosing between that which is good and that which is evil. Here is the definition
of natural law according to the Cambridge Dictionary of Philosophy (1999):
“Natural law, also called the law of nature in moral and political philosophy, is an
objective norm or set of objective norms governing human behavior, similar to the
positive laws of a human ruler, but binding on all people alike and usually
understood as involving a superhuman legislator.”

Other Schools of Legal Thought

The historical school of law believes that societies should base their legal decisions
today on the examples of the past. Precedent would be more important than moral
arguments. The legal realist school flourished in the 1920s and 1930s as a reaction
to the historical school. Legal realists pointed out that because life and society are
constantly changing, certain laws and doctrines have to be altered or modernised in
order to remain current. The social context of law was more important to legal
realists than the formal application of precedent to current or future legal disputes.
Rather than suppose that judges inevitably acted objectively in applying an existing
rule to a set of facts, legal realists observed that judges had their own beliefs,
operated in a social context, and would give legal decisions based on their beliefs
and their own social context.

The legal realist view influenced the emergence of the critical legal studies (CLS)
school of thought. The “Critics” believe that the social order (and the law) is

30
dominated by those with power, wealth, and
influence. Some Critics are clearly influenced by
the economist Karl Marx and also by distributive
justice theory. The CLS School believes the
wealthy have historically oppressed or exploited
those with less wealth and have maintained social
control through law. In so doing, the wealthy have perpetuated an unjust
distribution of both rights and goods in society. Law is politics and is thus not
neutral or value-free. The CLS movement would use the law to overturn the
hierarchical structures of domination in the modern society.

ITQ: What are the two main school of thoughts?

ITA: The two main schools are legal positivism and natural law.

D. Nature of Law
Some philosophers have postulated the existence of natural law by which they
mean the Law of God which regulates the actions of mankind. This concept is
often known as the principles of natural justice. In the narrower concept of law,
there must be a set of rules which can be applied objectively with someone to
enforce them. There have been many attempts to put these into a workable
definition, some more successful than others. One of the better is that of Salmond:
“Law consists of any principle which is recognised and enforced by the courts in
the administration of justice.” Another, which is possibly superior to that of
Salmond, since it has a slightly wider application, is that of James: “He defined
law as a body of rules for the guidance of human conduct which are imposed upon
and enforced among the members of a given state.”
31
E. Types of Law
Salmond, after stating that law in its general sense includes any rule of action, says
that it includes the following categories:
Imperative Law
These are rules of action imposed on men by authority, e.g. by the state.

Physical or Scientific Law

These are rules which formulate the uniformities of nature, e.g. the law of
gravitation. You can distinguish them from man-made laws, in the sense that they
merely state observations on a state of affairs that already exists.

Natural or Moral Law

These are rules formulating the principles of natural justice. This conception of law
is derived from Greek philosophy and Roman law, and has found more favour with
Continental jurists than in English jurisprudence. It overlaps to some extent with
physical or scientific law. In the English language, law and justice are two separate
words, showing that we recognise them to be two separate things – a distinction
that is not made in most other languages.

Conventional Law
These are rules agreed upon by persons for the regulation of their conduct towards
each other. Agreements entered into by, for example, the parties to a contract or
members of a company (who agree to be bound by the rules of its Articles of
Association) are enforceable under the chess, may not be enforceable by law.

32
Customary Law
These are rules of action embodied in custom. We shall consider later the
importance of custom in the development of the English legal system.

International Law
These are rules which govern sovereign states in their relations with each other.
Criminal law is concerned with offences against the state, i.e. crimes such as
murder, housebreaking and theft. The more serious criminal cases are dealt with by
a judge and jury; less serious offences (the overwhelming majority) are dealt with
by magistrates. The two parties are the prosecution and the accused. The
prosecution is conducted on behalf of the Crown via the Crown Prosecution
Service, in important cases by the Attorney-General. If the accused is found guilty
by the jury, he is sentenced by the judge; if he is not proved guilty, he is acquitted.

Civil law
This is the law of the state, as applied in the state’s courts of justice. It is into this
category that English law falls. It has to do with private litigation, e.g. breaches of
contract, disputes concerning property. The complainant issues a statement of
claim, setting out the facts he alleges against the defendant and asking for damages
or other remedy.

Administrative law
This is the study of governance. While National Assembly creates authority, the
President enforces that authority, and courts
confine or discipline the exercise of that authority.

33
 ITQ: What are the types of law?
ITA: Imperative law, Physical or Scientific law, Natural or Moral law, Conventional law,
Customary law, International law, Civil law and Administration law.

F. Sources of Law
Now, we are in a position to discuss the various sources from which English law is
derived.

The Meaning of the Term “Source(S)” According to Black Law Dictionary

The term “Source(s)” (also termed fons juris) may mean the origin and defined
source of law as something (such as a constitution, treaty, statute, of custom) that
provides authority for legislation and for judicial decisions; a point of origin for
law or legal analysis authoritative statement from which the substance of the law is
derived. It may also be described as: “something (such as a Constitution, Treaty,
Statute, or Custom) that provides authority for legislation and for judicial
decisions. A source of law is the point of origin for law or legal analysis.

There are numerous sources of law, including constitutions, legislatures,

executives, judiciaries, administrative agencies, and international organisations.

You may have observed lawyers in Court, when they make statements and refer
the Court to particular decided cases, the Law Reports where such cases can be
found, to some Act or Statute and pointing to a particular chapter, part or section.

34
We say that the Law Reports and the Statute or Act so cited are sources of his
authoritative statements or law.

In literature of jurisprudence, the problem of “Source(s)” relates to the question:

Where does the Judge obtain the rules by which to decide cases? In our present
context: Where do we obtain the law we have been talking about – the law
constituted in the Nigerian Legal System? In this sense of the sources of law,
Fullers has listed the following: statutes, judicial precedents, custom, the opinion
of experts, morality and equity. Fuller probably was concerned with “Sources of
Laws” rather than Sources of Law – where the law generally draws not only its
content but also its force.

Sources of Law may be classified into formal or material, and the latter further
Subdivided into historical, legal, authoritative and binding, or other sources.

Formal Source
A formal source is what gives validity to the law. Upon an Act of the National
Assembly, Who gave the National Assembly authority to legislate? The
Constitution, Where does the Constitution derive its power? The general will and
power of the people of Nigeria. This is the Ultimate Source. Thus the formal
source of law may be traced to the “common consciousness” of the people, or the
“Divine Will.”

Material Source
Here we are not concerned with basis of validity as we did in our discussion of
“formal source” of law. We are concerned here with the origin of the substance of

35
the law – Where the law derives from or the authoritative source from which the
substance of the law has been drawn. This may be
(i) Historical
This may comprise the writings of lawyers, e.g. the rules and principles of foreign
law. The writings do not form part of the local law until they are formally received
or enacted into law. Prior thereto, they serve as persuasive authority.

(ii) Legal
These are sources that are recognised as such by law itself. Examples are statutes,
Judicial Precedent and Customary Law

(iii) Authoritative and Binding Source

This refers to the origin of the legal rules and principles, which are being enacted
or formulated and regarded as authoritative and binding.
Examples are legislations
(Received law and Local statutes), judicial precedents
(Common law and Equity; and local precedents) and Customs
(Customary law).

Other Sources
These are non-formal sources or origin of legal rules that lack authority, but are
persuasive merely. Professor Elias considered the “Source of Law” in terms of the
mainspring of its authority and classified this into six categories; namely:
(i) Local Laws and custom
(ii) English Common law, the doctrines of English Equity and Statutes of general
applications in force in England on 1st January, 1900.

36
(iii) Local legislation, and the interpretations based thereon
iv) Law Reports
(v) Textbooks and Monographs on Nigerian Law
(vi) Judicial Precedents. There is no hard and fast rule on classification of Source.
What is of essence is knowing, or identifying the sources themselves and the
theories that have been proffered.

G. What is business Law?

Business law is a dynamic and exciting area of law. It has been flexible in order to
keep pace with the rapid changes in business and with the globalization of markets.
At the same time, it has been certain in order to assist in the growth and
development required in commerce. Business law is a subject that is difficult to
define. In fact, there has never been a universally acceptable definition for this
aspect of law. One thing is however clear. This is that it encompasses the laws that
apply to business which include most importantly the law of contract and other
aspects of law like company law, agency, sale of goods, banking, intellectual
property, competition law, taxation law, insurance and hire purchase.

This course material does not cover all of these subjects. Its main objective is to
look at certain areas in order to acquire an understanding of the themes, principles
and practices of business law

H. The Scope of Business law

The scope of business law includes local and international regulations. To
understand this course, it is imperative to understand the basic requirements of a
contract. These include offer, acceptance, intention between the parties to create a

37
legally binding relationship between themselves, consideration and capacity
between the parties. All these have been considerably treated in the previous
module. It is hoped that learners would have clearly understood the principles in
that module as they will be extensively used in the module and the later ones.

ITQ: Define Business Law?

ITA: Business law is also known as commercial law which deals with the creation of new
businesses and the issues that arise as existing business interact with the public, other
companies and with the government.

I. Functions of Business Law

In a nation, the law can serve to (a) keep the peace, (b) maintain the status quo, (c)
preserve individual rights, (d) protect minorities against majorities, (e) promote
social justice, and (f) provide for orderly social change. Some legal systems serve
these purposes better than others. Although a nation ruled by an authoritarian
government may keep the peace and maintain the status quo, it may also oppress
minorities or political opponents (e.g., Burma, Zimbabwe, or Iraq under Saddam
Hussein, even in Nigeria). Under colonialism, European nations often imposed
peace in countries whose borders were somewhat arbitrarily created by those same
European nations.

Over several centuries prior to the twentieth century, empires

were built by Spain, Portugal, Britain, Holland, France,
Germany, Belgium, and Italy. With regard to the functions of
the law, the empire may have kept the peace - largely with

38
force—but it changed the status quo and seldom promoted the native peoples’
rights or social justice within the colonised nation. In nations that were former
colonies of European nations, various ethnic and tribal factions have frequently
made it difficult for a single, united government to rule effectively. In Rwanda, for
example, power struggles between Hutus and Tutsis resulted in genocide of the
Tutsi minority.

Business law helps in establishing standards. The law is a guidepost for minimally
acceptable behavior in society. Some activities, for instance, are crimes because
society (through a legislative body) has determined that it will not tolerate certain
behaviors that injure or damage persons or their property. For example, under a
typical state law, it is a crime to cause physical injury to another person without
justification. Doing so generally constitutes the crime of assault.

J. Organisation of the Court

The judicial system comprises, as a result of these Acts, the following courts. They
are given in hierarchical order – the highest court first – and we shall then go on to
examine each in more detail.
1. House of Lords - This is the highest court in the land, where civil and
criminal appeals are heard.
2. Court of Appeal (Civil and Criminal Divisions) - Again, this court hears
civil and criminal appeals.
3. Divisional Courts - Two or more High Court judges may convene to hear
appeals from inferior courts in cases where points of law are referred from
the Magistrates’ Court or County Court.

39
 4. High Court of Justice - This consists of the Queen’s Bench Division
(including the Admiralty Court and Commercial Court); the Chancery
Division; and the Family Division. The court sits primarily in the Law
Courts in London, but may sit anywhere. Civil work, formerly handled at
Assizes, is tried by the High Court sitting locally. Under the Supreme Court
Act 1981 the High Court consists of the Lord Chancellor, the Lord Chief
Justice, the President of the Family Division, the Vice-Chancellor, the
Senior Presiding Judge and not more than 96 judges known as justices of the
High Court.
5. Crown Court - This court, sitting anywhere, has unlimited criminal
jurisdiction, taken over from the old Courts of Assize and Quarter Sessions.
It also hears appeals from the Magistrates’ Courts, by way of a rehearing,
and committals for sentence from the magistrates. In addition it acts as a
youth appeals court.
6. County Courts - These courts deal exclusively with civil cases involving
smaller claims of less legal complexity.
7. Magistrates’ Courts - These
courts have limited first instance
criminal jurisdiction and are also
where miscellaneous petty civil
jurisdiction takes place.

K. The Received English Law

The Received English Law is one of the major source of Nigerian commercial law.
The major reasons for the incursion of the Europeans on the African continent
were for commerce and commercial purposes. Nigeria is a good example of a

40
situation where Europeans commercial activities succeeded. From the exportation
of cash crops such as cocoa, palm oil, kolanut, groundnut, millet, maize, cassava
and lately crude-oil, the colonial masters were able to extend their stay on our soil.

As a greater percentage of Nigerians at that time were illiterate who only enjoyed
buying and selling without more, the Europeans through various means introduced
the English Legal System into our culture and by implication introduced their own
commercial system and laws into our local commerce. Prior to that time, what
obtained in England was the application of merchant law which was broadly
applied by merchants in their own courts. The rules developed in these courts were
incorporated into common law. Attempts to codify the mass case law arising from
the judgments of the common law courts in the late nineteenth century produced
the Bills of Exchange Act, 1882, the Sale of Goods Act, 1893, the Marine
Insurance Act 1906 and the Partnership Act 1890 all of which were in force in
England until 1900 when the Statute of General Application was promulgated and
this affected only the Marine Insurance Act 1906.

The purport of the Statute of General Application was that as from the 1st day of
January, 1900 laws made in England shall not be applicable in Nigeria except
those made prior to that date and that is why commercial transactions in Nigeria
were broadly governed by statutes in existence in England prior to 1st January,
1900.

41
L. Personnel of the Court
Lord Chancellor
This officer is the chief peer of the realm acting as Speaker of the House of Lords.
He is also the head of the English judiciary and is responsible for the appointment
of all judges of the High Court, and all Justices of the Peace.

Lord Chief Justice

This officer is the head of the common law side of the High Court of Justice. The
office is held for life, the only ground for removal being an address by both Houses
of Parliament to the Crown (Act of Settlement 1701). The Lord Chief Justice is a
member of the Court of Appeal and presides over the Criminal Division.

Master of the Rolls

The Master of the Rolls is the custodian of the public record and by virtue of his
office he is a member of the Court of Appeal. He also has duties concerned with
the Roll of Solicitors and, in some cases, appeal lies to him from the decisions of
the Disciplinary Council of the Law Society.

Judges.
Judges of the family court division should be assigned from among the judges of
the highest court of general trial jurisdiction. Their assignment to the family court
division should be:
a. By appointment of the presiding judge of the highest court of general
trial jurisdiction;
b. With special consideration given to the aptitude, demonstrated
interest, and experience of each judge;

42
 c. On a modified rotation system, with indefinite tenure discouraged;
d. If at all practical, on a full-time basis; and
e. Accompanied by the supporting personnel, equipment, and facilities
necessary for effective functioning.

Referees; judicial officers.

Only judges should perform judicial case decision-making functions.

Court administrator.
Each family court division with [four] or more judges (and, where justified by
caseload, in divisions with fewer judges) should have a full-time court
administrator. This official should be an assistant to the general trial court
administrator. The division administrator should be appointed by the general trial
court administrator with the concurrence of the presiding judge of the general trial
court, but should function under the supervision of the presiding judge of the
family court division.

In less populous jurisdictions, the general trial court administrator should direct the
staff members of the family court division.

Summary
At the end of this session, we have successfully introduced business law, gave the
meaning of law as well as the schools of legal thoughts. We had traced the sources
of law, the scope of business law, as well as the functions of law. In addition, we
discussed on the organisation of the courts and as well as the personnel of the
courts.

43
M. Discussion Questions
1 What is the meaning of business law and its sources?
2 What are the types and scope of business law?
3 You are to write a 2-page paper on an area of sources and types of law that is
of interest to you and submit the thesis to the assigned forum where all
participants will interact and pass comments to add to our knowledge.
4 Describe the basic functions of law and the various ways in which the courts
make laws based on your understanding.
5 What is the relationship between state statutes and the state or federal
constitutions?
6 Discuss the reason why predictability and adaptability are both desirable in
the body of law.
7 What distinguishes law from other rules?
8 Discuss what a civil litigant hope to achieve by taking a case to court.
9 Explain how appellate procedure differs from trial procedure.
10 Explain what makes a case moot and why a court will not hear a moot case.

References
ABE (1973). Study Manual: Principles of Business Law.
DADA, T.O. (2006), General Principles of Law, 3rd ed., T.O. Dada & Co.
Fox, William F. (2000). “Understanding Administrative Law.” 4th Edition.
Matthew Bender & Company, Inc.,
https://www.lexisnexis.com/documents/pdf/20090218103837_large.pdf
MACINTYRE, Ewan (2008). Business Law, 1st ed., Pearson Education Limited.
SAGAY, I.E. (2001). Nigerian Law of Contract, 2nd ed., Spectrum Law
Publishing

44
YEROKUN, OLUSEGUN (2004). Modern Law of Contract, 2nd ed., Nigerian
Revenue Project Publishers
The Cambridge Dictionary of Philosophy (1999). Edited By Robert Audi.
Cambridge University Press.

45
 9.1.2.2 STUDY SESSION 2
Dispute Settlement
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Means of Dispute Settlement
B. Procedure for Settling Dispute
C. Appeals
D. Court Problems and Proposed Solutions
E. Protecting Liberties and Rights
F. Principles: Equitable, Fast, Effective, and Mutually Acceptable
Summary
Discussion Questions
References/Further Readings

Introduction
Welcome to study session two. I want you to understand that, Dispute settlement is
the central pillar of the multilateral trading system, and the World Trade
Organisation’s (WTO’s) unique contribution to the stability of the global economy.
Without a means of settling disputes, the rules-based system would be less
effective because the rules could not be enforced. The WTO’s procedure
underscores the rule of law, and it makes the trading system more secure and
predictable. The system is based on clearly-defined rules, with timetables for
completing a case. First rulings are made by a panel and endorsed (or rejected) by
the WTO’s full membership. Appeals based on points of law are possible.

46
However, the point is not to pass judgement. The priority is to settle disputes,
through consultations if possible. By January 2008, only about 136 of the 369
cases had reached the full panel process. Most of the rest have either been notified
as settled “out of court” or remain in a prolonged consultation phase - some since
1995.

Learning Outcomes
At the end of this session, you should be able to:
1. identify the means of disputes settlement
2. list the procedure for dispute settlement
3. identify the court problems and proposed solutions

A. Means of Dispute Settlement

a. Negotiations - Referring to negotiation, the International Court of Justice
remarked that "there is no need to insist upon the fundamental character of this
method of settlement." It observed in this connection, as did its predecessor, the
Permanent Court of International Justice that, unlike other means of settlement,
negotiation which leads to "the direct and friendly settlement of disputes between
parties" is universally accepted. Furthermore, negotiations are usually a
prerequisite to resort to other means of peaceful settlement of disputes.

b. Consultations - Consultations may be considered as a variety of

negotiations. While they are not mentioned in Article 33 of the Charter, they are
provided for in a growing number of treaties as a means of settling disputes arising

47
from the interpretation or application of the treaty concerned. Consultations are
provided for as a preliminary phase in the process of settlement of disputes.

c. Exchanges of views - Exchanges of views may also be considered as a form

of consultations. They play an important role in the system established by the 1982
United Nations Convention on the Law of the Sea for the peaceful settlement of
disputes arising from the interpretation and application of the Convention.
Reference is made in this connection to article 283 of the Convention, which reads
as follows:
i. “When a dispute arises between States Parties concerning the
interpretation or application of this Convention, the parties to the dispute shall
proceed expeditiously to an exchange of views regarding its settlement by
negotiation or other peaceful means.”
ii. “The parties shall also proceed expeditiously to an exchange of
views where a procedure for the settlement of
such a dispute has been terminated without a
settlement or where a settlement has been
reached and the circumstances require
consultation regarding the manner of
implementing the settlement."

ITQ: What are the means of dispute settlement?

ITA: They are: Negotiations, Consultations and Exchange of views.

B. Procedure for Settling Dispute

Settling disputes is the responsibility of the Dispute Settlement Body (the General

48
Council in another guise), which consists of all WTO members. The Dispute
Settlement Body (SBD) has the sole authority to establish “panels” of experts to
consider the case, and to accept or reject the panels’ findings or the results of an
appeal. It monitors the implementation of the rulings and recommendations, and
has the power to authorize retaliation when a country does not comply with a
ruling.
 First stage: consultation (up to 60 days). Before taking any other actions
the countries in dispute have to talk to each other to see if they can settle
their differences by themselves. If that fails, they can also ask the WTO
director-general to mediate or try to help in any other way.
 Second stage: the panel (up to 45 days for a panel to be appointed, plus 6
months for the panel to conclude). If consultations fail, the complaining
country can ask for a panel to be appointed. The country “in the dock” can
block the creation of a panel once, but when the Dispute Settlement Body
meets for a second time, the appointment can no longer be blocked (unless
there is a consensus against appointing the panel).

Officially, the panel is helping the Dispute Settlement Body make rulings or
recommendations. But because the panel’s report can only be rejected by
consensus in the Dispute Settlement Body, its conclusions are difficult to overturn.
The panel’s findings have to be based on the agreements cited. The panel’s final
report should normally be given to the parties to the dispute within six months. In
cases of urgency, including those concerning perishable goods, the deadline is
shortened to three months.

The agreement describes in some detail how the panels are to work. The main

49
stages are:
 Before the first hearing: each side in the dispute presents its case in writing
to the panel.
 First hearing: The case for the complaining country and defence - the
complaining country (or countries), the responding country, and those that
have announced they have an interest in the dispute, make their case at the
panel’s first hearing.
 Rebuttals: The countries involved submit written rebuttals and present oral
arguments at the panel’s second meeting.
 Experts: If one side raises scientific or other technical matters, the panel
may consult experts or appoint an expert review group to prepare an
advisory report.
 First draft: The panel submits the descriptive (factual and argument)
sections of its report to the two sides, giving them two weeks to comment.
This report does not include findings and conclusions.
 Interim report: The panel then submits an interim report, including its
findings and conclusions, to the two sides, giving them one week to ask for a
review.
 Review: The period of review must not exceed two weeks. During that time,
the panel may hold additional meetings with the two sides.
 Final report: A final report is submitted to the two sides and three weeks
later, it is circulated to all WTO members. If the panel decides that the
disputed trade measure does break a WTO agreement or an obligation, it
recommends that the measure be made to conform to WTO rules. The panel
may suggest how this could be done.

50
  The report becomes a ruling: The report becomes the Dispute Settlement
Body’s ruling or recommendation within
60 days unless a consensus rejects it.
Both sides can appeal the report (and in
some cases both sides do).

C. Appeals
Either side can appeal a panel’s ruling. Sometimes both sides do so. Appeals have
to be based on points of law such as legal interpretation - they cannot reexamine
existing evidence or examine new issues. Each appeal is heard by three members
of a permanent seven-member Appellate Body set up by the Dispute Settlement
Body and broadly representing the range of WTO membership. Members of the
Appellate Body have four-year terms. They have to be individuals with recognised
standing in the field of law and international trade, not affiliated with any
government.

The appeal can uphold, modify or reverse the panel’s legal

findings and conclusions. Normally appeals should not last
more than 60 days, with an absolute maximum of 90 days. The
Dispute Settlement Body has to accept or reject the appeals
report within 30 days — and rejection is only possible by
consensus.

51
The case has been decided: what next?
Go directly to jail. Do not pass Go, do not collect. Well, not exactly. But the
sentiments apply. If a country has done something wrong, it should swiftly correct
its fault. And if it continues to break an agreement, it should offer compensation or
suffer a suitable penalty that has some bite.

Even once the case has been decided, there is more to do before trade sanctions
(the conventional form of penalty) are imposed. The priority at this stage is for the
losing “defendant” to bring its policy into line with the ruling or recommendations.
The dispute settlement agreement stresses that “prompt compliance with
recommendations or rulings of the DSB [Dispute Settlement Body] is essential in
order to ensure effective resolution of disputes to the benefit of all Members”.
If the country that is the target of the complaint loses, it must follow the
recommendations of the panel report or the appeal report. It must state its intention
to do so at a Dispute Settlement Body meeting held within 30 days of the report’s
adoption.

If complying with the recommendation immediately proves impractical, the

member will be given a “reasonable period of time” to do so. If it fails to act within
this period, it has to enter into negotiations with the complaining country (or
countries) in order to determine mutually-acceptable compensation — for instance,
tariff reductions in areas of particular interest to the complaining side.

If after 20 days, no satisfactory compensation is agreed, the complaining side may

ask the Dispute Settlement Body for permission to impose limited trade sanctions
(“suspend concessions or obligations”) against the other side. The Dispute

52
Settlement Body must grant this authorisation within 30 days of the expiry of the
“reasonable period of time” unless there is a consensus against the request.

In principle, the sanctions should be imposed in the same sector as the dispute. If
this is not practical or if it would not be effective, the sanctions can be imposed in
a different sector of the same agreement. In turn, if this is not effective or
practicable and if the circumstances are serious enough, the action can be taken
under another agreement. The objective is to minimise the chances of actions
spilling over into unrelated sectors while at the same time allowing the actions to
be effective.
Maintaining Order
This is an offshoot of establishing standards. Some semblance of order is necessary
in a civil society and is therefore reflected in the law. The law - when enforced -
provides order consistent with society’s guidelines.

D. Court Problems and Proposed Solutions

Disputes or problems are unavoidable in a society made of persons with different
needs, wants, values, and views. The law provides a formal means for resolving
disputes using the court system. There is a federal court system and each state has
its own separate court system. There are also various less formal means for
proffering solutions to problems collectively called alternative dispute resolution
(ADR). Some of the problems and proposed methods of solutions or dispute
settlements are however highlighted thus:

53
Arbitration
Beginning around 1980, a movement toward alternative dispute resolution began to
gain force throughout the United States. Bar associations, other private groups, and
the courts themselves wanted to find quicker and cheaper ways for litigants and
potential litigants to settle certain types of quarrels than through the courts. As a
result, neighborhood justice centers or dispute resolution centers have sprung up in
communities. These are where people can come for help in settling disputes, of
both civil and criminal nature, that should not consume the time and money of the
parties or courts in lengthy proceedings.

These alternative forums use a variety of methods, including arbitration, mediation,

and conciliation, to bring about agreement or at least closure of the dispute. These
methods are not all alike, and their differences are worth noting.

Arbitration is a type of adjudication. The parties use a private decision maker, the
arbitrator, and the rules of procedure are considerably more relaxed than those that
apply in the courtroom. Arbitrators might be retired judges, lawyers, or anyone
with the kind of specialised knowledge and training that would be useful in making
a final, binding decision on the dispute. In a contractual relationship, the parties
can decide even before a dispute arises to use arbitration when the time comes. Or
parties can decide after a dispute arises to use arbitration instead of litigation. In a
pre-dispute arbitration agreement (often part of a larger contract), the parties can
spell out the rules of procedure to be used and the method for choosing the
arbitrator. For example, they may name the specific person or delegate the
responsibility of choosing to some neutral person, or they may each designate a
person and the two designees may jointly pick a third arbitrator.

54
Many arbitrations take place under the auspices of some Arbitration Association.
The association uses published sets of rules for various types of arbitration (e.g.,
labor arbitration or commercial arbitration); parties who provide in contracts for
arbitration through the association are agreeing to be bound by the association’s
rules. Similarly, the National Association of Securities Dealers provides arbitration
services for disputes between clients and brokerage firms. International
commercial arbitration often takes place through the auspices of the International
Chamber of Commerce. A multilateral agreement known as the Convention on the
Recognition and Enforcement of Arbitral Awards provides that agreements to
arbitrate—and arbitral awards—will be enforced across national boundaries.

Arbitration has two advantages over litigation. First, it is usually much quicker,
because the arbitrator does not have a backlog of cases and because the procedures
are simpler. Second, in complex cases, the quality of the decision may be higher,
because the parties can select an arbitrator with specialised knowledge.

Under both federal and state law, arbitration is favoured, and a decision rendered
by an arbitrator is binding by law and may be enforced by the courts. The
arbitrator’s decision is final and binding, with very few
exceptions (such as fraud or manifest disregard of the law
by the arbitrator or panel of arbitrators). Saying that
arbitration is favored means that if you have agreed to
arbitration, you can’t go to court if the other party wants
you to arbitrate. Under the Federal Arbitration Act, the
other party can go to court and get a stay against your

55
litigation and also get an order compelling you to go to arbitration.

Mediation
Unlike adjudication, mediation1 gives the neutral party no power to impose a
decision. The mediator is a go-between who attempts to help the parties negotiate a
solution. The mediator will communicate the parties’ positions to each other, will
facilitate the finding of common ground, and will suggest outcomes. But the
parties have complete control: they may ignore the recommendations of the
mediator entirely, settle in their own way, find another mediator, agree to binding
arbitration, go to court, or forget the whole thing. Litigation is not the only way to
resolve disputes. Informal negotiation between the disputants usually comes first,
but both mediation and arbitration are available. Arbitration, though, is final and
binding. Once you agree to arbitrate, you will have a final, binding arbitral award
that is enforceable through the courts, and courts will almost never allow you to
litigate after you have agreed to arbitrate.
ITQ: What are the methods used for closure of disputes?
ITA: The variety of methods includes arbitration, mediation, and conciliation, to bring
about agreement or at least closure of the dispute.

E. Protecting Liberties and Rights

The constitutions and statutes of Nigeria and its constituent states provide for
various liberties and rights. A purpose and function of the law is to protect these
various liberties and rights from violations or unreasonable intrusions by persons,
organisations, or government. For example, subject to certain exceptions, the First
Amendment to the Constitution prohibits the government from making a law that
prohibits the freedom of speech. Someone who believes that his free speech rights

56
have been prohibited by the government may pursue a remedy by bringing a case
in the courts.

F. Principles: Equitable, Fast, Effective, and Mutually Acceptable

Disputes in the WTO are essentially about broken promises. WTO members have
agreed that if they believe fellow-members are violating trade rules, they will use
the multilateral system of settling disputes instead of taking action unilaterally.
That means abiding by the agreed procedures, and respecting judgements. A
dispute arises when one country adopts a trade policy measure or takes some action
that one or more fellow-WTO members considers to be breaking the WTO
agreements, or to be a failure to live up to obligations. A third group of countries
can declare that they have an interest in the case and enjoy some rights.

A procedure for settling disputes existed under the old GATT, but it had no fixed
timetables, rulings were easier to block, and many
cases dragged on for a long time inconclusively. The
Uruguay Round agreement introduced a more
structured process with more clearly defined stages
in the procedure. It introduced greater discipline for
the length of time a case should take to be settled, with flexible deadlines set in
various stages of the procedure. The agreement emphasizes that prompt settlement
is essential if the WTO is to function effectively. It sets out in considerable detail
the procedures and the timetable to be followed in resolving disputes. If a case runs
its full course to a first ruling, it should not normally take more than about one year
- 15 months if the case is appealed. The agreed time limits are flexible, and if the

57
case is considered urgent (e.g. if perishable goods are involved), it is accelerated as
much as possible.

Summary
In this session, we have had a study on dispute settlement. We had identified the
means of dispute settlement, the list of procedures for settling disputes as well as
the problems and proposed solutions to disputes

G. Discussion Questions
1. Discuss the reason why an appeal can only be taken from a court of record.
2. What is discovery and when does it occur in the litigation process?
3. Discuss diversity jurisdiction.
4. When Mr. Mike was hired as broker, he was required to sign an NYSC
registration form under which he agreed to "arbitrate any dispute, claim or
controversy" arising between him and his employer. When his employment was
terminated six years later (when Mike was 62), he sued for age discrimination
under the Age Discrimination Act. His employer argued that the dispute has to
be arbitrated. Will Mike have to arbitrate his arbitration claim? Discuss.
5. Lord Woolf was right to stress the importance of alternative disputes resolution
in obtaining settlement of civil claims, since very few need to come to court;
discuss
6. Visit http:hg.org/adr.html for more information about alternative dispute
resolution (ADR) and Explain two types of ADR and why these mechanisms are
increasingly being used. Explain the basic idea behind the adversary system, and
what some of its drawbacks are.

58
References
Abiola, S. (2005). Introduction to Business Law in Nigeria. Lagos: Malthouse
Press Ltd.
Anonymous. “The Sale of Goods Act, 1930.”
http://comtax.up.nic.in/Miscellaneous%20Act/the-sale-of-goods-act-
1930. pdf
Keith, A. (2002). Business law (7th Ed). London: Thomson.
Sagay. (2000). Nigerian Law of Contract. Ibadan: Spectrum Books Ltd.

59
 9.1.2.3 STUDY SESSION 3
Law of Contract
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Definition and Purpose of Contract
B. Freedom of Contract
C. What Constitutes A Contract?
D. The Basis of Contract
E. Principles and Nature of Law of Contract
F. Forms of Contract
G. Scope of the Law of Contract
H. Classification of Contract
Formal Contract
Simple Contract
Express and Implied Contract
Bilateral and Unilateral Contracts
Summary
Discussion Questions
References/Further Readings

Introduction
You should understand that, defining a generalised concept like Contract is a little
bit difficult. It is perhaps an over simplification to say that it is a “legally binding
or enforcement agreement”. It has been defined differently by several scholars

60
based on their standpoint. Contract has been seen as “an agreement giving rise to
obligations which are enforced or organised by law. The factor which distinguishes
Contract from other legal obligation is that they are based on the agreement of the
Contracting parties.”

Learning Outcomes
At the end of this session, you should be able to:
1. State the definition and purpose of contract
2. Stat the principles and nature of law of contract
3. Name the classification of contracts

A. Definition and Purpose of Contract

Anson (1959) defined Contract as a branch of law which determines the
circumstances in which a promise shall become legally binding on the person
making it.

Yerokun (2004), defined a contract as a promise or set of promises, which the law
will enforce. Contract is mainly concerned with relation between persons, which
the law will recognise and enforce where one of parties fails to perform his part of
the bargain. American Restatement (2nd) of the law of Contract 1978 defines it as
a promise or set of promises for the breach of which the law gives a remedy or the
performance of which the law in some way recognises as a duty.

Okany defined “a Contract as an agreement in which is legally binding on the

parties to it and which it broken may be enforced by action in court against
defaulting parties.”

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Also Okonkwo and Ilegun, defines Contract as an agreement which is legally
binding on the parties to its and which if broken, any be enforced by an action in
count against the defaulting party.

Chitty, defined Contract as a promise or set of promises which law enforce.

It is worthy of note that, from the above, it can be seen that the common theme
underlying all attempts to define the term “Contract” is that there must be an
agreement. A contract may be defined as an agreement enforceable by the law
between two or more persons to do or abstain from doing some act or acts, their
intention being to create legal relations and not merely to exchange mutual
promises (Keenan, 1997).

Abiola sees contract as simple an agreement made between two or more competent
parties which the law will enforce (Abiola, 2005).

Commercial transactions are usually referred to as Commercial Law. These

transactions are “basically concerned with the various aspects of law that regulate
the relationship between different parties that enter into agreements.” Law has
many important aspects. Commercial Law pertains to all people who are somehow
involved in a commercial transaction. This law has all rights to be regarded as a
broadened aspect of Law of contract. This law cannot be brought into existence
“without the presence of all the requirements for a valid contract.” These
requirements exist between persons and/or groups of persons.

62
It is sometimes difficult to define all areas which are covered by commercial law.
In most parts of cases this law is difficult to define. In most part of cases this law
covers rules which can be applied to all businesses. In most cases this law is not
limited to contract, company law, agency, sale of goods, banking, intellectual
property, competition law, taxation law, insurance law and hire purchase law.

Generally, the practice of law of contract is the area of human research which is
influenced by the general. This context often prevails in England and other states.
When to take a look at British context of this law we case see that there is no
particular statute that regulates and guides the commercial law practices in Great
Britain. In fact, this law regulates some particular aspects of state. At present, there
is a whole list of important components of law. These components are combined
together and make up what we currently call a commercial law. Different statutes
are used to regulate all aspects of state. These statutes also make up what is
commercial law.

The Law of contract consists of two parts: the General Part and the Special Part.
The General Part contains provisions relating to the foundations of obligation
relations (contracts and torts): their origin, the effect, and termination. The
provisions concerning the interpretation of contracts found in this part apply
regardless of the kind of contract in question. The Special Part is composed of
various kinds of contracts.

Among the provisions of the General Part of the Law of Contract and Torts one
finds provisions by which every contractual obligation must have a permitted
ground. A ground is not permitted if it is contrary to compulsory regulations,
63
public policy or fair usage. A contract with an unpermitted ground is null and void.
However, the ground of an obligation does not have to be indicated in the contract,
meaning that the Law also permits the so-called abstract legal transactions. In
principle, contracts are informal. A contract, on the other hand, must be concluded
in writing if so prescribed or if the contracting parties have agreed accordingly in
that respect.

The Special Part of the Law contains provisions concerning various kinds of legal
transactions. Thus the Law regulates the relations arising from twenty-two kinds of
contracts and unilateral legal transactions. These include provisions dealing with
kinds of obligation relations otherwise not regulated by similar foreign legislative
acts.

ITQ: What is a contract?

ITA: A contract in the legal sense is a form of agreement which a particular person will
recognise as legally binding

Generally, at common law only a party to a contract or

persons who are privy to a contract can sue and be sued
on it. In other words, a stranger to a contract cannot sue
or be sued on a contract even if it was made for his
benefit or purported to give him a right to sue. In
Anuruba V. E.C.B Ltd (2005,10NWLR, pt.933). On 24th
July 1995 one Nicholas Osuji entered in to a written agreement with the 1st
respondent for the sale of a motor vehicle to the respondent for the sum of N100,
000 and the 1st respondent paid the sum of N70 00 to the seller. It was agreed
between the seller and the 1st respondent that the letter would give possession of

64
the motor vehicle to the appellant who would use same as a taxi in trust for the 1st
respondent.

Simultaneously, the appellant took an overdraft of N100, 000 from the 1st
respondent and it was agreed that the appellant would repay the overdraft and
interest from the proceeds of his use of the motor vehicle as a taxi, and that upon
full payment of the overdraft and accrued interest on or before January 31st 1996,
the 1st respondent would pay the balance purchase of N30, 00000 for the motor
vehicle and the appellant would acquire ownership of the motor vehicle. In
furtherance to the agreements before the said Nicholas Osuji and the 1st
respondent and the agreement between the motor vehicle and the 1st respondent,
the motor vehicle and its documents were handed over to the appellant who started
using the motor vehicle as a taxi. But after operating for about 4⅓ months, the
appellant was only able to pay only sum of N14, 200 into his account with the 1st
respondent. Consequently, the 1st respondent took possession of the motor vehicle.

The appellant was aggrieved with the act of the1st respondent and he sued the 1st
respondent and the manager (the 2nd respondent) at the High Court, where he
claimed the delivery of the motor vehicle or the sum of N300, 000 as its value,
damages of N300, 000 for conversion of the motor vehicle, and the sum of N2, 000
per day from 7th December, 1995 till date of judgment in the suit.

The respondents, on their part, asserted that the appellant was not serious with the
management of the motor vehicle and that they seized the motor vehicle when it
became clear that the appellant would not be able to repay the overdraft granted to

65
him in accordance with the term of the overdraft. They also denied that the motor
vehicle was worth N300.000 or that the appellant suffered any damages.

At the trial the appellant admitted that he earned the sum of N28, 000 every two
weeks from the use of the motor vehicle as a taxi, but paid only the sum of N14,
200 into his account with the 1st respondent. In its judgment, the trial; court held
that although the agreement between the seller of the motor vehicle and the 1st
respondent was made in favour of the appellant, there was no privily of contract
between the appellant and the 1st respondent and, consequently that the appellant
could not benefit from the contract or enforce it . The trial court also held that
property in the motor vehicle remained in the 1st respondent and it was entitled to
impound it at the time it did. The trial court therefore dismissed the appellant’s
suit. It however, made what it called consequential order to the effect that the 1st
respondent should not sell the motor vehicle until a given date in order to enable
the appellant pay the balance sum owed to the 1st respondent.

The appellant was dissatisfied with the judgment of the trial court and he appealed
to the Court of Appeal, the court of Appeal dismissed the appeal and that
generally, at common law, only parties to a contract or persons who are privy to a
contract can sue and be sued on it. In other words, a stranger to a contract cannot
sue even if it was made for his benefit, or purport to give him a right to sue. This is
because such stranger has nothing to do with the offence and more importantly,
because he did not give any consideration to the offeror. However, by notice of the
equitable doctrine of constructive trust a party to a contract can constitute himself a
trustee of rights under a contract for a third part and as such confer such third party
with rights in the contract which are enforceable at equity.

66
The idea of Contract as being based on agreement was introduced into English
legal discussion only in the nineteenth century and does not accord with the raw
material of the common law particular in relation to the requirement of
consideration. English law does not general enforced gratuitous promises, the
element of non-gratuity being expressed technically by the requirement that some
consideration must move from the promises and in lay terms that it enforce
bargains rather than agreement.

It should be noted that, it is in relation to the requirement of modern usage most

readily relies on the language of promise, not consideration for party’s agreement.
It is also obvious that, another justification for the enforcement of Contract is said
to lie in the moral obligation of a party to perform his promise.

Moreover, one element which is common to all the definition of Contract is that
there is need for a prior agreement between the Contracting parties, which will
give rise to enforceable rights and obligations. The requirements of agreement had
led certain juristic writers, especially those of the nineteenth century to place
greater emphasis upon the consensual nature of Contractual obligations. “The
essence of a contract, it is said, is the meeting of the minds of parties in full and
final agreement, there must be in fact, “consensus ad idem.”

Consensus ad idem is an agreement of parties to the same thing: as a meeting of

minds. It is the coming together of two minds with a common intention: if the
terms of an agreement are Vague or illusory no binding Contract will emerge from

67
it. For there to be consensus ad idem, a Contract must of necessity involve, at least,
the parties to it, for it is unrealistic for a person to Contract with himself.

B. Freedom of Contract
The philosophy of individualism existed in English since 18th century and this was
adopted in Nigeria. The freedom to enter into contract got an express approval in
the Supreme Court case of Merchant Bank Nigeria Ltd. v. Adalma Tanker (1990)
5 NWLR (pt. 153)747 CA, here the court said that the parties are bound by their
agreements and the court will not rewrite the contract for the parties. The principle
of freedom of contract was reinforced by Cohen who said:
“The view that in an ideally desirable system of law, all obligations
would arise only out of the will of the individual contracting freely, rest
not only the will theory of contract but also in the political doctrine that
all restraint is evil and the government is best which governs least” N.J
Dion 1932 46 Harvard Law Review 558.

The law of contract is the basis of all economic activities in a modern society. The
concept is that the terms should be left to be determined by the parties, less
regulated by statutes or courts, except to protect the weak and young from
exploitation. An eminent judge, Sir George Jessel M. R., expressed ‘freedom of
contract’ in this way: “If there is one thing which more than another, public policy
requires, it is that men of full age and competent understanding shall have the
utmost liberty of contracting, and that contracts, when entered into freely and
voluntarily, shall be held sacred and shall be enforced by Courts of Justice.”

One may ask how valid this is today in the hurly barley of Nigeria’s commercial

68
environment. It can now be argued that this lofty and entirely commendable ideal
has been gradually eroded over the years in the face of the onslaught of an
increasingly commercial, complex world. Freedom of contract is workable only if
the parties to a potential contract have equal bargaining power; failing that, the
concept, is indeed a myth. We have already mentioned the bargaining power an
average individual has – or lacks – when negotiating a line of credit with a bank.
Later, we study some cases in which the inherent power of a major financial
institution is abused to the detriment of the individual.

Before we examine what is commonly referred to as the ‘elements’ of a contract,

there are underlying presumptions upon which this analysis is based:
 There are countless ‘agreements’ which are part of our daily lives (to take a
holiday, or to meet for dinner at 7.00 pm Friday) which are largely ‘social’
which do not constitute a legal obligation which is enforceable in law.
 A contract in the legal sense is a form of agreement which a particular
person will recognise as legally binding.
 In the Common Law System, we subscribe to the concept of ‘freedom of
contract’; that is, parties to an agreement are completely free to lay down
their respective rights and obligations, provided of course they comply with
existing laws or other ‘rules’ which the particular society has prescribed.
 There is a presumption, not always considered by the courts, those
consumers (and we are all ‘consumers’) possess an unequal bargaining
position in their dealing with the world of commerce.
 There is a presumption that in commercial
agreements, say between the XYZ Bank Plc and the
Nigerian Government, that the parties occupy equal

69
 bargaining power and as such they intend to be bound in law by whatever it
is they have agreed upon.

ITQ: What is Consensus ad idem?

ITA: It is an agreement of parties to the same thing, as a meeting of minds. It is the
coming together of two minds with a common intention

C. What Constitutes A Contract?

By now, you should understand that legally binding contracts provide the basis for
commercial transactions as well as performing a significant role in various ‘private
arrangements between individuals: buying and selling a flat or purchasing a new
car or a packet of toothpaste. Remember you are about to study the “rules” of what
constitutes a contract? Consider the word ‘rule’ carefully, as there really are no
‘rules’ to the Law of Contract in common Law or any other aspect of the law.
There are concepts and principles certainly, and if there are rules, they are
frequently refined by exceptions. But they are not rules in a finite, empirical sense.
In the previous section, we referred to the concept of ‘freedom of contract’” the
inherent right which individuals may apply to the contracting process. Is freedom
of contract a rule or concept? Certainly no if, among other things, we consider
unequal bargaining power as a factor for instance, the effect of duress or undue
influence.

D. The Basis of Contract

The following theories of contract deserve attention: will theory, declaration theory
and reliance theory.
a. The Will Theory - The basis of contract is the will of the parties (meeting of
the minds of the parties). If one party is in error as regards one of the vital

70
 elements of the agreement there is no real agreement. The result is that
neither party is bound nor each party may reclaim whatever it has
performed. In the light of the unsatisfactory outcome of this approach there
were suggestions that this theory be supplemented. As will be shown later
the shortcomings of the will theory in the event of dissensus, are corrected
by the reliance theory.
b. Declaration Theory - According to this theory the basis of an agreement is
not the underlying will of the parties but the will of the parties as manifested
in their actions. This formulation was made by Wessels J. A. in South
African Railways & Harbours v National Bank of South Africa Ltd 1924
AD 704 at 715 where the learned judge of appeal stated:
“The law does not concern itself with the working of the minds of parties to
a contract, but with the external manifestation of their minds. Even therefore
it from a philosophical standpoint the minds of the parties do not meet, yet,
if by their acts their minds seem to have met, the law will, where fraud is not
alleged, look at their acts and assume that their minds did meet and that they
contracted in accordance with what the parties purport to accept as a record
of their agreement. This is the only practical way in which courts of law can
determine the terms of a contract.”
This statement of the law has been criticized by various academic writers.
Kerr points out that Wessels J. A. did not apply this theory to the facts of the
case before him. He suggests that it should not be followed in the future
(Kerr The Principles of the law of Contract 6th ed p 20 – 25).
c. Reliance theory - According to this theory as it is applied in the context of
dissensus, a contract is based on the intention of one party to an agreement
and the reasonable impression or reliance on his part that the other party had

71
 the same intention. It is regarded as only supplementary to the will theory: if
the two parties do have coinciding intentions there is consensus and no need
to enquire whether one of the parties had any particular impression of the
other’s intention.
If there is a material mistake by one party or both and therefore no actual
consensus, the reliance theory acknowledges that there is a contract if one of
the parties, in a reasonable manner, relied on the impression that there was
consensus.

The reliance theory has been applied in a number of decisions Van der
Merwe et al. Requirements for proving a
contract on the reliance theory One of the
parties to the agreement must have created in
the mind of the other party the belief or reliance
that they had reached a consensus – see the
Hodgson Bros v South African Railways 1928 CPD 257 noted at page 36 of
Van der Merwe et al. The party who wants his reliance upheld must show
that the reliance was reasonable in the circumstances.

ITQ: What are the theories of contract?

ITA: Will theory, Declaration theory and Reliance theory.

E. Principles and Nature of Law of Contract

As we have encountered before, in trying to define ‘law’ and pinpoint the sources
in Nigeria the preferred approach is not to seek a concrete, definitive conclusion
but to take an overview, encompassing all of the points made, plus certain

72
prescribed elements. A contract is an intention to create legal relations between
parties, and must include certain elements in order to meet the criteria of a
contract.

This is the prelude to our analysis of just what constitutes a contract; that is, an
agreement made between parties who truly intend to be legally bound in their
relationship. The ‘constituent’ elements of a contract vary from writer to writer. Do
not be disturbed by this apparent inconsistency. Writers have broken down the
building blocks of a contract into five parts:
 Offer
 Acceptance;
 Consideration;
 Intention to create legal relations;
 Capacity;

a. Offer:
An offer is an announcement of a person’s willingness to enter into a contract.
Thus, an offer is a specific serious proposal that, if accepted, leads to a contract.
An offer is thus a proposition made by one party (Offeror) to another (Offeree)
indicating his willingness to be contractually bound on certain terms provided that
those terms are accepted by the other party An offer may be made expressly or
implied from the conduct of a party. It may be made to a particular person or in
some cases, to the public at large, where the contract, which eventually comes into
being, is a unilateral one; where there is a promise on one side for an act on the
other.

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Offer or Invitation to Treat: For an offer to be capable of becoming binding on
acceptance, it must be definitely clear and final. If it is merely a preliminary move
in negotiations which may lead to a contract, it is not an offer but an invitation to
treat. The offeror must not “merely have been feeling his way towards an
agreement, not merely initiating negotiations from which an agreement might or
might not in time result”. As Bowen, L.J., stated in Carlill v. Carbolic Smoke Ball
Co. (Supra), a person making an offer becomes “liable to anyone who, before it is
retracted, performs the condition” whereas by contrast, in invitations to treat, you
(the offeror) offer to negotiate, or you issue advertisements that you have got a
stock of books to sell, or houses to let, in which case there is no offer to be bound
by any contract. Such advertisements are offers to negotiate – offers to receive
offers – offers to chaffer.

In other words, an offer is distinguishable from an invitation to treat, for a

preposition to amount to an offer but not a mere request, it must be definite, certain
and unequivocal. Whilst an invitation to treat remains a mere offer to negotiate.

ITQ: What is an offer?

ITA: An offer is an announcement of a person’s willingness to enter into a contract.

Characteristics of Offer
i. It is a special kind of promise that is conditional upon the offeree making a
return promise known as the consideration. It is a definite intention on the
part of the Offeror to contract within the Offeree.
ii. It may be made to the whole world. In Carlil v. Carbolic Smoke Ball (1892)
2 Q.B. 484, the defendant company, Carbolic Smoke Ball manufactured a
medicine for curing influenza. It advertised it claiming that no one who used

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 the medicine could ever catch influenza again. The company even deposit
One Thousand pounds sterling (£1000) in the bank. The plaintiff used the
medicine and still caught influenza. He then sued for damages, the court
held that since the advertisement was made to the whole world, anyone
interested could come forward, accept and performed the condition and that
as such, there existed a contract.
iii. An offer must be complete. This means that all the vital terms must be
present. For example, A offers B a lease but fails to state the commencement
date. That will be an incomplete offer.
iv. An offer must be final. For instances, an offer to sell subject to condition is
not a definite promise. /it amounts to encounter offer. However, any efforts
made towards the execution of a condition could be regarded as an
acceptance as was held in Major Oni v. Communications Associations of
Nigeria High Court, Lagos, Suit No. L.D/625.71.

v. An offer must be objectively clear, that is, must not be vague nor
ambiguous.
vi. An offer must be distinguished from an “invitation to treat” An invitation to
treat is an assertion of readiness or preparedness to negotiate. The display of
goods in shop windows and department stores are mere invitation to treat
and not an offer. In Pharmaceutical Society of Great Britain v. Boots Cash
Chemists (1953) 1 Q.B. 401, where customers were allow to pick their
goods in a self-service chemist shop it was held that there was no contract
subsisting between the desks.

Termination of Offer

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An off becomes effective when it is accepted. It has no legal effect unless accepted
an offer may be terminated in any of these ways namely:
i. Revocation - An offer may be withdraw before it is accepted. this rule is
applicable even if he offeror expressly stated that he will keep the offer open
for a given period as was decided in Dickinson v. Dodd (1876) 2 Ch. D.
Defendant offered a house for sale 10, the offer was to remain June 12. On
June 11 plaintiff heard that the house had been sold to another person.
Plaintiff accepted by June 12. It was held that the revocation was effective
and that no contract existed.
ii. Death – This could be the death of one or both parties before acceptance or of
offeree before acceptance or of offeror before acceptance as was held in
Duff’s Executive’s case (1886) 32 Ch. D. 301, where the company offered
shares to D, D died before accepting. However, D’s executor claimed
acceptance. It was held that the offer had lapsed upon Duff’s death.
iii. Lapse of Time - An offer stated for a fixed time must be accepted within that
time – Ramsgate Victoria Hotel v. Monteffiore (1866) L.R. 1 Exch. 109. An
offer made without a fixed time will lapse after a reasonable time. Offer of
perishable goods lapses within short time. In the above case, the shares of a
company were offered in June but was accepted in November. It was held that
the offer had lapsed because the interval was unreasonable.
iv. Rejection - Rejection of an offer is another way of terminating an offer where
an offeree rejects an offer, it becomes terminated. Rejection can also come in
an indirect form where an acceptance involves a variation or modification of
the original offer. A rejection, however, does not terminate an offer until it is
communicated to the offeror. For instance, if Ade makes an offer to Dada and
Dada by post rejects the offer if Dada changes his mind, he can still telephone

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 or telegram acceptance after the initial rejection, actual reach the offer or
before it takes effect.

ITQ: What are the ways in which an offer may be terminated?

ÍTA: Revocation, Death, Lapse of time and Rejection.

b. Acceptance: An acceptance is an unequivocal final

expression by the offeree that he agrees to the terms
of the offer as conveyed to him by the offeror. By
acceptance of the offer, a contract is said to come into
existence as it underscores the bilateral nature of a
contract. Acceptance of an offer must include three aspects:
• It must be communicated clearly or indicated by action
• It must occur in a fashion specified in the offer
• It must be unconditional, without changes.
Is Actual Communication of Acceptance Necessary?
It all depends on the offer. In a unilateral contract no actual communication of the
fact of acceptance is normally required. Thus a unilateral contract is normally
concluded on the completion of the relevant act.

If the offer is silent as to be question whether actual communication is necessary a

distinction is made between Instantaneous communications. Example a
conversation between A and B face to face or on the telephone and delayed
communication, the post and telegrams. In instantaneous communication, the
general rule is that acceptance becomes effective only on actual communication to
the offeror in delayed communication the general rule is that he contract is formed
at the moment when a correctly addressed letter or telegram is properly posted or
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Sent Acceptance must precede termination of offer. An offer is capable of
acceptance only before it terminated. An offer terminates in the following
circumstance:
(i) withdrawals are revocation in unilateral contracts. An offer may be
withdrawn at any time before the offeree has started to perform the act of
acceptance. In bilateral contracts, an offer may be withdrawn at any time
before acceptance. To be effective, notice of withdrawal must as a rule be
actually communicated to the offeree by the offeror or a reliable source. No
distinction is made between instantaneous and delayed communication,
(ii) Rejection: An offer terminates if the offered rejects it provided that the
rejection is actually communicated to the offeror. A counter offer thus
operates as a rejection of the original offer.

ITQ: What is an acceptance?

ITA: An acceptance is an unequivocal final expression by the offeree that he agrees to
the terms of the offer as conveyed to him by the offeror.

c. Consideration: Consideration must include something of value given and

received by each party. At Common law, a promise not under seal is enforceable
only if it is made in return for another promise or an act; whether a positive act or
forbearance (Keith, 2002). It is part of a bargain. This requirement of quid pro
quid; something for something is called consideration. Keith Sees the expression as
some benefit accruing to one party, or some detriment suffered by the other. Abiola
defines the term as the “price” which one party pays for the promise or act of
another side. Frederick Pollock sees it as: an act or forbearance of one part or the
promise thereof is the price for which the promise of the other is bought and the
promise thus given for value is enforceable (Sagay, 2000).

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d. Intention to Create Legal Relations
Not every agreement is intended to create a legally binding relationship. For
example, most domestic agreements —such as the division of household chores —
would not constitute a contract recognised in law. In commercial agreements,
however, it is generally accepted that both parties intend to make a legally binding
contract and therefore it is unnecessary to include terms to this effect. Should such
a presumption be challenged, the burden of proof rests with the person who
disputes the presumption.

e. Capacity
A contract may be valid, voidable or void and one of the factors which determines
this is the contractual capacity of the respective parties to the agreement. Normally
speaking, an adult may make a contract with another adult which, if entered into
freely and without any defects, and which is not contrary to public policy, is
binding upon them both (i.e. valid). However, the law provides protection for
certain categories of persons deemed not to have full contractual capacity (e.g.
minors, drunks and the mentally disordered); hence the practice by firms of
excluding people under the age of 18 from offers of goods to be supplied on credit.

Concentrating on minors - those below voting age - the law prescribes that they
can only be bound by contracts for 'necessaries' (e.g. food, clothing, lodging) and
contracts of employment that are advantageous or beneficial, as in the case of a job
which contains an element of training or education. In most other instances,
contracts with minors are void-or voidable and as such will be either unenforceable
or capable of being repudiated by the minor.

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In the case of business, legal capacity depends on the firm’s legal status.
Unincorporated bodies (e.g. sole traders, partnerships) do not have a distinct legal
personality and hence the party to the agreement is liable for their part of the
bargain. Limited companies, by contrast, have a separate legal identity from their
members and hence contractual capacity rests with the company, within the limits
laid down in the objects clause of its Memorandum of Association.

f. Other Factors
To be enforceable at law a contract must be legal (i.e. not forbidden by law or
contrary to public policy). Similarly, the agreement must have been reached
voluntarily and result in a genuine meeting of minds. Consequently contracts
involving mistakes of fact, misrepresentation of the facts, or undue influence or
duress may be void or voidable, depending on the circumstances. In insurance
contracts, for instance, the insured is required to disclose all material facts to the
insurer (e.g. health record, driving record), otherwise a policy may be invalidated.
In this context a 'material fact' is one which would affect the mind of a prudent
insurer, even though the materiality may not be appreciated by the insured.

The Concept of Bargain

A bargain is an agreement of two or more persons to exchange promises, or to
exchange promise for a performance. Thus defined, ‘bargain’ as narrower than
‘agreement’ in that it is not applicable to all agreement, and broader than
‘contract’, since it includes a promise given in exchange for insufficient
consideration. It also covers transactions which the law refuses to recognise as
contracts because of illegality.”

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The basis of the common law of contract is bargain and a person who wishes to
enforce a given contract must show that he or she has given consideration. In other
words, to enforce a broken promise made by B to A, A must show that he or she
has paid some price for that broken promise. This is the essence of consideration.
Consideration, has been defined as follows: a valuable consideration in the sense of
the Law may consist either in ‘Some right, interest, profit or benefit accruing to
one party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other’: Currie V. Misa (1875) L.R. 10 Exch. 153. In practical
terms, a unilateral or ‘one-way’ promise (‘I promise to pay you N200, 000 on your
next birthday’) is not binding on the promisor unless that promise has been given
some form of consideration. Consideration may be either:
a. Positive: e.g. Promise to give, to pay, to do, or
b. Negative: to e.g. promise not to do something one is entitled to do; to suffer
a forbearance or loss.

Unequal Bargaining Power

It is an equitable concept and can arise in cases
involving economic duress. The mere fact that unequal
bargaining power exists between the parties (an
everyday occurrence!) are not, in itself, sufficient
grounds for treating a contract made under those
conditions as voidable. In this case, it was stated that,
Equity will not relieve a party from a contract on the ground only that there is
contractual imbalance not amounting to unconscionable dealing.

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Unconscionable Bargains
This is a mystery factor and has only been fleetingly referred to by legal writers
over the years. However, as you have learned thus far, there are many contractual
situations in which there is unequal bargaining power which can potentially give
rise to unconscionable (unfair or oppressive) conduct. As you have seen,
unconscionable conduct was considered, but not found, in the solicitor/client
relationship in the Westmelton (Vie) Pty Ltd case. Although there is, at the present
time, no general principle of English law in this area has been developed in
Australia, Canada and New Zealand and 'the following general observations can be
made.

Statutory Considerations
The House of Lords in the National Westminster Bank (supra) case, indicated that
the question of inequality of bargaining power was a legislative task. If a party can
show a contract is 'unconscionable' which is not defined, remedies are available.
For example, the court may refuse to enforce it, eliminate the 'unconscionable' part
and enforce the remainder, or alter or limit any such part which is deemed
unconscionable.

ITQ: What are the building blocks of a contract?

ITA: They are: Offer, Acceptance, Consideration, Intention to create legal Relations and
Capacity.

F. Forms of Contract
Contracts supported by consideration are essentially expected to be in writing. It is,
however, important to note that a contract may also be oral or implied and yet be
binding on the parties depending on the peculiar circumstances. A contract may not
be taken as being invalid or enforceable for the mere fact that it is not in a written

82
form. The court would normally not assist any person who was lured into an oral
agreement. There are some exceptions,
a. Contracts that must be in writing
i. Transfer of shares in a public company
ii. Marine insurance
iii. Hire purchase agreements
iv. Bills of exchange
v. Promissory notes.
The legal consequence of any non-compliance with the prescription is that
such a contract shall be void and of no effect.

b. Contracts which must be evidenced in writing

i. Contracts of guarantee (under section 4 of the Statute of Fraud)
ii. Contracts for the sale of an interest in land.

The legal consequence of non-compliance with this requirement is that such

contracts shall not be enforceable at law though they may not be necessarily void
as such.

G. Scope of the Law of Contract

There are different forms of contracts. In fact contracts have their own shapes and
sizes. Contracts take different forms and shapes, as well as sizes. Some contracts
involve large sums of money, which others are designed for trivial sums. Some
contracts last for a long time while others have a relatively short period of
existence. The content of contracts varies depending on purpose of this or that
contract.

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Though approached differently, contracts are formulated in accordance with
different principles. Recently, many of these principles have been challenged by
Atiyah (1986b). In the course of his research he pointed to the fact that many
principle according to which contractual law is built remain to be general only by
default. This is largely so because these rules are superseded by detailed ad hoc
rules lacking any principle. Atiyah points to the fact that ‘there is no such thing as
a typical contract at all’. The researcher pointed to importance of classical model
of contract. However, he also pointed to the fact that there are other types of
contracts. The classical model of contract is the most discrete, two-party,
commercial, executor form of exchange of information.

There are different types of contracts. Some contracts are not discrete while others
have a continuing effect on people. Some contracts are not discrete but continuing
(landlord and tenant relationships), while others can be characterized as two-party
contracts. Besides two-party contracts, there are multiparty contracts.
 Contracts have different specialisation:
 The contract of membership in a club
 Commercial or domestic (marriage) contracts
 Executory (unperformed) contracts
 Executed (fully performed) fully performed contracts

Human actions often depends on the manner they exchange information. This is
especially true in case of an enforceable unilateral gratuitous promise. The same
idea has been once mentioned by Atiyah who concluded that people should change
their focus and see contracts as something other than a monolithic phenomenon’.

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Atiyah once used this argument to support of a wider proposition that contract law
becomes an area which is increasingly merging with other areas of law such as tort
law and general obligations of people. Many people agree with Atiyah’s wider
proposition to accept the point mentioned in law. The resemblance between
different types of contract was also mentioned in law. A contract of employment is
a different form of contract.

Understanding of contract
Modern understanding of contractual law is a very complicated issue. This issue
suggests that there should be a special understanding of modern issues. An
important part of modern doctrine is presence of liberal individualism or laissez-
faire philosophy. This philosophy is a standard contract which makes basis of a
further process of capital accumulation and further aggregation. A new form of
capital aggregation is the process that has enabled powerful contracting parties to
impose contractual terms both on their consumers and on other, weaker parties.

The courts were reported to have made a radical decision to place greater limits
upon the exercise of contractual power. A final result of
this process was the fact that modern legislation went so
far as to introduce a special form of contract regulation.
This regulation was imposed on both employment
contracts and consumer credit contracts. These
contracts were successfully used both by employees and
consumers who are trying to protect individual rights of
people.

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H. Classification of Contract
Contracts are divided into different ways according to the nature of agreement
reached by the parties and the nature and terms of the agreement. A contract,
depending on its nature, can be oral, written under seal or even implied from the
conduct of the parties. However, contracts are classified according to the nature
and terms of agreement reach by parties. A contract, depending on its nature, can
be oral, written under seal or even implied from the conduct of the parties.
However, contracts are classified according to the nature and terms of agreement
reach by parties.

Formal Contract
A formal contract is a contract made by deed. It is a contract of ancient origin and
its validity from the form it is made. It is also known as contract made under seal.
It must be made in writing, signed, sealed and delivered. Contracts made by deed
do not need to be supported by consideration to be enforced in law. Accordingly,
the significant of a contract under seal is that it derives its validity from its form
formal contract are usually employed in land agreements, such as conveyance,
mortgage and gifts.

Simple Contract
All other contracts than formal contract are classified as simple contracts. They
may be in writing or they may be oral. Oral contracts are also called parol
contracts. The major factor between a contract under seal and a simple contract is
that, in simple contract, only a person who has furnish consideration can bring an
action to enforce the contract. The validity of the contract depends on the presence
of consideration.

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Express and Implied Contract
A contract is said to be express when the terms are clearly state and implied
contract, when the terms are not so stated. However, in an express contract, the
extent of the respective obligation of both the offeror and the offeree are clearly
stated either orally or in writing. The unique advantage of an express contract,
particularly when it is written the parties can always refer to it for interpretation in
case of controversy. A good example is where tenders are invited for a
construction work, each applicant who responds to the advert will clearly state all
the material terms such as the quality of the materials to be used, durability, prices,
guarantee, term or mode of payment. An implied contract is one which the terms
are so stated either orally or in writing.

Bilateral and Unilateral Contracts

A bilateral contract consists of exchange of promise for a promise under a bilateral
contract, both parties have outstanding obligations which they must fulfill. The
buyer is obliged to pay and the seller is obliged to deliver the goods to the buyer.
In a unilateral contract, only one party is obliged from the onset while the other -
party is completely free whether or not to accept. A unilateral contract can simply
be put as where one party is to set a stage for the other party to react or accept. It is
a kind of standard contract which goes beyond offer to the whole world, where a
reward is offered to anyone who finds and returns a lost or stolen article, such as
money, load or information leading to the arrest of a criminal.

ITQ: What are the classification of contract?

ITA: Formal contract, Simple contract, Express and implied contract & Bilateral and
unilateral contracts.

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Summary
We have talked about the law of contract in this session. The definition of the law
of contract was given, the principle of contract was given, and the scope of the law
of contract was highlighted, as well as the classification of the law of contract.

I. Discussion Questions
1. With the aid of decided cases, discuss the rules which apply to the
acceptance of an offer.
2. Should the decision established in the ruling in the case of Adam v Lindsell
be jettisoned in Nigeria or not?
3. a. What are the essential elements of a valid contract?
b. Under what circumstances can the offer and acceptance be cancelled?
4. What is meant by capacity to contract? Explain when a contract can be
discharged. Discuss each factor in detail.
5. a. Define contract.
b. Answer the following:
i. free consent.
ii. capacity to contract.
6. ‘Where both parties enter into a contract in the relief that certain assumed are
true, and it turns out that they are not true, the contract is void for mistake’.
To what extent is this an accurate statement of law?
7. ‘A common mistake has no effect whatsoever at common law unless it is
such as to eliminate the very subject matter of the agreement, in other
words, unless it empties the agreement of all content’ (Chesire and fifoot).
Discuss with the aid of decided cases.
8. When will a court order that a contract be specifically performed?

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9. It is said that while time is of essence in some contracts, it is not of essence
in some other. In view of this statement, discuss the importance of time in
the performance of a contract.
10 ‘A party who does not perform the whole of the contract is not entitled to
any Payment.’ Discuss.
11 Distinguish between ‘agreement’ and ‘contract’.
12 Outline five ‘constituent elements’ of a contract.
13 You are now ready to examine the first of the essential contractual elements by
which we can assess whether or not a legally binding agreement exists, as
distinct from an agreement where the parties are not legally bound to each
other.

References
Abiola, S. (2005). Introduction to Business Law in Nigeria. Lagos: Malthouse
Press Ltd.
Anonymous. “The Sale of Goods Act, 1930.”
http://comtax.up.nic.in/Miscellaneous%20Act/the-sale-of-goods-act-
1930.pdf
Keith, A. (2002). Business law (7th Ed). London: Thomson.
Sagay. (2000). Nigerian Law of Contract. Ibadan: Spectrum Books Ltd.

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 9.1.2.4 STUDY SESSION 4
Sale of Goods
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Title to goods
B. Classes of Goods
C. Work and Materials
Summary
Discussion Questions
References/Further Readings

Introduction
In the previous study sessions, we have outlined the law of contract. These
principles apply to all contracts, whatever their purposes, except in the rare
instances where statute or common law modifies the general rules. However,
various special types of contract have additional rules superimposed on the general
ones, which are applicable only to those particular contracts, namely:
For the sale of goods:
 Of agency
 Of instalment
 Of insurances
 Of carriage of people and goods by sea, land and air
 Of guarantee or suretyship, and so on

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In this session, the special type of contract we shall be looking at is sale of goods,
starting here with the former.

Goods: The subject matter of a contract of sale is the ‘goods’. ‘Goods’ mean every
kind of movable property excluding money and auctionable claims. “Goods”
includes all chattels personal, other than things in action and money and the term
includes emblements, industrial growing crops, and things attached to or forming
part of the land which are agreed to be severed before sale or under the contract of
sale. Besides, growing crops, standing trees and other things attached to or forming
part of land, also fall in the meaning of goods, provided these are agreed to be
severed from land before sale or under the contract of sale.

Further, stocks, shares, bonds, goodwill, patent, copyright, trademarks, water, gas,
electricity, ships and so on are all regarded as goods. Destruction of goods before
making of contract: Where in a contract for sale of specific goods, at the time of
making the contract, the goods, without knowledge of the seller, have perished or
become so damaged as no longer to answer to their description in the contract, the
contract is null and void. This rule, however, does not apply in case of
unascertained goods.

Destruction of Goods after the Agreement to sell but before sale: Where in an
agreement to sell specific goods, if the goods without any fault on the part of the
seller, have perished or become so damaged as no longer answer to their
description in the agreement, the agreement becomes void, provided the ownership
has not passed to the buyer. If the title to the goods has already passed to the buyer
he must pay for the goods though the same cannot be delivered.

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Learning Outcomes
At the end of this session, you should be able to:
a. Define Title to Goods
b. Define Sale by Description
c. Identify quality and Factor for Purpose
d. Identify Merchantable Quality
e. Define Sale by Sample
f. Define Unascertained Goods
g. Define Specific Goods

A. Title to Goods
A document of title to goods is one which entitles and enables its rightful holder to
deal with the goods represented by it, as if he were the owner. It is used in the
ordinary course of business as proof of ownership, possession or control of goods,
e.g. cash memo, bill of lading, dock warrant, warehouse keeper’s certificate, lorry
receipt, railway receipt and delivery order.

Price: The price means the money consideration for transfer of property in goods
from the seller to the buyer. The price may be ascertained in any of the following
modes:
i. The price may be expressly stated in the contact.
ii. The price may be left to be fixed in manner provided in the contract.
iii. Where the price is neither expressed in the contract nor there is any
provision for its determination, it may be ascertained by the course of
dealings between the parties.
iv. It may be a ‘reasonable price’.

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 v. It may be agreed to be fixed by ‘third party valuation’.

This Act consolidates the previous law on sale of goods. Like its predecessor (Sale
of Goods Act 1893) it is designed to complement and codify the common law. It
sets out the rules, but in many instances allows for these to be altered or waived by
agreement between the parties. In particular, S.62 (2) states:
“The rules of the common law, including the law merchant, except in so far
as they are inconsistent with the provisions of this Act, and in particular the
rules relating to the law of principal and agent and the effect of fraud,
misrepresentation, duress or coercion, mistake, or other invalidating cause,
apply to contracts for the sale of goods.”

The Sale of Goods Act 1979 has been amended by the Sale of Goods
(Amendment) Act 1994 which abolished the ancient custom
of market overt, by the Sale and Supply of Goods Act 1994
which replaced the implied condition of “merchantable
quality” with that of “satisfactory quality” and also
amended the rules on acceptance of goods by a buyer, and
most recently by the Sale of Goods (Amendment) Act
1995 which amended rules about partial deliveries.

The Contract of Sale

It is important to appreciate just what is a contract of sale of goods. S.2 (1)
provides as follows:

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 “A contract of sale of goods is a contract by which the seller transfers or
agrees to transfer the property in goods to the buyer for a money
consideration, called the price.”

Section 61(1) extends this by stating: “In this Act, unless the context or
subject matter otherwise requires, ‘contract of sale’ includes an
agreement to sell as well as a sale.”

Any other type of transaction in which the property in goods passes from one
person to another, is not a sale of goods such as to come within the ambit of the
Act. For example, contracts for “work and materials” are not such, nor are
contracts of barter. These are covered by the general law, not the Act.

In point of fact, contracts for work and materials have now been brought
substantially into line with the Act by virtue of the Supply of Goods and Services
Act 1982, of which more later.

The important thing to remember is that, to be covered by the Sale of Goods Act,
the transaction must be for a price in money. The most usual mode is however, by
expressly providing price in the contract. It is also fairly obvious that the contract
must be in respect of “goods.” But what are “goods”? Section 61(1) of United
Kingdom Law defines them as follows:
“Goods includes all personal chattels other than things in action and
money; and in particular ‘goods’ includes emblements, industrial growing
crops, and things attached to or forming part of the land which are agreed
to be severed before sale or under the contract of sale.”

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“Things (or choses) in action” are intangible rights that cannot physically be
handled – such as patents, copyrights, shares, securities, etc. – and “emblements”
are products created by annual industry, or the profits of a crop which has been
sown. Wheat is an emblement, but grass is not. So, in other words, “goods” covers
not only those things which are normally associated with the word, but also
agricultural produce, cut timber and so forth. In particular:
a. Motor cars are in all respects “goods.”
b. Ships and aircraft are covered by the definition, but they are subject to
special rules, and certain aspects of the law of sale of goods cannot apply
to them.
c. Coins – current coins of the realm are money, and therefore not goods. But
collectors’ pieces, even those which are current legal tender but which have
a market value in excess of their face value, may be “goods” (Moss v.
Hancock (1899).
d. Water, oil, gases – these are capable of being bought and sold as goods, so
come within the definition. For example, when you buy a cylinder of CO2
for a soda stream, you are certainly buying “goods” other than just the
metal cylinder.
e. Electricity – there is some doubt about this. It is probably best to say that
electricity is not “goods,” but other forms of power may be.
In Bentley Bros v. Metcalfe & Co. (1906) a landlord hired a machine to his
tenant. He also supplied the mechanical power by means of a shaft to drive
it.
HELD: The power to drive the machine was consumed
in the process,

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 therefore it was bought and not hired.
f. Domestic animals – these are “goods”, but wild animals are not.
g. Buildings – whilst attached to the land on which they stand, they are not
goods; but if they are demolished and sold, the constituent parts then
become goods.

ITQ: What is a contract of sale?

ITA: A contract of sale of goods is a contract by which the seller transfers or agrees to
transfer the property in goods to the buyer for a money consideration, called the price.

B. Classes of Goods
Goods fall into different categories, and inevitably somewhat different rules must
apply to them. Firstly, Section 5(1) of the Act breaks them down into “existing
goods” and “future goods.” “The goods which form the subject of a contract of sale
may be either existing goods owned or possessed by the seller, or goods to be
manufactured or acquired by him after the making of the contract of sale, in this
Act called future goods”.

Secondly, goods can be “specific,” “ascertained,” or “unascertained”. Section

61(1) of United Kingdom Law defines specific goods as “goods identified and
agreed on at the time a contract of sale is made” (ABE 1973). “Unascertained”
goods are not defined by the Act, but by necessary inference mean goods which
have not been specifically identified at the time of the contract as the actual goods,
the ownership of which will pass to the buyer. (For a definition of “ascertained”
goods, see below.) Let us look at these categories in more detail.

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i. Existing Goods - These present few difficulties. They are goods which are
actually in existence – that is, substantially in a state in which the possession
of them is capable of being transferred, at the time the contract of sale is
made.

ii. Future Goods - These are goods which are not in existence at the time of
the contract. Therefore, there cannot be a sale of them at that time, but only
an agreement to sell when the goods are actually in existence. Section 5(3)
of the United Kingdom Law makes this clear: “Whereby a contract of sale,
the seller purports to effect a present sale of future goods, the contract
operates as an agreement to sell the goods” (ABE 1973). Goods that fall into
this category may have to be manufactured before they become specific, or
they may have to be grown. A contract to sell next year’s barley crop from a
particular field is an agreement to sell that crop when it has been grown.
An agreement to sell future goods is, of course, a contract like any other, and
if the seller fails to produce the goods at the proper time he (or she) will be
in breach. There are, however, two points to note. Firstly, this is one area
where equitable principles do not apply. A buyer cannot get an order for
“specific performance” of a contract for future goods.

Re Wait (1927)
W contracted to buy 1,000 tons of wheat from the USA which had not been
shipped. Next day he sold 500 tons of this same wheat to a sub-buyer, who
promptly paid for it. W then went bankrupt, and his trustee claimed to be
entitled to the whole 1,000 tons. The sub-buyer sought an order for specific
performance.

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 HELD: He could not obtain it.
iii. Specific Goods - Specific goods are not only existing goods but are
essentially the actual goods which will pass under the contract. If you want to
buy a dozen screws, you can go to a DIY shop and take off the shelf a packet
containing 12 screws. These are specific goods. Or you can go to an old fashioned
ironmonger, and he will take down a box containing a gross of screws; they do not
become specific until he has counted out the 12 that you are actually buying.

iv. Ascertained Goods - Ascertained goods are goods identified by both parties,
e.g. “two of those bottles of port.” In the Act, they are treated as specific goods.

v. Unascertained Goods - Goods which are in existence (usually), but which have
not been specifically identified as the goods forming the subject-matter of the sale,
are “unascertained”. When they have been so identified, they become
“ascertained.” In H R & S Sainsbury Ltd v. Street (1972), it was held that a
contract to buy a specified quantity of produce to be grown in a particular field was
a contract for unascertained goods.

There can be complications. In Reardon Smith Line Ltd v. Yngvar Hansen-

Tangen (1976) a contract was made to charter a ship which was to be built in
Japan. Before construction started she was identified by a hull serial number.
HELD: It was a contract in respect of ascertained future goods.

The point of this is that the vessel could not be “specific” goods until completion,
but the yard’s serial number was sufficient identification to make her “ascertained”
from the outset. It is important to be clear on these definitions, as they will crop up

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throughout the subject, and different results will often flow depending on the type
of goods involved (ABE 1973).

In Aldridge v. Johnson (1857), a contract was made for 32 bullocks valued at

N192,000 plus N20,000 in cash, in exchange for 100 quarters of barley valued at
N215,000. The court construed this as a reciprocal sale of goods. However, had the
items not been valued, and the agreement merely been for bullocks plus cash for
barley, then it would have been barter.

Where nowadays you get a consideration which is partly in money and partly in
goods – i.e. a “trade in” such as you effect when trading in an old motor car in part
exchange for a new one – the legal position can go either way, depending on the
circumstances. It can be that the Sale of Goods Act will apply to both transactions
– that is, a sale of a used car by one party, followed by the purchase of a new car
by the same party. Or it can be construed as only one transaction – as the sale of
the new car, together with a subsidiary agreement to deliver the used car for an
agreed allowance off the price of the new. It will depend on the wording of the
contract, and the circumstances.

ITQ: Mention the classes of goods

ITA: Existing goods, Future goods, Specific Goods, Ascertained good and Unascertained
goods.

C. Work and Materials

It can sometimes be difficult to decide whether a contract whereby a person
supplies goods as part of a wider contract to undertake work is, or is not, a sale of
goods. At one end of the scale, there is the case of a builder erecting a house. As

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part of the contract he is required to provide the bricks, the plumbing and so on.
The property in these items passes to the purchaser at one stage or another, but
their provision is not covered by the Sale of Goods Act. It is strictly a contract for
work and materials. However, what is the status of a contract with a tailor to make
a suit of clothes? In Lea v. Griffin (1861) the test was laid down to be “whether the
contract was intended to pass the property.” On this test, the suit of clothes would
be a sale of goods. On the other hand, in Robinson v. Graves (1935) a contract to
paint a picture was held to be one for work and materials only. Where materials are
supplied wholly or mainly by the employer, then there can be a sale of goods only
if there are TWO distinct transactions – firstly, the materials being transferred to
the manufacturer, and secondly a sale back of the finished article.

EM or security deposit: In certain contract the buyer pays an amount in advance as

earnest money deposit or as a security deposit, for the due performance on his part
of the contract. Though the amount of earnest money is adjustable towards the
price of the goods, it differs from the price in the sense that while payment towards
the prices is recoverable, EM is liable to be forfeited if the buyer fails to perform
his part and the contract goes off.

Doctrine of Caveat Emptor (Let the Buyer Beware): If the buyer relies on his own
skill and judgment and takes the risk of the suitability of the goods for his purpose,
it is no part of the seller’s obligation to caution the buyer of the defects in the
goods or to give to the buyer an article suitable for his purpose.

If the buyer relies on his own skill and judgment and the goods turn out to be
defective, he cannot hold the seller responsible for the same. This is known as the

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‘doctrine of caveat emptor’ or ‘let the buyer beware’. This applies to all sale
contracts invariably, except in following cases:
a. When the buyer makes known to the seller the particular purpose for which
he requires the goods and relies on the seller’s skill and judgment.
b. When the goods are sold by description by a manufacturer or seller who
deals in goods of that description, the seller is bound to deliver the goods of
merchantable quality.
c. When the purpose for which the goods are purchased
is implied from the conduct of the parties or from the
nature or description of the goods, the condition of
quality or fitness for that particular purpose is
annexed by the usage of trade.
d. When the seller either fraudulently misrepresents or actively conceals the
latent defects.

Transfer of Property in goods: The property in goods is said to be transferred

from the seller to the buyer when the latter acquires the proprietary rights over the
goods and the obligations linked thereto. The transfer of property in goods is the
essence of a contract of sale. The moment when the property in goods passes from
the seller to the buyer is significant from the point that risks associated with the
goods follow the ownership, irrespective of the delivery. If the goods are damaged
or destroyed, the loss is borne by the person who is the owner of the goods at the
time of damage or destruction. The two essential requirements for transfer of
property in the goods are:
a. Goods must be ascertained and
b. The parties must intend to pass the property in the goods.

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Performance of a sale contract: Performance of a sale contract implies, as
regards the seller to deliver the goods, and as regards the buyer to accept the
delivery and make payment for them, in accordance with the terms of the contract.
Unless there is a contract to the contrary, delivery of the goods and payment of the
price are concurrent conditions and are to be performed simultaneously.

Delivery of goods: ‘Delivery’ means ‘voluntary transfer of possession of goods

from one person to another’. Delivery may be (a) actual (b) symbolic or (c)
constructive. Delivery is said to be actual when the goods are handed over
physically. A symbolic delivery takes place where the goods are bulky and
incapable of actual delivery e.g. a car is delivered by handing over the keys to the
buyer. A constructive delivery is a delivery by attornment which takes place when
the person in possession of the goods acknowledges that he holds the goods on
behalf and at the disposal of the other person.

Acceptance of Delivery: The buyer is said to have accepted the goods, when he
signifies his assent that he has received the goods under, and in performance of the
contract of sale. A buyer cannot reject the goods after he has accepted them. A
buyer is deemed to have accepted the goods, when:
a. He intimates to the seller, his acceptance or
b. He retains the goods, beyond a reasonable time, without intimating to the
seller that he has rejected them or,
c. He does any act in relation to the goods which is consistent with the
ownership of the seller.

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Sale and agreement to sell: A contract of sale of goods is a contract whereby the
seller transfers or agrees to transfer the property in goods to the buyer for a price.
There may be a contract of sale between one part-owner and another. Where under
a contract of sale the property in the goods is transferred from the seller to the
buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell. An agreement to sell becomes
a sale when the time elapses or the conditions are fulfilled subject to which the
property in the goods is to be transferred.

Contract of Sale, how made:

1. A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate
delivery of the goods or immediate payment of the price or both, or for the
delivery or payment by instalments, or that the delivery or payment or both
shall be postponed.
2. Subject to the provisions of any law for the time being in force, a contract of
sale may be made in writing or by word of mouth, or partly in writing and
partly by word of mouth or may be implied from the conduct of the parties.

Existing or future goods:

1. The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller, or future goods.
2. There may be a contract for the sale of goods the acquisition of which by the
seller depends upon a contingency which may or may not happen.

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 3. Where by a contract of sale the seller purports to effect a present sale of
future goods, the contract operates as an agreement to sell the goods

Goods perishing before making of contract- Where there is a contract for the
sale of specific goods, the contract is void if the goods without the knowledge of
the seller have, at the time when the contract was made, perished or become so
damaged as no longer to answer to their description in the contract.

Goods perishing before sale but after agreement to sell- Where there is an
agreement to sell specific goods, and subsequently the goods without any fault on
the part of the seller or buyer perish or become so damaged as no longer to answer
to their description in the agreement before the risk passes to the buyer, the
agreement is thereby avoided.

Sale by Description.
Where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with the description, and, if the sale is by
sample as well as by description, it is not sufficient that the bulk of the goods
corresponds with the sample if the goods do not also correspond with the
description.

Quality and Fitness for Purposes

Subject to the provisions of this Act and of any other law for the time being in
force, there is no implied warranty or condition as to the quality or fitness for any
particular purpose of goods supplied under a contract of sale, excepts as follows:-
1. Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required, so as to show that the
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 buyer relies on the seller’s skill or judgment, and the goods are of a
description which it is in the course of the seller’s business to supply
(whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably fit for such purpose. Provided
that, in the case of a contract for the sale of a specified article under its
patent or other trade name, there is no implied conditions to its fitness for
any particular purpose.
2. Where goods are bought by description from a seller who deals in goods of
that description (whether he is the manufacturer or producer or not), there is
an implied condition that the goods shall be of merchantable quality.
Provided that, if the buyer has examined the goods, there shall be no implied
conditions as regards defects which such examination ought to have
revealed.
3. An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade.
4. An express warranty or conditions does not negative a warranty or condition
implied by this Act unless inconsistent therewith.

Sale by sample-
1. A contract of sale is a contract for sale by sample where there is a term in the
contract, express or implied, to that effect.
2. In the case of a contract for sale by sample there is an
implied condition.
a. That the bulk shall corresponded with the sample in
quality.
b. That the buyer shall have a reasonable opportunity
of comparing the bulk with the sample.

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 c. That the goods shall be free from any defect, rendering them un-
merchantable, which would not be apparent on reasonable examination.

Unascertained Goods
Where there is a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer unless and until the goods are sanctioned
Sale of unascertained goods and appropriation:
1. Where there is a contract for the sale of unascertained or future goods by
description and goods of that description and in a deliverable state are
unconditionally appropriated to the contract, either by the seller with the
assent of the buyer or by the buyer with the assent of the seller, the property
in the goods thereupon passes to the buyer. Such assent may be expressed or
implied, and may be given either before or after the appropriation is made.
2. Delivery to carrier- Where, in pursuance of the contract, the seller delivers
the goods.

Specific Goods
a. Specific goods in a deliverable state- Where there is an unconditional contract
for the sale of specific goods in a deliverable state, the property in the goods passes
to the buyer when the contract is made, and it is immaterial whether the time of
payment of the price or the time of delivery of the goods, or both, is postponed.
b. Specific goods to be put into a deliverable state- Where there is a contract for
the sale of specific goods and the seller is bound to do something to the goods for
the purpose of putting them into a deliverable state, the property does not pass until
such thing is done and the buyer has notice thereof.

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c. Specific goods in a deliverable state, when the seller has to do anything
thereto in order to ascertain price. - Where there is a contract for the sale of
specific goods in a deliverable state, but the seller is bound to weigh, measure, test
or do some other act or thing with reference to the goods for the purpose of
ascertaining the price, the property does not pass until such act or thing is done and
the buyer has notice thereof.

Hire
A contract of hire is a contract under which a person bails or agrees to bail goods
to another by way of hire. As with contracts for the sale of goods, certain terms are
implied – namely, that the goods hired shall be of satisfactory quality and that they
shall be reasonably fit for the customer’s purpose where the supplier has been
notified of the intended purpose. The main difference between sale and hire is that
the supplier of hired goods remains the owner of them, and any failure by the hirer
to take reasonable care of the goods hired may result in an action being taken
against him. Since it is not the intention of the parties that the hirer should become
the owner, any disposal by the hirer of the goods hired could result in a
prosecution.

Summary
In this session, we have studied on the sale of goods. The tittle was defined, sale by
description was defined, the quality and fitness for purpose was highlighted, sale
by sample was defined, ascertained and unascertained goods was defined as well as
the definition of specific goods.

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E. Discussion Questions
1. What is a contract of sale of goods?
2. What is the difference between a sale and an agreement to sell? What is the
significance and distinction?
3. What is the difference between a contract for the sale of goods and a hire
purchase agreement?
4. What does the term ‘description’ cover; can there be a sale by description
where the buyer has seen and inspected the goods?
5. What is the meaning of ‘deliverable state’?
6. What are the rules relating to delivery of the wrong quality?
7. When will the seller be liable for deterioration of or damage of goods during
transit?
8. What are the limits on the buyer’s right to demand repair or replacement of
faulty goods and on the buyer’s right to claim a reduction of the purchase
price or rescission of the contract?
9. What is an unpaid seller? What are such a person’s rights?
10. If an unpaid seller resells, will the new buyer receive goods title?
11. What is the difference between a right to resale and a power to resale?
12. Why would a seller want a reservation of title clause?
13. The site you visited has all uniform model laws and is a source of
information concerning possible future changes in the contract of sale of
goods. In your journal, define the contract of sale of goods and distinguish
it from other contracts. Based on your understanding, explain the issues that
are likely to affect its future changes.
14. Michael and Austin orally agree to lease the equipment they need to set up
their own microbrewery from John. The fair market value for the equipment

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 is presently $500. Michael and Austin agree to pay John ten monthly
installment of $99 each. At the end of the lease term, Michael and Austin
have the option to purchase the equipment for $1. The expected fair market
value of the equipment at the end of the lease is $250. Do Michael and
Austin need to get the agreement in writing in order to ensure their rights?
If so, Why? If not, Why not?

References
Abiola, S. (2005). Introduction to Business Law in Nigeria. Lagos: Malthouse
Press Ltd.
Anonymous. “The Sale of Goods Act, 1930.”
http://comtax.up.nic.in/Miscellaneous%20Act/the-sale-of-goods-act-
1930.pdf
Keith, A. (2002). Business law (7th Ed). London: Thomson.
Sagay. (2000). Nigerian Law of Contract. Ibadan: Spectrum Books Ltd.

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 9.2 MODULE 2
Agency and Employment
Introduction
This module provides you with the tools for understanding an agency relationship
which arises when one person (the agent) acts expressly or impliedly for the
benefit of and under the direction of another (the principal) in any dealings with
third party. The act to be done by an agent is of varying degree and nature. Thus, it
may be the making of a contract, the institution of a legal action, or the conveyance
of a parcel of land. Agency law especially focuses on the relations between
principals and agents and the third persons with whom agents deal with in making
contracts on behalf of principals.

The contract of hire purchase is an agreement concluded between a Baylor, that is,
the owner, and a Bailee, that is, the hirer, in respect of some particular goods.
Because both have developed primarily from the decisions of the courts, most
agency and hire purchase rules spring from English Law. The law of negotiable
instruments has its genesis in the middle ages in the customs of merchants in
commercial transactions (i.e. Law Merchants) which was gradually absorbed by
and became part of English Law. By such custom of trade, certain instruments or
documents of title acquire the qualities of negotiability, i.e. their legal ownership is
made transferable by simple delivery – mere handing over – of the instrument or
document such as cheque, bill of exchange etc. The law relating to insurance on
the other hand is another example of specific or particular contracts. It is thus
govern by the English Law of contract, except the doctrine of frustration is
inapplicable to a contract of insurance. All these concepts and principles are
explained in this module.

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The module goes well beyond merely covering hire purchase principles, rules and
regulations guiding business activities but offers
insights into the credit sale agreement. Discussion
follows on the nature of negotiable instruments as well
as notes. The module concludes by explaining the
meaning, importance, conditions and warranties,
liabilities of principal and agent in the contract of
insurance.

9.2.1 Objectives
On completion of this module, you should:
1. Understand the concepts of agency and employment.
2. Understand the meaning, purpose, process and techniques as well as the
essentials of hire purchase and credit sale agreement.
3. Have adequate understanding of the nature of negotiable instruments and
notes.
4. Understand the concept, nature and objectives of contract of insurance.

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 9.2.2 STUDY SESSIONS
9.2.2.1 STUDY SESSION 5: Agency and Employment
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Definitions
1. Actual Express Authority:
2. Actual Implied Authority:
3. Apparent Authority:
4. Estoppel:
5. Ratification:
6. Inherent Agency Power:
B. Types of agent
1. General Agent
2. Special Agent
3. Mercantile Agent:
4. Broker
C. Formation of Agency
1. Implied agreement
2. Agent by holding out
3. Ratification of an agent's act: retrospective agreement
D. Authority of the Agent
F. Termination of Agency
G. Other Types of Relationship
H. How Agency Arises

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 J. Rights of Agents against Principals
K. Discussion Questions
Summary
References/Further Readings

Introduction
General Nature of Agency
“He who does an act through another is deemed in law to do it himself.”
This is a maxim of the common law, and it is the basis of the law of agency. Under
the normal rule of contract, if one person contracts with another, a third party can
derive no benefit, nor incur any obligations, under that contract. However, if one
person authorises another to do an act on his behalf, that other becomes the agent
of the first. The act of the agent, then, under the maxim quoted above, becomes the
act of the first person – who, therefore, “steps into the shoes” of the agent, and
becomes liable for the act (and able to enjoy its benefits) as if he himself had done
it in the first place. The agent has no personal liability; he “drops out” of the
transaction.

In commercial matters, the relationship of agency usually arises as a result of a

contract between two people, for one (the agent) to effect a contract on behalf of
the other. However, this is by no means the only way in which the relationship can
arise, nor is the effecting of a contract the only duty an agent can perform.

The fundamental principle is that, by the agreement of both parties, the agent is
enabled directly to affect the legal relations of another person. Except in the case of
“agency of necessity” – about which we shall talk later in this study unit – nobody

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can have an agency relationship forced upon him, nor can it arise other than by
agreement (express or implied).

Learning Outcomes
At the end of this session, you should be able to understand the following:
a. General Agency
b. Special Agency
c. Mercantile Agency
d. Brokerage

A. Definitions
Agency law often involves three parties—the principal, the agent, and a third party.
It therefore deals with three different relationships: between principal and agent,
between principal and third party, and between agent and third party.

There are a number of definitions on which, even at this early stage, you should be
clear. The essential ones are as follows:
a. Principal - The “principal” is the person who agrees, expressly or by
implication that another shall do an act for and on his behalf, and that he
shall be legally bound by that act.
b. Agent - An agent is the person who acts on behalf of his principal, and
binds his principal in law. An agent is a person who acts in the name of and
on behalf of another, having been given and assumed some degree of
authority to do so. Most organised human activity - and virtually all
commercial activity—is carried on through agency. No corporation would
be possible, even in theory, without such a concept.

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 c. Agency - Agency is a relationship which exists between two legal persons
– the principal and the agent – in which the function of the agent is to form
a contract between his principal and a third
party. Company directors act as agents of the
company. Agency law is a significant element
in understanding how the company as an
artificial legal person is able to enter into
contracts. The law of agency also impacts on company promoters.
d. Authority - The authority of an agent is the act(s) and thing(s) which he
is permitted or is authorized to do by his principal, and which will bind the
principal. There are several different types of authority – some express,
some implied – but, in general (subject to exceptions), the principal will be
bound by an act only if that act is within the authority of the agent to do on
the principal’s behalf.

The Restatement of Agency (Second) defines agency as "the fiduciary relation

which results from the manifestation of consent by one person to another that the
other shall act on his behalf and subject to his control, and consent by the other so
to act." According to authority Roscoe Steffen, the essentials of agency are few.
First, the relation is a consensual one; an agent agrees, or at least consents to act
under the direction or control of the principal. Second, the relation is a fiduciary
one; an agent agrees to act for and on behalf of the principal. He is in no sense a
proprietor entitled to the gains of enterprise nor is he expected to carry the risks.
The agent does not assume the risks of the enterprise. The problem of allocating
loss from mistaken contracts is much easier when the loss can be put on the agent,
but that case is relatively uninteresting because the theory is simple and the

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practical application is limited. Ordinarily, the loss cannot be put on the agent,
either because he is not rich enough or he is a difficult target for litigation, having
fled or having otherwise protected his assets from legal judgements.

Moreover, while questions involving the agent's liability for contracts are
interesting, much of their analysis revolved around the contract between principal
and agent rather than between agent and third party, so that agency issues are
secondary. The interesting cases from the point of view of agency law are thus
those in which the agent has created a conflict in which the principal and some
third party must share the loss, either because the efficient contract puts the risk
there or because the agent lacks the resources to assume liability. The
Restatement's "general principle of interpretation" says that an agent is authorized
to do, and to do only, what it is reasonable for him to infer that the principal desires
him to do in the light of the principal's manifestations and the facts as he knows or
should know them at the time he acts.

ITQ: Who is an agent?

ITA: An agent is one who agrees and is authorised to act on behalf of another, a principal,
to legally bind an individual in particular business transactions with the third parties
pursuant to an agency relationship.

.The common law provides six reasons why the principal may be bound by

contracts made by the agent. The reasons are:

1. Actual Express Authority: The principal has entered into an explicit
agreement with the agent authorising him to take particular action. When the board
of directors of a company votes to authorise the president to purchase a new office
building, this is actual express authority.

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2. Actual Implied Authority: The principal has entered into an explicit agreement
to employ the agent, and although he has not specifically authorised the particular
action at issue, the agent can reasonably infer that authority for that action has been
delegated to him. If the general manager of a department store hires clerks, the
store is bound by his contract even if he was not expressly granted that authority.

3. Apparent Authority: The principal has no agreement with the agent authorising
the action, but a third party could reasonably infer from the principal's conduct that
the agent was authorised. If the home office tells a customer that the sales manager
has authority to sell flour without confirmation, and then withdraws that actual
authority without telling the customer, the sales manager still has apparent
authority. This differs from actual implied authority in that apparent authority may
exist even if the principal has expressly forbidden the agent's action. Apparent
authority depends on the beliefs of the third party, not on the actual relation
between principal and agent.

4. Estoppel: The principal is "estopped" from objecting to the agreement made by

the agent if the principal could have intervened to prevent the confusion over
authority; e.g., if the principal overheard the agreement being made and failed to
assert that the agent was unauthorized.

As one opinion puts it, in order to prove agency by estoppel, the following
elements must be established:
(i) Intentional or negligent acts of commission or omission by the alleged principal
which created the appearance of authority in an agent;

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(ii) Reasonable and good faith reliance on the appearance of authority in the
putative agent by the third party; and
(iii) A detrimental change in position by the third party due to its reliance on the
agent's apparent authority.

5. Ratification: If no other authority exists, but the principal agrees to the contract
once he learns about it, this ratification binds the principal. If the flour salesman
has no authority to sell wheat, but he makes a contract anyway, that contract is
binding if the flour company agrees to it upon learning of the salesman's actions.

6. Inherent Agency Power: This concept is absent from the first Restatement of
Agency. It was formally introduced in 1958 in the Second Restatement, '8a of
which says, "Inherent agency power is a term used in the restatement of this
subject to indicate the power of an agent which is derived not from authority,
apparent authority or estoppel, but solely from the agency relation and exists for
the protection of persons harmed by or dealing with a servant or other agent." The
agency relationship may somehow give the agent the power to harm third parties
even if there is no manifestation by the principal that the agent is acting on his
behalf.

"Inherent agency power" is the new term invented to cover this source of liability,
which was already well known, but without a clear doctrinal foundation.

The best-known illustration of inherent agency power in the law of agency and
contracts is the classic teaching case, Watteau v. Fenwick. "From the evidence it
appeared that one Humble had carried on business at a beer-house called the

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Victoria Hotel, at Stockton-on-Tees, which business he had transferred to the
defendants, a firm of brewers and some years before the present action.

After the transfer of the business, Humble remained as defendants' manager; but
the license was always taken out in Humbles name, and his name was painted over
the door. Under the terms of the agreement made between Humble and the
defendants, the former had no authority to buy any goods for the business except
bottled ales and mineral waters; all other goods required were to be supplied by the
defendants themselves. The action was brought to recover the price of goods
delivered at the Victoria Hotel over some years, for which it was admitted that the
plaintiff gave credit to Humble only: they consisted of cigars, bovril, and other
articles. The learned judge allowed the claim for the cigars and bovril only, and
gave judgment for the plaintiff for 22L. 12s. 6d Watteau v. Fenwick raises
problems for both classic agency doctrines and everyday notions of fairness. There
is no actual authority, either express or implicit, for the agent to order the cigars,
because he was expressly instructed not to order them. There is no apparent
authority, because the principal did nothing to convey the idea that the manager
was acting as an agent. The plaintiff might be estopped from denying that Humble
was his agent, since Humble was put in a position to so act, but estoppel would
only permit recovery of the cost of the goods to the seller, not their price.
Ratification does not apply. All that remains is "inherent agency power": the ability
of the manager, based on his employment by the principal, to harm third parties by
making contracts.
Everyday notions of fairness do not help either. Who should bear the cost of the
mistaken order for cigars? Not the principal, it seems, since he never ordered the
cigars and expressly forbade the agent from doing so. Not the agent, it seems, since

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he was not buying the cigars for himself and received no benefit from them. Not
the third party, it seems, since he had no way of knowing that the manager was an
agent who lacked authority.

When analysing a given case between a principal and a third party involving
liability for a contract made by an agent, a court can draw upon a number of
doctrines, but the variety of doctrines is a sign more of the difficulty the court is in
than of the ease with which it can find a definite solution. The doctrines require
considerable thought in their application. What makes authority "express"? How
apparent does "apparent authority" have to be? When does the judge pull out the
last resort of "inherent agency power"? This last category was created because the
American Law Institute, and judges, realized that existing doctrines did not quite
fit all the cases that were coming to the courts. All of these doctrines are applied
haphazardly, giving rise to the suspicion that judges are deciding how the cases
should come out on common-sense grounds (usually quite reasonably) and then
groping for legal formalisms.

ITQ: Mention the reasons why the principal must be bound by the contract made by the
agent
ITA: Actual express authority, Actual implies authority, Apparent authority, Estoppel,
Ratification and Inherent agency power.

B. Types of agent
In practice, there are many examples of agency relationships, to which you are
probably aware of in everyday life, although you might not know that they
illustrate the law of agency. The most important agency relationship for the
Business Law learning objectives is that of company directors, who act as agents of
the company. As agents of the company, company directors are therefore acting to

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promote the interests of the members of the company and not their own self-
interest. Therein lays one of the core principles of corporate governance – that the
existence of agency theory and agency relationships underpins all corporate
behaviour.

Promoters may also act as agents of the company. An agency relationship exists
in a partnership where one partner acts as the agent for the other. As long as each
partner acts within their express and implied authority then they are acting for the
whole partnership when carrying out an ordinary partnership business.

1. General Agent
General agent acts on behalf of his principal on all affairs relating to the business
they undertaken and matter in the ordinary course of agent’s profession, business
or trade. A general agent, as the title suggests, is appointed by the principal and is
given a very broad remit to perform a ‘general’ set of duties.

2. Special Agent
A special agent is often appointed by the principal to perform a very special or
specific task. A special agent is one whose authority is restricted to the performance of a
particular act not being in the ordinary course of his business, trade or profession. On
completion of task, the agency terminates for instance, a polling agent. Both types derive their
authority from the terms of appointment. Such agent is one that has authority only in
carrying out a particular or specific purpose that is not part of the ordinary course
of business for such an agent. Example of general agent is a Solicitor/Legal
practitioner, brokers, auctioneers and estate agents. For a special agent, once he has
undertaken or performed that particular function given to him, he cease to be an

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agent. In Harmong Properties Ltd vs. Gradizis34, it was held that a director of
Limited Liability Company was general of the company and could issue a valid
quit notice, to a tenant of the company.

3. Mercantile Agent: This is agent who, in the customary course of business has
authority to sell or consign goods for sale, or to buy goods or to raise money on the
security of goods. Mercantile agent may also be entrusted with goods on sale or
return terms and will be paid his share of profit.

A mercantile agent is often associated with the industrialisation that occurred

during the Industrial Revolution in the eighteenth and nineteenth centuries in the
United Kingdom. This resulted in a significant proportion of the country’s trade
being processed through agents, who were also called factors, on behalf of their
principals. Merrett stated that ‘from the eighteenth century onwards, it had become
common for merchants wishing to sell goods to entrust them to agents. An agent
who was entrusted with possession of goods was often referred to as a factor’. In
many circumstances, the factor was regarded as a ‘professional agent who traded in
goods’. The position and role of a factor is succinctly commented on in Chitty on
Contracts: The distinction between these was important in nineteenth-century
commerce and is still important for the understanding of old cases. A factor was an
agent entrusted with the possession and control of goods to be sold by him for his
principal.
In this respect he differed from a broker, the latter not having generally such
possession or control, but being a mere negotiator empowered to effect contracts of
sale or purchase for others. A factor was therefore entitled to contract in his own
name and to receive payment, and his lien over the goods gave him a special

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contractual right, which should probably now be explained as based on a collateral
contract, entitling him to sue in priority to his principal. He might also sell goods
which he had bought; and the third party would not always know whether he was
doing this, or selling for his principal. These propositions were not normally true of
brokers, who negotiated and often concluded contracts in respect of goods which
they did not hold at all, and might be assumed to be dealing for others. The term
‘factor’ is however not used in this sense in England nowadays, and the term
‘broker’ has subsequently been applied to a much wider range of occupations,
starting with stockbrokers but extending much further.

Factors were also referred to as ‘commission agents or commission merchants,

although these expressions were frequently used in practice for purchasing agents’.
Prior to the introduction of the Factors Act 1889, the courts offered some guidance
on the definition of a factor. For example, in the case of Stevens v. Biller, Cotton
LJ defined a factor as ‘an agent, but an agent of a particular kind. He is an agent
entrusted with the possession of goods for the purpose of sale. That is the true
definition of a factor.’ As a result of the introduction of a number of Factors Acts
which ‘were partly a confirmation and partly an alteration of the law’, the first of
which was introduced in 1823, a mercantile agent can be defined as follows:
Where a mercantile agent is, with the consent of the owner, in possession of
goods or of the documents of title to goods, any sale, pledge, or other
disposition of the goods, made by him when acting in the ordinary course of
business of a mercantile agent, shall, subject to the provisions of this Act, be
as valid as if he were expressly authorised by the owner of the goods to
make the same; provided that the person taking under the disposition acts in

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 good faith, and has not at the time of the disposition notice that the person
making the disposition has not authority to make the same.

Bradgate took the view that mercantile agents are agents ‘whose business is to
dispose of goods on behalf of principals and who are given possession of the goods
for that purpose’. The Factors Act 1889 gave mercantile agents an extensive array
of powers to pass title to goods that belong to the principal which are in the agent’s
possession. Munday took the view that the Act ‘confers a wide authority upon
certain classes of agent to transfer good title in their principal’s goods to third
parties, even though they have no express authority

4. Broker
A broker has been referred to as an important historical type of agent, and the
term is rarely used in modern commercial practices. Nonetheless, a broker has
been defined as an agent who ‘negotiates contracts for the sale and purchase of
goods and other property but does not have possession of the goods’. A broker is
an agent that negotiates or serves as a link between a buyer and a seller without
having possession of the goods or the document of title. As such, he can neither
sue nor act in his own name example are stockbrokers in share dealings, insurance
and general buying and selling.

ITQ: What are the types of agent?

ITA: General agent, Special agent, Mercantile agent and Broker.

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C. Formation of Agency
An agency may be created, or an agent's authority may be extended, without
express consent. This happens when the principal
'holds out' a person to be his agent.

1. Implied agreement
In some cases, an agency created by implied agreement might result in the agent
having more implied authority than the principal might have consented to.

2. Agent by holding out

An agency relationship may be formed by implication when the principal holds
out to third parties that a person is his agent, even if the principal and the 'agent'
do not agree to form such a relationship. In such a case, the principal is prevented
from denying the agent's apparent/ostensible authority. An agency relationship is
not so formed if it is the 'agent' who creates the impression that he is in an agency
relationship with a 'principal.

3. Ratification of an agent's act: retrospective agreement

An agency relationship may be created retrospectively, after the 'agent' has formed
a contract on behalf of the 'principal'. Therefore, it is created by the 'principal'
ratifying the act of the 'agent'. If the principal agrees to the acts of the agent after
the event, he may approve the acts of the agent and make it as if they had been
principal and agent at the time of the contract.

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The conditions for ratification are:
 The principal must have existed at the time of the contract made by the
agent.
 The principal must have had legal capacity at the time the contract was
made.
 The ratification must take place within reasonable time.
 He ratifies the contract in its entirety.
 He communicates his ratification to the third party sufficiently clearly.
Once a contract has been ratified by the principal, the effect is that it is as if the
agency relationship had been expressly formed before the contract made by the
agent took place.

D. Authority of the Agent

A principal does not give the agent unlimited authority to act on his behalf. A
contract made by the agent is binding on the principal and the other party only if
the agent was acting within the limits of his authority from his principal. In
analysing the limits of an agent's authority, three distinct sources of authority can
be identified:

a. Express authority - Express authority is a matter between principal and

agent. This is authority explicitly given by the principal to the agent to
perform particular tasks, along with the powers necessary to perform those
tasks. The extent of the agent's express authority will depend on the
construction of the words used on his appointment. If the appointment is in
writing, then the document will need to be examined. If it is oral, then the
scope of the agent's authority will be a matter of evidence. If the agent

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 contracts outside the scope of his express (actual) authority, he may be liable
to the principal and the third party for breach of warranty of authority.
b. Implied authority - Where there is no express authority, authority may be
implied from the nature of the agent's activities or from what is usual or
customary in the circumstances.

Between principal and agent the latter's express authority is paramount. The
agent cannot contravene the principal's express instructions by claiming that
he had implied authority for acting in the way he did. As far as third parties
are concerned, they are entitled to assume that the agent has implied usual
authority unless they know to the contrary.

Actual authority
Express and implied authorities are sometimes referred to together as actual
authority. This distinguishes them from ostensible or apparent authority,
which is discussed next in this section.

Definition - Actual authority is a legal relationship between principal and

agent created by a consensual agreement.
The ostensible, or apparent, authority of an agent is the authority that the
principal tells other people that he has given to the agent. This may differ
from the express or implied authority of the agent. As a result, the agent can
be held in practice to have a more extensive authority than what actually
exists.
Difficulties with apparent/ostensible authority usually arise either:
I. Where the principal has represented the agent as having authority even
though he has not actually been appointed.
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II. Where the principal has revoked the agent's authority but the third party has
not received notice.

ITQ: What are the types of authority of the agent?

ITA: Express authority, Implied authority and Actual authority.

F. Termination of Agency
Agency is terminated by agreement or by operation of law through death, insanity,
insolvency. Agency is terminated when the parties agree that the relationship
should end.
It may also be terminated by operation of law in the following situations:
• Principal or agent dies.
• Principal or agent becomes insane.
• Principal becomes bankrupt, or agent becomes bankrupt and this affects his
position as agent.
Termination brings the actual authority of the agent to an end. However, third
parties are allowed to enforce contracts made later by the 'agent' until they are
actively or constructively informed of the termination of the agency relationship.

G. Other Types of Relationship

There are certain basic relationships which arise out of a contract whereby one
person commits an act (or acts) for another but which are not (or not wholly)
agency relationships.
a. Master and Servant (covers most employer/employee situations). This is
not primarily a matter of agency. A servant is under the contract and
direction of the master, and the master is vicariously liable for the acts of the
servant. However, vicarious liability arises by virtue of the relationship, not

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 by reason of the servant’s acting as an agent and the relevant liability is
generally in tort, particularly negligence. If a servant makes a contract on
behalf of his employer, then he does so as agent for the employer. However,
the liability of the employer is much wider than if it were a strictly agency
relationship, and it extends to torts (e.g. negligence) committed by the
servant in the course of his employment.

There is inevitably an overlap between the two relationships, that of agency

and that of master and servant, but essentially an employee acts by virtue of
a contract of employment, and it is only when he has occasion to contract on
behalf of his employer that he assumes the mantle of an agent for that matter
only. Some employees cannot be said to be servants because they are not
sufficiently under the control of their employers, but even most doctors
working in hospitals are now regarded as “servants.”
b. Independent Contractor - This is not an agency relationship. Again, the
concept arises principally in negligence. An independent contractor carries
out duties or work or services for another by virtue of a contract. However,
the “employer” of an independent contractor is not liable for the acts of the
contractor (except in rare instances). If the contractor makes a contract with
a third party in connection with his employment, he is solely liable in respect
of it. The “employer” is not liable either vicariously or under the law of
agency.
c. Partnership - By virtue of the Partnership Act 1890, S.5:
“Every partner is an agent of the firm and his other partners for the purpose of the
business of the partnership.”

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That is to say, a partner can bind the firm by an act done in the course of the
business of the partnership. The “firm” is not a legal entity in England (unlike in
some other jurisdictions) but each partner is jointly liable for all the debts of the
partnership. Their liability for debts incurred by their other partners arises by virtue
of the agency, not vicariously. However, the relationship of partners with each
other extends far wider than that of principal and agent.

Capacity
(a) To Act as Principal
Any person who is capable of acting in his or her own name is capable of so acting
through the agency of another. For instance, a minor can be a principal – but only
in respect of those matters which the law permits him to do.

A corporation can appoint an agent to do an act which is intra vires (within its
powers permitted by its memorandum of association). Conversely, an appointment
of an agent to do an ultra vires act does not bind the corporation, nor is it bound by
any contract entered into by an agent which is ultra vires the corporation (Ashbury
Railway Carriage Co. v. Riche (1875)).

Of course, in such circumstances an innocent third party is not left without a

remedy. Under the common law, any director who authorised such a contract
would be personally liable. By virtue of the European Communities Act 1972,
S.9, the company may itself be bound notwithstanding the fact that the contract
was ultra vires, if it was one entered into by the directors. The company may be
liable but it cannot, normally, enforce the benefit of an ultra vires contract against
the other party.

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A possible exception is in the case of mentally-disordered persons. You will
remember that a contract with such a person is voidable, unless it is made during a
lucid period. However, it has been held that a power of attorney executed by a
person under a mental incapacity is void (not merely voidable), and a deed
executed under the power was likewise void (Daily Telegraph Newspaper Co. Ltd
v. McLaughlin (1904)). Furthermore, it was held in Yonge v.Toynbee (1910) that,
where the principal (unknown to the agent) was
insane, then the agency was terminated. It seems,
therefore, that such persons are incapable of acting
as principals, even though, in lucid periods, they
are quite competent to contract on their own
behalf.

(b) To Act as Agent

Strangely enough, people can validly be agents even though they cannot validly act
on their own behalf. All people of sound mind are competent to act, and to
contract, as agents. This includes minors, and others with limited or no capacity to
contract on their own behalf. However, any personal liability of an agent arising
out of exceptional circumstances from a contract entered into on behalf of a
principal will arise only if he would have had the capacity to contract on his own
behalf. Normally, an agent is not liable personally in respect of contracts into
which he enters in his capacity as agent. However, in certain circumstances (e.g. if
he exceeds his authority) he may be personally responsible. It is only this latter
liability that will be affected by his own legal capacity or incapacity to contract.

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H. How Agency Arises
An agency relationship can arise in a number of ways.
By Express Agreement
By far the commonest way is by agreement between principal and agent. Such
agreement can be contractual or not. If contractual, the normal rules of contract
apply – that is, there must be offer, acceptance and consideration. Such
mitigating factors as misrepresentation, mistake, duress or illegality affect an
agency contract in exactly the same way as any other contract. Unless the agency is
of a character which requires it to be in writing (e.g. a power of attorney), it is
equally valid whether written or oral.

By Implied Agreement
An implied agency arises where both principal and agent have behaved towards
each other in such a way that it is reasonable to infer from their conduct that they
have both agreed to the relationship. The consent of the principal is likely to be
implied where he has put another person in such a position that, in accordance with
ordinary principles and practice, that person could be understood to be his agent.
Similarly, where the principal has used such words that a reasonable person would
infer that he had agreed to another, acting as agent on his behalf, that clearly shows
consent. However, as with any other contract, silence does not imply consent.
Hence, where a person purports to act on behalf of another, the first will not be
agent by implication, unless the other gives some indication that he agrees.

Consent of an agent to act as such is perhaps easier to imply. It usually arises

where he acts on behalf of the principal, although merely doing something that a

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person requires done does not, of itself, mean that that thing was done on behalf of
the requester.

ITQ: How can an agency relationship raise?

ITA: An agency relationship can raise by express agreement or by implied agreement.

I. Duties of Agents to their Principals

A paid agent has various duties which he owes to his principal. Some of these arise
out of the contract of agency, others apply in varying degrees, depending on
whether the agency is for reward or gratuitous, and are implied by the common law
or equity.

Contractual Agents
(a) Duty to Perform
The fundamental duty of an agent appointed under a contract is to carry out the
agency contract in accordance with its terms, express or implied, and not exceed
his authority. In Ferrers v. Robins (1835), an auctioneer was instructed to sell
goods for cash only. Instead, he sold them, and accepted a bill of exchange in
payment. The bill was later dishonoured.

Held: The agent was liable for the price.

If the principal’s instructions (or the terms of the contract) are ambiguous, the
agent will not be liable for breach if he fairly and in good faith interprets them one
way, and acts accordingly. However, if the ambiguity is apparent, the agent must
(if practicable) seek clarification before acting.

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(b) Duty to Obey Instructions
An agent is required to comply with all reasonable and lawful instructions given by
the principal in connection with the subject-matter of the agency, or the manner of
carrying out his duties. This duty can, of course, be modified (or even excluded
altogether) by the terms of the agency contract – and it is, in many cases, subject to
the custom and usages of the trade. This is especially so in the case of a
professional man acting as agent, who normally has a higher duty in respect of the
rules and ethics of his profession.

(c) Trade or Professional Custom

The custom or usages of the particular trade or profession often serve to imply
terms into a relevant agency contract. However, before such a term will be implied,
evidence must be given concerning the custom. It must be a genuine custom of the
trade, and not merely what is normally done in the ordinary course of business.
The courts will apply an objective test to ascertain whether the parties must have
intended to contract subject to the particular custom or usage alleged to have been
incorporated – that is, “would a reasonable man have expected it to apply?”

(d) Duty to Perform the Contract with Diligence

It will, normally, be implied in every agency contract that the agent will carry out
his duties with reasonable diligence. If he is unable to carry them out within a
reasonable time, or is not prepared to, then he has a duty to notify his principal of
this fact. This is no more than the requirements placed on a party to any contract to
perform it within a reasonable time if the contract does not specify a time for
performance. Time is not of the essence of a contract unless the contract provides
for it to be so.

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 Fiduciary Duties of all Agents
An agent is said to be in a fiduciary relationship towards his principal – he is,
loosely speaking, in a position of trust. However, he is not a trustee in the legal
sense. A trustee owes a higher degree of integrity and duty towards his beneficiary
than an agent does towards his principal. Perhaps, we can best sum this up by
saying that an agent must behave honourably and loyally in all his dealings with
his principal.
i. Duty to Make Full Disclosure - An agent is required to act in the best
interests of his principal. Or, at least, in what he reasonably considers to be his
principal’s best interests. If, as often happens, his principal’s interests conflict with
his own, he is not automatically barred from acting but he must first make a full
disclosure to the principal of his own personal interests in the matter. If full
disclosure is made, the principal is then in a position to decide whether to proceed
with the matter or whether to find another agent.
ii. Dealing with the Principal - Should an agent enter into a contract or other
transaction with his principal, then he must make a full disclosure of the
circumstances, and of all that he knows about the subject-matter. This situation is
likely to arise where the agent proposes either to buy the principal’s property
himself or to sell his own property to the principal. If this does occur without the
principal’s informed consent, he can either rescind the contract or require that the
profit the agent has made be handed over to him.
iii. Secret Profits and Bribes - A contractual agent receives an agreed fee or
commission for his services. He is not allowed to make any additional profits as a
result of the agency, unless he discloses them (these are called “secret profits”).
Should he do so, the principal can require the secret profits to be handed over to
him.

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 iv. Using his Position as Agent to acquire Personal Benefit - If an agent uses his
position to acquire a benefit or secret profit from a third party, he is required to
account for it to his principal.
v. Using Property of the Principal to Acquire a Benefit or Profit for Himself -
Property includes not only goods or physical possessions but also intangible
rights. Hence, an agent is not permitted to use his principal’s goods (nor
confidential information he has acquired as a result of his duties) to make a
personal profit for himself.
vi. Money Received for Principal’s Account - An agent has a duty to pay or
account on demand for any money he receives, or which he holds, which is for
the account or use of the principal. In other words, an agent cannot hold on to
money which, in reality, belongs to his principal, if the principal requires it to
be handed over. This rule applies notwithstanding the fact that third parties may
have claims on that money, and even if the money was received by the agent as
a result of a void or an illegal transaction.
vii. Accounting Requirements - Agents are required to keep property or money
belonging to the principal separate from their own. It is also their duty to keep
proper and accurate accounts of all transactions carried out in the course of their
agency. They must produce such accounts and supporting books and documents
to the principal or his agent on demand.
viii. Acquiring Principal’s Property in his own Name - If an agent acquires
property for or on behalf of his principal, but in his own name, then he is, of
course, the legal owner of it. However, he holds it as a trustee for the principal.
ITQ: What are the Fiduciary Duties of all Agents?
ITA: Duty to Make Full Disclosure, Dealing with the Principal, Secret Profits and
Bribes, Using his Position as Agent to acquire Personal Benefit, Using Property of the
Principal to Acquire a Benefit or Profit for Himself, Money Received for Principal’s
Account, Accounting Requirements and Acquiring Principal’s Property in his Own
Name.
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J. Rights of Agents against Principals
An agent has numerous duties and responsibilities vis-à-vis his principal – but he
also has rights.

Payment
It is interesting that an agent is not entitled to any payment or remuneration for his
services as of right. His only entitlement is if the contract of agency expressly or
by implication provides for it. This means that a non-contractual agent has no
entitlement to be paid, and is truly what he is called – a “gratuitous agent.”

On the other hand, where the agency is contractual, and the agent is in the course
of a business as such, then remuneration will be very readily implied if the contract
makes no express provision for it.

In the case of professional agents who charge on a fixed scale, this scale does not
automatically apply, unless it can be shown that a term of the contract, express or
implied, so provides. Frequently, however, in such cases, the custom of the trade or
profession will ensure that the scale is implied into the contract.

Summary
In this session, we have discussed on agency and employment. The definition of
agency was given, the types of agency was given also giving attention to general,
special, mercantile and brokerage agency arrangement. The duties as well as rights
of agents to principals were also extensively discussed.

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K. Discussion Questions
1. Discuss the duties which an agent owes to his principal.
2. “The doctrine of undisclosed principal is anomalous, unjust and inconsistent
with elementary principles of contract”. Discuss.
3. Discuss the grounds on which dismissal may be fair.
4. Discuss the grounds on which dismissal will be automatically unfair.
5. Why is agency law important? Who is an agent?
6. Discuss the types of agent and agency relationship.
7. Why is agency law especially important in business and government
context?
8. What distinguishes an employee from an independent contractor?
9. Why do employers frequently try to pass off employees as independent
contractors?

References
Abiola, S. (2005). Introduction to Business Law in Nigeria. Lagos: Malthouse
Press Ltd.
Keith, A. (2002). Business law (7th Ed). London: Thomson.
Sagay. (2000). Nigerian Law of Contract. Ibadan: Spectrum Books Ltd.

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 9.2.2.2 STUDY SESSION 6
Hire Purchase
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Meaning of Hire Purchase
B. Features of Hire Purchase Agreement
C. Terms and Conditions
D. Sale of Goods Act
E. Hire Purchase Agreement
F. Credit Sales Agreement
(a) Debtor
(b) Creditor
(c) Supplier
(d) Owner and Hirer (or Debtor)
(e) Credit
Summary
Discussion Questions
References/Further Readings

Introduction
I want you to understand that, hire purchase is a mode of financing the price of
the goods to be sold on a future date. “Hire Purchase Agreement means the
agreement entered into between the Hirer and the Owner in relation to the
Goods (“the Agreement”).” Goods mean those things that are set out in the

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Schedule to the Agreement. In a hire purchase transaction, the goods are let on
hire, the purchase price is to be paid in installments and hirer is allowed an option
to purchase the goods by paying all the installments.

Hire Purchase Price means the total sum payable over the life of the Hire
Purchase Agreement in order to complete the purchase of the Goods. Hire
purchase is a method of selling goods. In a hire purchase transaction the goods are
let out on hire by a finance company (creditor) to the hire purchase customer
(hirer). The hirer is required to pay an agreed amount in periodical installments
during a given period. Hirer means customer who enters into the Agreement with
the Owner. The ownership of the property remains with creditor and passes on to
hirer on the payment of the last installment.

Learning Outcomes
At the end of this session, you should be able to:
1. Explain the Meaning of Hire Purchase
2. Understand the Credit Sale Agreement

A. Meaning of Hire Purchase

A hire purchase agreement is defined in the Hire Purchase Act, 1972 as peculiar
kind of transaction in which the goods are let on hire with an option to the
hirer to purchase them, with the following stipulations:
a. Payments to be made in installments over a specified period.
b. The possession is delivered to the hirer at the time of entering into the
contract.
c. The property in goods passes to the hirer on payment of the last installment.

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 d. Each installment is treated as hire charges so that if default is made in
payment of any installment, the seller becomes entitled to
take away the goods,
e. The hirer/ purchase is free to return the goods without being
required to pay any further installments falling due after the
return.

B. Features of Hire Purchase Agreement

a. Under hire purchase system, the buyer takes possession of goods
immediately and agrees to pay the total hire purchase price in installments.
b. Each installment is treated as hire charges.
c. The ownership of the goods passes from the seller to the buyer on the
payment of the last installment.
d. In case the buyer makes any default in the payment of any installment the
seller has right to repossess the goods from the buyer and forfeit the amount
already received treating it as hire charges.
e. The hirer has the right to terminate the agreement any time before the
property passes. That is, he has the option to return the goods in which case
he need not pay installments falling due thereafter. However, he cannot
recover the sums already paid as such sums legally represent hire charges on
the goods in question.

ITQ: What is the meaning of a hire purchase?

ITA: Hire purchase is a mode of financing the price of the goods to be sold on a
future date.

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C. Terms and Conditions
a. Duration - The hiring shall commence on the date specified in the
agreement and shall continue until determined as therein and hereinafter
provided.
b. Rentals - The Hirer shall punctually and without prior demand pay the
installments as set out in the Schedule of the Agreement on the dates therein
provided and time of payment shall be of the essence of this Agreement. The
Hirer shall pay interest at the rate of 9 per cent per annum on all overdue
installments from the due date until payment thereof and the rights of the
Owner hereunder shall not in any way be affected by any time or other
indulgence that the Owner may see fit to grant to the Hirer.
c. Repayment - The Hirer will repay the amount financed by the Owner to the
Hirer in accordance with the terms and conditions of this credit agreement.
Such repayments shall be in Naira.
d. Purchase Installment - When:-
i. The Hirer pays the Purchase Installment,
ii. All instalments and other monies payable by the Hirer to the Owner under
the Agreement shall have been duly paid and provided that the Hirer shall
not have committed any breach of these terms and conditions or of the
Agreement and paid the Purchase Instalment, then title to the Goods will
pass to the Hirer.
e. Other Covenants By Hirer are –
i. The Hirer shall:-
 Keep the Goods in good repair and condition and make good the loss of
and all damage to the Goods whether occasioned by his or her own act,
default, neglect or otherwise;

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  Keep the Goods at all times in his or her possession and control and not
take, send, use, cause or permit the Goods to be taken, sent or used out
of the country without prior written consent of the Owner;
 In the event of the Goods being damaged, lost, destroyed or stolen,
immediately notify the Owner thereof in writing;
 Immediately notify the Owner in writing of any change of the Hirer’s
address;
 Keep the Goods free from distress, execution or other legal process and
punctually pay or cause to be paid all rent, rates, taxes and other
outgoings payable in respect of the premises where the Goods may be,
and produce to the Owner on demand the receipts for the last payments
made in respect thereof;
 Permit the Owner and his authorised agent at all reasonable times to
inspect the Goods and for such purpose to enter upon the premises
where the Goods may be;
 Punctually pay all license duties, registration charges, taxes, insurance
premiums and other charges and outgoings payable in respect of the
Goods and/or the use thereof and produce the receipts for such payments
to the owner and/or his authorised agent on demand in writing;
 Within 10 days of receipt of a request in writing from the Owner inform
the Owner where the Goods are at the time the information is given or, if
sent by post, at the time of posting;
ii. The Hirer shall not during the continuance of the hiring:-
 By any act of omission cause or permit to be done any act or thing which
is likely to or may prejudice the Owner's rights or property in the Goods;

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  Abandon, assign, charge, mortgage, pledge, part with possession of, sell,
sub-hire or otherwise deal in the Goods or any licences, registration
books or other documents relating thereto or any interest therein, or in
the Agreement or the Purchase Instalment or allow any lien be created
on the Goods or the aforementioned licences, registration books, or
document, whether for repair charges, expenses, storage or otherwise;
 Use or allow the Goods to be used for any unlawful purpose or in
contravention of any statute or regulations for the time being in force or
otherwise contrary to law or drive or allow the Goods to be driven in a
negligent manner or in breach of the Road Traffic Acts or any Bye-laws
or Regulations made thereunder;
 Remove, alter or change any identification marks, name-plate, trade
mark or name on the Goods or any part thereof, or destroy, damage or
alter any registration book, licence or other document relating to the said
Goods.
f. Insurance - The Hirer shall maintain insurance in respect of the Goods
where required by law. As the Hirer is liable to the Owner for any loss or
damage arising out of his or her liability to take reasonable care of the
Goods he or she is strongly recommended to keep the Goods
comprehensively insured against all risks for their full replacement value.
g. Termination By Owner - Should the Hirer fail to comply with any of these
terms and conditions and the terms of the Agreement or if any information
provided by the Hirer is incorrect or untrue the Owner is entitled to
terminate the Agreement after giving notice to the Hirer.
 Before termination the Owner shall serve a notice on the Hirer telling
the Hirer of the action the Owner proposes to take. If the Hirer does not

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 remedy the breach detailed in the notice or pay such sum as is stated to
be compensation for the breach within 21 days of the date of service of
the notice to the Hirer, the Owner shall then enforce its rights against the
Hirer.
 On termination of the agreement by the Owner the Hirer will no longer
be in possession of the Goods with the Owner's consent and will be
liable to pay to the Owner:-
 All instalments due to the date of termination;
 Such sum as will bring the total of the sums paid and sums due under
point above to one-half of the Hire Purchase Price;
 Damages for any failure to take reasonable care of the Goods.
 Should the Owner become entitled, pursuant to the provisions of the
Agreement or otherwise, to recover possession of the Goods and should the
Goods not forthwith be surrendered by the Hirer to the Owner, the Hirer
hereby irrevocably grants to the Owner, his servants and agents, full
permission, leave and license, without previous notice, to enter upon any
premises owned or occupied by the Hirer or of which he appears to be the
owner or occupier or tenant [other than a house used as a dwelling or a
building within the curtilage thereof] for the purpose of taking possession of
the Goods, and the Hirer expressly agrees that the Owner, his servants or
agents shall not incur any liability to the Hirer or any person claiming
through him or her for or in respect of such entry.

No relaxation, forbearance, indulgence or delay by the Owner in enforcing any of

the terms or conditions of this Agreement or the granting of time by the Owner to
the Hirer, shall prejudice, affect or restrict the rights and powers of the Owner

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hereunder nor shall any waiver by the Owner or any breach operate as a waiver of
any subsequent or any continuing breach. Any notice, letter or document permitted
or required to be given to the Hirer under this Agreement shall be deemed to have
been validly given if served on the Hirer personally or sent to him by prepaid
ordinary post or left at the address of the Hirer stated in the Agreement or at the
last address which shall have been notified in writing to the Owner, and any such
notice, letter or document sent by post shall be conclusively deemed to have been
received by the Hirer within 48 hours after the time of posting. The liability of two
or more Hirers signing the Agreement as Hirers shall be joint and several. The
Agreement shall in all respects be interpreted in accordance with the laws of the
country.

D. Sale of Goods Act

In a contract of hire purchase, the element of sale is inherent as the hirer always
has the option to purchase the movable asset by making
regular payment of hire charges and the property in the
goods passes to him on payment of the last installment. So
in this context we will discuss the provisions of Sales of
Goods
Act, which apply to hire purchase contract.

Contract of Sale of Goods: A contract of sales of goods is a contract whereby the

seller transfers or agrees to transfer the property in goods to the buyer for a price. It
includes both an actual sale and an agreement to sell. Essential Ingredients of a
Sale: A contract of sale is constituted of following elements:

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 a. Two parties: namely the buyer and the seller, both competent to contract to
effectuate the sale.
b. Goods: The subject matter of the contract.
c. Money consideration: price of the goods.
d. Transfer of ownership: of the general property in goods from the seller to
the buyer.
e. Essentials of a valid contract under the Indian Contract Act.

Sales versus Bailment: In a sale, there is a conveyance of property in goods from

seller to the buyer for a price and the buyer becomes the owner of goods and can
deal with them in the manner he likes. In case of bailment (or leasing) there is a
mere transfer of possession of goods from the bailor to the bailee.

Sales versus Mortgage, Pledge and Hypothecation: The essence of contract of a

sale is the transfer of general property in the goods. A mortgage is a transfer of
interest in the goods from a mortgagor to mortgagee to secure a debt. A pledge is a
bailment of goods by one person to another to secure payment of a debt. A
hypothecation is an equitable charge on goods without possession, but not
amounting to mortgage. The essence and purpose of these contracts is to secure a
debt. All the three differ from sale, since the ownership in the goods is not
transferred which is an essential condition of sale.

Sale versus hire purchase: A hire purchase agreement is a kind of bailment

whereby the owner of the goods lets them on hire to another person called hirer, on
payment of certain stipulated periodical payments as hire charges or rent. If the
hirer makes payments regularly, he gets an option to purchase the goods on making

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the full payment. Before this option is exercised, the hirer may return the goods
without any obligation to pay the balance rent. The hirer is however, under no
compulsion to exercise the option and purchase the goods at the end of the
agreement period.

A hire purchase contract, therefore, differs from sale in the sense that:
a. In a hire purchase the possession of the goods is with the hirer while the
ownership vests with the original owner.
b. There is no agreement to buy but only an option is given to hirer to buy the
goods under certain conditions, and
c. The ownership in the goods passes to the hirer when he exercises his option
by making the full payment.

E. Hire Purchase Agreement

A hire purchase agreement is in many ways similar to a lease agreement, in so far
as the terms and conditions are concerned. The important clauses in a hire purchase
agreement are:
a. Nature of Agreement: Stating the nature, term and commencement of the
agreement.
b. Delivery of Equipment: The place and time of delivery and the hirer’s liability
to bear delivery charges.
c. Location: The place where the equipment shall be kept during the period of
hire.
d. Inspection: That the hirer has examined the equipment and is satisfied with it.
e. Repairs: The hirer to obtain at his cost, insurance on the equipment and to
hand over the insurance policies to the owner.

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 f. Alteration: The hirer not to make any alterations, additions and so on to the
equipment, without prior consent of the owner.
g. Termination: The events or acts of hirer that would constitute a default
eligible to terminate the agreement.
h. Risk: of loss and damages to be borne by the hirer.
i. Registration and fees: The hirer to comply with the relevant laws, obtain
registration and bear all requisite fees.
j. Indemnity clause: The clause as per Contract Act, to indemnify the lender.
k. Stamp duty: Clause specifying the stamp duty liability to be borne by the
hirer.
l. Schedule: of equipment forming subject matter
of agreement.
m. Schedule of hire charges. The agreement is
usually accompanied by a promissory note
signed by the hirer for the full amount payable under the agreement
including the interest and finance charges.

F. Credit Sales Agreement

Credit sales transaction is regulated by the Consumer Credit Act 1974. This Act is
an extremely comprehensive and far-reaching statute which aims to control ALL
forms of credit afforded to “consumers”, under whatever guise it may appear.

Terminology
The Consumer Credit Act introduces a number of concepts which were quite new
at the time of its passage in 1974. The terminology used is not necessarily the

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ordinary everyday meaning of the relevant word. The most important definitions
and concepts are:
(a) Debtor
The debtor is the person who receives credit – in effect, the customer. The debtor
can be an individual, a partnership, or a club or other unincorporated association.
He cannot be a company. It is important to remember that a “consumer”
transaction is not necessarily one which is of a private nature unconnected with
business. The distinction is between whether the recipient of credit – the debtor –
is, or is not, incorporated.

(b) Creditor
This is the person or organisation supplying the credit. The creditor can be an
individual, a company or any other organisation. It is frequently a finance
company, a bank or a shop.

(c) Supplier
This is the person who, or organisation which, supplies goods or services which are
the subject matter of the credit. For example, if a washing machine is acquired on
hire purchase, the shop supplying it is the “supplier”, the HP Company is the
“creditor”. If a bank grants an overdraft, it is both the “supplier” (of a service, i.e.
money) and the creditor.

(d) Owner and Hirer (or Debtor)

These definitions apply only to leasing or hiring agreements. The words have the
obvious meaning. The “hirer” must be an individual, like a debtor. However, you
should note carefully that there is an unfortunate conflict of definitions in respect

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of hire purchase transactions. In the Consumer Credit Act 1974 (the Act), a person
acquiring goods on hire purchase is NOT referred to as “the hirer” – he is the
“debtor”; whereas the actual goods which are the subject of a hire purchase
transaction are referred to in the Act as being “hired”. This must be distinguished
from the Hire Purchase Act 1965, which did call the person acquiring goods on HP
the “hirer”. It would have been more helpful had the draftsmen of the two Acts
been consistent.

(e) Credit
Credit is defined (in S.9 (1)) as a “cash loan or other financial accommodation”.
The concept is fundamental to the Act, but it is not as simple as the definition
would imply. The essential thing is that payment for goods or services must be
deferred. Whether payment is subsequently made in one lump sum or by
instalments does not matter; it is still credit if, by agreement, repayment of the cash
sum advanced or provided is deferred. If, however, the actual payment for goods or
services provided (as opposed to cash supplied so that goods or services may be
acquired) is deferred, then that is not credit within the terms of the Act. For
example, if a shop permits payment by monthly account, it is not providing
“credit” – nor is British Telecom when it submits its account quarterly. Not even in
a house building contract, where payment is due at stated stages of construction, is
credit being given. But on the other hand, an overdraft facility granted by the bank,
or a credit card transaction, or a loan to buy a car, or a hire purchase or similar
agreement, all entail the granting of credit. As a rule of thumb, we may say that if
cash, or the facility to use cash, for a purchase of goods or services is given or
granted, then credit is being supplied. If, on the other hand, payment for goods or

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services already supplied is deferred, then credit is not being granted – under the
terms of the Act.

ITQ: What is the difference between a debtor and a creditor?

ITA: The debtor is the person who receives credit - in effect, the customer while the
creditor is the person or organisation supplying the credit

Various types of credit are defined:

Running-account Credit
This is where the agreement calls for the provision of credit (usually up to a set
limit, but not necessarily) as and when the debtor requires it. A bank overdraft
facility is a typical example, or the provision of a credit card (e.g. MasterCard
which sets a fixed limit, and is a “running account” credit).

Fixed Sum Credit

This occurs, as the words imply, where the credit given is a stated amount and is
not a running account. A hire purchase transaction, or a loan from a finance
company, moneylender or pawnbroker are all examples.

Lastly, there are various types of agreement for the provision of credit which need
definition.
Debtor-Creditor-Supplier Agreement
This is the typical hire purchase agreement, where there are three parties involved
– the customer who acquires the goods, the shop which supplies them, and the
finance company which provides the credit. It also applies to credit card
transactions, where there are only two parties involved, it is simply a Debtor-
Creditor agreement, e.g. a bank loan.

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Credit-token Agreement
These cover all forms of agreement involving the provision and use of credit cards,
vouchers, coupons, trading stamps, and similar items. By far the commonest are
the ordinary credit cards such as MasterCard, Barclaycard/Visa etc. The term also
includes credit cards issued by shops for use only in that shop, bank cards, and
similar cards.

Consumer Hire Agreement

The Act defines this as an agreement made by a person with an individual (“the
hirer”) for the bailment of goods to the hirer, being an agreement which: Is not a
hire purchase agreement. It is capable of subsisting for more than three months
does not require the hirer to make payments exceeding an agreed sum.

Credit is thus supplied by virtue of the hire charges. It covers normal domestic
rental agreements (e.g. for a TV) and business rentals or leases of equipment (e.g.
photocopiers) to individual traders or partnerships.

Exempt Agreements
These are agreements exempted from the provisions of the Act by statutory
instrument, under authority given by Section 16. At present these comprise the
following:
-Credit agreements connected with land
-Agreements where the debtor is required to make only a small number of
repayments

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-Agreements where the level of credit charges payable by the debtor is less than a
certain level (less than the higher of 13% or 1% above the highest of the clearing
bank base rates)
-Agreements connected with foreign trade.
-Regulated Agreements: These are consumer credit or consumer hire agreements
which are not exempt.
-Small Agreements: These are regulated
agreements for credit not exceeding £50.
Certain provisions of the Act do not apply to
small agreements

ITQ: What are the types of credit?
ITA: Running account credit, Debtor-Creditor-Supplier agreement, Credit Token
agreement, Consumer hire agreement and Exempted agreements.

Summary
In this session, we have discussed on hire purchase agreement. The meaning of
hire purchase was given, the features of hire purchase, the terms and conditions of
hire purchase and hire purchase agreement were discussed. Also sales agreements
including credit sales agreement were highlighted.

G. Discussion Questions
1. Identify and discuss the three broad reasons for the adoption of the hire
purchase system.
2. What is hire purchase? Explain the sources of hire purchase finance in any
country of your choice
3. What are the features of hire purchase?
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 4. Distinguish between a hire purchase and a lease
5. What is installment purchase? Discuss its features.
6. Discuss the advantages and disadvantage of hire purchase
7. Discuss any important element of hire purchase agreement
8. Differentiate between a hire purchase system and installment payment
system.

Reference
Abiola, S. (2005). Introduction to Business Law in Nigeria. Lagos: Malthouse
Press Ltd.
Keith, A. (2002). Business law (7th Ed). London: Thomson.
Sagay. (2000). Nigerian Law of Contract. Ibadan: Spectrum Books Ltd.
www.dphu.org/uploads/attachements/books/books_5934_0.pdf
Abe Diploma in Business Administration. Study Manual. Principles of Business
Law

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 9.2.2.3 STUDY SESSION 7
Instruments, Negotiable and Notes
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Nature of Negotiable Instruments and Note
B. Kinds of Negotiable Instruments
- Bills of Exchange
- Cheques
- Promissory Notes
Summary
Discussion Questions
References/Further Readings

Introduction
You are welcome to this study session. I want you to know that, negotiation is the
process of transferring the instrument to someone who is not one of the original
parties to it. A bearer instrument, which is one that states on its face that it is
payable to “bearer,” is negotiated simply by passing the instrument from one
person to another. An order instrument is made payable to a specific person or to
their order and is negotiated by that person signing (endorsing) on the back and
then delivering it to another. An order instrument will become a bearer instrument
with an endorsement in that simple form. Cheques are normally made payable to a
specific person.

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For example, if Pede draws a cheque made payable to Queen, Queen could
negotiate that cheque to Naidu by signing on the back of it and delivering it to
Naidu. If this endorsement is only a signature, the cheque becomes a bearer
instrument and Naidu could transfer it without further endorsement. If Queen not
only signed his name but, as part of the endorsement, stated that the cheque is
payable to Naidu or to the order of Naidu, then the instrument remains an order
instrument, and Naidu must go through the two-stage process of endorsing it and
delivering it to some third party to negotiate it further. In fact, there are many
different types of endorsements, each designed to accomplish a different purpose.

Learning Outcomes
At the end of this session, you should be able to understand the following:
1. Nature of Negotiable Instruments and Note
2. Kinds of Negotiable Instruments
3. Benefits of Negotiable Instruments
4. Formal Requirements for Negotiable Instruments

A. Nature of Negotiable Instruments and Note

At the outset, it is necessary to distinguish between the assignment of contractual
rights, and the negotiation of negotiable instruments. When contractual rights are
assigned, it is necessary to notify the debtor of the transfer before the assignee can
enforce payment directly. The element that makes negotiable instruments an
effective substitute for money in many situations is their free transferability from
one party to another without having to notify or acquire the consent of the original
parties to the transfer.

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To facilitate their transferability, negotiable instruments have acquired a second
characteristic that makes them unique in the field of special contractual
relationships. When contractual rights are assigned, the assignee is in no better
position than the assignor, and any defense the debtor has against the assignor will
hold against the assignee as well, thus allowing the debtor to avoid payment. This
possibility obligates the assignee to investigate and accept the risks associated with
the dealings between the original parties, since the assignee is subject to them. A
negotiable instrument is unique because when it is transferred through negotiation
to a third party who meets certain qualifications, that third party may take the
instrument free of any problems which may exist between the original parties to it.
The holder of the negotiable instrument may have better claims than the person
from whom it was received. Even if the debtor under the instrument has a good
defence against the original creditor, it cannot be used against an innocent third
party, who is called a holder in due course, and the debtor will have to pay.

This is the essential pre-requisite to making negotiable instruments freely

transferable because it removes much of the risk and uncertainty that might
otherwise interfere with their use.

ITQ: What is negotiation?

ITA: Negotiation is the process of transferring the instrument to someone who is not one
of the original parties to it.

B. Kinds of Negotiable Instruments

Although the Bills of Exchange Act deals only with bills of exchange (drafts),
cheques, and promissory notes, it is important to note that other types of
instruments can qualify as negotiable instruments or take on many of their

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characteristics. For example, bonds made payable to a designated person or to his
or her order have been held to be negotiable
instruments. Similarly, share certificates where
no restrictions are included have been
specifically designated as negotiable instruments
in some jurisdictions.

Bills of Exchange
A bill of exchange, sometimes referred to as a draft, is an order instrument,
whereby an order or direction is given by one person to another, usually a bank or
financial institution, to pay funds to a third. The person drawing up the instrument
is called the drawer. It is the drawer who orders the drawee, usually a financial
institution, to make payment to a third party, known as the payee. Although the
instrument is addressed to the drawee, it is physically transferred to the payee, and
the payee then presents the instrument to the drawee for payment. Normally, the
drawer has already established some sort of business arrangement, such as an
account, with the person or institution being ordered to pay.

Otherwise, the order would simply be ignored. However, in some circumstances, a

bill of exchange is used as a means of collecting a debt, and then, the drawer orders
the drawee/debtor to make payment to a third party. The idea is that when the
payee presents the instrument to the drawee/debtor for payment, it will be
honoured; if it is not, there will be damage to the debtor’s credit rating.

If the bill is made payable on demand, it is usually presented for payment right
away, but where the instrument is made payable at some future time, the payee or

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subsequent holder must wait for payment. In these circumstances, the holder of the
bill can determine whether the bill will be honoured at that future date by
presenting it to the drawee for acceptance. The drawee accepts the obligation to
pay the amount specified on the instrument at the date of maturity by writing the
word “accepted,” the date, and the appropriate signature on the bill of exchange.
When the drawee has done this, he or she has accepted the bill and is referred to
subsequently as the acceptor, rather than the drawee. If the drawee refuses to
accept the instrument, it has been dishonoured, and the holder can then seek
redress from the drawer without waiting until the maturity date. But if the
instrument is accepted, the drawee becomes primarily liable on the instrument and
the drawer no longer has any control over the payment of the bill.

It is interesting to note that before acceptance takes place, the drawee owes no
obligation to the payee or subsequent holder, since there is no direct relationship
between them, but after acceptance the drawee, now the acceptor, is directly
obligated. Prior to acceptance, the drawee will only honour because of his
relationship to the drawer, and so, the drawer still retains control and can order the
drawee not to pay. But after acceptance, the drawee loses the right to countermand
the instrument. For example, if Garcia buys a boat from Saito and gives Saito a bill
of exchange, payable three months later, drawn on Ace Trust Company, where
Garcia has an account or line of credit, it is quite likely that Saito would go to Ace
Trust Company as soon as possible to find out whether Ace would honour the bill
three months hence. Ace Trust Company would indicate their willingness to
honour the instrument at maturity by their representative writing “accepted” across
the instrument, accompanied by the date and the signature of the appropriate
signing officer. If they refuse to do this, the bill would be dishonoured, and Saito

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would then turn to Garcia, the original drawer of the instrument, for satisfaction.
But if Ace does accept the bill, Garcia can no longer issue any instructions to Ace
in relation to it. In effect, the primary debtor is now Ace Trust Company. Since
they have assumed the debt and the obligation to pay, Garcia has lost control of the
situation.

The Bills of Exchange Act states that the position of the acceptor is the same as that
of the maker of the promissory note. If Garcia were to discover that there had been
some fraudulent misrepresentation on the part of Saito, Garcia could countermand
the order to Ace Trust Company any time before acceptance. But once Ace has
accepted the bill and become the primary debtor, it owes an obligation to Saito to
honour the instrument independently of Garcia and so must pay independent of any
difficulties that exist between Garcia and Saito. If there has been fraud, Garcia has
the right to sue Saito for compensation, but he cannot prevent Ace from paying out
on the accepted bill of exchange.

Although it is possible to make a qualified acceptance, such as “acceptable when

car repair complete,” this can be treated as a dishonour of the bill of exchange.
Bills of exchange can be used to accomplish two purposes. First, they are an
extremely effective method of transferring funds between parties without the
necessity of carrying cash, and, second, they can be used to create a creditor-debtor
relationship.

Demand drafts and sight drafts are usually used to transfer funds, the demand draft
being payable when it is presented and the sight draft payable three days after
being presented. The advantage of the sight draft is that it gives the drawee time to

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assemble the funds after it has been presented. A bill of exchange payable at some
future time is called a time draft.

Although the bill of exchange was traditionally the most significant type of
negotiable instrument, its use in modern times has dwindled because of business
people’s increased reliance on cheques, and more recently the move to electronic
methods of banking. However, the bill of exchange is still a valuable tool of
commerce, and there are many circumstances in which, because of tradition or the
need for the unique qualities of this instrument, the bill of exchange is still
important today.

Cheques
A cheque is a bill of exchange drawn on a bank and payable on demand. It is
drawn up by the drawer and made payable to the payee. Thus, a cheque may be
viewed as a type of bill of exchange; it has the same general characteristics but is
limited to situations in which the drawee is a bank and payment can be demanded
immediately. It should be noted that the definition of “bank” for the purposes of
the act has been broadened to include other institutions, such as credit unions and
some trust companies. Since a cheque is payable on demand, its primary purpose is
to exchange funds conveniently rather than to function as an instrument of credit.
However, cheques that are post-dated can be used to create a creditor-debtor
relationship over substantial periods of time.

Because a creditor-debtor relationship is inconsistent with a cheque being payable

on demand, a post-dated cheque does not acquire all the characteristics of a
negotiable instrument until the date specified on the instrument. As a result, the

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drawer retains the right to countermand a post-dated cheque up to the stated date,
even when it gets into the hands of an innocent third party before that date. This is
because the post-dated cheque, by its very nature, is irregular on its face.

Promissory Notes
Whereas bills of exchange and cheques are order instruments involving third
parties, a promissory note simply involves a promise by one person to pay another.
The person making the promise or the debtor who draws up and signs the
promissory note is called the maker, and the person to be paid is called the payee.
The main function of promissory notes is to advance credit and they are commonly
used by financial institutions, especially in consumer loan transactions. These
notes often require payment by installments and the payment of interest. When
installments are involved, the payment of each installment should be endorsed on
the note so that any subsequent holder will have notice of what has been paid.

The maker of a promissory note corresponds to the acceptor of a bill of exchange

having the direct obligation to honour the instrument when it comes due.
Promissory notes like bills of exchange and cheques can be negotiated to third
parties, who, if they qualify, can enforce them despite any problems associated
with the original deal. It is this characteristic that makes promissory notes so
attractive to institutions in the business of lending money. The merchant, selling
something on credit, would have their customer sign a conditional sale agreement
and also sign a promissory note. The merchant would then assign the conditional
sale agreement, negotiating the promissory note to an innocent third-party finance
company. Thus, the merchant gets paid immediately for his goods, and the finance
company can enforce the credit agreement independent of any problems that might

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be associated with the original deal. If the goods were defective, the debtor could
only seek recourse from the original merchant but would still have to pay on the
promissory note.

ITQ: What are the kinds of negotiable instruments?

ITA: Bills of exchange, Cheques, Promissory notes.

Summary
In this session instruments negotiable and notes were discussed. The nature of
negotiable instruments were highlighted, and the kinds of negotiable instrument
were discussed giving attention to bills of exchange, cheques and promissory
notes.

C. Discussion Questions
1. Explain the various kinds, benefits and formal requirements of negotiable
instruments.
2. With the aid of decide cases, discuss the rules which govern the acceptance
of negotiable instruments.
3. Explain clearly, the term “negotiation”.
4. What are the different modes of negotiation?
5. What is the significance of an instrument qualifying as negotiable instrument
when it comes to the transferability of the instrument?
6. Discuss the requirements for a person to become a holder
7. Discuss the difference between negotiable and nonnegotiable instrument

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 9.2.2.4 STUDY SESSION 8
Insurance
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Meaning and Contract of Insurance
B. Fundamentals of Insurance
C. Cost and Benefits of Insurance
- Payment of Losses
- Economic Growth
- Loss Prevention
- Credit Support
- Cost to Society
- Insurance Contract
- Insurance terminology you should know:
D. Condition and Warranties
E. Liabilities of Principal and Agent
Summary
Discussion Questions
References/Further Readings

Introduction
Insurance is a form of risk management in which the insured transfers the cost of
potential loss to another entity in exchange for monetary compensation known as
the premium. In other words, insurance may be defined as a contract between two
parties whereby one party called insurer undertakes in exchange for a fixed sum

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called premium to pay the other party called insured a fixed amount of money
after happening of a certain event. “A Contract may be defined as an agreement
between two or more parties to do or to abstain from doing an act, with an
intention to create a legally binding relationship.”

Learning Outcomes
At the end of this session, you should be able to know the following:
1. Meaning and Contract of Insurance
2. Condition and Warranties
3. Liabilities of Principal and Agent

A. Meaning and Contract of Insurance

Insurance allows individuals, businesses and other entities to protect themselves
against significant potential losses and financial hardship at a reasonably
affordable rate. We say "significant" because if the potential loss is small, then it
doesn't make sense to pay a premium to protect against the loss. After all, you
would not pay a monthly premium to protect against a N5000 loss because this
would not be considered a financial hardship for most. Insurance is appropriate
when you want to protect against a significant monetary loss. Take life insurance
as an example. If you are the primary breadwinner in your home, the loss of
income that your family would experience as a result of our premature death is
considered a significant loss and hardship that you should protect them against. It
would be very difficult for your family to replace your income, so the monthly
premiums ensure that if you die, your income will be replaced by the insured
amount. The same principle applies to many other forms of insurance. If the

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potential loss will have a detrimental effect on the person or entity, insurance
makes sense.

General Insurance comprises of insurance of property against fire, burglary etc,

personal insurance such as Accident and Health Insurance, and liability insurance
which covers legal liabilities. Suitable general Insurance covers are necessary for
every family. It is important to protect one’s property, which one might have
acquired from one’s hard earned income. Losses created to
catastrophes such as the tsunami, earthquakes, cyclones
etc. have left many homeless and penniless. Such losses
can be devastating but insurance could help mitigate them.
Property can be covered, so also the people against
Personal Accident. A Health Insurance policy can provide
financial relief to a person undergoing medical treatment whether due to a disease
or an injury.

ITQ: What is the meaning of insurance?

ITA: Insurance is a form of risk management in which the insured transfers the cost of
potential loss to another entity in exchange for monetary compensation known as the
premium

B. Fundamentals of Insurance
Insurance works by pooling risk. What does this mean? It simply means that a
large group of people who want to insure against a particular loss pay their
premiums into what we will call the insurance bucket, or pool. Because the number
of insured individuals is so large, insurance companies can use statistical analysis
to project what their actual losses will be within the given class. They know that
not all insured individuals will suffer losses at the same time or at all. This allows
the insurance companies to operate profitably and at the same time pay for claims
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that may arise. For instance, most people have auto insurance but only a few
actually get into an accident. You pay for the probability of the loss and for the
protection that you will be paid for losses in the event they occur.

Risks- Life is full of risks, some are preventable or can at least be minimised, some
are avoidable and some are completely unforeseeable. What's important to know
about risk when thinking about insurance is the type of risk, the effect of that risk,
the cost of the risk and what you can do to mitigate the risk?

The characteristics of an insurance transaction are

• Pooling of resources
• Accumulation of funds;
• Distribution of funds to those who have losses;
• Transfer of risk from one person to the group; and
• Spread of risk among all members of the group.

When people facing a common risk pool their resources, they create an
accumulation of funds from which individual losses can be paid. Such an
arrangement transfers risk from the individual to the group because the group
shares the cost of the risk among all of its members. All insurance, no matter what
type or sold by which company, is a form of this kind of arrangement

C. Cost and Benefits of Insurance

The products and services the insurance industry provides offer many benefits to
society. Today's insurance provides protection by reimbursing people when their
property is damaged or they suffer some other loss. Insurance helps individuals and

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business owners resume their normal standard of living and operations, which also
benefits society as a whole.
The primary benefits of insurance include:
• payment of losses;
• economic growth;
• credit support;
• loss prevention; and
• peace of mind.

Payment of Losses
If a business burns down and has no means to resume operation, it would mean
financial hardship for the owner. But the negative impact would extend beyond the
owner and affect
• Employees (who now are unemployed);
• Those from whom the business purchases raw materials, goods or services (who
now must find a new customer); and
• Those to whom the business provides goods and
services (who now must find another business to fill
their needs).
The proceeds of an insurance policy benefit everyone
by restoring the insured person or organisation to the
same financial condition as before the loss and
preventing the loss from rippling out and affecting
others negatively.

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Economic Growth
The insurance industry plays an important role in the nation's economy. It is
second only to the commercial banking industry as a source of investment funds
because insurance companies invest the billions of the premium dollars they
receive annually in a wide range of investments.

Insurance companies use premiums collected from policyholders to

• pay for claims;
• pay for cost of doing business; and
• build cash reserves for future loss payments.

Cash reserves are invested in federal and municipal bonds that are used to build
roads, schools and utilities. Reserves are also invested in commercial
developments and the stock market. These investments promote economic growth
in communities and support the insurance company's requirement of maintaining
sufficient capital reserves to pay future losses and earn a profit.

Loss Prevention
Insurance also benefits society by encouraging activities and devices that reduce
the amount of losses and their economic impact.

Credit Support
Banks and credit institutions rely on insurance to make sure they can recover loans
if disaster occurs. Insurance allows borrowers to guarantee creditors that their
investment is protected against disasters.
Insurance protects:

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• The value of property from unforeseen disasters; and
• A client's ability to pay back loans if illness or premature

ITQ: What are the primary benefits of insurance?

ITA: Payment of loss, Economic growth, Credit support, Loss prevention and Peace of
mind.

Cost to Society
Despite its benefits, insurance is not without costs. Insurance can inadvertently
create a situation where losses are more likely to occur. For example, no one would
burn down his or her house if he or she had to bear the financial burden. Tempted
by the opportunity offered by insurance coverage, unscrupulous people commit
arson simply to access policy proceeds. This is an insurance cost because the loss
would not have occurred unless the arsonist believed he or she could collect on the
policy. In other words, without insurance, arson for profit would not exist.

Insurance Contract
The insurance contract is a legal document that spells out the coverage, features,
conditions and limitations of an insurance policy. It is critical that you read the
contract and ask questions if you don't understand the coverage. You don't want to
pay for the insurance and then find out that what you thought was covered isn't
included.

Insurance terminology you should know:

Bound: Once the insurance has been accepted and is in place, it is called "bound."
The process of being bound is called the binding process.

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Insurer: A person or company that accepts the risk of loss and compensates the
insured in the event of loss in exchange for a premium or payment. This is usually
an insurance company.

Insured: The person or company transferring the risk of loss to a third party
through a contractual agreement (insurance policy). This is the person or entity
who will be compensated for loss by an insurer under the terms of the insurance
contract.

Insurance Rider/Endorsement: An attachment to an insurance policy that alters

the policy's coverage or terms.

Insurance Umbrella Policy: When insurance coverage is insufficient, an umbrella

policy may be purchased to cover losses above the limit of an underlying policy or
policies, such as homeowners and auto insurance. While it applies to losses over
the dollar amount in the underlying policies, terms of coverage are sometimes
broader than those of underlying policies.

Insurable Interest: In order to insure something or someone, the insured must

provide proof that the loss will have a genuine economic impact in the event the
loss occurs. Without an insurable interest, insurers will not cover the loss. It is
worth noting that for property insurance policies, an insurable interest must exist
during the underwriting process and at the time of loss. However, unlike with
property insurance, with life insurance, an insurable interest must exist at the time
of purchase only.

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D. Condition and Warranties
What are warranties?
A warranty is a guarantee given by the seller to
the buyer about the quality, fitness and
performance of the product. It is an assurance
provided by the manufacturer to the customer that
the said facts about the goods are true and at its
best. In other words, warranties should be seen as
contractual statements giving assurances from a seller/supplier to a
purchaser/customer about the nature of the assets/goods/services being purchased.
A warranty, as above defined, is a condition which must be exactly complied with,
whether it be material to the risk or not. If it be not so complied with, then, subject
to any express provision in the policy, the insurer is discharged from liability as
from the date of the breach of warranty, but without prejudice to any liability
incurred by him before that date.

Many times, if the warranty given, proves false and the product does not function
as described by the seller then remedies like a return or exchange are also available
to the buyer i.e. as stated in the contract.

A warranty can be for lifetime or for a limited period. It may be either expressed,
i.e., which is specifically defined or implied, which is not explicitly provided, but
arises according to the nature of sale like:
 Warranty related to undisturbed possession of the buyer.
 Warranty that the goods are free from any charge.
 Disclosure of harmful nature of goods.

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  Warranty as to quality and fitness

If a warranty is breached, even if the subject matter of the warranty is irrelevant to

the loss, the insurer is automatically discharged from all future liability. The
insurer does not have to elect to avoid further liability although it can waive its
rights. Any liability that has already arisen remains on foot. There is no
requirement that the breach be connected in any way with any subsequent claim.
Trivial or inadvertent breaches are sufficient to trigger the insurer’s discharge of
liability. The breach cannot be remedied.

The rules of strict compliance apply to both express and implied warranties. In
insurance law, the term warranty has been described as a ‘word of uncertain
meaning’. Any attempt to explain the significance of the term is complicated by
the often indiscriminate use of the word to denote clauses in policies with widely
varying functions, and by variations in legal vocabulary attributable in part to
changes in legal terminology over the years and in part simply to judicial
idiosyncrasy.

General contract law distinguishes between conditions and warranties. Conditions

go to the heart of the contract and a breach may lead to rescission; warranties are
terms whose breach may give rise to damages, but not rescission.

ITQ: What is a warranty?

ITA: A warranty is a guarantee given by the seller to the buyer about the quality, fitness
and performance of the product.

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What are Conditions?
Conditions are terms, obligations and provisions imposed by the buyer and seller
while entering into a contract of sale, which needs to be satisfied. The conditions
are indispensable to the objective of the contract. There are two types of
conditions, in a contract of sale which are:
a. Expressed Condition: The conditions which are clearly defined and agreed
upon by the parties while entering into the contract.
b. Implied Condition: The conditions which are not expressly provided, but as
per law, some conditions are supposed to be present at the time of making
the contract. However, these conditions can be waived off through express
agreement. Some examples of implied
conditions are:
 Condition relating to title of goods.
 Condition with respect to the quality and
fitness of the goods.
 Condition as to wholesomeness.
 Sale by sample
 Sale by description

ITQ: What are conditions? What are the two types of conditions?
ITA: Conditions are terms, obligations and provisions imposed by the buyer and seller
while entering into a contract of sale, which needs to be satisfied. The two types of
conditions are Expressed and Implied condition.

Key Differences between Condition and Warranty

The following are the major differences between condition and warranty:
a. A condition is an obligation which requires to be fulfilled before another
proposition takes place. A warranty is a surety given by the seller regarding
the state of the product.
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 b. Condition is vital to the theme of the contract while Warranty is ancillary.
c. Breach of any condition may result in the termination of the contract while
the breach of warranty may not result in the cancellation of the contract.
d. Violating a condition means violating a warranty too, but this is not the case
with warranty.
e. In case of breach of condition, the innocent party has the right to rescind the
contract as well as a claim for damages. On the other hand, in breach of
warranty, the aggrieved party can only sue the other party for damages

At the time of agreeing to the contract of sale, both the buyer and seller, puts a
number of stipulations regarding payment, delivery, quality, quantity, etc. These
stipulations can be either condition or warranty, which depends on the nature of the
contract. Every contract of sale has a number of implied conditions and warranties.

E. Liabilities of Principal and Agent

Agency deals with situations in which one person - the principal- uses another
person - the agent- to act on his behalf. Sometimes the acts of the agent are
attributed legally to the principal, sometimes not. The key to determining whether
a principal is liable for contracts made by his agent is authority: was the agent
authorised to negotiate the agreement and close the deal? Obviously, it would not
be sensible to hold a contractor liable to pay for a whole load of lumber merely
because a stranger wandered into the lumberyard saying, “I am an agent for ABC
Contractors; charge this to their account.” To be liable, the principal must have
authorised the agent in some manner to act in his behalf, and that authorisation
must be communicated to the third party by the principal.

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Types of Authority
The strongest form of authority is that which is expressly granted, often in written
form. The principal consents to the agent’s actions, and the third party may then
rely on the document attesting to the agent’s authority to deal on behalf of the
principal. The principal bears the risk of any wrongful action of his agent.

Implied Authority
Not every detail of an agent’s work can be spelled out. It is impossible to delineate
step-by-step the duties of a general agent; at best, a principal can set forth only the
general nature of the duties that the agent is to perform. If express authority were
the only valid kind, there would be no efficient way to use an agent, both because
the effort to describe the duties would be too great and because the third party
would be reluctant to deal with him.

But the law permits authority to be “implied” by the relationship of the parties, the
nature and customs of the business, the circumstances surrounding the act in
question, the wording of the agency contract, and the knowledge that the agent has
of facts relevant to the assignment. The general rule is that the agent has implied or
“incidental” authority to perform acts incidental to or reasonably necessary to
carrying out the transaction.

Actual or Implied Authority

Actual authority includes express authority and implied authority (not to be
confused with implied appointment, that is, appointment by estoppel). Express

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authority is the authority which the principal has expressly given to the agent
whether orally or in writing. Implied authority (sometimes described as usual
authority) is the authority of an agent to do acts which are reasonably incidental to
and necessary for the effective performance of his duties. The content of implied
authority depends on the facts of each case and is sometimes determined by the
usages and customs of a trade, business or profession.

The scope of the actual authority of the agent is therefore to be ascertained from
the oral or written agreement between principal and agent, usage and customs of
the relevant trade, profession or business and the course of dealing between the
two parties. If the agent enters into a contract with a third party pursuant to his
actual authority, the contract entered into will create contractual rights and
liabilities between the principal and the third party.

Apparent or ostensible authority

a. An agent is said to have apparent or ostensible (not actual) authority if:
I. The principal has made a representation (whether by words or conduct) to
the third party to the effect that the agent has the authority to act for him
although the agent does not in fact have such authority;
II. The third party has in fact relied on such representation to deal with the
agent;
III. The third party has altered his position resulting from such reliance, for
example, assuming obligations under a contract with the agent
b. In essence, apparent or ostensible authority is authority which the principal
induces a third party to believe the agent has when the agent in fact has not.
The agent has only the appearance of authority, but no actual authority to act

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 on behalf of the principal. Nevertheless, if the third party enters into a contract
with the agent in reliance on the principal's representation, that contract will
still be legally binding on the principal.
c. Apparent or ostensible authority will give rise to agency by estoppel. The
principal's representation to the third party as to the authority of the agent to
act on his behalf, when acted upon by that third party by entering into a
contract with the agent, operates as an estoppel which prevents the principal
from denying that such contract is binding upon him.

ITQ: What are the types of authority?

ITA: Implied Authority, Actual or Implied Authority & Apparent or ostensible
authority.

Summary
In this session, we have discussed about insurance. The meaning and contract of
insurance was stated, the fundamentals of insurance, characteristics of insurance,
as well as transaction cost and benefits highlighted. Also conditions and warranty
were discussed, the difference between conditions and warranties given as well as
liabilities and principles were stated.

F Discussion Question
1. With the aid of decided cases or statutes, compare and contrast the conditions
and warranties as well as the liabilities of the Principal and Agent in the
contract of insurance.
2. What is the difference between a life insurance contract and an annuity contract?
3. Describe the different forms of ordinary life insurance.
4. Why do life insurance companies invest in long-term assets?
5. What is the major source of life insurance underwriting risk?
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6. Who are the main regulators of the life insurance industry?
7. Why is traditional life insurance in decline?
8. What is the primary function of an insurance company? How does this function
compare with the primary function of a depository institution?

Reference
Cathy Pareto (2010) Introduction to Insurance
http://www.investopedia.com/university/insurance/default.asp

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 9.3 MODULE 3
Introduction
This third module has set a standard for easy learning that provides you with the
tools for understanding the law surrounding the various forms of business
organisation and the role of the shareholders as well as their securities regulation.
The module goes well beyond merely covering legal principles, rules and
regulations affecting the management of these various forms of business but offers
insights into the importance of law of torts to business, basis of tortious liability,
and “passing off” and “trade libel” new developments and trends that will greatly
affect the future of business activities. A discussion follows immediately on labour
relations and the general activities on trade unions. After considering that, then, the
discussion is followed by preventive and
regulatory law. The module concluded by
discussing the need for internet and
international laws as well as jurisdiction
over online activities.

9.3.1 Objectives
On completion of this module you should be able to:
1. Explore the current and contemporary legal issues and to generalize better
solutions in the management of a more effective corporate business.
2. Have adequate understanding on “passing off” and “trade libel” new trends
and development.
3. Demonstrate your knowledge and understanding on the principles
underpinning labour relations and trade unions activities.

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4. Understand the various Preventive and Regulatory
Law available and with analytical mind and skills
for evaluating Jurisdiction over online activities.

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 9.3.2 STUDY SESSIONS
9.3.2.1 STUDY SESSIONS 9: Business Organisation
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Sole Proprietorship
B. Partnership
C. Formation and Termination of a Corporation
D. Financing the Corporation and the Role of Shareholders
- General Sources of Corporate Funds
- Plowback
- Debt Securities
- Equity Securities
- Other Forms of Finance
- Rights of a Corporation
E. Classification of Corporations
1. Non-profit Corporations
2. Public Corporations
3. Professional Corporations
4. Business Corporations
F. Security Regulation
Summary
Discussion Questions
References/Further Readings

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Introduction
The legal form of a business can have great bearing on the successful operation
and resulting profitability of the business venture. It is important therefore, that
you have a general understanding of these fundamental features of each of the
basic types of business organisations. An injury or wrong may be committed,
either with or without force, to the person or property of another. Such injury may
arise by nonfeasance, or by the malfeasance or the misfeasance of the wrongdoer
for which there may be action for damages (liability for torts). Today’s
businessperson must be concerned not only with competing effectively against
competitors but also with the protection of both properties (personal, real and
intellectual) and complying with a myriad of regulatory requirements (such as:
sales, consumer, environmental protection).

Businesses may be organised in many ways. The most common forms today are
sole proprietorship, partnership, limited partnership, Limited Liability Company
and corporation. The sole proprietorship form of business organisation is thereby
discussed.

Learning Outcomes
At the end of this session, you should be able to:
1. Identify the forms of business organisations
2. Discuss about partnership form of business
3. Discuss on the formation and termination of a cooperation
4. Discuss on the management of a cooperation
5. Discuss on financing the cooperation and the role of shareholders
6. Discuss on the securities regulation

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A. Sole Proprietorship
This is one of the forms of business organisation. It is a type of business unit
where one person is solely responsible for providing the capital and bearing the
risk of the enterprise, and for the management of the business.” Thus, ‘Sole
Proprietorship’ from of business organisation refers to a business enterprise
exclusively owned, managed and controlled by a single person with all authority,
responsibility and risk.

Characteristics of Sole Proprietorship Form of Business Organisation

a. Single Ownership: The sole proprietorship form of business organisation
has a single owner who himself/herself starts the business by bringing
together all the resources.
b. No Separation of Ownership and Management: The owner
himself/herself manages the business as per his/her own skill and
intelligence. There is no separation of ownership and management as is the
case with company form of business organisation.
c. Less Legal Formalities: The formation and operation of a sole
proprietorship form of business organisation does not involve any legal
formalities. Thus, its formation is quite easy and simple.
d. No Separate Entity: The business unit does not have an entity separate
from the owner. The businessman and the business enterprise are one and
the same, and the businessman is responsible for everything that happens in
his business unit.
e. No Sharing of Profit and Loss: The sole proprietor enjoys the profits
alone. At the same time, the entire loss is also borne by him. No other person

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 is there to share the profits and losses of the business. He alone bears the
risks and reaps the profits.
f. Unlimited Liability: The liability of the sole proprietor is unlimited. In case
of loss, if his business assets are not enough
to pay the business liabilities, his personal
property can also be utilized to pay off the
liabilities of the business.
g. One-man Control: The controlling power of
the sole proprietorship business always
remains with the owner. He/she runs the business as per his/her own will.

ITQ: What is a sole proprietorship: What are the characteristics of sole proprietorship?

ITA: It is a type of business unit where one person is solely responsible for providing the
capital and bearing the risk of the enterprise, and for the management of the business. The
characteristics of a sole proprietorship are: No Separation of Ownership and Management,
Less Legal Formalities, Less legal formalities, No Separate Entity, No Sharing of Profit and
Loss, Unlimited Liability & One-man Control.

Merits of Sole Proprietorship Form of Business Organisation

a. Easy to Form and Wind Up: It is very easy and simple to form a sole
proprietorship form of business organisation. No legal formalities are
required to be observed. Similarly, the business can be wind up any time if
the proprietor so decides.
b. Quick Decision and Prompt Action: As stated earlier, nobody interferes in
the affairs of the sole proprietary organisation. So he/she can take quick
decisions on the various issues relating to business and accordingly prompt
action can be taken.

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 c. Direct Motivation: In sole proprietorship form of business organisations.
The entire profit of the business goes to the owner. This motivates the
proprietor to work hard and run the business efficiently.
d. Flexibility in Operation: It is very easy to effect changes as per the
requirements of the business. The expansion or curtailment of business
activities does not require many formalities as in the case of other forms of
business organisation.
e. Maintenance of Business Secrets: The business secrets are known only to
the proprietor. He is not required to disclose any information to others unless
and until he himself so decides. He is also not bound to publish his business
accounts.
f. Personal Touch: Since the proprietor himself handles everything relating to
business, it is easy to maintain a good personal contact with the customers
and employees. By knowing the likes, dislikes and tastes of the customers,
the proprietor can adjust his operations accordingly. Similarly, as the
employees are few and work directly under the proprietor, it helps in
maintaining a harmonious relationship with them, and run the business
smoothly.

Limitations of Sole Proprietorship Form of Business Organisation

a. Limited Resources: The resources of a sole proprietor are always limited.
Being the single owner it is not always possible to arrange sufficient funds
from his own sources. Again borrowing funds from friends and relatives or
from banks has its own implications. So, the proprietor has a limited
capacity to raise funds for his business.

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 b. Lack of Continuity: The continuity of the business is linked with the life of
the proprietor. Illness, death or insolvency of the proprietor can lead to
closure of the business. Thus, the continuity of business is uncertain.
c. Unlimited Liability: You have already learnt that there is no separate entity
of the business from its owner. In the eyes of law the proprietor and the
business are one and the same. So personal properties of the owner can also
be used to meet the business obligations and debts.
d. Not Suitable for Large Scale Operations: sole proprietorship form of
business organisation is not suitable for large-scale business since the
resources and the managerial ability is limited.
e. Limited Managerial Expertise: A sole proprietorship from of business
organisation always suffers from lack of managerial expertise. A single
person may not be an expert in all fields like, purchasing, selling, financing
etc. Again, because of limited financial resources, and the size of the
business it is also not possible to engage the professional managers in sole
proprietorship form of business organisations.

ITQ: What are the limitations of a sole proprietorship?

ITA: Limited Resources, Lack of Continuity, Unlimited Liability, Not Suitable for
Large Scale Operations, Limited Managerial Expertise.

Formation of Sole Proprietorship Form of Business Organisation

It is very simple to establish a sole proprietary concern. Any
person who is willing to start a business and has the
necessary resources can set up this form of business
organisation. To start and operate the business in this form,
practically does not require any legal formalities to be

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fulfilled. In some cases like restaurant, chemist shop etc. however, permission from
the competent authority is required to be obtained before starting the business.
Similarly, setting up a factory may involve taking permission from the local
authority. But, formation of business unit as such does not involve any
complexities.

B. Partnership
‘Partnership’ is an association of two or more persons who pool their financial and
managerial resources and agree to carry on a business, and share its profit. The
persons who form a partnership are individually known as partners and collectively
a firm or partnership firm.

Characteristics of Partnership Form of Business Organisation

Based on the definition of partnership as given above, the various characteristics of
partnership form of business organisation, can be summarized as follows:
a. Two or More Persons: To form a partnership firm at least two persons are
required. The maximum limit on the number of persons is ten for banking
business and 20 for other businesses. If the number exceeds the above limit,
the partnership becomes illegal and the relationship among them cannot be
called partnership.
b. Contractual Relationship: Partnership is created by an agreement among
the persons who have agreed to join hands. Such persons must be competent
to contract. Thus, minors, lunatics and insolvent persons are not eligible to
become the partners. However, a minor can be admitted to the benefits of
partnership firm i.e., he can have share in the profits without any obligation
for losses.

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c. Sharing Profits and Business: There must be an agreement among the
partners to share the profits and losses of the business of the partnership
firm. If two or more persons share the income of jointly owned property, it is
not regarded as partnership.
d. Existence of Lawful Business: The business of which the persons have
agreed to share the profit must be lawful. Any agreement to indulge in
smuggling, black marketing etc. cannot be called partnership business in the
eyes of law.
e. Principal Agent Relationship: There must be an agency relationship
between the partners. Every partner is the principal as well as the agent of
the firm. When a partner deals with other parties he/she acts as an agent of
other partners, and at the same time the other partners become the principal.
f. Unlimited Liability: The partners of the firm have unlimited liability. They
are jointly as well as individually liable for the debts and obligations of the
firms. If the assets of the firm are insufficient to meet the firm’s liabilities,
the personal properties of the partners can also be utilized for this purpose.
However, the liability of a minor partner is limited to the extent of his share
in the profits.
g. Voluntary Registration: The registration of partnership firm is not
compulsory. But an unregistered firm suffers from some limitations which
makes it virtually compulsory to be registered. Following are the limitations
of an unregistered firm.
 The firm cannot sue outsiders, although the outsiders can sue it.
 In case of any dispute among the partners, it is not possible to settle the
dispute through court of law.

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  The firm cannot claim adjustments for amount payable to, or receivable
from, any other parties.

ITQ: What is partnership? What are the characteristics of partnership?

ITA: Partnership’ is an association of two or more persons who pool their financial
and managerial resources and agree to carry on a business, and share its profit. The
characteristics of a partnership are: Two or More Persons, Contractual Relationship,
Sharing Profits and Business, Existence of Lawful Business, Principal Agent
Relationship, Unlimited Liability & Voluntary Registration.

Advantages of Partnership Form of Business Organisation

a. Easy to Form: A partnership can be formed easily without many legal
formalities. Since it is not compulsory to get the firm registered, a simple
agreement, either in oral, writing or implied is sufficient to create a
partnership firm.
b. Availability of Larger Resources: Since two or more partners join hands to
start partnership firm it may be possible to pool more resources as compared
to sole proprietorship form of business organisation.
c. Better Decisions: In partnership firm each partner has a right to take part in
the management of the business. All major decisions are taken in
consultation with and with the consent of all partners. Thus, collective
wisdom prevails and there is less scope for reckless and hasty decisions.
d. Flexibility: The partnership firm is a flexible organisation. At any time the
partners can decide to change the size or nature of business or area of its
operation after taking the necessary consent of all the partners.
e. Sharing of Risks: The losses of the firm are shared by all the partners
equally or as per the agreed ratio.

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 f. Keen Interest: Since partners share the profit and bear the losses, they take
keen interest in the affairs of the business.
g. Benefits of Specialization: All partners actively participate in the business
as per their specialization and knowledge. In a partnership firm providing
legal consultancy to people, one partner may deal with civil cases, one in
criminal cases, another in labour cases and so on as per their area of
specialization. Similarly two or more doctors of different specialization may
start a clinic in partnership.
h. Protection of Interest: In partnership form of business organisation, the
rights of each partner and his/her interests are fully protected. If a partner is
dissatisfied with any decision, he can ask for dissolution of the firm or can
withdraw from the partnership.
i. Secrecy: Business secrets of the firm are only known to the partners. It is
not required to disclose any information to the outsiders. It is also not
mandatory to publish the annual accounts of the firm.

Limitations of Partnership Form of Business Organisation

A partnership firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that
the liability of the partners is unlimited i.e., the partners are personally liable for
the debt and obligations of the firm. In other words, their personal property can
also be utilized for payment of firm’s liabilities.
(b) Instability: Every partnership firm has uncertain life. The death, insolvency,
incapacity or the retirement of any partner brings the firm to an end. Not only that
any dissenting partner can give notice at any time for dissolution of partnership.

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(c) Limited Capital: Since the total number of partners cannot exceed 20, the
capacity to raise funds remains limited as compared to a joint stock company
where there is no limit on the number of share holders.
(d) Non-transferability of share: The share of interest of any partner cannot be
transferred to other partners or to the outsiders. So it creates inconvenience for the
partner who wants to transfer his share to others fully and partly. The only
alternative is dissolution of the firm.
(e) Possibility of Conflicts: You know that in partnership firm every partner has
an equal right to participate in the management. Also every
partner can place his or her opinion or viewpoint before the
management regarding any matter at any time. Because of
this, sometimes there is friction and quarrel among the
partners. Difference of opinion may give rise to quarrels
and lead to dissolution of the firm.

ITQ: What are the limitations of partnership?

ITA: Unlimited liability, Instability, Limited Capital, Non-transferability of share &
Possibility of Conflicts.

Types of Partners
You have learnt that normally every partner in a firm contributes to its capital,
participates in the day-to-day management of firm’s activities, and shares its
profits and losses in the agreed ratio. In other words all partners are supposed to be
active partners. However, in certain cases there are partners who play a limited
role. They may contribute capital and such partners cannot be termed as active
partners. Similarly, some persons may simply lend their name to the firm and make
no contribution to capital of the firm. Such persons are partners only in name.

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Thus, depending upon the extent of participation and the sharing of profits, liability
etc., partners can be classified into various categories. These are summarised here
under.
a. Based on the extent of participation in the day-to-day management of the
firm partners can be classified as ‘Active Partners’ and ‘Sleeping Partners’.
The partners who actively participate in the day-to-day operations of the
business are known as active partners or working partners. Those
partners who do not participate in the day-to-day activities of the business
are known as sleeping or dormant partners. Such partners simply
contribute capital and share the profits and losses.
b. Based on sharing of profits, the partners may be classified as ‘Nominal
Partners’ and ‘Partners in Profits’. Nominal partners allow the firm to use
their name as partner.

Formation of Partnership Form of Business Organisation

The following steps are to be taken in order to form a partnership firm:
a. Minimum two members are required to form a partnership. The maximum
limit is ten in banking and 20 in other businesses.
b. Select the like-minded persons keeping in view the nature and objectives of
the business.
c. There must be an agreement among the partners to carry on the business and
share the profits and losses. This agreement must preferably be in writing
and duly signed by the all the partners. The agreement, i.e., the partnership
deed must contain the following:
i. Name of the firm
ii. Nature of the business

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 iii. Names and addresses of partners
iv. Location of business
v. Duration of partnership, if decided
vi. Amount of capital to be contributed by each partner
vii. Profit and loss sharing ratio
viii. Duties, powers and obligations of partners.
ix. Salaries and withdrawals of the partners
x. Preparation of accounts and their auditing.
xi. Procedure for dissolution of the firm etc.
xii. Procedure for settlement of disputes
d. The partners should get their firm registered with the Registrar of Firms of
the concerned state. Although registration is not compulsory, but to avoid
the consequences of non-registration, it is advisable to get it registered when
it is setup or at any time during its existence. The procedure for registration
of a firm is as follows:
i. The firm will have to apply to the Registrar of Firms of the concerned state
in the prescribed form.
ii. The duly filled in form must be signed by all the partners.
iii. The filled in form along with prescribed registration fee must be deposited in
the office of the Registrar of Firms.
iv. The Registrar will scrutinise the application, and if he is satisfied that all
formalities relating to registration have been duly complied with, he will put
the name of the firm in his register and issue the Certificate of Registration.

ITQ: What is the minimum and maximum number of people in a partnership?

ITA: Minimum two members are required to form a partnership. The maximum limit is
ten in banking and 20 in other businesses

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C. Formation and Termination of a Corporation
The corporation is the dominant form of the business enterprise in the modern
world. As a legal entity, it is bound by laws. However, as a significant institutional
actor in the business world, the corporation has a host of relationships that have
called forth a separate body of law. The US Supreme Court contributed
importantly to the development of corporate law. In Gibbons v. Ogden, 22 U.S. 1
(1824) a groundbreaking case, the Court held that the Commerce Clause of the US
Constitution (Article I, Section 8, Clause 3) granted Congress the power to regulate
interstate commerce. However, in Paul v. Virginia, Paul v. Virginia, 75 U.S. 168
(1868). The Court said that a state could prevent corporations not chartered there—
that is, out-of-state or foreign corporations—from engaging in what it considered
the local, and not interstate, business of issuing insurance policies. The inference
made by many was that states could not bar foreign corporations engaged in
interstate business from their borders.

This decision brought about a competition in corporation laws. The early general
laws had imposed numerous restrictions. The breadth of corporate enterprise was
limited, ceilings were placed on total capital and indebtedness, incorporators were
required to have residence in the state, the duration of the company often was not
perpetual but was limited to a term of years or until a particular undertaking was
completed, and the powers of management
were circumscribed. These restrictions and
limitations were thought to be necessary to
protect the citizenry of the chartering
legislature’s own state. But once it became
clear that companies chartered in one state

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could operate in others, states began in effect to “sell” incorporation for tax
revenues.

Corporate Law Today

Following World War II, most states revised their general corporation laws. A
significant development for states was the preparation of the Model Business
Corporation Act by the American Bar Association’s Committee on Corporate
Laws. About half of the states have adopted all or major portions of the act. The
2005version of this act, the Revised Model Business Corporation Act (RMBCA),
will be referred to throughout our discussion of corporation law.

ITQ: What is a corporation?

ITA: A corporation is the dominant form of the business enterprise in the modern world, it
is bound by laws because it is a legal entity.

Ownership and Control

Ownership and control of corporations are separated. In the publicly held
corporation, which has many shareholders, the separation is real. Ownership is
widely dispersed because millions of shares are outstanding and it is rare that any
single shareholder will own more than a tiny percentage of stock. It is difficult
under the best of circumstances for shareholders to exert any form of control over
corporate operations. However, in the closely held corporation, which has few
shareholders, the officers or senior managers are usually also the shareholders, so
the separation of ownership and control may be less pronounced or even
nonexistent. Transfer of interest in a corporation, through a sale of stock, is much
easier; but for the stock of a small corporation, there might not be a market or there
might be contractual restrictions on transfer.

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Financing
Corporations can finance by selling freely transferable stock to the public or by
incurring debt. The corporation is a legal entity in its own right, one that can
provide a “veil” that protects its shareholders from personal liability. This crucial
factor accounts for the development of much of corporate law. Unlike the
individual actor in the legal system, the corporation is difficult to deal with in
conventional legal terms. The business of the sole proprietor and the sole
proprietor herself are one and the same. When a sole proprietor makes a decision,
she risks her own capital. When the managers of a corporation take a corporate
action, they are risking the capital of others—the shareholders. Thus accountability
is a major theme in the system of law constructed to cope with legal entities other
than natural persons.

Corporate existence begins only when the Department of Business Services has
“filed’’ the Articles of Incorporation. The Articles of Incorporation must set forth
the following: corporate name; initial registered agent and registered office;
corporate purpose; authorised shares; initial issued shares and the consideration to
be paid therefor. Steps towards the formation of a corporation:
Step 1: Choose a business name:
The name of your business can be the difference between success and failure. In
today’s global market, where Internet searches and social media are key to any
company’s marketing strategy, a business name that’s hard to remember, say, or
spell can cripple your new company before it ever gets off the ground.
As you think about possible business names, ask yourself:
 Does this name convey what my company does?
 Will it appeal to my target customers?

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  Does it reflect the brand image I’m seeking to create?
 Will it carry my company through the years if I decide to expand or shift
focus?

Prohibited words and phrases

Additionally, most states prohibit the use of a corporate name that is “substantially
similar” to that of a corporate or LLC name already in existence or dissolved
within the past 2 years. Also, the use of obscenities, profanity, or a name that may
be considered “deceptive” is prohibited in most states.

Protecting the Corporate Name

Generally, incorporating a business under a specific name will only prevent
another individual from forming a corporation with the same name in the same
state.
Step 2: Choose a business entity Type Selecting the right legal structure for your
business can save you headaches and financial hassles down the road, so choose
wisely.
Step 3: Choose a state: The state where your business is physically located (or
headquartered, if you expect to have locations in multiple states) is your “home
state.” Once you’ve chosen the state where you will incorporate or form your LLC,
there are some additional documents that you may need:
a. Business License: Just about every business needs a city or county business

license. You may also be subject to state or federal licensing requirements.

b. State License: State licenses are usually required for personal or professional

service businesses like accounting, contracting, or cosmetology that have

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 specific industry standards. Depending on the nature of your business, you
may need to register with the state to collect and pay sales or use taxes.
c. Federal License: Federal licenses are required for businesses that are highly

regulated by the federal government, such as ground transportation,

preparing meat products, manufacturing alcohol or tobacco, or providing
investment advice.
d. TIN number: Every organisation is required by law to obtain tax

identification number.
e. Certificate of Good Standing: Also known as a “Certificate of Existence” or

a “Certificate of Authorisation,” this document is proof that your company is

authorised to transact business in its home state, is in compliance with state
laws and regulations, is up to date on all payments owed to the state, and has
filed all required documents with the state.

D. Financing the Corporation and the Role of Shareholders

A corporation requires money for many reasons. The methods available to a
corporation for raising funds, focusing on how firms generate large amounts of
funds and finance large projects, such as building a new factory. One major
method of finance is the sale of stock. A corporation sells shares of stock, often in
an initial public offering. In exchange for consideration - usually cash - the
purchaser acquires stock in the corporation. This stock may give the owner a share
in earnings, the right to transfer the stock, and, depending on the size of the
corporation and the number of shares, power to exercise control. Other methods of
corporate finance include bank financing and bonds.

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General Sources of Corporate Funds
To finance growth, any on-going business must have a source of funds. Apart from
bank and trade debt, the principal sources are plowback, debt securities, equity
securities, and private equity.

Plowback
A significant source of new funds that corporations spend on capital projects is
earnings. Rather than paying out earnings to shareholders, the corporation plows
those earnings back into the business. Plowback is simply reinvesting earnings in
the corporation. It is an attractive source of capital because it is subject to
managerial control. No approval by governmental agencies is necessary for its
expenditure, as it is when a company seeks to sell securities, or stocks and bonds.
Furthermore, stocks and bonds have costs associated with them, such as the
interest payments on bonds, while retaining profits avoids these costs.

Debt Securities
A second source of funds is borrowing through debt securities. A corporation may
take out a debt security such as a loan, commonly evidenced by a note and
providing security to the lender. A common type of corporate debt security is a
bond, which is a promise to repay the face value of the bond at maturity and make
periodic interest payments called the coupon rate. For example, a bond may have a
face value of N10, 000 (the amount to be repaid at maturity) and a coupon rate of 7
percent paid annually; the corporation pays N70 interest on such a bond each year.
Bondholders have priority over stockholders because a bond is a debt, and in the
event of bankruptcy, creditors have priority over equity holders.

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Equity Securities
The third source of new capital funds is equity securities—namely, stock.
Equity is an ownership interest in property or a business. Stock is the smallest
source of new capital but is of critical importance to the corporation in launching
the business and its initial operations. Stock gives the investor a bundle of legal
Rights - ownership, a share in earnings, transferability and, to some extent, the
power to exercise control through voting. The usual way to acquire stock is by
paying cash or its equivalent as consideration.

Other Forms of Finance

While stock, debt securities, and reinvested profits are the most common types of
finance for major corporations (particularly publicly traded corporations), smaller
corporations or start-ups cannot or do not want to avail themselves of these
financing options. Instead, they seek to raise funds through private equity, which
involves private investors providing funds to a company in exchange for an interest
in the company. A private equity firm is a group of investors who pool their money
together for investment purposes, usually to invest in other companies. Looking to
private equity firms is an option for start-ups - companies newly formed or in the
process of being formed - that cannot raise funds through the bond market or that
wish to avoid debt or a public stock sale. Start-ups need money to begin
operations, expand, or conduct further research and development. A private equity
firm might provide venture capital financing for these start-ups. Generally,
private equity firms that provide a lot of venture capital must be extremely savvy
about the start-up plans of new businesses and must ask the start-up entrepreneurs
numerous challenging and pertinent questions. Such private equity firms expect a

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higher rate of return on their investment than would be available from established
companies.

ITQ: What are the general sources of corporate funds?

ITA: Plowback, Debt securities, Equity securities & Stocks.

Rights of a Corporation
Corporations lack certain rights that natural persons possess. For example,
corporations do not have the privilege against self-incrimination guaranteed for
natural persons by the Fifth and Fourteenth Amendments. In any legal proceeding,
the courts may force a corporation to turn over incriminating documents, even if
they also incriminate officers or employees of the corporation. And the corporation
is not entitled to federal review of state criminal convictions, as are many
individuals. Also given the importance of the corporate entity as a veil that limits
shareholder liability, it is important to note that in certain circumstances, the courts
may reach beyond the wall of protection that divides a corporation from the people
or entities that exist behind it. This is known as piercing the corporate veil, and it
will occur in two instances: (1) when the corporation is used to commit a fraud or
an injustice and (2) when the corporation does not act as if it were one.

E. Classification of Corporations
There are four major classifications of corporations: (1) non-profit, (2) municipal,
(3) professional, and (4) business. Business corporations are divided into two
types, publicly held and closely held corporations.

1. Non-profit Corporations
One of the four major classifications of corporations is the non-profit corporation

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(Also called not-for-profit Corporation). It is defined in the American Bar
Association’s Model Non-Profit Corporation Act as “a corporation no part of the
income of which is distributable to its members, directors or officers.” Non-profit
corporations may be formed under this law for charitable, educational, civil,
religious, social, and cultural purposes, among others.

2. Public Corporations
The true public corporation is a governmental entity. It is often called a municipal
corporation, to distinguish it from the publicly held corporation, which is
sometimes also referred to as a “public” corporation, although it is in fact private
(i.e., it is not governmental). Major cities and counties, and many towns, villages,
and special governmental units, such as sewer, transportation, and public utility
authorities, are incorporated. These corporations are not organised for profit, do
not have shareholders, and operate under different statutes than do business
corporations.

3. Professional Corporations
Until the 1960s, lawyers, doctors, accountants, and other professionals could not
practice their professions in corporate form. This inability, based on a fear of
professionals’ being subject to the direction of the corporate owners, was
financially disadvantageous. Under the federal income tax laws then in effect,
corporations could establish far better pension plans than could the self-employed.

4. Business Corporations
The Two Types

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It is the business corporation proper that we focus on in this unit. There are two
broad types of business corporations: publicly held (or public) and closely held (or
close or private) corporations. Again, both types are private in the sense that they
are not governmental. The publicly held corporation is one in which stock is
widely held or available for wide public distribution through such means as trading
on a national or regional stock exchange. Its managers, if they are also owners of
stock, usually constitute a small percentage of the total number of shareholders and
hold a small amount of stock relative to the total shares outstanding. Few, if any,
shareholders of public corporations know their fellow shareholders.

By contrast, the shareholders of the closely held corporation are fewer in number.
Shares in a closely held corporation could be held by one person, and usually by no
more than thirty. Shareholders of the closely held corporation often share family
ties or have some other association that permits each to know the others. Though
most closely held corporations are small, no economic or legal reason prevents
them from being large. Some are huge, having annual sales of several billion naira
each.
The giant publicly held companies with more than $1 billion in assets and sales,
with initials such as IBM and GE, constitute an exclusive group. Publicly held
corporations outside this elite class fall into two broad (non-legal) categories: those
that are quoted on stock exchanges and those whose stock is too widely dispersed
to be called closely held but is not traded on exchanges

ITQ: What are the major classification of corporations?

ITA: Non-profit Corporation, Municipal Corporation, Professional Corporation and
Business Corporation.

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F. Security Regulation
What is commonly referred to as “securities” are essentially worthless pieces of
paper. Their inherent value lies in the interest in property or an on-going enterprise
that they represent. This disparity between the tangible property - the stock
certificate, for example - and the intangible interest it represents gives rise to
several reasons for regulation. First, there is need for a mechanism to inform the
buyer accurately what it is he is buying. Second, laws are necessary to prevent and
provide remedies for deceptive and manipulative acts designed to defraud buyers
and sellers. Third, the evolution of stock trading on a massive scale has led to the
development of numerous types of specialists and professionals, in dealings with
whom the public can be at a severe disadvantage, and so the law undertakes to
ensure that they do not take unfair advantage of their customers.

What Is a Security?
Securities law questions are technical and complex and usually require
professional counsel. For the non-lawyer, the critical question on which all else
turns is whether the particular investment or document is a security. If it is, anyone
attempting any transaction beyond the routine purchase or sale through a broker
should consult legal counsel to avoid the various civil and criminal minefields that
the law has strewn about.

The definition of security, which is set forth in the US Securities Act of 1933, is
comprehensive, but it does not on its face answer all questions that financiers in a
dynamic market can raise. Under Section 2(1) of the act, “security” includes “any
note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate
of interest or participation in any profit-sharing agreement, collateral-trust

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certificate, preorganisation certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a security,
fractional undivided interest in oil, gas, or other mineral rights, or, in general, any
interest or instrument commonly known as a ‘security,’ or any certificate of
interest or participation in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”

Under this definition, an investment may not be a security even though it is so

labelled, and it may actually be a security even though it is called something else.
For example, does a service contract that obligates someone who has sold
individual rows in an orange orchard to cultivate, harvest, and market an orange
crop, involve a security subject to regulation under federal law? US Supreme Court
(1946) answers in the affirmative. The Court said the test is whether “the person
invests his money in a common enterprise and is led to expect profits solely from
the efforts of the promoter or a third party.” Under this test,
courts have liberally interpreted “investment contract” and
“certificate of interest or participation in any profit-sharing
agreement” to be securities interests in such property as real
estate condominiums and cooperatives, commodity option
contracts, and farm animals (Mayer, et a;, 2010).

The Securities and Exchange Commission

Functions
The Securities and Exchange Commission (SEC) is over half a century old,
having been created by Congress in the Securities Exchange Act of 1934. It is an
independent regulatory agency, subject to the rules of the Administrative

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Procedure Act. The SEC’s primary task is to investigate complaints or other
possible violations of the law in securities transactions and to bring enforcement
proceedings when it believes that violations have occurred. It is empowered to
conduct information inquiries, interview witnesses, examine brokerage records,
and review trading data.

Fundamental Mission
The SEC’s fundamental mission is to ensure adequate disclosure in order to
facilitate informed investment decisions by the public. However, whether a
particular security offering is worthwhile or worthless is a decision for the public,
not for the SEC, which has no legal authority to pass on the merits of an offering or
to bar the sale of securities if proper disclosures are made.

ITQ: What are the forms of business organisation?

ITA: They are: Sole Proprietorship, Partnership and Corporations.

Summary
In this session, we have discussed about business organisation. The forms of
business organisation was discussed with emphases on the sole proprietorship form
of business organisation. The limitations, merits and characteristics were listed,
partnership form of business organisation with their characteristics, formation
limitations and merits was discussed. Also the formation and termination of
corporation was discussed. The financing of the corporations as well as securities
regulations and security exchange was discussed.

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G. Discussion Questions
1. Discuss the principal factors that should be considered in determining which
form of business organisation to use.
2. Musa entered into a five-year employment contract with ABUCONS, a
company owned by ABU, Zaria. During Musa’s employment, ABUCONS
owned some assets; however, it maintained separate corporate and financial
records at ABU’s corporate offices. Because ABUCONS often operated
with a “zero bank account” it frequently required loans from ABU. When
Musa was fired from his position he sued ABU (ABUCONS sole
shareholder) for breach of contract. Is ABU liable for ABUCONS’s financial
obligations to Musa? Explain
3. Discuss whether or not you believe business law is an important component
to the study of business and why?
4. What are the various forms of business organisation?
5. What is a business corporation? How a corporation does becomes classified
as a manufacturer?
6. Discuss the exemptions that apply to limited liability company partnerships,
trust and other unincorporated legal entities that are treated as corporations
for federal income tax purposes.
7. Discuss extensively how to manage a corporate business
8. Discuss the role of shareholders in a business
9. Discuss fully the nature of formation and termination of a corporation.
10. What are the ways of managing a corporate business?

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REFERENCES
Mayer, Don, Warner, Daniel M., George J. Siedel, Jethro K. Lieberman, and
Martina, Alyssa Rose (2010). The Law, Corporate Finance, and Management

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 9.3.2.2 STUDY SESSION 10
Torts of Importance to Business
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Nature of Torts of Importance to Business
1. Trespass to land
2. Nuisance
3. Trespass to the person
4. Defamation
5. Deceit, injurious falsehood and 'passing-off'
6. Negligence
B. Kinds of Torts
C. Basis of Tort Liability
- Dimensions of Tort: Fault Tort Principles
- Dimensions of Tort: Nature of Injury
- Dimensions of Tort: Excuses
- Damages
Summary
Discussion Questions
References/Further Readings

Introduction
Welcome to study session ten. In this study session, you will understand that, a
tort is a civil wrong and the person wronged will make a civil claim for

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compensation or an injunction. The plaintiff's claim generally is that he has
suffered a loss such as personal injury at the hands of the defendant, and the
defendant should pay damages.

Torts are wrongful acts against an individual, a company or their property that
gives rise to a civil liability against the person who committed them. Torts are one
of the two major branches of private obligations; the other being contract law.
Torts are found in both common law and civil law jurisdictions. There are a
number of torts, however negligence is the one that will concern you most in your
studies. This leads into the topic of consumer protection.

Learning Outcomes
At the end of this session, you should be able to:
1. Discuss on the nature of tort of importance to a business
2. Identify the basis of tortious liability
3. Discuss on passing off and trade libel

A. Nature of Torts of Importance to Business

The nature of tort can best be understood by examining examples of torts.
1. Trespass to land
Trespass to land involves one or a combination of the following acts
without lawful justification:
Entering land that is owned by the plaintiff.
Remaining on the land.
Placing objects or projections onto the land. Liability for trespass is strict,
which means that even if the action is accidental or no damage results from

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 it, the trespasser is still liable. There is a fundamental right to the privacy of
the home under the common law.

2. Nuisance
Landowners have the right to use their land as they see fit and not to have
their land interfered with. Nuisance occurs where the use of land by one
occupier causes damage to a neighbouring occupier or their land.
There are two types of nuisance, private and public:
a. Private nuisance - This is the 'unlawful interference with a person's use, or
enjoyment of land, or some right or in connection with it'. Cases of private
nuisance often involve neighbours and are caused by noise, smell,
vibrations, animals, trees and incursions by other such items. Judging
liability is a balancing act: occupiers are entitled to 'reasonable comfort' but
no more.
b. Public nuisance - Public nuisances are not related to private nuisance as
they are created by statute and are criminal offences. Examples include
obstructing the highway, takeaway restaurants creating litter, and raves' that
attract hundreds of people late at night creating noise and disturbance to a
wide area. These nuisances are 'acts or omissions that materially affect the
reasonable comfort and convenience of the life of a class of Her Majesty's
subjects'. The plaintiff is not required to have an interest in land before
being entitled to sue, unlike private nuisances.

ITQ: What is the meaning of a tort?

ITA: A tort is a civil wrong and the person wronged will make a civil claim for
compensation or an injunction.

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3. Trespass to the person
The acts of battery, assault and false imprisonment are commonly
considered within the scope of trespass to the person. You should note that
the acts may also result in a criminal action against the defendant.
(a) Battery - Battery involves the intentional bringing of a material object
into contact with another person. It is not just restricted to violent acts, but
can also include non-violent acts such as the application of 'tone rinse' to a
scalp. For liability to be created it is just the act that must be intentional –
not the injury.
(b) Assault - Assault is the intentional act of putting another in reasonable
fear or apprehension of immediate battery. Words may not be enough to
create a liability unless they are accompanied by menacing or threatening
actions. For example, telling someone you will shoot them may not be
classed as assault unless you are pointing a gun at them as well. The plaintiff
does not have to prove the defendant intended to cause battery, it is
sufficient to prove that they were in reasonable fear of it. Therefore, pointing
an unloaded gun constitutes assault even if there is no intention to cause
injury.
(c) False imprisonment - False imprisonment involves unlawfully arresting,
imprisoning or preventing a person from leaving from where they are. The
plaintiff does not have to prove damage was caused as it was their liberty
that was taken from them. If a person interferes with another person's
autonomy, say by beating or restraining them, this constitutes the tort of
trespass to the person in Australia. There does not have to be intent. This
differs from the law in other jurisdictions, for example the UK, where there
must be intent to trespass. Therefore, in Australia, an act which is direct but

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 unintentional can lead to an action for negligent trespass, but the plaintiff
must prove how there was a 'direct' and 'substantial' interference with their
personal autonomy when the incident occurs in a public place.

4. Defamation
The expression or publication of false or defamatory statements that is not
lawfully justified are known collectively as defamation. In other words,
defamation involves the ridicule of an individual or holding them in
contempt. The words libel and slander are often used to describe this tort. In
legal terms, libel refers to visible acts such as writing, pictures and even
effigies. Slanderous acts are those that are spoken or gestured. You should
note that libel is a criminal act which will be actionable in all cases while
slander is a civil injury and in almost all cases damage must be proved. In
Australia, a company or corporation cannot sue for defamation.

5. Deceit, injurious falsehood and 'passing-off'

Deceit is a wrong whereby the plaintiff is misled into taking actions that are
to his detriment. A typical example of deceit is the con-artist who
encourages an individual to pay him money for goods that he has no
intention of supplying. Injurious falsehood involves the defendant making
false statements about the plaintiff that cause the plaintiff damage through
the actions of others. A key example in the business context is the tort of
passing-off. Passing-off is the use of a name, mark or description by A that
misleads a consumer to believe that A’s business is that of another. This tort
often occurs when expensive 'designer' products such as watches or clothing
are copied and sold as 'originals' to unsuspecting customers.

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 6. Negligence
The number of actions under negligence far exceeds the number under the
other torts. In simple terms the carelessness of
an individual or company causes damage
(physical, emotional or economic) to the
plaintiff. Negligent acts tend to be inadvertent or
reckless, but not normally intentional.

ITQ: The nature of tort can best be understood by examining examples of tort, what are those
examples?
ITA: Trespass to land (Entering, Remaining & Placing), Nuisance (Private and Public),
Trespass to person (Battery, Assault & False imprisonment), Defamation, Deceit, injurious
falsehood and 'passing-off’ and Negligence.

B. Kinds of Torts
There are three kinds of torts:
a. Intentional torts
b. negligent torts,
c. and strict liability torts.
Intentional torts arise from intentional acts, whereas unintentional torts often result
from carelessness (e.g., when a surgical team fails to remove a clamp from a
patient’s abdomen when the operation is finished). Both intentional torts and
negligent torts imply some fault on the part of the defendant. In strict liability torts,
by contrast, there may be no fault at all, but tort law will sometimes require a
defendant to make up for the victim’s losses even where the defendant was not
careless and did not intend to do harm.

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C. Basis of Tort Liability
There is a clear moral basis for recovery through the legal system where the
defendant has been careless (negligent) or has intentionally caused harm. Using the
concepts that we are free and autonomous beings with basic rights, we can see that
when others interfere with either our freedom or our autonomy, we will usually
react negatively. As the old saying goes, “Your right to swing your arm ends at the
tip of my nose.” The law takes this even one step further: under intentional tort
law, if you frighten someone by swinging your arms toward the tip of her nose,
you may have committed the tort of assault, even if there is no actual touching
(battery). Under a capitalistic market system, rational economic rules also call for
no negative externalities. That is, actions of individuals, either alone or in concert
with others, should not negatively impact third parties. The law will try to
compensate third parties who are harmed by your actions, even as it knows that a
money judgment cannot actually mend a badly injured victim.

Dimensions of Tort: Fault Tort Principles

This can be viewed along different dimensions. One is the fault dimension. Like
criminal law, tort law requires a wrongful act by a defendant for the plaintiff to
recover. Unlike criminal law, however, there need not be a specific intent. Since
tort law focuses on injury to the plaintiff, it is less concerned than criminal law
about the reasons for the defendant’s actions. An innocent act or a relatively
innocent one may still provide the basis for liability. Nevertheless, tort law—
except for strict liability—relies on standards of fault, or blameworthiness. The
most obvious standard is willful conduct. If the defendant (often called the
tortfeasor—i.e., the one committing the tort) intentionally injures another, there is
little argument about tort liability.

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Thus all crimes resulting in injury to a person or property (murder, assault, arson,
etc.) are also torts, and the plaintiff may bring a separate lawsuit to recover
damages for injuries to his person, family, or property. Most tort suits do not rely
on intentional fault. They are based, rather, on negligent conduct that in the
circumstances is careless or poses unreasonable risks of causing damage. Most
automobile accident and medical malpractice suits are examples of negligence
suits. The fault dimension is a continuum. At one end is the deliberate desire to do
injury.
a. A person or legal entity that the middle ground is occupied by careless
conduct. At the other end is conduct that most would consider entirely
blameless, in the moral sense. The defendant may have observed all possible
precautions and yet still be held liable. This is called strict liability. An
example is that incurred by the manufacturer of a defective product that is
placed on the market despite all possible precautions, including quality-
control inspection. In many states, if the product causes injury, the
manufacturer will be held liable.

Dimensions of Tort: Nature of Injury

Tort liability varies by the type of injury caused. The most obvious type is physical
harm to the person (assault, battery, infliction of emotional distress, negligent
exposure to toxic pollutants, wrongful death) or property (trespass, nuisance, arson,
interference with contract). Mental suffering can be redressed if it is a result of
physical injury (e.g., shock and depression following an automobile accident). A
few states now permit recovery for mental distress alone (a mother’s shock at
seeing her son injured by a car while both were crossing the street). Other
protected interests include a person’s reputation (injured by defamatory statements

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or writings), privacy (injured by those who divulge secrets of his personal life), and
economic interests (misrepresentation to secure an economic advantage, certain
forms of unfair competition).

Dimensions of Tort: Excuses

A third element in the law of torts is the excuse for committing an apparent wrong.
The law does not condemn every act that ultimately results in injury. One common
rule of exculpation is assumption of risk. A baseball fan who sits along the third
base line close to the infield assumes the risk that a line drive foul ball may fly
toward him and strike him. He will not be permitted to complain in court that the
batter should have been more careful or that management should have either
warned him or put up a protective barrier. Another excuse is negligence of the
plaintiff. If two drivers are careless and hit each other on the highway, some states
will refuse to permit either to recover from the other. Still another excuse is
consent: two boxers in the ring consent to being struck with fists (but not to being
bitten on the ear).

ITQ: There are three kinds of torts, name them

ITA: Intentional torts, negligent torts and strict liability torts.

Damages
Since the purpose of tort law is to compensate the victim for harm actually done,
damages are usually measured by the extent of the injury. Expressed in money
terms, these include replacement of property destroyed, compensation for lost
wages, reimbursement for medical expenses, and dollars that are supposed to
approximate the pain that is suffered. Damages for these injuries are called
compensatory damages. In certain instances, the courts will permit an award of

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punitive damages. As the word punitive implies, the purpose is to punish the
defendant’s actions. Because a punitive award (sometimes called exemplary
damages) is at odds with the general purpose of tort law, it is allowable only in
aggravated situations. The law in most states permits recovery of punitive damages
only when the defendant has deliberately committed a wrong with malicious intent
or has otherwise done something outrageous.

Punitive damages are rarely allowed in negligence cases for that reason. But if
someone sets out intentionally and maliciously to hurt another person, punitive
damages may well be appropriate. Punitive damages are intended not only to
punish the wrongdoer, by exacting an additional and sometimes heavy payment
(the exact amount is left to the discretion of jury and judge), but also to deter others
from similar conduct. The punitive damage award has been subject to heavy
criticism in recent years in cases in which it has been awarded against
manufacturers. One fear is that huge damage awards on behalf of a multitude of
victims could swiftly bankrupt the defendant. Unlike compensatory damages,
punitive damages are taxable.

ITQ: What is the purpose of tort?

ITA: The purpose of tort law is to compensate the victim for harm actually done.

Summary
In this session, we had discussed about torts of importance to business. The nature
of torts of importance to business was highlighted, basis of tortious liabilities,
kinds and dimensions of torts were all discussed.

D. Discussion Questions
1. Explain what you understand by tortious liability.
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 2. Highlight and discuss the future challenges before the courts on the “passing
off” and “trade libel”
3. What are the difference types of torts in business?
4. Discuss the importance of torts in business organisations
5. Discuss what a tort is against a business
6. Analyze the basis of tortious liability

References
Don Mayer, Daniel M. Warner, George J. Siedel and Jethro K. Lieberman, (2012).
The Law, Corporate Finance, and Management. (http://2012books.lardbucket.org/)

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 9.3.2.3 STUDY SESSION 11
Labour Relations
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Definitions and Meaning of Labour Relations
B. Trade Unions
- What do trade unions do?
- Aims of Trade Union?
Summary
Discussion Questions
References/Further Readings

Introduction
You should know that, at the heart of labour relations is the desire of both
management and labor to create an efficient and effective organisation. When this
happens, management is planning, organising and directing work such that
employees understand their roles and responsibilities in a way that they can
produce the desired outcomes. There is a healthy work environment and strong
working relationships amongst everyone.

The employees have an opportunity to contribute and each feels valued as part of
the collective effort of the session. A mutual respect exists between management
and employees. Life is good and everyone is happy. Achieving and sustaining this
ideal state does not always occur; and some might argue, never fully happens.

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Employees do not always meet expectations, conflict and other factors challenge
group dynamics, laws and other compliance issues exist, and sometimes managers
and supervisors do not lead or address a given situation well. The domain of labor
relations exists in a dynamic environment. While the preference of managers and
supervisors is to lead emphasising the upside, they also need to understand their
responsibilities and be able to address the downside. The session on labour
relations will focus on what managers and supervisors need to know and do,
particularly when there are performance issues.

Learning Outcomes
At the end of this session, you should be able to:
1. Define Labour relations
2. Define Trade Unions

A. Definitions and Meaning of Labour Relations

Labour relations commonly referred to as labour-management relations have been
severally defined as:
i) Covering collective bargaining and relations of all types between workers and
employers, and between workers and workers, personnel administration, worker
supervisory training. It involves everything that has to do with the atmosphere and
climate of the workplace. (Yesufu, 1962), as quoted in Folayan (1998, P. 82).
ii) As a web of rule which bind the actors, government, employers and workers, in
the workplace.
iii) The process of interest accommodation by which conditions of work are fixed;
relations are regulated and power is shared in the field of labour. Cordova (1980);

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iv) Covers show work rules are made and applied, and how decisions are taken to
distribute among the producers their share in the rewards of production. Damachi
(1986);
v) As an interdisciplinary field that encompasses the study of all aspects of people
at work. It includes the study of individuals, groups of workers who may or may
not organize into a union or an association, the behaviour of employer and union
organisation, the public policy or legal framework governing employment
conditions, the economics of employment conditions, the economics of
employment problems, and even the comparative analysis of industrial relation
system in countries over different time periods.

The above definitions each contribute ideas that describe industrial relation
phenomena as involving webs of relations between employers, workers and
government. Cole (1980) contends that the key issues of industrial relations are
those of conflict, cooperation, rule-making, authority and power, information and
communication, and motivation.

The regulation of management-employee relations is often mediated by

government representative. However, the labour relationship encompasses
divergent interest parties such as:
a) Managers (representing employers)
b) Employer’s associations’ representative
c) Individual employees whose part in the system has been overshadowed by
collective interests which unions represent.
d) Trade union representatives
e) Government representatives

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f) Representative so the law.

Describing Actors in industrial relations system Ubeku (1983, P586) identified the
following:
1) The key Actors – comprise the trade unions, employers (including employer’s
associations) usually represented by management;
2) The interaction of the actors and the conflict they
generated;
3) The rules and regulations established through public
policy and collective bargaining process, to regulate
relationship including conflict resolution; and
4) The role each actor plays or should play in an industrial relations system

ITQ: What is Labour relations?

ITA: Labour relations, commonly referred to as labour-management relations is a collective
bargaining and relations of all types between workers and employers, and between workers
and workers, personnel administration, worker supervisory training. It involves everything
that has to do with the atmosphere and climate of the workplace.

B. Trade Unions
Definition: Trade Unions are voluntary organisation of Workers as well as
Employers formed to protect and promote the interest of their members. They are
the most suitable organisations for balancing and improving the relations between
the employer and the employees. Trade Union means any combination, whether
temporary or permanent, formed primarily for the purpose of regulating the
relations between workmen and employers or between workmen and workmen or
between employers and employers, or for imposing restrictive conditions on the

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conduct of any trade or business, and includes any federation of two or more trade
unions.

Trade Unions have made headway due to rapid industrial development. The
workers come together to maintain and improve their bargaining power on wages
and working conditions. The first organised Trade Union in India named as the
Madras Labour Union was formed in the year 1918. From the beginning itself,
Trade Unions were not confined to workers alone. From 19thCentury itself there
were Employer’s associations in the form of Chamber of Commerce, Industrial
Associations etc. to protect and promote the interests of their members in a
concerted manner. After independence, expansion of industrial activity and
grouping worker’s Trade Unions acted as a spur for strengthening and expansion
of employers’ organisation. In industrially advanced countries, trade unionism has
made a great impact on the social, political and economic life. India, being an
agricultural country, trade unionism is restricted to industrial areas and it is still in
a stage of growth.

What do trade unions do?

1. Trade unions speak on behalf of their members.
2. Trade unions provide members with information, advice and guidance about
work-related problems.
3. Trade unions provide members with a range of services including training,
insurance, financial services and legal advice.
4. Trade unions bargain with employers to get better pay for members.
5. Trade unions campaign on particular issues, for example low pay,
discrimination and bullying.

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Aims of Trade Union?
1. Trade unions are organisations that represent people at work. ‘Representing’
could mean someone from the union meeting with management on behalf of
a member or a group of staff or taking up a problem with your employer for
you.
2. Trade unions aim to protect their members. This includes making sure that
workplaces are safe and that people’s health is not being put at risk through
their jobs. It also means legal protection – trade unions usually employ
lawyers to make sure that companies and organisations treat their staff in
accordance with the law.
3. Trade unions aim to improve their members’ pay and conditions. If a single
member of staff approaches management because they feel they should be paid
more, they are much less likely to be successful than if every member of staff
speaks as one through their trade union. Trade unions collectively negotiate
better pay and conditions on behalf of their members and, statistically, union
members earn more than non-union members.

ITQ: What is a trade union?

ITA: Trade Unions are voluntary organisation of Workers as well as Employers
formed to protect and promote the interest of their members.

Summary
In this session, we have studied about labour relations. The definitions and
meanings were given, trade union was defined their aims and what they do was
also discussed.

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C. Discussion Question
1. Draw from your own work experience or an organisation that you have
study. Discuss the pros and cons of having a more diverse workforce. Is
there a gap between the principles underpinning the labour relations
examined in this study unit? If there is a difference explain why.
2. Analyse the definition of labour relations
3. What is trade union, what are the aims of trade union?

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 9.3.2.4 STUDY SESSION 12
Preventive and Regulatory Law
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Preventive Law
B. What is “Property?
C. Sales and Consumer Protection
Summary
Discussion Questions
References/Further Readings

Introduction
Preventive law is generally defined as a programme, supported by policies,
procedures, and regulations, that endeavors to minimise the risk of litigation or to
secure, with more certainty, legal rights and duties. Preventive law emphasises the
importance of pre facto planning to avoid legal problems and their consequences
should litigation ensue. There are four components of preventive law - all of which
should be put into everyday practice at the building level by principals:
a. The anticipation of legal challenges (foreseeability);
b. The evaluation of the legal merits of potential challenges;  
c. A consideration of the policies (in effect or proposed) affected by potential
challenges; 
d. Implementation or modification, where appropriate, in response to the first
three steps. 

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Learning Outcomes
At the end of this session, you should be able to:
1. Define personal property
2. Discuss real property’
3. Discuss on sales and intellectual property
4. Define intellectual property.

A. Preventive Law
Preventive Law is a legal approach in which the lawyer is proactively involved
managing client legal affairs. The concepts of preventive law and the
management of risk, are illustrated by six general beliefs:
a. An understanding of the substance of law limits an education organisation’s
culpability and exposure. Effective principals base their day-to-day decision
making on substantive law, which consists of both an understanding of the
basic tenets of law and knowledge of current education litigation decisions.
b. The proper application of procedures, informed decision making, and
foreseeability reduces liability and environmental and organisational loss.
Effective principals adhere to procedures and precedents established by law,
exercise reasonable and prudent judgment in situations not directly
addressed by the law, and integrate foreseeability when practicing
preventive law, thus minimising exposure to liability and loss. 
c. Working with counsel reduces budget loss. When they have questions about
legal issues that are not directly addressed in established laws and
procedures, effective principals consult legal counsel.  
d. Flexibility endangers system stability but enhances conflict resolution.
Although principals must strictly adhere to, enforce, and monitor all policies

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 and procedures, effective principals demonstrate flexibility and reduce
conflict (and avoid litigation) by fostering a school climate in which
divergent ideas may be presented, respected, permitted to flourish, and
channeled into productive results for the school.  
e. Knowledge of precedent, constitutional compliance, and public information
needs enhances crisis and motivational management and monitoring.
Effective principals understand the legal ramifications of precedent-setting
cases and consider the significant protections provided to students, teachers,
and others under various interpretations of the Constitution when making
decisions. They also know that it is often up to them to educate parents and
others about how court actions influence the daily operations of the school.  
f. Leadership in the education enterprise must be coupled with leadership in
preventive law. Effective education leadership
sometimes involves taking calculated risks when
complicated situations warrant decisive action;
however, such risks must be legal and must
demonstrate a commonsense commitment to
preventive law. 

ITQ: What is the meaning of preventive law?

ITA: Preventive law is generally defined as a programme, supported by policies,
procedures, and regulations, that endeavors to minimise the risk of litigation or to
secure, with more certainty, legal rights and duties.

B. What is “Property?
The term “property” is extraordinarily difficult to define. The problem arises
because the legal meaning of “property” is quite different from the common
meaning of the term. The ordinary person defines property as things, while

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 the attorney views property as rights. Most people share an understanding
that property means: “things that are owned by persons.” For example,
consider the book you are now reading. The book is a “thing.” And if you
acquired the book by purchase or gift, you presumably consider it to be
“owned” by you. If not, it is probably “owned” by someone else. Under this
common usage, the book is a “property.”

In general, the law defines property as rights among people that concern
things. In other words, property consists of a package of legally recognised
rights held by one person in relationship to others with respect to some thing
or other object. For example, if you purchased this book, you might
reasonably believe that you own “the book.” But a law professor would
explain that technically you own legally-enforceable rights concerning the
book. For example, the law will protect your right to prevent others from
reading this particular copy of the book. 

Notice that the legal definition of “property” above has two parts: (1) rights among
people (2) and right that concern things. Both parts of the definition are quite
vague. What are the possible rights that might arise concerning things? Suppose,
for example, that A “owns” a 100-acre tract of forest land. What does it mean to
say that A “owns” this land? Exactly what are A’s rights with respect to the land?
The second part of the definition is equally troublesome. What are the things that
rights may permissibly concern? For example, could A own legal rights in the
airspace above the land, in the wild animals roaming across the land, or in the
particular genetic code of the rare trees growing on the land? Indeed, can A own
rights in an idea, in a graduate degree, in a job, or in a human kidney?

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Property and Law
Law is the foundation of property rights. Property rights exist only if and to the
extent they are recognised by our legal system. As Jeremy Bentham observed that
Property and law are born together, and die together. Before laws were made there
was no property; take away laws, and property ceases.

Real Property
Real property consists of rights in land and anything attached to land (e.g.,
buildings, signs, fences, or trees). It includes certain rights in the land surface, the
subsurface (including minerals and groundwater), and the airspace above the
surface. But how extensive are these rights? If owns exclusive property rights in
100 acres of land known as Greenacre, does he also own rights in all the airspace
1,000 miles above the land? Or in the soil 1,000 miles below Greenacre? If the
wind blows across Greenacre, does F own rights in the wind? Or in the wild bee
hive in a Greenacre tree? Historically, property law was almost exclusively
concerned with real property. In feudal England—the birthplace of our property
law system— land was the source of political, social, and economic power.
Control over land provided the basis for political sovereignty, the foundation of
social status, and the principal form of wealth; accordingly, disputes concerning
real property were resolved in the king’s courts. Personal property, in contrast, was
relatively unimportant in the feudal era; when a person died, the distribution of his
personal property was supervised by church courts. Under these conditions, two
distinct branches of property law evolved. Real property law, the dominant branch,
became complex and often arcane; in contrast, personal property law remained
relatively simple and straightforward. Thus, the property law that the new United
States inherited from England mainly consisted of real property law.
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Even today, the standard first year law school course on “property” mainly
examines real property law. This focus may appear anachronistic in our
technological age; stocks, bonds, patents, copyrights, and other forms of intangible
personal property are increasingly valuable. Yet land remains the single most
important resource for human existence. All human activities must occur
somewhere. As our population increases and environmental concerns continue,
disputes about property rights in our finite land supply will escalate.

Personal Property- are Items of tangible, visible personal property—such as

jewelry, livestock, airplanes, coins, rings, cars, and books—are called chattels.
Virtually all of the personal property in feudal England fell into this category.
Today, property rights can exist in almost any tangible, visible “thing.” Thus,
almost every moveable thing around you now is a chattel owned by someone.
There are two particularly prominent exceptions to this general observation. Even
though human kidneys, fingers, ova, sperm, blood cells, and other body parts might
be characterised as “tangible, visible things,” most courts and legislatures have
proven reluctant to extend property rights this far. Similarly, deer, foxes, whales,
and other wild animals in their natural habitats are deemed unowned.

Intangible Personal Property

Rights in intangible, invisible “things” are classified as intangible personal
property. Stocks, bonds, patents, trademarks, copyrights, trade secrets, debts,
franchises, licenses, and other contract rights are all examples of this form of
property. The importance of intangible personal property skyrocketed during the
twentieth century, posing new challenges that our property law system was poorly
equipped to handle. Other intangible “things” in which property rights may exist is
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a person’s name. Traditionally, property rights could not exist in a name, unless it
was used in a special manner (e.g., as a trademark). Today, however, the law
protects a celebrity’s “right of publicity”—the right to the exclusive use of the
celebrity’s name and likeness for commercial gain. If spouse A works to finance
spouse B’s law school education, is B’s law degree deemed marital “property”
such that A is entitled to a share when he and B
divorce? If A works for C for 30 years, does A
have a property right in his job? Upon retirement,
does A have a property right in social security
benefits? The universe of intangible things is
seemingly endless, and the law in this area will
continue to evolve rapidly.

C. Sales and Consumer Protection

This Act applies to the offering, selling and other marketing of consumer goods
and services by businesses to consumers. The Act applies also where a business
acts as an intermediary in the transfer of goods or services to consumers. This Act
does not apply to statutory insurance, group life assurance of employees, or
corresponding benefits granted by a municipal insurance institution.

For the purposes of this Act, consumer goods and services are defined as goods,
services and other merchandise and benefits that are offered to natural persons or
which such persons acquire, to an essential extent, for their private households. For
the purposes of this Act, consumer is defined as a natural person who acquires
consumer goods and services primarily for a use other than business or trade.

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Regulatory Techniques in Consumer Protection
The Draft Common European Sales Law (CESL) uses four major techniques to
protect consumers. Unfortunately, these techniques’ superficial appeal does not
withstand economic logic. Also the CESL provisions designed to protect
consumers are far less likely to succeed as lawmakers and commentators believe,
and that they may bring about unintended consequences and hurt consumers (Bar-
Gill and Ben-Shahar, ND).

The four consumer protection techniques employed by the CESL are: (1)
mandatory pro‐consumer arrangements, which must be part of every consumer
contract; (2) mandated disclosure; (3) regulation of entry to and withdrawal from
contracts; and (4) pro‐consumer default rules and contract interpretation. Each of
these techniques is utilised extensively and repeatedly in the CESL. None of these
approaches is new, but the fervor with which they are implemented is almost
unprecedented.

The first technique - mandatory pro‐consumer arrangements - is perhaps the most

phenomenal device. Eighty‐one provisions in the CESL are mandatory: sellers
cannot write contracts that derogate from these arrangements to the detriment of
consumers. The second technique is, unsurprisingly, mandated disclosure. This is a
standard staple of consumer protection: give people information to help them make
better autonomous choices. “Sunlight is the best of disinfectants,” as the truism
goes. The third technique is the regulation of entry to, and withdrawal from,
consumer contracts. These rules are intended to promote freedom from contract:
help consumers avoid transactions that are otherwise the result of “passive”
contracting. The fourth and final regulatory technique is the supplementation of

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incomplete contracts with pro‐consumer default arrangements. We find relatively
less use of this device for the simple reason that many arrangements that operate as
gap‐fillers in other sales statutes are accorded mandatory status in the CESL.

Intellectual Property
Intellectual property refers to creations of the mind:
inventions; literary and artistic works; and symbols,
names and images used in commerce. David
Bainbridge defines intellectual property as that area of
law which concerns legal rights associated with creative
effort or commercial reputation and goodwill.

The object of Intellectual Property is to protect a work that has only an abstract
existence and therefore cannot be perceived by the senses, unlike a building or a
car. However, like material goods, intellectual creations may be subject to a
proprietary right. Intellectual property law deals with the protection of inventions.
It is also a means of safeguarding the fruits of their creativity and maintaining their
incentives to invest in innovation.

Intellectual property can be passed on to someone like other kinds of property by

gift, sale or bequest, and it could be temporary or permanent in nature. However, it
is a right that is limited in nature. There are different periods for all the forms of
the intellectual and industrial property.

The Principal object of intellectual property is to ensure consumers a variety of

products at the lowest possible price. Intellectual Property law ensures private

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property rights enabling individual and business outfits to appropriate to
themselves the value of the information they produce and encourage them to
produce more.

Intellectual property is divided into two categories:

a. Industrial Property includes patents for inventions, trademarks, industrial
designs and geographical indications.
b. Copyright covers literary works (such as novels, poems and plays), films,
music, artistic works (e.g., drawings, paintings, photographs and sculptures)
and architectural design. Rights related to copyright include those of
performing artists in their performances, producers of phonograms in their
recordings, and broadcasters in their radio and television programs. It is
important to note that Copyright is the main aspect of an intellectual
property. This is the right that protects the work of an author in any
circumstance from invasion or infringement.

What are intellectual property rights?

Intellectual property rights are like any other property right. They allow creators,
or owners, of patents, trademarks or copyrighted works to benefit from their own
work or investment in a creation. These rights are outlined in Article 27 of the
Universal Declaration of Human Rights, which provides for the right to benefit
from the protection of moral and material interests resulting from authorship of
scientific, literary or artistic productions.

Nature and Definition of Intellectual Property Law

Intellectual property law is an area of law which concerns legal rights associated
with creative effort or commercial reputation and goodwill. The law deters others
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from copying or taking unfair advantage of the work or reputation of another and
provides remedies where this arises. Under intellectual property law, owners are
granted certain exclusive rights to a variety of intangible assets, such as musical,
literary, and artistic works; discoveries and inventions; words, phrases, symbols,
and designs.

ITQ: What are the four consumer protection techniques employed by the CESL

ITA: (1) Mandatory pro‐consumer arrangements, (2) Mandated disclosure (3) Regulation
of entry to and withdrawal from contracts; and (4) Pro‐consumer default rules and
contract interpretation.

Summary
In this session, we have discussed on the topic, preventive and regulatory law.
Preventive law was defined personal property, real property sales and consumer
protection as well as intellectual property were all extensively discussed.

D. Discussion Question
1. From your own experience or what you have studied, if you hire a real estate
broker to sell your house, what normally must the broker do to earn a
commission?
2. What personal property is subject to local taxation? What is considered
personal property for local property tax purposes?
3. Who must report leased personal property? Discuss whether there is penalty
for failure to file a report, or in filing a late return.
4. What property tax is exempt from personal property tax, what personal
property tax exemptions apply generally to all tax payers, regardless of the
form of entity of the owner?
5. What is the “No Trespassing” law for private property?

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 6. Discuss the basic principles of property law
7. What is partition in property law?
8. What is the intellectual property law?

References
Abiola, S. (2005). Introduction to Business Law in Nigeria. Lagos: Malthouse
Press Ltd.
Keith, A. (2002). Business law (7th Ed). London: Thomson.
Sagay. (2000). Nigerian Law of Contract. Ibadan: Spectrum Books Ltd.
www.dphu.org/uploads/attachements/books/books_5934_0.pdf
Abe Diploma in Business Administration. Study Manual. Principles of Business
Law

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 9.3.2.5 STUDY SESSION 13
Internet and International Laws
Section and Subsection Headings
Introduction
Learning outcomes
Main Content
A. Sources of internet and International laws
- What is Cyber warfare?
- How is Cyber warfare Unique?
B Cyber Operations, Attacks, Exploitation and Defence
- Cyber Operations and Jus ad Bellum
- Cyber Operations as “Force”
- Effects “Equivalent” to Death, Injury and Destruction
- Cyber Attacks Incapacitating “Critical Infrastructures”
- Self-Defence in the Cyber Domain
- Cyber Operations and UN Security Council Enforcement
- Cyber Operations as “Warfare”
- Cyber Operations in Pre-Existing Conflicts
- Cyber Operations as “Attacks”
Summary
Discussion questions
References/Further Readings

Introduction
You are welcome to the last study session of this course. In this study session, you
will get to know that, the Internet has an international law problem. International

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institutions ranging from the International Telecommunication Union to the U.N.
General Assembly are becoming increasingly involved in regulating the Internet
apart from the question of the desirability of international regulation which at this
point may be an inevitability. This activity suffers from an even more fundamental
defect. International regulation is proceeding without any attention to existing
international law on freedom of expression or the consequences of these regulatory
decisions for human rights. Without consideration of international human rights
law and values, decisions about regulation will be driven by government and
industry interests. The result is likely to be standards on issues such as data privacy
and censorship that are inconsistent with and even undermine international human
rights.

Learning Outcomes
At the end of this session, you should be able to:
1. Discuss on sources of internet and international laws
2. Identify the jurisdiction over online activities

A. Sources of internet and International laws

Internet governance issues are addressed from the technical, policy, economic,
institutional, and legal perspectives. Legal discussions focused on:
• legal issues including cybercrime, intellectual property rights, data protection,
cyberwarfare, privacy rights, and consumer rights;
• legal mechanisms for addressing Internet governance issues, including self-
regulation, international treaties, and jurisdiction.

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Legal considerations are becoming crucial in exploring the various ways and
means of fitting proposed institutional designs for Internet governance within
existing national and international legal frameworks. Some questions to be asked
include: what is cyber warfare? What would be the most suitable international
legal instrument for addressing Internet governance issues? What is the
relationship between international public and private law in the field of Internet
governance?

What is Cyber warfare?

The term “cyber warfare” refers to warfare conducted in cyberspace through cyber
means and methods. Warfare is commonly understood as referring to the conduct
of military hostilities in situations of armed conflict. Cyberspace can be described
as a globally interconnected network of digital information and communications
infrastructures, including the Internet, telecommunications networks, computer
systems and the information resident therein. Thus, for example, the infection of a
belligerent adversary’s computer network with a malicious virus would constitute
an act of cyber warfare, whereas the aerial bombardment of a military cyber
command would not. The fact that cyber warfare is conducted in cyberspace does
not exclude that it may produce kinetic or other non-electronic effects outside the
cyber domain and may even be specifically intended to do so by the attacker. For
instance, targets of cyber warfare may also include persons whose life, or objects
the functionality of which, depends on computer systems, such as certain power
stations, means of transport, or persons connected to various kinds of medical,
military or professional life-support systems. Cyber warfare is however a unique
warfare.

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How is Cyber warfare Unique?
Cyber warfare is very unique. This calls for due consideration when interpreting
and applying existing international law to cyber warfare because of the specific
characteristics of cyberspace. Most notably, cyberspace is the only domain which
is entirely man-made. It is created, maintained, owned and operated collectively by
public and private stakeholders across the globe and changes constantly in
response to technological innovation. Cyberspace not being subject to geopolitical
or natural boundaries, information and electronic payloads are deployed
instantaneously between any point of origin and any destination connected through
the electromagnetic spectrum. These travel in the form of multiple digitalised
fragments through unpredictable routings before being reconstituted at their
destination. Cyberspace is readily accessible to governments, non-state
organisations, private enterprises and individuals alike. It is however not easy to
disguise the origin of an operation, thus rendering the reliable identification and
attribution of cyber activities particularly difficult.

ITQ: What is cyber warfare?

ITA: The term “cyber warfare” refers to warfare conducted in cyberspace through cyber
means and methods

B Cyber Operations, Attacks, Exploitation and Defence

The term “cyber operation” or, “computer network operation” (CNO) refers to the
reduction of information to electronic format and the actual movement of that
information between physical elements of cyber infrastructure. Cyber
operations can be categorized as “computer network attack”, “computer network
exploitation” and “computer network defence”. While computer network attacks
(CNA) comprise all cyber operations aiming “to disrupt, deny, degrade, or destroy

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information resident in computers and computer networks, or the computers and
networks themselves,” computer network exploitation (CNE) refers to “enabling
operations and intelligence collection to gather data from target or adversary
automated information systems or networks.” Computer network defence (CND),
in turn, refers to “actions taken to protect, monitor, analyze, detect, and
respond to unauthorised activity within information systems and computer
networks” or, in short, the prevention of CNA and CNE through intelligence,
counterintelligence, law enforcement and military capabilities. This
terminology, which is specific to operations conducted in cyberspace, must be
carefully distinguished from existing technical terms of international law such as,
“force”, “armed attack” and “attack”.

Cyber Operations and Jus ad Bellum

The jus ad bellum is that body of law which governs the resort by states to force in
their international relations. Today, the most important source of jus ad bellum is
the UN Charter. Certain aspects of that law, such as the precise modalities
governing the use of force in a case of self-defence, for instance, are not regulated
in the UN Charter and must be derived from customary law as reflected in state
practice and opinio juris and identified in international jurisprudence. In this
context, it will have to be examined in what circumstances, if any, cyber operations
can amount to (1) an internationally wrongful threat or use of “force”, (2) an
“armed attack” justifying the resort to necessary and proportionate force in self-
defence, or (3) a “threat to the peace”, “breach of the peace” or “act of aggression”
subject to UN Security Council intervention. Cyber operations below the threshold
of “force”, even if otherwise prohibited under the customary principle of non-
intervention, on the other hand, may represent lawful counter-measures in response

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to internationally wrongful acts not reaching the threshold of “armed attack” by
another state. The occurrence of cyber operations amounting to an “armed attack”
permits the attacked state to exercise its inherent right to self-defence through
means otherwise prohibited by the Charter including, most notably, the resort to
force. Also, the practical relevance of the determination that cyber operations
amount to a “threat to the peace”, “breach of the peace” or “act of aggression” is
that it allows the UN Security Council to take forcible
measures, including military force, in order to maintain
or restore international peace and security irrespective of
the qualification of the cyber operations in question as
“force” or “armed attack” under articles 2(4) and 51 of
the UN Charter.

Cyber Operations as “Force”

According to article 2(4) of the UN Charter, “all Members of the United Nations
shall refrain in their international relations from the threat or use of force against
the territorial integrity or political independence of any state, or in any other
manner inconsistent with the Purposes of the United Nations”. The question thus
arises, to what extent cyber operations can qualify as “force” within the meaning of
this prohibition? In the absence of a treaty definition, the concept of “force” must
be interpreted in good faith in accordance with the ordinary meaning to be given to
the term in its context and in the light of the Charter’s object and purpose.

Although the ordinary meaning of “force” is clearly broad enough to include both
armed and unarmed forms of coercion, the overwhelming majority of
commentators today consider the term “force” in article 2(4) of the UN Charter as

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practically synonymous to “armed” or “military” force. This does not necessarily
mean that the prohibition of interstate force is limited to the application of kinetic,
chemical, biological or nuclear weaponry.

According to the International Court of Justice, the prohibition applies “to any use
of force, regardless of the weapons employed”. Indeed, it is relatively
uncontroversial that cyber operations fall under the prohibition of article 2(4) of
the UN Charter once their effects are comparable to those likely to result from
kinetic, chemical, biological or nuclear weaponry. This would certainly include the
use of cyber operations as an offensive or defensive tool designed to cause death or
injury to persons or the destruction of objects and infrastructure, irrespective of
whether such destruction involves physical damage, functional harm, or a
combination of both. Conspicuous examples of a use of “force” within the meaning
of article 2(4) of the UN Charter, therefore, would be cyber operations
manipulating target computers systems so as to cause a meltdown in a nuclear
power station, or opening the floodgates of a dam above a densely populated area,
or disabling a busy airport’s air traffic control during bad weather conditions, each
with potentially horrendous consequences in terms of death, injury and destruction.

The real difficulty arises, however, with regard to the qualification as a use of
“force” of cyber operations that do not, or not directly, cause death, injury or
destruction. Article 41 of the UN Charter refers to “interruption of
communication” as a “measure not involving armed force”, thus suggesting that
certain denial of service attacks (DOS) would not fall under the prohibition of
article 2(4). However, this does not warrant the conclusion that, absent violent
effects, all cyber operations necessarily fall short of armed force. Consider, for

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example the crippling effect of cyber operations disabling the electrical power
grids of major cities, the incapacitation of systems controlling industrial
production, or the infiltration of malware designed to “blind” an entire air defence
system. In this context, it should be noted that article 2(4) of the UN Charter
prohibits the resort to force between states regardless of magnitude or duration.

As the International Court of Justice (ICJ) clarified in its Nicaragua Case, even
minor acts of interstate force fall under the general prohibition of article 2(4) of the
UN Charter, regardless of whether they also qualify as acts of “aggression”, or as
“armed attacks” entitling the targeted state to resort to force in self-defence. This
interpretation is reinforced by the approach taken in IHL, according to which even
minor instances of armed force occurring between states are sufficient to trigger an
international armed conflict. Indeed, it would hardly make sense for article 2(4) of
the UN Charter, as the primary norm aiming to safeguard international peace and
security, not to systematically prohibit all forms of interstate conduct sufficient to
give rise to an international armed conflict within the meaning of article 2 common
to the Geneva Conventions. In fact, the UN Charter even goes further and prohibits
not only the actual use, but already the threat of force in interstate relations. While
the UN Charter does not define what constitutes a wrongful “threat” of interstate
force, the ICJ has held that: the notions of “threat” and “use” of force under Article
2, paragraph 4, of the Charter stand together in the sense that if the use of force
itself in a given case is illegal for whatever reason the threat to use such force will
likewise be illegal.

Overall, there still is no consensus as to the precise threshold at which cyber

operations should amount to an internationally wrongful threat or use of force. The

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cyber operations, almost always falling within the grey zone between traditional
military force and other forms of coercion, simply were not anticipated by the
drafters of the UN Charter and, so far, neither state practice nor international
jurisprudence provide clear criteria regarding the threshold at which cyber
operations not causing death, injury or destruction must be regarded as prohibited
under article 2(4) of the UN Charter.

It should also be noted that a cyber operation need not amount to “force” within the
meaning of article 2(4) of the UN Charter to be internationally wrongful, nor
would all cyber operations amounting to “force” necessarily be unlawful. First, the
illegality of a cyber operation may result from the violation of any obligation under
international law. For example, interstate computer network exploitation for the
purposes of intelligence gathering, electronic dissemination of hostile propaganda,
or denial of service attacks would each violate the sphere of sovereignty of the
affected state and, thus, the customary principle of non-intervention, even if they
do not qualify as a use of force within the meaning of article 2(4) of the UN
Charter. Similarly, nondestructive cyber operations intruding into computer-based
archives, documents and correspondence of a foreign diplomatic mission, or
interfering with the mission’s free communication, would violate international
obligations of the receiving state under the law governing diplomatic relations.34
Potentially relevant legal issues could also arise under international trade law, or
under human rights law, for instance where denial of service attacks interfere with
the freedom of expression of persons coming within the jurisdiction of the
operating state.35 The focus of the present analysis, however, are the restraints
imposed by existing international law on cyber warfare and not the international
permissibility (or not) of cyber operations more generally.

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The “Interstate” Dimension of Cyber Operations
Article 2(4) of the UN Charter is addressed to states only and prohibits their resort
to force exclusively in their mutual “international relations”. This essentially
means that the use or threat of force must be legally attributable to a state and
directed against one or several other states. In international law, acts are
attributable to a state when they are performed by persons or entities acting on
behalf or with the authorization or endorsement of a state so as to engage its
international legal responsibility for their behaviour. Such persons or entities are
described as “state agents”. Persons or entities who are not acting on behalf of a
state or whose link to a given state is insufficient to engage its international legal
responsibility, on the other hand, cannot be regarded as state agents and can be
described as “non-state actors”.

The use of force (including through cyber operations) by individual hackers and
other non-state actors may be relevant under international humanitarian law and, in
some cases, international criminal law, but is not prohibited by article 2(4) of the
UN Charter. While states providing significant support to such non-state actors
generally cannot be directly held responsible for cyber operations carried out by
the latter, their assistance may in and of itself amount to “indirect” use of force in
contravention of article 2(4) of the UN Charter and the principle of non-
intervention. State agency, particularly de facto agency, should not to be confused
with such “indirect” use of force. While the use of force by de facto state agents is
directly attributed to the state on whose behalf they are acting, “indirect” use of
force denotes a form of support by a state for non-state actors using force on their
own behalf. In consequence, the supporting state is internationally responsible for
the given assistance, but not for the force used by the assisted entities or persons.

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Finally, it cannot be excluded that the use of force by non-state actors may amount
to a threat to international peace and security and require the Security Council to
take or authorize measures of collective enforcement. Nevertheless, the prohibition
of the actual resort to force by and among non-state actors is generally a matter of
domestic criminal law and certainly is not the aim of Article 2(4) of the UN
Charter.

Cyber Operations as “Armed Attacks”

The Difference between “Force” and “Armed Attack”

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According to article 51 of the UN Charter, “nothing in the present Charter shall
impair the inherent right of individual or
collective self-defense if an armed attack
occurs against a Member of the United
Nations”. With respect to the use of force,
this terminology suggests a gap between the
prohibition of “force” under article 2(4) and
the exception in case of “armed attack” of article 51 of the UN Charter. Indeed, the
scope of article 2(4) of the UN Charter is wider than that of article 51 in that it
prohibits not only armed, but also unarmed or indirect modes of force, and not only
the actual use, but also the mere threat of force. In other words, not every threat or
use of force prohibited by article 2(4) automatically also constitutes an armed
attack justifying self-defensive action in derogation from the Charter regime.
Though prohibited under article 2 (4) of the Charter, the threat or use of force
below the threshold of “armed attack” is not of sufficient gravity to justify a
response in derogation from the Charter regime of collective enforcement,
prohibition of unilateral force and peaceful settlement of disputes. The lack of an
express derogatory clause for situations where states are confronted with the threat
or use of force below the threshold of an armed attack does not preclude the
injured state from exercising its right of self-defence through means not disallowed
under the Charter, such as the interruption of network communication services, the
introduction of domestic control and security measures, the mobilization and
preparation of effective defence, or even counter-measures not involving the use of
force.

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In one aspect, at least, the scope of article 51 may also exceed that of article 2(4),
namely by derogating from the Charter restrictions in all cases where an armed
attack occurs against a member state, irrespective of its attributability to another
state. Arguably, therefore, an armed attack against a state carried out by non-state
actors from within the territory of another state—although not, as such, prohibited
under article 2(4)45—could potentially justify self-defensive action within that
(territorial) state in derogation from Charter restrictions. It should be pointed out,
however, that the interpretation of the notion of armed attack to include acts
carried out by non-state actors remains controversial and does not reflect universal
consensus.

In any case, the practical relevance of the qualification of a state-sponsored cyber

operation as an “armed attack” is that it would allow the injured state to take self-
defensive action in derogation from the treaty restrictions otherwise imposed by
the UN Charter including, most notably, the resort to military force both within and
outside the cyber domain. In view of the difficulty of determining the precise
threshold at which cyber operations should amount to a threat or use of “force”
prohibited under article 2(4) of the UN Charter, similar problems are awaiting any
attempt to transpose the notion of “armed attack” to the cyber realm. Cyber
Operations as “Armed” Attacks

First, from a textual perspective, the notion of “armed attack” necessarily implies
the use of a weapon. In the advisory opinion on the legality of the threat or use of
nuclear weapons, the ICJ clarified that article 51 of the Charter, just as articles 2(4)
and, applies “to any use of force, regardless of the weapons employed”. While
cyber-attacks do not depend on the availability of traditional kinetic, biological,

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chemical or nuclear weaponry, they cannot be carried out without the requisite
infrastructure making up cyberspace, thus raising the question of its qualification
as a “weapon”. In this respect, it has been convincingly noted that “it is neither the
designation of a device, nor its normal use, which make it a weapon but the intent
with which it is used and its effect. The use of any device, or number of devices,
which results in a considerable loss of life and/or extensive destruction of property
must therefore be deemed to fulfill the conditions of an “armed” attack.”

It would thus appear that cyber operations have the qualitative capacity to qualify
as an “armed” attack within the meaning of article 51 of the UN Charter. Beyond
this conclusion, however, the criteria become murky. In Nicaragua, the ICJ found
it “necessary to distinguish the most grave forms of the use of force (those
constituting an armed attack) from other less grave forms”, such as a “mere
frontier incident”, based on the “scale and effects” of the force involved.
Unfortunately, however, the Court’s subsequent failure to further explain and
specify its reasoning provided for more confusion than insight and, today, does not
prove particularly helpful in transposing the concept of “armed attack” to cyber
operations.

Effects “Equivalent” to Death, Injury and Destruction

A good starting point may be to ask whether as a minimum, every state-sponsored
cyber operation intended to inflict death, injury or physical destruction within the
sphere of sovereignty of another state would automatically also qualify not only as
a “use of force” but also as an “armed attack” within the meaning of article 51 of
the UN Charter. This approach would certainly be convincing in that it would
liberate states from the prohibition on the use of (counter-) force as soon as cyber

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operations directed against them are likely to result in destructive effects
equivalent to those normally caused by the use of kinetic, chemical, biological or
nuclear weapons. In view of the disruptive, rather than destructive, consequences
of the vast majority of cyber-attacks it remains unsatisfactory, however, to interpret
the “scale and effects” criterion exclusively in terms of effects equivalent to
physical destruction.

The main problem is that, depending on what is considered to be “equivalent” to

physical destruction, this approach will either end up being too restrictive (that is,
including only cyber operations directly resulting in physical destruction but not,
for example, the “mere” incapacitation of the entire national power grid,
telecommunication network or air defence system) or too expansive (that is,
including any large scale denial of service attack even against nonessential, purely
civilian service providers such as, for example, online shopping services or
telephone directories).

Cyber Attacks Incapacitating “Critical Infrastructures”

In order to come to an adequate interpretation of the “scale and effects” criterion in
the absence of direct infliction of death, injury or destruction, reference could be
made to “critical infrastructures”, the protection of which has always been the key
concern of states in their discussion of cyber security. This concept is used by
states and multilateral organisations in the discussion of cyber security and
addresses one of the key concerns in this respect. Moreover, although national
interpretations of the term vary, the following examples illustrate that there is
sufficient overlap and consistency to provide for a viable working definition:

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 UN General Assembly: Critical infrastructures include “those used for the
generation, transmission and distribution of energy, air and maritime
transport, banking and financial services, e-commerce, water supply, food
distribution and public health and the critical information infrastructures that
increasingly interconnect and affect their operations.”
 United States: “Critical infrastructures are those physical and cyber-based
systems essential to the minimum operations of the economy and
government. They include, but are not limited to, telecommunications,
energy, banking and finance, transportation, water systems and emergency
services, both governmental and private.” “The term ‘critical infrastructure’
means systems and assets, whether physical or virtual, so vital to the United
States that the incapacity or destruction of such systems and assets would
have a debilitating impact on security, national economic security, national
public health or safety, or any combination of those matters.”
 Shanghai Cooperation Organisation: “’Critical structures’ public
facilities, systems and institutions attacks on which may cause consequences
directly affecting national security, including that of the individual, society
and state.”
 European Union: “Critical infrastructure include those physical resources,
services, and information technology facilities, networks and infrastructure
assets which, if disrupted or destroyed, would have a serious impact on the
health, safety, security or economic well-being of Citizens or the effective
functioning of governments.” “Critical Information Infrastructure (CII): ICT
systems that are critical infrastructures for themselves or that are essential
for the operation of critical infrastructures (telecommunications,
computers/software, Internet, satellites, etc.)”.

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Even though the UN General Assembly rightly recognised “that each country will
determine its own critical information infrastructures”,62 a determination likely to
be based on fluctuating considerations of national security,63 it cannot be denied
that the concept facilitates transposing the “scale and effects” criterion to the cyber
domain. Accordingly, it could be argued that cyber-attacks unlikely to result in
death, injury or destruction could still amount to an “armed attack” if they aim to
incapacitate “critical infrastructures” within the sphere of sovereignty of another
state.

Self-Defence in the Cyber Domain

The principle of proportionality (often confused with the quantitative aspect of the
principle of necessity) additionally requires that the harm caused by the self-
defensive action both to the attacking state and to uninvolved third states and
individuals be justified by the gravity of the armed attack which the defensive
action is designed to avert or repel. According to this modality, action taken in
self-defence is legally justified only to the extent that the harm it is expected to
cause remains in reasonable proportion to the harm it aims to prevent. According
to these modalities, self-defensive action in cyberspace is not permissible in
response to harm which has already been caused by hostile cyber operations, but
only with a view to preventing or repelling an imminent or ongoing attack, and
only to the extent actually necessary for that purpose. Moreover, the harm likely to
be inflicted on the attacker or uninvolved third states or individuals by self-
defensive cyber action must always be justified by the seriousness of the harm to
be prevented. The speed, unpredictability and clandestine nature of most cyber
operations severely hamper the defending state’s ability to react in time to detect

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and prevent or repel an imminent or ongoing attack, which may well be designed
and timed to produce its harmful effects only months after the attacker’s intrusion.

In practice, cyber defence must largely rely on automated systems, which render a
human case-by-case assessment and verification both of the attacker’s identity and
the necessity and proportionality of self-defensive action extremely difficult. These
specific characteristics of cyber operations, in conjunction with the fact that cyber-
attacks are increasingly conducted by non-state actors relying on series of small-
scale operations, have provoked an extension to cyberspace of the continuing
discussion on the permissibility of anticipatory self-defence. Irrespective of how
this question will eventually be resolved as a general matter, ensuring the
compliance of self-defensive action in cyberspace with the fundamental
requirements of necessity and proportionality will certainly continue to pose a
significant challenge for some time to come. Lastly, it should also be recalled that
while an armed attack within the meaning of article 51
of the UN Charter justifies self-defensive action in
derogation from the UN Charter regime of peaceful
dispute settlement and non-use of force, it does not
relieve the defending state from its obligations under
other applicable frameworks of international law such
as, most notably, international humanitarian law.

Cyber Operations and UN Security Council Enforcement

Within the United Nations system, the Member States “confer on the Security
Council primary responsibility for the maintenance of international peace and
security”. To the extent that cyber operations can adversely affect the international

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relations between states, there can be no doubt that the Council’s responsibility
also extends to maintaining international peace and security in cyberspace. When
the Security Council determines the existence of a “breach of the peace,” an “act of
aggression” or, most commonly, a “threat to the peace,” it can undertake or
authorize such measures as may be necessary to maintain or restore international
peace and security. Such measures may be limited to issuing recommendations, or
calling on the involved parties to comply with provisional measures, but may also
involve armed and unarmed enforcement.

The UN Charter lists as an example of unarmed enforcement the “complete or

partial interruption of ... telegraphic, radio, and other means of communication”,
thus providing an express basis for UN-sanctioned cyber blockades regardless of
whether the relevant threat to the peace arises in cyberspace. Should the Council
come to the conclusion that measures not involving armed force are or would be
inadequate, “it may take such action by air, sea, or land forces as may be necessary
to maintain or restore international peace and security.” While there can be no
doubt that this provision also applies where the relevant threat to the peace arises
in cyberspace, a textual reading of article 42 of the UN Charter seems to provide a
basis for armed enforcement action only “by air, sea, or land forces.” This may
raise the question of whether forces operating in the separate domains of space and
cyberspace are excluded. Clearly, however, the purpose of article 42 of the UN
Charter was not to restrict the means of enforcement available to the Security
Council but to extend them, where need be, to all armed services available to the
leading military powers of the drafting period. From a teleological perspective,
therefore, article 42 of the UN Charter cannot reasonably be interpreted as

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depriving the Security Council of the possibility to authorize the use of armed
force in cyberspace.

Contrary to the notions of “force” and “armed attack,” that of “threat to the peace”
is a largely political concept, which leaves the Security Council a broad measure of
discretion. As a matter of law, the determination of a “threat to the peace” neither
presupposes an internationally wrongful act, nor a threat or use of “force” or the
occurrence of an “armed attack” within the meaning of the UN Charter. In
principle, therefore, the Security Council has the power to authorize enforcement
action, including military force, against cyber threats far below the threshold
required for self-defensive action or even for a qualification as interstate force. In
determining whether a particular cyber operation constitutes a threat to the peace,
the Security Council’s discretion is not completely unlimited. At the very least, the
Council is obliged to act in conformity both with the purposes and principles of the
Charter and, more generally, with the “principles of justice and international law”.

Lastly, just as in the case of self-defensive action, it should be recalled that an

authorization of armed enforcement by the UN Security Council merely provides a
legal justification for the otherwise prohibited use of force against another state,
but does not relieve enforcing states from their obligations under other applicable
frameworks of international law such as, most notably, international humanitarian
law

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Cyber Operations as “Warfare”
Definition and Terminology
The question of whether cyber operations can amount to war, warfare, armed
conflict or hostilities raises preliminary questions of definition and terminology.
For the time being, the notions of “cyberwar,” “cyberwarfare,” “cyber hostilities”
and “cyber conflict” have not been authoritatively defined for the purposes of
international law. The only treaty definition that exists, by the regional Shanghai
Cooperation Organisation, concerns the wider concept of “information war”, which
is defined as: confrontation between two or more states in the information space
aimed at damaging information systems, processes and resources, critical and other
structures, undermining political, economic and social systems, mass psychological
brainwashing to destabilize society and state, as well as to force the state to taking
decisions in the interest of an opposing party.

As usefully pointed out by a leading commentator, the term “information warfare”

is often inaccurately used as a synonym for “information operations”: while the
latter can occur both in times of peace and of war, the former refers exclusively to
information operations conducted in situations of armed conflict and excludes
information operations occurring during peacetime. Applied to the more specific
context of cyber operations, this means that the use of the term “cyberwar”,
“cyberwarfare”, “cyber hostilities” and “cyber conflict” should be restricted to
armed conflicts within the meaning of IHL. Indeed, security threats emanating
from cyberspace which do not reach the threshold of armed conflict can be
described as “cyber-crime”, “cyber operations”, “cyber policing” or, where
appropriate, as “cyber terrorism” or “cyber piracy”, but should not be referred to

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with terminology inviting doubt and uncertainty as to the applicability of the law of
armed conflict.

Cyber Operations in Pre-Existing Conflicts

Today, it appears to be uncontested that IHL applies to cyber operations which are
carried out in the context of a pre-existing international or non-international armed
conflict. It seems to be generally recognised that the fact that cyber operations did
not exist at the time of the drafting and adoption of most contemporary instruments
of IHL does not preclude their applicability to such operations. One of the most
fundamental rules of IHL has always been that the right of belligerents to choose
methods or means of warfare is not unlimited, and article 36 of AP I expressly
requires that: “In the study, development, acquisition or adoption of a new weapon,
means or method of warfare, a High Contracting Party is under an obligation to
determine whether its employment would, in some or all circumstances, be
prohibited by [international law].” Thus, existing
IHL clearly anticipates the application of its rules
and principles to newly developed methods and
means of warfare. It is not the precise nature of a
means or method, but the context in which it is
used, which subjects it to the rules and principles
of IHL. Whether a cyber-operation must be
regarded as carried out in the context of an armed conflict does not necessarily
depend on the territorial connection of the operation but, rather, on whether it is
carried out for reasons related to an armed conflict or, in the words of the
International Criminal Tribunal for the Former Yugoslavia (ICTY), whether it has
a “nexus” with an ongoing armed conflict. This also means that cyber operations

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conducted for reasons unrelated to an armed conflict (lack of nexus) may qualify as
cyber criminality, cyber policing etc., but are not governed by IHL, even if carried
out by a belligerent party, or within a territory affected by an armed conflict.

Can Cyber Operations Trigger an Armed Conflict?

One of the most difficult questions is whether and, if so, in what circumstances
cyber operations can give rise to an armed conflict without the parallel occurrence
of conventional hostilities. In other words, can cyber operations, in and of
themselves, trigger the applicability of IHL? This question must not be confused
with the distinct questions of whether cyber operations can qualify as a “threat or
use of force” or an “armed attack” within the meaning of the UN Charter.
According to a 2008 opinion paper of the International Committee of the Red
Cross (ICRC), the currently prevailing legal opinion on the definition of “armed
conflict” under IHL can be summarized as follows:
1. International armed conflicts exist whenever there is resort to armed force
between two or more States.
2. Non-international armed conflicts are protracted armed confrontations occurring
between governmental armed forces and the forces of one or more armed groups,
or between such groups arising on the territory of a State [party to the Geneva
Conventions]. The armed confrontation must reach a minimum level of intensity
and the parties involved in the conflict must show a minimum of organisation.

The ICRC’s opinion paper also emphasizes that, while a situation can evolve from
a non-international to an international armed conflict and vice versa, “legally
speaking, no other type of armed conflict exists”. Consequently, cyber operations
can trigger the applicability of IHL to the extent that they can give rise to all

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required constitutive elements of an international or non-international armed
conflict.

International Armed Conflict: As far as international armed conflicts are

concerned, cyber operations must amount to the “resort to armed force between
two or more States”.

The question of whether armed force occurs “between” states essentially turns on
legal attributability as governed by the general international law of state
responsibility. Accordingly, the applicability of IHL cannot be limited to acts
committed by members of the state armed forces but must be extended to the
conduct of any other person acting as a state agent, whether de jure or de facto, on
behalf of a belligerent. While there is no reason to alter the application of the law
of state responsibility in cyber space, the identification of the source or author of a
cyber operation can pose particularly difficult evidentiary problems, which may
have consequences for the presumptions or precautions to be applied in case of
doubt.

The second question is whether cyber operations can be regarded as “armed force”
(or, in non-international armed conflict, “armed confrontation”) triggering the
applicability of IHL even in the absence of the use of kinetic force. So far, there
seems to be consensus that this is the case, at least wherever cyber operations cause
the same effects as kinetic force, namely death, injury or destruction. Obviously,
however, not every use of force necessarily indicates the existence of an armed
conflict and not all acts of war necessarily involve a use of force. Indeed, armed
conflicts can even be triggered by formal declarations of war. Strictly speaking,

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therefore, the existence of an international armed conflict does not necessarily
depend on the use of “force” between states but, at least in the absence of a formal
declaration of war, on the occurrence of belligerent “hostilities” within the
meaning of IHL. Accordingly, state-sponsored cyber operations would give rise to
an international armed conflict if they are designed to harm another state not only
by directly causing death, injury or destruction, but also by directly adversely
affecting its military operations or military capacity.

Non-International Armed Conflict: The constitutive elements for non-international

armed conflicts differ from those for international armed conflict in that they
involve at least one non-state belligerent showing a minimum degree of
organisation, and in that the armed confrontations (that is, hostilities) must show a
minimum level of intensity (“protracted”).

The first criterion requires organised collective action, which would certainly
exclude cyber operations conducted by individual hackers from the notion of
armed conflict. From a strictly theoretical perspective it cannot be excluded that
even a small, but organised, group of hackers launching highly destructive cyber
operations against, say, a state’s military networks could trigger a non-international
armed conflict. As long as such cyber operations emanate from within territory
controlled by the attacked state, however, and as long as they are not accompanied
by a threat or use of conventional military force which could prevent the state from
exercising its territorial authority over the attackers, such operations would in
practice most likely be regarded as a criminal threat to be addressed through law
enforcement measures. A qualification of such operations as “hostilities” capable
of triggering a non-international armed conflict becomes more likely when they

265
occur repeatedly over a certain duration and emanate from territory where the
attacked state cannot exercise its law enforcement authority, and where the local
authority is unwilling or unable to intervene. For the time being, it is probably still
too early to make definite statements as to the precise threshold at which cyber
operations trigger a non-international armed conflict (a question unresolved even
for non-international conflicts fought through traditional means and methods). As
has rightly been stated already in the ICRC’s contribution to the 2004 Stockholm
Conference, “whether CNA alone will ever be seen as amounting to an armed
conflict will probably be determined in a definite manner only through future state
practice”.

Cyber Operations as “Attacks”

As to the definition of the term, article 49(1) of AP I provides that “attacks means
acts of violence against the adversary, whether in offence or defence.” This
definition has triggered significant discussion as to what extent cyber operations, in
view of their non-kinetic nature, could be regarded as “acts of violence” and,
therefore, as “attacks” within the meaning of IHL. Today, it seems to be generally
recognised that “acts of violence” do not necessarily require the use of kinetic
violence, but that it is sufficient if the resulting effects are equivalent to those
normally associated with kinetic violence, namely the death or injury of persons or
the physical destruction of objects (effects-based approach). Strictly speaking, this
approach does not “extend” the notion of attack beyond acts of violence, but
simply recognises that cyber operations triggering processes likely to directly
cause death, injury or destruction are not only equivalent to, but constitute an
integral part of, an “act of violence” within the meaning of article 49(1) of AP I.
There is disagreement, however, as to whether the notion of attack also includes

266
cyber operations aiming to merely capture or neutralise (that is, inhibit, hinder or
hamper the proper exercise of its function)—rather than kill, injure or destroy—the
target. The leading argument in favour of extending the effects-based interpretation
of “attack” to cyber operations aiming to “neutralise” is that the treaty definition of
military objectives in article 52(2) of AP I includes objects whose “capture and
neutralisation” would offer a definite military advantage and puts these two
alternatives on the same level as total or partial destruction. Those opposing this
extension base themselves on a more literal interpretation of attacks as “acts of
violence” and require that, if not the act itself, at least its consequences must be
violent in order for it to be considered as an attack. In support of their view they
further point out that the principle of proportionality is formulated in terms of
attacks causing “loss of civilian life, injury to civilians, damage to civilian objects,
or a combination thereof” but does not include capture or neutralisation.

While both arguments have their strong points, neither seems to provide an entirely
satisfactory interpretation of the notion of attack in relation to cyber operations. On
the one hand, it would hardly be convincing to exclude the non-destructive
incapacitation of a state’s air defence system or other critical military infrastructure
from the notion of attack simply because it does not directly cause death, injury or
destruction. On the other hand, it may well be exaggerated to extend the notion of
attack to any denial of service attack against, for example, online shopping
services, travel agents or telephone directories

Summary
In this session, we have discussed about internet and international laws. Sources of
internet and international laws were given. The activities of cyber warfare,

267
operations, attack, exploitation and force in cyber operations were discussed. Self
defence in cyber warfare as well as the UN Security Council enforcement in the
cyber warfare was discussed.

C. Discussion Question
1. Explain the sources of Internet and International Laws of any country of
your choice.
2. Discuss the law and regulation that apply to e-commerce
3. Discuss the sources of internet and international laws
4. Discuss the jurisdiction over online activities
5. What is international law? What are the types of international law?
6. Is international law really law? Discuss
7. Explain in detail the object, purpose and basis of international law
8. “International law is primarily concerned with the rights, duties and interest
of states”. Examine this statement with reference to the place of individuals
and non –state entities in international law.
9. “International law is a law regulating the rights and duties of states and
creating no rights and imposing no duties on individuals” Do you agree with
this statement? Why and why not. Argue
10. “International law is not a true law, but a positive international morality”
Elaborate your answer with appropriate arguments.

References
Bar‐Gill, Oren and Ben‐Shahar, Omri (ND). “Regulatory Techniques
In Consumer Protection: A Critique Of The Common European Sales Law.”  
http://www.law.uchicago.edu/files/files/OBS-OBG%20paper_0.pdf

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 10.0 FURTHER READING/REFERENCES
1. Barnes James A., Dworkin Morehead T. & Richard Eric L. (2000) Law for
Business, 7th Edition, McGraw- Hill Companies, Inc.
2. Abiola Sanni, (2005) Introduction to Nigerian Business Law, Malthouse
Press Limited, Lagos.
3. Adesanya, M. O. & Oloyede, E. O. (1983) Business Law in Nigeria,
University of Lagos Press, and Evans Bothers Limited.
4. Sagey, I.E. (2000) Nigeria Law of Contract, 2nd Edition, Spectrum Books
Limited, Ibadan.
5. Kodilinye, G. & Aluko, O. (2001). The Nigeria Law of Torts, 2nd Edition,
Spectrum Books Limited, Ibadan.
6. Company & Allied Matters Decree 1990.
7. Richard Mann & Barry Roberts (2006) Business Law. 13th Edition, Author:
SBN: 0-324-20486-8.

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 11.0 BUSINESS LAW GLOSSARY
This Small Business Law glossary gives you access to definitions for Business Law
legal terminology commonly used in documents and court proceedings. It will help
you understand the legal terms and phrases which are relevant to business
organisations.

A
1. Acceptance: an agreement to an offer resulting in a contract.
2. Accord and Satisfaction: an agreement made and executed in satisfaction of
the rights one has from a previous contract.
3. Agent: the party appointed by the principal to enter into a contract with a third
party on behalf of the principal.
4. Alien Corporation: one that is incorporated in a foreign country.
5. Answer: official document detailing a defendant's defense.
6. Antitrust: laws which seek to promote competition among businesses.
7. Appellate Court: court hearing cases appealed from lower courts.
8. Arraignment: charging a person with a crime and asking for that person's
plea.
9. Arrest: to take into police custody.
10. Assignee: the party to whom the assignment is made.
11. Assignment: a means whereby one party conveys rights to another person
who is not a party to the original contract.
12. Assignor: the party making the assignment.
13. Authority: power to act for someone else.

270
14. Bailee: the party who acquires possession but not the title of personal property
in a bailment.
15. Bailment: the transfer of possession but not the title of personal property by
one party to another, under agreement.
16. Bailor: the party who gives up possession, but not title, of property in a
bailment.
17. Bearer: a person in possession of an instrument.
18. Bearer Paper: a commercial paper payable to bearer; i.e. to the person having
possession of such.
19. Beneficiary: recipient of the proceeds of a life insurance policy; one who
inherits property as specified in a will.
20. Bill of Lading: the contract existing between the consignor (shipper) and the
carrier.
21. Bill of Sale: a document of conveyance that provides written evidence of
one's title to tangible personal property.
22. Blank Endorsement: having no words other than the signature of the
endorser.
23. Board of Directors: a body of persons elected by the stockholders to define
and establish corporate policy.
24. Booking: administrative step taken after an arrested person is brought to a
police station, which involves entry of the person's name, the crime for which
the arrest was made, and other relevant facts on the police "blotter," and which
may also include photographing, fingerprinting and the like.
25. Breach of Contract: a situation in which one of the parties to a contract fails
or otherwise refuses to perform the obligation established in that contract.

271
26. Business Law: those rules of conduct prescribed by a government and its
agencies, regulating business transactions.

C
27. Capital Stock: declared value of outstanding stock.
28. Cashier's Cheque: a cheque drawn on a bank's own funds and signed by a
responsible bank official.
29. Certificate of Deposit: the acknowledgment by a bank of a receipt of money
with an agreement of repayment.
30. Certified cheque: a cheque for which the bank assures that the drawer has
sufficient funds to make payment.
31. Cheque: an order by a depositor on the bank to pay a sum of money to a
payee.
32. Civil Law: legal proceedings concerned with the rights of public citizens.
33. Close (closed, closely held) Corporation: a designation which applies to a
corporation in which outstanding shares of stock and managerial control are
held by a limited number of people (often members of the same family).
34. Commercial Paper (Negotiable Instrument): a writing drawn in a special
form which can be transferred from person to person as a substitute for money
or as an instrument of credit.
35. Common Law: customs that have become recognised by the courts as
binding on the community.
36. Common Stock: stock that entitles owner vote.
37. Compensatory Damages: an award paid to the injured party to cover the
exact amount of their loss, but no more.
38. Complaint (Petition): a written request initiating a civil suit.

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39. Consideration: that which the promisor demands and receives as the price for
a promise.
40. Consignee: one to whom goods are shipped by common carrier.
41. Consignor: one who ships goods by common carrier.
42. Contract: an agreement between two or more competent persons which is
enforceable by law.
43. Contract to Sell: an agreement wherein a seller agrees to transfer title of
goods to a buyer for a consideration (price), at a future time.
44. Contractual Capability: the necessity that the parties desiring to enter into
contracts meet all requirements.
45. Corporation: an artificial being, invisible, intangible and existing only in
contemplation of law; an entity that has a distinct existence separate and apart
from the existence of its individual members.
46. Counteroffer: an intended acceptance which changes or qualifies the offer,
and is a rejection of the original offer.
47. Creditor Beneficiary: the person to whom the promise of a contract owes an
obligation or duty which will be discharged to the extent that the promisor
performs the promise.
48. Crime: an offense which is injurious to society as a whole.
49. Criminal Law: laws dealing with crimes and the punishment of wrongdoers.

D
50. Defendant: the person against whom legal action is brought.
51. Disaffirmance: the repudiation of, or election to avoid, a voidable contract.
52. Discharge: termination of a contract by performance, agreement,
impossibility, acceptance of breach, or operation of law.

273
53. Discovery: pretrial steps taken to learn the details of the case.
54. Domestic Corporation: operates in the state that granted the charter.
55. Donee Beneficiary: a third party beneficiary to whom no legal duty is owed
and for whom performance is a gift.
56. Dormant or Sleeping Partner: partner unknown to public with no part in
management.
57. Draft: a written order signed by one person requiring the person to whom it is
addressed to pay a particular sum of money to the bearer, either on demand or
at a certain time.
58. Drawee: the person, company, or financial institution ordered to pay a draft.
59. Drawer: the person who executes any draft.
60. Duress: a means of removing one's free will; obtaining consent by means of
threat to do harm to the person, his family, or his property.

E
61. Employee: the person hired to perform work and who is obligated both as to
the work to be done and as to the manner in which it is to be done.
62. Employer: the party who hires employees to do certain work.
63. Endorsee: a person who becomes the holder of a negotiable instrument by
endorsements which names him or her as the person to whom the instrument
is negotiated.
64. Endorsement: the signature or statement of purpose by the owner on the back
of the instrument of negotiable instrument, which indicates the future control.
65. Endorser: person who writes his or her name on back of instrument.
66. Executed Contracts: those contracts in which the parties have fulfilled the
terms.

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 67. Execution: the carrying out or completion of some task.
68. Executory Contracts: those contracts in which the terms have not been
completely executed or fulfilled.
69. Existing Goods: those goods which are, at the time of the contract, in
existence and owned by the seller.
70. Express Authority: the authority of an agent, stated in the document or
agreement, creating the agency.
71. Express Contract: a contract in which the parties express their intentions,
either orally or in writing, at the time of the agreement.
72. Express Warranty: the actual and definite statement of a seller, either
verbally or in writing, guaranteeing a standard or level of performance.

F
73. Felony: a criminal offense that is punishable by confinement in prison or by
death.
74. Fiduciary: a relationship of trust and confidence, such as that which exists
between partners in a partnership.
75. Foreign Corporation: designation that applies when a corporation operates in
any state other than where it is chartered.
76. Formal Contract: those contracts that must be in special form or produced in
a certain way, such as under seal.
77. Fraud: the intentional or reckless false statement of a material fact upon
which the injured party relied which induced the injured party to enter into a
contract to his or her detriment.
78. Future Goods: those goods which are not in existence at the time a contract is
agreed to.

275
G
79. General Agent: one who is authorised to execute the principal's business of a
particular kind, or the entire principal's business at a particular place, if not all
of one kind.
80. General Partner: an individual actively and openly engaged in the business
and held out to everyone as a partner.
81. Goods: movable tangible personal property.

H
82. Holder: one in possession of commercial paper.

I
83. Identified goods: these are goods specified by the buyer and seller.
84. Implied Authority: an agent's authority to do things not specifically
authorised in order to carry out express authority.
85. Implied Contract: one in which terms of the contract are implied by acts or
conduct of the parties.
86. Implied Warranties: is a warranty imposed by law, arising automatically
because the sale has been made.
87. Independent Contractor: one who contracts to perform certain tasks for a set
fee, but who is contracting party as a means by which the contract is executed,
except for specifications established in the contract independent.
88. Injunction: a judicial order or decree forbidding the performance of a certain
act.

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 89. Intangible Personal Property: evidences of ownership of personal property
such as stock of corporations, cheques and copyrights.

J
90. Judgment: a decision of a court.

L
91. Law (Blackstone's Definition): those rules of civil conduct commending
what is right and prohibiting what is wrong.
92. Limited Liability Corporation: newest form of business ownership
recognised in the U.S.A.; combines features of both the corporation and
partnership.
93. Limited Partner: partner whose liability for the firm's debts is limited to the
amount of his/her investment.
94. Liquidated Damage: a provision in a contract fixing the amount of the
damages to be paid in the event one party breaches the contract.

M
95. Maker: the person who executes a promissory note.
96. Malpractice: a breach of contract by a professional; failure to perform a
professional service with the ability and care generally exercised by others in
the profession.
97. Merchant: a person who deals in goods of the kind, or otherwise by
occupation purports to have knowledge or skill peculiar to the practices or
goods involved in the transaction.

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98. Minor: a person under full legal age; in most states (but not all), the standard
is under the age of frighten.
99. Misdemeanor: a criminal offense which is neither treason nor a felony.
100. Misrepresentation: stating an untrue fact.

N
101. Necessaries (Necessities): items, required or proper and useful, for
sustaining a human being at an appropriate living standard (examples: food,
clothing and shelter).
102. Negligence: failure to exercise ordinary care; omission to do something
which a reasonable and prudent person would do under ordinary
circumstances or the doing of something which a reasonable and prudent
person would not do; lack of due care (exercised by a wrongdoer who has
not acted as a reasonable person would).
103. Negotiable Instrument (Commercial Paper): a writing drawn in a special
form which can be transferred from person to substitute for money or as an
instrument of credit.
104. Negotiation: the act of transferring ownership of a negotiable instrument to
another party.
105. Nominal Damages: a token award to symbolise vindication of the wrong
done to the plaintiff; generally, the award is $1.00.
106. Nominal Partner: person who pretends to be a partner or permits others to
represent him or her as a partner.
107. Novation: the change of one of the parties to a contract at the mutual
agreement of the original parties.

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O
108. Offer: an expression of willingness to enter a contractual agreement.
109. Offeree: the person to whom an offer is made.
110. Offeror: the party who initiates or makes an offer.
111. Order Paper: a commercial paper made payable ‘to the order of' some
named party; the word "order" or its equivalent must be used.
112. Ordinances: laws enacted by local municipalities.

P
113. Partnership: the voluntary association of two or more people who have
combined their resources to carry on as co-owners of a lawful enterprise for
their joint profit.
114. Par-value Stock: stock with an assigned face value.
115. Payee: the party to whom any negotiable instrument is made payable.
116. Personal Property: all property which is not real property.
117. Petition (Complaint): a written request initiating a civil suit.
118. Plaintiff: the individual who initiates a civil action.
119. Preferred Stock: stock giving special advantage as to payment of dividends,
upon liquidation or both.
120. Price: that consideration stipulated by contract, generally expressed in
money or money's worth.
121. Principal: a party who appoints a second party to serve as an agent.
122. Private Corporation: a corporation formed by individuals to form some
non-governmental function.
123. Process (Summons): a notice of complaint given to a defendant, defining
the complaint and a time frame in which a response, or answer, must be

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 filed, and which serves the purpose of conferring personal jurisdiction over
the defendant.
124. Promissory Estoppel: an equitable doctrine that prevents the promisor from
revoking the promise when the promisee justifiably acts in reliance upon the
promise to his detriment.
125. Promissory Note: a negotiable instrument containing a promise to pay.
126. Promoter: one who takes initial steps to form corporation.
127. Property: anything that may be owned.
128. Public Corporation: a corporation formed to carry out government
functions.
129. Punitive Damages: an award paid to the plaintiff in order to punish the
defendant, not to compensate the plaintiff.

Q
130. Qualified endorsement: an endorsement which limits the liability of the
endorser.

R
131. Ratification: confirming an act that was executed without authority or an act
which was voidable.
132. Real Property: land and those objects permanently attached to land.
133. Rejection: refusal to accept.
134. Rescission: canceling, annulling, avoiding.
135. Restrictive Endorsement: an endorsement which prevents the use of the
instrument for anything except the stated use.

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136. Revocation: the annulment or cancellation of an instrument, act or promise
by one doing or making it.

S
137. Sale: the transfer of title to goods from the seller to the buyer for a
consideration called the price.
138. Secret Partner: partner active in a business unknown to the public.
139. Service Contracts: the contracting of services rather than goods.
140. Shareholders (Stockholders): those having title to one or more shares of
stock in a corporation; combined, they represent ownership of the
corporation.
141. Sherman Antitrust Act: legislation intended to promote competition among
businesses by prohibiting restraint of trade.
142. Silent Partner: an individual who takes no active part in the management of
a business but has capital invested in the business.
143. Simple Contract: any contract other than a formal contract, whether
written, oral or implied.
144. Sole Proprietorship: a business owned by one person.
145. Special Agent: one authorized by the principal to execute specific acts.
146. Special Endorsement: an endorsement which designates the particular
person to whom payment is to be made.
147. Special Performance: a contract remedy by which the court requires the
breaching party to perform the contract.
148. Stare Decisis: the principle that the decision of a court should serve as a
guide or precedent and control the decision of a similar case in the future.

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149. Statute of Frauds: a statute originally enacted by the English Parliament
and now enacted in some form in all states, listing certain types of contracts
which could be enforced only if in written form.
150. Statute of Limitations: a law that restricts the period of time within which
an action may be brought to court.
151. Statutes: laws which are enacted by legislative bodies.
152. Stockholders (Shareholders): those having title to one or more shares of
stock in a corporation; combined, they represent ownership of the
corporation.
153. Subchapter Corporation: a creation of the tax codes; shareholders elect to
be taxed as a partnership (no double taxation) without losing corporation
status.
154. Summons (Process): a notice of complaint given to a defendant, defining
the complaint and a time frame in which a response, or answer, must be
filed, and which serves the purpose of conferring personal jurisdiction over
the defendant.

T
155. Third Party Beneficiary: person not party to a contract, but whom parties
intended to benefit.
156. Tort: a private or civil wrong, either intentional or caused by negligence, for
which there may be action for damages.
157. Treasury Stock: stock reacquired by a corporation.
158. Trial Courts: courts that conduct the original trial and render their decision.

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 159. Undue Influence: improper influence that is asserted by one dominant
person over another, without the threat or harm.
160. Unenforceable Contract: an agreement which is not in the form required by
law.
161. Uniform Commercial Code: recognised as the most important statute in
business law; includes provisions which regulate certain sales of goods.
162. Unilateral Contract: a one-sided contract/agreement formed when an act is
done in consideration for a promise.
163. Usurious: exceeding the maximum rate of interest which may be charged on
loans.

V
164. Valid Contract: a contract which will be enforced by the court.
165. Void Contract: an agreement of no legal effect.
166. Voidable Contract: a contract that would be an enforceable agreement, but
due to circumstances, may be set aside by one of the parties.

W
167. Warranties: guarantees made by a seller that an article, good or service will
conform to certain standard or will operate in a certain manner.

Source: http//quizlet.com/4410863/business-law-glossary.

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