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Diploma in Business
Unit Number and Title
Unit 5 Aspects of Contract and Negligence for Business
The present report would try to understand what a contract is? What its essential elements are? In the present report we will try to understand different types of contract and what are the different essential terms in a contract and their importance in the contract between two parties. In this report we will try to do a case study based on the given case of Linda Green and how this law of contract helps her in overcoming different problems related to her salon business. We will also discuss different acts related to the law of Licensed and contracts like the Sale of Goods Act, the consumer credit act, the employment act, the unfair contract terms act and other acts as well. We will also discuss the different types of business which is the business as a sole trader, partnership and a limited company.
According to Pollock, a contract is a promise or set of promises which the law will enforce. There are some specific elements that should be present to make a contract valid legally, they are as followings:
Intention: this is a very important aspect of law of contract as to be legally valid the parties must have entered into a contract with an intention or motive to be bound by it. As social contracts are not legally valid and this was also held in the case of Balfour v Balfour (1919), where a social agreement between a husband and wife was not held to be legally enforceable (INSITE LAW MAGAZINE, 2014)
Offer: it a proposal by the offeror to the offeree to enter into a contract. In a contract the offer is the first step in the formation of a contract (INSITE LAW MAGAZINE, 2014).
Acceptance: when the offeree gives an acceptance to an offer in the form of an unequivocal consent, then a contract is formed (INSITE LAW MAGAZINE, 2014).
Consideration: is the price paid for the promise, it is the most essential part of the consideration as in a valid contract there should be the presence of a consideration and it must hold some value in the eyes of the law (INSITE LAW MAGAZINE, 2014).
In the contract at present there is a contract between Linda and an employee, in the contract the terms of the contract should be written, there should be a job offer by Linda and the same should be accepted by the employee, the contract needs to be signed by both Linda and the employee to be legally binding on them.
Legal terms hold much importance in the contract and they should be incorporated in the contract to be effective on the parties. The legal terms that should be present in the contract between Linda and a potential employee are described below:
Express terms: the terms on which the parties have agreed, these terms are written in the contract and in the present contract, the job description, the salary, the working hours, are the terms that would be considered express terms (E-LAW RESOURCES, (n.d.)).
Implied terms: the terms that are inserted in the contract by courts, these terms in the present contract can be to behave in a professional manner, to treat the customers well, to follow the employer orders (E-LAW RESOURCES, (n.d.)).
Exclusion terms: the terms that takes away the liability of one party in case of a breach of contract. In the present contract the terms like termination clause may have some exclusion clause where if the employee is terminate he or she cannot claim a damage or breach of the contract by Linda (E-LAW RESOURCE, (n.d.)).
The law of contract was made to protect the innocent party from fraud of any kind. In the present case the wholesaler is not demanding a fair deal by asking Linda to use the bad quality colouring agent for the time till it shows positive results. As if Linda keeps on using the bad quality colouring agent then all the customers will have a bad image of the salon and it would create further bad name for the salon, to deal with this issue Linda can take the help of the Unfair Contract Terms Act 1977 and the Unfair Terms in a Consumer Contracts Regulations 1999,as both these acts protect the innocent party from unfair terms in the contract.
Section 6 of the unfair contracts terms act 1977, this section applies to the sale of goods and also to the contracts of hire purchase. The provisions is related to the liability that arises under the implied terms given in the sale of Goods Act 1979, this act provides that:
One party to the contract cannot exclude its liability arising about the title and it applies to both consumer and non-consumer sales.
In the consumer sales a party cannot exclude its liability in relation to the description, quality or fitness for purpose (E-LAW RESOURCE, (n.d.)).
In the similar manner the wholesaler cannot exclude himself from the liability arising of the bad quality product which is the colouring agent and also he cannot compel Linda to continue the use of the colouring agent till they show positive result. Therefore Linda is not bound by the terms of the wholesaler as the use of the colouring agent which is of bad quality is unfair therefore Linda is not bound by it, she can terminate her contract with the and also she can claim for the damages caused to her and the customers due to the use of the colouring agent.
The Sale of Goods Act 1979 is the act which protects the buyers from any kind of fraud or misrepresentation by the seller. This act deals with the goods that are bought and sold in United Kingdom. This act says that the transfer of the property from the seller to the buyer is complete when there is money transaction between the parties that is the price.
The goods should be in a satisfactory quality in accordance with the price of the goods that is paid.
The goods should be of a reasonably good quality and it should also be fir for the purpose for which it was bought. It is the responsibility of seller to ensure that the goods are fit for the purpose.
The sale of Goods act amendment in March 2012 says that if a fault occurs in a product within six months of purchase, the consumer is entitled to make assumption that the goods was sold with the defect already present in goods. This implies that the goods were not of a reasonably good quality at the time of the purchase of the goods. Also this means that the seller has breached his contract and also the statutory obligations related to the goods.
Therefore a person, who buys the goods that are faulty, is entitled to a replacement or repair or a free refund and the retailer is obliged to do all this as a price of his breach (MARKKITELEY, 2012).
Now coming to the present case Linda can make a case against the wholesaler on the basis of the faulty goods that were sold to her by the wholesaler, the hairdryer and all the hair dryers were faulty in nature from the very beginning and now the wholesaler is obliged to either replace, repair or refund the faulty goods and Linda can also make a case on the breach of the contract by the wholesaler.
The Consumer Credit Act 1974, this act provides protection to the consumers from unfair credit rates and terms.
The Consumer Credit Act 1974 deals with the following area of credit contracts:
So after discussing all the above provisions of the Consumer Credit Act 1974, Linda can go ahead with her future credit agreements, but she should be careful that all the above provisions of the act are followed by the wholesalers.
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There are some basic legal differences between a sole trader, partnership and a limited company. These differences have been discussed below:
Sole trader: As a sole trader is also the business, the sole trader is the owner of the business.
Employment status: The sole trader is self-employed and he can keep employees.
Tax on profits: The sole trader is required to pay the class 2 and 4 national insurance and also the sole trader is required to pay the income tax on the taxable profits that his business makes. The top rate of tax is 50%.
Losses: A sole trader is allowed to offset his trading losses against his other source of income.
Extracting profits: A sole trader can withdraw his cash from the business without any taxable effect.
Borrowing: The sole trader is allowed to freely borrow money from his business account.
Insolvency: The sole trader is personally liable if the business fails.
Accounts: The sole trader is required to pay his annual personal self-assessment tax return every year.
Selling the business: When the business or its assets are sold then the sole trader is liable to personally and he is also taxed on any gain under the Capital Gains Tax rules. A disposal where the gains are up to five million pounds may also qualify for the Entrepreneurs’ relief.
Expenses in general: The sole trader may obtain a tax relief for the expenses that are incurred exclusively for the purposes of business (ASFB, 2010).
A partnership:in a partnership is a business form in which two or more people share the responsibility of the business.
The partners share the business profits and each partner is taxed individually on their share of the profits.
Legal responsibilities:Each partner is personally responsible for their share of loss that the business suffers.
Also for the expenses related to the business.
A partner may also be a limited company as it has its own legal identity.
How to set up a business partnership: The partners need to choose a “nominated partner” from among themselves who would be responsible for keeping all the business records.
The nominated partner is required to register the partnership with the HM revenue and customs.
All the partners need to individually register for the self-assessment and they would be required to pay their personal tax and national insurance on their share of profit in the business.
The registration should be done before 5th October to be safe from penalty.
Partnership’ tax responsibilities: Thenominated partneris needed to send a partnership and personal self-assessment tax return each year.
All the partners are required to pay income tax on their share of profits and also the national insurance.
The partnerships also need to register for VAT if the business is crossing more than 81,000 pounds every year (GOV. UK, 2014).
A limited company:a company is an organisation which has a separate legal identity from the owner. The group of people who own the company, own shares in the company.
Employment status: A director is the office holder, for tax and national insurance purposes the company officers are considered as the employees of the company and are taxed on that basis.
Tax on profits: The company is required to pay the Corporation Tax on its taxable profits. The company tax rates are lower than the rates of the income tax.
Losses: The Company may offset its loss in the trade against its other source of income.
Extracting profits: A person is taxed on any income that is withdrawn from the company and it may be taxed as a dividend or PAYE depending on the nature of the income that is withdrawn.
Borrowing: A director can borrow from his own company, there are some limits that are set by the Companies Act 2006, and also there are some taxes on the amount borrowed, firstly the company is required to pay a tax charge of 25% if the borrowed amount is not repaid within nine months.
Insolvency: The shareholders have limited liability on the amount of shares that they have not being paid on. A director can be held liable personally accountable if the director continues trading during the insolvency of the company, which also causes financial losses to the creditors.
Accounts: A separate company account is needed to be prepared under the provisions of the Companies Act and these needs to be filed with Companies House. also the HMRCrequires full accounts for the Corporation Tax which required being submitted using special software.
Selling the business: When the business and its assets are sold then the company is required to pay the corporation tax on any profit that it had made and the shareholders are required to pay tax on the distribution of the proceeds. The company shares can also be gifted.
Expenses in general: The company may get tax relief for its expenses if they are incurred exclusively for the purposes of the trade. If the director incurs private expenses that were paid by the company then they are treated as income. The private expenses can be used to offset a loan that was made by the director to the company. The private payments may also be treated as distributions or dividends (ASFB, 2010).
There are some legal provisions that Linda must keep in mind before naming her salon. Firstly Linda cannot use terms like limited, LLP, Ltd, in the name of her salon. Secondly she cannot use any sensitive name for her salon. Thirdly she is not allowed to use a name that gives an impression of government connections. Fourthly the name should not be similar with other salons in the same area and lastly the name must not be offensive. When Linda has checked all these provisions then she can go ahead with her chosen name (GOV.UK, 2014).
There are some statutory provisions that Linda should have knowledge about:
The employment rights act 1996 provides the following rights:This act provides the employees itemised pay statement Right to national minimum wage.
Also the terms and condition of the job must be given in writing.
The Sex discrimination Act, 1975 provides the employees from discrimination in job selection, or promotion which is based on gender of the employee.
The Equal Pay Act 1970provides that men and women should be paid equally for equal type and amount of work done by them.
The National Minimum Wage Act, 1998,this act provides that the employees should be paid at least the national minimum wage that is increased every year with rising cost of living (BUSINESS CASE STUDIES, 2014).
There are two types of dismissals, fair and unfair dismissals and Linda should use a fair mean of dismissing the stylist. To dismiss the stylist Linda has many reasons including her conduct, her behaviour with the customers, her unprofessional behaviour are all valid reasons for the dismissal. To carry on the dismissal, Linda needs to take care of the following:
We have tried to understand the importance of the law of contract and how the law of contract helps an innocent party from the effects of the breach of the contract by providing different remedies. In this report we have discussed all the aspects related to the law of contract and have also seen the implications of the different laws and acts on the present case study of Linda Green, who is a salon owner and how the law of contract protects her from the unfair terms by the wholesaler in regards to the colouring agent and also in relation to the faulty hairdryers. In this report we have seen the importance of different acts and also we have discussed different types of business structures.
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Balfour v Balfour 2 KB 571.
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INSITE LAW MAGAZINE. 2014. 4. Acceptance. [online]. [Accessed 4july2014]. Available from World Wide Web: <http://www.insitelawmagazine.com/ch4acceptance.htm>
INSITE LAW MAGAZINE. 2014. 5.consideration. [online]. [Accessed 4july2014]. Available from World Wide Web: <http://www.insitelawmagazine.com/ch5consideration.htm>
INSITE LAW MAGAZINE. 2014. Intention to Create Legal Relations: When is there a contractual intention? [online]. [Accessed 4july2014]. Available from World Wide Web: <http://www.insitelawmagazine.com/ch2intention.htm>
INSITE LAW MAGAZINE. 2014. offer. [online]. [Accessed 4 july 2014]. Available from World Wide Web: <http://www.insitelawmagazine.com/ch3offer.htm>
MARKKITELEY. 2012. A brief overview to The Sales of Goods Act 1979. [online]. [Accessed 7july2014]. Available from World Wide Web: <http://www.kiteleys.co.uk/blog/a-brief-overview-to-the-sales-of-goods-act-1979/>
WHICH. 2014. REGULATION Consumer Credit Act. [online]. [Accessed 7july2014]. Available from World Wide Web: <http://www.which.co.uk/consumer-rights/regulation/consumer-credit-act>