Essays from business law

1. Sources of obligations

An obligation can be defined as a relationship between at least two persons, where one person
is bound to perform a given action to the other person, while the second person has a right to
require the first person to do it. The obligation action can consist of giving, acting, non-acting,
or bearing. Legal facts and conditions that form the basis of obligations are sources of
obligations. The most frequent source of obligations includes legal transactions in general,
particularly contracts. A contract includes expressions of will by two or more persons, which
are bound to perform the contracted actions. Unilateral civil-law transactions are those
wherein the obligation as a bilateral legal relation arises by an expression of will by one
person only. This include issuing securities and public promise of reward. Causing damage or
civil offence is a source of obligation, in the way that the person that caused the damage to
another person through an unlawful action is bound to indemnify the latter for the damage,
unless he proves that the damage occured with no fault of his. Acquisition without
foundations as a source of obligation creates the obligation to return what was received
without foundations. If someone takes an action in good faith in another person's interest and
without the latter's authorization it is called management without mandate.

2. Classification of companies

Company law is an independent legal discipline which studies the legal regime of companies,
both the general legal regime and the legal regime of each individual company. The basic goal
of forming companies is making profit, while in the case of other types of associations the
goal is the satisfaction of certain interests. Companies are generally classified as corporations
and partnerships. Further corporations are classified as joint-stock company and limited-
liability company, while partnerships are classified as general partnership, limited partnership
and limited-stock partnership. Corporations are a special form of business organization, where
interests of capital dominate over the personal features of members. It can be established by
one or more person, founders can include legal or natural local and foreign persons. Members
of corporations are not liable for the company's obligations with their property, but their rights
to participate in the management and distribution of profit are proportional to their shares. The
minimum amount of equity for establishing a joint-stock company is 50 000, where the
minimum amount for establishing a limited-liability company is 2 000. The company is
established by means of a contract on the establishment, memorandum of association, but also
has its statute. The basic difference between corporations and partnerships is in the regimen of
liability for obligations in legal and business operations. The characteristic of partnership is
that they have no less than two members, wherein at least one is liable for the company's
obligations with his entire property. The law does not prescribe the minimum equity capital
for their establishment and operations. The partnership is also established through
memorandum of association.

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 3. Liability of corporations

Company liability implies a few legal and economic aspects. In order to establish a company,
the act of registration itself has to be preceded by taking a number of obligations necessary for
a company to be established. These can include obtaining loans, acquisition of required
equipment, signing contracts... All companies, regardless of their type, are liable with the
company's entire property. Founders of joint-stock companies and founders of limited-
liability companies are liable up to the value of their shares. When assets decrease below a
minimum defined by law, liquidation proceedings are ordered. When founding a company, its
future members freely choose whether they will establish a company, which type of company
they will select, and which activity they will engage in. They also freely decide upon the
company management, within limits set by law. Members distribute profit and cover losses
proportionally to their shares, but are also free to liquidate the company if they don't want to
be involved in a commercial activity any longer.

4. Merger by formation of a new company

A merger by formation of a new company includes the association of two or more companies
of the same or different organization forms into a single new company. This is a form of
universal succession in the sense of taking over the rights and obligations of transferor
companies. The decision on this status change is made at the shareholders' general meeting in
the case of corporations, or by all the company members in the case of partnership. The
decision must be made by all the companies that merge, and must be the same; otherwise it
could not be the subject of implementation. The decision must result from the freely
expressed will by the owners or organs of companies that merge. Every form of status change
must be registered with the court register of companies. In the case of merger between an
open-joint stock company with another company, the result of the merger has to be a new
open joint-stock company. Regardless of whether it is a case of status change of merger by
formation of a new company, merger by absorption or division, just as with the change in
company form, a so-called reorganization plan has to be made, which includes data on
participating companies, ownership rights of shareholders, description, valuation and
distribution of transferor companis' assets and liabilities, and so on.

5. Systems of establishing companies

Systems of establishing companies are: normative system, system of law, system of

concessions, system of applications, and licensing system. The complexity of organizing
separate forms of companies leads to the implementation of the combination of two or more
systems of establishing companies in such individual forms. The normative system is
considered dominant both in our legal system and in others. The essence of this system is that
a law prescribes requirements for company establishment. Establishment of a company is
completed with the act of its registration. All the potential founders are equal. The normative

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system prevails because it is applicable to all forms of company organization. System of law
implies that a company is established by means of a special law or another administrative
document, and are registered as one of the two forms of corporations. The system of
concessions originated in the Middle Ages, and was associated with granting permits to
conduct, typically, trading activities. This is a combination of the normative regime and the
concession regime of company establishment. In this system the company establishment is
also completed by registration with the authorized registration court. The licensing system
applies to special forms of organization, when a special law of the lex specialis nature
provides the basis for establishing these companies. These are licenses granted by state
regulatory organs. The procedure of its establishment is also completed by registration with
the authorized registration court. The legal regime of application is applied in cases when
starting a given company requires an application. The application is submitted to the
authorized state organ. This regime is necessary and is usually present in recording foreign
investments.

6. Company activity

Companies have their identifiers defined by law. The essential reason for the existence of
company identifiers is their distinction in legal and business transactions. The basic
mandatory company identifiers are: company name, company activity, and registered office.
There are other identifiers as well, like registration number, tax number, custom number,
banking account and etc. Company activity is the economic activity conducted by a company.
Activity is frequently called the field of business. Activity itself implies a set of a few
activities registered by a company in the court register. In practice, companies register a
greater number of activities, typically those they assume could be their field of business.
Companies must register their activity into the court register. A company can thus be engaged
only in the activity for which it satisfies special requirements according to a decision by the
competent state administrative organ.

7. Power of attorney

Power of attorney is a legal relationship whereby a given person, named principal, authorizes
another person, named attorney-in-fact, to act as his agent. In our legal system, power of
attorney remains defined through norms listed in the LoO. The agent and attorney-in-fact act
on behalf and on account of the principal. Agency finds its legal grounds in the law, while
power of attorney finds its legal grounds in the written power of attorney, the legal grounds
for which are again found in legal document. The second difference is that agency is
exercised by a person who has a legal employment status with the company, while in the case
of POA these are mostly persons who do not have such a status. The legal transaction of POA
requires a legally defined written form. It can be time limited or unlimited, and territorially
limited or unlimited. The scope of POA is defined by the principal's will. Other tasks beyond
the scope of regular operations require obtaining a special POA. The LoO provides for a

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special POA in the following cases: taking up liability on a bill, signing a guarantee contract,
signing a settlement contract, signing a contract on a selected court... The POA should be
restricted or revoked in the same way in which it was granted, in written form.

8. Data for the court register

Registration is obligatory for all the business entities that appear in legal and business
operations, as well as entities with so called public authority, such as school establishments,
state institutes, agencies, etc. Entry into the court register can be considered as the first
instance of a company acquiring a legal and business capacity. The registration court can
require only the information determined by the law. The data are classified as either general
or specific. The general data include: company name and seat, object of entry, name and seat
of the subject of entry, abbreviated name of firm, taxation and identification number, form of
the subject of entry, full name and position of the agent, extent of authorities of the agent,
amount of agreed equity, percentage of participation of each individual founder... Special data
on the other side include: branches or the business units of the subject of entry, ties to a
subsidiary, the merger between two or more subjects of entry, changes in the form of subject
entry, cessation of the subject of entry... For the existence of general and special data on
registration in the court register to be proven, they must be documented appropriately. These
documents are also called registration documents. Special documents are necessary for
registering a change in data significant for legal operations. This is extremely important due to
the protection of creditors' or other third parties' interest. As a separate obligation in
registering the necessary data, the LoC provides for the registration of identification
information on members, contributions and liability for the obligations of the company with
regard to interest and shares in the company. Also the LoO prescribes the obligation for entry
into the court register at the start of a company's liquidation or bankruptcy proceeding,
including the full name and residence address of the trustee in liquidation or bankruptcy, and
the date of termination or completion of the procedure.

9. Bankruptcy as a form of business cessation

Business cessation is an unavoidable occurence in a company's work and operations. There is

the fundamental LoC, regulations on both company establishment and operations and the
major reasons and ways in which companies cease to exist. Besides bankruptcy and
liquidation, the forms of cessation also include status changes, which are forms of cessation in
a conditional sense. Persons affected by the opening of the proceedings; creditors in
bankruptcy, must declare their opinion on the reorganization plan. If the reorganization plan is
not presented or approved by vote, the bankruptcy proceedings are closed by sales; converting
the debtor's assets into money in order to pay creditors. In cases when bankruptcy proceedings
rules are applied pursuant to the regulation, three kinds of proceedings are possible. These
are: main proceeding, secondary proceeding, and territorial proceeding. The main proceeding
itself can be opened in an EU member state where the debtor has its centre of business

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interests. The centre of business interests can be defined as a centre where the company's
office is registered, or as a location where the company's management is seated. Secondary
proceedings can be opened in any territory where the debtor has a registered branch.
Territorial proceedings are those that are opened toward a branch prior to the opening of the
main bankruptcy proceedings.

10. Arbitration

B&H law enables all methods of extra-judicial settlement of business law disputes, including
amicable resolution, mediation, conciliation, and arbitration. The history of arbitration dispute
resolution in B&H is 120 years old. B&H law divides arbitrations into domestic and foreign
arbitrations. In case of dispute, the parties have two possibilities: to settle the dispute by
internal arbitration, or with international arbitration. The practice in B&H indicates that the
arbitration clause is provided for by the founding document. According to those arbitration
clauses, each party in a dispute appoints one arbitrator, at their discretion, and the appointed
arbitrators elect a president. The law in B&H respects the principle of the autonomy of wills
of the parties, which enables agreement on international arbitration. Agreement on the
relevant material law for the disputable relations between the business entities is also allowed.
If parties can autonomously dispose with their rights, they can make arbitral agreements for
existing or future disputes that might arise from a concrete legal relation. In order to be valid,
an arbitral agreement must be written.

11. Essential elements of a contract of sale

The essential elements of a contract are those components that give, to the contract, the
features of a defined type of legal transaction. The essential elements of a contract of sale
always include an object. Quantity and price have this quality only under certain
circumstances. A thing as an object of sale is a limited part of nature that can be put under
human control and rule, and if it is factually and legally movable. According to the existence
criterion, an object of sale can include a perished, existing or future thing. In a contract, the
goods that are the object of sale have to be described at least to a degree that makes them
specifiable. Quantity is the physical, spatial and quantitative specification of the goods which
are the object of sale. Quantity is an essential element of a contract if it has been made
explicit, if the nature of goods points to it, and if it is required by a specific circumstance of
the actual transaction. In all other cases, it is a non-essential element. Regardless of legal
qualification, quantity is always specified in a contract. Price is the value compensation for
the provided goods and the transferred property right over it. The ways in which the price is
determined include coercive regulation, contract, and dispositive regulation. Generally
companies form prices freely based on market conditions. The needs of managing economic
policy, prevention of monopolistic agreements or behaviour, may lead to a smaller or greater
intervention by state. Price formation by means of a contract is the most frequent case in
practice. Price is entered in a contract as specified or specifiable. If the price is neither

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specified nor specifiable in the contract, the buyer has to pay the price that was regularly
charged by the seller at the time of contract formation. The reasonable price is considered to
be the current price at the time of contract formation.

12. Concept of agency

Agency in its broadest sense is acting for someone else. Agency can be defined as a
relationship between two persons whereby one, called an agent, is legally considered to
represent another, a principal, in such a way that he is capable of influencing the principal's
legal position toward strangers based on this relationship, in that he will form contracts or
dispose with property. There is also the term 'electronic agent', which refers to computer
software that automatically processes received offers or orders, and then send confirmations,
which in turn have the capacity of accepting received offers. It can be manifested by factual
and legal actions- statements of will. There are three subjects in agency: the principal, agent
and a third party. A relatively independent legal relation arises between each of these
respectively, and therefore agency as a whole is a complex legal structure. According to the
basis of its occurence, agency can be classified as: legal, statutory, based on the document of
relevant judicial or administrative organ, or contractual (power of attorney). If the agent is
authorized to give an unlimited number of statements, agency is general. If the number of
statements is specified, it is special agency. Regardless of the scope of authority, agents can
be unlimited, independent or more or less limited in their activity. The LoO recognizes
following kinds of agency: power of attorney, business power of attorney, traveling
salesman's authorities, and the so-called employment power of attorney. Agent is nothing
else than a person who represents another person in transactions and acts for him.

13. Essential elements of construction contract

The construction contract is a contract for services by an independent contractor. The

contractor as a characteristic debtor, does not take up the obligation of work but rather the
obligation of achieving the contracted result. Essential elements of the construction contruct
are: object, price, due date, contractual fine, premium to the contractor, warranty period for
the quality of work, and vwritten form of the contract. The object of the construction is
defined in a twofold way: as a 'building structure' and as 'construction work'. The object of the
transaction is defined either directly in the contract or, more frequently, by referring to
technical documentation. The price is the compensation owed by the investor to the contractor
for the achieved result: the structure or completed construction work. The price is always
ascertained by an agreement between the parties. The due date is the moment by which, or the
period within which, the structure or construction work has to be completed. The contract
provides for the payment of a contractual fine if the contractor falls behind schedule. The
contract may provide for the payment of a specified amount by contracted periods, or as a
percentage of the value of uncompleted works for a specified time. The amount cannot exceed
5% of the total price of work. The contractor that is behind schedule of fulfilling its

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obligations owes, to the investor, payment of the contracted fine pursuant to their agreement.
The premium exists in order to stimulate the contractor to fulfill his obligation before the due
date, and to make his position equal to the investor's.

14. Elements of insurance contract

An insurance contract binds an insurance contractor to associate a given amount in an

insurance community, while the community is bound to pay the compensation, the contracted
amount to the insured or a third person, or do something else if the event that represents the
insured case occurs. Elements of insurance contract are: parties (insurer and insurance
contractor), object of insurance, risk, premium, insured amount, and duration of insurance. An
insurer is a legal person or organization whose activity includes providing insurance tasks.
Definition of the object of insurance depends on the understanding of its nature. But it should
be viewed as the property the normal existence of which the parties are interested in. For an
object to be insured it must be exposed to risk. Where there is no risk, there is no insurance-
this is the fundamental rule both in property and insurance of persons. Premium is the amount
paid by the insurance contractor into the insurance fund as the price for risk taken up by the
insurer. The premium is calculated for individual branches and types of insurance. Its amount
depends on the degree of probability of the occurence of the harmful event. The insured
amount in the contract is the specified value of property interest which is concentrated in the
object of insurance for the contractor. The duration of insurance is the period within which the
insured is covered by insurance. Its length has a vital effect on the size of risk and premium
amount. Duration of insurance is determined by the contract, so that the period of insurance is
identical with the duration of the contract. The insurance ceases with the expiration of the
contract, either for legal reasons or due to cancellation by one of the parties to the contract.