Business Law and Ethics: Formation of Contractual Relationships and Enron Fraud Scandal

This study material covers the topics of formation of contractual relationships and the Enron fraud scandal. It explains the basic standards of behavior expected in business law and the principles of business ethics. It also discusses the rules and regulations governing contracts, the rights and obligations of parties, and the remedies for breach of contract. Additionally, it provides an overview of the Enron fraud scandal, including the background of the company, the timeline of its fall, and the criminal charges faced by its executives.

Business Law and
Ethics

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
Formation of contractual relationships........................................................................................3
TASK 2............................................................................................................................................6
Enron fraud scandal.....................................................................................................................6
Corporate Governance................................................................................................................9
Sarbanes-Oxley Act, 2002..........................................................................................................9
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Business law refers to the basic standards of the behaviour which is expected by the
companies and other business forms to follow. It is also called the commercial or corporate law
that applies to rights, obligations, conduct and relations of the person and business which is
engaged in trade, sales, merchandising and commerce. Business ethics are different from law as
the former refers to the principles and guidelines that tell people as to how to behave and the
later are the rules and regulations which are binding on people (Haugh, 2019). Contract law is a
part of corporate law which regulate the contracts between different people and businesses and
tells the rights and obligations of the parties. This report shall deal with the case study on
formation of contractual relationships and further it will cover Enron fraud scandal.
TASK 1
Formation of contractual relationships
A contract law may refer to the rules and regulations that govern and regulate the legal
contract between the parties. It states the rights, obligations, conduct and relation of the parties
who have entered into a contract. In case of breach of contract, the law provides the remedies to
the aggrieved party to compensate the damages resulted from breach.
An agreement which give rise to the legal obligations between 2 or more parties is a
contract. It must be enforced and recognised by the law to have a legal binding effect. Under
common law, for creating a contract, three essentials are needed, that is, an agreement,
consideration and the contractual intention to enter into a contract (Andrews, 2016). A contract
may include express or implied terms. The former means those terms which are set by the parties
in their agreement and the later refers to those terms which are either created by any custom and
usage or by any statute or law.
For reaching an agreement, it is necessary that one party must make an offer which
should be accepted by the other. An offer must be defined as an expression to willingly enter into
a contract on some specified terms. It is made with an intention that once accepted by the other,
it will be binding on the parties. An acceptance may be referred to as the final assent to the offer
and all its terms must be accepted for a valid acceptance.

Consideration under common law refers to the value of something to make a promise
enforceable. A consideration must not be adequate and be sufficient. It must be given by the
promisee in order to fully accept the offer.
A legal intention is necessary to create a contract if the agreement is supported by the
consideration. In simple words, the parties shall have an intention to create a legal binding
contract with each other.
The administration of justice in England is administered by the sub-ordinate and superior
courts. Each court is responsible to hear the civil and criminal cases. The superior court in
English legal system are the Supreme Court, High court and Court of Appeals. The Supreme
Court is the highest court of appeal for all kinds of case. Before 2005, this task was entrusted to
the House of Lords but after the Constitutional Reform Act of 2005, Supreme Court was
established and it replaced the former court (ALPA, 2019). Other superior court is the High
Court of Justice which functions as the appellate court for civil and criminal cases and also act as
civil court of first instance. It has three divisions mainly Chancery, Queen's Bench and Family
divisions. The last is Court of Appeals which is entrusted to hear appeals from tribunals and
other courts. It has two divisions, that is, criminal which hears appeal from Crown court while
civil division hear appeal from County courts and High court. The Crown Court hears both
appeals and original criminal cases and is also responsible to hear civil cases of limited amount.
The sub-ordinate courts include County Courts, Family Court, Magistrate Court and
Youth Courts. The County Court has a civil jurisdiction which is presided by the Circuit or
District judge. The Family Court has jurisdiction to deal with family matters. The Magistrate
Courts hear the criminal cases and is the first court where criminal proceedings are initiated. The
Youth Courts hear criminal cases of offenders who are aged between 10-17 years.
Under the given case scenario, the parties are advised to file a case in County Court if
their claim is minor and in case of large amount, they are advised to file a suit in High Court of
Justice. Any party, if aggrieved by the decision of sub-ordinate court may file an appeal to the
Court of Appeals (Downe, 2020).
For the contract between Hilary and Eleanor, Hilary made an offer to general public
through advertisement to sell the printing press for £15000. In response to the above offer,
Eleanor counter offered to buy it at £10000 to which Hilary again offered Eleanor to purchase it
at £13000. Eleanor did not responded and Hilary accepted the former offer to sell it at £10000

but Eleanor did not responded. In this given case, there is no acceptance to the offer so there is
no binding contract between Hilary and Eleanor. In a similar case of Hyde v. Wrency, the Court
held that making a counter offer results in rejection of the offer which cannot be further restored
or accepted. For constituting a valid contract, there must be offer, acceptance, consideration and
intention.
For the contract between Hilary and Amy, the former offered to sell the computer at
£1000 through letter and the morning when Amy received the letter, she send the letter of
acceptance. But before it could be delivered, she send a fax to reject it. Under this, the rejection
was received first and acceptance was received later but send first, so there is no binding contract
between the parties as rejection was first communicated.
For the contract between Hilary and Olivia, the painting of a famous artist was put on
sale through a large notice on the window of the shop. The offer stated that it would be available
to the first customer at £1. Olivia waited for 2 days for the commencement of sale and when she
entered the shop, Hilary told her that the sale did not exist now. So in this case, the sale is a
invitation to treat and not the offer so there is no binding contract between them. In a similar case
of Partridge v. Crittenden, the Court held that the advertisements are included under invitation to
treat and not under offer and hence they are not binding (Noussia, 2019).
The contract law defines various remedies to the parties who have suffered loss due to
breach of contract. Remedies are given to parties to compensate the loss suffered by them. The
law of contract provides different remedies like damages, specific performance, injunction,
repudiation and rescission. Under the given case scenario, the parties my either opt for one in
order to claim the remedy.
In case of Hilary and Eleanor, the aggrieved party may claim damages as a remedy.
Damages are awarded to compensate the party from the loss if it has suffered any injury due to
the breach. In order to claim damages, the party aggrieved must show that actual loss has been
suffered by the party, the type of loss must be recognised and must not be too remote that
damages cannot compensate it. The onus is on the aggrieved party to prove the above essentials
(Gu and Zhang, 2017).
In case of Hilary and Amy, the party aggrieved may claim either damages or injunction
order. The later remedy is claimed to restrain the party from committing the breach. There are
many types of injunctions available like interlocutory which is claimed to regulate the position of

the parties, permanent which is permanent in nature and is claimed after disposal of case,
prohibitory which prohibit the defendant to commit any act of breach and last is mandatory
which requires the defendant to reverse the effect of breach (Beale, 2020).
In case of Hilary and Olivia, the aggrieved party may claim specific performance of
contract. This remedy is claimed when damages alone cannot work to compensate the party and
it compels the defendant to fulfil the terms of the contract. For claiming this remedy, the
claimant must claim the remedy with 'clean hands', that is, it must show that performance of
contract is essential to cover the loss suffered due to breach of contract.
TASK 2
Enron fraud scandal
Background of the company
Enron Corporation was a public company which was founded in United States of
America in 1985 by the merger of two companies Houston Natural Gas and InterNorth. The
company used to deal in natural gas, electricity, telecommunication and pulp and paper. The
organisation claimed the revenues of around $101 billion in 2000. The corporation was even
listed for 6 years as the Most Innovative Business of America from 1996-2001 in Fortune
magazine. It had approx 21000 staff employed in the organisation. The company had total assets
of worth $68 billion before its bankruptcy (Kalinowski, 2018). The founder of the Enron
Corporation was Kenneth Lay.
Timeline- Fall of Enron
When the company was formed with the merger of two other companies, the USA
government enacted several series of law which deregulated the natural gas sale in 1990s. As a
result, the corporation lost its rights to operate pipelines. The company's Chief Operating Officer,
Jeffrey Skilling transformed Enron into trader of the energy derivative contracts where the
company can act as intermediary between producer of natural gas and customers. Under the
leadership of Jeffrey, the corporation was able to earn huge profits through this trading. Jeffrey
started emphasizing on the aggressive trading and hired top MBA candidates into the company to
create a competitive environment. He also recruited Andrew Fastow who later become the Chief
Financial Officer of the organisation. He was entrusted to see the investments of the corporation
while Jeffrey oversaw the trading operations.

During the bull market of 1990s, the organisation saw rapid growth as the company was
able to create the market for anyone who was willing to trade about anything. So Enron started
trade derivative contracts for many commodities like coal, electricity, steel and paper.
EnronOnline was also launched to build a broadband telecommunication network.
The boom years of the company came to an end when the company faced heavy
competition in energy business due to which its profit has fallen down rapidly (Seijts, 2017). So
under the pressure of shareholders and investors, the executives of the company began dubious
accounts practice which included 'mark to market accounting' which helped company to show
illusion of high profits. And on the other hand, the company started engaging in partnerships to
hide its trouble assets through Special purpose entities. This helped the company in transfer of its
assets to SPEs so that the losses could look less severe and they can hide the toxic asset and
debts from their creditors and investors. Andrew Fastow looked into the SPEs and during these
years, an auditor LLP, Arthur Anderson served as the auditor and consultant of the Enron
Corporation.
The downfall of Enron came in mid 2001 when various analysts started digging the
financial statement of the corporation which were released publicly. On the other hand, Kenneth
Lay resigned from the post of Chief Executive Officer and Jeffrey Skilling took his
responsibility. But Kenneth remained the member of the Board of Directors. After few months,
Jeffrey also resigned from his office stating 'personal reason' as its reason for resignation and
Kenneth again resumed the office. This resulted in questioning the financial health of the
company and an internal investigation was initiated by signing the memorandum by Vice
President, Sherron Watkins who warned Kenneth regarding the accounting frauds being
committed internally into the organisation and simultaneously, the Securities and Exchange
Commission (SEC) began the formal investigation to look into the transactions of Enron
Corporation and SPEs (Bhasin, 2016).
Investigation by Securities and Exchange Commission
During the investigation, the stock prices went down from $90 to less than $1 in
November 2001. Kenneth Lay and Jeffrey Skilling resigned from the office and Andrew Fastow
was also fired after two days of SEC investigation. Andersen told its auditors to destroy tons of
documents of Enron Corporation except the basic ones. The company suffered $618 millions
loss. During the course of investigation, executives of Enron confessed that they were hiding

their huge losses of $586 millions from 1997. This caused Securities and Exchange Commission
to expand their investigation to Arthur Andersen LLP.
In early November 2001, the corporation disclosed that it has been subject to purchase by
its rival company, Dynegy for $9 million. But later on, Dynegy announced that there is no
merger with the Enron. The company files for bankruptcy protection in December 2001. The US
Bankruptcy Court approved the Enron's plan for reorganization and the new BOD changed the
name of the company to Enron Creditors Recovery Corporation. The New York Stock Exchange
suspended the trading of shares of Enron and simultaneously the company ended the partnership
with Arthur Andersen LLP.
Criminal charges
The Justice department of USA began the criminal investigation against the Enron
Corporation. The accounting firm, Arthur Andersen LLP was held liable for obstructing the
justice and the jury gave guilty verdict against the firm (Chapple, Walsh and Shen, 2020). But
later the Supreme Court reversed the verdict but the consequences of this scandal forced the firm
to shut down its working.
The court held Jeffrey Skilling guilty of 35 counts of insider trading and fraud. He agreed
to become informant so that he can be subject to reduced punishment. Kenneth Lay was guilty of
six counts of fraud and conspiracy but before the sentence was passed, he died of heart attack.
Andrew Fastow was found guilty of 78 counts which included conspiracy, money laundering and
fraud. He was imprisoned for six years.
What happened later?
 Many lawsuits were filed by the investors and shareholders against the corporation. The
group of banks were asked to pay the settlement of $7.2 billion for participating in
accounting fraud. Skilling filed an appeal for revering the verdict of lower court but the
Supreme Court rejected it.
 In 2013, June The Federal court reduced the sentence of Jeffrey Skilling when he agreed
to stop challenging its verdict and forfeited $42 million which shall be distributed to
victims of this scandal (Daiser, Ysa and Schmitt, 2017).
 In December 2015, SEC announced that it has obtained summary verdict against Jeffrey
Skilling to permanently barred him to serve as director or officer of any public company.
And in 2019, Jeffrey Skilling was released from prison after serving 12 years.

Analysis of the Enron Scandal
This scandal impacted the whole nation in terms of financial stability. Enron Corporation
has been a massive fail due to the lack of check and balance in the decision making process. The
undefined code of conduct and ethical standards resulted in giving rise to legal issues. The lack
of review process in the top management level created an environment which was conducive to
involve the goals of the organisation. The failure of management, analysts, bankers, regulators
and auditors have given rise to this scandal which has shaken the accounting standards prevailing
in the country.
Corporate Governance
This concept is made up of multiple facets which includes securities, legal and
accounting rules which are designed to protect interest of the shareholders in a very transparent
way. It is a combination of laws, processes and rules which operate, regulate and control the
businesses. The corporate governance includes the external and internal factors which affects the
interest of stakeholders like shareholders, management, suppliers, customers management and
government regulators of any company.
` The main purpose of this concept is to provide a prudent and effective management so
that success is delivered to the company (Bhabra and Hossain, 2017). It is a system which direct
and controls the companies and the top management like board of directors are the responsible
for governance of the organisation.
This concept got its relevancy after the Scandal of Enron Corporation. This gave a light
on the deficiencies of the corporate governance therefore a framework of strong corporate
governance is important so that interest of the shareholders and investors is protected and their
confidence is build in the governance of the company.
Sarbanes-Oxley Act, 2002
After the massive failure of Enron Corporation, the government immediately passed a
law in 2002 to prevent further financial disasters. The main aim of this legislation was to protect
the shareholders from the fraudulent financial reporting by the companies. It focuses on bringing
the accurate and reliable disclosures from the corporations so that there is transparency between
the investor and the company's financial health.
The Act establishes the Public Company Accounting Oversight Board which is entrusted
to oversee accounting industries. This Act holds the CEOs responsible for the accounting frauds

and audits. It places punitive penalties and punishments for the accounting errors and frauds
(Lagasio and Cucari, 2019).
CONCLUSION
From the above assignment, it is concluded that the business law plays a prevalent role in
regulating the businesses and companies to function smoothly and effectively. The law of
contract governs the legal contracts between the parties by stating the rights, obligations, conduct
and relation of the parties. It provides various remedies to the parties who have suffered loss on
account of breach of contract. The case study discussed above provides that there is no binding
contract between the parties and if they file any suit they are subject to various remedies like
damages, specific performance of contract, injunction, etc. (Heidemann, 2016). Further it is
summarised that Enron scandal has shaken the accounting standards of the country. This massive
failure has lightened the government to fill the gaps which would cause such massive scandals.
In response to various scandals like Enron, the legislatures enacted the law called Sarbanes
Oxley Act so that it can bring transparency in the accounting system and the interest of the
stakeholders are also protected.

REFERENCES
Books and Journals
ALPA, G., 2019. The Effect of Fundamental Rights on Contract Law in a Comparative
Perspective. European Business Law Review. 30(2). pp.301-318.
Andrews, N., 2016. Sources and General Principles of English Contract Law. In Arbitration and
Contract Law (pp. 165-175). Springer, Cham.
Beale, H., 2020. Transnational Contract Law: Lando’s Contribution and the Way
Forward. European Review of Private Law. 28(3).
Bhabra, H.S. and Hossain, A.T., 2017. The Sarbanes-Oxley act and corporate
acquisitions. Managerial Finance.
Bhasin, M.L., 2016. Fraudulent reporting practices: the inside story of India's
Enron. International Journal of Management Sciences and Business Research.
Chapple, E., Walsh, K. and Shen, Y., 2020. Corporate Culture and Fraud. In Corporate Fraud
Exposed. Emerald Publishing Limited.
Daiser, P., Ysa, T. and Schmitt, D., 2017. Corporate governance of state-owned enterprises: a
systematic analysis of empirical literature. International Journal of Public Sector
Management.
Downe, A., 2020. From Relief to Compulsion and Back Again in Contract Law. European
Review of Contract Law. 16(3). pp.410-431.
Gu, Y. and Zhang, L., 2017. The impact of the Sarbanes-Oxley Act on corporate
innovation. Journal of Economics and Business. 90. pp.17-30.
Haugh, T., 2019. Modeling the Message: Closing the Knowledge Gap in Business Law and
Ethics Classes. Journal of Legal Studies Education. 36(2). pp.159-188.
Heidemann, M., 2016. Identities in contract: merchant law in Europe and the future of European
contract law. Maastricht Journal of European and Comparative Law. 23(4). pp.667-
701.
Kalinowski, C., 2018. Topical Analysis of the Enron Emails Using Graph Theory.
Lagasio, V. and Cucari, N., 2019. Corporate governance and environmental social governance
disclosure: A meta‐analytical review. Corporate Social Responsibility and
Environmental Management. 26(4). pp.701-711.
Noussia, K., 2019. Transparency in the Insurance Contract Law of England. In Transparency in
Insurance Contract Law (pp. 573-590). Springer, Cham.
Seijts, G., 2017. Enron Explained (Reading). Leadership in Practice: Theory and Cases in
Leadership Character.