Business Law and Ethics: Contract Law Principles and Enron Fraud

This case study delves into the intricacies of contract law and ethical considerations, examining both theoretical principles and real-world applications. The first part analyzes hypothetical contractual scenarios involving Hillary, Amy, and Olivia, focusing on offer, acceptance, and legal remedies within the English legal system. It assesses the validity of contracts and advises on appropriate court actions. The second part provides a detailed background of the Enron scandal, evaluating its impact on ethical corporate governance and the subsequent implementation of the Sarbanes-Oxley Act. It discusses the accounting fraud, corporate malpractices, and audit failures that led to Enron's downfall and the regulatory reforms enacted to prevent similar occurrences.

Business law and ethics

Table of Contents
INTRODUCTION...........................................................................................................................2
TASK 1............................................................................................................................................3
Contract law the blue prints of a contract....................................................................................3
Court system in relation to the English legal system...................................................................4
Binding contracts in context of case study..................................................................................5
Various remedies available to the parties....................................................................................6
TASK 2............................................................................................................................................7
Enron Fraud Scandal: Background..............................................................................................7
The case in context of ethical corporate governance...................................................................8
Sarbanes-Oxley (SOX) Act 2002 prompted by the scandal........................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Contract law can be defined as a body of law instated to protect the rights and obligations
of the contractual parties which are under a contract. It basically governs the interpretations,
potential conflicts, validity and relationship among two or more people especially about
provision of services, sale of goods, exchange or transfer of ownership or interests. This essay
will take into account the case study of contractual relationship and define contract law, describe
briefly the blue prints of a contract, explain the court system in context of the English legal
system, giving advice to the parties involved in the given case study regarding the court action to
be pursued. In the first task, individual essay, will advise Hillary regarding binding contracts that
are among her, Amy and Olivia. Apart from that various remedies for various parties will be
discussed. The second task, individual report will cover the background of the Enron scandal,
assess the case in context of ethical corporate governance and Sarbanes-Oxley Act. Enron
Corporation, founded in 1985, was an American company for commodities, energy and services
company based in Texas. At the end of 2001, It came out that Enron's financial condition was
undergoing a systematic, creatively planned and institutionalized accounting fraud and
corruption which led to Enron scandal and the company went bankrupt and dissolved facing
legal actions.
TASK 1
Contract law the blue prints of a contract
The law of obligations encompasses contract, tort and restitution and certain obligations
arise in the contract law when one party makes an agreement with other person or party with the
intention that it has to be legally binding. Most contracts are made in the context of intent to
create legal relationships and primarily for commercial relationships like sale and purchase of
goods and services. Contract law is a body of law for protection of rights and obligations of the
contractual parties under a contract. It governs the interpretations, validity and relationship
among two or more people especially about provision of services, potential conflicts, sale of
goods, exchange or transfer of ownership or interests (Austen-Baker, 2017). A contract is created

when there is involvement of two or more parties when there has been an acceptance offer and a
form of consideration such as payment is passed from one of the parties to the other. In the case
of meeting this condition or when otherwise agreed, the conditional contract becomes
enforceable. The acceptance of any offers can be done by conduct or by words, in the relation
to offeree objectively inferring that there has been an agreement to the offerer's terms. An
enforceable contract needs a level of certainty regarding its terms and the terms of the contract
has to be clearly apparent to the involved parties. If there has been no consensus ad idem or
agreement on identical terms, then the court of law cannot interpret or abide legal action on
contract laws. If a contract is illegal, it can not be enforced by any tribunal or court and might be
termed as a void contract. Although, court differentiates between circumstances if the purpose of
contact is illegal and if innocent party gets a legal remedy in certain cases. Mistakes and
misinterpretations likely tend to make contacts voidable and can be legally terminated
(Cartwright, 2016).
The brief blueprint of the contact law of UK consists of Intention of creating legal
relations between family and friends and commerce and making basic commercial or social
arrangements accordingly, Formation of a contract, Offer and acceptance, Acceptance of an offer
(unilateral and bilateral contracts), Termination of an offer, Consideration of an offer. The
Contents of a contract are terms that are implied to the contracts are implications by statute law,
face and common law. And major terms incorporated in a contract are incorporation through
course of dealing, of written terms of notice and by signature. The contracts can be classified as
Statutory, common law and parties' own classification. Contracts may pertain to
misrepresentation like fraudulence, negligence and innocence. Breach of a contract can be in the
form of anticipatory breach, fundamental breach and the effect of repudiation (Harder, 2020).
Court system in relation to the English legal system
The court system according to English Law System describes the law as civil law and
criminal law. The contract law comes under civil law, which is defined as the constitution of
obligations and rights a person has with other individual or groups. A remedy can be claimed by
the person from the wrongdoer if formers rights have been infringed. The civil law basically
provides means for obtaining compensation by the injured party (Huxley-Binns, Martin and
Frost, 2017).

The civil courts in the English legal system consists of the main courts and other courts.
Primary courts from the highest level of hierarchy are Supreme Court, Court of Appeal, High
court for Justice and county courts at the local level. Other courts are Magistrates courts,
Employee appeal tribunal, European court of justice and European court for Human rights.
Initially the claimant has to register the case in the county courts. Apart from insolvency and
probate, the appeal has to be made in the court of appeal. In the high court of justice, the issues
of contracts and torts are dealt in the Queens Bench Division and the power of judicial review
lies with the Queens Bench Divisional court. A three track system is practised for contract and
tort claims in the county and high courts. For small claims up to £5,000, small claims track is
allocated (Wilson and et.al., 2020). A fast track court provides moderately valued claims in the
range of £5,000 to £25,000. A multi-track court is allocated for higher claims of over £25,000. In
case of Hillary, for her contractual relationship case with Eleanor, she has to pursue county court
initially and then and higher court in the fast track claims. In case of Hillary's incident with Amy,
small tracks court are pursued and for the case of Hillary and Olivia, county court has to be
approached (Andrews, 2016).
Binding contracts in context of case study
A binding contract refers to the legal agreement that is enforced by the court of law in the
event when parties under a stipulated clause tend to cause breaches. It is a legal obligation of the
parties that are addressed by judicial system in cases of violation. These agreements need to meet
certain criteria to be considered binding. Things that are not considered a contract are invitations
to treat, agreements in principles, agreements that lack definitive meaning, contracts to negotiate
etc. A binding contract law has offers and prerequisites for a valid offer. According to the high
court in England and Wales, the elements that should be present for contracts to be legally
binding are intention of legal relations by both parties, offer by one party capable of acceptance
by other, acceptance of the offer, a mutual promise by both to provide valuable consideration
(Pierce, 2018).
In the first case of Hillary advertising her printing press for sale of £15,000 where
Eleanor offered to purchase it for £10,000, the negotiation is going on as Hillary wrote to offer
£13,000 and then £10,000, but didn't hear from Eleanor. This does not follow the prerequisites of
contract as there was no acceptance of offer or any written mutual promise of exchange of

consideration. A lack of response is not a considered as acceptance. Therefore, there doesn't exist
any binding contract of Hillary with Eleanor.
In case of Hillary writing to Amy, offering the sale of office computer for £1,000, where
Amy wrote a letter to Hillary accepting to buy at the mentioned price by sending a post. There
exists a legally binding contract between both the parties as the four elements of a contract are
being met. The communication gap between both the parties arise when Amy changed her mind
and sent Hillary a fax stating to ignore the post when it arrives. In case of communication by
post, the acceptance takes effect as son as the post is sent and communication through text, email
or fax that are of instantaneous nature, the acceptance takes place at the time of receipt. So as
soon as Amy sent the acceptance, they entered into a contract.
In the case of Hillary and Olivia, Hillary puts notices on the windows of her art gallery,
stating that a valuable painting by an artist would be sold for £1 to the first customer entering the
gallery at the commencement of sale. Olivia waits for two days to get the painting, but Hilary
refuses the sale. There is no legal contract established as there has been no communication on the
acceptance of any offer (Smits, 2017).
Various remedies available to the parties
A breach of contract can affect both the parties involved in a contractual relationship, and
the legal system has derived various remedies regarding it. But in the courts where there is
limited jurisdiction, the primary remedy is an award for damages.There are various other
remedies available in case of such breach of contracts such as Compensatory damages which
consist of general and special damages. The remedies are the refund, reimbursement in full or
partial according to the situation. Compensatory damages are intended to cover the cost of actual
loss. Other damages are termed as punitive damages which are given to punish the wrongdoer
through penalty, and are awarded rarely.
In the case of Hillary and Eleanor there was no binding contract, therefore no remedy can
be given to both the parties and also in the case of Hillary and Olivia where there has been no
intention of entering into a legal contract.
But in the case of Hillary and Amy, the non-acceptance of the written offer can land
Olivia into trouble as she is legally liable to purchase the office computer and denying the
purchase later on can create problems in the contractual relationship. Hillary can be at a loss if

Amy doesn't go forward with the purchase. Therefore, she can claim compensatory damages for
the breach of contract by Amy (Herian, 2020).
TASK 2
Enron Fraud Scandal: Background
Enron was founded in 1985 as a merger between two small regional companies
InterNorth and Houston Natural Gas. It became a major corporation for natural gas, electricity,
pulp and paper and communications, while generating a high revenue of about $101 billion in
financial year 2000 making it one of the biggest corporations of the time. Enron used to
employee more than 29,000 workers, claimed a high market value and was labelled as America's
most innovative company by Forbes. At the end of 2001, It was revealed that Enron's financial
condition was suffering a systematic, creatively planned and institutionalized accounting fraud
and corruption.
The Enron scandal was publicized in the year 2001, resulted in the bankruptcy of the
Enron corporation and dissolution of Arthur Anderson, one of the leading accounting
partnerships across globe. This is also considered as America's largest reorganization and
bankruptcy and biggest audit failure that crumbled the wall street. The scandal ripped apart the
concept of ethical corporate governance by practising wilful corporate frauds, malpractices,
insider trading, corruption and audit failures and became a primary factor in the establishment of
the Sarbanes-Oxley Act 2002 (Segal, 2019).
Causes for downfall
 Enron used the securitization method vastly for receiving future cash flows on immediate
basis. For example, if the company owns the asset for the purpose of generating cash
flows every year, they would sell off future cash flows at a discount to special entities
and investors. The company received the money pre-hand to gather a huge amount of
money in short term and this debt kept accumulating. (Prebble, 2016)

 For the single task of creating cash flows, Enron established a global finance department
which instituted the idea of prepays. For example, Enron signed a contract with SPEs t
set forth a particular amount for electricity or gas that the company is supposed to deliver
in future and receive the money upfront and a failure in delivery would classify it as a
loan. In such transactions the company never recognized a loan but termed it as a trading
liability and was an illegal transaction which was kept clandestine by the firm.
 Enron inculcated the mark-to-market accounting method for recognizing its future
potential profits immediately. For example, the revenue from the Blockbuster project was
recognised under this method, even when the long term project was terminated, the
company did not take into account the amount of loss. To continue the mark-to-market
method, similar projects had to be concluded for entering same amount or higher value of
revenue, which became a vicious circle (Luke, 2018).
The case in context of ethical corporate governance
Corporate governance
The primary role of the board of directors of any organization is to overview the activities
and maximize its values and culture. The leaders have to fulfil three particular functions, that are,
ensuring the organization doesn't breach any laws, information given externally is accurate and
evolving the business plan. Enron did not comply with these requirements led to the
quintessential failure(Dibra, R., 2016).
Although the board of Enron consisted of many experienced and highly expertized people
from business, political and legal areas; the financial structure of Enron were highly complex and
difficult to understand for external parties. Other reasons why board could not discover the
inconsistencies in the statements of the company are:
 Board being largely deceived by the management, the information they received was
either incomplete or falsified and did not have full access to it.
 The board members were not independent as major directors were involved in a conflict
of interest.
 Enron's organizational culture was aggressive and tough, the organizational objectives
and major decision was aimed towards increasing the stock prices while the norms of
ethics, values and corporate governance was neglected.

 The board waived the rules of conflict of interest, allowing the CFO to make private
partnerships for conducting the business. Such partnerships concealed the liabilities and
debts which highly impacted the company's profits.
 Other major corporate governance debacles were concentration of power in the hands of
CEO, numerous illustrations of malpractices, unethical activities, dark alliances between
Enron and its independent auditors, skilful concealment of company's earning reports,
encouraging employees to purchase stock in the company, insider trading practices like
trading on stock exchange by having access to confidential information to gain advantage
etc.
Involved parties
Several persons and parties were involved in the execution of the accounting frauds and
business malpractices. Firstly the CEO Jeff Skilling and chairman Kenneth Lay focussed on
increasing the value of the stocks alongside meeting the wall-street's expectations. Neither cared
regarding shareholders, employees, falsifying data, lying to investors and other stakeholders and
basically pulled the strings for the whole scandal. Secondly, the Global finance team and the
accountants committed the accounting frauds, mainly the chief financial officer Andy fastow and
deputy Michael copper, who came up with idea of special purpose entities by providing own
capital for foundation, managing the SPEs LJM1/2. Thirdly the lawyers who signed off the
partially illegal contracts of the company. Other credit agencies like Standard & Poors and
Moody's Analytics had knowledge regarding Enron's malpractices, such as their off-balance
sheet debt. The rating agencies had more access to the documents than investors and were
dazzled by the perception of Enron being a great company, ultimately failing to see the big
picture. The external investors for prepays knew about the situation but ignored it in order to
make money. The most prominent banks Chase Manhattan and Citigroup kept giving capital as
leaders to the special purpose entities and helped in providing securities to Enron in case they
would not be able pay by signing exclusive contracts with insurance companies (Hosseini, 2016).
Sarbanes-Oxley (SOX) Act 2002 prompted by the scandal
The Sarbanes-Oxley Act of 2002 is the law passed by the U.S. Congress to protect the
investors of an organization or corporation from fraudulent financial reporting, aiming at their

internal financial controls, audit procedures by external auditors bringing a reform in the
business financial practices. The act was passed in response to several corporate accounting
scandals like Enron scandal in the period of 2000-02 and established new standards for corporate
management, public accounting corporations and board of directors (Peavler, 2016).
To handle and curb the incidences of corporate fraud, the legislation was drafted by US senators
Paul Sarbanes and US representative Michael Oxley, with the intent to improve the reliability
and accuracy of disclosers of corporations in documents like financial statements and protect the
investors through:
 Increasing the strength and extensiveness of corporate governance rules.
 Ending the loopholes in the practices of accounting and creating strict new rules for
corporate officers, auditors, accountants and imposed stringent requirements for record-
keeping.
 Increasing the disclosure and accountability of corporate requirements like Public
auditors, accountants and corporate executives.
 Underpinning the requirements of describing financial transactions and reporting
procedures to shareholders for improving the corporate transparency.
 Reinforcing the whistle-blower protection laws and sub-sections and monitoring of
compliance and code of conduct.
 Increasing the penalty and fines for executive and corporate malfeasance and
wrongdoings. New criminal penalties were added for violation of security laws.
 Authorizing the establishment of the Public Company Oversight board or PCAOB for
monitoring the corporate behaviour further, particularly in the accounting and finance
areas.
 Besides the regulations like accuracy, audits and controls, the SOX Act of 2002 has also
outlined requirements for information technology or IT departments about electronic
records.
CONCLUSION
The essay focusses on the determination of contract law in relation to the English legal
system and takes into account the case study of contractual relationship between Hillary and
Amy, Eleanor and Olivia. The main elements a binding contract were describes as intention of

legal relations by both parties, offer by one party capable of acceptance by other, acceptance of
the offer, a mutual promise by both to provide valuable consideration. Primary courts in context
to the English legal system were identified as Supreme Court, Court of Appeal, High court for
Justice and county courts at the local level. The relevance of binding contracts in relation to the
case study was assessed along with discussion of available legal remedies for both the given
parties. the case of Enron scandal derives the accounting frauds and unethical business practices
in major corporations and its impact of the legal system. The major causes for the downfall of
Enron were determined to be securitization method vastly for receiving future cash flows,
establishment of a global finance department which instituted the idea of prepays and mark-to-
market accounting method. The fraud led to the creation of Sarbanes-Oxley Act law by U.S.
Congress to protect the investors of an organization or corporation from fraudulent financial
reporting.

REFERENCES
Books and Journals
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Contract Law (pp. 165-175). Springer, Cham.
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Francis.
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Verlag.
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Pierce, B., 2018. Contract Law Govern the Recruitment Process and Enable Enforcement of
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Prebble, L., 2016. Enron. Bloomsbury Publishing.
Segal, T., 2019. Enron scandal: The fall of a wall street darling. Investopedia, updated May, 29.
Smits, J.M. ed., 2017. Contract law: a comparative introduction. Edward Elgar Publishing.
Wilson, S., and et.al., 2020. English legal system. Oxford University Press.