Business Law Class Lecture Notes

BUSINESS LAW FOR DIPLOMA
STUDENTS
BY
FRANK C. KATUMBAKU
ASSISTANT LECTURER - CBE
COURSE CONTENTS
Lecture 1: The nature, scope and importance of business law in commercial transaction.
Lecture 2: The Court System in Tanzania.
Lecture 3: The law of contract in business transactions.
Lecture 4: The contract of Sale of Goods in business transactions.
Lecture 5: The Hire Purchase agreements in business activities.
Lecture 6: The role and operations of an agency in the business environment.
Lecture 7: Forms of business associations (partnerships and companies) in commercial activities.
Lecture 8: The law of negotiable instruments in commercial transactions.
Lecture 9: Principles of insurance law in business transactions.
PREPARED BY KATUMBAKU, Frank C

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LECTURE NO. 1:
THE NATURE, SCOPE AND IMPORTANCE OF BUSINESS LAW
(a) Objectives:
(1) To explain to you the meaning and characteristics of law.
(2) To make you understand the sources of law in Tanzania.
(3) To enable you understand the importance of law.
(4) To explain the meaning and importance of business law.
(b) Introduction:
This first lecture is intended to let you understand how the law emerged and its
importance in the daily sphere of life.
What a law is:
The universal definition of law is that it is a set of rules used to regulate human behavior in the
entire society.
Oxford Dictionary of Law has defined the term law to mean the enforceable body of rules that
govern any society.
In addition to that one can also attempt to define the term law according to various legal scholars
as follows;
According to Cicero law is the highest reason implanted in nature, which commands what ought
to be done and forbids the opposite.
Salmond defines law as a body of principle which is recognized and enforced by the courts in the
administration of justice.
James defines 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.

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Robert V. Makaramba, in his legal method manual defines law as rules that deal with social
behavior of human beings.
From the above definitions of law; it is obvious that, while defining law one should include some
key terms so as to come out with a better definition. Hence, a better definition should indicate that;
law is a set of rules imposed or enacted by the competent and lawful authority, the breach of which
may lead to the punishments or compensation.
Characteristics of law:
• Law must be rules or principles with legal force.
• It should be universal. The law should be general because it deals with a group of human
beings.
• The law imposes a legal obligation to do or to abstain from doing a certain act.
• The law should attract punishment in case of breach.
• The law should provide a solution over a certain matter.
Sources of Law:
A source of law is that which may be pointed out as forming the basis of law, this means that, the
existence of a particular law can only be justified when it has a base or its origin. Such sources can
also determine whether the law is of local or foreign origin. We will examine each of these
important sources or origin of the law separately hereunder.
The Constitution of the United Republic of Tanzania: A constitution is the basic law of the land
and the most fundamental source of law of any country. Any other laws of the country must

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conform to it, that is to say, any law which is inconsistent with the constitution, shall be void. Read
article 64(5) of the constitution of the United Republic 1977.
The importance of the constitution as one of the sources of law lies further in the fact that, it
provides for rights and duties of its citizens. Note that: Constitution is a public document which
regulates the relations between the state and its citizens. It establishes the state’s form of
government and sets out its most fundamental principles.
Case Law/ Precedent: Case law as a source of law developed through decisions made by courts.
In other words, it is the law pronounced by judges while making decisions in cases. It is also known
as judicial precedent. Such decisions must be made by the superior courts, that is, the high court
and the court above it, and declared as the law to bind all subordinate courts/ inferior courts when
determining what law should apply to other similar factual situation in a future case.
Statutes/ Legislations: Statutes consist of Acts of parliament or Principal legislation. These are
the law made by the parliament i.e. the parliament passes pieces of legislations which are then
assented to by the president before they become law. Such pieces of legislation are called Acts of
parliament. Apart from principal legislations, there is subsidiary legislation
i. Principal legislations
Means the statute which is passed by parliament such as law of contract Act, the Companies Act
and many others. Laws passed by parliament are known as Acts of Parliament.
ii. Subsidiary Legislations

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Are those laws/statutes made by other administrative authorities apart from the parliament but after
being given or delegated powers by the Parliament. Examples of such administrative authorities
include but not limited to Minister, local governments councils and public corporations.
Customary Law: It is the other major source of law in Tanzania. This refers to the customs and
practices of local ethnic communities which are accepted by them as binding. In practice
customary law plays a significant role in land and personal law ie matters to do with domestic
relations and inheritance. Note that: Customary law is defined to mean any rule or body of rule
whereby rights and duties are acquired or imposed, established by usage in the community in
general as having the force of law.
Received laws: Received law is that law which was imposed by the British colonizers in the then
Tanganyika. Therefore, the laws applicable in Tanzania were based or received from England i.e.
common laws, doctrines of equity and statutes of general application
i. The common law
The term common law means law which was common to the whole of England. These laws were
not the result of legislation but created by the custom of the people and decisions of the judges.
ii. Equity
Equity refers to rules which were developed by the court of chancery in England as a
supplementary system to cure the mischief of the common law. This system of law was originally
inspired by the ideas of natural justice.

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International Law: The portion of law formulated to govern international matters among nations.
It can be a source of law in a given country after being adopted or ratified by the Parliament to
cover the matters at a domestic level.
Islamic Law: Islamic law in Tanzania is applicable in matters relating to marriage, divorce,
succession and etc. This law applies in these matters to the part of the people that have faith in
Islam. In case of conflict between an Act Parliament and Islamic law, the Act of Parliament
prevails.
Importance of Law to the Society:
The law is important because it keeps the society running and remains a problem free. Without
law there would be chaos and conflicts among the people and it would be survival of the fittest
and everyman for himself.
✓ The law is important because it acts as a guideline to the conducts of the people that are
accepted in the society.
✓ Law creates brotherhood since it governs the relationship between one individual person
and another.
✓ The Law protects the victims by imposing punishment to those who have done unlawful
actions.
✓ It creates awareness of the available rights and duties of citizens as provided in the
constitution.
✓ The law helps to control and or change the human behavior through imposing punishment
to the wrong doers. Hence it reduces the number of criminals. Otherwise the society will
be full of crime and illegal actions.
✓ It gives the procedure or directives on how to institute a case in the court where a dispute
arises for example Civil Procedure Law
✓ The law is important because it is used as a tool in administration of justice to the people
for instance if one is affected by the act committed by the other, will seek remedy from the
court of law.

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✓ Law is useful in resolving conflicts in the society.
✓ It protects the fundamental rights of citizens, for example right to life, right to work and
freedom of movement.
✓ Law facilitates development of the society
✓ Law also helps to lead the government of the state and govern the relationship between one
citizen and another.
✓ It provides knowledge over a certain subject matter
It should further be noted that the existence of law and its implementation in our country facilitates
good governance and accountability to the people. Also, it promotes peace and harmony which
eventually lead to the development in the society.
What Business Law is:
The phrase business law or mercantile law or commercial law is not a separate branch of law.
Basically, it is a part of civil law which deals with the rights and obligations arising out of
transactions between mercantile persons. This is the law dealing with commercial transactions
between individual persons. On the other hand, it refers to the rules and principles which control
or guide commercial relations between persons such as contracts, agency, partnership and
companies. The business law regulates the rights and obligations arising out between the business
persons in a particular business arrangement. A mercantile/ business person may be a single
individual (a sole trader) or a number of individuals acting together as a partnership or a company.
Importance of Business Law:
✓ The knowledge of business law provides people with understanding of various business legal
principles and its implications on business transactions.
✓ People learn how to recognize, analyze and avoid many legal problems which can arise in the
ordinary course of business transactions.
✓ Helps to avoid unnecessary commercial disputes for not adhering to business principles.
Exercises: Answer the three questions below. Then find an opportunity to have your answer
read and commented on by a fellow student or your lecturer.
(a) What led to the emerge and development of law in Tanzania?

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(b) Describe underlying grounds for delegated legislations in Tanzania.
(c) Explain the relevancy of business law among business society.
LECTURE NO. 2:
THE COURT SYSTEM IN TANZANIA
(a) Objectives:
(1) To define the term court and court system/ hierarchy.
(2) To identify and demonstrate the court system by aid of diagram.
(3) To describe to you the Primary Magistrate Court, District Magistrate Court, and
Resident Magistrate Court.
(4) To describe the High Court of Tanzania Mainland and its Divisions.
(5) To explain the Court of Appeal of Tanzania.
(6) To explain in a nutshell the different tribunals as quasi-judicial bodies.
(b) Introduction:
In this lecture we are going to look at different levels of courts according to their
powers in administration of justice. In addition, in this lecture we are going to
consider the different tribunals as quasi-judicial bodies.
What a Court is:
This is the body established by law for administration of justice by judges or magistrates. Also,
court can be defined as a building in which judicial activities for administration of justice is taking
place.
What a court hierarchy/ system is:
This refers to the arrangement of courts from the lowest court to the highest court vested with
different powers in administration of justice. That is to say arrangement from the primary court to
the court of appeal. Consider the following diagram

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Judiciary and Judicial hierarchy:
In Tanzania Judiciary is an independent government body to interpret and enforce the laws of the
land. It has four tiers based on hierarchy each vested with different jurisdictions to preside over
different matters. Consider the following;
1. The Court of Appeal of the United Republic of Tanzania

2. The High courts of Republic of Tanganyika and High courts of Peoples Republic of Zanzibar.
3. Magistrates courts which include the Resident Magistrate courts and District courts both at the
same level having concurrent/ same jurisdictions.
4. The lowest court is the Primary Magistrate courts.

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Levels of Courts from the Lowest to the Highest:
Primary Magistrate Courts
These are the lowest courts from the hierarchy of courts in Tanzania mainland. S.3(1) of the
Magistrates’ Courts Act, No. 2 of 1984, provides for the establishment of Primary courts which
have and exercise jurisdiction within their respective Districts where are established, in all
proceedings of a civil nature where the law applicable is customary law or Islamic law,
matrimonial proceedings relating to civil and Christian Marriages or any other proceedings in
respect of which jurisdiction is conferred on a Primary Court by the Magistrates’ Court Act or any
other law. They also hear and determine cases in minor offences. Primary courts are presided over
by the magistrate who sits with not less than two assessors and every such assessor shall be
required, before judgment, to give his opinion as to all questions relating to customary or Islamic
law. However, the court shall not be bound to conform with the opinions of the assessors (See
section 7 of the MCA). All appeals from the primary court goes to the District Court situated at a
place under which the Primary Court is established. (See Section 20 of the MCA)
District Magistrate Courts
Section 4(1) of the MCA establishes the District Magistrate Courts. These courts are established
in every district within the region. They have original jurisdiction in both criminal and civil cases,
appellate jurisdiction as per section 20 of the MCA, and revisional jurisdiction as per section 22
of the same law over Primary courts. District courts are presided over by a district magistrate or a
resident magistrate (see section 6(1) (b) of the MCA. Take note that all appeals from the District
Court go to the High Court of Tanzania.
Resident Magistrate Courts
Section 5(1) of the MCA provides for the establishment of Resident Magistrate Courts. Generally,
these courts are established within the region level and presided over by a single resident
magistrate as per section 6(1) (c) of the MCA. They have concurrent jurisdiction (same powers)
with the District Courts, therefore an appeal from the District court cannot be lodged in the
Resident court but to the high Court. However, it should be understood that the appeals from the
Resident court exercising extended goes to the Court of Appeal of Tanzania.

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Note that: Resident court can be given extra power (extended jurisdiction) by the High court to
try cases which are in law required to be tried/ heard in the High court. Therefore, if one is
aggrieved by the decision pronounced by this court (court with extended jurisdiction) may appeal
to the Court of Appeal of Tanzania. Similarly, RM court has appellate, supervisory and revisional
powers/jurisdiction over decisions or proceedings of the primary courts.
The High Court of Tanzania Mainland
Article 108 of the constitution of the United Republic of Tanzania provides for the establishment
of the High Court. The high court of Tanzania mainland was established since 1920. It has
unlimited jurisdiction in all matters, but its jurisdiction is exercised in conformity with the written
laws which are used in Tanzania. It can hear and decide a new case or an appeal case arising from
the decision or judgment of the District court or Magistrate court. Also, the High Court can make
a certain order for instance orders decisions of inferior courts, tribunals, and administrative
authorities to be brought before it and quashes them if they are ultra vires or show an error of law.
Take note that the High court has unlimited jurisdiction in a sense that it deals with all cases of
which other inferior courts lack jurisdiction on them. For example, murder cases.
Divisions of the High Court:
The High Court of Tanzania mainland splits into the following divisions;
✓ High court of Tanzania, Land Division

This court deals with all land matters as the court of first instance in all immovable properties in
which the subordinate tribunals like District Land and Housing Tribunal lacks power to deal with.
This court also deals with appellate matters from the District Land and Housing Tribunals. It is a
court of records in land matters.
✓ High Court of Tanzania, Commercial Division
It is a court where proceedings concerning commercial disputes are instituted. The commercial
Court can review or revise the decisions of other subordinate courts and may also review its own
decision.
✓ High Court of Tanzania, Labour Division

This court is specifically dealing with labour disputes involving employees employed in the
management capacity, as well as industrial disputes involving a large number of employees

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challenging their employers due to either summarily dismissal or termination of their employment
by way of retrenchment or redundancy. It should be noted that all fresh or new cases brought into
this division are not, according to the law, handled by the Commission for Mediation and
Arbitration (CMA) in the first instance due to lack of jurisdiction. But all appeals from this tribunal
go to the High court, labour division.
✓ High Court of Tanzania, Economic and Corruption Crimes Division.
This is a recent established court to handle economic and corruption cases.
The Court of Appeal of Tanzania
The court of Appeal is the Supreme Court of the land (for both Tanzania Mainland and Zanzibar).
It was established by Article 117(1) of the Constitution of the United Republic of Tanzania. The
function of the court of appeal is to hear and determine every appeal brought before it arising from
the judgment or other decision of the High Court and the court with extended jurisdiction (Article
117(3) of the Constitution). It has power to review, revise and refer all the decisions made by its
subordinate court and the court of appeal itself. Also, it is important to know that the court of
Appeal is not a court of first instance i.e. cannot deal with fresh/ new cases.
Different Tribunals as Quasi-judicial Bodies:
A part from ordinary courts which vested with judicial powers to deal with various issues in
dispensation of justice there are also established bodies or administrative tribunals to settle certain
types of dispute in the same manner as ordinary courts we have discussed above. These tribunals
are bodies outside the hierarchy of the courts with administrative functions, that is to say, have the
power to decide various quasi-judicial issues.
Quasi-judicial here referring to the actions of an agency, board, or other government entity in
which there are hearings, orders, judgments or other activities similar to those conducted by courts.
As a general rule, only courts of law have the authority to decide various issues that affect
individual rights. One major exception to this general rule is the power of an administrative agency
to make decisions concerning the rights of parties.

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There are good numbers of these administrative tribunals. The following are few of them
1. The District land and housing tribunal

2. The ward tribunal
3. Military tribunal (Court Martial)
4. Commission for Mediation and Arbitration
5. Marriage Conciliation boards
6. Tax Revenue Appeals Board
7. The Environmental Appeals Tribunal
The District Land and Housing Tribunal
This is the tribunal with the status of the District court, exercising original jurisdiction in all
proceedings relating to land of which the value of the property does not exceed 50 Million
Tanzanian Shillings or where the subject matter is capable of being estimated at a money value
not to exceed 40 million Tanzanian Shillings.
The Ward Tribunal
The ward Tribunal has the primary function of securing peace and harmony in the area for which
it is established, by way of mediation, for settlement of disputes. This tribunal also has the power
to hear and decide disputes relating to the offences and civil disputes specified by law, and may
impose penalties depending on the circumstance.
Military Tribunal (Court Martial)
Refers to the tribunal dealing with military offences committed by members of defense forces.
military offence is sometimes referred to as disciplinary offence for example disclosing
information which ought not to be open to the public. The decisions of this tribunal should be
challenged by the high court that is to say all appeals arising from the decisions or judgments of
this tribunal should be brought before the high court.

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Commission for Mediation and Arbitration
This is also an administrative tribunal of which the labor officers have the power in law to make
decisions on labor disputes between employer and employee. A dispute may arise due to either
unfair termination of employment or summarily dismissal (dismiss the employee from an
employment without giving notice), thus a matter may be brought before this commission for
settlement.
The Marriage Conciliation Boards
The marriage conciliation boards are found in every ward being an advisory and conciliation board
to matrimonial disputes. The parties to a dispute are given advice which help to resolve the dispute.
Tax Revenue Appeals Board
The board has original jurisdiction/ power in all proceedings of a civil nature in respect of disputes
arising from revenue laws administered by the Tanzania Revenue Authority. Therefore, any
dispute of a civil nature based on the revenue of which it is governed by TRA should be brought
before this board for further proceeding.
The Environmental Appeals Tribunal
This tribunal deals specifically with the disputes relating to environment as far as the rights of
individual is concerned. Under this Tribunal the Minister of environment or other environmental
officers are given power to settle disputes of civil nature in respect of the law relevant to deal with
the environment.
Why Administrative Tribunals?
Ordinary courts are very slow due to the complex procedures to be observed, costly in terms of
court fee and advocate fee. Also, technical procedures in solving disputes. A case may be pending
in a court for two to five years. Thus, administrative tribunal emerged to ensure speedy
dispensation of justice. It is believed that justice delayed is justice denied. Therefore, the
administrative tribunals play a great role to settle various disputes which could actually be brought
before the courts and takes long time to meet the end of justice.

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Exercises:
(a) Do the courts in Tanzania have the same jurisdictions in handling legal disputes?
(b) What are the reasons which give rise to the establishment of administrative tribunals?
(c) What is meant by the expression “a court with extended jurisdiction.”
LECTURE NO. 3 A:
THE LAW OF CONTRACT IN BUSINESS TRANSANCTIONS
(a) Objectives:
(a) To define the term contract.
(b) To introduce to you the law relating to contract in Tanzania.
(c) To point out the types of contract.
(d) To explain the formation of a contract
(b) Introduction:
In this lecture you are going to study the various categories of contract and see how
the rights and obligations of the contracting parties are created.
What a contract is:
The universal definition of a contract is that it is an agreement with legal force. So, it is not all
agreements or undertakings which amount to contracts. The legal binding nature of an agreement
is necessary for there to be a contract.
Law Applicable:
In Tanzania the law which govern matters of contract is the Law of Contract Act, Cap 345 R.E
2002. It defines the term contract under Section 2 (1) (h) that “any agreement enforceable by law
is a contract”. Section 2 (1) (d) provides the meaning of an agreement that “any promise or set of
promises forming consideration for each other, is an agreement”. A contract is therefore a
combination of an agreement and legal obligation or a duty enforceable by law.

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Categories of Contract:
Formal or written contracts

Refers to a contract in which the terms and conditions agreed by the parties are written on paper,
signed, witnessed and sealed. However, such agreement must be made enforceable at law. This is
sometimes called a contract under seal. This type of contract can easily be used as evidence in the
court of law when a dispute arises.
Simple contracts (Oral contracts)
A simple contract is any oral or written agreement that is not required to follow a specific form or
to be signed, witnessed, or sealed. Many contracts entered into in business and in everyday life are
simple contracts. Therefore, it can be difficult to use it as evidence in law where there is a need
that there should be written evidence of the terms of contracts.
Express Contracts
These are contracts from which the parties express their intentions to it. Are formed by the express
language of the parties through actual words in their agreement, and can be either written or oral.
Implied Contracts
Implied contracts are formed not by the words of the parties but by their actions. These derive their
force from their presumed intentions that is to say both parties must clearly show their assent to
enter into an agreement of which the terms are clear to both. For example; Lilian goes to a shop to
buy some items. She puts down ten thousand shillings at the cashier’s window. The cashier takes
the money and returns three thousand shillings (3000/=) to her.
Executed contracts
An executed contract is one in which the object of the contract is at once performed.
Executory Contracts
An executory contract is the type of contract which one of the parties binds himself to do or not to
do a given thing at some future date.
Bilateral Contracts
These are formed when the two parties exchange promises to perform some act in the future. A
bilateral contract results from an exchange of promises whereby both parties bind themselves to
undertake some future action. For example; John offers to sell his car to Irene if she will pay him
20m. Irene accepts the offer.

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Unilateral Contracts
These are formed where by one party makes a promise to the other that can only be accepted by
the other’s performance. A unilateral contract is one-sided contract. For example; a father promises
his son that he will pay him 100,000 Tshs if he can stop smoking cigarettes for two years. The son
immediately stops smoking. The Son has accepted his father’s unilateral offer.
Valid contracts
These are contracts which are enforceable by law since they constitute/ contain with the essential
elements or ingredients. Ingredients here are used to indicate the criteria or requirements of a
contract which is legally binding the parties.
Voidable contracts
Contracts which are capable of being repudiated or affirmed by one party to it upon made by the
other party in presence of misrepresentation, undue influence, fraud or mistake. The option is set
free that one can choose to avoid the terms of contract and seek remedies for the loss sustained as
a result of the said factors or can decide to affirm without imposing action against the other party.
For example: The buyer wants to buy a cow for 30,000/= Tshs. In the course of negotiation, the
seller tells buyer a cow is capable to produce 10 liters of milk per day while in fact it gives only 5
liters. Basing on the statement made by seller, he decides to buy it. If the buyer will find the
statement made was not true, he will have legal right to set aside the contract and seek reliefs for
the loss he has suffered. The other option available to the buyer is to treat the contract in the similar
manner as if no false statements made to induce him. In law voidable contract is enforceable unless
it is avoided.
Void contracts
These are contracts which have no legal force. The contract is void at the moment parties conclude
it, that being the case there is no contractual rights, in law, available to the parties even when a
dispute arises. Consider the situation that two parties enter into contract to commit murder for a
valuable consideration. This arrangement cannot be enforceable by law since it is void ab initio
(void from very beginning). Note that all illegal contracts are null and void in the eyes of law.
Unenforceable contracts
These are contracts which are valid but are incapable of being enforced in the court of law because
of some technical defects. For example, being out of time under the Law of limitation Act, the
contract not in writing or is not stamped, etc.
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Illegal contracts
Illegal means contrary to law. An agreement is said to be illegal if its object or consideration
✓ is forbidden by law or
✓ it is of such a nature that if permitted it would defeat the provisions of the law or
✓ is fraudulent or
✓ involves or implies injury to the person or property of another
✓ the court regards it as immoral or opposed to public policy
A good example of an illegal act is an agreement to commit murder or theft or robbery or to
cause harm (assault) would be illegal and void.
Formation of a Contract:
As we have already seen, an agreement is a preliminary to a contract, and this requires the meeting
of mind of the parties. Therefore, in order for a contract to be made there must be offer and
acceptance which can be communicated either by words spoken, written or by conducts of the
parties. That is to say an agreement is reached by one party (offeror) making an offer and the other
party (offeree) accepting it. However, for an agreement to constitute valid contract a number of
tests must be satisfied. We shall see them in the later study.
Example: 1
“A” Makes an offer to sell his car to “B” for 10M, if “B” accepts to buy it, then the agreement is
said to be complete between the parties.
Example: 2
A taix offers to carry persons in a certain direction at a fixed price. An acceptance of that offer is
complete as soon as the passenger takes his seat in the taix.
Note: It is not always necessary that words spoken or written should be used to form a contract.
Acts and conduct may be sufficient.
Contracts and Agreements Distinguished:
Meaning of an Agreement
An agreement is a combination of an offer and acceptance. An agreement is made up of an offer

made by one person and an acceptance of that offer by a person to whom the offer is made. Once

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an offer has been accepted, the offer and the acceptance change their characters and become
promises. According to section 2(1) (e) of the Contract Act “Every promise and every set of
promises, forming the consideration for each other, is an agreement”.
Meaning of a Contract
A contract must be an agreement. However, to qualify as a contract an agreement must meet a

number of tests. The main test you should look for is whether or not the agreement is enforceable
by law. Note that not all agreements are enforceable by law. To be enforceable by law an
agreement must have the following elements which are stated in section 10 of the Law of Contract
Act “All agreements are contracts if they are made by the free consent of parties competent to
contract for a lawful consideration with a lawful object …. ….”
Concepts of an Offer and Acceptance:
What an Offer (or Proposal) is:
This is an indication of willingness to do or refrain from doing something that is capable of being
accepted to form a legal binding contract. The word offer is used synonymously with the word
proposal. Section 2(1) (a) of the Law of Contract Act defines the term proposal as:
“When one person signifies to another his willingness to do or to abstain from doing anything,
with a view to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal.”
A proposal/offer is made by an offeror to an offeree and is capable of acceptance only by an offeree
who knows of its existence. An offeree is a person to whom an offer is made and a person who
made it is called an offeror. Section 4(1) of the Law of Contract Act, Cap. 345 R.E., 2002 provides
that an offer must be communicated and communication of an offer becomes effective and
complete when it comes to the knowledge of the person to whom it is made (i.e. an offeree).
Characteristics of an Offer (or Proposal):

Must be made willingly
For a proposal to be effective it must have been made willingly, that is, the proposer must be
willing to be bound by the terms he has stated.

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Clarity and certainty of the terms of an offer
The terms of an offer must be clear and certain because the person to whom the offer is made
should be in a position to know what the offer is. Is a statement like "Seller I want to buy your car"
an offer? The statement looks clear and certain. But is it? Has Buyer specified the price which he
is willing to pay the Seller? So, is the statement still clear and certain? If your answer is that the
statement is not certain then section 29 of the Contract Act becomes relevant. It states: Agreements,
the meaning of which is not certain, or capable of being made certain, are void. Where the terms
of the offer are not certain, yet the offeree accepts the offer the agreement reached will be treated
by the law as no agreement at all.
Made to a person, a group of persons or to the whole world at large
An example of an offer being made to the whole world is provided by the leading contract case of
Carlill v. Carbolic Smoke Ball Co. (1893).
Final expression
An offer or a proposal should be stable and final expression of willingness by the proposer/ offeror
to be bound should his offer be accepted. Where the proposer keeps on changing the terms of his
statement then in law such statement cannot be regarded as a proposal.
Types of an Offer:
Special Offer
This is a type of an offer which is made to a definite person. In other words, this refers to a limited
offer basing on specification. For example, an offer made by ‘A’ to ‘B’, ‘C’ cannot accept because
was not made to him.
General Offer
This means the offer is made to individuals generally or to the public. The offer may be made to
the world at large in which case anybody may accept it. A good example of this type of offer is a
reward by advertisement for performing a condition(s). For example: “A” advertised that he would
pay a reward of 50M to any person managed to find and return his lost property. It is possible to
make an offer to the world at large and that the contract is then made with anyone who accepts the
offer (performs the condition).

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Counter Offer
Means a response to an offer, made to the offeror by the offeree that seeks to introduce a new term
or to vary an existing term of the offer.
Cross Offer
If two parties make an offer to each other in ignorance of the other persons` offer, these are cross
offers and there is no acceptance at all.
An Offer and an Invitation to Treat Distinguished:

Unlike an offer which is the final, firm and clear expression of willingness by the offeror to be
bound an invitation to treat does not express final willingness by the one who invites to be bound
in those terms. The invitor merely proposes certain terms on which he is willing to negotiate. He
invites any person to make an offer in the terms he has proposed. He may accept or reject the offer.
Alternatively, invitation to treat is distinguished from an offer in that “an offer can be converted
into a contract by acceptance provided that the other elements of a valid contract (will be discussed
later) are present. An invitation to treat cannot be accepted.
Invitation to treat defined;
This is an invitation to others to make offers, for example by displaying goods in a shop window.
This means inviting a person to make an offer in the terms proposed by the invitor. Here the invitor
proposes certain terms on which he is willing to negotiate, he invites any person to make an offer
in the terms he/she has proposed, and he may accept or reject the offer.
Examples of invitation to treat:
✓ The exhibition of goods for sale. The display of goods for sale is not an offer. They create
room for negotiation. They invite a person to make an offer and the same is accepted by the
reception of the money. See the case of Fisher v. Bell (1961)
✓ General advertisement of goods. The goods advertised in newspapers that are for sale is not an
offer. However, advertisements of rewards for the return of lost or stolen property are offers
since they clearly show an intention to be bound without the need for further negotiation.
✓ An invitation for tenders. A tender is an estimate submitted in response to a prior request.

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✓ An auctioneer`s request for bids. Advertisements for auction to be held or a request for bids is
an invitation to treat and not an offer to sell to the highest bidder. The bid is the offer and the
fall of the hammer is the acceptance.
✓ A company prospectus, a prospectus or advertisement inviting the public to subscribe for
shares or debentures is an invitation to treat. (even if as a practice, it is described as an offer
for the sale but it is not). Any member of the public can make the offer by completing and
sending in an application form, the company then accepts the offer in whole or in part. The
prospectus will make it clear that the company has the right to accept in respect of a proportion
of the shares applied for.
Termination of an Offer:
By revocation of an offer by the offeror
S.5 (1) of the Law of Contract Act provides for the revocation of offer. That is to say an offer may
be revoked at any time before it has been accepted. However, a revocation is not effective until it
is brought to the knowledge of the offeree. To put it another way, a revocation of an offer must be
communicated to the offeree. Revocation can be defined to mean the withdrawal of an offer by the
offeror so that it can no longer be accepted.
By rejection of an offer by the offeree

The rejection of an offer terminates the offer. The rejection can be due to the failure of condition
to which the offer is made or for any other reason. For example, where there is counter offer by
offeree which has the effect of destroying the offer.
By lapse of time
Where an offer has been made for a limited time, it terminates when that specified time expires.
But where there is no time limit on the offer, it is considered to remain open for a reasonable time
depending upon the circumstances of each particular case.
By failure to fulfill a condition of an offer
In the event the offeree fails to meet or fulfil the condition spelled out by the offeror, the offer
comes to an end.
By death or unsound mind of the either party
The death or mental disorder of either offeror or the offeree terminates the offer.

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What an Acceptance is:
This can be defined as the signification of assent to the proposal by a person to whom it is made.
To put it another way, acceptance means agreement of the terms of proposal made by the proposer.
S.2 (1) (b) of the Law of Contract Act provides for the definition of acceptance as “When the
person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted, and a proposal, when accepted, becomes a promise.”
We should note that once a proposal has been accepted the person making the proposal becomes
the “promisor” and the person accepting the proposal becomes the “promisee”. In law the promisor
and the promisee are referred to as parties to the agreement. Infinite
Characteristics of an Acceptance:
Acceptance must be made while the offer is still in force
Acceptance is effective only if it is given before an offer is terminated. We have already seen the
offer cannot be valid all the time. It can terminate for a number of reasons such as lapse of time,
revocation and death. Therefore, at any time when the offer is still open the acceptance can be
made.
Acceptance must be given only by the person to whom the offer is made
An offer cannot be accepted by another person without the consent of the offeror. In other words,
an offer made to a particular person can be validly accepted by him alone. Similarly, an offer made
to a class of persons can be accepted by any member of that class. An offer made to the world at
large can be accepted by any person who has knowledge of the existence of the offer.
Acceptance must be absolute and unqualified
The acceptance must be absolute and unconditional, otherwise the mind of the parties could not
be in the same point i.e. consensus ad idem. Any suggested variation amounts to a counter offer.
Acceptance must be communicated to the offeror either orally, in writing, or by conduct
The modality of communication of acceptance depends on the way an offer is addressed or the
manner prescribed by the offeror on how acceptance should be like. If the statement of offer is
silent on how acceptance will be communicated, then it can be given expressly or impliedly by the
offeree or his authorized agent.

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Exercises:
(a) When can an offer be said have been accepted under the law of Contract Act.
(b) What distinguishes an offer from an invitation to treat?
(c) Describe the various ways of terminating an offer.
LECTURE NO. 3 B:
ESSENTIAL ELEMENTS OF A VALID CONTRACT
(a) Objective:
To let you understand the meaning of a valid contract and the essential requirements
of a valid contract.
(b) Introduction:
In this fourth lecture we are going to look at the essential elements of a contract.
These are agreement (offer and acceptance), intention to create legal relations,
contractual capacity, consideration, free consent, legal object, etc.
What a Valid Contract is:

This can be defined to mean the contract which is enforceable by law since it constitutes with the
essential elements or ingredients. Ingredients here are used to indicate the criteria or requirements
of a contract which are legally binding the parties. If we were to ask ourselves “What agreements
are contracts?” we can find the right answer under Section 10 of the Law of Contract Act. It
provides that; “All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void” Let us now examine each of the essential elements.
Offer and Acceptance:
You will recall that the previous lecture was on, among other things, formation of a contract where
an offer and acceptance were relatively examined. To recap it one may significantly state that
communications must have passed between the parties showing their intention to deal with one
another; and this is called offer and acceptance. Therefore, a valid contract is formed where
agreement is reached by one party making an offer and the other party accepting it. For example,
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Jumanne offers to sell his car to Frank for 30 million Tshs. Frank accepts the offer. Hence a
contract is formed.
Consideration:
Consideration revolves around exchange of values embedded in goods or services. A person who
parts with value must be given some value in return. Nothing should go for nothing: “Quid pro
quo”. Section 25(1) of the LCA provides that: “An agreement made without consideration is void.”
Definitions
✓ Consideration is defined as something which is of some value in the eyes of the law.
✓ Consideration is a price for which the promise is bought.
Statutory definition of consideration is provided under Section 2(1)(d) of the Law of Contract Act.
It reads as follows:
“When at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing something, such
act or abstinence or promise is called a consideration for the promise.”
Illustrations: (i) X received 10,000/= Tshs in return for goods he has delivered to Y. Here, the
money received by X and the goods delivered to Y is the consideration for the promise of each
other.
(ii) A agrees to sell his house to B for 10 Million. Here B’s promise to pay the sum of 10 Million
is the consideration for A’s promise to sell the house, and A’s promise to sell the house is the
consideration for B’s promise to pay the sum of 10 Million.
Essentials of Valid Consideration
The four component parts of the definition of consideration (given above) may well be described
as the essentials of valid consideration.
➢ Consideration must move at the desire of the promisor. In order to constitute legal
consideration, the act or abstinence forming the consideration for the promise must be done at

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the desire or request of the promisor. Thus, acts done or services rendered voluntarily, or at the
desire of third party, will not amount to valid consideration so as to support a contract.
➢ Consideration may move from the promisee or any other person. The consideration need
not move from the promisee alone but may proceed from a third party. This means that even a
stranger to the consideration can sue on a contract, provided he is a party to the contract.
➢ Consideration may be past, present or future. The words, “has done or abstained from
doing; or does or abstains from doing; or promises to do or to abstain from doing,” used in the
definition of consideration clearly indicate that the consideration may consist of either
something done or not done in the past, or done or not done in the present or promised to be
done or not done in the future. To put it briefly, consideration may consist of a past, present or
a future act or abstinence.
• Past consideration: It is also called a bad consideration. Here the subject matter of a
contract is wholly executed and furnished (performed) before the promise is made.
• Present consideration: It is also called executed consideration. The subject matter or a
thing that constituting consideration is completely performed by the parties.
• Future consideration. It is also called executory consideration. A kind of consideration
which the subject matter is to be furnished in future.
➢ Consideration must be something of value. Consideration must be something to which the
law attaches a value. The consideration need not be adequate to the promise for the validity of
an agreement. The law leaves the contracting parties free to make their own bargains.
Exceptions to the Rule, “No Consideration, No Contract”
The general rule is that, “An agreement made without consideration is void” (Section 25(1) of the
LCA). But there are a few exceptions to the rule, where an agreement without consideration will
be perfectly valid and binding. The same provision offers for these exceptions as follows:
➢ Agreement made on account of natural love and affection

An agreement made without consideration is enforceable if it is;
• expressed in writing, and
• registered under the law for the time being in force for the registration of documents, and
is

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• made on account of natural love and affection,
• between parties standing in a near relation to each other.
➢ Agreement to compensate for past voluntary service
A promise made without consideration is also valid, if it is a promise to compensate, wholly
or in part, a person who has already voluntarily done something for the promisor, or done
something which the promisor was legally compellable to do.
➢ Agreement to pay a time-barred debt
Where there is an agreement, made in writing and signed by the debtor or by his authorized
agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid
even though it is not supported by any consideration. It should be noted that a time barred debt
cannot be recovered and therefore a promise to repay such a debt is without consideration,
hence the importance of this exception.
➢ Completed gift
A gift (which is not an agreement) does not require consideration in order to be valid. This
provides that, as between the donor and donee, of any gift actually made will be valid and
binding even though without consideration. Under this there is no need of natural love and
affection or nearness of relationship between the donor and donee. The gift must, however, be
complete.
Capacity of Parties:
Capacity to contract refers to competence to contract. In our LCA there is a requirement that parties
to a contract must pe competent. Section 11(1) defines the word competence. It says:
“Every person is competent to contract who is of the age of majority according to the law
to which he is subject, and who is of sound mind, and is not disqualified from contracting
by any law to which he is subject”.
In general, anybody over the age of 18, who is sober and mentally unimpaired, is capable of
contracting. This also applies to corporations which can contract in exactly the same way as living
persons but, of course, they must do it through the agency of a human being. A corporation can
contract under its corporate seal. However, certain categories of person have no capacity (or only
limited capacity) to contract.

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Minors/ Infants
A minor or infant is a person under the age of 18 years. This person is regarded in law incapable
of forming a valid contract. This is reflected under Section 11(2) of the LCA, which states that:
“An agreement by a person who is not hereby declared to be competent to contract is void”.
However, there is an exception to this general rule, which is stated under Section 68 of the LCA.
It provides as follows:
“If a person incapable of entering into a contract, or anyone who he is legally bound to
support, is supplied by another person with necessaries suited to his condition in life, the
person who has furnished such supplies is entitled to be reimbursed from the property of
such incapable person”.
Therefore, a minor's agreement for necessaries is valid and enforceable against him. The Sale of
Goods Act Cap. 214 provides in Section 4 that a minor may be held liable for necessaries. It states
that:
“Capacity to buy and sell is regulated by the general law concerning capacity to contract,
and to transfer and acquire property: Provided that where necessaries are sold and
delivered to an infant, or minor, or to a person who by reason of mental incapacity or
drunkenness is incompetent to contract, he must pay a reasonable price therefor.
Necessaries in this section means goods suitable to the condition in life of such infant or
minor or other person, and to his actual requirement at the time of sale and delivery”.
It should be noted that; food, clothing and shelter are necessaries. In addition, education and
medical services may be included. You should also note that what is or is not a necessary will
depend on the condition in life of the minor.
Mentally-disordered and Drunken Persons
Except for contracts for necessaries, contracts are not binding on such persons, unless they
specifically ratify them during a lucid period (in the case of a mentally disordered person) or when
sober. Consider the following;
Unsoundness of mind
According to Section 11(1) of the LCA a person who is of unsound mind is incompetent to
contract. The definition of a person of unsound mind is given in comparison to one who is of sound
mind under Section12(1) of the LCA in that: “ A person is said to be of sound mind for the purpose
of making a contract if, at the time when he makes it, he is capable of understanding it and of

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forming a rational judgment as to its effect upon his interests”. The law allows a person who is
usually of unsound mind, but occasionally of sound mind, to make a contract when he is of sound
mind. Conversely, a person who is usually of sound mind, but occasionally of unsound mind, may
not make a contract when he is of unsound mind (Read Section 12(2) & (3) of LCA). Apart from
what we have explained above, an agreement of a person of unsound mind is void just like that
of a minor.
Free Consent of the Parties:
Two or more persons are said to consent when they agree upon the same thing in the same sense.
This has been provided for under Section 13 of the LCA. Consent is said to be free when it is not
caused by coercion, undue influence, misrepresentation, fraud or mistake. This has been provided
for under Section 14 of the LCA. When consent to an agreement is caused by coercion, undue
influence, misrepresentation or fraud, there is ‘no free consent’ and the contract is voidable at the
option of the party whose consent was so caused (Section 19(1) of the LCA). But when consent is
caused by ‘bilateral mistake’, as to a matter of fact essential to the agreement, the agreement is
void (Section 20(1) of the LCA). In such a case there is ‘no consent’ at all. You have to read one
by one in detail the following causes leading to ‘flaw in consent’.
Coercion is defined in Section 15;
Undue influence is defined in Section 16;
Fraud is defined in Section 17;
Misrepresentation is defined in Section 18;
Mistake is subject to the provisions of Sections 20, 21 and 22.
Legality of Object:
For an agreement to be valid, the object/ subject matter agreed upon by the parties must not be
prohibited by law. Section 23 of the LCA declares what considerations and objects are lawful and
what are not. If the object or consideration is unlawful for one or the other of the reasons mentioned
in Section 23, the agreement is ‘illegal’ and therefore void. For example, gambling contracts are
illegal contracts unless the law provides otherwise, or a contract involves selling and purchasing
of abusive drugs for instance cocaine or marijuana.
What Considerations and Objects are Unlawful?
According to Section 23, every agreement of which the object or consideration is unlawful is void,
and the consideration or the object of an agreement is unlawful in the following cases:
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➢ If it is forbidden by law.
➢ If it is of such a nature that, if permitted, it would defeat the provisions of any law.
➢ If it is fraudulent.
➢ If it involves or implies injury to the person or property of another.
➢ If the court regards it as immoral or opposed to public policy.
Intention to Create Legal Relation:
It is the requirement of the law that an offer or its acceptance should be made with the intention to
create legal relations. Normally for a contract to be valid the parties to it must have shown their
intention to create legal relation that is to say focus on the legal consequence of their agreement.
This is helpful in case of breach of the terms one may seek remedies to the court of law. The courts
will not enforce any contract unless it is clear that the parties intended to be legally bound by their
agreement. It is presumed that this is the intention in normal commercial contracts and that it is
not the intention in respect of domestic and social agreements.
Commercial Agreements
In all commercial agreements, the presumption is that the parties intend to create legal relations.
With these agreements there is a strong presumption that the parties intend to enter into a legally
binding agreement in consequence of their dealings.
Domestic and Social Agreements
In all domestic and social agreements, the presumption is that the parties do not intend to create
legal relations. With these agreements the presumption is that the parties do not intend to create
legal relations when they exchange promises. For example, in the case of Balfour v. Balfour
(1919), the wife of a man working in Ceylon had to remain in England for medical reasons. Her
husband promised to pay her an allowance of £30 a month. HELD: The agreement was not
intended to have legal force (also, the wife had not provided any consideration for the promise).
Possibility of Performance:
This is to say the subject matter of the contract must be made possible in terms of performance.
Section 56(1) states that, “An agreement to do an act impossible in itself is void. A contract to do
an act which, after the contract is made, becomes impossible in terms of performance (Sub-section
2).

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Exercises:
(a) “Consideration need not be adequate but it must have some value in the eye of the law.”
Explain.
(b) What do you understand by a person who lacks capacity to contract?
(c) Explain why a minor cannot form a valid contract under the Law of Contract Act.
(d) State two situations in which a contract may be declared to be void or voidable.
(e) Contract without consideration cannot be enforced, explain this statement
LECTURE NO. 3 C:
DISCHARGE OF A CONTRACT AND REMEDIES FOR BREACH OF A CONTRACT
(a) Objectives:
1) To explain the meaning of “discharge of a contract”.
2) To make you understand the ways through which a contract can be discharged.
3) To define the term remedy as it relates to the breach of contract.
4) To describe the available remedies to the aggrieved party as a result of the
breach of a contract.
(b) Introduction:
You would think that, a contract comes into existence only by an agreement, its
discharge or ending, could easily be executed by numerous ways. Equally so, in this
lecture we are going to look at the methods which can terminate a contract. In
addition to that, you are going to understand the remedies available in law to the
non-breaching parties to the contract.
Discharge of a Contract Explained:

After a contract having been formed, and the manner in which the parties having been performed,
it is now necessary to see how the contractual relationship is terminated. The term discharge of a
contract means termination of contractual obligations. That is to say a release of the parties from
contractual obligations or liabilities. As soon as all parties to a contract have fully performed their
contractual obligations, the contract is deemed an executed agreement and the obligations of all
parties are thereby discharged. A contract may be discharged in one of the following methods;
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Discharge by Agreement or Mutual Consent
Parties to a contract may be released from any obligation in respect with mutual agreement. This
may happen for example by the substitution of a fresh agreement in place of the original one.
A contract may be framed in such a manner that it contains the elements of its own discharge
within itself. For example, it may contain provisions, express or implied, which provide for its
determination in certain circumstances such as non-fulfilment of a condition.
NOTE: Every contract is irrevocable except by mutual agreement, and it is the duty of the person
who wishes to revoke it to show something in the terms of contract itself that it is not intended to
be permanent.
Discharge by Performance
By performance is meant the fulfillment of the terms of the contract as agreed by the parties to it.
Once the parties have fully performed their contractual obligations, the contract comes to an end.
To put it in other way, once each party to a contract has done what he/she has agreed to do under
it, the contract is discharged and obligation of each party to perform ends. Take note that under
performance, the thing to be accomplished or performed must be done in the manner prescribed,
otherwise there is no performance. For example, Ashura offers to sell her shoes to Irene if she will
pay her 20,000/=. Irene accepts the offer. Soon after the money paid and the said shoes received
the contract is discharged since each party will be having performed as promised and nothing more
remains to be done.
Death or incapacity
In situation involving personal service contracts, the death or incapacity of either party will
discharge the contract. This involves only contracts for services of a personal nature that cannot
be delegated. For example: Mr. Majanga, a qualified lecturer in banking law, signs a two-year
contract to teach at IFM, he dies after the first year of the contract. Therefore, Majanga’s contract
with IFM is discharged following his death.

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Frustration of Contract or Destruction of Subject matter
A contract may be terminated as a result of an unforeseeable event that takes place after parties
enter into a valid contract but before performance is done, that destroys the purpose of the contract.
Unforeseeable event must render a contract impossible in performance or prevents its main
purpose from being achieved. For example: Elisha pays Rutambi 50,000/= to paint his car. Before
the performance is due, a severe storm causes a tree to fall on Elisha’s car causing damage to it.
The contract is discharged, since its purposes has been frustrated by an unforeseeable intervening
event (the demage caused by the storm). Though Rutambi could still paint the car and may even
wish to do so; but to allow this contract to be carried out would be pointless and unreasonable.
Breach of Contract
This means failure by a party to a contract to perform his obligations under that contract or an
indication of his intention not to do so. The breach of a contract may be either total or partial. If it
is total the party injured is entitled to treat the contract as discharged and to sue immediately for
damages for the loss sustained. This is because the consequences of breach are sufficiently serious.
When a breach is not sufficiently serious to allow for discharge, the injured party is entitled to sue
for damages only.
Remedies for Breach of a Contract Explained:
The term remedy can be defined as any of the methods available at law for the enforcement,
protection, or recovery of rights or for obtaining redress for their infringement. Generally, the
parties to a contract are required to perform the terms and conditions prescribed under it. But there
are some instances in which one or more of the parties to a contract fails or refuses to do so.
Whenever this happens, there are some remedies/damages available to an injured party for the loss
which he has sustained through a breach of contract.
Compensatory damages
The most common relief afforded to an injured party for the loss which he has sustained through
a breach of contract is compensatory damages, sometimes called monetary compensation. It is a
sum of money awarded by a court as compensation for a breach of contract. It is a money award
meant to place the injured party as far as possible in his original position.

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Specific performance
This involves the carrying out of the contract as agreed under an order of the court. It can also be
described as a court order to a person to fulfil his obligations under a contract. For example, when
contracts have been exchanged between the parties for the sale of a house but the seller delaying
unnecessary to perform his part, the court may order him to complete the sale. There are some
circumstances in which money damages are not favorable and proper remedy to compensate a non-
breaching party, in that situation the specific performance is fundamental. That is to say the court
has the power to force the breaching party to actually perform the contract as promised or agreed.
Consider the following illustrations;
➢ Chautundu, as an artist, contracts to sell one of his unique paintings to Chaumbea for 15,000/=.
He then changes his mind. Chaumbea can seek specific performance, since the painting is
unique and money damages will not adequately compensate him for his loss.
➢ John contracts to paint Juma’s house for 30,000/= Tshs. He then changes his mind. The only
remedy available to Juma is compensatory damages since a court will not force John to paint
the house against his will. The money recovered as damages by Juma may be used to pay
another artist of similar skill to paint the house.
Injunction
This is an order of the court compelling a person to do or to refrain from doing some act which has
been the subject matter of a contract. An injunction can sometimes be obtained to prevent the
breach of the contract. An injunction can be granted compelling either party to a contract to observe
the terms of a contract. For example: FK, a musician, agreed to work exclusively for the Tip Top
connection for a certain period. Nevertheless, he entered into another engagement because he
required more money, but the court granted an injunction order restraining him from carrying out
his second engagement.
Quantum meruit
This is a latin word described to mean as much as he deserved. That is to say payment of so much
as the party doing the service deserves. It can also be defined as legal principle that enables the
provider of goods or services to recover fees for the provision of those goods or services.

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Rescission
This remedy is to the effect that a party may seek to rescind the contract. Rescission simply means
the setting aside of a voidable contract, which is thereby treated as if it had never existed.
Exercises:
(a) Explain the meaning of discharge of a contract.
(b) Describe the remedies for the breach of a contract.
LECTURE NO. 4:
THE CONTRACT OF SALE OF GOODS IN BUSINESS TRANSACTIONS
(a) Objectives:
(1) To identify the law related to sale of goods.
(2) To define the term goods and its types.
(3) To explain the nature and definition of a contract of sale of goods.
(4) To make you understand the formation of a contract of sale of goods.
(5) To point out the differences between a contract of sale of goods and an
agreement to sell.
(6) To let you understand the rights and duties of parties in a sale of goods contract.
(7) To explain the conditions and warranties as the terms applied in a sale of goods
and their legal implication.
(b) Introduction:
The sale of goods is the most common of all commercial contracts of which many
people in the business world enter into in the daily life. Whenever you buy goods,
let say from a supermarket, you have entered into a contract for the sale of goods.
The general principles of contract which we have previously examined such as offer
and acceptance, the capacity of the parties, consideration, legality of the object, and
the like apply to the sale of goods contract. In this lecture therefore, you will be in
a position to understand the legal principles in respect of formation and operation
of a contract relating to the sale of goods.

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The Law Applicable to Sale of Goods:
The law related to the sale of goods in Tanzania is called the Sale of Goods Act, Cap 214 R.E
2010. This law governs all commercial transactions involve sale of goods between the seller and
buyer. Here the seller is the one who sells or agrees to sell goods, and the buyer is the person who
buys or agrees to buy goods.
Goods Defined:
Goods need to be covered under this law includes all tangible movable objects that can be owned
for example chairs, computers, pens, shoes, etc. Therefore, objects permanently attached to land
(immovable property) and intangible property such as copyrights are excluded from the definition
of goods.
Types of Goods
➢ Specific (ascertained) goods:
Are the ones which have been identified and agreed upon at the time of contract by the parties.
➢ Unspecific (unascertained) goods:
These are goods which have not been identified and agreed upon at the time of making the contract.
For example, any stock which is found in hardware and no any buyer have offered to buy them.
➢ Conditional (contingent) goods:
These are goods which either do not exist or are goods which are to be manufactured in the future.
For example, if a Tanzanian government enters into contract of sale of fifty rescuing helicopters
with a Chinese company on the condition that, such helicopters should be supplied when El-Nino
arises in Tanzania.
The Nature and Definition of a Contract of Sale of Goods:
Under the Sale of Goods Act we have contract of sale of goods and agreement to sell. We must
therefore give the meaning in accordance with the law as follows:

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Contract of Sale of Goods
This is the contract where by the seller transfers or agrees to transfer the property in goods to the
buyer for a money consideration, called the price. This has been defined under S.3 (1) of the Sale
of Goods Act. Contract of sale of goods sometimes called an executed contract of sale since the
subject matter is contracted at once (that is to say the transfer of goods to the buyer and the payment
of price to the seller is completely done). Therefore, in contract of sale the buyer becomes the
owner of goods upon delivery and pay for them.
Agreement to Sell
Here the transfer of the property in the goods is to take place at a future time or subject to some
conditions to be fulfilled after the transfer. S.3 (3) of the Sale of Goods Act provides for this
definition. This is sometimes called an executory contract of sale since the transfer of ownership
of goods is to take place in the future. Under the agreement to sell, therefore, the seller remains
with the property in goods.
Formation of Contract of Sale of Goods:
A contract of sale goods may be made in writing or by word of mouth, or may be implied from the
conduct of the parties (that is to say by actions/conducts of the parties). This has been clearly
provided for under S.5 (1) Cap 214.
Different between Contract of Sale of Goods and Agreement to Sell:
Ownership of property
In contract to sale, the property in goods passes to the buyer, i.e. the buyer becomes the owner of
goods and the seller remains with nothing. But in agreement to sell there is no transfer of property
in goods to the buyer hence the seller continues to be the owner of property.
Risk of loss
In contract of sale of goods, the risk of loss immediately passes to the buyer while in agreement to
sell the risk is not passing to the buyer but to the seller himself.

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Consequences of breach
In contract of sale of goods, the seller can sue only for the price while in agreement to sell the
seller can sue for damages (compensation) and not for the price.
Right to resale
In the contract of sale of goods, the property is under the ownership of the buyer, hence the seller
cannot resale goods while in agreement to sell, the goods remain with the seller i.e. he can do
whichever he wants over the goods.
Rights and Duties of Seller and Buyer in Sale of Goods Contracts:
Once a contract for the sale of goods comes into existence, it is important to determine the duties
of the buyer and seller with respect to the goods.
For the seller:
➢ It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in
accordance with the terms of the contract of sale. [this is provided under S.29 of the Sale of
Goods Act]
➢ The seller is duty bound to give/afford the buyer a reasonable opportunity of examining the
goods. [S.36 (2)].
For the buyer:
➢ It is the duty of the buyer to pay for the price upon receiving goods from the seller [S.29]
➢ The buyer has the right of examining goods. Where goods are delivered to the buyer which
he has not previously examined, he therefore has the right of examining them for the purpose
of ascertaining whether they are in conformity with the contract. [S.36(1)]
➢ Buyer is not bound to return rejected goods. Whether goods are delivered to the buyer and
he refuses to accept them, having the right so to do, he is not bound to return them to the
seller. [S.38 of the Act]

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Terms of Contract in Sale of Goods Contract:
Condition defined
This refers to the fundamental term of the contract of the sale of goods, the breach of which may
give rise to a right to treat the contract as repudiated/rejected i.e. allowing the other party to
terminate the contract.
Warranty defined
This is the minor term of the contract, the breach of which may give rise to a claim for damages
but not a right to reject the goods and treat the contract as repudiated. In other words, this is an
assurance by the seller of property that the goods or property will be as promised. It can also be
defined to mean a guarantee given to the buyer by a seller stating the good condition of the property
and that it is free from defects/problems. The seller goes further and state that he will repair or
replace defective goods as the case will be.
Note: Where the contract is for specific goods i.e. the property in which has passed to the buyer,
the breach of any conditions to be fulfilled by the seller can only be treated as a breach of warranty
and not as a ground for rejecting the goods and treating the contract as repudiated unless otherwise
there is a term of the contract, express or implied, to that effect.
Implied Conditions and Warranties in Contracts of Sale of Goods:
➢ There is an implied condition on the part of the seller that in the case of a sale he has a right to
sell the goods and in case of an agreement to sell he will have a right to sell the goods at the
time when the property is to pass (Section 14(a) of the SGA.
➢ Where the goods are sold by description, there is an implied condition that the goods shall
correspond with the description, and if the sale is also by sample (Section 15(1) of the SGA).
time when the property is to pass (Section 14(a) of the SGA).

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time when the property is to pass (Section 14(a) of the SGA).
➢ An implied condition that the bulk (goods) shall correspond with the sample in quality. Section
17(2) (a) of the SGA.
➢ An implied condition that the buyer shall have a reasonable opportunity of comparing the bulk
with the sample. Section 17(2)(b).
➢ An implied condition that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable examination of the sample.
Section 17(2)(c).
➢ It is an implied warranty that the buyer shall have and enjoy the quite possession of the goods.
Section 14(b).
➢ It is an implied warranty that the goods shall be free from any charge or encumbrance in favour
of any third party, not declared or known to the buyer before or at the time when the contract
is made. Section 14(c) of the SGA.
Exercises:
(a) Distinguish between a sale and an agreement to sell.

(b) Explain the contractual terms and their legal implication.
LECTURE NO. 5:
THE HIRE PURCHASE AGREEMENTS IN BUSINESS ACTIVITIES
Hire purchase is a branch of business law which deals with the study of rules governing sales
transactions which involves payments by instalment. These contracts are very common in purchase
of goods which involves huge amount of prices that cannot be paid at once. In Tanzania, the law
governing hire purchase contracts is the Hire Purchase Act, CAP 14 and other laws governing
general principles of contract (The Law of Contract Act).
Hire Purchase Agreement defined

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This is an agreement between the seller and the hirer in which the seller agrees to sale goods to the
hirer to be paid by instalments, that is to say contracts for sale of goods to be paid by instalments.
For example, when a person buys a car for 15000000/= to be paid by three instalments of
5,000,000/= he is said to buy that car under hire purchase contract.
Hire purchase agreement also considered as an agreement of hiring goods in order to purchase
with the payments to be done by instalments.
Parties to a Hire Purchase Agreement
Basically, the hire purchase agreement is formed by two parties namely the owner and the hirer.
The owner is the person who sale the hire purchase goods to the hirer, and the hirer is the person
who hires/purchase the goods under hire purchase agreement.
Basic elements of the hire purchase agreement
• Parties: It must mention the parties to the contract. Hire purchase agreements involve two
parties, namely the owner of goods and the hirer.
• It must be in writing: Hire purchase agreement must be reduced down in writing in order to
form record for future reference in the event of any dispute. [S. 6 (1) of the Hire Purchase
Act]
• Must state the total amount of hire purchase price to be paid to the goods: It is important to
indicate so as to give the hirer the right over the goods on last instalment. [S. 6 of the Hire
Purchase Act]
• Must state the number of instalments and the amount to be paid in every instalment: This is
important because it indicates the exactly amount which the hirer is supposed to pay per
instalment and the exact date to make the payment so that the owner of the goods can take
action in the event of breach of non or late payment. [S. 6 (2) (b) of the Hire Purchase Act]
• Must be registered: Every hire purchase agreement is supposed to be registered by the
Registrar of documents i.e. the Registrar of hire purchase agreements. [S. 5(1) of the Hire
Purchase Act]

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• Must be signed by the parties: This is very important because the signature indicates the
commitment of the parties to legal action in case of breach of the contract. [S. 6 (2) (a) of the
Hire Purchase Act]
Rights and duties of parties to a Hire Purchase Agreement
Owner’s Rights:
• The right to be paid the instalments as agreed

• The right to be compensated for the breach of the terms of the hire purchase agreement e.g
late payments of the instalments or damage to the goods.
• The right to retain possession of the goods until the last instalment is paid.
Owner’s Duties:
• Duty to supply the hirer with a written contract or memorandum

• The duty to inform the hirer on anything affecting the hire purchase agreement
• Duty to deliver the goods to the hirer after paying the last instalment
• Duty to protect the goods from any risk e.g. by paying reasonable insurance.
Hirer’s Rights:
• Right to be given a written memorandum of the hire purchase agreement by the owner.
• Right to compensation for any breach of the hire purchase agreement by the owner.
• Right to enjoy the goods free from disturbance of the third person that is to say free enjoyment
of the goods from encumbrances.
• The right to inspect the goods before taking their delivery from the owner.
• The right to terminate the hire purchase agreement after giving sufficient notice
Hirer’s Duties
• Duty to pay the agreed instalments in time

• Duty not to remove hire purchase goods which are in his possession from United Republic of
Tanzania without prior authorization of the owner.

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• Duty to give information of the lost goods, that is to say to give the owner information of
whereabouts of the hire purchase of goods if they are in his possession pending payment of
the instalments.
Distinction between Sale and Hire Purchase Agreement
Option to return the defect goods
In hire purchase agreement, the hirer has an option to return the goods if any defect or problem
arises before the last instalment since this contract is based on instalment as a mode of payment,
whereas in contract of sale of goods there is no option to the buyer because the buyer becomes
immediate owner of goods.
Parties
In hire purchase parties are the owner and the hirer, while in a contract of sale parties are the seller
and the buyer.
Tax payment
In sale of goods, tax is payable while in hire purchase there is no sale tax.
Registration
In hire purchase, the agreement must be registered otherwise the agreement becomes
unenforceable while in sale of goods registration of contract is not mandatory.
Possession of goods
In Hire purchase, the hirer is given immediate possession of goods while in sale of goods the buyer
may get immediate possession of the goods and sometimes, he may decide not to get immediate
possession of the goods.
Conditions and Warranties applied in Hire Purchase Contracts
In every hire purchase agreement, there shall be implied condition and warrant as provided for
under S.8 (1) of the Hire Purchase Act as follows;

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• An implied warranty that the hirer shall enjoy the possession of the goods
• An implied condition that the owner shall have the right to sell the goods at the time when the
property is to pass
• An implied warranty that the goods shall be free from any disturbance
• Also, an implied condition that the goods shall be of good quality
Hire Purchase Agreement and Credit Sale Agreement
As we have previously examined the concept of hire purchase in that the hirer takes possession of
the goods as soon as he has paid the first instalment or initial deposit of the price and finally obtains
ownership of the goods when he has paid all the agreed number of installments. Coming to the
credit sale agreement the position is not the same.
Definition of Credit Sale Agreement
This refers to the contract for the sale of goods under which the price is payable by instalments
and the ownership passes to the buyer. This is to the effect that no condition as per sale agreement,
the buyer becomes the immediate owner of the goods though the purchasing price is not all paid.
It should, therefore, born in mind that the hire purchase agreement differs from a credit sale in that
under the credit sale the ownership passes when the contract is signed but in hire purchase
ownership never passes until all instalments are promptly paid.
Importance of Hire Purchase Agreements in Business
1. Expansion of business entities especially in developing countries like Tanzania. For example,
in purchasing capital intensive machines to run the company.
2. The hirer is given immediate possession of the goods as soon as the first instalment is paid.
3. No tax is payable under the hire purchase agreements as compared to the sale of goods
contract.
4. The hire purchase agreement is safe and secure since the hirer has option to return the defect
goods before the last instalment. Therefore, the hirer is extremely protected before the last
payment over the goods is due.

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5. Hire purchase agreement is in most cases affordable since the purchasing price is not paid at
once.
Etc.
LECTURE NO. 6:
THE LAW OF AGENCY IN BUSINESS ACTIVITIES
Definition and nature of Agency
Agency is governed by the Law of Contract Act, Cap 345 R.E of 2002 under Part X (Ten). The
term agency connotes the relationship between an agent and his principal. The law defines the
term agent under S. 134 as a person employed to do any act for another or to represent another in
dealings with third persons. The person for whom such act is done, or who is so presented, is called
the principal. The main purpose of agency is to establish a contractual relationship between the
principal and the third party through an agent.
From the above definitions one may say that the essentials of a valid agency include the
appointment of an agent, negotiation and conclusion of contract between an agent and a third party
and termination of agency.
Formation of Agency
An agency may be formed through four main ways:
1. Express appointment
2. Implied appointment
3. Ratification
4. Agency of necessity

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Express Appointment
This happens when the principal instructs another person through an instrument (document) such
as power of attorney, to do certain things on behalf. The instructions will be stating specifically
what the appointee is to do.
Example:
I, Joachim Machimu of P.o. Box 3168, Dar es Salaam hereby appoint Emmanuel Joseph of P.o.
Box 235 Mwanza, to enter into contracts on behalf, with third parties, in all matters of sale of
goods but not lease of business premises nor withdrawal of funds from my account.
Note: both parties must sign this document
Implied Appointment
This type of appointment takes place when “X” pays for goods ordered by “Y”. The implication
here is that “X” is an agent of “Y”, may not be allowed to deny the fact that he is an agent of “Y”.
Necessity
Agency of necessity occurs when a person is entrusted with another’s property and it becomes
necessary to do something to preserve that property. In such a case, although the person who is
entrusted with the property has no express authority to do the act necessary to preserve it because
of the necessity, such an authority is implied.
Appointment by ratification
The term “ratification” means an act of adopting the contract or other transaction by a person
whom was not bound by it originally.
Where acts are done by one person on behalf of another, but without his knowledge or authority,
he may elect to ratify such acts and if he ratifies them, the same effects will follow as if they had
been performed by his authority.

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By operation of law
In line of law, the following categories of persons are deemed to act as agents.
✓ Promoters in the process of company formation.

✓ Directors of a registered company.
✓ Partner(s) in a firm.
Classes of Agents
1. According to the authority conferred to them:
A special agent is one who is appointed for a particular purpose, and is therefore invested with
limited powers. He has no authority to bind his principal in any other matter than that for which
he is engaged.
A general agent is a person who has an authority to do anything which comes within the limits of
the position in which he has been placed by his principal, and who binds the principal by his acts
done in that position.
A universal agent is one whose authority is unlimited. Such an agent has power to bind his
principal by any act which he does, provided the same is legal and agreeable to the law of the land.
2. According to the nature of work/service performed or rendered:
Auctioneers
These are agents appointed by the seller to sell goods, either private or by public auction, for a
reward, generally in the form of the commission. The auctioneer is the agent of the seller and his
authority may be revoked at any time before a sale takes place.
Brokers
A broker is described as an agent employed to make bargains and contracts in matters of trade,
commerce, or navigation between other parties for a compensation commonly called brokerage.

Page 47
Commission Agents
These are agents who buy and sell goods for other persons and in turn they receive a certain
payment upon the amount of the transaction. Their right to the remuneration depends upon the
special contract made between their principals and themselves.
Del Credere Agents
A del credere agent is an agent commissioned or employed to sell some items, who undertakes
that purchasers he procures will pay for any goods they take, for instance travel agents who sell
tickets. In other words, a del credere is an agent who gives gurantee to his principal to the effect
that the third person with whom he enters into contract shall perform the obligations of the contract.
The agent gives that gurantee for a payment of an additional remuneration which is called del
credere commission.
Factors
This is an agent who is entrusted with possession of goods of the principal and has the authority
to buy, sell, or to deal with goods in any manner to raise money on their security.
Banker
Is an agent of any customer when he collects cheques or drafts or bills or when buys or sells the
securities on behalf of its customer. He has a general lien as regards the balance of the customers’
account in the bank.
The Role of Agent and Principal in Business and their Legal Rights
The roles/duties of Agent to Principal
1. To carry out the terms of the employment according to the directions given by the principal.
Here an agent is required to perform the tasks which he was instructed to perform. For
example, if the agent was instructed to buy, sell or to negotiate any other contract, then the
agent will be required to perform according to the instruction/ direction given to him by the
principal.
2. Safeguard the rights of the principal as if they were his own rights

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3. Duty to communicate with the principal to give information or obtain instructions
4. Duty to seek the principal’s consent where necessary, before doing anything he thinks it will
need the principal’s consent.
5. Duty to conduct the business of the principal with reasonable care and skill
6. Duty to disclose all profits made out of the authority given to him. The agent is not supposed
to take any profits without the consent of the principal.
Rights of an agent
Right of retainer
An agent may retain, out of any sums received on account of the principal in the business of the
agency, all moneys due to himself in respect of advances made or expenses properly incurred by
him in conducting such business, and also such remuneration as may be payable to him for acting
as agent. [Section 169 of the LCA]
Right to receive remuneration
An agent is entitled to receive remuneration as his commission/reward for the task performed.
[Section 171 of the LCA]
Right to be compensated
An agent has a right to be compensated by the principal for any injury/harm caused to him by the
principal. However, he cannot get compensation if the injury results from his own negligence.
Right to lien
An agent is entitled to retain goods, papers and other property of the principal, whether movable
or immovable received by him, until the amount due to himself for commission has been paid or
accounted for to him.

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Duties of Principal to Agent
Duty to indemnify him
The employer of an agent is bound to indemnify him against the consequences of all lawful acts
done by such agent in exercise of the authority conferred upon him
Duty to pay him his entitlements
The principal has duty and is liable to pay the agent all his lawful entitlements/money as per terms
of the agency.
Duty to pay compensation
The principal must make compensation to his agent in respect of injury caused to such agent by
the principal’s neglect or want of skill.
Rights of principal
Right of principal to repudiate the transactions when agent deals, on his own account, in business
of the agency without principal’s consent.
Right to claim benefits gained by agent in the course of his dealings without the knowledge of his
principal.
Principals-third Party Relationship
Generally, the principal is bound by the acts of his agent done under his authority, or with his
consent. Section 178 of the Law of Contract Act provides that, “Contracts entered into through an
agent, and obligations arising from acts done by an agent, may be enforced in the same manner,
and will have the same legal consequences as if the contract had been entered into and the acts
done by the principal in person”.
Rights of third party where the principal is undisclosed
A third party has the right to sue the agent or the principal when he discovers the identity of the
principal. It sometimes happens that an agent negotiates or contract with a third party, disclosing

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that he is an agent but not stating the name of his principal. He may also not even disclose the fact
that he is acting as an agent at all.
As far as the third party is concerned who has contracted with an agent for an undisclosed principal,
or with a person who has not disclosed that he is acting as an agent, he can sue either the agent or
(when he discovers the identity or existence of the principal) he can sue the principal.
Termination of Agency
The relationship of principal and agent may be terminated in any one of the following ways;
• By the agreement of the parties

• By complete performance of the contract: That is to say the completion of the business for
which the agency was created brings to an end a particular agency.
• By expiration of time: Where an agency is created for a definite period, it comes to an end
when that specific time comes to an end.
• By the death or insanity of the principal or the agent.
• By the bankruptcy of the principal
• By the destruction of the subject-matter
• By revocation on the part of the principal. The principal can withdraw his agent’s authority at
any time, although he may have to pay damages to his agent if this involves breach of a contract
between principal and agent.
• By the renunciation of the agent: The agent on renouncing must compensate the principal for
any loss which may arise out of the renunciation.

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LECTURE NO. 7:
LEGAL FORMS OF BUSINESS ORGANIZATIONS IN BUSINESS ACTIVITIES
General Introduction:
In starting a new business an entrepreneur has to decide the legal form the business should take.
Choice of the legal form depends on nature of business, the size of the business, capital required,
taxation rates, degree of compliance of laws of the land, management styles, and so on.
PART 1: SOLE PROPRIETORSHIP
Objectives:
1) To explain the meaning of sole proprietorship.

2) To make you understand the formation of sole proprietorship.
3) To describe the advantages and disadvantages of sole proprietorship.
4) To explain to you the dissolution of sole proprietorship.
Sole Proprietorship Defined:
This is a type of business organization where by one person owning and operating a business for
the aim of getting profit. A single person owns the business, arranges for its financing, controls it,
enjoys all profits, bears all risks and pays all debts of the business.
Formation of a Sole Proprietorship:
The easiest business organization to form is a sole proprietorship. In most cases, business people
can initiate a sole proprietorship by simply opening their doors for business. Depending upon the
nature, location, and extent of the business, the sole proprietor may have to check on the business
preliminary requirements such as business license, and filing requirements. For example, in
Tanzania the law requires a formal filing if a sole proprietor chooses to use a fictitious name
(business name). A sole proprietor may wish to operate business by using his own name or business
name. Own name may be like Joe Stevenson Trading Centre and business name like Ravee Group
Enterprise.
If he wishes to use his own name, he can do so without having to file an application for registration
purpose as an approval by the competent authority. But if the sole proprietor decides not to include

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his or her name as part of the business, then he must register the business name i.e. seeking for
permission to do business under that name. Consider the following illustrations;
Illustration 1
Baraka wants to open a stationary store in mwanza. He rents office space and begins doing business
immediately under the name “Baraka’s Stationary store” In this case he needs no approval before
he can start his business, since he opts to use his own name to operate his business but he must
maintain valid records of his business profits and losses for tax purposes.
Illustration 2
If Baraka wants to call his stationary store “B & Y Stationary Store”, he must apply for permission
to do business in the state under that name, since it is not his proper name. Registration of business
name is made under Business Name Registration Act, Cap 213, R.E 2002. This law provides for
the requirements needed for registration of the name that including filling an application form and
submit to the BRELA (Business Registration and Licensing Agency).
Such applications are approved upon the filing of required form with a small application fee. Take
note that an application can either be accepted or rejected by BRELA. It can reject where it appears
that the chosen name is currently being used by a similar business in the country. In short there is
no complication in terms of law in operating business as a sole trader i.e. it is the simplest form of
business to organize and can be afforded by the majority in every state, since the capital involved
is minimal.
Advantages of a Sole Proprietorship:
➢ Under a sole proprietorship you can own all the assets and take all the profits of the business.
➢ There are no complicated procedures before business start to operate.
➢ It is simple to dissolve/ end.
➢ A sole proprietor is the chief decision maker to his or her business. He does according to his
wish no other person needs to be consulted on business decision.
➢ A sole proprietor can change his business at any time if he / she acquire some new ideas.
➢ A sole proprietor may employ others to assist in daily operation of the business. Nevertheless,
he may easily get assisted by his family members or relatives as the case will be.
➢ Utmost secrecy about the business matters can be maintained.
➢ Fewer taxes are paid.

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➢ Moreover, a sole proprietor may easily change the location of his or her business depending
on the demand of his customers, that is to say seeking for new market where it appears
necessary.
Etc.
Disadvantages of a Sole Proprietorship:

➢ The owner of the sole proprietorship is personally responsible for all liabilities incurred by the
business. For example, debts.
➢ Also suffer all business losses and have all the problems and worries arising out in a business.
➢ Under a sole proprietorship there is slow raising of profit due to minimal capital involved.
➢ Limited capital resources for expansion. The owner depends more on his own resources and
may fail to raise additional capital for business expansion.
➢ It is not easy to get loan from the bank or any financial institution to develop a business.
➢ A sole proprietorship can easily collapse due to some factors for example death of the owner
or bankruptcy.
Etc.
Dissolution of a Sole Proprietorship:
What causes the dissolution of a sole proprietorship?

The Owner’s Decision
The owner of business may decide at any time to close or sell the assets of the business to other
people. There is no legal formality involved in selling and transferring assets of the business
provided that all debts of the business are paid in full.
Bankruptcy
A sole proprietorship may be dissolved for the reason of debts i.e. if the owner cannot pay his
debts, he may be forced to dissolve his business by his creditors through the court of law. The
court orders the compulsory administration of a bankrupt’s affairs so that his assets can be fairy
distributed among his creditors.
Death or Illness

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If the owner dies or suffering from a certain disease for quite a long time in such a way that cannot
be able to proceed with the business, the business may stand dissolved since its operation may
ultimately attract some difficulties.
Change of the Legal Form
If a business expands, the owner may decide to incorporate it and becomes a corporate entity in
law. By incorporating and transferring the assets of his business, the sole proprietor terminates
his old business and creates a new business entity.
Exercises: True or False?

(a) Business people can form a sole proprietorship only by going through the Attorney
General’s office in the country.
(b) The greatest advantage of a sole proprietorship is that the owner has complete control
over the operation of the business.
(c) A major disadvantage of a sole proprietorship is unlimited liability.
PART 2: PARTNERSHIP
(a) Objectives:
1) To identify the law applicable.
2) To explain the meaning of a partnership according to the law.
3) To make you understand the formation of a partnership.
4) To state the essential elements of a partnership.
5) To explain types of partners, rights and duties of partners, contractual relations
amongst partners and outsiders.
6) To make you understand the legal nature of liability to the partners, and the
legal requirement to expel a partner from the business.
7) To describe the advantages and disadvantages of a partnership.
8) To explain to you the dissolution of a partnership.
(b) Introduction:
Having considered the legal position of sole proprietorship, we now turn to the legal
environment of the partnership. In this part our focus is on how business may be

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conducted by more than one person in form of a partnership, and the main target is
to trade with a view of getting profit.
Law Applicable
The law governing partnership in Tanzania is the Law of Contract Act, CAP 345 R.E 2002. It
should be noted that the partnership form of business organization has its roots in contract.
Definition of a Partnership
A partnership is defined in section 190(1) of the Law of Contract Act as; the relationship which
subsists between persons carrying on business in common with a view of profit. Persons who have
entered into partnership with one another are called collectively a “firm”, and the name under
which their business is carried on is called the “firm name” (this is provided under section 190(2)
of the LCA).
Formation of a Partnership
A partnership, like any contract, can be formed by an oral or written agreement, and it can be made
expressly or implied from the conduct of the parties, even when no specific oral or written
agreement exists. Section 191(1) of the LCA provides that, “The relationship of partnership arises
from contract and not from status.” Section 2(1) (h) of the LCA defines contract as an agreement
enforceable by law.
The written agreement of a partnership is known as PARTNERSHIP DEED or ARTICLES OF

PARTNERSHIP. Normally deeds or articles are more useful since with these documents it is easy
to change the rules and it can be an evidence to refer should a dispute occur. There are no specific
formalities necessary for entering into a partnership agreement. The same rules that apply to the
formation of a valid contract apply to the formation of a partnership agreement. For example,
parties/ partners must have the capacity to contract and consent must have obtained freely to one
another.
A simple example of a partnership agreement;
Dawson, Elisha and Alex purchase a grocery store together, with Dawson providing 50 percent of
the capital, Elisha and Alex 25 percent each. All three have a voice in running the business, and

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all three share profits equally or in accordance to the percentage of the capital that they originally
invested.
Illustrations on a Partnership Deed;
Partnership Deed defined
Partnership Deed means a document in which the respective rights and obligations of the members
of a partnership are set forth. It should be drafted with care and be signed by all the partners. In
other words, Partnership Deed is a document which contains the terms and conditions to be
enforced by the members of a partnership firm.
The Deed should cover the following points:
➢ The name of the firm and the names and addresses of partners who compose it.
➢ Nature of business and the town and place where it will be carried on.
➢ Date of commencement of partnership.
➢ The amount of capital to be contributed by each partner and the methods of raising finance in
future if so required.
➢ The ratio of sharing profits and losses.
➢ Salaries, commissions etc., if any, payable to partners.
➢ The method of preparing accounts and arrangement for audit and safe custody of cash.
➢ Division of task and responsibility, i.e. the duties, powers and obligations of all the partners.
➢ Rules to be followed in case of retirement, death and admission of a partner.
➢ Expulsion of partners in case of gross breach of duty or fraud.
➢ The circumstance under which the partnership will stand dissolved.
➢ Arbitration in case of dispute among the partners.
Note: The terms laid down in the Deed may be varied by consent of all the partners, at any time,
for the best interest of the business of a partnership.
Registration of Business Names
Whenever a partnership is carried on under a name which does not consist of the true surnames of
all the partners, the partnership name has to be registered to the BRELA, and the true names of

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each of the partners have to be disclosed therein. It has to be noted, therefore, that upon clearance
and confirmation by BRELA, the partners are issued with a certificate of business name.
Types of Partners
Partners are of different types in law as provided below:
General/Active Partner
This is the type of partner who has the right to take part in the management of the business unless
the agreement provides otherwise. For example, the partnership agreement may say that some
junior partners are not allowed to sign cheques. The absence of such agreement makes all partners
to be entitled to share in the management.
Dormant/Sleeping Partner
He is a partner who puts money or capital into the partnership but takes no active part in the
Management of the business. If he does take part in management, he would cease to be a dormant
partner and become as general partner.
Limited Partner
This is a partner who has a right to a share of the profits of the partnership but has no right to
participate in the management of the firm. Also, his liability is limited to the amount of capital he
originally agreed to contribute
Salaried Partner
This is a type of partner, normally a professional for example accountants and solicitors, assisting
in business operation without putting any money into the firm as the general or dormant partners
do. These salaried partners are paid salary just as employees; however, they are not partners, for
the purpose of dissolving the firm. If they want to leave, they do so by serving out their notice or
getting paid instead. Salaried partners are usually appearing on the firm’s letter heading as partners,
or on the list of partners in the ordinary course of the business, being so, are liable to pay the debts
of the firm as a partner if the outsider (customer) has relied on their status as such. Because of this
case a salaried partner should be indemnified by general partners in case he is made to pay the
firm’s debts.

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Sub-Partner
When a partner agrees to share his share of profits in a partnership firm with an outsider, such an
outsider is called a sub-partner. Such a sub-partner has no rights against the firm nor he is liable
for the debts of the firm.
Duties of Partners in a Partnership

Section 192 of the Law of Contract Act provides for the following duties of partners;
➢ To carry on the business of the partnership for the greatest common advantage.
➢ To be just and faithful to each other.
➢ To render true accounts and full information of all things affecting the partnership to any
partner or his legal representatives.
Rights of Partners in a Partnership
Section 194 of the Law of Contract Act provides for the rights of the partners in relation to the
partnership, as expressed below;
➢ Every partner has a right to take part in the management of the partnership business.
➢ Every partner has a right to have access to and to inspect and copy any of the books of the firm.
➢ The right to share equally in the profits of the business
➢ Right to be indemnified in respect of payment made and personal liabilities incurred by a
partner in the ordinary course of the business.
Normally the partnership deed provides for the rights and responsibilities of the partners in the
course of running a business. The rationale behind this is to avoid unnecessary misunderstanding
and therefore operating their affairs in a more effective and efficiency manner.
Relationship of Partners within the Partnership
Generally, partners are bound to carry on the business of the partnership for the greatest common
advantage, to be just and faithful to each other (see section 192 of the LCA). That is to say they
have to operate a business in utmost of good faith (uberrimae fidei). Partners have the ability to
change the partnership agreement. They can change the business of the firm but all the partners
must be in agreement about this, that is to say both must consent upon such agreement. They can
also change the provisions or requirements of the law in terms of agreement. For example, the law

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provides that profits and losses are to be shared equally but the partners may provide for a different
share in their agreement.
Relation of Partners to Third Parties (Outsiders)
Ideally, every partner is the agent of the firm and of his co-partners for the purpose of the business
of the partnership (see section 201(1) of the LCA). Therefore, any act of a partner, which is done
within the scope of the partnership business and in the ordinary course of the business, is binding
upon all the other partners. That is to say every partner is liable/ responsible to make compensation
to third persons in respect of loss or damage arising in the ordinary course of business of the firm.
In short, act done by one partner can render the whole firm liable (Read section 202 of the LCA).
This might happen even if a partner, in dealing with a customer (outsider), had no authority of
conducting himself in dealing with outsider in the course of business. But the firm will not be
bound if an outsider knew that the partner had no authority. In a partnership all partners are liable
for the act done by one partner, either by authority or not, towards the outsiders.
Illustration:
Eradius and Joshua were partners in a garage business for repairing motor cars and they expressly
agreed not to sell cars. Joshua without consent or knowledge of Eradius sold a car to
Mwasakafyuka. It was discovered that Joshua had no title to the car hence Mwasakafyuka
demanded back the money but Joshua had no money. Therefore, Eradius was held liable as his
partner.
Nature of the Liability of Partners
Since the partnership is not a legal entity, and cannot sue or be sued in its own name, therefore the
partners will be held responsible for any liability incurred by the firm for example debts to its
creditors. Also, partners are jointly liable for contracts entered into by the firm in case of breach
thereof or as the case will be.
Every partner is liable to make compensation to third persons for any wrongful act done by any
partner in his ordinary course of the business. For example, where a partner receives money or
property for the firm and misapplies it before it reaches to the firm, all other partners will be held
liable.

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Note: A retiring partner can be held liable only in respect of debts incurred before his retirement,
provided due notice of retirement is given. If this notice is not given, a partner is liable for any
debts incurred by the firm after his retirement. An exception to this occurs where, by a special
agreement, a partner arranges to be liable for debts incurred by the firm after his retirement.
Likewise, a new or incoming partner is not liable for debts or any other liability incurred by the
firm in his absence but she can be held liable only in respect of debts incurred after she became a
partner in the firm.
Expulsion of a Partner
Majority of partners can expel any other partner only if a power to do so appears in the partnership
agreement. Section 199 of the LCA provides that, “A partner may not be expelled from a firm by
his partners unless a power to that effect has been expressly conferred by agreement between the
partners.” That is to say there must be an expulsion clause in the partnership agreement which
suggests one to be expelled if he acts beyond the interest of other partners or as the case will be.
Absence of this clause no power to expel a partner will exist in the relations of partners to one
another. It should be born in mind that whenever a partner is expelled from the partnership shall
be told what he had done was wrong and given a chance to explain.
Advantages of a partnership
➢ Easy formation compared to a corporate entity:
Partnership is relatively easy to establish, that is by way of an agreement among the partners
in oral or by written words or by conduct. It includes very less legal formalities and expenses.
➢ Sharing of risk or losses:
The losses of the partnership and other risk incurred in a business are shared by the partners.
This is different when you compare with a sole proprietorship.
➢ Ability to raise fund:
With more than one owner in a business, the ability to raise funds may be increased because
two or more partners may be able to contribute more funds and because of this becomes easy
even to get loan from the bank to expand a business as much as possible

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➢ Easy to Manage:
Partnerships are easy to manage, because the partnerships managers are normally partners of
the business. Therefore, it reduced management cost.
➢ Skills and expertise:
A Partnership may benefit from the combination of different partners with skills and expertise,
hence smooth running of the business. For example, a partnership may involve professionals
like doctors, accountants or Lawyers, depending on the nature of business.
➢ Easy to operate:
A partnership is a simple business to operate, since there are no requirements to hold meeting
and record minutes from the partnership’s meetings as compared to a corporate entity.
Therefore, it is flexible business in operation like that of sole proprietorship. For example,
partnership can bring changes in its operation easily and quickly by way of agreement.
➢ Close Supervision:
Partners take active part in the management of the business. The close supervision of partners
in running a business reduces or avoids possible risk hence leads to greater efficiency.
➢ Secrecy:
The partnership Secrecy can be maintained by the partners since there is no law provides for
a disclosure of business affairs or secret to non-partners. For example, accounts of the firm.
Disadvantages of a partnership
➢ Unlimited Liability:
Partners have unlimited liability i.e. debts incurred by the business must be shared to all
partners. Also, a partner has unlimited liability for another partner’s act being either due to
malpractice, negligence or error.
➢ Since decisions are shared, disagreement may occur:
This can be due to difference of opinion in discussing a certain matter which may result to a
conflict and sometimes can lead to dissolution of the partnership.

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➢ The partnership may have a limited life:
It may end upon the withdrawal or death of a partner or bankruptcy of a partner.
➢ Limited Capital:
There is a limit on number of members of partnership; therefore, the capital that can be raised
from the partners is limited. Large Scale business requires huge capital and partnership is not
the proper form of business to meet the requirement.
➢ Risk of implied authority:
A partner acts as an agent of the partnership and his co-partners, therefore his acts bind the
firm and other partners. A dishonest or incompetent partner may lead the firm in difficulties
because the other partners shall suffer the consequence.
➢ Lack of public confidence:
There is no legal requirement on the firm to publish or disclose accounts. The public/people
may suspect that the firm is earning huge profit at the cost of the consumers, thus the firm
lacks confidence of the public.
Dissolution of a Partnership
The term dissolution simply means bringing to an end or winding up. Therefore, dissolution of
partnership here means causing an existing partnership to come to an end by releasing the partners
from obligations previously agreed to. A partnership can be dissolved in a variety of ways, and it
can be non-judicial dissolution or judicial dissolution (that is to say statutory dissolution and
dissolution by court order).
Statutory Dissolution as provided for under Sections 212-214 of the LCA
➢ Expiration of an agreed period:
A partnership entered into for a fixed term is dissolved when the period expires.
➢ Completion of the purpose or undertaking for which the partnership was formed:
For example, if partners entered into a partnership agreement for road construction, then soon
after completion of the construction the partnership is dissolved.
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➢ By death of a partner:
The death of a partner dissolves the firm. The share of the partner who has died goes to his
representatives who are usually appointed by his will. The firm shall continue after the death
of a partner as a new partnership agreement according to the wish of the remaining partners.
➢ Bankruptcy of a partner:
The bankruptcy of a partner also dissolves the partnership, and the non-bankrupt partners may
wish to continue with the business.
➢ By the giving of notice:
A partnership which is not entered into for a fixed period of time can be dissolved by notice
given by any partner to the others of his intention to dissolve the partnership. The notice must
be in writing if the partnership agreement is in the form of a deed, if not, oral notice will be
given.
Dissolution by Court Order as per Section 215 of LCA
There are some circumstances where the court may order such dissolution. This occurs when
partners apply for an order in court of law under the following grounds;
➢ When a partner becomes of unsound mind.
➢ When a partner becomes incapable of performing his part of the partnership contract.
➢ When a partner has been guilty of misconduct which goes to the root of the partnership
business.
➢ When a partner willfully commits a breach of the partnership agreement or conducts himself
in such a manner that it becomes difficult for others to carry on business with him.
➢ When the business of the partnership can only be carried on at a loss.
Effects/ Consequences on Dissolution of a Partnership
Notifying third parties (outsiders) upon dissolution

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Notice of dissolution must be given to third parties who have had business dealings with the
partnership. Also to those people who may have been aware of the partnership existence, and the
notice shall be published in a newspaper. Each partner must also receive actual notice of the
partnership dissolution.
Distribution of the Assets

On the dissolution of a partnership, each partner is entitled to have a share of proceeds after selling
partnership assets. However, in case of debts by creditors, the assets of the business can be used
to pay creditors in full and that any surplus be paid to the partners according to their entitlement
that is profit – sharing ratio.
The assets or property of the firm must be used to pay off the creditors of the firm. The assets
remaining are to be applied in paying to the partners the amounts which are due to them as partners.
Exercises:
(a) A partnership is an association formed “with a view of profit”. What does this mean?
(b) What tests would you apply for determining the existence of partnership? Explain.
(c) What is a partnership deed? State its main contents.
(d) Can a minor be admitted to a partnership? If so, what are the rules governing his rights
and liabilities? Explain.
PART 3: COMPANIES
(a) Objectives:
1) To identify the law applicable.
2) To explain the meaning of a company.
3) To let you understand the two major types of companies.
4) To make you understand the formation of a company.
5) To describe the necessary documents to the company formation.
6) To state the features of a registered company.
7) To distinguish between a company and a partnership.
8) To state advantages and disadvantages of a company.
9) To explain the winding-up of a company.

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(b) Introduction:
A company is a legal person in law separate from the individuals who compose it
and managed it. It is therefore, in this part, important to examine company law in
order to know the principal law governing formation, operation and winding up of
companies.
Law applicable
In Tanzania companies are governed or regulated by The Companies Act No. 12 of 2002
Definition of a company
➢ This is the most common business organization created by law to act as an artificial person to
carry on business or other activities.
➢ It can also be defined as a type of association in which persons join together and contribute
money or capital for the purpose of carrying on business or other activities.
➢ Is a group of people who are registered to carry out a particular business together in the name
of the company for example; TBL, Fast jet, TANESCO and many others
Types of Companies
There are several types of companies, despite of the fact that the major ones are private and public
companies.
Private Companies
These are companies which consist of not less than two and not more than 50 members. Private
companies are usually registered and controlled by individual persons.
Characteristics of a Private Company
➢ The members of a private company may range between two and fifty.
➢ The private company should not require members of public to subscribe shares.
➢ Also, it restricts the right to transfer its shares out of its members.

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Public Companies
Are companies consisting of seven members and have no limited maximum number of members.
Therefore, the smallest number of persons that can combine to form a public company is seven.
Characteristics of a Public Company
➢ It requires a minimum of seven members but it does not have maximum number of members.
➢ It can offer its shares to the public. That is to say the general public is allowed to subscribe
shares.
➢ It has free transferability of shares from one member to another.
Formation of Companies
The companies in Tanzania are formed by the process known as REGISTRATION or

INCORPORATION. This is done by filling or presenting some important documents to the office
of BRELA, normally to the Registrar of the company, for it to be registered. The important
documents which must be submitted before registering the company are Memorandum of
Association and Articles of Association.
Before a company is formed and registered there must be a person who does the necessary
preliminary work to form it. This person is known as a “PROMOTER” his functions may include
making sure that the Memorandum and Articles of association are prepared, provides the
registration fees, drafts the prospectus (for public companies), pays for the expenses of issuing it,
negotiates with the vendors (if any), etc. A promoter stands in fiduciary relationship towards the
company which he promotes. Note further that, promoter is entitled to receive remuneration.
Steps to be followed in formation of the companies
Forming a company under the Companies Act, Cap. 212 one would go through the following steps.
➢ One must have the name of the company to be formed.

➢ Name clearance.
➢ Having the Memorandum and Articles of Association in place.
➢ Attestation (by the commissioner for oath) of the Memorandum and Articles of Association.
➢ Registration

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➢ Issuance of registration certificate.
Take note that, one may undertake all these procedures of forming a company through ONLINE
REGISTRATION to the website of BRELA. Other filing requirements are clearly provided on the
relevant website.
What a Memorandum of Association is:
This is a document which consists of all the terms concerning the establishment of a company. It
is the constitution or charter of the company. This document provides the powers or limitations of
the company. Therefore, any transaction undertaken by the company over and above the powers
contained in the memorandum is ultra-vires.
Contents of a Memorandum of Association
Name of the company
The company will be named for example NYANZA CO. LTD; however, the company must not
be registered with a name which is closely resembling or identical with another existing company.
Because it may mislead people into thinking that its business is the same as that of some other
company.
Place of registered office
The place in which the registered office of the company is to be situated must be shown. This
provision is important for taxation and other purposes.
Objects of the company
This provision is to show the purpose for which the company is formed. It is important to know
the powers and limits of the company, and any act done outside these powers is null and void.
Liability of the members
Declaration that liability of members is limited must be stated. It is limited according to the
subscription of shares
Share capital of the company
That is the value of all shares to be issued by the company.

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What an Articles of Association is:
These are rules and regulations which specify the mode of conducting the business of a company.
Articles of Association are the by-laws for carrying into effect the objects provided in the
Memorandum of Association and for the management of internal affairs.
Contents of Articles of Association
Maters regulated by the Articles of Association include: -
➢ Share capital
➢ Transfer of shares
➢ Votes of members
➢ Appointment of directors
➢ Dividends
➢ Winding – up
➢ Alteration of shares
➢ Proceedings of General Meetings
➢ Powers of directors
➢ Removal of directors
➢ Accounts
Etc.
Characteristics/ Attributes of an Incorporated or Registered Company
Suing and being sued: A company being a legal person may sue or be sued on its own name. This
is because the company after being registered gets powers to act e.g. It may enter into contract-
with other persons, it may commit civil wrongs and criminal offences.
Property ownership: The company acquires right to own and dispose property in its own name,
since the company property is completely separated from that of the members.
Limited liability: Under the registered/ incorporated company the liability of members is limited.
For example, the members are not liable for the company debts

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Transferability of shares, particularly to the public companies.
Independent/ separate legal entity: After incorporation a company becomes separate or distinct
from the individuals or members who own and manage it.
Centralized Management: Management of a corporation is centralized in a board of directors

elected by stockholders.
Perpetual existence/ succession: A corporation enjoys perpetual existence i.e. it continues until it
is dissolved. The death or bankruptcy of any member of a company (director, officer or
shareholder) cannot make the company to an end.
Common Seal: Every company must possess a common seal which must have the name and
address of the company. A common seal may be used for the certification or verification of all-
important documents of the company.
Differences between a Registered Company and a Partnership
The method of formation
All companies must be formed by law i.e. through registration of Memorandum of Association
and Articles of Association to the BRELA while a partnership is formed by way of agreement and
it can be formed orally or by written form.
Written Constitution
A Company must have a written constitution i.e. a memorandum of Association. A partnership

agreement can be in writing or there is no need to have a constitution.
Limited liability of members on Companies while in partnership there is unlimited liability to the
partners. That is to say all the shareholders of a company will not be responsible for the debts of a
Company. But the partners must be responsible for the debts or any other liability of the firm.

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Membership
A company continues to exist even when its members die or bankrupt because of perpetual
succession while a partnership agreement can be dissolved when one of its partners dies or
bankrupt
Formalities and public inspection
Under the Company most of the documents and information concerning the company is open for
public inspection but a firm can maintain complete secrecy over its affairs.
Termination
A company cannot be terminated without law since it has been created by law; therefore, its
termination is also regulated by law whereas a partnership may be dissolved without law for
example can be dissolved on the death or bankruptcy of a partner.
Advantages of a Company
➢ Member’s liability is limited, for example members are usually not liable for company debts.
➢ The company’s name is protected. If one attempts to use the name of the Company which is
similar or identical with an existing one will be held criminally responsible.
➢ It has huge finances. This can help the company to develop, and it is through this can drive
the business flexible and invest a lot.
➢ The company continues despite the death or bankruptcy of members.
➢ Appointment, retirement or removals of directors are clearly stated in the Articles of
Association.
➢ Employees can acquire shares at any time according to their wish.
➢ Shares in the Company may be transferred easily without the consent of the other shareholders.
This is commonly applied in public companies
Disadvantages of a Company
➢ Restricted Capital rising: For private companies, there is a restriction on the raising of capital
through sale of shares i.e. shares are not offered to the public.

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➢ Disputes may arise between directors and shareholders as their ideas of what is best for the
company differ. This is commonly happening to the public companies due to its nature.
➢ Double taxation: Earnings of the company are taxable together with the shareholder’s salary
when the dividends are issued.
➢ Formalities: Formalities under the company are fundamental e.g. Minutes of the Company’s
meetings must be recorded etc.
➢ Costly in formation and operation: In incorporation or registration, there are fees for filing the
documents and fee payable to the lawyer upon preparation or drafting of legal documents of
the company.
Winding up of a Company
Winding – up is the legal term for the termination or dissolution of a company. A Company is
brought into existence through a legal process and it comes to an end through a legal process as
well. Therefore, a company being a person cannot exist forever however, it does not die naturally
like a person but it dies through the legal process called winding up.
Modes of winding - up a company
There are two modes namely;
➢ By the court (compulsory winding up)

➢ Voluntary winding up of the company
Winding up by the Court
The court having jurisdiction of winding up of the company is the High Court. However, the High
Court may direct the Resident Magistrate court to undertake the proceedings of winding up of
the company. There are some circumstances under which the company may be wound up by the
court. Such circumstances include the following:
➢ If the company is unable to pay debts to its creditors.
➢ If the number of members falls below the minimum requirements.
➢ The Company does not commence its business within a year from its incorporation.
➢ If the company chooses that the company be wound up by the court.
Voluntary winding up

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A Company may be wound up voluntarily upon the following circumstances.
➢ Expiration of a fixed period of time for the existence of a company.

➢ If the Company resolves by special resolution that the company be wound up voluntarily.
If it is no longer
LECTURE NO. 8:
THE LAW OF NEGOTIABLE INSTRUMENTS IN BUSINESS ACTIVITIES
The law of negotiable instrument is the branch of business law which governs payment by using
documents called negotiable instruments such as bill of exchange, cheque and promissory note.
This mode of payment was invented in order to assist the business persons in commercial and
financial transaction. Before this mechanism developed, the commercial transaction was
associated with many problems for instance problem of distance, time, holding cash which
involved huge amount and many others. Therefore, new invention came to supplement these
problems including the risks of robbery.
Definition of Negotiable Instruments
These are documents which are used in commercial activities to make payment of money. So, the
primary function of negotiable instrument is to effect payment. In other words, negotiable
instruments are documents which imposes an obligation to pay certain sum of money to the one
entitled with.
They are called “negotiable instruments” because they can be negotiated or transferred from one
person (payee) to another person (endorsee) through endorsement/ signing at the back of the
instrument or by a mere delivery.
Law Applicable
The basic law which governs negotiable instruments in Tanzania is the Bills of Exchange Act
CAP 215. This law among other things governs the important things to be observed in formation

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of negotiable instruments and the rights and obligation of the parties to a negotiable instrument
e.g. responsibilities of the drawer of a cheque if it is rejected or dishonoured.
Types of Negotiable Instruments
Basically, there are three common types of negotiable instruments
• Bill of exchange
• Promissory Note
• Cheques
Bill of exchange
This is an unconditional order in writing which is prepared by one person (drawer) to another
person (drawee) requiring him or her to pay on demand or at a fixed or future time, the certain sum
of money to a specified person or to bearer. The person to whom the bill is sent is supposed to sign
the bill in order to accept the payments. This is provided under Section 3(1) of the Bills of
Exchange Act.
Essential elements of a bill of exchange
A bill of exchange must contain the following elements;
• an unconditional order to pay a sum certain in money

• the name of the drawer (one making the order)
• the name of the drawee (one to whom the order is adressed)
• the signature of the drawer
• an indication of time i.e a fixed or determinable future time of payment or on demand
• a specification of the person to be paid (the payee) or bearer
Examples of a bill of exchange;
1. Nyeriga Jaji pay Emmanuel Joseph Tshs. 100,000/= (say hundred thousand) on 25th June,
2014 for value received.
Signed: Masumbuko Joshua
Dated: 10th May, 2014

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In the above example the drawer is Masumbuko Joshua, the drawee is Nyeriga Jaji, the payee
is Emmanuel Joseph, the sum payable is Tshs. 100,000/= and is to be paid on 25th June, 2014.
2. Hamis Hussein pay bearer Tshs. 20,000/= (say twenty thousand) on demand
Signed: Peter Mdoe
Promissory Note (pro note)
Is an unconditional promise in writing made by the person promises to pay a sum certain in money
to a specified person or to bearer, on demand or at a fixed or determinable future time. Two original
parties to a pro note are a promisor (drawer who is also the drawee of the instrument) and a
promisee (who is the payee). S.89 of the Bills of Exchange Act provides for this.
The main elements of pro note are as follows;
• an unconditional written promise to pay a sum certain in money

• made and signed by the maker(promissory)
• engaging to pay another person (promisee/payee
• on demand or at a fixed or determinable future time
• to or to the order of, a specified person or to bearer
Example of promissory note:
John Saatatu, promise to pay Khadija Chautundu Tshs. 10,000/= (ten thousand) seven days after
sight.
Signed: John Saatatu
In this illustration the promisor is John Saatatu and the promisee is Khadija Chautundu.
Cheques
A cheque is a bill of exchange drawn on a banker and payable on demand. An instrument not
drawn on a banker and which does not comply with conditions stipulated in a bill of exchange S.3
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(1) of the Bills of Exchange Act is not a cheque. This is the common method used to make
documentary payments in our day to day transactions.
Important parties and key terms used in negotiable instruments
❖ The drawer: This is a person who prepares the negotiable instrument i.e. the one who instructs
or promises the payments e.g. the one who prepares a cheque to another person. In other
words, is the person who drafted the instrument.
❖ Drawee: This is a person who is instructed to pay by the drawer i.e. bank
❖ Payee: This is a person whose favour the instrument is drawn or a person who receives the
payments by a negotiable instrument. In other words, is the person intended by the drawer to
benefit from the instrument
❖ Indorsee: This is a person who possesses a negotiable instrument after the original payee
transfers it on his favour through the process of endorsement i.e. signing at the back of it and
thereafter delivering to him. Therefore, new person transferred with the payments is called
endorsee.
❖ Bearer: Means the person in possession of a bill or note which is payable to bearer.
❖ Bearer instrument: Is the negotiable instrument which specifies no particular person i.e.
whoever in possession of it is entitled to receive payment. Normally contains the statement
pay to bearer.
❖ Order instrument: Is the instrument which specifies a particular person to receive the sum
amount of money stated. For example: Pay Chauzembe Mambomengi.
❖ Endorsement: Is the process of signing a cheque or a bill by the original payee to transfer it
to another person (endorsee) who will receive the money on his behalf.
❖ Holder: A person in possession of a bill or note. He can either be the payee or endorsee or
the bearer
❖ Holder in due course: Is a person who holds a negotiable instrument before the original
payee presents it for payments. E.g. a person who has been transferred a negotiable
instrument by the payee.

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Transferability of Negotiable Instruments
This means effective transfer of an instrument to a third party so as to enable him to enforce it in
his own name, for example an instrument payable to Chautundu Ally will be said to have been
negotiated or transferred when Chautundu Ally transfers that document by way of endorsement
and delivery to the third person. As we have said earlier endorsement simply means the process of
signing at the back of the instrument, say cheque, by the payee and thereafter delivering it to
another person.
❖ In short, the transfer of negotiable instrument can only be by simple delivery or by

endorsement and delivery.
Characteristics of a negotiable instrument
In order to avoid dishonour or rejection and other legal liabilities attached to a negotiable
instrument like forgery a negotiable instrument must contain the following attributes;
• It must mention the parties to the negotiable instrument.

This shows the identity of the party who is paying and who is being paid in the negotiable
instrument. Otherwise the bank can pay wrong person.
• It must indicate the amount in figures and in words.
This shows how much the bank is permitted to pay to the person from the drawer’s account. This
normally helps to avoid forgery in amount to be paid by the drawee to the beneficiary.
• It must be signed by the drawer
This indicates his/her consent permitting the bank to make payments. This also indicates the
identity of the drawer. If the drawer’s signature is not genuine the law releases or discharged him
from any liability connected to the bill. (Section 23 of the Bills of Exchange Act)
• It must indicate the date of payment or preparing the bill
This is important because it is used to determine the expiration of the time of presenting the bill or
negotiable instruments. Section 40 of the Bills of Exchange Act requires the holders of bills to
present them for payments within a reasonable time and a reasonable time is that the time agreed
according to the rules governing business practise in a particular area.
• It must indicate the order of payment.

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This is an instruction to pay from the drawer to the bank. This is important because it indicates the
nature of the instruction guiding negotiability of the cheque. It helps the bank to know when the
bill does allow transfer/ negotiation and when does the order limit further negotiation.
Legal rights available to parties using negotiable instrument
The holder may sue on the bill in his own name (s.38 (a) Cap. 215)
• Right to endorsement i.e. a holder of a bill may transfer his title to another person, and such
other person (transferee) acquires the same title as the transferor had in the bill
• Right to be paid a sum certain in money at a fixed time or at a future time or on demand
Advantages of Negotiable Instruments
• Safety/security i.e. control theft

• They are portable i.e. easy to carry a negotiable instrument than the cash it represents
• They are very useful in international transactions which prefers most paper-based payments
• They are transferable i.e. the holder can easily transfer the bill to another person in the course
of business to meet his needs.
• They encourage growth of trade, since with a single instrument one can transfer large sum
of money without involving coins or notes. Thus, contributes to economic development
• Saves in case of shortage of coins/notes
• Accounts/records keeping
Disadvantages of Negotiable Instruments
• They have complex procedures of presentation i.e. requirements of many documents to verify
identity
• Dishonoured bill wastes time in business
• Forgery can sometime affect the bills.

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LECTURE NO. 9:
THE LAW OF INSURANCE IN BUSINESS ACTIVITIES
Insurance law is a branch of business law which deals with the study of principles of law governing
insurance business i.e. formation and performance of insurance contracts.
Law applicable
In Tanzania insurance is governed by the Insurance Act of 2009.
Insurance is a guarantee given to a person by the insurance company/ insurer where by the insurer
promises to compensate a person if a particular risk occurs e.g. a guarantee to compensate a car if
an accident occurs.
Definition and illustration of key terms
Premium is the amount of money contributed which a person/ insured pays to the insurance
company annually i.e. is the consideration paid in insurance. In other words, a premium is a
consideration in the contract of insurance tendered by the insured or his agent to the insurer
(insurance company) for their undertaking to pay the sum insured on the happening of the event
insured against. Different methods are used in determining the premium depending on the risks of
which are graded in classes, for example first, second, third and bad risks. It has to be noted that
the premium need to be paid before the policy/contract commences, and once is paid a legal
binding contract is concluded between the insured and insurer. Therefore, insurers become liable
for any loss happened to the property insured.
Days of grace refers to the days given by insurer to the insured requiring him to pay premiums
which are not paid when a renewal date is due. If premiums are not paid within the days of grace
the policy/contract lapses and the insurer is not liable if loss to the insured property occurs.
However, the insurer is liable for losses happening during the days of grace given to the insured
provided that other conditions of the contract have been observed.
Cover note is a temporary insurance contract given to the insured before the permanent insurance
policy given. It can also be described to mean a document evidencing a temporary insurance
contract while the risk is being assessed. Cover notes are either issued by the insurer or their agents

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on their behalf. A person who is authorized by the insurer to issue cover notes on their behalf is
called cover holder.
A cover note contains the name and address of the proposer/insured, conditions of a policy to be
insured, duration of the cover, description of risk insured against and the sum of money insured. It
is signed by a responsible officer or any other officer authorized to sign a policy may sign the
cover note.
Insurance policy simply means an agreement/contract formed between the insurer and insured
which contains the terms and conditions governing their duties and liabilities. Every policy of
insurance contains conditions and have to be complied with, the breach of which entitles the
injured party to repudiate the policy and claim for any loss suffered.
Insured is a person who buys insurance/ is a person who is protected by the insurance contract. In
other words, is the party seeking protection from the insurance company. The insured must have
capacity to contract that is to say must be sane and of age of majority (in case of natural person)
while a legal person must be incorporated or registered company.
Insurer is the insurance company provides people with insurance service. Insurer is also known
as underwriter or assurer. Again, the insurer must be competent to enter into contract otherwise
the contra shall be void.
Risk means an economic hazard; whose occurrence is uncertain (it may or it may not occur). When
this risk attaches to the item insured, then loss occurs. Examples of risks are such as fire, accident,
theft etc. The risk in this meaning is that which is contained in the insurance contract which was
agreed by the parties and that if causes the loss to the property insured the compensation shall be
payable by the insurer to the insured.
Reinsurance is a process whereby an insurance company purchases security to another insurance
company (reinsurer) by transfers a portion of its risks so that it can assist in compensation when
the loss of the subject matter insured occurs.
Double insurance is insurance whereby the subject matter is insured in two or more insurance
companies i.e. the insured property is protected from risk by two or more insurers.
Types of Insurance Contracts
There are many types of insurance in Tanzania including the following;
• Life insurance

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• Fire insurance
• Marine insurance
• Motor vehicle insurance
• Health insurance
Fire Insurance
This is the type of insurance to cover properties from fire risk e.g. insurance to cover a warehouse,
petrol station or vehicle from fire.
Marine Insurance
This is the type of insurance paid to cover goods transported through sea or ocean transport. E.g.
to ensure goods over risks resulting from submerging ship, high sea piracy etc.
Motor Vehicle Insurance
This is the type of insurance to protect a car and passengers from accident risk. In case the car gets
an accident, the insurance company will compensate the insured the car and pay loss to the injured
passengers.
Health Insurance
Is the type of insurance where by the insurer agrees to cover the insured medical expenses if he or
she falls ill on a particular disease covered by the insurance.
Life Insurance
Unlike insurance in property, life insurance is a class of its own, and hence, it is separately treated.
This is a type of insurance to protect the beneficiaries of a person after his death eg insurance to
pay some amount of money to the family of a person after his death or to pay burial expenses upon
death of the insured person. In other words, life insurance is a contract to pay a certain sum of
money on the death of a person or after attaining a certain age in consideration of payment of
premiums.

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Formation of insurance contract
To have an enforceable contract of insurance, all of the essential elements of a binding contract
must be present such as parties, offer and acceptance, capacity, consideration (premium), free
consent and legality. It has to be noted that an offer to a contract of insurance is made by the
insured by filling in special printed forms prepared by the insurer. Once that is done the insurer
will then has discretion to accept or refuse the offer given by the insured. Consider the following
procedures of formation of insurance;
Procedures of formation of insurance
The process of formation of insurance contract passes through several stages. Among of the
important stages include the following.
Filling the insurance proposal form i.e. this acts as an offer made by the client to the insurance
company. An offer is made by filling in special printed forms prepared by the insurer. At this stage
the insured has two duties namely 1. acting honestly and in utmost good faith (uberrimae fidei)
i.e. to disclose all the material facts surrounding the subject matter of insurance and 2. a duty of
non-misrepresentation which means to give correct information pertaining to the subject matter to
be insured.
Assessment of the proposal forms by the insurance company i.e. in this stage the insurance
company examines the details given by the client in the insurance proposal form to see whether
they can accept to insure the client or not depending on the information given in the proposal form.
Calculation of the premium to be paid by the client: in this stage the insurance company calculates
the estimated amount of premium/ contribution to be contributed by the client depending on their
assessment of the proposal form which shows the insured subject matter, its amount and nature of
risks.
Payment of the Premium: if the clients agree to the estimated premium, he is requested to pay the
amount in order for the insurance company to prepare the insurance cover note.
Issuing the cover note: the insurance company issues a temporary contract of insurance called a
cover note which indicates that the client is insured pending issuing the insurance policy. During
this time, the insurance company makes further assessment to discover any information which
could have been withheld by the insured before issuing a permanent insurance policy.

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Issuing insurance policy: this is the final stage whereby the insurance company issues the
permanent insurance contract.
It has to be noted that the essentials of insurance are the same with those studied in the law of
contract. For example, offer and acceptance, consideration, capacity to contract, legal subject
matter, etc.
General Principles of Insurance Business
Utmost good faith
This is the principle which states that, the parties to the insurance contract must disclose all the
important information/material facts which may affect the insurance contract i.e. to state the true
price of the properties, state the true age etc. This will help the insurer to calculate the rate of
premium.
Insurable Interest
This is a principle which states that, a person is only allowed to ensure those properties which he
owns or have close connection with. E.g. only the cars which he owns or people who are his close
relatives
Principle of Indemnity
This is the principle which states that, insurance contracts are for compensation but not profit i.e.
a person to insurance is only paid the amount of money for compensating the damaged properties
but not less or more. A person should not be allowed to benefit more than what he deserves to be
compensated.
Principle of Subrogation
This is a principle which states that, after paying the insured, the insurance company steps in the
shoes of the insured to claim any compensation from the person who caused the loss and ownership
of the remains of the properties which are already paid for i.e. after paying the insurance, the
insurance company acquires all rights on behalf of the insured like taking the remains of the
properties involved in the risk which the insurance company has already paid to the insured.

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Proximate cause (proxima causa)
This principle states that only the nearest cause of a loss is relevant for consideration and not any
remote cause of such a loss (causa proxima non-remota spectator). The insurer may pay
compensation for the loss suffered by the insured after proving that the peril (risk) insured against
is the proximate cause of the loss. This principle is applicable to all contracts of insurance except
life assurance. The purpose of the principle is to find out the immediate cause of the loss.
Contribution
The payment made by each of the two or more insurance companies in respect of the loss or
damage of the subject matter (property) insured in both sides. Here the insurers get together to pay
compensation to the insured for the loss suffered.
Insurance Contracts and other Contracts
Broadly speaking, the insurance contracts and the law of contracts share the same elements in their
formation as per law requires. However, the contract of insurance is distinguished from other
contracts including simple contracts (informal contracts) in that: It is a contract of utmost good
faith (uberrimae fidei) where the insured is required to disclose all the material facts of the object
to be insured for the insurer to assess the risk. The insured must have a legal right (insurable
interest) in the subject matter of insurance, the contract of insurance is the contract of indemnity
i.e the insured is not supposed to gain or lose in the insurance contract, other basic principle which
apply to the contract of insurance is subrogation which is the right of the insurer to step into the
shoes of the insured after having settled the claim. Contribution is the right of the insurer to call
upon other insurers who had insured the same risk to come up and settle together the claim. And
proximate cause is another basic principle applicable in insurance contracts in determining
whether or not the insured event was the proximate cause of the loss suffered. These principles
have already discussed, therefore take and note.
Furthermore, an offer made under insurance contracts is of its own kind i.e. made by filling in
special printed forms prepared by the insurer something which is not obvious to other contracts.

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The Discharge of the Insurance Contract
The contract of insurance may be discharged/terminated in the similar way as that of ordinary
contract we have discussed in the previous study unit. It includes but not limited to complete
performance, mutual agreement, breach, destruction of the subject matter, etc. When there is a
discharge of a contract, the parties are released from their respective obligations and rights.

Page 85

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BUSINESS LAW FOR DIPLOMA

Lecture 2: The Court System in Tanzania.

Lecture 3: The law of contract in business transactions.

Lecture 4: The contract of Sale of Goods in business transactions.

Lecture 5: The Hire Purchase agreements in business activities.

Lecture 6: The role and operations of an agency in the business environment.

Lecture 7: Forms of business associations (partnerships and companies) in commercial activities.

Lecture 8: The law of negotiable instruments in commercial transactions.

Lecture 9: Principles of insurance law in business transactions.

PREPARED BY KATUMBAKU, Frank C

What a law is:

govern any society.

to be done and forbids the opposite.

and enforced among the members of a given state.

PREPARED BY KATUMBAKU, Frank C

behavior of human beings.

may lead to the punishments or compensation.

• Law must be rules or principles with legal force.

• The law should attract punishment in case of breach.

• The law should provide a solution over a certain matter.

important sources or origin of the law separately hereunder.

PREPARED BY KATUMBAKU, Frank C

article 64(5) of the constitution of the United Republic 1977.

government and sets out its most fundamental principles.

parliament. Apart from principal legislations, there is subsidiary legislation

ii. Subsidiary Legislations

PREPARED BY KATUMBAKU, Frank C

general as having the force of law.

common laws, doctrines of equity and statutes of general application

i. The common law

inspired by the ideas of natural justice.

PREPARED BY KATUMBAKU, Frank C

cover the matters at a domestic level.

Importance of Law to the Society:

PREPARED BY KATUMBAKU, Frank C

Importance of Business Law:

PREPARED BY KATUMBAKU, Frank C

What a Court is:

What a court hierarchy/ system is:

PREPARED BY KATUMBAKU, Frank C

1. The Court of Appeal of the United Republic of Tanzania

PREPARED BY KATUMBAKU, Frank C

PREPARED BY KATUMBAKU, Frank C

✓ High court of Tanzania, Land Division

✓ High Court of Tanzania, Labour Division

PREPARED BY KATUMBAKU, Frank C

✓ High Court of Tanzania, Economic and Corruption Crimes Division.

This is a recent established court to handle economic and corruption cases.

The Court of Appeal of Tanzania

Different Tribunals as Quasi-judicial Bodies:

PREPARED BY KATUMBAKU, Frank C

1. The District land and housing tribunal

The District Land and Housing Tribunal

The Ward Tribunal

Military Tribunal (Court Martial)

PREPARED BY KATUMBAKU, Frank C

The Marriage Conciliation Boards

Tax Revenue Appeals Board

The Environmental Appeals Tribunal

Why Administrative Tribunals?