Contracts (Grade 10 NSC Matric Business Studies): Revision Notes

Understanding Contracts

What is a contract?

A contract is a legally binding agreement between two or more people or businesses. When you make a contract, you promise to do certain things, and the law can make sure you keep those promises.

Contracts help prevent misunderstandings in the future by clearly stating what each person must do. You can make contracts by writing them down or sometimes by speaking about them, but everything in the contract must follow the laws of the country.

Parties to a contract

The people or businesses involved in a contract are called the parties. Usually there are two parties, but sometimes there can be more. When there are many parties, contracts can become quite complicated.

Details that must be included in contracts

Every proper contract should include certain important information:

• Information about the parties - names, addresses and contact details of everyone involved
• Clear terms and conditions - what each person promises to do
• Payment arrangements - how much money will be paid and when
• Duration - how long the agreement will last
• When it comes into effect - the start date of the agreement
• Legal capacity - both parties must be legally able to make contracts
• Voluntary agreement - no one should be forced or threatened into signing

Types of contracts

There are several different types of contracts that businesses and individuals commonly use. Let's look at the most important ones:

Employment contracts

An employment contract is a legal agreement between a business (the employer) and a worker (the employee). This contract explains what job the employee will do and what they will receive in return.

What should be included in employment contracts:

• Employer details (business name, address, contact information)
• Employee details (full name, address, ID number)
• Job title and description of duties
• Salary or wages information
• Working hours and days
• Benefits (like medical aid or pension)
• Overtime, weekends and public holiday arrangements
• Meal breaks and rest periods
• Leave entitlement
• How employment can be terminated

Rights and responsibilities of employers:

Employers have important duties they must fulfil:

• Provide fair payment to employees
• Create a reasonably safe working environment
• Follow labour laws like the Labour Relations Act and Basic Conditions of Employment Act
• Give employees proper leave (annual leave, sick leave, family responsibility leave)

Rights and responsibilities of employees:

Employees also have duties they must carry out:

• Be available for work during agreed times as stated in the contract
• Use their skills properly for the job they were hired to do
• Act in the best interests of the business, not just their own interests
• Avoid dishonesty, misconduct and inappropriate behaviour
• Follow lawful and reasonable instructions from the employer

Insurance contracts

Insurance contracts help people and businesses protect themselves against risks. The person buying insurance (called the insured or policyholder) pays regular amounts of money (called premiums) to an insurance company (called the insurer). In return, the insurance company promises to pay compensation if certain bad events happen.

Personal insurance types include:

• Life insurance - provides money to family members if the policyholder dies
• Home and contents insurance - protects against damage from fire, floods, burglary or theft
• Vehicle insurance - covers costs from accidents, theft or hijacking
• Disability insurance - provides money if someone becomes disabled due to accidents or injuries
• Medical insurance - helps pay for medical expenses and hospitalisation
• Travel insurance - covers risks when travelling

Business insurance types include:

• Property insurance - protects business buildings and equipment from damage
• General liability insurance - covers costs if the business is sued for negligence
• Vehicle insurance - protects company vehicles
• Natural disaster insurance - covers losses from storms, floods, hail or droughts
• Workers compensation - helps when employees get injured or become ill at work

Responsibilities of the insured person:

• Read and understand the insurance contract thoroughly before signing
• Be honest when providing information to the insurance company
• Pay premiums on time as agreed
• Follow all terms and conditions in the contract

Responsibilities of the insurer:

• Clearly explain all terms and conditions to the insured person
• Keep all promises made in the contract
• Process claims quickly and fairly
• If they fail in their responsibilities, the insured can complain to the insurance ombudsman

Hire purchase contracts

A hire purchase agreement allows customers to take possession of products immediately but pay for them over time through regular instalments. This helps businesses sell expensive items to customers who cannot afford to pay the full amount upfront.

How hire purchase works:

• The customer chooses a product they want to buy
• The business allows them to take the product home immediately
• The customer pays for the product in fixed monthly amounts over an agreed period
• The total amount paid will be more than the original price of the product

Benefits for businesses:

• They can sell expensive items to more customers
• It increases sales volume and profits
• Customers who couldn't afford full payment can now buy products

Risks for businesses:

• Some customers may stop making payments
• This can cause cash flow problems for the business

Lease contracts

In a lease agreement, one person (the lessor) owns an asset and allows another person (the lessee) to use it in exchange for regular payments. The lessee never owns the asset - they are just paying to use it.

Common leased assets include:

• Buildings and land (immovable assets)
• Vehicles, computers, photocopying machines, equipment (movable assets)

Benefits of leasing:

• Good option for entrepreneurs with limited capital
• Allows access to expensive equipment without large upfront payments
• More flexible than buying equipment
• Easier than getting loans to purchase equipment

Disadvantages of leasing:

• The lessee never owns the asset
• Total payments over time will be much more than the asset's actual value

Rights and obligations of the lessor:

• Must make the asset available on the agreed date
• Must ensure the asset is in good condition
• Must fulfil all promises made in the contract
• May be responsible for maintaining certain aspects of the asset

Rights and obligations of the lessee:

• Must pay the agreed amount on time
• Must take good care of the asset during the lease period
• Must inform the lessor about any desired improvements
• Must honour all obligations in the agreement
• May be responsible for maintaining certain aspects of the asset

Rental contracts

A rental contract is an agreement between a landlord (property owner) and a tenant (person who will live in the property). The tenant pays monthly rent to use the landlord's house or flat.

Important legislation: The Rental Housing Act and Amended Rental Housing Act govern rental contracts. These laws established Rental Housing Tribunals to settle disputes between landlords and tenants.

Rights and obligations of landlords:

• Must give tenants access to the property on the agreed date
• Must ensure the property is in good condition when tenants move in
• Must handle major maintenance and repairs (like structural problems)
• Must not disturb tenants unreasonably
• Can expect rent to be paid on time

Rights and obligations of tenants:

• Must pay rent on time as agreed
• Must use the property only for the agreed purpose
• Must take care of the property and keep it in good condition
• Must leave the property in the same condition as when they moved in
• Must honour all terms in the rental agreement

Legal implications of contracts

For a contract to be legally enforceable (meaning a court can make people follow it), several important factors must be present:

Without these elements, a contract may be void or voidable, meaning it has no legal force and cannot be enforced by the courts.