Caf03 ST 2017 PDF

P
ICAP
Business Law
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© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Certificate in Accounting and Finance
Business Law
C
Contents
Page
Syllabus objectives and learning outcomes v

Section A: Mercantile Law
Chapter
1 Introduction to the legal system 1
2 Introduction to the law of contract 23
3 Offer and acceptance 33
4 Capacity of parties 43
5 Consideration 51
6 Free consent 59
7 Legality of object, consideration and agreements opposed
to public policy 75
8 Void agreements 83
9 Contingent contracts 93
10 Quasi contracts 99
11 Performance of a contract 107
12 Discharge of a contract 123
13 Remedies for breach of contract 139
14 Indemnity and guarantee 149
15 Bailment and pledge 163
16 Agency 181
17 Partnership Act 201
18 Negotiable instruments Act 223
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Business Law
Page
Section B: Company Law

Chapter
19 Company 253
20 Incorporation of company 265
21 Share capital – types and variation 283
22 Share capital – prospectus 291
23 Mortgages and charges 299
24 Meetings 307
25 Management 321
26 Investments and dividends 341
27 Accounts and audit 353
Index 367
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Business Law
S
Syllabus objectives
and learning outcomes
ASSESSMENT OF FUNDAMENTAL COMPETENCIES

BUSINESS LAW
Objective
To give students an understanding of the legal system and commercial laws; and build a knowledge base
of corporate laws.
Learning Outcome
The candidate will be able to demonstrate:
1 basic knowledge of the legal environment
2 comprehension of laws governing contracts, partnership and negotiable instruments
3 knowledge of the legal terminology of company law and the basics of company incorporation
4 familiarity with the provisions governing the issuance of shares
5 knowledge of the management of companies
6 familiarity with investment by companies, financial accounts and distribution of profit
7 knowledge of the appointment of auditors and their responsibilities and duties.
© Emile Woolf International v The Institute of Chartered Accountants of Pakistan

Business Law
Grid Weighting
Introduction to legal system 5-10
Mercantile law
Contract Act 1872 20-30
Partnership Act 1932 10-15
Negotiable Instrument Act 1881 10-15

50
Companies Act, 2017 and Securities Act, 2015
Sections 1 to 56- of the Companies Act, 2017 8-15
Sections 57 to 112 of the Companies Act, 2017 and Sections 87 to 93 of 8-15

Securities Act, 2015
Sections 118 to 196 of the Companies Act, 2017 8-15

Total 50
Syllabus
Contents Level Learning Outcome
Ref
A Introduction to the Legal
System
Sources and process of
legislation
1 Sources of law and an 1 LO1.1.1: Briefly describe sources of law in
introduction to the Constitution Pakistan
of Pakistan LO1.1.2: Describe the basic structure of the
constitution of the Islamic Republic of Pakistan.
2 Process of legislation and legal 1 LO1.2.1: Define legislation and describe its
system in Pakistan forms
LO1.2.2: Briefly describe the process of
legislation as per the Constitution
LO1.2.3: Identify and briefly explain the structure
of the courts in Pakistan
LO 1.2.4 Explain alternate dispute resolution
(ADR) and its advantages and disadvantages.
B Mercantile law
a Contract Act 1872
1 Introduction to the Law of 2 LO 2.1.1: Define “contract”, “agreement” and
Contract “promise”
LO 2.1.2: Identify essential elements of a valid
contract
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Syllabus objectives and learning outcomes
Syllabus
Ref
LO 2.1.3: Be aware of factors which might affect

the validity of a contract and their consequences
LO 2.1.4: Identify different types of a contract.
2 Offer and acceptance 2 LO 2.2.1: Define offer and acceptance
LO 2.2.2: Identify different types of offers
LO 2.2.3: Explain how offer is different from
invitation of an offer
LO 2.2.4: Identify essential elements of offer and
acceptance
LO 2.2.5: Understand the timing of revocation
and its communication
LO 2.2.6: Identify circumstances when an offer
lapses.
3 Capacity of Parties 2 LO 2.3.1: Identify circumstances when a person
is not competent to contract
LO 2.3.2: Be aware of consequences or
enforceability of contracts with persons not
competent to contract.
4 Consideration 2 LO 2.4.1: Define consideration and identify
essentials of consideration
LO 2.4.2: Understand rules relating to
consideration
LO 2.4.3: Identify agreements which are valid
without consideration.
5 Free consent 2 LO 2.5.1: Define free consent
LO 2.5.2: Know the effect of absence of free
consent
LO 2.5.3: Be aware of factors which may affect
the consent
LO 2.5.4: Identify and understand coercion,
undue influence, fraud, misrepresentation and
mistake.
6 Legality of object and 2 LO 2.6.1: Identify circumstances where object or
consideration and agreements consideration is unlawful
opposed to public policy LO 2.6.2: Identify agreements opposed to public
policy.
7 Void agreement 2 LO 2.7.1: Be aware of circumstances or
conditions when an agreement is considered as
void
LO 2.7.2: Identify different types of void
agreements.
8 Contingent contract 2 LO 2.8.1: Define contingent contract
LO 2.8.2: Identify characteristics of contingent
contract
LO 2.8.3: Understand rules regarding contingent
contract
LO 2.8.4: Understand the difference between
contingent contact and wagering agreement.
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Syllabus
Ref
9 Quasi contract 2 LO 2.9.1: Know meaning of quasi contract

LO 2.9.2: Understand and apply rules regarding
quasi contract
LO 2.9.3: Be aware of different kinds of quasi
contract.
10 Performance of a contract 2 LO 2.10.1: Explain performance and its types i.e.
actual and attempted
LO 2.10.2: Understand rules relating to joint and
reciprocal contracts and appropriation of
payment
LO 2.10.3: Identify essentials of a valid tender
LO 2.10.4: Define tender and explain its types
and effects. Describe the essentials of a valid
tender
LO 2.10.5: Identify factors which may affect the
performance of a contract
LO 2.10.6: Understand and apply rules relating
to joint and reciprocal promises
LO 2.10.7: Understand the meaning of
appropriation of payment and rules regarding
appropriation of payment
LO 2.10.8: Explain the assignment of contracts.
11 Discharge of a contract 2 LO 2.11.1: Understand the meaning of discharge
of contract
LO 2.11.2: Identify modes of discharge of a
contract: discharge by performance, by consent,
operation of law, impossibility of performance,
lapse of time and breach (actual and
anticipatory)
discharge of a contract.
12 Remedies for breach of 2 LO 2.12.1: Explain the remedy
contract LO 2.12.2: Describe the various remedies
available in case of breach of a contract
LO 2.12.3: Understand rules relating to amount
of damages
LO 2.12.4: Identify different kinds of damages
LO 2.12.5: Understand the remoteness of
damages.
13 Indemnity and guarantee 2 LO 2.13.1: Define contract of indemnity and
contract of guarantee. Differentiate between
contract of guarantee and indemnity
LO 2.13.2: Identify parties in a contract of
indemnity and contract of guarantee
LO 2.13.3: Differentiate between contract of
guarantee and indemnity
LO 2.13.4: Describe the rights of indemnity
holder
LO 2.13.5: Identify the essentials of the contract
of guarantee
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Syllabus
Ref
LO 2.13.6: Understand the kinds of guarantees

i.e. specific and continuing, and revocation of
continuing guarantee
LO 2.13.7: Describe rights and responsibilities of
surety
LO 2.13.8: Explain how surety is discharged
indemnity, guarantee and surety.
14 Bailment and pledge 2 LO 2.14.1: Define bailment and identify the
essentials of the contract of bailment
LO 2.14.2: Explain the types of bailment
LO 2.14.3: Identify duties and rights of the bailor
and bailee
LO 2.14.4: Explain how contract of bailment is
terminated
LO 2.14.5: Identify rights and duties of finder of
goods
LO 2.14.6: Explain pledge (pawn), pledgor
(pawnor) and pledgee (pawnee)
LO 2.14.7: Explain rights of pledgor and pledgee
LO 2.14.8: Understand the rules of pledge by
non-owners
LO 2.14.9: Differentiate between bailment and
pledge.
15 Agency 2 LO 2.15.1: Define agency, agent and principal
and explain types of agents
LO 2.15.2: Identify rights and duties of the agent
and principal
LO 2.15.3: Understand rules relating to agency
LO 2.15.4: Differentiate between sub agent and
co-agent
LO 2.15.5: Explain how an agency can be
created
LO 2.15.6: Understand the circumstances when
an agent is personally liable
LO 2.15.7: Identify irrevocable agency
LO 2.15.8: Explain how an agency can be
terminated
LO 2.15.9: Understand the meaning of
undisclosed agency, position of agent, principal
and third party.
b Partnership Act 1932
1 Chapter I – Preliminary 2 LO3.1.1: Define the terms.
2 Chapter II - The nature of 2 LO3.2.1: Understand and describe the
partnership partnership relationship, its creation and identify
and explain the types of partnership and the
mode of determining existence of a partnership.
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Syllabus
Ref
3 Chapter III - Relations of 2 LO3.3.1: Determine and explain the rights and
partners to one another duties of partners of the firm under various
circumstances
LO3.3.2: Explain the provisions of the law
relating to conduct of the business, property of
the firm and personal profits earned by partners.
4 Chapter IV - Relations of 2 LO3.4.1: Describe the relationship of partners
partners to third parties with third parties
LO3.4.2: Identify and explain the concepts of
implied authority of the partner in relation to third
parties, partner’s authority in an emergency,
mode of doing act to bind the firm, effect of
admissions by a partner, effect of notice to acting
partner, liability of a partner for acts of the firm
and liability of the firm for wrongful acts of a
partner or misapplication by partners, principle of
holding out in given situations
LO3.4.3: Identify and explain the rights of
transferee of a partner’s interest and the rights
and liabilities of a minor admitted to the benefits
of partnership.
c Negotiable Instruments Act
1881
1 Definitions and meanings 1 LO4.1.1: Define and explain terms
(Section 1 to 25) LO4.1.2: Explain provisions relating to types of
negotiable instruments and their maturity.
2 Discharge of liability (Section 2 LO4.2.1: Identify and explain how the maker of a
82 to 90) negotiable instrument is discharged from his
liability under given scenarios.
3 Provisions relating to cheques 2 LO4.3.1: Describe provisions relating to crossing
(Section 122A to 131C) of cheques
LO4.3.2: Briefly describe and differentiate
between a cheque crossed generally and a
cheque crossed specially and their payment
modes.
C a Preliminary and
incorporation (Sections 1 to
56)
1 Definitions (Section 2 and 118) 1 LO5.1.1: Define the terms which are relevant to
the areas covered in the syllabus.
2 Meaning of “subsidiary” and 2 LO5.2.1: Explain subsidiary and holding
“holding company” (Section 2 company and when a company becomes a
(37), (68)) subsidiary or holding company of another
company.
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Syllabus
Ref
LO5.2.2: Apply the concept of subsidiary in
simple scenarios.
3 Powers and functions of the 1 LO5.3.1: Demonstrate familiarity with the powers
Commission (Section 7) and functions of the Commission.
4 Business and objects of a LO5.4.1: Describe the business and objects of a
company (section 26) company
5 Memorandum of association 2 LO5.5.1: Describe the memorandum of
(Section 27 to 35, 40, 41) association and state its purpose
LO5.5.2: List/explain the clauses of
memorandums of association of various types of
companies
LO5.5.3: Describe the purpose and procedure of
alteration to different clauses of a memorandum
of association
LO5.5.4: Describe the effect of alteration/noting
of alteration of memorandum of association
6 Registration of memorandum 2 LO5.6.1: Define the articles of association and
and articles of association state its purpose
(Section16-18, 36, 37-39) LO5.6.2: State the information which should be
contained in the articles of various companies.
LO5.6.3: Describe the procedure for alteration of
articles
LO5.6.4: Describe the procedure of registration
of the memorandum and articles of association
LO5.6.5: Describe the effects of registration of
the memorandum and articles of association.
L05.6.6: State the provisions relating to printing,
signing and date of memorandum and article of
association
7 Provisions with respect to 2 LO5.7.1: Describe with examples the procedure /
names of companies/its change prohibitions with regard to the selection of the
(Section 10-13) name of a company /change of name
LO5.7.2: Identify/explain the actions and
procedures needed to be taken by company and
registrar, if a company is registered by a
prohibited name.
8 Association not for profit 1 LO5.8.1: Comprehend the nature of association
(Section 42, 43) not for profit./provisions relating to
licensing/revocation of licenses granted under
section 42
9 Companies limited by 1 LO5.9.1: Understand the provisions regarding
guarantee (Section 45) divisible profit and dividing the undertaking into
shares or interest.
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Business Law
Syllabus
Ref
b Allotment of shares,
registration of charge etc.
(Sections 57 to 112 of
Companies Act 2017 and
Sections 87 to 93 of
Securities Act 2015))
1 Prospectus, allotment, issue 1 LO6.1.1: Define a prospectus and explain its
and transfer of shares and purpose (Section 57)
debentures, deposits, etc. LO6.1.2: Understand the requirements relating to
a prospectus as laid down in Section
87(2),(4),(5),(6),(7), 88(1-8), 90, 91, 92 and 93 of
the Securities Act 2015
LO6.1.5: Understand/explain the provisions
regarding statement and consent of expert.
2 Share capital and debentures 1 LO6.2.1: Provision relating to nature / number of
(Section 58 to 62, 85 - 87of shares and other securities
Companies Act, 2017) LO6.2.2: Describe the classes and kinds of
shares
LO6.2.3: Describe with simple example the
condition of fully paid shares
LO6.2.4: State the provision relating to alteration
of share capital / kinds of alterations that can be
made to the share capital
LO6.2.5: Understand the meaning of variation of
shareholders’ rights
LO6.2.6: Demonstrate familiarity with the
procedure for cancellation of variation of
shareholders’ rights.
3 Registration of mortgages, 1 LO6.3.1: Discuss the meaning of
charges etc. (Section 100, 105, mortgage/charge with simple examples, and the
109, 110 and 112 of duty of company and the procedure for
Companies Act, 2017) registration of charges
LO6.3.2: State the right of an interested party in
respect of a registration of mortgage/charge
LO6.3.3: State the duty and procedure of
payment or satisfaction of mortgage/ charge
LO6.3.4: Demonstrate familiarity with the right to
inspect the instrument creating a
mortgage/charge
LO6.3.5: Discuss the consequences of
registered and unregistered mortgages/ charges.
© Emile Woolf International xii The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
c Management and
administration (Sections 19
to 25 and 118 to 196 of
Companies Act, 2017)
1 Registered office, publication of 2 LO7.1.1: Discuss with simple examples the
names etc. (Section 21, 22, 24, provisions with regard to having a registered
25) office, publication of name and publication of
paid-up capital.
2 Commencement of business by 1 LO7.2.1: State the conditions to be fulfilled
a public company (Section 19 before commencement of business by a
and 20) company
LO7.2.2: State the applicability and non-
applicability of the conditions on different kinds of
company.
LO7.2.3: State the consequences of non-
compliance of Section 19
3 Meeting and proceedings 1 LO7.3.1: State the timing, matters and reports
(Section 131 to 152) relating to statutory meetings
LO7.3.2: State the timing, matters and reports
relating to an annual general meeting using
simple examples
LO7.3.3: State who can call an annual general
meeting
LO7.3.4: State the timing, matters and reports
relating to an extraordinary general meeting
LO7.3.5: State who can call an extraordinary
general meeting
LO7.3.6: State the quorum for a general meeting
LO7.3.7: State the entitlement of a member in
respect of appointment of proxy and conditions
applicable thereon
LO7.3.8: Describe the provisions relating to
agenda/ resolution / minutes of meetings.
LO 7.3.9: State the circumstances in which
proceedings of the general meeting may be
declared invalid.
4 Directors (Section 153 to 185) 1 LO 8.4.1: Explain and apply in given scenarios,
the legal provision with respect to directors’:
x Eligibility/ineligibility
x Number
x First, subsequent and independent directors
x Term/tenure of office of directors
x Elections
x Removal/vacation of office
x Filling of casual vacancies
x Remuneration
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Syllabus
Ref
x Powers, duties, rights, liabilities and

limitations
x Assignment of office and alternate directors
x Proceedings
x Code of Corporate Governance
x Passing of resolution
LO8.4.2: State the legal provisions relating to
loans to directors.
5 Chief executive (Section 186 to 1 LO8.5.1: Explain the appointment of first chief
196) executive and subsequent chief executives using
simple examples
LO8.5.2: State the provisions/ conditions
applicable on appointment, removal,
engagement in any business
LO8.5.3: State the provisions relating to
appointment of a chairman/ share registrar/ sole
purchase/sales agents/ secretary.
d Investments, accounts etc.
(Sections 199 to 244of
Companies Act, 2017)
1 Investment in associated 2 LO9.1.1: Describe the conditions applicable to a
companies and undertakings company for making investment in associated
(Section 199) companies and undertakings.
2 Investment of companies to be 1 LO9.2.1: Discuss with simple examples as to
held in its own name (Section how a company can hold its investment in names
200) other than its own name.
3 Disclosure of interest by 1 LO9.3.1: Explain the requirements of disclosure
directors (Section 205) of interest by director in contract / arrangement
entered into by or on behalf of the company.
4 Interest of other officers etc. 1 LO9.4.1: Explain the requirements of disclosure
(Section 206) of interest by officers in contract / arrangement
entered into by or on behalf of the company.
5 Interested director not to 1 LO9.5.1: Describe the provisions relating to
participate or vote in participation of interested director in the
proceedings of directors proceedings of directors in contract /
(Section 207) arrangement entered into by or on behalf of the
company.
6 Accounts (Section 220, 223, 1 LO9.6.1: Describe the provisions relating to the
226, 227, 232 and 233 ) books of accounts to be kept by company.
LO9.6.2: Explain the requirements with respect
to the annual accounts and the balance sheet
LO9.6.3: Describe directors’ report/ duty to
prepare directors’ report and statement of
compliance
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Syllabus
Ref
LO9.6.4: Describe the authentication of balance
sheet and profit and loss account
LO9.6.5: Discuss requirements of filing of
balance sheets and profit and loss accounts with
the registrar.
7 Dividend (Section 240 to 244) 1 LO9.7.1: Explain the requirements relating to
declaration of dividend and identify/explain
certain restrictions on declaration of dividend
LO9.7.2: Describe the provisions applicable to
payment of dividend.
LO9.7.3: Describe the provision applicable to
unclaimed share and dividend to vest with the
Federal Government
e Audit (Sections 246 to 251 of
Companies Act 2017)
1 Audit (Section 246 to 251) 2 LO10.1.1: Explain the provisions applicable to
• Appointment, removal and remuneration of
auditors
• Qualification and disqualification of auditors
• Powers/ duties of auditors and an auditor’s
right to access the record and information
• An auditor’s duty to report and contents
thereof
• Signature on an audit report.
© Emile Woolf International xv The Institute of Chartered Accountants of Pakistan

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© Emile Woolf International xvi The Institute of Chartered Accountants of Pakistan

Business Law
CHAPTER
1
Introduction to the legal system
Contents
1 Introduction to the legal system
2 Legislation
3 Structure of courts in Pakistan
4 Chapter review
© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Business Law
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system and commercial
laws; and build a knowledge base of corporate laws.
Introduction to the legal system

LO On the successful completion of this paper, candidates will be able to demonstrate a
basic knowledge of the legal environment
LO 1.1.1 Briefly describe sources of law in Pakistan
LO 1.1.2 Describe the basic structure of the constitution of the Islamic Republic of Pakistan
LO 1.2.1 Define legislation and describe its form
LO 1.2.2 Briefly describe the process of legislation as per the Constitution
LO 1.2.3 Identify and briefly explain the structure of the courts in Pakistan
LO 1.2.4 Explain alternate dispute resolution (ADR) and its advantages and disadvantages.
References to Legal Acts

Section number references embedded in the learning materials refer to the following legal acts unless
otherwise stated:
Act Chapters
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Act, 2017 19-27
Securities Act 2015 22

Section A: Mercantile Law - Chapter 1: Introduction to the legal system
1 INTRODUCTION TO THE LEGAL SYSTEM
Section overview
Definition of Law
Definition of Mercantile Law
Why Chartered Accountants study law
Where to apply law in practical life
Sources of law in Pakistan
Doctrine of Binding Precedent
Criminal law and civil law
1.1 Definition of Law

Law means a set of rules or a system of rules of conduct designed and enforced by the state to
control and regulate the conduct of people.
Law is not stagnant. As circumstances and conditions in a society change, laws are also
changed as per the requirements of the society.
The word law may have different meaning for different situations. It is often preceded by an
adjective to give it a more clear meaning e.g. Civil Law, Criminal Law, Business Law etc.
1.2 Definition of Mercantile Law

Business Law is the part of civil law which deals with the rights and obligations of persons
dealing with each other. It includes laws relating to contracts, partnership, sales of goods,
negotiable instruments etc.
1.3 Why Chartered Accountants study law

The intention of studying law in Chartered Accountancy is not to become an expert lawyer
dealing with complex legal issues.
The objective of studying law in Chartered Accountancy is to be aware when legal problems
arise, be able to judge when outside assistance is required, evaluate the financial implications of
law and also communicate with the lawyers.
1.4 Where to apply law in practical life

A general knowledge of some of the more important legal principles and how they apply to
certain problems will help in avoiding conflict with the people around us. Civil law involves the
problems that impact on people’s everyday life like debts, tenancy issues, sale of goods etc. One
should know the law to which he is subject because generally ignorance of law is neither excuse
nor defence.
1.5 Sources of law in Pakistan

The law consists of rules that regulate the conduct of individuals, businesses, and other
organizations within society.
The legal system is derived from English common law (Equity) and is based on the constitution of
Pakistan 1973 as well as Islamic law (sharia). Thus we can say that in Pakistan the main sources
of law are following:
1. Legislation
2. Precedent
3. Custom
4. Agreement

Business Law
Legislation
It is the law created by the Parliament of a country and other bodies to whom it has delegated
authority.
Precedent
Precedent is a judgment or decision of a court which are binding on the subordinate courts.
Customs
With the passage of time as the society develops this source of law diminished its tendency as a
source of law. In Pakistan, the customary law has been replaced by the Shariat Law.
Agreement
Parties in their agreement stipulate terms for themselves which constitute law for the contracting
parties.
1.6 Doctrine of Binding Precedent

The Doctrine of binding precedent means that a judge is bound to apply decisions from earlier
cases to the facts of the case before him provided certain conditions are satisfied. A precedent is
established in the following circumstances.
The judicial decision that creates a precedent must be based on a proposition of law or
principle of law. A precedent cannot be based simply on a question of fact. It is not the
actual decision in a particular case that creates the precedent: the precedent is established
by a principle of law or proposition of law of the decision.
This proposition or principle of law must have been used by the judge in reaching his
decision in the particular case. (The reason for reaching a decision in a particular way is
called the ‘ratio decidendi’.)
A judicial decision may also include a statement of law that was not a part of the ratio
decidendi in the case. Any such statement of the law is irrelevant to the decision and such
statements are sometimes called ‘obiter dicta’, which means ‘said by the way’. Statements
of the law that are obiter dicta do not form part of the binding precedent. However, they
may be treated as a persuasive authority, and taken into consideration by judges in later
cases.
Judges who must decide on subsequent cases are required to identify the judicial precedent (if
any) that applies in the case.
There are comprehensive law reports on decisions in earlier cases, and judges should
refer to these and look for a similar case that sets a precedent. If a precedent is discovered
that was set by a court of equal or higher status, the judge dealing with the current case
should normally follow this precedent.
There are rules for establishing the legal principle from the details of an earlier case, and
applying the principle to the facts of the current case.
The legal principle must form part of the judge’s ratio decidendi.
The facts in the case must be materially the same as in the case that is used as the
precedent. If a judge decides that the material facts in a later case are different, he or she
can ‘avoid’ (ignore) the precedent set by the earlier case in reaching a decision.
However, a precedent established by a lower court does not necessarily have to be
applied by a higher court, although in practice it is unusual for a higher court to overrule
the precedent set by a lower court, if the precedent is long-established.
Types of precedent
Original precedent is one which creates and applies a new rule.
Binding precedent is one which is required to be followed

Persuasive precedent is one which is not required to be followed e.g. a decision by lower court,
decision by courts of other countries.
Declaratory precedent is the application of an already existing rule of law.
How can precedents be altered or avoided?
Precedents can sometimes be altered or avoided by judges.
Overruling a precedent. A precedent established by a lower court can be overruled by a
higher court. The higher court sets aside the decision of the lower court, and the precedent
ceases to apply.
Making a distinction between cases. A judge may avoid a precedent by identifying facts
in the current case that make it different from a previous case. If the facts are sufficiently
different, the judge in the current case does not have to follow the precedent of the
previous case. Judges who do not wish to apply a precedent in a particular case may
therefore try to identify distinguishing features in the case, and use these to justify a
decision that ignores the precedent.
Advantages and disadvantages of binding precedent
There are several advantages in a system of law based on binding precedent.
It can save time and expense. When a new legal dispute arises, time can be saved by
considering how the court is likely to make its decision based on the relevant precedent.
This may persuade one party to the dispute to reach an out-of-court settlement. If the case
goes to court, the existence of a precedent means that the legal arguments do not have to
be repeated in the current case, because they are already established.
Another important advantage of precedent and case law is that judicial decisions should be
consistent in all cases of a similar nature, because judges are required to treat similar
cases in the same way, as established by the precedent. Consistency in judicial
decisions is an important characteristic of a good system of law, because individuals and
organisations who become involved in legal disputes can often know what to expect if they
take their dispute to court. (They may dispute the facts of the case, but the legal principles
should be well-established.)
Flexibility in the law. Judges are able to interpret the existing law, including statute law,
by creating new precedents. This gives some flexibility to the law, because judges are able
to develop new law without the need for new legislation by statute.
There are also some disadvantages with binding precedent and case law.
The large number of precedents. There are a large number of reported legal cases that
can be cited as precedents in a current case. Lawyers can therefore argue about which
precedents should apply in a particular case. When there is uncertainty about which
precedents should apply, there will be uncertainty about the outcome of the legal dispute.
This is a weakness in the law.
Unjust precedents. In some cases, a precedent might be unfair or unjust. Unless the
precedent is overruled by a higher court, unfair decisions will be continued in future cases.
The law is weakened when it is seen to be unfair.
The judiciary makes the law. Although judges are interpreting the law when they create
new precedents, they are also in effect making new law. It could be argued that the
judiciary should not make new law, but should do no more than interpret the established
law.
1.7 Criminal law and civil law

There are several branches of the law. Each deals with a different area of law and legal
relationships. Two major branches of the law are:
criminal law
civil law

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Criminal law
Criminal law establishes conduct that the State considers unacceptable, and which it wishes to
prevent. Individuals or organisations that act contrary to the criminal law are threatened with
punishment by the State, in the form of imprisonment and/or fines.
With criminal law, the State establishes acceptable standards of behaviour, and represents the
interests of society as a whole in doing so.
Legal action may be brought by the State against individuals who are accused of being in breach
of the criminal law. It is the responsibility of the State (and not private individuals) to bring these
legal actions, in criminal trials.
Civil law
The civil law is a branch of the law that primarily deals with disputes between individuals and
organisations (such as companies), and it regulates relationships between them regarding their
rights and obligations. A violation of the civil law is a tort (a wrongdoing), but is not a crime. The
civil law provides for remedies for civil wrongs (torts), but these do not include imprisonment.
Civil law may be established by statute or by case law (common law), codification, interpretation
of the law, consideration, and so on.
Example: Civil law

property disputes (Transfer of property act)
work-related disputes (employment law)
accusations of negligence (negligent behaviour) (Tort)
claims by consumers against manufacturers or service providers
commercial disputes between business entities (commercial law)
copyright disputes
claims of defamation of character (Tort)
disputes about an alleged breach of contract (Contract Act)
Legal proceedings in the civil law are initiated by an individual or private person against another.
(In contrast, a criminal prosecution is brought to court by the State.) For example, an individual
may bring a civil action against another person, claiming a wrongdoing by that person and
seeking a settlement (for example, seeking money compensation in the form of ‘damages’.)
A civil case might therefore be identified as: Tanveer v Khatri where a case is brought to the civil
court by Tanveer (the ‘plaintiff’) who is making a claim against Khatri (the claimant).
Criminal law or civil law?
Many of the legal aspects of commercial and business law are aspects of the civil law, but the
criminal law may also apply. For example fraud and money laundering are criminal activities that
may occur in business.
It is also important to remember that the same action may be in breach of the criminal law and
also a tort in civil law. In such a situation, the action may give rise to:
criminal prosecution by the State and
civil action by a private person, claiming a remedy such as damages.
Example: Criminal law and Civil law

Suppose that a train company operates a train service, and there is a major accident involving loss
of life and injury to passengers. The State may claim that the train company or its senior
managers are guilty of a breach of the criminal law and bring a case in the criminal court.
Individuals who have been injured in the crash and individuals who have lost a relative killed in the
crash may bring civil actions against the train company, demanding compensation.
Business managers must therefore be aware of both the criminal law and civil law implications of
their activities.

The burden of proof

Another important difference between criminal law and civil law is the burden of proof that is
required by a court.
In criminal cases, the burden of proof is much greater than in civil law cases. The guilt of
an accused person needs to be proved ‘beyond all reasonable doubts.
In contrast, in civil cases the court needs to be satisfied ‘on the balance of probabilities’
that a person is liable.
This means that an individual accused of a crime might be found not guilty in a criminal court, but
the same individual may be sued in a civil court for the same may be found liable.

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2 LEGISLATION
Section overview
President
Prime Minister
Senate
National Assembly
Process of Legislation
Delegated Legislation
Pakistan has a Federal Parliamentary System of government, with the President as the Head of State
and popularly elected Prime Minister as Head of Government. The Federal Legislature is a bicameral
Majlis-e-Shoora (Parliament), composed of the President, National Assembly (Lower House) and
Senate (Upper House).
2.1 President
The President of Pakistan is Pakistan’s Head of State and is considered a symbol of unity.
President must be a Muslim.
President is elected for a five year term by Senate, National Assembly and members of
Provincial Assemblies.
President is eligible for re-election, but no individual may hold the office for more than two
consecutive terms.
The majority party in the National Assembly usually nominates and elects a person as the
President.
The President approves the statutes passed by the National Assembly and thereafter by
the Senate.
He guides the Prime Minister in the matters of national importance.
2.2 Prime Minister

The Prime Minister must be nominated and elected by a majority of members in the
National Assembly. That individual is then appointed as Prime Minister by the President.
The Prime Minister is assisted by the Federal Cabinet. A council of ministers whose
members are appointed by the President on the advice of the Prime Minister.
Federal Ministers are supported by secretaries and other government officers appointed in
each department for ensuring that policies formulated by the government are acted upon.
2.3 Senate
The Senate is a permanent legislative body with equal representation from each of the four
Provinces with representatives elected by the members of their respective Provincial
Assemblies.
The role of the Senate is to promote national cohesion and harmony and to alleviate fears
of the smaller provinces regarding domination by any one province because of its majority,
in the National Assembly.
There are also representatives from the Federally Administered Tribal Areas and
Islamabad Capital Territory.

Members are elected for a period of six years. Half the members retire after three years
and are replaced by the equal number of newly elected senators.
Senate is a permanent institution. The election of all members is not held at the same time
and so it continues to be present on a permanent basis.
The Chairman of the Senate under the constitution is next in line to act as President if the
office becomes vacant and until such time a new President can be formally elected.
The members elect from themselves a chairman and a Deputy Chairman.
All statutes passed by the National Assembly are also approved by the Senate with the
exception of money bills.
Composition of Senate
Khyber Federal
Punjab Sindh Baluchistan Fata Total
Pakhtokhwa Capital
General 14 14 14 14 8 2 66
Women 4 4 4 4 1 17
Technocrats 4 4 4 4 1 17
Minority 1 1 1 1 4
104
Fourteen shall be elected by members each Provincial Assembly

Four women shall be elected by members of each Provincial Assembly
Four technocrats including Ulema shall be elected by the members of each Provincial
Assembly.
Eight shall be elected from the Federally Administered Tribal Areas in such manner as the
President may by order prescribe.
Two on general seats and one woman and one technocrat including aalim shall be elected
from the Federal Capital in such manner as the President may by order prescribe.
Four non-Muslims, one from each Province, shall be elected by the members of each
Provincial Assembly.
2.4 National Assembly
The seats for the national assembly are determined on the basis of population of
provinces.
The members are elected for a period of five years on the basis of direct votes by the
voters registered.
The members elect from themselves Speaker, Deputy Speaker and Prime Minister.
The most important function of the National Assembly is law making and formulation of
policies.
Composition of National Assembly
Khyber Federal
Punjab Sindh Baluchistan Fata Total
Pakhtokhwa Capital
General 148 61 35 14 12 2 272
Women 35 14 8 3 60
Minority 10
342

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2.5 Process of Legislation

When National Assembly is in session a bill in respect of any matter may originate in either
house.
Scenario 1:
x If it is passed by the house in which it is originated then it is transmitted to the other
house and
x If the bill is also passed by the other house (without any amendment) then it is
presented to the President for assent.
Scenario 2:
x If the bill is transmitted to a House and is passed with amendments it shall be sent
back to the House in which it originated and
x if that House passes the Bill with those amendments it shall be presented to the
President for assent.
Scenario 3:
x If a bill transmitted to a House is rejected or not passed within ninety days or a Bill
sent to a House with amendments is not passed by that House with such
amendments
x The bill at the request of the house in which it originated shall be considered in the
joint sitting of both the house i.e. National Assembly and the Senate and
x If it is passed by the votes of the majority of the members present and voting in the
joint sitting it shall be presented to the President for assent.
Scenario 4:
x When the President has returned a Bill to the Parliament it shall be reconsidered by
the Parliament in Joint Sitting and
x If it is again passed with or without amendment by the Parliament by the votes of the
majority of the members of both Houses present and voting.
x It shall be presented to the President for assent.
The President shall within ten days assent to the bill or return it to the Parliament for
reconsideration (in case of a bill other than money bill) of any provision or any amendment
therein.
In case a bill is pending in the National Assembly or passed by it, is pending in the Senate.
The bill shall lapse on the dissolution of National Assembly. But if the bill is pending in the
Senate not passed by the National Assembly shall not lapse on dissolution of the National
Assembly.
Money bills
A money bill shall originate in the National Assembly and after it has been passed by the
Assembly it shall (without being transmitted to the Senate) be presented to the President for
assent.
Ordinance
The President if deems necessary to take immediate action, he has power to make an
Ordinance when the National Assembly is not in session.
Such Ordinance promulgated thus, shall have the same force and effect as an Act of the
Parliament.
The Ordinance shall stand repealed after one hundred and twenty days if it is not
presented or passed
x by the National Assembly in case of Money Bill and
x by both houses if it is other than Money Bill.

The chart below shows the process of legislation
Process of Legislation
When National When National Assembly

Assembly is in session is not in session
President
Money bills All other bills
National National Ordinance

Assembly Senate
Assembly
President
Sent for reconsideration to

Parliament (joint sitting of National
Assembly and Senate)
Assent Reject /
Amend
Act / Law
2.6 Delegated Legislation

In Delegated Legislation power is given to an Executive (a minister or public body to make
subordinate or delegated legislation for specified purposes only). E.g. Local authorities are given
statutory powers to make bye-laws which apply within a specific locality.
Control over delegated legislation
Parliament has some control over delegated legislation by restriction and defining the
power to make rules.
Rules made under delegated power to move legislation may be challenged in the courts on
the grounds that it is ultra vires. In other words that it exceeds the prescribed limits or has
been made without due compliance.
If the objection is valid the court declares it void.
Advantages of delegated legislation
Time
Parliament does not have time to examine matters in detail
Expert opinion
Much of the content of delegated legislation is technical and is better worked out in
consultation with professional, commercial or industrial groups outside Parliament.

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Flexible
Delegated legislation is more flexible than an Act of Parliament. It is far simpler to amend a
piece of delegated legislation than to amend an Act of Parliament.
Disadvantages of delegated legislation
The main criticism of delegated legislation is that it takes law making away from the
democratically elected members. Power to make law is given to unelected civil servants
and experts working under the supervision of a government minister.
Because delegated legislation can be produced in large amounts the volume of such law
making becomes unmanageable and it is impossible to keep up-to-date.

3 STRUCTURE OF COURTS IN PAKISTAN
Section overview
Supreme Court
High Courts
Criminal Courts
Civil Courts
Federal Shariat Court
Alternate Dispute Resolution
The structure of courts in Pakistan has the following basis levels:
Supreme court
Federal
High courts Shariat
Court
Criminal courts Civil courts
Session Magistrate District

Civil court
court court court
3.1 Supreme Court

The Supreme Court of Pakistan is the highest appellate court of the country and court of last
resort. It is the final arbiter of the law and the Constitution. Its orders/decisions are binding on all
other courts in the country. All executive and judicial authorities are bound to act in aid of the
Supreme Court. The Constitution contains elaborate provisions on the composition, jurisdiction,
powers and functions of the Court. The Constitution assigns the Supreme Court a unique
responsibility of maintaining harmony and balance between the three pillars of the State, namely,
the Legislature, the Executive and the Judiciary. As guardian of the Constitution, the Court is
required to preserve, protect and defend this basic document.
Jurisdiction of Supreme Court
The Supreme Court exercises original, appellate and review jurisdiction. It possesses exclusive
original jurisdiction for the settlement of intergovernmental disputes between Federal and
Provincial Government(s) or Provincial Governments inter se. Under this jurisdiction, the Court
pronounces declaratory judgments. The Supreme Court can also exercise original jurisdiction,
with respect to the enforcement of fundamental rights, if the case involves an issue of public
importance. The Court also exercises advisory jurisdiction, where under the President may obtain
its opinion on a question of law. Under its appellate jurisdiction, the Court entertains appeals
against orders and decisions of High Courts and other special courts/tribunals.

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Criteria to be Judge of Supreme Court

A person with five years’ experience as a Judge of a High Court or
Fifteen years standing as an advocate of a High Court is eligible to be appointed as Judge
of the Supreme Court.
3.2 High Courts

There is one High Court in each province, and one in the federal capital, Islamabad, including:
Lahore High Court, Lahore, Punjab
Sindh High Court, Karachi, Sindh
Peshawar High Court, Peshawar, Khyber Pakhtunkhwa
Balochistan High Court, Quetta, Baluchistan
Islamabad High Court, Islamabad,
The High Court has supervisory role over other Courts subordinate to it. It may issue a writ of
habeas corpus which is an order for the release of a person wrongfully detained, and also
prerogative orders against inferior courts, tribunals and other bodies such as local authorities in
so far as they have a duty to exercise a discretion fairly.
Criteria to be Judge of High Court
Ten years’ experience as an advocate of a High Court or
Ten years’ service as a civil servant including three years’ experience as a District Judge
or
Ten years’ experience in a judicial office.
There are three types of prerogative order.
1. Mandamus
2. Prohibition
3. Certiorari
1. Mandamus
Mandamus requires the court or other body to carry out a public duty.
E.g. a tribunal may be ordered to hear an appeal which it has wrongly refused to do.
2. Prohibition
It prevents a court or tribunal from exceeding its jurisdiction.
3. Certiorari
Certiorari orders a court or tribunal which has taken action to submit the record of its
proceedings to the High Court for review. It is exercised when an inferior court has acted
illegally, exceeding its jurisdiction or reached its decision contrary to the principles of
natural justice, without giving the person concerned the right to know of and reply to the
case against him.
Areas of jurisdiction of the High Court
Following are the few areas of jurisdiction of the High Court
Original civil jurisdiction
Appellate civil jurisdiction
Appellate criminal jurisdiction
Supervisory jurisdiction
Constitutional jurisdiction

3.3 Criminal Courts

The criminal courts structure is given below:
Courts Staff Jurisdiction
Supreme Court of Chief Justice

Pakistan Discussed earlier
Justice
High Court Chief Justice

Supervisory control
Justice
Sessions Court Sessions Judge All other offences not covered in Judicial
Magistrate Jurisdiction, but sentence of death is
passed subject to the confirmation of High
Additional Sessions
Court. Cases of enforcement of law relating to
Judge
Hudood are also tried by sessions judges.
Assistant Sessions Offences with punishment not exceeding seven

Judge years.
Magistrates Court Offences with punishment of imprisonment for a

Judicial Magistrate
term not exceeding three year, fine not
1st Class
exceeding Rs. 15,000 and whipping.
Offences with punishment of imprisonment for a

Judicial Magistrate
term not exceeding one year, fine not exceeding
2nd Class
Rs. 5,000.
Offences with punishment of imprisonment for a

Judicial Magistrate
term not exceeding one month, fine not
3rd Class
exceeding Rs. 100.
Provincial Government on recommendation of

Special Judicial
High Court confer upon any person powers of
Magistrate
Judicial Magistrate.
Sessions Judge
Each province consists of sessions / divisions and every session division shall be a district or
consists of districts. The Provincial Government established a Court of Session for every
sessions / division and appoints a judge of such court called session judge.
Additional Sessions Judges
The Provincial Government may also appoint Additional Sessions Judges and Assistant
Sessions Judges to exercise jurisdiction in one or more such courts.
Magistrates’ courts
Magistrates’ Courts are the subordinate criminal courts. In addition, they also exercise certain
family law, administrative law and minor civil functions.
District Magistrate
In every district, the Provincial Government appoints a Magistrate of first class, who is called the
District Magistrate.
Subordinate Magistrate
The Provincial Government appoints as many persons as it thinks fit besides the District
Magistrate as Magistrates of the first, second or third class in any district and defines local areas
within which such persons may exercise all or any of the powers as invested.

Business Law
Criminal court Appeals
Magistrates Courts
Assistant Sessions Court
Conviction for Sedition Sessions Court

Conviction for more
(trouble making) than 4 years
High Court
Division Bench of High Court
Supreme Court of Pakistan
3.4 Civil Courts
Courts Staff Jurisdiction
Supreme Chief Justice

Court of Writ Jurisdiction in issues of public importance.
Pakistan Justices
Chief Justice Supervisory Control

High Court Company Bench
Justices
Banking Court
District Judge
District Court Certain suits of unlimited value of subject matter.
Additional District
Judge
Civil Judge 1st Class Suit of unlimited value of subject matter.

Civil Court /
Suit having value of subject matter not exceeding
Rent Civil Judge 2nd Class
Rs. 50,000.
Controller /
Family Court Suit having value of subject matter not exceeding
Civil Judge 3rd Class
Rs. 5,000.
Additional District Judge

In every district of a Province, there is a Court of District Judge which is the principal court of
original jurisdiction in civil matters. Government in consultation with the High court, appoints as
many Additional District Judges as may be necessary. An additional district judge discharges
such functions of a District Judge as the District Judge assigns him and has the same powers
like that of District Judge.
Civil Judge
Civil Judges function under the superintendence and control of District Judge and all matters of
civil nature originate in the courts of Judges. The District Judge may, however, withdraw any
case from any Civil Judge and try it himself.

Appeals against the judgments and decrees passed by the Civil Judges in cases where the value
of the suit does not exceed the specified amount lie to the District Judge.
Civil court Appeals
Civil Courts
Suits value below Rs.200,000
District Court
Suit value above
Rs. 200,000
High Court / Company Bench /

Banking Court
Division Bench of High Court
Family Courts
These courts deal with matrimonial cases. Most divorce cases are heard in the family court,
family property cases and proceedings relating to children etc.
Company Courts
The court having jurisdiction under the Companies Act, 2017 is the High court having
jurisdiction in the place at which the registered office of the company is situated.
The Federal Government may empower any civil court to exercise all or any of the
jurisdictions by this ordinance.
In each High Court one or more benches known as the company bench are constituted by
the chief justice of High Court.
All the matters coming before the court under this Ordinance are disposed of within ninety
days from the date of presentation.
Industrial Tribunal
Industrial Tribunals were established by the Industrial Relation Act, 2008. They have a wide
jurisdiction over most disputes between employee and employer.
Redress of individual grievances
Complaints of unfair dismissal
Pay claims
Questions as to the terms of employment
Appeals against health and safety notices.
Terms to remember
Juveniles: Any offence, other than one punishable with death or transportation for life, committed
by any person under the age of fifteen years. The age is calculated at the date when he appears
or brought before the court, may be tried by a District Magistrate working under the Reformatory
Schools Act, 1897.

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Decision reversed:
If an appeal court gives its judgment in favour of the party making the appeal (the appellant) the
original decision is said to be reversed.
Court of first instance:
It is the court where the case is originally heard in full.
Appellate Court:
It is the court to which an appeal is made against the judgment or the sentence.
3.5 Federal Shariat Court
Courts Staff
Chief Justice
Justices
Chief Justice
Federal Shariat Court
Justices
Composition of Federal Shariat Court

The Federal Shariat Court consists of not more than eight Muslim Judges including the
Chief Justice who are appointed by the President in accordance with Article 175A.
Out of the number not more than three shall be Ulema having at least fifteen years’
experience in Islamic law, research or instruction and not more than four each, one of
them
x is or
x has been or
x is qualified
to be a Judge of High Court.
The judges hold office for a period of three years. However, the President may, extend
such period.
Process
The Court may either
x of its own motion or
x on the petition of
- citizen of Pakistan or
- the Federal / Provincial Government
x examine and
x decide
the question whether or not any law or provision of the law is repugnant to the Injunctions
of Islam.
If Federal Shariat court decides that a law or the provision of any law is repugnant to the
Injunctions of Islam, it shall set out in its decision:
x The reasons for its holding that opinion and
x The extent to which such law or provision is so repugnant

And specify the day on which decision shall take effect.

Provided that no such decision shall take effect before the expiration of the period within
which an appeal may be preferred to the Supreme Court or where an appeal has been so
preferred, before the disposal of such appeal.
Appeal to Supreme Court

A party aggrieved by the final decision of the court within sixty days of such decision may
prefer an appeal to the Supreme Court.
An appeal on behalf of the Federation or a Province may be preferred within six months of
such decision.
3.6 Alternate Dispute Resolution

Alternate Dispute Resolution (ADR) is any type of procedure or combination of procedures
voluntarily used to resolve issues in controversy, other than court based adjudication.
ADR is generally classified into following types:
Negotiation
In negotiation the participation is voluntary and there is no third party who facilitates the
resolution process or imposes a resolution.
Mediation
In mediation there is a third party a mediator is a person who facilitates the resolution process but
does not impose a resolution on the parties.
Arbitration
Arbitration is settlement of a dispute by an independent person usually chosen by the parties
themselves.
Conciliation
It is a process in which conciliator meets with the parties separately to resolve the grievances.
Advantages of ADR
Speedy
Arbitration is often faster than litigation in court.
Cheaper and Flexible
Arbitration can be cheaper and more flexible for businesses.
Privacy
The public and the press have no right to attend a hearing before an arbitrator.
Appeal
In most legal systems, there are very limited avenues for appeal of an arbitral award.
Service of an expert
The parties may choose the person who is an expert in the particular commercial field that they
are in to settle their dispute.
Disadvantages of ADR
Appeal
Limited Avenue for appeal means that an erroneous decision cannot be easily overturned.
Expensive
In countries where the cost of court action is not so high this might be more expensive to go to
arbitration.

Business Law
Applicability of law
Rules of applicable law are not necessarily binding on the arbitrators, although they cannot
disregard the law.
Delay
When there are multiple arbitrators on the panel, manage their schedules for hearing dates in
long cases can lead to delays.
Arbitration in Islamic way
Islamic arbitration is known as Takhim.
Qualification to be an arbitrator
Must be a Muslim
Male
Knowledge in Sharia and
Free from any defects that could affect his ability to arbitrate.

4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Briefly describe the sources of law in Pakistan
Understand the civil and criminal law
Explain the purpose and constituents of Parliament
Explain the procedure followed for enactment of any law in Pakistan
Discuss the structure of the courts in Pakistan

Business Law

CHAPTER
Business Law
2
Introduction to the law of contract
Contents
1 Introduction to the law of contract
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Introduction to the law of contract
LO On the successful completion of this paper, candidates will be able to demonstrate
knowledge of laws relating to Contract Act.
LO 2.1.1 Define “contract”, “agreement” and “promise”
LO 2.1.2 Identify essential elements of a valid contract
LO 2.1.3 Be aware of factors which might affect the validity of a contract and their consequences
LO 2.1.4 Identify different types of a contract.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 2: Introduction to the law of contract
1 INTRODUCTION TO THE LAW OF CONTRACT
Section overview
Definition of a contract
Essentials of a valid contract
Classifications of contract
1.1 Definition of a contract
Definition: Contract [Section 2(h)]

An agreement enforceable by law is a contract.
A contract is an agreement which legally binds the parties. The analysis of the above definition
reveals that a contract has following two elements:
Contract
Agreement Enforceability
Offer Acceptance Legal obligation
These two essentials are discussed below:
Definition: Agreement [Section 2(e)]

Every promise and every set of promises forming the consideration for each other is an
agreement.
The analysis of the above definition reveals that an agreement comes into existence only when
one party makes a proposal or offer to the other party and the other party signifies his
acceptance thereto. Thus an agreement can be an accepted proposal.
Definition: Promise [Section 2(b)]

When the person to whom the proposal is made signifies his assent to it, the proposal is said to
be accepted. A proposal, when accepted becomes a promise.
The person making the proposal is called the promisor and the person accepting the proposal is
called the promisee.
Definition: Proposal [Section 2(a)]

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.

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Enforceability
Every contract is an agreement, but every agreement is not always a contract. An agreement
creating a legal obligation is said to be enforceable by law. The parties to an agreement must be
bound to perform their promises and in case of default by either of them, must intend to sue. For
an agreement to be enforceable by law there should be legal obligation instead of social, moral
or religious obligation.
Example: Enforceability
A, offers to sell his furniture to B or Rs. 50,000. B accepts this offer. In this agreement if
there is default by either party, an action for breach of contract can be enforced through a
court of law provided all the essential elements of a valid contract are present in this
agreement.
A invites B to dinner. B accepts the invitation but fails to turn up. Here, A cannot sue B for
damages because the parties to this agreement do not intend to create legal obligations.
Thus, the law of contract covers such agreements where the parties intend to create legal
obligations. In social, domestic, moral and religious obligation the usual presumption is that the
parties do not intend to create legal obligations.
1.2 Essentials of a valid contract
The essentials of a valid contract are shown below [Section 10]:
These essentials are discussed below:

Offer and acceptance
There must be an agreement between parties to create a valid contract. An agreement involves a
valid offer and its acceptance.
Example: Offer and acceptance

A offers to buy bike from B for Rs.50,000 to which B responds positively.
Here A has made an offer and B has accepted it

Offer and acceptance is discussed in detail in Chapter 3.

Legal relationship
A contract to become valid must have a legal relationship. In case of social or domestic
agreements, the usual presumption is that the parties do not intend to create legal relationship
but in commercial or business agreements, the usual presumption is that the parties intend to
create legal relationship unless otherwise agreed upon.
Example: Legal relationship

A invited B on a dinner at his home. B accepted the invitation. It is a social agreement. If A fails to
serve dinner to B than B cannot go to court for enforcing the agreement and similarly if B did not
turn up than A cannot go to court for enforcing the agreement.
Competency of parties
As per section 11 the parties to an agreement must be competent to contract. In other words, the
person must be of
The age of majority
Person of sound mind and
Not declared as disqualified from contracting by any law to which he is subject.
Example: Competency of parties

A (Minor) borrowed Rs. 100,000 from B and executed mortgage of his property in favour of the
lender. This is not a valid contract because A is not competent to contract.
Competency of parties is discussed in detail in Chapter 4.

Consideration
As per section 23 an agreement must be supported by lawful consideration. Gratuitous (without
consideration) promises are not enforceable at law. Consideration requires not only presence of
consideration but also lawfulness of consideration.
Example: Consideration
A offers to buy IPAD from B for Rs. 50,000 to which B responds positively.
Here A’s promise to pay Rs. 50,000 is the consideration for B’s promise and B’s promise to sell
the IPAD is the consideration for A’s promise.
Consideration is discussed in detail in Chapter 5.

Free Consent
As per section 14 an agreement must be made between parties by free consent. In other words,
the consent must not be obtained from following:
Coercion
Undue influence
Fraud
Misrepresentation
Mistake
Example: Free consent

A beats B and compels him to sell his bike for Rs. 20,000. Here, B’s consent has been
obtained by coercion because beating someone is an offence under the Pakistan Penal
Code.

Business Law
Example: Free consent (continued)

A having advanced money to his son, B during his minority, upon B’s coming of age
obtains, by misuse of parental influence, a bond from B for a greater amount than the sum
due in respect of the advances. A employs undue influence.
Free consent is discussed in detail in Chapter 6.

Lawful Object
As per section 23 the object of an agreement must be lawful. An object is said to be unlawful
when:
It is forbidden by law
Is of such a nature that if permitted would defeat the provisions of any law
It is fraudulent
It involves an injury to the person or property of another
The court regards it as immoral, or opposed to public policy
Example: Lawful object

A, B and C enter into an agreement of the division among them of gains acquired, or be
acquired, by them by fraud. The agreement is void, as its object is unlawful.
A promises to obtain for B an employment in the public service, and B promises to pay
Rs.10,000,000/-to A. The agreement is void as the consideration for it is unlawful.
A, who knows that B has stolen goods amounting to Rs.500,000, receives Rs.100,000
from B in consideration of not exposing A. This agreement is illegal.
Lawful object is discussed in detail in Chapter 7.

Not declared as void
As per section 24 to 30 an agreement which is not enforceable by law is called void agreement.
There are certain agreements which have been expressly declared as void such as:
Agreement, the consideration or object of which is partly unlawful
Agreement made without consideration
Agreement in restraint of marriage
Agreement in restraint of legal proceedings
Agreement in restraint of trade
Uncertain agreements
Wagering agreement
Example: Not declared as void

A and B carried on business in a certain locality in Karachi. A promised to stop business in
that locality if B paid him Rs 1,000 per day. A stopped his business but B did not pay him
the promised money. It was held that A could not recover anything from B because the
agreement was in restraint of trade and was thus void (restraint of trade).
A promises to pay Rs 10,000 to B if it rained today, and B promises to pay Rs 1,000 to A if
it did not. The agreement is void because the happening and non-happening is dependent
on future uncertain event (wager).
Void agreements are discussed in detail in Chapter 8.

Certainty
As per section 29 an agreement may be void on the grounds of uncertainty. The meaning of the
agreement must be certain or capable of being certain.
Example: Certainty
A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show what kind of
oil was intended. The agreement is void for uncertainty.
A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil." The nature of
A's trade affords an indication of the meaning of the words, and has entered into a
contract for the sale of one hundred tons of coconut oil.
A agrees to sell to B "all the grain in my granary at Peshawar." There is no uncertainty here
to make the agreement void.
A agrees to sell to B "one thousand mounds of rice at a price to be fixed by c." As the price
is capable of being made certain, there is no uncertainty here to make the agreement void.
A agrees to sell to B "my white horse for Rupees five hundred or Rupees one thousand."
There is nothing to show which of the two prices are to be given. The agreement is void.
Possibility of performance
As per section 56 the terms of the agreement must be capable of being performed. An
agreement to do an act impossible in itself is void.
Example: Possibility of performance

A agrees with B to discover treasure by magic. The agreement is void.
Legal formalities
As per section 25 an oral contract is a perfectly valid contract, except in certain cases where a
contract must comply with the necessary formalities as to writing, registration etc.
Example: Legal formalities

An oral agreement for arbitration about present disputes is unenforceable because the law
requires that such arbitration agreement must be in writing.
1.3 Classifications of contract

The different classifications of contract are shown below:
Performance
Formation
Enforceability
•Express •Valid contracts •Executed

contracts •Void agreement contract
•Implied •Void contract •Executory
contracts •Voidable contract
•Quasi contracts contract
•Illegal
agreement
•Unenforceable
agreement

Business Law
The above classifications of contract are briefly discussed below:
Express contracts A contract created by words i.e. verbally or in writing

Implied contracts A contract created by conduct of a person or the
circumstances of a particular case.
Quasi contracts An obligation imposed by law.
Valid contract An agreement which is enforceable by law.
Void agreement Section 2(g) An agreement which is not enforecable by law.
Void contract Section 2(j) A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable.
Voidable contract Section 2(i) An agreement which is enforceable by law at the option
of the aggrieved party.
Illegal agreements An agreement the object of which is illegal.
Unenforecable agreement An agreement which is otherwise valid but due to some
technical lacking, such as writing etc. remains
unenforceable.
Executed contract A contract where both the parties have performed their
respective promises.
Executory contract A contract in which something remains to be done.
Unilateral contract A contract is which a promise on one side is exchanged
for an act on the other side. In such contract one party to
a contract has performed his part and performance is
outstanding against the other party.
Bilateral contract A contract in which a promise on one side is exchanged
for a promise on the other.
Example: Void contract

A music hall was rented out for a series of concerts. The hall caught fire before the date of first
concert. The contract was valid at the time of its formation but became void when hall caught fire.
Example: Void agreement

A (Minor) borrowed Rs. 100,000 from B and executed mortgage of his property in favour of the
lender. This is a void agreement because A is not competent to contract and B cannot legally
enforce against A.
Example: Voidable contract

A threatens to kill B if he does not sell his BMW for Rs 1 million to A. B contracted to sell his BMW
to A and receives the payments. Here, B’s consent has been obtained by coercion. Hence, this
contract is voidable at the option of B but B has no right to insist that contract shall be performed.
Example: Illegal agreement

A, who knows that B has stolen goods amounting to Rs.500,000, receives Rs.100,000 from B in
consideration of not exposing A. This agreement is illegal.
Example: Unenforceable agreement

An oral agreement for arbitration about present disputes is unenforceable because the law
requires that such arbitration agreement must be in writing.

2 CHAPTER REVIEW
Chapter review
Understand the meaning of a contract
Discuss the essentials of a valid contract
Explain the different classifications of contract

Business Law

CHAPTER
Business Law
3
Contents
1 Offer
2 Acceptance
3 Revocation of offer and acceptance
4 Chapter review

Business Law
INTRODUCTION
Learning outcomes
knowledge of laws relating to offer and acceptance of a contract.
LO 2.2.1 Define offer and acceptance
LO 2.2.2 Identify different types of offers
LO 2.2.3 Explain how offer is different from invitation of an offer
LO 2.2.4 Identify essential elements of offer and acceptance
LO 2.2.5 Understand the timing of revocation and its communication
LO 2.2.6 Identify circumstances when an offer lapses.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 3: Offer and acceptance
1 OFFER
Section overview
Definition of proposal / offer

Essentials of an offer
Types of offer
1.1 Definition of proposal / offer
Definition: Proposal / offer [Section 2(a)]

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.
Thus, an offer is a proposal by one person to another for entering into a legally binding
agreement with him.
1.2 Essentials of an offer

The essentials of an offer are shown below:

Two persons
For a valid offer there needs to be two persons. A person cannot make an offer to himself. The
person making the proposal is called offeror and the person to whom offer is made is called
offeree.
Certain and definite
A valid offer is one which is certain and definite. Thus, no contract can come into existence if
offer is uncertain.

Business Law
Contractual intention
An offer must be made with an intention to create a contract.
Communication
The offer must be communicated to the offeree. The communication is complete when it comes
to the knowledge of the person to whom it is made. In case an offer is made by post, its
communication will complete when the letter reaches the offeree. An offer can be made by words
spoken or written or through conduct of the person. [Section 4]
Objective of consent
An offer must be made with a view to obtain the consent of the other person to proposed act or
abstinence.
Conditional
An offer may be subject to some condition. It is on the sole discretion of the person to whom such
offer is made to either accept or reject it. A conditional offer lapses when condition is not
accepted.
Negative confirmation
An offer cannot be in the form of negative confirmation i.e. if it is not accepted within a specific
time then it will be presumed to have been accepted.
Invitation of an offer
An offer is different from an invitation of an offer. The intention in invitation of an offer is to
circulate information of his readiness to do the transaction. Such intentions are not offers and do
not tantamount to promise on acceptance.
In other words, an invitation of an offer means an intention of a person to invite others with a view
to enter into an agreement.
Example: Invitation of an offer

Goods were displayed in a departmental store for sale and self-service system was there. One
customer selected an item. Here the display of goods is an invitation to offer and selection by the
customer is an offer to buy.
Communication of special conditions

When there are special terms and conditions in an offer they must be specifically communicated
to the other party.
1.3 Types of offer

Following are the different types of offer:
Specific Offer If an offer is made to definite or a particular person or specific group of

persons it is said to be specific offer. Such offer can be accepted only by
that definite person or that specific group of persons.
If an offer is made to the world or public than it is said to be general offer.
Such offer can be accepted by any person. The contract is made with
General offer
person who having the knowledge of the offer comes forward and acts
according to the conditions of the offer.
If two parties ignorant of each other’s offer made similar offers to each
Cross offers other they are called cross offers. Cross offers are not equal to
acceptance.
Standing / Open If an offer is of on-going nature it is said to be a standing offer. A contract
/ Continuing is entered only when the person signifies his acceptance on the basis of
offer / Tender the tender.
.

Example: Specific Offer

A offers to buy bike from B for Rs.50,000.
Example: General Offer

A advertised in the newspaper that he would pay Rs.50,000 to anyone who traces his d o g . B ,
who knew about the reward traced that dog and sent a message to A that he had found his dog.
It was held that A was entitled to receive the amount of reward.
Example: Cross offers

A of Karachi sends by post to B of Lahore offering to sell his bike for Rs.50,000. The letter is
posted on 1st December and on same day, B of Lahore sends a letter by post to A of Karachi
offering to buy A’s bike for Rs.50,000.
Example: Standing / Open / Continuing offer / Tender

A required a large quantity of certain goods during a year and offered this by an advertisement.
B supplied those goods at a specific rate. Every supply of B is an acceptance of the standing offer
of A.

Business Law
2 ACCEPTANCE
Section overview
Meaning of acceptance
Essentials of acceptance
2.1 Meaning of acceptance

When the person to whom the proposal is made signifies his assent to it, the proposal is said to
be accepted. [Section 2(b)]
Thus, an acceptance means assenting to an offer made. An offer when accepted becomes a
promise.
2.2 Essentials of acceptance

The essentials of acceptance are shown below:

Absolute and unconditional
An offer should be accepted without any condition. If any condition is imposed on an offer then it
turns out to be counter offer instead of acceptance. [Section 7]
Communication
The acceptance may be complete when it is communicated to the offeror. An offer can be
accepted by words spoken or written or through conduct of the person. Further, a valid
acceptance is communicated either by the offeree himself or any person authorized by him to
communicate to the offeror.

Postal rule
The communication of acceptance by post is complete as against the proposer when it is put in a
course of transmission. In case of acceptance made by post, the proposer becomes bound as
soon as the letter of acceptance is posted even if such letter is lost or delay.
The communication is complete as against the acceptor when it comes to the knowledge of the
proposer. In case of acceptance by post, the acceptor becomes bound when the letter of
acceptance is actually received, before that acceptor may revoke his acceptance.
Contracts over telephone / telex / fax
A contract by telephone / telex / fax is treated on the same principle as an oral agreement made
between two parties when they are face to face with each other. In such cases, the contract will
complete only when the acceptance is received by the proposer and not when it is transmitted by
the acceptor.
Reasonable time
A valid acceptance is when it is accepted within the time specified or within a reasonable time
where no time is specified.
Reasonable mode
Acceptance should be made in the manner specified or in a usual manner where no mode is
specified.
If the proposal prescribes a manner in which offer is to be accepted and the acceptance is not
made in that manner. The offeror shall, in this case, when the acceptance is communicated to
him, insist that his proposal shall be accepted in the prescribed manner and not otherwise. If the
offeror fails to insist within a reasonable time it is deemed that he has accepted the performance.
Awareness of proposal
The acceptor must be aware of the proposal at the time of acceptance of the proposal.
Before lapse of an offer
The acceptance must be given before the offer lapses or is withdrawn.
Negative confirmation
A proposal is not accepted if the offeree remains silent. In cannot be in the form of negative
confirmation i.e. if it is not accepted within a specific time than it will be presumed to have been
accepted.

Business Law
3 REVOCATION OF OFFER AND ACCEPTANCE
Section overview
Timing of revocation
Communication of revocation
Lapse of an offer
3.1 Timing of revocation

According to Section 5 of the Contract Act:
Timing of revocation of A proposal may be revoked at any time before acceptance or the
an offer communication of its acceptance is complete as against the
proposer, but not afterwards.
Timing of revocation of An acceptance can be revoked at any time before the

an acceptance communication of the acceptance is complete as against the
acceptor i.e. when acceptance comes to the knowledge of the
offeror, but not afterwards.
3.2 Communication of revocation

The rules regarding the communication of revocation are as under [Section4]:
As against the person When it is put in a course of transmission so as to be out of the

who makes it power of the revoker.
As against the person to When it comes to the knowledge of the revokee.

whom it is made
3.3 Lapse of an offer

An offer is lapsed in the following ways:
Revocation
An offer may be revoked before its acceptance by the offeree. [Section 5]

Lapse of time
An offer will come to an end if it is not accepted within the time specified or within a reasonable
time where no time is specified. What is the reasonable time is a question of fact depending
upon the subject matter and circumstances. [Section 6(2)]
Death or insanity
An offer comes to an end by the death or insanity of the offeror if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance. [Section 6(4)]
Non-fulfilment of condition precedent
An offer comes to an end when the acceptor fails to fulfil the conditions precedent to the offer.
[Section 6(3)]
Counter offer
An offer comes to an end if the counter offer is made.

Non-acceptance according to requirement
An offer comes to an end if it is not accepted according to the requirement (if any) of the offeror.
Non-acceptance / Rejection
An offer comes to an end if it is not accepted by the offeree. An offer is said to be rejected if the
offeree expressly rejects.
Subsequent illegality or destruction
An offer comes to an end if it becomes illegal or the subject matter is destroyed before its
acceptance.

Business Law
4 CHAPTER REVIEW
Chapter review
Define the offer and acceptance along with their essentials
Discuss briefly the law relating to the communication of offer, acceptance and revocation
Discuss the circumstances in which an offer lapses

CHAPTER
Business Law
4
Capacity of parties
Contents
1 Competent to contract
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Capacity of parties
knowledge of laws relating to competency / capacity of parties.
LO 2.3.1 Identify circumstances when a person is not competent to contract
LO 2.3.2 Be aware of consequences or enforceability of contracts with persons not competent to
contract.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 4: Capacity of parties
1 COMPETENT TO CONTRACT
Section overview
Who are competent to contract?

Agreements with a minor
Agreements by persons of unsound mind
Agreements with persons disqualified by law
1.1 Who are competent to contract?

According to Section 11 of the Contract Act 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.
The below chart shows the persons who are incompetent to contract:
Incompetent to contract
Disqualified by
law
• Alien enemies
Minor Unsound mind • Foreign sovereigns
and ambassadors
• Convicts
• Insolvent
1.2 Agreements with a minor

In Pakistan a minor is a person who has not attained majority which is:
21 years where a guardian of a minor’s person or property is appointed by the court of law
under the Guardians and Wards Act, 1890; or
18 years in other cases.
Position of agreements by a minor

The law pertaining to agreements with a minor is given below:
An agreement with a minor is void.
Where an infant / minor represents fraudulently or otherwise that he is of the age of
majority and induces another to enter into a contract with him, he will not be liable
Since ratification has a retrospective application it is necessary that the minor must be
competent to contract at the time when the contract is entered into. Therefore, an
agreement with a minor cannot be ratified subsequently after he attains majority.

Business Law
If a minor enters into an agreement jointly with a major person then such agreement can
be enforced against the major person who has jointly promised to perform.
A minor can be admitted for the benefits of partnership with the consent of all the partners.
He cannot be a partner until he attains majority. [Section 30 of the Partnership Act]
A minor can be agent but cannot be a principal but if anyone acts on behalf of minor
principal, he will be personally liable. [Section 184]
A minor cannot be declared insolvent because he is incompetent to contract.
A minor can file a suit but cannot be sued.
If the parent of a minor entered into on behalf of a minor being within the scope of the
authority and for the benefit of the minor then such agreements can be enforced by or
against the minor.
A person who supplied necessaries to a minor is entitled to be reimbursed from the
property of such minor. Such claim is against the property of the minor and not against the
minor personally. [Section 68]
1.3 Agreements by persons of unsound mind

Meaning of sound mind
According to Section 12 of the Contract Act, 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 to understand the terms of the contract,
to form a rational judgment as to its effect upon his interests.
Thus, if a person is not capable of both, he is said to have suffered from unsoundness of mind.
Example: Meaning of sound mind

The examples of persons having an unsound mind include:
specific persons/idiots
lunatics and
drunken persons.
Specific persons/idiots
A person who is so mentally deficient by birth as to be incapable of ordinary reasoning or rational
conduct is said to be a specific person.
Lunatic
A person affected by lunacy is said to be 'lunatic'. A person can become lunatic at any stage of
his life.
Position of agreements with a person of unsound mind
The positions of such agreements are given below:
If a lunatic enters into a contract while he is of unsound mind, an agreement during this
period is void.
If a lunatic enters into a contract while he is of sound mind, an agreement during this
period is valid.
An agreement with a specific person is void.
A person delirious from fever or drunken person cannot enter into a contract while such
delirium or drunkenness lasts and he is not able to understand the terms of the contract or
form a rational judgment.

A person of unsound mind can enforce a contract for his benefits

A person who supplied necessaries to a person of unsound mind or his defendant entitled
to be reimbursed from the property of such person of unsound mind. Such claim is against
the property of the person of unsound mind not against the person personally.
Position of a person who is usually of unsound mind but occasionally of sound mind
A person who is
usually of unsound mind but
occasionally of sound mind
may make a contract when he is of sound mind
Example: Position of a person who is usually of unsound mind but occasionally of sound mind
A patient in a lunatic asylum who is at intervals of sound mind may contract during those
intervals.
Position of a person who is usually of sound mind but occasionally of unsound mind
A person who is
usually of sound mind but
occasionally of unsound mind
may not make a contract when he is of unsound mind
Example: Position of a person who is usually of sound mind but occasionally of unsound mind
A sane man who is so delirious from fever or who is so drunk that he cannot understand the
terms of a contract or form a rational judgment as to its effect on his interest cannot enter into
contract while such delirium or drunkenness lasts.
Burden of proof
The rules regarding the burden of proof are following:
If a person is usually of sound mind or in drunkenness or in delirium from fever then the
burden of proof that he was of unsound mind lies on the person who questions the validity
of contract.
If a person is usually of unsound mind then the burden of proof that he was of sound mind
lies on the person who confirms it.
1.4 Agreements with persons disqualified by law

There are some disqualifications imposed on certain persons in respect of their capacity to
contract which are discussed below:
Alien enemies An alien is a person who is the citizen of a foreign country. He can enter
into a contract and be sued during peace time but if a war is declared
than an alien enemy can neither enter into a contract or be sued during
the period of war. Contracts entered before the declaration of war are
either suspended or terminated during the period of war.
Foreign Such persons have immunity unless they choose to submit themselves
sovereigns and to the jurisdictions of our courts. They have a right to enter into a
ambassadors contract but can claim the privilege of not being sued.
Convicts A convict while under imprisonment is incapable of contracting but this

disability comes to an end after the expiry of the sentence or when he is
on parole.

Business Law
Insolvent A person declared as insolvent cannot enter into a contract as his

property is dealt with by official assignee or official receiver.
Note
Companies A company is an artificial person and a contract entered into by a

company will be valid only if it is within the powers granted by the
Memorandum of Association.

2 CHAPTER REVIEW
Chapter review
Explain the capacity to contract and persons who are incompetent to contract
Discuss the position of agreements entered by person incompetent to contract

Business Law

CHAPTER
Business Law
5
Consideration
Contents
1 Consideration
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Consideration
knowledge of laws relating to consideration of a contract.
LO 2.4.1 Define consideration and identify essentials of consideration
LO 2.4.2 Understand rules relating to consideration
LO 2.4.3 Identify agreements which are valid without consideration.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 5: Consideration
1 CONSIDERATION
Section overview
Definition of consideration
Essential elements of consideration
Stranger to contract
Agreements without consideration
1.1 Definition of consideration

Definition: Consideration [Section 2(d)]
When at the desire of the promisor, the promisee or any other person who 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.
When a party to an agreement promises to do something, he must get something in return. This
something is in return of consideration. The analysis of the above definition reveals that a
consideration may be the value by which promise is bought. Consideration may be following:
An act i.e. doing of something
An abstinence or forbearance i.e. abstaining or refraining from doing something.
A return promise
Example: Consideration
A promises B to guarantee payment of price of the goods which B sells on credit to C.
Here selling of goods by B to C on credit is consideration for A’s promise.
A asks B not to sue C for a year for his debts and promises in case of default of C, A would
be liable.
Here B not filing a suit for a year is abstinence, which is a sufficient consideration for A.
A promises to deliver iPhone to B and B promises to pay Rs. 85,000 on delivery.
Here the consideration for A will be Rs. 85,000 on delivery and consideration for B will be
delivery of goods
1.2 Essentials elements of consideration

The essentials of consideration are shown below:

Business Law
These are discussed below.

Desire of the promisor
An act or abstinence of promise constituting consideration must have been done or made at the
desire or request of the promisor. Thus, an act done at the desire of a third party or without the
desire of the promisor cannot constitute a valid consideration.
Example: Desire of the promisor
A saves B’s goods from fire without being asked to do so. A cannot demand payment for his
services.
Move / from promisee or any other person

In return consideration may be from the promisee himself or by any other person even by
stranger.
Example: Move / from promisee or any other person
X transferred certain property to her daughter Y with a direction that Y should pay Z annuity. On the
same day Y executed a deed in writing in favour of Z and agreed thereby to pay the annuity. Later,
Y refused to pay the annuity on the plea that no consideration had moved from Z.
Here Z is entitled to maintain suit because a consideration not necessarily move from the
promisee, it may move from any other person (by X in this case).
Consideration may be past, present or future

The consideration may be past (done or abstained from doing), present (does or abstains from
doing) or future (promises to do or to abstain from doing).
The consideration which has moved before the formation of agreement is said to be past
consideration.
The consideration which moves simultaneously with the promise is called present
consideration.
The consideration which moves after the formation of agreement is called future consideration.
Example: Consideration may be past, present or future
A renders some service to B in the month of August. In September B promises to
compensate A an amount of Rs. 10,000 for the services he rendered to him. Past services
amount to past consideration. A can recover Rs. 10,000 from Y.
A sells his car for Rs. 1 million and delivers the car at the time of payment. Here the
consideration is moving simultaneously with the promise and is called present
consideration.
A promises to deliver certain goods to B after 5 days and B promises to pay after 5 days
from the date of delivery. Consideration in this case is future.
Consideration to have some value

There is no requirement for the adequacy of consideration but it should have some value. There
should be something in return and this something in return need not necessarily be equal in
value to something given.
Consideration must be real
The consideration must be real and not illusory.
Example: Consideration must be real
A engages B to work as an accountant in his office and promises to make him happy. This
promise is not enforceable because the consideration is not real but illusory.
A promises to put life into B’s dead wife and B promises to pay Rs. 1 million. This
agreement is void because consideration is impossible to perform and not real.
A engages B to work as an accountant in his office and promises to pay him Rs. 75,000 per
month. This is a real consideration for both the parties.

Something which the promisor is not already bound to do

It may be an act, abstinence, forbearance or a return promise e.g. compromise of a disputed
claim, composition with creditors.
The consideration must be something which the promisor is not already bound to do because a
promise to do what a promisor is already bound to do adds nothing to the existing obligation.
Lawful
The consideration must neither be unlawful nor opposed to public policy.
Example: Lawful
A promises B to pay Rs. 100,000 to beat C. B beats C and claims Rs. 100,000 from B. A
refuses to pay. B cannot recover because the agreement is void on the ground of unlawful
consideration.
A promises B to obtain an employment in the public service and B promises to pay Rs.
100,000 to A. The agreement is void on the ground of unlawful consideration.
1.3 Agreement, the consideration or object of which is partly unlawful

If a party of a single consideration for one or more objects, or any one or any part of any one of
several conditions for a single object, is unlawful, the agreement is void. [Section 24]
Example: Agreement, the consideration or object of which is partly unlawful
A promises to superintends, on behalf of B, a legal manufacture of indigo, and an illegal traffic in
other articles. B promises to pay salary to A of Rs. 10,000 per month. The agreement is void as the
object of A’s promise and the consideration for B’s promise being in party unlawful.
1.4 Stranger to contract

Generally a stranger to a contract cannot sue, while a stranger to consideration can sue. This
rule is known as the doctrine of privity of contract. Privity of contract means the relationship
subsisting between the parties who have entered into contractual obligations. It implied a
mutuality of will and creates a legal bond between the parties to a contract.
Exceptions
The following are the exceptions to the rule that a stranger to a contract cannot sue:
When an arrangement is made in connection with marriage, partition or other family
arrangements and a provision is made for the benefit of a person, he may sue although he
is not a party to the contract.
The person who becomes an agent of third party by acknowledgement or estoppel, may
be sued by such third party.
Where a benefit under a contract has been assigned (other than one involving personal
skill), the assignee can enforce the contract subject to all equities between the original
parties to the contract.
Where a charge in favour of a person has been created on specific immovable property,
such charge is enforceable at the instance of the person beneficially interested, though he
may not be a party to the document creating the charge.
1.5 Agreements without consideration

According to Section 25 of the Contract Act, an agreement without consideration is void except
under the following cases:
Natural love and affection [Section 25(1)]
Agreements made on account of natural love and affection without consideration will be valid if it
is:
expressed in writing,

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registered under the law,

made on account of natural love and affection, and
between parties standing in a near relation to each other.
Example: Natural love and affection
A, for natural love and affection; promises to give his son, B, Rs. 10,000. A puts his promise to B
into writing and registers it. This is a contract.
Promise to compensate past voluntary services [Section 25(2)]

Such promise made without consideration is valid if:
it is a promise to compensate and
the person who is to be compensated has already done something voluntarily or has done
something which the promisor was legally bound to do.
Example: Promise to compensate
A finds B's purse and gives it to him. B promises to give A Rs.5,000. Now this promise of B
is a contract.
A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
Time barred debt [Section 25(3)]

A promise to pay time barred debt is enforceable if:
it is made in writing,
it is signed by the debtor or his agent, and
it relates to a debt which could not be enforced by a creditor because of law of limitation.
Gifts
The gifts which are accepted by the donee are called completed gifts and are valid.
Example: Gift
X transferred some property to Y by a duly written and registered deed as a gift. This is a valid
contract even though no consideration given by Y.
Contract of agency
A consideration is not necessary for a contract of agency. [Section 185]
Contract of bailment
A consideration is not necessary for a contract of bailment i.e. gratuitous contract of bailment.
Example: Gratuitous bailment

Zaheer lends an IPAD to Imran for his work without any charge.
Charitable subscription
Where the promise on the strength of the promise makes commitments i.e. changes his position
to the detriment.
Contract of guarantee
Consideration received by the principal debtor is sufficient for the surety and it is not necessary to
result in some benefit to the surety himself. [Section 127]
Example: Contract of guarantee
B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will
guarantee the payment of the price of the goods. C promises to guarantee the payment in
consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.

2 CHAPTER REVIEW
Chapter review
Define consideration and essentials of a valid consideration
Discuss the contracts where there is no consideration

Business Law

CHAPTER
Business Law
6
Free consent
Contents
1 Consent – Consensus-ad-idem
2 Coercion
3 Undue influence
4 Fraud
5 Misrepresentation
6 Mistake
7 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Free consent
knowledge of laws relating to free consent of a contract.
LO 2.5.1 Define free consent
LO 2.5.2 Know the effect of absence of free consent
LO 2.5.3 Be aware of factors which may affect the consent
LO 2.5.4 Identify and understand coercion, undue influence, fraud, misrepresentation and mistake.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 6: Free consent
1 CONSENT – Consensus-ad-idem
Section overview
Definition of consent
Effect of absence of consent
Definition of free consent
Effect of absence of free consent
1.1 Definition of consent
Definition: Consent [Section 13]

Two persons are said to consent when they agree upon the same thing in the same sense.
Thus, the analysis of the above definition reveals that both the parties must be at the same
frequency of mind at the time of entering into a contract i.e. Consensus ad ideur.
1.2 Effect of absence of consent

The effect of absence of consent is that the agreement is not valid and is not enforceable by law.
[Section 19]
Example: Effect of absence of consent

X has one Alto and one Coure. He wants to sell Coure. Y does not know that X has two cars. Y
offers to buy X’s Alto for Rs. 400,000. X accepts the offer thinking it to be an offer for his Coure.
Here, there is no identity of minds in respect of the subject matter. Hence, there is no consent at
all and hence there is no agreement.
1.3 Definition of free consent
Definition: Free consent [Section 14]

The consent is said to be free when it is not caused by:
Coercion or
Undue influence or
Fraud or
Misrepresentation or
Mistake
1.4 Effect of absence of free consent

The effect of absence of free consent is that the contract becomes voidable if the consent is
obtained by coercion or undue influence or fraud or misrepresentation at the option of the party
whose consent was so caused but if the consent is obtained by mistake then agreement may be
void-ab-initio or contract is not voidable depending upon the nature of the mistake. [Section 19A]

Business Law
2 COERCION
Section overview
Definition of coercion
Effects of coercion
2.1 Definition of coercion

Definition: Coercion [Section 15]
Coercion is the:
committing or
threatening to commit any act
x which is forbidden by Pakistan Penal Code or
unlawful detaining or
threatening to detain,
Any property with an intention of causing any person to enter into an agreement.
The analysis of the above definition reveals that coercion may be compelling a person to enter
into a contract under pressure or a threat.
Example: Coercion
A beats B and compels him to sell his bike for Rs. 20,000. Here, B’s consent has been
obtained by coercion because beating someone is an offence under the Pakistan Penal
Code.
A, on board an English ship causes B to enter into an agreement by an act amounting to
criminal intimidation under the Pakistan Penal Code. A afterwards sues B for breach of
contract at Karachi. A has employed coercion, although his act is not offence by the law of
England and PPC was not in force at the time when or place where the act was done.
Coercion may be exercised from any person, and may be directed against any person, even a
stranger.
Example: Coercion
A threatens to kill C, B’s daughter, if B refuses to sell his house to him. B agrees to sell his
house. Here, B’s consent has been obtained by coercion though C is not a party to the
contract.
A threatens to kill B if B refuses to sell his house to C. B agrees to sell his house. Here, B’s
consent has been obtained by coercion though A is not a party to the contract.
2.2 Effects of coercion

The effects of coercion are given below: [Section 19, 64 and 72]
The contract becomes voidable at the option of the party whose consent was so caused.
The burden of proof lies on the party who rescinds the contract.
The party rescinding a voidable contract shall, if he has received any benefit from another
party, restore such benefit i.e. restitution.
A person to whom money has been paid or anything delivered by coercion must repay or
return it.
Example: Effects of coercion
A threatens to kill B if he does not sell his BMW for Rs 1 million to A. B contracted to sell his BMW
to A and receives the payments. Here, B’s consent has been obtained by coercion. Hence, this
contract is voidable at the option of B but B has no right to insist that contract shall be performed.

3 UNDUE INFLUENCE
Section overview
Definition of undue influence

Nature of relationship
Effect of undue influence
Difference between coercion and undue influence
3.1 Definition of undue influence
Definition: Undue influence [Section 16]

A contract is said to be induced by undue influence where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses
that position to obtain unfair advantage over the other.
Thus the analysis of the above definition reveals that an undue influence means dominating in a
relationship the will of the other person to obtain an unfair advantage. A contract is said to be
induced by undue influence:
Where the relations between the parties are such that
one of them in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other.
3.2 Nature of relationship

A person is in a position to dominate the will of another where he:
holds the real or apparent authority over the other e.g. parent and child
stands in a fiduciary relation to the other e.g. already indebted
makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily distress e.g. medical attendant and
patient.
Example: Undue influence

A having advanced money to his son, B during his minority, upon B’s coming of age
obtains, by misuse of parental influence, a bond from B for a greater amount than the sum
due in respect of the advances. A employs undue influence.
A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical
attendant, to agree to pay B an unreasonable sum for his professional services. B employs
undue influence.
A being in debt to B, the money lender of his village, contracts a fresh loan on terms which
appear to be unconscionable. It lies on B to prove that the contract was not induced by
undue influence.
A applies to a banker for a loan at a time when there is stringency in the money market.
The banker declines to make the loan except at a unusually high rate of interest. A accepts
the loan on these terms. This is a transaction in the ordinary course of business, and the
contract is not induced by undue influence.
3.3 Effect of undue influence

The contract becomes voidable at the option of the party whose consent was so caused. The
burden of proof is on the party who was in a position to dominate the will of the other party not all
cases [Section 19].

Business Law
In the following relationships it is presumed that a person is in a position to dominate the will of
another person:
Father and son
Guardian and ward
Employer and Employee
Trustee and beneficiary
Teacher and student
Doctor and patient
Solicitor and client
Fiancé and fiancée
Pardanasheen lady (Completely secluded)
In the following relationship there is no presumption that a person is in a position to dominate the
will of another person:
Landlord and tenant
Creditor and debtor
Husband and wife (non parda observing)
Rebutting presumption
The presumption of undue influence can be rebutted by showing that the:
Dominant party has made a full disclosure of all the facts to the weaker party before
making the contract
Price was adequate
Weaker party was in receipt of competent independence advice before entering into the
contract.
The contract may be set aside either absolutely or if the party who was entitled to avoid it has
received any benefit, upon such terms and conditions as to the Court may seem just. [Section
19A]
3.4 Difference between coercion and undue influence
S.no Coercion Undue influence
1 Definition
A contract is said to be caused by A contract is said to be induced by undue
coercion when it is obtained by: influence:
committing or threatening to Where the relations between the parties
commit any act are such that
x which is forbidden by x one of them in a position to
Pakistan Penal Code or dominate the will of the other and
unlawful detaining or x uses that position to obtain an
threatening to detain. unfair advantage over the other.
2 Consent
Consent is obtained by giving a Consent is obtained by dominating the will.
threat of an offence or committing an
offence.

S.no Coercion Undue influence
3 Nature of pressure
It involves physical pressure. It involves moral pressure.
4 Relationship
Parties to a contract may or may not Parties to a contract are related to each other
be related to each other. under some sort of relationship.
5 Reason
The objective is to compel a person The objective is to obtain an unfair advantage.
to enter into a contract.
6 Criminal liability
Criminal liability is incurred, Criminal liability is not incurred.
therefore it is illegal.
7 On whom
Coercion may be employed on a Undue influence may only be employed on the
person other than a party whose party whose consent is desired.
consent is desired, for instance his
son.
8 By whom
It can be excercised by a stranger to It can only be exercised by a party to the
the contract. contract and not by a stranger.
9 Onus of proof
The onus of proof is on the party The onus of proof is on the party in a position
who wants to relieve himself of the to dominate the will of the other party.
consequences of coercion.
10 Restoration of benefit
The aggrieved party has to restore The party avoiding the contract may or may
the benefit received. not restore benefit.

Business Law
4 FRAUD
Section overview
Definition of fraud
Essentials of fraud
Effects of fraud
Silence as to fraud
4.1 Definition of fraud

Definition: Fraud [Section 17]
Fraud means and includes any of the following acts committed.
by a party to a contract, or
with his connivance, or
by his agent
with intent
to deceive another party to it or his agent, or
to induce to enter into a contract
By false assertion
A false representation of a fact made
Knowingly or
Without belief in its truth
Example: False assertion
A sells to B locally manufactured goods representing them to be imported goods charging a
higher price, it amounts to fraud.
Active concealment
The active concealment of a fact by one having knowledge or belief of the fact such as, where
steps are taken by a seller concealing some material facts so that the buyer even after a
reasonable examination cannot trace the defects, it will amount to fraud,
Example: Active concealment
Z a furniture dealer conceals the cracks in furniture sold by him by using some packing material
and polishing it in such a way that the buyer even after reasonable examination cannot trace the
defect, it would amounts to fraud through active concealment.
Empty promise
A promise made without any intention of performing it constitutes to fraud.
Example: Empty promise
Buying goods under a contract of sale with an intention of not paying the price is fraud.
Declared act
Any such act or omission as the law specially declares to be fraudulent
Fitted act
Any other act fitted to deceive.

4.2 Essentials of fraud

The essentials of fraud are shown below:

Party to a contract
The fraud must be committed by a party to a contract or by anyone with his connivance or by his
agent. Thus, the fraud by a stranger to the contract does not affect its validity.
False representation
It means that a false representation is made with the knowledge of its falsehood. It will equal to
fraud if a true representation is made but becomes untrue at the time of formation of contract the
fact is known to the party who made the representation.
Representation as to fact
A mere opinion does not amount to fraud. A representation must relate to a fact than it amount to
fraud.
Actually deceived
A deceit, which does not deceive is not fraud. The fraud must have actually deceived the other
party who has acted on the basis of such representation.
Suffered loss
Loss has been suffered by the party who acted on the representation.
4.3 Effects of fraud

The effects of fraud are as follows [Section 19]:
The contract becomes voidable at the option of the party whose consent was so caused.
The party whose consent was so caused may insist on performance of the contract.
The party whose consent was so caused is entitled to claim damages.

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Exceptions to rescind the contract

A party cannot rescind the contract where:
silence amounts to fraud and the aggrieved party had the means of discovering the truth
with ordinary diligence
the party gave the consent in ignorance of fraud
the party after becoming aware of the fraud takes a benefit under the contract
an innocent third party before the contract is rescinded acquires for consideration and in
good faith some interest in the property passing under the contract,
the parties cannot be restored to their original position.
4.4 Silence as to fraud

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances of the case are such that parties stands in fiduciary relationship
or where silence itself is equivalent to speech. [Section 17]
Example: Silence as to fraud
A sells by auction to B a horse which A knows to be unsound. A says nothing to B about the
horse's unsoundness. This is not fraud by A.
B is A's daughter and has just come of age. Here, the relation between the parties would make
it A's duty to tell B if the horse is unsound.
B says to A, "If you do not deny it, I shall assume that the horse is sound." A says nothing. Here
A's silence is equivalent to speech. If the horse turns out to be vicious. A can be held liable for
fraud.
Note
In the early 80’s the Federal Shariat Court decided that provision regarding position of silence in
Contract Act is not in conformity with the teachings of Islam.

5 MISREPRESENTATION
Section overview
Definition of misrepresentation
Essentials of misrepresentation
Effects of misrepresentation
5.1 Definition of misrepresentation
Definition: Misrepresentation [Section 18]

Misrepresentation means and includes-
Unwarranted statement
When a person makes a positive statement that a fact is true when his information does not
warrant it to be so, though he believes it to be true this amounts to misrepresentation.
Breach of duty
Any breach of duty which
without an intent to deceive,
gains an advantage to the person committing it, or
anyone claiming under him,
by misleading another
to his prejudice or
to the prejudice of anyone claiming under him.
Inducing mistake about subject matter (Innocent misrepresentation)
A party to an agreement induces (however innocently) the other party to make a mistake as to
the nature or quality of the subject of the agreement.
5.2 Essentials of misrepresentation

The essentials of misrepresentation are shown below:

Business Law

Party to a contract
The representation must be made by a party to a contract or by anyone with his connivance or by
his agent. Thus, the representation by a stranger to the contract does not affect the validity of the
contract.
False representation
There must be a false representation and it must be made without the knowledge of its falsehood
i.e. the person making it must honestly believe it to be true.
Representation as to fact
A mere opinion does not amount to misrepresentation. A representation must relate to a fact if it
amounts to misrepresentation.
Object
The objective is to induce the other party to enter into contract without the intention of deceiving
the other party.
Actually acted
The other party must have acted on the faith of the representation.
5.3 Effects of misrepresentation

The effects of representation are following [Section 19]:
the contract becomes voidable at the option of the party whose consent was so caused.
The party whose consent was so caused may insist on performance of the contract.
Exceptions to rescind the contract
A party cannot rescind the contract where:
the party whose consent was caused by misrepresentation had the means of discovering
the truth with ordinary diligence;
the party gave the consent in ignorance of misrepresentation
the party after becoming aware of the misrepresentation takes a benefit under the contract
an innocent third party before the contract is rescinded acquires for consideration and in
good faith some interest in the property passing under the contract,
the parties cannot be restored to their original position.

6 MISTAKE
Section overview
Mistake
Types of mistakes
6.1 Mistake
Where both the parties to an agreement are under a mistake as to matters of facts essential to
the agreement, the agreement is void [Section 20].
6.2 Types of mistakes
The types of mistakes are shown below:
Types of mistakes
Mistake of law Mistake of fact
Pakistan Foreign
Bilateral Unilateral
law law
Subject Possibility of Identity of Nature of

matter performance person contract
Mistake of Pakistan law

A contract is not voidable because it was caused by a mistake as to any law in force in Pakistan.
[Section 21]
Mistake of foreign law
A mistake as to the law not in force in Pakistan has the same effect as a mistake of fact i.e. void.
[Section 21]
Bilateral mistake
Where both the parties to an agreement are under a mistake as to a matter of facts essential to
the agreement, the agreement is void.
An erroneous opinion as to the value of the thing which forms the subject matter of the
agreement is not to be deemed a mistake as to a matter of facts. [Section 20]
Example: Bilateral mistake

A buys' a painting believing it to be worth Rs 100,000 while in fact it is worth only Rs
10,000. The contract is not void.
A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Karachi. It turns out that, before the date of the bargain, the ship conveying the cargo had
been cast away and the goods lost. Neither party was aware of facts. The agreement is
void.

Business Law
Bilateral mistake as to the subject matter

A bilateral mistake as to the subject matter includes the following mistakes as to the:
x existence of subject matter
x quantity of subject matter
x quality of subject matter
x price of subject matter
x identity of subject matter
x title of subject matter
Example: Bilateral mistake as to the subject matter
A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of
bargain though neither party was aware of the fact. The agreement is void because there is
bilateral mistake as to the existence of subject matter.
A agrees to buy from B all his horses believing that B has two horses but B actually has
three horses. The agreement is void because there is bilateral mistake as to the quantity of
subject matter
A agrees to buy a particular horse from B. Both believe it to be a race horse but it turns to
be a cart horse. The agreement is void because there is bilateral mistake as to the quality
of the subject matter.
A agrees to buy a particular horse from B who mentioned in his letter the price as Rs 1,150
instead of 5,150. The agreement is void because there is bilateral mistake as to the price
of the subject matter.
A agrees to buy from B a certain horse. B has one race horse and one cart horse. A thinks
that he is buying race horse but B thinks that he is selling cart horse. The agreement is void
because there is bilateral mistake as to the identity of subject matter.
A agrees to buy a particular horse from B. That horse is already owned by A. The
agreement is void because there is bilateral mistake as to the title of the subject matter.
Bilateral mistake as to the possibility of performance

Where the parties believe that an agreement is capable of performance and actually it is
not then it is said to be a bilateral mistake as to the possibility of performance due to which
agreement is void.
Unilateral mistake
A contract is not voidable merely because it was caused by one of the parties to it being under a
mistake as to matter of facts. [Section 22]
Example: Unilateral mistake

A buys' a painting believing it to be worth Rs 100,000 while in fact it is worth only Rs 10,000.
Exceptions
Following are the exceptions where agreement is void on the basis of unilateral mistake:
Mistake relating to the identity of the person
Mistake relating to the nature of the contract
Example: Mistake relating to the identity of the person
A knew that on "account of his criticism of the plays in the past, he would not be allowed entry to
the performance of a play at the theatre. The managing director of the theatre gave instructions
that ticket should not be sold to A. A, however, obtained a ticket through one of his friends. On
being refused admission to the theatre, he sued for damages for breach of contract. It was held
that there was no contract between the theatre company and A as the theatre company never
intended to contract with A.

Example: Mistake relating to the nature of contract

An old illiterate man was induced to sign a bill of exchange by means of a false representation
that it was a mere guarantee. It was held that he was not liable for the bill of exchange because
he never intended to sign a bill of exchange.

Business Law
7 CHAPTER REVIEW
Chapter review
Discuss the meaning of consent
Explain when a consent is said to be free
Understand the effects and meaning of coercion, undue influence, fraud and misrepresentation
Discuss the laws relating to the effect of mistake on contracts

CHAPTER
Business Law
7
Legality of object, consideration and
agreements opposed
to public policy
Contents
1 Legality of object, consideration and agreements opposed
to public policy
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Legality of object, consideration and agreements opposed to public policy

knowledge of laws relating to legality of object and agreements opposed to public
policy.
LO 2.6.1 Identify circumstances where object or consideration is unlawful
LO 2.6.2 Identify agreements opposed to public policy.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 7: Legality of object, consideration and agreements opposed to public policy
1 LEGALITY OF OBJECT, CONSIDERATION AND AGREEMENTS OPPOSED TO

PUBLIC POLICY
Section overview
Circumstances where object or consideration is unlawful

Agreements opposed to public policy
1.1 Circumstances where object or consideration is unlawful
Definition: Legality of object and consideration [Section 23]

The consideration or object of an agreement is lawful unless:
It is forbidden by law
Is of such a nature that if permitted would defeat the provisions of any law
It is fraudulent
It involves an in injury to the person or property of another
The court regards it as immoral, or opposed to public policy
The analysis of above definition is given below:

Forbidden by law
If the law of the state prohibits an object or the consideration of an agreement then such
agreements are void. An act is forbidden by law when it is punishable by the law of the country.
Example: Forbidden by law

A promises B to drop a prosecution which he has instituted against B for robbery, and B
promises to restore the value of the things taken. The agreement is void, as its object is
unlawful.
A promises to obtain for B an employment in the public service, and B promises to pay
Rs.1,000/- to A. The agreement is void as the consideration for it is unlawful.
The effects of such agreements are following:

The collateral transactions to such an agreement also become tainted and hence cannot
be enforced.
No action can be taken for the recovery of money paid or property transferred under such
an agreement and for the breach of any such agreement.
In case of an agreement containing the promise, some part of which is legal and other part
illegal, the legal position is as under: [Section 57 & 58]
x If the illegal part cannot be separated than the whole agreement is illegal.
x If the illegal part can be separated than court will enforce the legal part and will
reject illegal party.
Defeats the provisions of any law
If the object or the consideration of an agreement is of such nature that, if permitted, it would
defeat the provisions of any law, the agreement is void.

Business Law
Example: Defeats the provisions of any law

A's estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by
which a defaulter is prohibited from purchasing the estate. B, upon an understanding with A,
becomes the purchaser, and agrees to convey the estate to A, upon receiving from him the price
which B has paid. The agreement is void as the transaction, in fact, a purchase by the defaulter,
and would so defeat the object of the law.
Fraudulent
Where the object of an agreement is fraudulent the agreement is void.
Example: Fraudulent
A, B and C enter into an agreement of the division among them of gains acquired, or be
acquired, by them by fraud. The agreement is void, as its object is unlawful.
A, being agent for a landed proprietor, agrees for money, without the knowledge of his
principal, to obtain for B a lease of land belonging to his principal. The agreement between
A and B is void, as it implies a fraud by concealment by A, on his principal.
Involves or implies injury

The object of an agreement will be unlawful if it tends to injure a person or the property of
another. Property can either be movable or immovable.
Example: Involves or implies injury

A promised to pay Rs.100,000 to B o n a g re e i ng to publish a defamatory article against C. It
was held that B could not recover the amount because the agreement was void as it involves
injury to C.
Court regards it as immoral or opposed to public policy

Where the object or consideration of an agreement is such that the court regards it as immoral or
opposed to the public policy then the agreement is void.
Example: Court regards it as immoral or opposed to public policy

A, who is B's mukhtar, promises to exercise his influence, as such, with B in favour of C,
and C promises to pay Rs 1,000 to A. The agreement is void, b e c a u s e it is immoral.
A agrees to let her daughter to hire to B for concubinage. The agreement is void because it
is immoral, though the letting may not be punishable under the Pakistan Penal Code.
1.2 Agreement, the consideration or object of which is partly unlawful

A contract may contain several distinct promises or a promise to do several distinct acts of which
some are legal and others illegal, or a part of which is legal and a part of which is illegal. In case
of an agreement containing the promise, some part of which is legal and other part(s) illegal, the
legal position is as follows [Section 24]:
If the illegal part cannot be separated than the whole agreement is illegal.
If the illegal part can be separated than court will enforce the legal part and will reject
illegal party.
Promise to do legal and illegal things

Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly,
under specified circumstances, to do certain other things which are illegal, the first set of
promises is a contract, but the second is a void agreement. [Section 57]

Example: Promise to do legal and illegal things

A and B agree that A shall sell B a house for Rs.10,000,000 but that, if B uses it as a
gambling house, he shall pay Rs.50,000,000 for it.
The first set for reciprocal promises, namely to sell the house and to pay Rs.10,000,000 for it, is
a contract. The second set is for an unlawful object, namely, that B may use the house as a
gambling house and is a void agreement.
Alternative promise being illegal

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced. [Section 58]
Example: Alternative promise being illegal

A and B agree that A shall pay B Rs.1,000 for which B shall afterwards deliver to A either
rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
1.3 Agreements opposed to public policy

An agreement is said to be unlawful if the court regards it as opposed to public policy. Following
are the agreements which are held to be opposed to public policy:
Trading with enemy
A person cannot enter into an agreement with an alien enemy during the period of war on the
ground of public policy. This is because the further performance of the agreement involves
commercial interaction with the enemy and the continued existence of agreement would confer
upon the enemy an immediate or future benefit. Contracts entered before the declaration of war
are either suspended or terminated during the period of war.
Stifling prosecution
Criminals should be prosecuted and punished; hence an agreement for stifling prosecution is
illegal. It is in public interest that if a person has committed crime he must be prosecuted and
punished.
Example: Stifling prosecution

A, who knows that B has stolen goods amounting to Rs.500,000, receives Rs.100,000 from B in
consideration of not exposing A This agreement is illegal.
Maintenance and champerty

Maintenance is an agreement where a person promises to maintain a suit in which he has no
interest.
Example: Maintenance and champerty
A promises to pay B Rs.100,000 if B files a suit against C.
Champerty is an agreement whereby one party agrees to assist another in recovering property
and in turn is to share in the proceeds of the action.
In Pakistan, Maintenance and champerty are not absolutely void. They may be treated valid if
they fulfil certain conditions if:
(i) It is reasonable
(ii) With bona fide intention
x If funds are supplied then maintenance and champerty both may be valid
x But if professional services have been provided then only maintenance may be
valid and not champerty.

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Sale of public offices

The agreements of sale of public offices are illegal as such agreements, if enforced, would led to
inefficiency and corruption on public life. Similarly, an agreement to pay money to a public
servant to induce him to act corruptly or to retire and thus make way for the appointment of
promisor are void on the ground of public policy.
Restraint of parental rights
An agreement which prevents a parent to exercise his right of guardianship is void. A father is
entitled by law to the custody of his child. He cannot enter into an agreement which is
inconsistent with his duties arising out of such custody.
Restraint of personal liberty
An agreement which unduly restricts the personal liberty of a person is void as law generally
allows all persons freedom to enter into any contract they please.
Agreement to create monopoly
An agreement to create monopoly is void as this will impair consumer sovereignty and result in
high prices for law quality of goods and services.
Marriage brokerage agreement
An agreement in which a person promises for reward to procure marriage for another is void
being opposed to public policy.

2 CHAPTER REVIEW
Chapter review
Explain the cases where the object or consideration of an agreement are said to be unlawful
Name various types of agreements which are considered to be opposed to public policy

Business Law

CHAPTER
Business Law
8
Void agreements
Contents
1 Void agreements
2 Agreements in restraint of trade
3 Wagering agreements
4 Other void agreements
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Void agreements
knowledge of laws relating to void agreements.
LO 2.7.1 Be aware of circumstances or conditions when an agreement is considered as void
LO 2.7.2 Identify different types of void agreements.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 8: Void agreements
1 VOID AGREEMENTS
Section overview
Meaning of void agreements

Void agreements
1.1 Meaning of void agreements

An agreement not enforceable by law is said to be void. All agreements may not be enforceable
by law. The agreements which are not enforceable by law right from the time when they are
made are called void-ab-initio. [Section 2(g)]
Effect on agreement collateral to void agreement
When an agreement is void, other agreement which is collateral to it is also void and is not
enforceable by law if the other party has knowledge about it
1.2 Void agreements

Contract Act declares certain agreements to be void. Such agreements are listed below:
1. Agreements by or with persons incompetent to contract [Section 11]
2. Agreements made under mutual mistake of fact [Section 20]
3. Agreements made under mutual mistake of foreign law [Section 21]
4. Agreement, the object or consideration of which is unlawful [Section 23]
5. Agreement, the consideration or object of which is partly unlawful [Section 24]
6. Agreement made without consideration [Section 25]
7. Agreements in restraint of trade [Section 27]
8. Wagering agreement [Section 30]
9. Agreements in restraint of legal proceedings [Section 28]
10. Agreements in restraint of marriage [Section 26]
11. Uncertain agreements [Section 29]
12. Agreements contingent on impossible events [Section 32]
13. Agreements to do impossible acts [Section 56]
14. Agreement to enter into an agreement in future
Note
Agreements from 1 to 6 have been discussed in earlier chapters.
From 5 to 11 are those agreements which are specifically or expressly declared as void under
the Contract Act.

Business Law
2 AGREEMENTS IN RESTRAINT OF TRADE
Section overview
Meaning of agreements in restraint of trade

Exceptions of agreements in restraint of trade
2.1 Meaning of agreements in restraint of trade

Every agreement by which anyone is restricted from exercising a lawful profession, trade or
business of any kind, is to that extent void. [Section 27]
Example: Agreements in restraint of trade
A and B carried on business in a certain locality in Karachi. A promised to stop business in that
locality if B paid him Rs. 1,000. A stopped his business but B did not pay him the promised
money. It was held that A could not recover anything from B because the agreement was in
restraint of trade and was thus void.
2.2 Exceptions of agreements in restraint of trade

Following are the exceptions where agreements in restraint of trade are not considered as void:
Sale of goodwill
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a
similar business within specified local limits, so long as the buyer, or any person deriving title to
the goodwill from him, carries on a like business therein, provided that such limits are
reasonable. [Section 27]
Partner’s agreements
The Partnership Act allows following agreements as an exception to the agreement in restraint of
trade:
Existing partner
Subject to contract between partners, a partner may not carry on any business competing
with that of the firm while he is a partner. [Section 1]
Outgoing partner
An outgoing partner may agree with his partners that he will not carry on any business
similar to that of the firm for a specified period and for specified local limits. [Section 36]
Dissolution of the firm
Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that
some or all of them will not carry on a business similar to that of the firm for a specified
period and for specified local limits. [Section 54]
Sale of goodwill
Partner(s) may upon the sale of the goodwill of a firm, make an agreement that partner(s)
will not carry on any business similar to that of the firm for a specified period and for
specified local limits. [Section 55]
Trade combinations
An agreement between different firms in the nature of a trade combination in order to maintain a
price level and avoid under selling is not void.
Example: Trade Combinations
An agreement by two persons to avoid competition is void because it tends to create
monopoly.
An agreement among some manufacturing companies not to sell goods below a minimum
price and to divide the profits in a certain proportion is not void because such agreement
was made to regulate the business and not to restrain it.

Service Agreements
During the employment, agreement of services often contains a clause by which an employee is
prohibited from working anywhere else. Such a clause in service agreement by which an
employer restricts the employee not to compete with the employer or accepting any other
employment is not restraint of trade. Further, where legitimate interest or goodwill or trade secret
of employer is involved an employer may restrict his employee even after the end of employment
but such restriction should be just and reasonable.
Example: Service Agreements
An employee who possesses certain trade secrets, agreed not to carry on the similar
business during 5 years after the termination of service.
It is a valid agreement because restraint is intended to protect an employer against an
employee making use of trade secrets learned by him in the course of his employment.
An agreement to restrain a servant from competing for 5 years after the period of service.
It is void because restraint is intended to avoid competition.

Business Law
3 WAGERING AGREEMENTS
Section overview
Meaning of wagering agreement

Effects of wagering agreement
3.1 Meaning of wagering agreement

An agreement between two persons under which money or money’s worth is payable, by one
person to another on the happening or non-happening of a future uncertain event is called a
wagering event. An agreement by way of wager is void. [Section 30]
Example: Wagering agreement

A promises to pay Rs. 10,000 to B if it rained today, and B promises to pay Rs. 1,000 to A if it did
not.
Example: Transactions which are not held wagers:

Prize competitions which are games of skill, e.g. picture puzzles, athletic competitions. For
example, an agreement to enter into a wrestling event in which winner was to be rewarded
by the entire sale proceeds of tickets is not a wagering contract.
An agreement to contribute to a plate or prize of the value of Rs. 500 and above to be
awarded to the winner of a horse race.
Stock market transaction in which the delivery of shares is intended to be given.
Contracts of insurance.
3.2 Effects of Wagering Agreement
The effects of wagering agreements are following:

Such agreements are void
No suit can be filed to recover the amount won on any wager.
Transactions which are collateral to wagering agreements may also be void.

4 OTHER VOID AGREEMENTS
Section overview
Agreements in restraint of legal proceedings

Agreements in restraint of marriage
Agreements contingent on impossible events
Agreements to do impossible acts
Agreements to enter into an agreement in the future
4.1 Agreements in restraint of legal proceedings

Every agreement by which any party is restricted from enforcing his right under a contract by the
usual legal proceedings or which limits the time within which he may enforce his right is void.
[Section 28]
Exceptions
An agreement between two or more persons who agree that any dispute which may arise
between them shall be referred to arbitration, is valid.
An agreement whereby parties agree not to file an appeal in upper court lf law, is valid.
Parties making extract to select one court of law between two courts equally competent.
Exception
An agreement restraining the marriage/to hear case, is valid of a minor is valid.
4.2 Agreements in restraint of marriage

Every agreement in restraint of the marriage of any person other than a minor is void. This is
because the law regards marriage and married status as the right of every individual. [Section 26]
Example: Agreements in restraint of marriage

A promises with B for good consideration that she will not marry C. It is a void agreement..
4.3 Uncertain agreements

An agreement the meaning of which is not certain or capable of being made certain are void.
[Section 29]
Example: Uncertain agreements

A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show what kind of
oil was intended. The agreement is void for uncertainty.
A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil." The nature of
A's trade affords an indication of the meaning of the words, and has entered into a
contract for the sale of one hundred tons of coconut oil.
A agrees to sell to B "all the grain in my granary at Peshawar." There is no uncertainty here
to make the agreement void.
A agrees to sell to B "one thousand mounds of rice at a price to be fixed by c." As the price
is capable of being made certain, there is no uncertainty here to make the agreement void.
A agrees to sell to B "my white horse for Rupees five hundred or Rupees one thousand."
There is nothing to show which of the two prices are to be given. The agreement is void.

Business Law
4.4 Agreements contingent on impossible events

Contingent agreements to do or not to do anything, if an impossible event happens are void
whether the impossibility of the event is known or not to the parties to the agreement at the time
when it is made. [Section 32]
Example: Agreements contingent on impossible events

A agrees to pay Rs. 1,000 if B marries C (a Hindu) who is already married to D. This agreement is
void.
4.5 Agreements to do impossible acts

An agreement to do an impossible act is void. [Section 56]
Example: Agreements to do impossible acts

A agrees with B to discover treasure by magic. The agreement is void.
4.6 Agreements to enter into an agreement in the future

An agreement to enter into an agreement in the future is void.

5 CHAPTER REVIEW
Chapter review
Discuss briefly expressly declared void agreements
Discuss the exceptions to such void agreements
Explain wagering agreement

Business Law

CHAPTER
Business Law
9
Contingent contracts
Contents
1 Contingent contracts
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Contingent contracts
knowledge of laws relating to contingent contracts.
LO 2.8.1 Define contingent contract
LO 2.8.2 Identify characteristics of contingent contract
LO 2.8.3 Understand rules regarding contingent contract
LO 2.8.4 Understand the difference between contingent contact and wagering agreement.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 9: Contingent contracts
1 CONTINGENT CONTRACT
Section overview
Definition of contingent contract

Characteristics of contingent contracts
Rules regarding contingent contracts
Difference between contingent contract and wagering agreement
1.1 Definition of contingent contract
Definition: Contingent contract [Section 31]

A ‘contingent contract’ is a contract.
to do or
not to do something
if some event, collateral to such contract
does or
does not happen.
Insurance contracts and contracts of indemnity and guarantee provide the best example of
contingent contracts.
Example: Definition of contingent contract

A contracts to pay B Rs.10,000 if B’s house is burnt. This is a contingent contract.
1.2 Characteristics of contingent contracts

The following are the characteristics of contingent contracts:
the performance of a contingent contract depends upon the happening or non-happening
of some future event.
the event must be collateral to the contract
the event must be uncertain
1.3 Rules regarding contingent contracts

The rules regarding the enforcement of contingent contract are given below:
Contracts contingent upon the happening of an uncertain future event
A contract, the performance of which is contingent on the happening of an uncertain future event,
cannot be enforced by law unless and until that event has happened. If the event becomes
impossible, such contracts become void. [Section 32]
Example: Contracts contingent upon the happening of an uncertain future event

A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced
by law unless and until C dies in A's life time.
A makes a contract with B to sell a horse to B at a specified price if C to whom the horse
has been offered, refuses to buy him. The contract cannot be enforced by law unless and
until C refuses to buy the horse.
A contract to pay B a sum of money when B marries C. C dies without being married to B.
The contract becomes void.

Business Law
Contracts contingent upon the non-happening of a certain future event

A contract the performance of which is contingent on the non-happening of a certain future event
can be enforced when the happening of that event becomes impossible and not before. [Section
33]
Example: Contracts contingent upon the happening of a certain future event

A agrees to pay B a sum of money if a certain ship does not return. This ship is sunk. The
contract can be enforced when the ship sink.
Contracts contingent upon the future conduct of a living person

If the future event on which a contract is contingent is the way in which a person will act at an
unspecified time, the event shall be considered to become impossible when such person does
anything which renders it impossible that he should so act within any definite time or otherwise
than under further contingencies. [Section 34]
Example: Contracts contingent upon the future conduct of a living person

A agrees to pay B a sum of money if B marries C. C marries D. the marriage of B to C must now
be considered impossible, although it is possible that D may die, and that C may afterwards
marry B.
Contracts contingent upon the happening of an uncertain specified event within a fixed time
Contingent contracts to do or not to do anything if a specified uncertain event happens within a
fixed time become void if at the expiration of the time fixed such event has not happened or if
before the time fixed such event becomes impossible. [Section 35]
Example: Contracts contingent upon the happening of an uncertain specified event within a fixed
time
A promises to pay B a sum of money if a certain ship returns within a year. The contract may be
enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.
Contracts contingent upon the non-happening, of an uncertain specified event within a fixed time
A contract of performance of which is contingent on the non-happening of a specified uncertain
event within a fixed time may be enforced by law:
When the time fixed has expired and such event has not happened or
If (before the expiry of the time fixed) it becomes certain that such event will not happen.
[Section 35]
Example: Contracts contingent upon the non-happening of an uncertain specified event within a
fixed time
A promises to pay B a sum of money if a certain ship does not return within a year. The contract
may be enforced if the ship does not return within the year, or is burnt within the year.
Agreements contingent upon impossible events
Contingent agreements to do or not to do anything, if an impossible event happens, are void,
whether the impossibility of the event is known or not to the parties to the agreement at the time
when it is made. [Section 36]
Example: Agreements contingent upon impossible events

A agrees to pay B Rs. 1,000 if two straight lines should enclose a space. The agreement is
void.
A agrees to pay B, Rs. 1,000 if B will marry A's daughter C. C was 'dead at the time of the
agreement. The agreement is void.

Section A: Mercantile Law - Chapter 9: Contingent contracts
1.4 Difference between contingent contract and wagering agreement

Following are the few differences between contingent and wagering agreement:
Contingent contract Wagering agreement
Validity
It is a valid contract. It is void and illegal.
Interest of parties
In a contingent contract parties have real Parties are not interested in the occurrence or
interest in the occurrence or non-occurrence non-occurrence of the event except for the
of the event e.g. insurable interest in the winning or losing the amount.
property insured.
Uncertain event
The future uncertain event is merely The uncertain event is the sole determining
collateral. factor of the agreement.
Reciprocal promises
It consists of reciprocal promises. It may or may not consist of reciprocal
promises.

Business Law
2 CHAPTER REVIEW
Chapter review
Define the term contingent contracts
Discuss the rules relating to the performance of contingent contracts
Explain the extent of impossibility of the contingency affects the performance of the contract
Differentiate between contingent contract and wagering agreement

CHAPTER
Business Law
10
Quasi contracts
Contents
1 Quasi contracts
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Quasi contracts
knowledge of laws relating to Quasi contracts.
LO 2.9.1 Know meaning of quasi contract
LO 2.9.2 Understand and apply rules regarding quasi contract
LO 2.9.3 Be aware of different kinds of quasi contract.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 10: Quasi contracts
1 QUASI CONTRACTS
Section overview
Meaning of Quasi contract

Types of Quasi contracts
Application of Quantum Meruit
1.1 Meaning of Quasi contract

A Quasi contract is an obligation imposed by law in absence of any agreement between the
parties. A quasi-contract is not an actual contract, but is a legal substitute formed to impose
equity between two parties. The concept of a quasi-contract is that of a contract that should have
been formed, even though in actuality it was not. The other name for Quasi contracts is
constructive contracts.
1.2 Types of Quasi contracts

The types of Quasi contracts are listed below:
Supply of necessaries
Payment by interested person
Person enjoying benefit of non-gratuitous act / goods
Finder of goods
Payment by mistake or under coercion
These Quasi contracts are discussed below:
Supply of necessaries
If a person incapable to enter into contract or his dependent is supplied by another person
necessaries suited to his conditions in life the person supplying such necessaries is entitled to be
reimbursed his price from the property of such incompetent person. [Section 68]
This has been discussed in detail in chapter 4.
Example: Supply of necessaries
A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B's property.
A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition
in life. A is entitled to be reimbursed from B's property.
Payment by interested person

A person, who is interested in the payment of money which another is bound by law to pay, and
who therefore pays it, is entitled to be reimbursed by the other. [Section 69].
Thus the essential requirement of this section is:
The payment made should be bona fide for the protection of one’s interest
The payment should not be a voluntary one
The payment must be such as the other party was bound by law to pay
Example: Payment by interested person
B holds land in Sindh, on a lease granted by A, a Zamindar. The revenue payable by A to the
Government being in arrears, his land is advertised for sale by the Government. Under the revenue
law, the consequence of such sale will be the annulment of B's lease. B, to prevent the sale and
the consequent annulment of his own lease, pays the Government the sum due from A. A is bound
to make good to B the amount so paid.

Business Law

Where a person lawfully does anything for another person, or delivers anything to him, not
intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of, or to restore, the thing so done or
delivered. [Section 70]
Following conditions must be satisfied before any right of action arises under this section:
The thing must have been done lawfully
The person doing the act should not have intended to do it gratuitously
The person for whom the act is done must have enjoyed the benefit of the act.
Example: Person enjoying benefit of non-gratuitous act / goods

A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is
bound to pay A for them.
A saves B's property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
Finder of goods
A person who finds goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee. He is bound to take as much care of the goods as a man of
ordinary prudence would, under similar circumstances, take of his own goods. He must also take
reasonable steps to trace its owner - if he does not, he will be guilty of wrongful conversion of the
property. [Section 71]
This has been discussed in detail in chapter 15.
Example: Finder of goods

A found a diamond rings at a wedding reception of B. A told B and other guests about it with an
intention to find the true owner. If he is not able to find the owner he can retain the ring as bailee.
Payment by mistake or under coercion

A person to whom money has been paid, or anything delivered by mistake or under coercion,
must repay or return it. [Section 72]
Example: Payment by mistake or under coercion

A and B jointly owe Rs. 100 to C. A alone pays the amount to C, and B, not knowing this fact,
pays Rs. 100 over again to C. C is bound to repay the amount to B.
A railway company refuses to deliver up certain goods to the consignee, except upon the
payment of an undue charge for carriage. The consignee pays the sum charged in order to
obtain the goods. He is entitled to recover so much of the charge as was excessive.
Quantum meruit
The term Quantum Meruit means “as much as earned or deserved.” In case of breach of contract
the application or non-application of the term quantum meruit varies depending upon the terms of
the contract. Further, the divisibility or indivisibility of performance of the contract may also be
taken into account.
The aim of such an award is based on an implied agreement to pay for what has been done.
Quantum Meruit is likely to be sought where one party has already performed part of his
obligations and the other party then repudiates the contract. Provided the injured elects to treat
the contract as terminated, he may claim a reasonable amount for the work done.

1.3 Application of Quantum Meruit

Quantum meruit applies in the following cases:
Void agreement or a contract that becomes void
Act preventing the completion of contract
Divisible contract
Indivisible contract performed completely but badly
Express or implied contract to render services but no remuneration is pre-settled
Void agreement or contract that becomes void
When an agreement is discovered to be void, or when a contract becomes void, any person who
has received any advantage under such agreement or contract is bound to restore it, or to make
compensation for it to the person from whom he received it. [Section 65]
Example: Void agreement or contract that becomes void

A, pays B Rs. 1,000 in consideration of B’s promising to marry C, A’s daughter. C is dead at
the time of the promise. The agreement is void, but B must repay A Rs. 1,000.
A contracts with B to deliver to him 250 kg of rice before May. A delivers 130 kg only
before the agreed time, and none after. B retains the 130 kg. He is bound to pay A for
them.
A, a singer contracts with B, the manager of a theatre, to sing at his theatre for two nights
in every week during the next two months, and B engages to pay her Rs. 50,000 for each
night's performance. On the sixth night, A wilfully absents herself from the theatre, and B,
in consequence rescinds the contract. B must pay A for the five nights on which she has
sung.
A contracts to sing for B for Rs. 100,000 which are paid in advance. A is too ill to sing. A is
not bound to make compensation to B for the loss of the profits which B would have made
if A had been able to sing, but must refund to B Rs. 100,000 paid in advance.

Where a person lawfully does anything for another person, or delivers anything to him, not
intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of, or to restore, the thing so done or
delivered. [Section 70]
Example: Person enjoying benefit of non-gratuitous act / goods

A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is
bound to pay A for them.
A saves B's property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
Act preventing completion of performance

If a party does not complete the contract or prevents the other party from completing it, the
aggrieved party can sue on quantum meruit.
Example: Act preventing completion of performance

C, an owner of a magazine engaged P to write a book to be published by instalments in his
magazine. After a few instalments were published, the publication of the magazine was stopped.
It was held that P could claim payment for the part already published.

Business Law
Divisible contract
The party at default may sue on a quantum meruit if the contract is divisible and the party not at
default has enjoyed benefits of the part performance.
Example: Divisible contract

A hired B to construct a house for Rs. 1 million but B abandoned this contract after having done
the work worth Rs. 0.5 million. Afterwards, A got the work completed. B could not recover
anything for the work done because he was entitled to the payment only on the completion of the
work.
Indivisible contract performed completely but badly

If it is an indivisible contract which has been completely performed but with faults than the party
at default may claim the amount agreed after deducting any amount which the other party has
paid to remove faults.
Example: Indivisible contract performed completely but badly

A agreed to decorate B's flat for a lump sum of Rs. 200,000. A did the complete work but B
complained of faulty workmanship. It costs B another Rs. 30,000 to remedy the defect. It was
held that A could recover only Rs. 170,000 from B.
Express or implied contract to render services but no remuneration is pre-settled

When there is an express or implied contract to render services but no remuneration is pre-
settled in such a case reasonable remuneration is payable.

2 CHAPTER REVIEW
Chapter review
Explain Quasi contracts
Discuss the kinds of Quasi contracts

Business Law

CHAPTER
Business Law
11
Performance of a contract
Contents
1 Performance of a contract
2 Reciprocal promises
3 Appropriation of payment
4 Assignment of contracts
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Performance of a contract
knowledge of laws relating to performance of a contract.
LO 2.10.1 Explain performance and its types i.e. actual and attempted
LO 2.10.2 Understand rules relating to joint and reciprocal contracts and appropriation of payment
LO 2.10.3 Identify essentials of a valid tender
LO 2.10.4 Define tender and explain its types and effects. Describe the essentials of a valid tender
LO 2.10.5 Identify factors which may affect the performance of a contract
LO 2.10.6 Understand and apply rules relating to joint and reciprocal promises
LO 2.10.7 Understand the meaning of appropriation of payment and rules regarding appropriation of
payment
LO 2.10.8 Explain the assignment of contracts.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 11: Performance of a contract
1 PERFORMANCE OF A CONTRACT
Section overview
Meaning of performance
Types of performance
Types of tender
Essentials of a valid tender
Effect of refusal to perform
Persons who can perform and demand performance
Rules regarding the performance of joint promise
Time and place of performance
Time as essence of contract
1.1 Meaning of performance

A contract creates an obligation, which continues till the contract has been discharged by actual
performance. Performance of the contract is one of the vital modes of discharge of the contract.
A contract is said to have been performed when the parties to a contract either perform or offer to
perform their respective promises.
Obligations of parties to contracts
The parties to a contract must either perform, or offer to perform their respective promises,
unless such performance is dispensed with or excused under the provisions of this Act, or of any
other law.
1.2 Types of performance

There are two types of performance as follows:
Actual performance
When the promisor has made the performance in accordance with the terms of the contract and
is accepted by the promisee it is called an actual performance. [Section 37]
Example: Actual performance

A contracted to deliver to B at his warehouse on 1st November, 500 bales of cotton of a particular
quality. A brought the cotton of requisite quality to the appointed place on the appointed day
during the business hours, and B took the delivery of goods. This is an actual performance.
Attempted performance
Although, the promisor has made an offer of performance but the offer of performance of
promisor is not accepted by the promisee it is called an attempted performance. Attempted
performance is also known as tender. [Section 38]
Example: Attempted performance

A contracted to deliver to B at his warehouse on 1st November, 500 bales of cotton of a
particular quality. B refused to take the delivery of goods; it is a case of attempted
performance because A has done what he was required to do under the contract.

Business Law
1.3 Types of tender

There can be two types of tender as follows:
Tender of goods or services
Where the promisor offers to deliver the goods or services but the promisee refuses to accept.
Effects
Goods or services need not be offered again.
Promisor may sue the promisee for non-performance and claim damages.
Promisor is discharged from his liability i.e. he is not liable for non-performance.
Tender of money
Where the promisor offers to pay the amount but the promisee refuses to accept the same.
Effects
Promisor is not discharged from his liability to pay the amount
Promisor will not be liable for interest from the date of a valid tender
1.4 Essentials of a valid tender

The essentials of a valid tender are shown below:
Unconditional
Tender is said to be unconditional when it is made in accordance with the terms of the
contract.
Proper Time
Tender must be made at the stipulated time or during business hours. Tender of goods or
money before the due date is also not a valid tender.

Secttion A: Mercan
ntile Law - Chap
pter 11: Performance of a contract
P
Proper Place
T
Tender must be made at the stipulated place or att business pllace.
P
Proper Perso
on
Itt must be made
m to the promisee orr his duly au
uthorized aggent. In case
e of several joint
p
promisees, a tender madde to one of them has the same legaal consequen nces as tend
der to
a of them.
all
R
Reasonable Opportunity
O
Promisee mu
P ust have reassonable oppportunity for examining
e thhat the goods offered are
e the
s
same as per the terms of the contractt.
W
Whole Obliga
ation
A valid tender is for the w
whole obligation. Howeve
er, a minor deeviation from
m the terms of
o the
c
contract may not render th he tender inv
valid.
F
Fixed amount and legal te
ender
In
n case of ten
nder of mone
ey the amoun
nt must be fix
xed and in leegal tender.
1.5 Effect of refusal to

t perform
When a party to a contract ha as refused to perform or o disabled himself fromm performing g his
promise
e in its entire
ety, the prom
misee may pu ut an end to the contract
ct, unless he has signified
d, by
words or
o conduct, hish willingnesss in its contin
nuance. [Secction 39]
Examp
ple: Effect of refusal to peerform
A, a singer enters
e into a contract with
w B, the manager of a theatre, to sing at his
theatre twoo nights in evvery week during the ne ext two montths, and B engages
e to pay
p
her Rs.100 for each nig ght's perform mance. On the sixth nigh ht, A wilfully
y absents
herself from
m the theatre e. B is at liberty to put an
a end to thee contract.
A, a singer enters
e w B, the manager of a theatre, to sing at his
into a contract with
theatre twoo nights everry week during the next two monthss and B enga ages to pay her
at the rate of
o Rs.100 fo or each nigh
ht. On the six
xth night, A w
wilfully abseents herself.
With the as e seventh niight. B has ssignified his acquiescen
ssent of B, A sings on the nce
in the continuance of thhe contract, and cannott now put an n end to it, but
b is entitledd to
compensation for dama age sustained by him thhrough A's fa ailure to sing on the sixtth
night.
1.6 Person
ns who can perform a
and demand
d performa
ance
Personss who can pe
erform and d
demand perfo
ormance are
e shown beloow [Section 40
4 to 42]:
• Promisorr
• Promisorr's agent
Perrsons wh
ho • Legal reppresentative
e
can
n perform
m • Third parrty
• Joint promisor
• Promisee e
Perrsons whho • Promisee e's agent
can
n deman nd • Legal reppresentative
e
perrformanc
ce • Third parrty
• Joint promisees
© Emile W
Woolf Internation
nal 111 The Institute off Chartered Acc
countants of Pakistan
Business Law
Persons who can perform
Promisor
If a contract is of personal nature or it was agreed that promise will be performed by the
promisor himself than such promise must be performed by the promisor.
Example: Promisor
A promises to marry B, A must perform this promise personally.
A promises to paint a picture for B, A must perform the promise personally.
Promisor’s agent
If the intention of parties is that the promise can either be performed by the promisor
himself or any person employed by him than such contracts can be performed by the
promisor himself or an agent employed by him.
Example: Promisor’s agent

A promises to pay B a sum of money. A may perform this promise either by personally
paying the money to B, or by causing it to be paid B by another, and if A dies before the
time appointed for payment, his representatives must perform the promise, or employ
some proper person to do so.
Legal representatives
Unless a contrary intention appears or the contract is of personal nature on death of
promisor, his legal representative can perform the contract.
Example: Legal representatives

A promises to marry B, A dies. A’s legal representatives cannot perform this promises.
Third party
With the consent of the promisee a contract can be performed by a third party. When a
promisee accepts performance of the promise from a third person, he cannot afterwards
enforce it against the promisor.
Joint promisor
Unless a contrary intention appears, in case of several promisor the following persons
must perform the promise:
x All the promisors jointly in case of all the promisors are alive
x Representatives of the deceased promisor jointly with the surviving promisor(s) in
case of death of any of the joint promisors
x Representatives of all of them jointly in case of death of all joint promisors
Example: Joint promisor

A and B jointly promise to repay a loan of Rs.10,000 on a specified day. A dies before
that specified day. A's representative jointly with B must perform the promise on the
specified day.
Persons who can demand performance
Promisee
Under a contract only a promisee can demand the performance of the promise.
Example: Promisee
A promises B to pay Rs.10,000 to C. It is only B who can demand performance and not C.

Promisee’s agent:
If the intention of parties is that performance can be demanded from any person
authorised by the promisee then performance can be demanded by promisee’s agent.
Legal representative
Unless a contrary intention appears from the contract or the contract is of a personal
nature on death of the promisee, his legal representative can demand performance.
Example: Legal representative

A promise to marry to B on the specified day. B dies before the specified day. The legal
representatives of B cannot demand performance of the promise from A because the contract is
of personal nature.
Third party
A third party can also demand the performance of the contract in some exceptional cases
like beneficiary in case of trust or the person for whose benefit the provision is made in
family arrangements.
Joint promisees
In case of several promisees, unless a contrary intention appears, the performance can be
demanded by the following persons:
x All the promises jointly in case all the promisees are alive
x Representatives of deceased promisee jointly with the surviving promisees in case
of death of any of joint promisees
x Representatives of all of them jointly in case of death of all joint promisees
Example: Joint promisees

A promises B and C jointly to repay loan of Rs.10,000 on a specified day. B dies before
that specified day. B's representative jointly with C can demand the performance from
Aon specified day. If B and C die before that specified day, the representatives of B and
C jointly can demand the performance from A on the specified day.
1.7 Rules regarding the performance of joint promise

The rules regarding the performance of joint promises are as follows [Section 43 to 44]:
Joint and several liability of joint promisors
When two or more persons make a joint promise, the promisee may, in the absence of
express agreement to the contrary, compel anyone or more of such joint promisors to
perform the whole of the promise.
Example: Joint and several liability of joint promisors

A, B and C jointly promise to pay DRs.3,000. D may compel either A or B or C to pay him
Rs.3,000.
Right to claim contribution

Each of two or more joint promisors may compel every other joint promisor to contribute
equally with himself to the performance of the promise, unless a contrary intention
appears from the contract.
Example: Right to claim contribution

A, B and C jointly promise to pay D a sum of Rs.3,000. C is compelled to pay the whole. A
is insolvent, but his assets are sufficient to pay one-half of his debts. C is entitled to
receive Rs.500 from A's estate and Rs.1,250 from B.

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Sharing of loss in contribution

If anyone of two or more joint promisors makes default in such contribution, the
remaining joint promisors must bear the loss arising from such default in equal shares.
Example: Sharing of loss in contribution

A, B and C are under a joint promise to pay D Rs.3,000. C is unable to pay anything and A
is compelled to pay the whole. A is entitled to receive Rs.1,500 from B.
Release of one joint promisor

Where two or more persons have made a joint promise, a release of one of such joint
promisors by the promisee, does not discharge the other joint promisor or joint promisors;
neither does it free the joint promisor so released from responsibility to the other joint
promisor or joint promisors.
Example: Release of one joint promisor

A, B and C jointly promise to pay D Rs.3,000. D releases A from his liability and sues B
and C for payment, Here, neither B and C are released from their liability to D nor is A
released from his liability to B and C for contribution.
Devolution of joint rights

When a person has made a promise to two or more persons jointly, then, unless a
contrary intention appears from the contract, the right to claim performance rests, as
between him and them, with them during their joint lives, and, after the death of any of
them, with the representative of such deceased person jointly, with the survivor or
survivors and after the death of the last survivor, with the representatives of all jointly.
[Section 45]
Example: Devolution of joint rights

A, in consideration of Rs.5,000 lent to him by B and C, promises B and C jointly to repay
them that sum with interest on a day specified. B dies. The right to claim performance
rests with B's representative jointly with C during C's life, and, after the death of C, with
the representatives of B and C jointly.
1.8 Time and place of performance

The various rules regarding the time and place of performance are given below:
Time for performance is not specified

Where the time for performance is not specified in a contract and the promisor has
undertaken to perform without application by the promisee then the contract must be
performed within a reasonable time. The question 'What is reasonable time' is a question
of fact. [Section 46]
Time for performance is specified

Where the time for performance is specified in a contract and the promisor has
undertaken to perform it without application by the promisee then the promisor must
perform his promise on that particular day during the usual hours of business and at a
place where the promise ought to be performed. [Section 47]
Place for performance is specified

Where the time for performance is specified in a contract and the promisor has not
undertaken to perform it without application by the promisee than the promisee must
apply for performance at a proper place and within usual hours of business. [Section 48]

Place for performance is not specified

Where the place for performance is not specified in a contract and the promise is to be
performed without application by the promisee than the promisor must apply to the
promisee to appoint a reasonable place for the performance and to perform the promise
at such place. [Section 49]
Promisee prescribes the manner or time

Where the promisee prescribes the manner or time for performance then the promise
must be performed in the manner and at the time prescribed by the promise. [Section 50]
Example: Time and place of performance

B owes A Rs.2,000. A desires B to pay the amount to A's account with C, a banker. B
who also banks with C, orders the amount to be transferred from his account to A's
credit, and this is done by C. Afterwards, and before A knows of the transfer, C fails.
There has been a good payment by B.
A and B are mutually indebted. A and B settle an account by setting off one item
against another, and B pays A the balance found to be due from him upon such
settlement. This amounts to payment by A and B, respectively, of the sums which
they owed to each other.
A owes B Rs.2,000. B accepts some of A's goods in reduction of the debt. The
delivery of the goods operates as a part payment.
A desires B, who owes him Rs.100, to send him a note for Rs.100 by post. The debt
is discharged as soon as B posts a letter containing the note duly addressed to A.
1.9 Time as essence of contract

Time is essence of a contract means that it is necessary for the parties to a contract to
perform their respective promises within the specified time. But if the promisor fails to do
so, can the promisee rescind the contract? This question can be answered by deciding
whether in such a case time was or was not the essence of the contract. [Section 55]
Cases where time is essence
In the following cases, time is usually considered to be the essence of contract:
Where the parties have expressly agreed to treat the time as the essence of the contract.
Where the non-performance at the specified time operates as an injury to the party.
Where the nature and necessity of the contract requires the performance of the contract
within the specified time.
Consequences where time is essence
In case the performance is not made where time is essence the breach will have following
consequences:
Voidable at the option of promisee.
Promisee is entitled to claim compensation for any loss arising to him due to non-
performance of the promise at agreed time where performance beyond the stipulated time
is not accepted.
Promisee is not entitled to claim compensation for any loss arising to him due to non-
is accepted, unless the promisee gives notice to the promisor of his intention to claim
compensation.
Consequences where time is not essence
In case the performance is not made where time is not essence the breach will have the
following consequences:

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Not voidable at the option of promisee.

is not accepted.
is accepted, unless the promisee gives notice to the promisor of his intention to do so.
Example: Consequences where time is not essence

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two
nights in every week for the next two months. B agrees to pay her Rs 100 for each performance.
On the sixth night, A willfully absents herself from the Theatre.
In this case, B has the following two options:
B may rescind the contract and claim compensation for the loss occasioned to him by A's
failure to sing on the sixth night.
B may permit A to sing on the seventh night and claim compensation for loss from A
by giving a notice to A of his intention to do so.

2 RECIPROCAL PROMISES
Section overview
Meaning of reciprocal promises

Types of reciprocal promises
Rules regarding performance of reciprocal promises
2.1 Meaning of reciprocal promises

Promises which form the consideration or part of the consideration for each other are called
'reciprocal promises'. [Section 2(f)]
Example: Meaning of reciprocal promises

In a contract for sale, A promises to deliver the goods to B at a fixed price and B promises to give
promise for the payment of the price. Such promises are called reciprocal promises.
2.2 Types of reciprocal promises

The reciprocal promises have following types:
Mutual and independent
When the promises are to be performed by each party independently, without waiting for the
other party to perform is called Mutual and independent.
Mutual and dependent
When the performance of one party depends on the prior performance of the other party it is
called Mutual and dependent.
Mutual and concurrent
When the promises are to be performed simultaneously i.e. at the same time it is called Mutual
and concurrent.
2.3 Rules regarding performance of reciprocal promises

The rules regarding the performance of reciprocal promises are as follows:
Simultaneous performance
When a contract consists of reciprocal promises to be simultaneously performed, the
promisor need not perform his promise unless the promisee is ready and willing to perform
his reciprocal promise. [Section 51]
Example: Simultaneous performance

A and B contract that A shall deliver goods to B to be paid for by B on delivery A need
not deliver the goods unless B is ready and willing to pay for the goods on delivery B
need not pay for the goods, unless A is ready and willing to deliver them on payment.
A and B contract that A shall deliver goods to B at a price to be paid in instalments,
the first instalment to be paid on delivery. A need not deliver unless B is ready and
willing to pay the first instalment on delivery. B need not pay the first instalment,
unless A is ready and willing to deliver the goods on payment of the first instalment.
Order of performance
Where the order in which reciprocal promises are to be performed is expressly fixed by the
contract, they must be performed in that order, and where the order is not expressly fixed
by the contract, they must be performed in the order which the nature of the transaction
requires. [Section 52]

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Example: Order of performance

A and B contract that A shall build a house for B at a fixed price. A's promise to build
the house must be performed before B's promise to pay for it.
A and B contract that A shall make delivery of his stock-in-trade to B at a fixed price,
and B promises to give security for the payment of the money. A's promise need not
be performed until the security is given, because the nature of the transaction
requires that A should have security before he delivers up his stock.
Preventing the performance

When a contract contains reciprocal promises, and one party to the contract prevents the
other from performing his promise, the contract becomes voidable at the option of the party
so prevented; and he is entitled to compensation from the other party for any loss which he
may sustain in consequence of the non-performance of the contract. [Section 53]
Example: Preventing the performance

A and B contract that B shall execute certain work for A, for Rs.1,000. B is ready and willing
to execute the work accordingly, but A prevents him from doing so. The contract is voidable
at the option of B; and, if he elects to rescind it, he is entitled to recover from A
compensation for any loss which he has incurred by its non-performance.
Non-performance in case of mutual and dependent reciprocal promises

Where the performance of one party depends on the prior performance of the other party
and the party who is liable to perform first, fails to perform it, then such party cannot claim
the performance from the other party and must make compensation to the other party for
any loss which the other party may sustain by the non-performance of the contract.
[Section 54]
Example: Non-performance in case of mutual and dependent reciprocal promises

A contracts with B to execute certain builder's work for a fixed price, B supplying the
timber necessary for the work. B refuses to furnish any timber. A need not execute
the work, and B is bound to make compensation to A for any loss caused to him by
the non-performance of the contract.
A contracts with B to deliver to him, at a specified price, certain merchandise on
board of a ship which cannot arrive for a month, and B engages to pay for the
merchandise within a week from the date of the contract. B does not pay within the
week. A's promise to deliver need not be performed, and B must make
compensation.
A promises B to sell him 1000 bales of merchandise to be delivered next day, and
B promises A to pay them within a month. A does not deliver according to his
promise. B's promise to pay need not be performed, and A must make
compensation.
Promise to do legal and illegal things

Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly,
under specified circumstances, to do certain other things which are illegal, the first set of
promises is a contract, but the second is a void agreement. [Section 57]
Example: Promise to do legal and illegal things

A and B agree that A shall sell B a house for Rs.10,000 but that, if B uses it as a
gambling house, he shall pay Rs.50,000 for it.
The first set for reciprocal promises, namely to sell the house and to pay Rs.10,000 for it, is a
contract. The second set is for an unlawful object, namely, that B may use the house as a
gambling house and is a void agreement.

Alternative promise being illegal

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced. [Section 58]
Example: Alternative promise being illegal

A and B agree that A shall pay B Rs.1,000 for which B shall afterwards deliver to A either
rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.

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3 APPROPRIATION OF PAYMENT
Section overview
Meaning of appropriation of payment

Rules regarding appropriation of payment
3.1 Meaning of appropriation of payment

Appropriation of payment means allocation of payment to a particular debt.
3.2 Rules regarding appropriation of payment

The various rules regarding appropriation of payments are given below:
Debt to be discharged is indicated
The payment, if accepted must be applied accordingly. [Section 59]
Example: Debt to be discharged is indicated

A owes B, among other debts, Rs.1,000 upon a promissory note, which falls due on the
first June. He owes B one other debt of that amount. On the first June, A pays to B
Rs.1,000. The payment is to be applied to the discharge of the promissory note.
A owes to B, among other debts; the sum of Rs.567. B writes to A and demands payment
of this sum. A sends to BRs.567. This payment is to be applied to the discharge of the debt
of which B had demanded payment.
Debt to be discharged is not indicated

The creditor has option to apply the payment to any lawful debt due from the debtor even if it is a
time barred debt but he cannot apply to a disputed debt. [Section 60]
Neither party makes an appropriation
The payment shall be applied in discharge of the debts in order of time whether or not they are
time barred. In other words, all payments shall be applied towards the payment of first debt till it
gets extinguished. Similarly, all subsequent payments applied towards second debt till it gets fully
paid and so on and so forth. If the debts are of equal standing, the payment shall be applied in
discharge of each, proportionately. [Section 61]
If principal amount and markup both are due, then mark-up is settled first and then principal
amount is settled.

4 ASSIGNMENT OF CONTRACTS
Section overview
Meaning of assignment of contracts

Modes of assignment of contracts
4.1 Meaning of assignment of contracts

Assignment of a contract means transfer of contractual rights and liabilities to a third party.
4.2 Modes of assignment of contracts

Assignment of a contract may take place in the following ways:
Assignment by act of parties
Assignment by operation of law
Assignment by act of parties
Assignment by act of parties takes place when the parties to a contract themselves make the
assignment. Such an assignment is subject to the following rules:
If it is a contractual obligation/right involving personal skill or ability than it cannot be
assigned.
If the contract expressly or impliedly provides that the contract shall be performed by the
promisor only then such obligation cannot be assigned
If the contract does not expressly or impliedly provides that the contract shall be performed
by the promisor only then the promisor or his representative my employ a competent
person to perform such obligation but even than the promisor remains liable to the
promisee for proper performance.
By Novation the promisor may transfer his liability to a third party with the consent of the
promisee and the transferee.
Actionable claims i.e. claim to any debt or to any beneficial interest in movable property
can always be assigned by an instrument in writing. Notice of such assignment is also
required to be given by the debtor.
Assignment by operation of law
Assignment by operation of law takes place when the law intervenes. Such assignment takes
place in the following cases:
In case of death of any party the rights and obligation (other than those of personal nature)
of the deceased party pass on to his legal representatives.
In case of insolvency of any party the rights and obligations (other than those of personal
nature) of the insolvent party pass on to the Official Receiver or Assignee.
Example: Assignment
A promises to marry B. Here, neither A can assign their obligation nor B can assign their
right because the contract is of personal nature.
A owes B Rs.100,000 and C owes A Rs.100,000. Here A cannot compel B to recover the
amount from C. However, he can transfer his liability to C with the consent of B and C. B
can also transfer his right to a third party to recover the amount from A.

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5 CHAPTER REVIEW
Chapter review
Understand the meaning of performance of a contract
Explain the term tender and effect of refusal to accept a tender
State who can perform and demand performance
State briefly provisions of act relating to the time and place of performance
Explain reciprocal promises and rules regarding their performance
Summarize the rules laid down in the act as to the appropriation of payments
Understand the meaning and modes of assignment of contract

CHAPTER
Business Law
12
Discharge of a contract
Contents
1 Discharge of a contract
2 Discharge by performance
3 Discharge by agreement or by consent
4 Discharge by operation of law
5 Discharge by impossibility of performance
6 Discharge by lapse of time
7 Discharge by breach
8 Chapter review

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INTRODUCTION
Learning outcomes
Discharge of a contract
knowledge of laws relating to discharge of a contract.
LO 2.11.1 Understand the meaning of discharge of contract
LO 2.11.2 Identify modes of discharge of a contract: discharge by performance, by consent, operation of
law, impossibility of performance, lapse of time and breach (actual and anticipatory)
LO 2.11.3 Understand rules relating to discharge of a contract.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 12: Discharge of a contract
1 DISCHARGE OF A CONTRACT
Section overview
Meaning of discharge
Modes of discharge of a contract
1.1 Meaning of discharge

A contract is said to be discharged when contractual relations between the parties to a
contract are terminated or comes to an end.
In other words, when the parties to a contract have either performed or are freed from the
task of performing their respective obligations as arising from the contract.
1.2 Modes of discharge of a contract

The chart below shows the various ways in which a contract is said to be discharged:

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2 DISCHARGE BY PERFORMANCE
Section overview
Actual performance
Attempted performance
Performance of a contract is one of the most common ways of discharging a contract. A contract can be
discharged by performance in any of the following ways:
2.1 Actual performance

If the parties to the contract perform their respective promises in accordance with the terms of the
contract then it is said to be discharged by actual performance. [Section 37]
Example: Actual performance

particular quality. A brought the cotton of requisite quality to the appointed place on the
appointed day during the business hours, and B took the delivery of goods. This is an actual
performance.
2.2 Attempted performance

If the promisor has made an offer of performance as per the terms of the contract and the
promisee refuses to accept the offer of performance then the promisor is said to be discharged
by attempted performance. It is also known as tender. It is equivalent to actual performance. In
this performance, the promisor offers to perform his obligation, but the promisee refuses to
accept his performance. [Section 38]
Effect of tender is that the contract is deemed to be performed. Promisee is discharged from his
liability of non-performance. His rights against the promise are unaffected.
Example: Attempted performance

particular quality. B refused to take the delivery of goods; it is a case of attempted
performance because A has done what he was required to do under the contract.

3 DISCHARGE BY AGREEMENT OR BY CONSENT
Section overview
Novation
Rescission
Alteration
Remission
Waiver
Promisee’s refusal / neglect
The rights and obligations created by an agreement can be discharged without being performed
through formation of another agreement between the parties due to which the rights and obligations in
the original agreement comes to an end. A contract can be discharged by mutual agreement in any of
the following ways:
3.1 Novation
Novation means the substitution of a new contract for an old one. The new agreement
extinguishes the rights and obligations that were in effect under the old agreement.
A novation ordinarily arises when a new individual assumes an obligation to pay that was
incurred by the original party to the contract. In the case of a novation, the original debtor is
totally released from the obligation, which is transferred to someone else. The nature of the
transaction is dependent upon the agreement between the parties. A novation also takes place
when the original parties continue their obligation to one another, but a new agreement is
substituted for the old one. [Section 62]
Example: Novation
A owes money to B under a contract. It is agreed between A, B and C that B shall now
accept C as his debtor; instead of A. The old debt of A to B no longer exists and a new debt
from C to B has been contracted.
A owes B Rs.10,000. A enters into an agreement with B, and gives B a mortgage of his
(A's) estate for Rs.5,000 in place of the debt of Rs.10,000. This is a new contract and
extinguishes the old.
3.2 Rescission
Rescission is the cancellation of a contract by mutual agreement of parties. [Section 62]
Example: Rescission
A promises B to sell and deliver 500 Bales of cotton on 1st November at his godown and B
promises to pay for goods on 1st December. A does not supply the goods. B may rescind the
contract.
3.3 Alteration
Alteration means a variation made in the language or terms of a contract with mutual agreement.
When this occurs the original contract is discharged and a new contract is created. The parties in
alteration remain same. [Section 62]
Example: Alteration
X promise to sell and deliver 500 bales of cotton, on 1st November and Y promises to pay for
goods on 1st December. Afterwards, X and Y mutually decide that the goods shall be delivered in
five equal instalments at Z's godown. Here, original contract has been discharged and a new
contract has come into effect.

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3.4 Remission
Remission means accepting a less amount than the initial amount agreed. [Section 63]
Example: Remission
A promises to paint a picture for B. B afterwards requested A not to do so. A, if agreed is no
longer bound to perform the promise.
A owes B Rs.5,000. C pays to B Rs.1,000, and B accepts them in satisfaction of his claim
on A. This payment is a discharge of the whole claim.
3.5 Waiver
Waiver is a unilateral act of one person that results in the surrender of a legal right. Thus, it
amounts to releasing a person of certain legal obligation under a contract.
3.6 Promisee’s refusal / neglect

If any promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to any non-
performance caused. [Section 67]

4 DISCHARGE BY OPERATION OF LAW
Section overview
Death
Insolvency
Material alteration
Same identity
A contract may be discharged by operation of law in any of the following cases:
4.1 Death
On the death of the promisor a contract involving the personal skill or ability is discharged. In
other contracts, the rights and liabilities of the deceased person pass on to his legal
representatives.
Example: Death
A (an artist) promises to paint a picture for B by June 22, 2013 for Rs. 100,000. A dies before
completing the picture. Here it is a contract involving personal skill and on death of A the contract
will be discharged.
4.2 Insolvency
When a person’s debts exceeds his assets, he is adjudged insolvent and his property stands
vested in the Official Receiver or Official Assignee appointed by the court. Such person cannot:
Enter into contracts relating to his property
Sue
Sued
Therefore, on declaration of a person as an insolvent person is discharged from his liabilities
incurred prior to his adjudication.
Example: Insolvency
A took a loan from B amounting to Rs. 1 million payable in June 2013. On March 2013 A was
declared as insolvent by relevant court. After the order adjudication he is discharged from his
liabilities as the amount will be paid by the Official Assignee / Official Receiver.
4.3 Material alteration

A contract is discharged if the terms of the contract are materially altered without getting prior
consent of parties. A material alteration is one which changes following in a significant manner:
Legal identity of the contract; or
Character of the contract; or
Rights and liabilities of the parties to the contract
An alteration which is not material or which is made after getting prior consent does not affect the
validity of the contract.
Example: Material alteration

A gives a promissory note amounting to Rs. 50,000 to B payable on August 16, 2013. B
subsequently, endorses the same note in favour of C after altering the date from August 16, 2013
to August 23, 2013.

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Example: Material alteration (continued)

Here, change of date is a material alteration and has discharged A from the instrument because
it was made without his consent.
4.4 Same identity

When the promisor becomes the promisee, the other parties are discharged e.g. negotiation back
in case of negotiable instrument i.e. creditor to himself becomes a debtor of the same loan.
Example: Same identity

A gives a promissory note to B. B endorses the note in favour of C who in turn endorses in favour
of A. Here, A is both the promisor and the promisee and hence the other parties are discharged.

5 DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
Section overview
Supervening impossibility
Grounds of supervening impossibility
Not an excuse of supervening impossibility
Supervening illegality
5.1 Supervening impossibility

When a contract is valid at the time of formation and becomes impossible to perform
subsequently it is called effected by supervening impossibility.
Effects of supervening impossibility
The effects of supervening impossibility are as follows: [Section 56]
A contract becomes void when an act becomes impossible after the formation of the
contract.
A contract becomes void when an act becomes unlawful by reason of some event beyond
the control of promisor.
A promisor is liable to compensate the promisee for any loss which arose due to non-
performance of promisor when the promisor hides the impossibility of performance.
A person is bound to restore any benefit received or compensated under a contract when
such agreement or contract becomes void.
Example: Effects of supervening impossibility

A contracts to sing for B at a concert for Rs.10,000 which is paid in advance. A is too ill to sing. A
must refund Rs.10,000 to B.
5.2 Grounds of supervening impossibility

A contract is discharged by supervening impossibility in the following cases:
Destruction of subject matter
If the subject matter of the contract is destroyed after the formation of the contract without any
fault of either party then a contract is said to be discharged.
Example: Destruction of subject matter

A music hall was rented out for a series of concerts. The hall caught fire before the date of first
concert. It was held, the contract has become void on the ground of supervening impossibility.
Death or personal incapacity (doctrine of frustration)

If a contract is of personal nature then on the death / incapacity / illness of a person a contract is
said to be discharged.
Example: Death or personal incapacity (doctrine of frustration)

A agreed to sing on a specified day. A fell seriously ill and could not perform on that day. The
contract was discharged.
Declaration of war
At the time of declaration of war the contracts with alien enemies are either suspended or
declared as void.

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Example: Declaration of War

X contracts to take in cargo for Y at a foreign port. X's government afterwards declares war
against the country in which the port is situated. The contract becomes void when the war is
declared.
Particular state of things ceases to exist or occur

The contract is discharged if that particular state of thing which forms the basis of a contract
ceases to exist or occur.
Example: P articular state of things cease to exist or occur

A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The
contract becomes void.
5.3 Not an excuse of supervening impossibility

Impossibility of performance is, as a rule, not an excuse from performance. It means that a
person should perform his promise if he has promised to do so unless the performance becomes
absolutely impossible.
A contract is not discharged by the supervening impossibility in the following cases:
Difficulty of performance
If the performance of a contract becomes difficult, more costly or less beneficial then that agreed
at the time of its formation, a contract will not be discharged.
Example: Difficulty of performance

A agreed to supply gold within a specified time. He failed to supply in time because of
government's restriction on the transport of gold from collieries. Here A will not be discharged
because the gold was available in the open market from where A could have obtained it.
Commercial impossibility
When the contract becomes commercially unviable or non-profitable it is not said to be
discharged.
Example: Commercial impossibility

A, a furniture retailer, agreed to supply certain furniture to B at an agreed rate. Afterwards, there
was a sharp increase in the rates of the timber and rates of wages. Since, it was no longer
profitable to supply at the agreed rate, A did not supply. A will not be discharged on the ground of
supervening impossibility.
Default of a third party

On default of a third party, on whose work the promisor is relying, a contract is not said to be
discharged.
Example: Default of a third party

A entered into a contract with B for the sale of goods to be manufactured by C, a manufacturer of
those goods. C did not manufacture those goods. A will not be discharged and will be liable to B
for damages.
Strikes, lockouts and civil disturbances

Unless otherwise agreed by the parties to the contract, a contract is not discharged on the
grounds of strikes, lockouts and civil disturbances.

Example: Strikes, lockouts and civil disturbances

A agreed to supply to B certain goods to be imported from America. The goods could not be
imported due to riots in that country. It was held that this was no, excuse for non-performance of
the contract.
Partial impossibility
A contract is not discharged simply on the grounds of partial impossibility of some of the objects
of the contract.
5.4 Supervening illegality

If the performance of the contract becomes unlawful due to a change in the law after the
formation of the contract then the contract is said to be discharged.
Example: Change of law

A agreed to sell his land to B after the formation of the contract, the Government issued a
notification and acquired the land. The contract was discharged.

Business Law
6 DISCHARGE BY LAPSE OF TIME
Section overview
Limitation period
6.1 Limitation period

If a contract is not performed within the period of limitation then it is discharged as the parties
cannot legally enforce their rights.
After the expiry of the limitation period, the debt becomes time banned and hence cannot be
recovered through court of law.
Example: Limitation period

A sold goods to B amounting to Rs. 10,000 on a credit of 1 year on January 1, 2012. On due date
i.e. December 31, 2012 B defaulted in payment.
In the given scenario A can file suit against B by December 31, 2015.

7 DISCHARGE BY BREACH
Section overview
Actual breach of contract

Anticipatory breach of contract
If a party refuses or fails to perform his part of the contract then the contract is said to be discharged
due to breach. A breach of contract may occur in the following two ways:
7.1 Actual breach of contract

Actual breach of contract occurs when a party to a contract refuses or fails to perform his part of
the contract at the time fixed for performance. [Section 38]
Actual breach of contract occurs in the following two ways:
Due date of performance
If any party to a contract refuses or fails to perform his part of the contract at the time fixed for
performance, it is called an actual breach of contract on due date of performance.
Example: Due date of performance

A agreed to sell to B 10 tons of wheat @ Rs.8,000 per ton to be delivered in two equal
instalments on 20th November and on 21st November. On 20th November, A refused to deliver
the goods. It is an actual breach of contract on due date of performance.
Course of performance
If any party has performed a part of the contract and then refuses or fails to perform the
remaining part of the contract, it is called an actual breach of contract during the course of
performance.
Example: Course of performance

A agreed to sell to B 10 tons of wheat @ Rs.8,000 per ton to be delivered in two equal
instalments on 20th November and 21st November. On 20th November, A delivered 5 tons and
refused to deliver remaining 5 tons. It is an actual breach of contract during the course of
performance.
Consequences of actual breach

The consequences of actual breach depend upon whether the time was the essence of the
contract or not. The consequences in both the cases may be summarized as follows:
Time is essence
In case of actual breach where time is of the essence, the breach will have the following
consequences: [Section 55]
Voidable at the option of promisee
is not accepted
damages.
Time is not essence
In case of actual breach where time is not essence the breach will have the following
consequences: [Section 55]

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Not Voidable at the option of promisee

damages.
Example: Time is not essence

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two
nights in every week for the next two months. B agrees to pay her Rs.100 for each performance.
On the sixth night, A wilfully absents herself from the Theatre.
In this case, B has the following two options:
B may rescind the contract and claim compensation for the loss occasioned to him by A's
failure to sing on the sixth night.
B may permit A to sing on the seventh night and claim compensation for loss from A by
giving a notice to A of his intention to do so.
7.2 Anticipatory breach of contract

Anticipatory breach of contract occurs when before the performance is due the party acts in a
way that the contract may not be performed. [Section 39]
A party may be intended not to perform the contract in the following two ways:
Refusal to perform promise
When a party to a contract has refused to perform his promise
Example: Refusal to perform promise

A, a farmer agrees to sell to B his entire crop of 10 tons of wheat @ Rs. 8,000 per ton to be
delivered on 20th November. On 1st November, A informs B that he is not going to supply the
goods. A has committed anticipatory breach of contract by express repudiation.
Disabled to perform promise

When a party to a contract has disabled himself from performing his promise in its entirety.
Example: Disabled to perform promise

delivered on 20th November. On 1st November, A contracted to sell his entire crop to C @ Rs.
10,000 per ton. A has committed anticipatory breach of contract by implied repudiation.
Options to the aggrieved party

In case of anticipatory breach, the aggrieved party has the following two options:
Options to the aggrieved party Calculation of damages

Rescind the contract and claim damages for Damages will be equal to the difference
breach of contract without waiting until the between the price prevailing on the date of
due date for performance or breach and the contract price. [Section 73]
Treat the contract as operative and wait till Damages will be equal to the difference
the due date for performance and claim between the price prevailing on the due date
damages if the promise still remains of performance and the contract price.
unperformed
Consequences of treating contract as operative
If the aggrieved party treats the contract as operative and waits till the due date for performance,
the consequences of anticipatory breach will be as follows:

The promisor may perform his promise on or before the due date of performance and the
promisee will be bound to accept the performance.
The promisor may take advantage of the discharge by supervening impossibility arising
between the date of breach and the due date of the performance and in such a case, the
promisee shall lose his right to sue for damages.
Example: Consequences of treating contract as operative

delivered on 20th November. On 1st November, A informs B that he is not going to supply the
goods. B decided not to rescind the contract on 1st November and to wait till 20th November. On
19th November, the entire crop was destroyed by fire without the fault of either party. Since the
contract becomes void on the ground of impossibility of performance, B had lost the right to sue A
for damages.

Business Law
8 CHAPTER REVIEW
Chapter review
Explain the various modes in which a contract may be discharged
Discuss the doctrine of supervening impossibility
Explain types of breach and their consequences

CHAPTER
Business Law
13
Remedies for breach of contract
Contents
1 Remedies for breach of contract
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Remedies for breach of contract

knowledge of laws relating to remedies for breach of a contract.
LO 2.12.1 Explain the remedy
LO 2.12.2 Describe the various remedies available in case of breach of a contract
LO 2.12.3 Understand rules relating to amount of damages
LO 2.12.4 Identify different kinds of damages
LO 2.12.5 Understand the remoteness of damages.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 13: Remedies for breach of contract
1 REMEDIES FOR BREACH OF CONTRACT
Section overview
Meaning of remedy
Remedies for breach
Kinds of damages
Rules regarding amount of damages
Remoteness of damages
1.1 Meaning of remedy

A remedy can be defined as a manner in which a right is enforced or satisfied by a court when
some harm or injury, recognized by society as a wrongful act, is inflicted upon an individual.
Remedies can be categorized into the following types:
Common law remedies
Equitable remedies
Quantum meruit claim
Common law remedies
Damages and action for the price are common law remedies and are more frequently sought
when a remedy is needed for breach of contract, since they arise as of a right. The object of such
a remedy is not to punish the party at fault but to compensate the aggrieved party (pecuniary
loss) as far as money can do so.
Equitable remedies
Equitable remedies are the court ordered action that directs parties to do or not to do something.
In other words, equitable remedies are only appropriate in specialised circumstances e.g. where
monetary damages would be inadequate compensation for the breach of an agreement. Specific
performance and injunction are equitable remedies.
Quantum meruit claim
Quantum meruit claim is categorized as a claim in quasi contract. The aim of such an award is
based on an implied agreement to pay for what has been done. Quantum meruit is likely to be
sought where one party has already performed part of his obligations and the other party then
repudiates the contract. Provided the injured elects to treat the contract as terminated, he may
claim a reasonable amount for the work done.
1.2 Remedies for breach

Parties to a lawful contract are bound to perform their respective obligations. But when one of the
parties refuses to perform his obligations he is said to have committed a breach of the contract.
The various remedies available to an aggrieved party are as follows:
1. Rescission of contract
2. Restitution
3. Damages
4. Specific performance
5. Injunction
6. Quantum meruit

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Rescission of contract
Rescission is the putting an end to a contract. Rescission means a right not to perform your
obligation. In case of breach of a contract, the promisee may put an end to the contract. In such a
case, the aggrieved party is discharged from all the obligations under the contract and is entitled
to claim compensation for the damage which he has sustained because of the non-performance
of the contract. [Section 39 and 75]
Example: Rescission of Contract

A agrees to supply 10 tons of wheat to B on 20th November. B promises to pay for the goods on
its receipt. A does not supply the goods on the due date. Here, B is discharged from the liability of
paying the price. B is entitled to rescind the contract and to claim compensation for the damage
which he has sustained because of non-supply of goods on the due date.
When is rescission granted?

The court may grant rescission in the following two cases:
Where the contract is voidable at the option of the aggrieved party
Where the contract is unlawful for causes not apparent on its face and defendant is more
to blame than the plaintiff
When is rescission not granted?
The court may not grant rescission in the following cases:
Where the aggrieved party has expressly or impliedly ratified the contract
Where owing to the change of circumstances, the parties cannot be restored to their
original positions
Where the third party has acted in good faith and for consideration
Where only part of a contract is sought to be rescinded and such part is not severable from
the rest of the contract
Restitution
It means return of the benefit received by one party to the contract from the other under a void
contract. When a contract becomes void it needs not to be performed by either party.
Example: Restitution
A pays B Rs. 1,000 in consideration of B’s promising to marry C (A’s daughter). C is dead at the
time of promise. The agreement is void but B must repay A Rs.1,000.
Damages
Damages are monetary compensation allowed for loss suffered by the aggrieved party due to
breach of a contract. The object of awarding damages is not to punish the party at fault but to
compensate the aggrieved party (pecuniary loss) as far as money can do so. [Section 73]
Specific performance
Suit for specific performance is an equitable doctrine that compels a party to execute the
agreement according to its terms where monetary damages would be inadequate compensation
for the breach of an agreement.
Specific performance is a discretionary remedy, which is allowed only in a limited number of
cases some of them are listed below:
Monetary compensation is not adequate
Actual damage cannot be ascertain due to non-performance
It is probable that compensation in money on non-performance cannot be obtained
There is a contract for the sale of rare commodities
There is a contract for the sale of land / building / apartment / houses

Following are the cases where suit for specific performance is not maintainable where:
Monetary compensation are considered as an adequate remedy
Contract is of personal nature, e.g. contract of services
Court cannot supervise the performance of the contract e.g. construction of building
One of the parties is a minor
Contract is inequitable to either party
Example: Specific performance

A agreed to sell an old painting to B for Rs. 500,000. Subsequently, A refused to sell the
painting. Here, B may file suit against A for the specific performance of the contract.
A agrees to sell two rare Pakistani Handmade carpets to B for Rs. 2 million. In case of
breach by A, B may compel A to perform the contract specifically, because there is no
standard for ascertaining the actual damages which would be caused by the non-
performance by A.
Injunction
Suit for injunction is also an equitable remedy demanding courts stay order. Injunction means an
order of the court which abstains from wrong doing. Where a party to a contract does something
which he promised not to do, the court may issue an order prohibiting him from doing so.
Thus, injunction is a preventive relief. It is particularly appropriate in case of anticipatory breach
of contract where damages would not be an adequate relief.
Example: Injunction
A agreed to play cricket for Apple Cricket Club during the contract period of 3 years. During
the contract period, A made a contract with Orange Cricket Club and refused to play
cricket for Apple Cricket Club. Here, A could be restrained by injunction from doing so.
X, a film actress, agreed to act exclusively for Y for a year and for no one else. During the
year she contracted to act for Z. Here, she could be restrained by injunction from doing so.
Quantum meruit
The term Quantum Meruit means “as much as earned or deserved.” In case of breach of contract
the application or non-application of the term quantum meruit varies depending upon the terms of
the contract. Further, the divisibility or indivisibility of performance of the contract may also be
taken into account.
The aim of such an award is based on an implied agreement to pay for what has been done.
Quantum Meruit is likely to be sought where one party has already performed part of his
obligations and the other party then repudiates the contract. Provided the injured elects to treat
the contract as terminated, he may claim a reasonable amount for the work done.
This has been discussed in detail in Chapter 10.
Example: Quantum Meruit

C as owner of a magazine engaged P to write a book to be published by instalments in his
magazine. After a few instalments were published, the publication of the magazine was
stopped. It was held that P could claim payment for the part already published.
A, a singer contracts with B, the manager of a theatre, to sing at his theatre for two nights
in every week during the next two months, and B engages to pay her Rs. 100 for each
night's performance. On the sixth night, A wilfully absents herself from the theatre, and B,
in consequence rescinds the contract. B must pay A for the five nights on which she had
sung.

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1.3 Kinds of damages

Following are the different kinds of damages:
Ordinary Damages
Ordinary damages are those which arise naturally in the usual course of things from the breach
itself. These damages can be recovered if the following two conditions are fulfilled: [Section 73]
The aggrieved party must suffer by breach of contract, and
The damage must be a direct consequence of the breach of contract
Example: Ordinary Damages

On 1st December; X contracted to sell and deliver 50 tons of wheat @ Rs. 8,000 per ton to Y on
1st January. On 20th December y, afterwards, contracted to sell those goods to Z at Rs. 10,000
per ton. X failed to deliver goods on 1st January when the price of the wheat was Rs. 9,500 per
ton. Y is entitled to recover Rs. 75,000 [i.e. (Rs. 9,500 – Rs. 8,000) x50). Y is not entitled to
recover Rs. 1,00,000 as profit which would have arisen to Y from the sale to Z because the profit
is the indirect consequence of the breach of contract.
Special damages
Special damages can be recovered for the loss which the parties [Section 73]
Knew about
At the time they made the contract
As likely to result from such breach of contract
Special damages are due to special losses which are in the reasonable contemplation of the
parties at the time of formation of contract.
Example: Special Damages

A, a builder; contracts to erect and finish a house by the first of January, in order that B
may give possession of it at that time to C, to whom B has contracted to let it. A is
informed of the contract between B and C. A builds the house so badly that, before the first
of January it falls down, and has to be rebuilt by B, who, in consequence, loses the rent
which he was to have received from C, and is obliged to make compensation to C for the
breach of his contract. A must make compensation to B for the cost of rebuilding the
house, for the rent lost, and for the compensation made to C.
A delivers to B, a common carrier; a machine to be delivered without delay, to A's mill
informing that his mill has stopped for want of the machine. B unreasonably delays the
delivery of machine, and A, in consequence, loses a profitable contract with the
Government. A is entitled to receive from B, by way of compensation, the average amount
of profit, which would have been made by the working of the mill during the time that
delivery of it was delayed, but not the loss sustained through the loss of the Government
contract.
Exemplary (vindictive) damages

Exemplary (vindictive) damages are those which are awarded with a view to punish the wrong
doer and not primarily with an idea of awarding compensation to the injured party. The court may
award these damages in case of:
a breach of promise to marry, where damages shall be calculated on the basis of mental
injury sustained by the aggrieved party.
wrongful dishonour of a cheque by a banker. In case of wrongful dishonour of a cheque,
the rule is smaller the amount of the cheque, larger will be the amount of damages
awarded. A trader may recover such damages as wrongful dishonour of cheque shall
adversely affect his goodwill but a non-trader whose cheque is wrongfully dishonoured will
have to prove the loss of goodwill before claiming such damages.

Nominal damages
Nominal damages are awarded where the injured party has sustained damage of a short but not
of a substantial nature to be reckoned.
Where the breach is technical and injured party has no intention of performing his part of
the contract
Where the injured party has not suffered any actual damage or fails to prove that he has
Where damage is due to the fault of the injured party
Damages for inconvenience and uneasiness
If a party has suffered physical inconvenience and discomfort due to breach of contract, that
party can recover the damages for such inconvenience and discomfort.
Example: Damages for inconvenience and uneasiness

H with his wife and children booked a ticket for a midnight train, to be transported to a particular
place where he lived. They were, however, transported to a wrong place and they had to walk
several miles on a drizzling night and as a result, his wife caught cold and he had to incur some
medical expenses., It was held that he could recover compensation for inconvenience and not for
medical expenses for the sickness of his wife because it was very remote consequence.
Liquidated damages
When the parties to a contract at the time of formation of contract, specify a sum which will
become payable by the party responsible for breach, such specified sum is called Liquidated
Damages. This amount represents a genuine attempt to work out what the loss would be in the
event of such a breach. [Section 74]
Penalty
If a contract states that a particular sum is to be paid on breach of the contract and [Section 74]
that sum is not the genuine pre-estimate of the loss that would be suffered in the event of
breach or
that the sum is disproportionate to the actual loss likely to result due to breach this is
penalty clause.
the court can decrease but not increase the penalty stipulation.
Stipulation for Interest
Two parties may agree to give a specific rate of interest in case of breach of contract. [Section
74]
Forfeiture of Security Deposit (or Earnest Money)
A clause in a contract which provides for forfeiture of security deposit in the event of failure to
perform is in the nature of a penalty. In such cases, the court may award reasonable
compensation only but in case where contract is made with the government, in case of breach
the government can forfeit the whole amount of the deposit as security. [Section 74]
1.4 Rules regarding amount of damages

The object of awarding damages is not to punish the party at fault
The injured party is to be placed in the same position as money can do if the contract had
been performed
The aggrieved party can recover actual loss suffered by him arising naturally.
The fact that damages are difficult to assess does not prevent the injured party from
recovering.
Where no real loss arises nominal damages are awarded.

Business Law
If the parties fix any amount as damages in case of breach of contract then the court will
allow only reasonable amount.
It is the duty of the injured party to minimise the damage suffered.
1.5 Remoteness of damages

There are some losses which clearly result from the defendant’s breach of contract but are
considered too remote from the breach for it to be fair to expect the defendant to compensate the
claimant for them.
Example: Remoteness of damages

A taxi driver is booked to take a passenger to the airport in time for a certain flight to Karachi
where the passenger expects to complete a deal worth Rs. 1 million. If the tax driver breaches the
contract by arriving late, the taxi firm may be liable for expenses such as any extra cost for getting
the next flight but is unlikely to be expected to compensate the passenger for the loss of Rs. 1
million.

2 CHAPTER REVIEW
Chapter review
Discuss the various remedies available to a party in case of breach of a contract
Explain the circumstances when rescission is granted by court
Explain the circumstances when specific performance is granted by court
Understand the different kinds of damages

Business Law

CHAPTER
Business Law
14
Indemnity and guarantee
Contents
1 Contract of indemnity
2 Contract of guarantee
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Indemnity and guarantee

knowledge of laws relating to indemnity and guarantee.
LO 2.13.1 Define contract of indemnity and contract of guarantee. Differentiate between contract of
guarantee and indemnity
LO 2.13.2 Identify parties in a contract of indemnity and contract of guarantee
LO 2.13.3 Differentiate between contract of guarantee and indemnity
LO 2.13.4 Describe the rights of indemnity holder
LO 2.13.5 Identify the essentials of the contract of guarantee
LO 2.13.6 Understand the kinds of guarantees i.e. specific and continuing, and revocation of continuing
guarantee
LO 2.13.7 Describe rights and responsibilities of surety
LO 2.13.8 Explain how surety is discharged
LO 2.13.9 Understand rules relating to indemnity, guarantee and surety.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 14: Indemnity and guarantee
1 CONTRACT OF INDEMNITY
Section overview
Definition of contract of indemnity

Parties in a contract of indemnity
Rights of indemnity holder
Time of commencement of the indemnifier’s liability
1.1 Definition of contract of indemnity

Definition: Contract of indemnity [Section 124]
A contract by which one party promises to save the other from loss caused to him by the conduct
of the promisor himself, or by the conduct of any other person.
1.2 Parties in a contract of indemnity

Indemnifier (Promisor)
The indemnifier (or promisor) is the person who promises to make good the loss.
Indemnified / Indemnity holder (Promisee)
The indemnified (also referred to as the indemnity holder or promisee) is the person whose loss
is to be made good.
Example: Indemnified / Indemnity holder (Promisee)
A contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of a certain sum of Rs. 200/-. This is a contract of Indemnity.
In the above example A is the indemnifier and B is the indemnity holder.
1.3 Rights of indemnity holder

According to Section 125 of Contract Act, a promisee is entitled to recover the following amounts
from the promisor provided that he acts within the scope of his authority:
All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
All costs which he may be compelled to pay in
x bringing or
x defending such suits.
But the indemnified should not acted against the order of the promisor and acted as any
prudent man would act under similar circumstances in his own case, or with the authority
of the indemnifier and
All sums which he may have paid under the terms of any compromise of any such suit.
The compromise should not be contrary to the orders of the indemnifier and should be a
prudent one or authorized by the indemnifier.
1.4 Time of commencement of the indemnifier’s liability

The Contract Act is silent on the time of commencement of the indemnifier’s liability under the
contract of indemnity. On the basis of judicial pronouncement of courts, it can be said that the
liability of an indemnifier commences as soon as the liability of the indemnity holder becomes
absolute and certain. In other words, if the indemnity holder has incurred an absolute liability
even though he has himself paid nothing, he is entitled to ask the indemnifier to indemnify him.

Business Law
Example: Time of commencement of the indemnifier’s liability

A promises to compensate B for any loss that he may suffer by filing a suit against C. The court
orders B to pay C damages of Rs. 50,000. As the loss has become certain, B may claim the
amount of loss from A and give it to C.

2 CONTRACT OF GUARANTEE
Section overview
Definition of contract of guarantee

Parties in a contract of guarantee
Essentials of a contract of guarantee
Kinds of guarantee
Revocation of a continuing guarantee
Nature of surety’s liability
Rights of surety
Discharge of surety
Circumstances where surety is not discharged
Difference between contract of indemnity and contract of guarantee
2.1 Definition of contract of guarantee
Definition: Contract of guarantee [Section 126]

A contract of guarantee is a contract to perform the promise or discharge the liability of a third
person in case of his default.
Consideration received by the principal debtor is sufficient for the surety and it is not necessary to
result in some benefit to the surety himself. [Section 127]

consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.
2.2 Parties in a contract of guarantee

Principal debtor
The person in respect of whose default the guarantee is given. [Section 126]
Creditor
The person to whom guarantee is given. [Section 126]
Surety
The person who gives guarantee. [Section 126]

A and his friend B enter a shop and A says to Z “Supply the goods required by B and if he does not
pay you, I will.” It is a contract of guarantee.

Business Law
2.3 Essentials of a contract of guarantee

The essentials of a contract of guarantee are shown below:

Tripartite agreement
A contract of guarantee is a tripartite agreement between the principal debtor, creditor and
surety. There are three contracts in contract of guarantee:
Contract between creditor and the principal debtor
Contract between surety and the principal debtor
Contract between surety and creditor
Consent of parties
Consent is an essential for all the contracts similarly all three must have consented in a contract
of guarantee.
Existence of a debt
A contract of guarantee requires an existing debt or a promise whose performance is guaranteed
which is enforceable at law. If no such liability exists then there cannot be a contract of
guarantee. The principal debtor can be a minor; in this case surety will be liable personally.
Essentials of a contract
All the essentials required in a contract must exist in a contract of guarantee.
Examples: Essentials of a contract

consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s
promise.
A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for
a year and promises that if he does so, C will pay for them in default of payment by B. A
agrees to forbear as requested. This is a sufficient consideration for C’s promise.
A sells and delivers goods to B. C, afterwards, without consideration, agrees to pay for
them in default of B. The agreement is void.

Misrepresentation
According to Section 142 of Contract Act, a guarantee must not be obtained by
misrepresentation.
Fraud
According to Section 143 of Contract Act, a guarantee must not be obtained by fraud.
2.4 Kinds of guarantee

Guarantee may be classified under the following two categories:
1. Specific guarantee
2. Continuing guarantee
Specific guarantee
When a guarantee extends to a single transaction or debt, it is called a specific or simple
guarantee. The liability of the surety comes to an end when the guaranteed debt is duly
discharged or the promise is duly performed.
Examples: Specific guarantee

A guarantees payment to B of the price of the five bags of flour to be delivered by B to C and to
be paid for in 3 months. B delivers five bags to C, C pays for them. This is a contract of specific
guarantee.
Continuing guarantee
According to Section 129 of Contract Act, when a guarantee extends to a series of transactions,
it is called a continuing guarantee. A surety’s liability continues until the revocation of the
guarantee.
Examples: Continuing guarantee

A, in consideration that B will employ C in collecting the rent of B’s zamindari promises B to be
responsible, to the amount of Rs. 5,000, for the due collection and payment by C of those rents.
This is a continuing guarantee.
2.5 Revocation of a continuing guarantee

A continuing guarantee can be revoked in the following ways:
Notice
A continuing guarantee may at any time be revoked by the surety as to future transactions, by
notice to the creditor. [Section 130]
Examples: Notice
A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees to
B, for 12 months, the due payment of all such bills to the extent of Rs. 5,000. B discounts
bills for C to the extent of Rs. 2,000. Afterwards at the end of three months. A revokes the
guarantee. This revocation discharges A from all the liability to B for any subsequent
discount. But A is liable to B for Rs. 2,000 on default of C.
A guarantees to B to the extent of Rs. 10,000, that C shall pay all the bills that B shall draw
upon him. B draws upon C, C accepts the bill. A gives notice of revocation, C dishonours the
bill at maturity. A is liable upon his guarantee.
Death of surety
The death of the surety operates, in the absence of any contract to the contrary, as a revocation
of a continuing guarantee regarding future transactions. [Section 131]

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Other modes of revocation of continuing guarantee

A continuing guarantee is also revoked in following ways:
novation [Section 62]
alteration [Section 133]
release or discharge of the principal debtor by creditor [Section 134]
compounding of creditor with the principal debtor [Section 135]
creditor’s act or omission impairing surety eventual remedy [Section 139]
loss of security [Section 141]
2.6 Nature of surety’s liability

Nature of surety’s liability - it is co-extensive
The liability of a surety is equal to that of the principal debtor unless otherwise agreed. [Section
128]
Examples: Nature of surety’s liability – it is co-extensive

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by
C, A is liable not only for the amount of the bill, but also for any interest and charges which may
have become due on it.
Limitation of surety’s liability

The liability of surety may be made less than that of the principal debtor by an express contract to
that effect.
Initiation surety’s liability
The liability of the surety arises immediately at the time of default by the principal debtor. The
creditor can sue the surety without suing the principal debtor.
Condition precedent to surety’s liability
Where a person gives a guarantee upon a contract that a creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that person does not
join.
2.7 Rights of surety

The rights of surety are shown below:
Rights of surety
Against /
Against / towards Against / towards
towards
principal debtor creditor
co-sureties
Rigth to
Right to Right to Right to Right to
claim
subrogation indemnity securities claim set off
contribution

Rights against / towards principal debtor
Right to subrogation
After making a payment and discharging the liability of the principal debtor, the surety is clothed
with all the rights of the creditor, which he can himself exercise against the principal debtor.
[Section 140]
Right to indemnity
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the
surety; and the surety is entitled to recover from the principal debtor all payments properly made
under the guarantee. After the surety makes payment, he is entitled to recover from the principal
debtor whatever amount he has paid rightfully including the amount of interest. [Section 145]
Examples: Right to indemnity

B is indebted to C, and A is surety for the debt. C demands payment from A and, on his
refusal, sues him for the amount. A defends the suit, having reasonable grounds for doing
so, but is compelled to pay the amount of the debt with costs. He can recover from B the
amount paid by him for costs, as well as the principal debt.
C lends B a sum of money, and A at the requests of B accepts a bill of exchange drawn by
B upon A to acute the amount. C the holder of the bill demands payment of it from A, and
on A’s refusal to pay sues him upon the bill. A, not having reasonable grounds for so doing,
defends the suit, and has to pay the amount of the bill and costs. He can recover from B
the amount of bill, but not the sum paid for costs, as there was no real ground for
defending the action.
Rights against / towards creditor

Rights to securities
A surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of suretyship is entered into, whether the surety knows of
the existence of such security or not and if the creditor loses or without the consent of the surety
parts with such security, the surety is discharged to the extent of the value of the security.
[Section 141]
Examples: Right to securities

C advances to B, his tenant, Rs. 2,000 on the guarantee of A. C has also a further security
for Rs.2,000 by a pledge of B’s furniture. C cancels the pledge. B becomes insolvent, and C
sues A on his guarantee. A is discharged from liability to the amount of the value of the
furniture.
C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that
advance from A. C afterwards takes B’s goods in execution under the decree, and then
without the knowledge of A, withdraws the execution. A is discharged.
A, as surety of B makes a bond jointly with B to C to secure a loan from C to B. Afterwards,
C obtains from B a further security for the same debt subsequently C gives up the further
security. A is not discharged.
Right to claim set off

The surety has a right to claim set off if any which the principal debtor had against the creditor.
Rights against co-sureties
Right to claim contribution
When a debt is guaranteed by two or more sureties, they are called co-sureties. The co-sureties
are liable to contribute, as agreed, towards the payment of the guaranteed debt. When one of the
co-sureties makes payment to the creditor, he has a right to claim contribution from the other co-
surety or co-sureties. Following are the rules of contribution between co-sureties: [Section 146 &
147]

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In the absence of any contract, all co-sureties are liable to contribute equally in case of
default by principal debtor.
Examples: Right to claim contribution
A, B and C are sureties to D for a sum of Rs.3,000 lend to E. E makes default in
payment. A, B and C are liable, as between themselves to pay Rs.1,000 each.
A, B and C are sureties to D for a sum of Rs.1,000 lent to E, and there is a contract
between A, Band C that A is to be responsible to the extent of one-quarter, B to the
extent of one quarter, and C to the extent of one half. E makes default in payment.
As between the sureties, A is liable to pay Rs.250, B Rs.250 and C Rs.500.
If co-sureties have agreed to guarantee different sums than co-sureties are liable to
contribute equally, subject to the maximum amount guaranteed by each one.
Examples: Guarantee of different sums
A, B and C as sureties for D, enter into three separate bonds, of different amounts -
A for Rs.10,000, B for Rs.20,000 and C for Rs.40,000, conditional for D’s duly
accounting to E.
x D makes default to the extent of Rs. 30,000 than A, B and C are each liable
to pay Rs. 10,000.
x D makes a default to the extent of Rs. 40,000 than A is liable to pay Rs.
10,000 and B and C are liable to pay Rs. 15,000 each.
x D makes a default to the extent of Rs. 70,000 than A, B and C are liable to
pay full penalty of his bond.
Where there are co-sureties, a release by the creditor of one of them does not discharge
the others, neither does it free the surety so released from his responsibility to the other
sureties. [Section 138]
2.8 Discharge of surety

The ways in which a surety is discharged are shown below:
These modes are discussed below.

Discharge of surety by revocation

Notice
A surety can be discharged by giving notice to the creditor in case of continuing guarantee, as to
future transactions, by notice to the creditor. [Section 130]
Death of surety
The deceased surety’s estate will not be liable for any transactions entered into between the
creditor and the principal debtor after the death of the surety, even if the creditor has no notice of
the death. [Section 131]
Novation
Novation means the substitution of a new contract of guarantee for an old one. The new contract
extinguishes the rights and obligations that were in effect under the old contract. [Section 62]
Discharge of surety by the conduct of the creditor
Alteration
If an alteration is made without the consent of the surety then the surety is discharged as to the
transactions, subsequent to the alteration. [Section 133]
Examples: Alteration
A becomes surety to C for B's conduct as a manager in C's bank. Afterwards, B and
C contract, without A's consent, that B's salary shall be raised, and that he shall
become liable for one-fourth of the losses on overdrafts. B allows a customer to
overdraw, and the bank loses a sum of money. A is discharged from his surety ship
by the variance made without his consent, and is not liable to make good this loss.
C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A's
becoming surety to C for B's duly accounting for money received by him as such
clerk. Afterwards, without A's knowledge or consent, C and B agree that B should
be paid by a commission on the goods sold by him and not by a fixed salary. A is
not liable for subsequent misconduct of B.
C contracts to lend B Rs. 5,000 on the first March. A guarantees repayment. C pays
Rs. 5,000 to B on the first January. A is discharged from his liability as the contract
has been varied in as much as C might sue B for the money before the first of
March.
Release of principal debtor

The surety is discharged by any contract between the creditor and the principal debtor, by which
the principal debtor is released. [Section 134]
Examples: Release of principal debtor
A gives guarantee to C for goods to be supplied by C to B. C supplies goods to B,
and afterwards B becomes embarrassed and contracts with his creditors (including
C's) to assign to them his property in consideration of their releasing him from their
demands. Here, B is released from his debt by the contract with C, and A is
discharged from his surety ship.
A contracts with B to grow a crop of wheat on A's land and to deliver it to B at a
fixed rate, and C guarantees A's performance of this contract. B diverts a stream of
water which is necessary for irrigation of A's land, and thereby prevents him from
raising the wheat. C is no longer liable for his guarantee.
A contracts with B for a fixed price to build a house for A within a stipulated time, B
supplying the necessary timber. C guarantees A's performance of the contract. B
omits to supply the timber. C is discharged from his surety ship.
Arrangement
A contract between the creditor and the principal debtor, by which the creditor makes a
competition with, or promises to give time to, or not to sue, the principal debtor, discharges the
surety, unless the surety assents to such contract. [Section 135]

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Discharge of surety by invalidation of contract

Misrepresentation/ Fraud
Any guarantee which has been obtained by means of misrepresentation made by the creditor or
keeping silence as to material circumstances, or with his knowledge and assent, concerning a
material part of the transaction, is invalid. [Section 142 & 143]
Examples: Fraud
A engages B as a clerk to collect money for him. B fails to account for some of his
receipts and A, in consequence calls upon C to furnish security for his duly accounting. C
gives guarantee for B's duly account. A does not inform C about B’s previous conduct. B,
afterwards, makes default. C is not liable because the guarantee was obtained by
concealment of facts.
Act or omission
If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any
act which his duty to the surety requires him to do, and the eventual remedy of the surety himself
against the principal debtor is impaired, the surety is discharged. [Section 139]
Examples: Act or omission
B contracts to build a ship for C for a given sum, to be paid by instalments as the work
reaches certain stage. A becomes surety to C for B's due performance of the contract.
C, without the knowledge of A, pre-pays to B the last two instalments. A is discharged
by this prepayment.
C lends money to B on the security of a joint and several promissory note, made in C's
favour by B, and by A as surety for B, together with a bill of sale of B's furniture, which
gives power to C to sell the furniture, and apply the proceeds in discharge of the note.
Subsequently, C sells the furniture, but, owing to his misconduct and wilful
negligence, only a small price is realized. A is discharged from liability on the note.
Failure of co-surety to join surety

Where a person gives a guarantee upon a contract that a creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that other person does
not join. [Section 144]
2.9 Circumstances where surety is not discharged

Where a contract to give time to the principal debtor is made by the creditor with a third
person, and not with the principal debtor, the surety is not discharged.
Patience on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him, does not, in the absence of any provision, in the guarantee to the
contrary, discharge the surety.
Where there are co-sureties, the release by the creditor of one of them does not discharge
the other nor does it free the surety so released from his responsibility to the other
sureties. [Section 138]
2.10 Difference between contract of indemnity and contract of guarantee

The following table summarises the key differences between the contract of indemnity and
contract of guarantee as explored above.
S.no Contract of indemnity Contract of guarantee
1 Number of parties
There are two parties indemnifier and There are three parties principal debtor,
indemnity holder. creditor and surety.

S.no Contract of indemnity Contract of guarantee
2 Number of contracts
There is only one contract. There are three contracts.
3 Object
The indemnifier undertakes to save the The surety undertakes for the payment of
indemnity holder from any loss. debts of principal debtor in case of his
default.
4 Nature of liability
The liability of indemnifier is primary and The liability of surety is secondary and
unconditional. conditional and co-extensive.
5 Commencement of liability
The liability arises only on the happening The liability arises only on the non-
of a contingency. performance of an existing promise or
non-payment of an existing debt.
6 Right to sue
The indemnifier cannot sue a third party A surety, on discharging the debt of
in his own name because of absence of principal debtor, can sue the principal
privity of contract between him and third debtor in his own name.
party.

Business Law
3 CHAPTER REVIEW
Chapter review
Define a contract of indemnity
Discuss the rights of indemnity holder
Define contract of guarantee and its types
Discuss the nature and extent of surety’s liability
Understand the rights of surety
Explain the various ways in which the surety is discharged

CHAPTER
Business Law
15
Bailment and pledge
Contents
1 Nature of bailment
2 Duties and rights of bailor and bailee
3 Termination
4 Finder of goods
5 Pledge
6 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Bailment and pledge

knowledge of laws relating to contract of bailment and pledge.
LO 2.14.1 Define bailment and identify the essentials of the contract of bailment
LO 2.14.2 Explain the types of bailment
LO 2.14.3 Identify duties and rights of the bailor and bailee
LO 2.14.4 Explain how contract of bailment is terminated
LO 2.14.5 Identify rights and duties of finder of goods
LO 2.14.6 Explain pledge (pawn), pledgor (pawnor) and pledgee (pawnee)
LO 2.14.7 Explain rights of pledgor and pledgee
LO 2.14.8 Understand the rules of pledge by non-owners
LO 2.14.9 Differentiate between bailment and pledge.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 15: Bailment and pledge
1 NATURE OF BAILMENT
Section overview
Meaning of bailment
Essential elements of bailment
Types of bailment
1.1 Meaning of bailment

The bailment is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. [Section 148]
The word “Bailment” is derived from a French word “Baillier” which means to deliver. The
analysis of the above law also reveals that if a person already having had possession of the
goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and the
owner becomes the bailor of such goods, although they may not have been delivered by way of
bailment.
Example: bailment
X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. There is a contract of
bailment between X and Y.
A lends a laptop to B to be returned after the examination. There is a contract of bailment
between A and B.
An insurance company places a damaged insured car of X in possession of Y, a repairer. X
is the bailor, the insurance company is the bailee, and Y is the sub-bailee.
1.2 Essential elements of bailment

The essential elements of bailment are shown below:

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Agreement
A bailment is usually created by agreement between the bailor and the bailee. It may be
gratuitous i.e. without consideration or non-gratuitous i.e. with consideration. The agreement may
be express or implied. In case of finder of goods the bailment is implied by law.
Delivery of goods
A bailment involves delivery of goods by bailor to bailee. In this connection, the following points
may be noted:
The delivery must be voluntary e.g. the delivery of jewellery by its owner to a thief who
shows a revolver does not create a bailment because the delivery is not voluntary.
Delivery may be actual or constructive
x Actual delivery is when goods are physically transferred by one person to another
e.g. delivery of a car to mechanic for the purpose of repair.
x Constructive or symbolic delivery may be made by doing something which has the
effect of putting the goods in the possession of the intended bailee or any person
authorized to hold them on his behalf. This means possession is transferred to the
bailee without actually handing over the goods physically e.g. the delivery of a
railway receipt amounts to delivery of the goods.
Purpose
The delivery of goods from bailor to bailee must be for some purpose such as personal service,
safe custody, some work to be done upon or transportation.
Return of specific goods
In contract of bailment the goods are either returned or disposed of as per the instructions of
bailor after the purpose is achieved.
1.3 Types of bailment

The various types of bailment are shown below:
Types of bailment
On the basis of On the basis
reward of benefit
Bailment for the

Bailment for the Bailment for the
Gratuitous Non-gratuitous mutual benefit
exclusive exclusive
Bailment Bailment of bailor and
benefit of bailor benefit of bailee
bailee
Bailment on the basis of reward
Type Meaning
Gratuitous It is a contract of bailment where no consideration passes between the

bailment bailor and the bailee.
Non-gratuitous It is a contract of bailment where some consideration passes between

bailment the bailor and the bailee.


Zaheer lends an IPAD to Imran for his work without any charge.
Example: Non-gratuitous bailment

A hires a car from B.
Bailment on the basis of benefit
Type Meaning
Bailment for the exclusive A contract of bailment which is executed only for the benefit of
benefit of bailor the bailor.
Bailment for the exclusive A contract of bailment which is executed only for the benefit of
benefit of bailee the bailee.
Bailment for the mutual A contract of bailment which is executed for the mutual benefit
benefit of bailor & bailee of the bailor and the bailee.
Example: Bailment for the exclusive benefit of bailor

X who is going out of station to attend a conference delivers his tablet to Y for proper care.
Example: Bailment for the exclusive benefit of bailee

Zaheer lends an iPhone to Imran for a day without any charge.
Example: Bailment for the mutual benefit of bailor & bailee

A hires a car from B.
There can be two more types of bailment:

Sub-bailment
A sub-bailee is a person to whom the actual possession of goods is transferred by someone who
himself is not the owner of goods but has a present right to possession of them as bailee of the
owner. Where the bailee sub-bails the goods with the authority of the owner, the relationship
between the owner and the sub-bailee is that of bailor and bailee.
Example: Sub-Bailment
An insurance company places a damaged insured car of A in possession of R, a repairer. A is the
bailor, the insurance company is the bailee, and R is the sub-bailee.
Pledge/Pawn
Term Meaning
Pledge The bailment of goods as security for payment of a debt or performance of a

promise is called pledge or pawn
Pawnor The bailor in this case is called the pawnor / pedgor
Pawnee The bailee in this case is called the pawnee / pledgee

Business Law
2 DUTIES AND RIGHTS OF BAILOR AND BAILEE
Section overview
Duties of bailor
Duties of bailee
Rights of bailor
Rights of bailee
The table below shows the duties and rights of bailor and bailee:
These are explained below:
2.1 Duties of bailor

Duty to disclose faults
According to Section 151 of Contract Act:
Gratuitous Bailment Non-gratuitous Bailment
The bailor is bound to disclose to the bailee faults in the If the bailee suffers any loss
goods bailed: due to any fault in the goods,
Of which the bailor is aware and the bailor is liable to bailee for
such loss whether he knows
Which materially interfere with the use of them or those faults or not.
expose the bailee to extraordinary risks
If the bailor does not disclose such faults and the bailee
undergoes some loss due to such faults, the bailor is liable
to bailee for such loss.


A lends a horse, which he knows to be vicious, to B. He does not disclose that the horse is vicious.
The horse runs away and B is thrown and injured. A is responsible to B for damage sustained.
Example: Non-gratuitous bailment

A hires a car of B. The car is unsafe, though B is not aware of it, and is injured. B is responsible to
A for the injury.
Duty to bear expenses

Gratuitous bailment Non-gratuitous bailment
In case of gratuitous bailment it is the duty of In non-gratuitous bailment it is the duty of the
the bailor to indemnify bailee for all the bailor to indemnify bailee for all the extra
necessary expenses which the bailee has ordinary expenses which the bailee has
incurred for the purpose of bailment. incurred for the purpose of bailment.
Example: Gratuitous Bailment

A leaves his car with B, a friend, for safe custody for six months. B has to pay Rs. 1,000 per
month to the night watchman for keeping a watch over the car. It is the duty of A to pay B the
necessary expenses incurred by B.
Example: Non-gratuitous Bailment

A lends his horse to B, a friend, for two days. The feeding charges are to be paid by B. But if the
horse meets with an accident A will have to repay B medical expenses incurred by B
Duty to indemnify bailee for loss in case of early termination of gratuitous bailment
In case of gratuitous bailment the bailor can terminate bailment even if it is made for a fixed time
or purpose. In such case bailor is liable to compensate bailee for any loss in excess of benefit
due to early termination. [Section 159]
Example: Duty to indemnify bailee for loss in case of early termination of gratuitous bailment
A lends an old discharged IPhone to B gratuitously for three months. B incurs Rs.12,000 on its
repairs. If A asks for the return of the IPhone after one month, he will have to compensate B for
expenses incurred by B in excess of the benefit derived by him.
Duty to receive back the goods

Bailor is bound to receive back the goods when the purpose is completed or on expiry of period.
In case the bailor refuses to accept the goods then he is liable to pay the charges incurred by
bailee for the safe custody of goods. [Section 164]
Example: Duty to receive back the goods

A lent an X-box to B for five days. On the expiry of five days, A refused to receive back the x-box
but two days thereafter, he agreed to receive back the X-box. During these two days, B incurred
Rs. 1,000 as software update charges. A must repay Rs. 1,000 to B.
Duty to indemnify the bailee

The bailor is liable to indemnify bailee for any loss arising due to defective title of bailor. [Section
164]

Business Law
Example: Duty to indemnify the bailee

B asks A, his friend to give him car for one hour. A, instead of his own car delivers Z’s car to B.
While B was riding, Z catches B and hands him over to the police custody. B is entitled to recover
from A all costs which he had to incur in getting out of this situation.
Duty to bear the risk of loss

If the bailee has taken reasonable steps to protect the goods then the bailor is bound to bear the
risk of loss of goods bailed. [Section 152]
2.2 Duties of bailee

Duty to take care of the goods bailed
In all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a
man of ordinary prudence would, under similar circumstances, take of his own goods of the same
bulk, quality and value as the goods bailed. [Section 151 & 152]
Example: Duty to take care of the goods bailed
Imran entered a restaurant for dining. His coat was taken by a waiter who hung it on a hook
behind Imran. When Imran rose to leave, the coat was gone. The proprietor of the restaurant will
be liable for the loss.
Duty not to make any unauthorized use of goods

If the bailee uses the goods bailed in a manner which is not according to the terms of the
contract, he shall be liable to compensate bailor for any loss arising due to inconsistent use of
goods bailed. [Section 154]
Example: Duty not to make any unauthorized use of goods
A lends a laptop to B for his use only. B allows C, a member of his family, to use the laptop. C
uses with care, but the laptop accidently falls and its LCD braked. B is liable to make
compensation to A for the injury caused to the laptop.
Duty not to mix the goods bailed with his own goods
A bailee is bound to keep the goods bailed separately. He must take prior consent from bailor to
mix with his own goods. [Section 155 to 157]
Mixture without bailor’s consent
Goods being separable Goods being inseparable

If the bailee so mixes without the consent of If the bailee so mixes without the consent of
the bailor and the goods can be separated or the bailor and the goods cannot be separated
divided, the bailee is liable for the: then the bailee is liable to the bailee for the
Expenses of separation or division loss of the goods.
Any damage arising from the mixture.
Example: Mixture without bailor’s consent

Goods being separable
A bails 100 bales of cotton marked with a particular mark to B. B, without A’s consent, mixes the
100 bales with other bales of his own, bearing a different mark. A is entitled to have his 100
bales returned and B is bound to bear all the expenses incurred in the separation of the bales,
and any other incidental charges.
Goods being inseparable
A bails a bag of farm wheat worth Rs. 550 to B. B without A’s consent, mixes the wheat with
imported wheat of his own, worth only Rs. 250 a bag. B must compensate A for the loss of his
wheat.

If the goods of the bailor get mixed up with the like goods of the bailee, by inadvertence of the
bailee or accident or by the act of an unauthorized third party, the mixture belongs to the bailor
and the bailee in proportion to their shares.
Duty not to set up an adverse title
The bailee is not the legal owner of the goods bailed but holds the goods on behalf of the bailor.
He cannot deny the right of the bailor to bail the goods and receive them back. He may however
refuse to deliver goods back to the bailor if there is an effective pressure such as a court order,
not to return goods to the bailor.
Duty to return the goods
It is the duty of the bailee to return the goods bailed without demand as soon as the:
Time for which they were bailed has expired or
Purpose for which they were bailed has been accomplished
unless otherwise agreed upon.
If the bailee fails to do so, he is responsible for any loss, destruction or deterioration of the goods
from that time. [Section 160 & 161]
Example: Duty to return the goods

A delivered some CDs to B for watching. He pressed for their return, but B neglected to return
them although more than reasonable time had elapsed. A fire accidently broke out on B,
premises and the CDs were burnt. B was liable for the loss although he was not negligent,
because of his failure to deliver the CDs within a reasonable time.
Duty to return increase

In the absence of any contract, it is the duty of the bailee to return to the bailor any:
increase or
profit
if the goods are bailed. [Section 163]
Example: Duty to return increase

A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver
the calf as well to A.
2.3 Rights of bailor

Right to claim damages in case of negligence
A bailor is entitled to claim damages if bailee has not taken reasonable care of the goods bailed.
[Section 152]
Right to terminate the contract in case of unauthorized use
A bailor is entitled to terminate the contract if the bailee without the consent of bailor uses the
goods for other purposes. [Section 153]
Right to claim compensation in case of unauthorized use
A bailor is entitled to claim compensation if the bailee without the consent of bailor uses the
goods for other purposes and any damage arise. [Section 154]
Right to claim separation of goods in case of unauthorized mixture
A bailor has a right to claim separation of goods bailed (if separable) if bailee mixes the goods
with his own goods without prior consent. [Section 156]
Right to claim compensation in case of unauthorized mixture of goods
A bailor has a right to claim compensation from bailee for any loss to the goods bailed if bailee
mixes the goods with his own goods without prior consent. [Section 157]

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Right to demand return of goods

A bailor has a right to demand return of goods after the fulfilment of the purpose or after the
expiry period of bailment. [Section 160]
Right to claim compensation in case of unauthorized retention of goods
If the bailee does not return or deliver the goods according to the bailor’s direction after the
fulfilment of purpose or after the expiry of period of bailment, the bailor has a right to claim
compensation for any loss, destruction or deterioration of the goods. [Section 161]
Right to demand increase
In the absence of any contract, the bailor has a right to demand any increase or profit which may
have accrued from the goods bailed. [Section 163]
2.4 Rights of bailee

Right to claim damages
If the bailor does not disclose the fault in the If the bailee undergoes any loss due to any
goods of which he is aware and the bailee fault in the goods, the bailee has a right to
suffers some loss due to such faults, the claim damages.
bailee has a right to claim damages.
Right to claim reimbursement of expenses

In case of gratuitous bailment the bailee has In case of non-gratuitous bailment the bailee
a right to claim indemnification of all the has a right to claim indemnification of all the
necessary expenses which he has already extra ordinary expenses which the bailee has
incurred for the purpose of bailment. already incurred for the purpose of bailment.
Right to be indemnified in case of early termination of gratuitous bailment

In case of gratuitous bailment the bailee has a right to claim indemnification if the bailor
terminates the contract of bailment before the expiry of fixed period or completion of purpose. In
such case bailee has a right to claim compensation for any loss in excess of benefit due to early
termination. [Section 159]
Right to recover loss in case of bailor’s defective title
The bailee has a right to be indemnified for any loss arising due to defective title of bailor.
[Section 164]
Right to recover loss in case of bailor’s refusal to take the goods back
If the bailor refuses to take back the goods then bailee has a right to be indemnified in case he
suffers any loss. [Section 164]
Right to deliver goods in case of several joint owner
In absence of any contract to the contrary, the bailee has a right to deliver back the goods in
accordance with the instructions of one joint owner without the consent of or other of the joint
owners. [Section 165]
Bailee not responsible on re-delivery to bailor without title
If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or
according to the directions of the bailor, the bailee is not responsible to the owner in respect of
such delivery. [Section 166]

Rights of bailor and bailee against wrong-doer

If a third person wrongfully deprive the bailee of the use or possession of the goods bailed then
the bailee may use such remedies as the owner might have used and either the bailor or the
bailee may bring a suit against the third person for such deprivation or injury.
Whatever is obtained by way of relief or compensation is any such suit in the above case, shall
as between the bailor and the bailee, be dealt with according to their respective interests.
[Section 180 & 181]
Example: Rights of bailor and bailee against wrong doer

X delivered a TV to Y for repairs. Z forcefully takes possession of TV from Y’s shop. In this case,
either X or Y may sue Z, if Y files the suit, he shall hand over the amount received after deducting
his repair charges to X.
Right of particular lien

Where the lawful charges of the bailee in respect of the goods bailed are not paid, he may retain
the goods until he receives due remuneration for the services he has rendered in respect to
them. This right of the bailee to retain the goods is known as ‘particular lien’.
A particular lien is available to a bailee only against those goods on which some skill and labour
have been expended by him. But if the bailee does not complete the work within the agreed time,
or a reasonable time, he cannot exercise his right of lien. Also, if he voluntarily permits the bailor
to regain possession of the goods without payment of the charges, he cannot exercise the right
of lien. [Section 170]
Example: Right of particular lien

A delivers a rough diamond to B, a jeweller to be cut and polished which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.
A gives a piece of cloth to B, a tailor, to sew it into a coat. B promises A to deliver the coat as
soon as it is finished, and to give A three months credit for the price. B is not entitled to retain the
coat.

Business Law
3 TERMINATION
Section overview
Termination of all contract of bailment

Termination of gratuitous bailment
3.1 Termination of all contract of bailment

All contract of bailment are terminated in the following cases:
Automatic termination
A bailment of goods is automatically terminated on:
Expiry of the time for which goods were bailed
Completion of purpose for which they are bailed.
Inconsistent use of goods
When the bailment is for a specific purpose and goods bailed are used inconsistent of the
purpose for which they are bailed.
Destruction of the subject-matter
A bailment is terminated when the subject-matter of the bailment is
destroyed, or
by reason of a change if its nature becomes incapable of use for the purpose of the
bailment.
3.2 Termination of gratuitous bailment

Death of the bailor or bailee
On death of the bailor or bailee the gratuitous bailment is terminated.
Before the expiry of the fixed period
In case of gratuitous bailment the bailor can terminate the contract of bailment before the expiry
of fixed term or completion of purpose. In such a case, the bailor is liable to indemnify the bailee
in case the loss exceeding the benefit derived due to early termination.

4 FINDER OF GOODS
Section overview
Rights of finder of goods

Duties of finder of goods
Finder of goods is the person who finds some goods which do not belong to him. If he takes them into
his custody, he becomes a bailee.
4.1 Rights of finder of goods

Right to lien
The finder of goods has a right of lien over the goods found until he receives the compensation
for expense incurred by him to preserve the goods and to find the owner but he has no right to
sue the owner for any such compensation incurred by him voluntarily. [Section 168]
Right to sue for reward
The finder can sue for any specific reward which the owner has offered for the return of the
goods. He may also retain the goods until he receives the reward. [Section 168]
Right of sale
A finder of goods may sell the goods found if [Section 169]:
The owner cannot with reasonable diligence be found, or
If found, he refuses to take the goods or
Goods will perish or lose the greater part of their value, or
The lawful charges of the finder, in respect of the goods found, amount to two third of their
value.
4.2 Duties of finder of goods

The finder of goods is subject to same responsibility as a bailee. The duties are given below:
Duty to take care
The finder of goods must take reasonable care of the goods found like a person of ordinary
prudence.
Duty not to use for personal purpose
The goods found must not be used for personal purpose.
Duty not to mix with its own goods
The goods found must not be mix with his own goods.
Duty to find the owner
Subject to lien, the finder of goods must return the goods to the true owner if found.

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5 PLEDGE
Section overview
Definition
Rights of pawnee
Rights of pawnor
Pledge by non-owners
Difference between pledge and bailment
5.1 Definition
Definition: Pledge [Section 172
The bailment of goods as security for payment of a debt or performance of a promise is called a
pledge.
The person who delivers the goods as security for payment of a debt or performance of a
promise is called pawnor or pledgor.
The person to whom the goods are delivered as security for payment of a debt or performance of
a promise is called pawnee or pledgee.
Any kind of movable property, i.e., goods, documents, or valuables may be pledged. But delivery
is necessary to complete a pledge. The delivery may be actual or constructive.
Example: Pledge
If A borrows Rs. 200,000 from B and keeps his Rolex watch as security for payment of the debt,
the bailment of watch is a pledge.
5.2 Rights of pawnee

Right of retainer
The pawnee may retain the goods pledged for [Section 173]:
Payment of the debt or the performance of the promise
For the interest of the debt and
All necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.
Example: Right of retainer
A borrows Rs. 100,000 for a period of 1 month on an interest of 1% per month (Rs 1,000 ) from
ABC Bank and kept his laptop as security.
ABC Bank has a right to keep laptop of A in its custody until the loan amount i.e. Rs. 100,000 and
mark up i.e. Rs. 1,000 is paid in full.
Right of retainer for other advances
It is the presumption that when the pawnee lends money to the same pawnor after the date of the
pledge the right of the retainer over the pledged goods extends to subsequent advances also
unless otherwise agreed upon. If the goods are separately secured then such presumption will
not prevail. [Section 174]
Right to extraordinary expenses
The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged. [Section 175]

Example: Right to extra ordinary expenses

A pledged gold with B against a loan of Rs. 100,000 at a mark-up of 15% per annum. Being
concerned with the growing incidences of burglary in the city, B insured the gold. At the time of
repayment, B claimed the cost of insurance cover in addition to the principal sum due and
interest.
Here, the claim of B is valid as the expenses were made for the preservation of the goods
pledged.
Right against true owner, when the pawnor’s title is defective

When the pawnor has obtained possession of the goods pledged by him under a voidable
contract but the contract has not been rescinded at the time of the pledge, the pawnee acquires a
good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of
title.
Rights where pawnor makes default
If the person makes default in payment of the debt or performance of the promise then the
pawnee can exercise the following rights: [Section 176]
Right to sue
The pawnee may file a suit against the pawnor upon the
x debt or
x promise and
x may retain the goods pledged as a collateral security.
Right to sell
The pawnee may sell the goods pledged after giving pawnor a reasonable notice of the
sale. He can recover from the pawnor any deficiency arising on the sale of the goods by
him. However, he shall have to hand over the surplus to the pawnor, if any, realized on the
sale of the goods
Example: Rights where pawnor makes default

ABC Bank granted a loan of Rs. 10 million to XYZ Limited against the pledge of shares of a listed
company. XYZ Limited defaulted on repayment of the loan. The market value of the shares at the
time of default was Rs. 9 million.
Here, ABC Bank can file a suit for the recovery of the defaulted amount and retain the pledged
shares or after giving reasonable notice to XYZ Limited may sell the shares of the listed company
to recover the defaulted amount and sue XYZ Limited for the remaining amount.
5.3 Rights of pawnor

Right to get back goods
On the performance of promise, or repayment of loan and interest, if any, the pawnor is entitled
to get back the goods pledged. [Section 177]
Right to redeem debt

If the pawnor makes default in payment of the debt or performance of the promise at the
stipulated time, he may still redeem the goods pledged at any subsequent time before the actual
sale of them. In this case he must pay, in addition, any expenses which have arisen from his
default. [Section 177]
Right to see
The pawnor has a right to see that the pawnee preserves the goods pledged and properly
maintains them.

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Note
Other duties of pawnee and pawnor are same as duties of bailor and bailee
5.4 Pledge by non-owners

The general rule is that it is the owner who can ordinarily create a valid pledge. But in the
following cases even a non-owner can create a valid pledge.
Pledge by mercantile agent

The pawnee of goods from a mercantile agent, who has no authority from the principal to pledge,
gets a good title to the goods if: [Section 178]
The agent is in possession of the goods or documents of title to the goods with the consent
of the owner
The agent pledges the goods while acting in the ordinary course of business of a
mercantile agent
The pawnee acts in good faith and
The pawnee has not at the time of the pledge, notice that the agent has no authority to
pledge.
Pledge by person in possession under voidable contract

When a person has obtained possession of the goods under a voidable contract and he pledges
those goods before the contract has been rescinded, the pawnee of such goods acquired a
goods title to them provided the pawnee acts in good faith and without notice of the pawnor’s
defect of title. [Section 178A]
Example: Pledge by person in possession under voidable contract

A purchases a piano from B by fraud. A has a voidable title to the goods. Before B rescinds the
contract, A pledges the piano to C, who acted in good faith and is ignorance of the fraud. It is a
valid pledge.
Pledge by seller in possession after sale

Where a seller having sold goods, continues to be in possession of the goods or of the
documents of title to the goods and pledges them either himself or through a mercantile agent to
a person who pledges them in good faith and without notice of the sale, it will be a valid pledge.
[Section 30 of the Sales of Goods Act]
Example: Pledge by seller in possession after sale

A sells certain goods to B and promises to deliver the goods the next day. Before delivery A
pledges the goods with C who acts in good faith and without notice of the prior sale to B. It will be
a valid pledge.
Pledge by buyer in possession before sale

Where a person having bought or agreed to buy goods obtains with the consent of the seller,
possession of the goods or documents of title to the goods and pledges them either himself or
through an agent, the pawnee who acts in good faith and without notice of any right of the
original owner is respect of the goods. The pledge of goods will be valid. [Section 30 of the Sales
of Goods Act]
Pledge by co-owner in possession

One of the several co-owners of goods in possession thereof with the assent of the other co-
owners may create a valid pledge of the goods if the pawnee acts in good faith and without
notice about the co-owners.

5.5 Difference between pledge and bailment

Following are the few differences between pledge and bailment:
Pledge Bailment
Nature of contract
The bailment of goods as security for The bailment is the delivery of goods by one
payment of a debt or performance of a person to another for some purpose, upon a
promise is called pledge. contract that they shall, when the purpose is
accomplished, be returned or otherwise
disposed of according to the directions of the
person delivering them.
Name of parties
pawnor and pawnee Bailor and bailee
Purpose
The purpose of pledge is security for the Bailment is for safe custody, transportation
performance of a specific promise, i.e. the etc.
payment of a debt or performance of a
promise
Right to use
Pawnee has no right to use the goods Bailee can use if terms of bailment so
pledged. provide.
Right to sell
Pawnee can sell the goods pledged after Bailee can either retain the goods or sue the
giving notice to the pawnor in case of default bailor for his dues.
by the pawnor.

Business Law
6 CHAPTER REVIEW
Chapter review
Define bailment and its characteristics
State the rights and duties of bailor and bailee
Describe briefly the various ways by which an bailment may be terminated
Explain the rights and obligations of a finder of goods
Define pledge and discuss the circumstances where pledge can be made by non-owners
Differentiate between pledge and bailment

CHAPTER
Business Law
16
Agency
Contents
1 Role of an agent
2 Rights and duties of the agent and principal
3 Irrevocable agency
4 Termination of agency
5 Undisclosed agency
6 Personal liability of an agent
7 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Contract of Agency
knowledge of laws relating to contract of agency.
LO 2.15.1 Define agency, agent and principal and explain types of agents
LO 2.15.2 Identify rights and duties of the agent and principal
LO 2.15.3 Understand rules relating to agency
LO 2.15.4 Differentiate between sub agent and co-agent
LO 2.15.5 Explain how an agency can be created
LO 2.15.6 Understand the circumstances when an agent is personally liable
LO 2.15.7 Identify irrevocable agency
LO 2.15.8 Explain how an agency can be terminated
LO 2.15.9 Understand the meaning of undisclosed agency, position of agent, principal and third party.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 16: Agency
1 ROLE OF AN AGENT
Section overview
Definition of an agent: the principal-agent relationship

Types of agent
Difference between Sub-agent and Co-agent
Legal problems with agency relationships
Creation of agency
Authority of an agent
1.1 Definition of an agent: the principal-agent relationship
Definition: Agent [Section 182]

An agent is a person employed to do any (lawful) act for another or to represent another in
dealing with a third person.
The person for whom such act is done or who is so represented is called the principal.
All types of business may use agents. An agent is a person who acts on behalf of someone else
(a ‘principal’) to arrange a transaction with a third party. The transaction creates a legal contract,
and the contract is between the principal and the third party.
There is a legal relationship between the agent and the principal. The nature of this
relationship is explained later.
The agent acts on behalf of the principal, by negotiating with a third party. Under normal
circumstances, there is no legal agreement between the agent and the third party.
However, the agent may negotiate the terms of a contract between the principal and the
third party.
When the contract is made, it is between the principal and the third party.
Any person who is of the age of majority and who is of sound mind may employ an agent.
As between the principal and third persons any person may become an agent. Thus even
a minor or a person of unsound mind can be appointed as agent. It is so because the act
of the agent is the act of the principal and therefore the principal is liable to third parties for
the acts of a minor agent.
No consideration is necessary to create an agency.
An agent may act for a principal in arranging just one transaction. However, it is common in
business for an agent to act regularly on behalf of a principal, arranging large numbers of
different business transactions and contracts.
However, it might be useful to have a simple example of an agent-principal relationship in mind.
One example is using an agent appointed for the sale of goods. The agent will act on behalf of
the owner (the principal) and try to find a buyer (a third party). If the agent is successful and the
goods are sold, the contract for the sale and purchase of the goods is between the seller and the
buyer. The agent does not enter into a contract with the buyer (the third party) although he has
an agreement with the principal (from which he will earn a fee).

Business Law
1.2 Types of agent

Following are the different types of agent:
Commercial agent An agent who regularly buys or sells goods on behalf of a principal.
or mercantile agent For example, a company in Karachi might have an agent in Lahore,
who arranges the sale of the company’s goods with buyers in Lahore.
Broker A broker is an intermediary who arranges trades or transactions on
behalf of clients (principals). An example is a stock broker, who
arranges the purchase or sale of stock market investments on behalf
of a client.
Auctioneer An auctioneer is an agent who is authorised to sell property of a
principal at auction.
Del credere agent A del credere agent is one who in consideration of an extra
commission, guarantees his principal that the persons with whom he
enters into contract on behalf of the principal shall perform their
obligation. He occupies the position of both a guarantor and an agent.
Company directors It is important to be aware that company directors act as agents for
and managers their company; therefore the rules of agency law apply to the actions
carried out by directors on behalf of the company. Employees,
particularly senior managers, might also act as agents for their
employer.
Partners in a It is also important to be aware that business partners act as agents for
business their partnership business. The rules of agency law therefore apply to
partnership the powers conferred on a partner to bind the partnership to
contractual agreements and obligations.
Sub-agent A sub-agent is the person employed by the original agent to act under
[Section 191 to 193] his control in the business of agency.
The general rule is that an agent is not entitled to delegate his
authority to another person without the consent of his principal. This is
because when the principal, appoints a particular agent to act on his
behalf, he relies upon the agent's skill, integrity and competence.
However, an agent may appoint a sub-agent and delegate the work to
him if:
The principal has expressly permitted delegation of such power.
The ordinary custom of trade a sub-agent may be employed.
Thus stock exchange member brokers generally appoint clerks
to transact business on behalf of their clients. Or:
The nature of work is such that a sub-agent is necessary e.g. a
manager of a shop may employ sales assistant.
The acts to be done are purely immaterial.
Unforeseen emergencies arise rendering appointment of the
sub-agent necessary.
Where a sub-agent is properly appointed
In such a case:
The principal is bound by the acts of the sub-agent as if the sub-
agent was an agent originally appointed by the principal.
The agent is responsible to the principal for the acts of the sub-
agent.
The sub-agent is responsible for his acts to the agent, but not to
the principal, except in case of fraud or wilful wrong.

Where a sub-agent is not properly appointed

Where the appointment of a sub-agent is made without authority and
without any justification the following consequence arises:
The agent stands as a principal towards such a sub-agent
The principal is not represented by such sub-agent and hence
he is not liable for the acts of the sub-agent.
The agent is responsible for the acts of the sub-agent to the
principal as well as to the third parties.
The sub-agent is not responsible to the principal at all. He
cannot be held liable by the principal even for fraud or wilful
wrong. He is responsible for his acts only to the agent.
Co-agent or A co-agent or a substituted agent is a person who is named by the

substituted agent agent, on an express or implied authority from the principal, to act for
[Section 194] the principal. He is not a sub-agent but an agent of the principal for
such act of the business of the agency as to be entrusted to him. He is
the agent of the principal, though he is named, at the request of the
principal, by the agent.
In selecting a co-agent for his principal an agent is bound to exercise
the same amount of discretion as a man of ordinary prudence would
exercise in his own case and if he does this then he is not responsible
to the principal for the acts or negligence of his co-agent.
1.3 Difference between Sub-agent and Co-agent
S.no Sub-agent Co-agent / substituted agent
1 Control
A sub-agent works under the control of A co-agent works under the instructions
the agent. of the principal.
2 Contract
There is no contract between sub-agent There is a contract between co-agent and
and the principal. the principal.
3 Responsibility
The agent is responsible to the principal The agent is not responsible to the
for the act of the sub-agent. principal for the act of the substituted
agent if the agent while selecting the
substituted agent exercised the same
amount of discretion as a man of ordinary
prudence would exercise in his own case
4 Termination
A sub-agent is automatically terminated if Co-agent is not affected by the
the authority of the agent is revoked by termination of the original agency.
the principal.
5 Remuneration
Remuneration to sub-agent is paid by the Remuneration to co-agent is paid by the
agent. principal.

Business Law
1.4 Legal problems with agency relationships

There are several possible legal problems with agency arrangements. In particular, there may be
some doubt about the validity of a contract that an agent makes with a third party on behalf of a
principal. For example:
A person might claim to act on behalf of a principal P, and a third party might enter into an
agreement believing the contract to be with P. However, P might deny that the person is in
fact his agent.
A person might be the agent of P with authority to make certain agreements on behalf of P.
However, the agent might make an agreement with a third party and in doing so go beyond
the limits of his authority as agent. The principal P might then refuse to accept the
agreement as legally binding. An example of this is where a manager makes an
agreement on behalf of the company he works for, and the company refuses to honour the
agreement on the grounds that the manager did not have the authority to make the
agreement.
1.5 Creation of agency

An agency relationship does not have to be a written agreement between the principal and the
agent, although it will certainly help to remove much of the uncertainty if there is a written agency
agreement.
There are four ways in which an agency relationship, recognised in law, can be established:
by express appointment (by agreement)
by ratification
by estoppel
by necessity.
Agency by express appointment (by agreement)
The most common method of creating an agency relationship is by agreement and mutual
consent. The principal appoints an agent (to carry out a particular task or to undertake a
particular function) and the agent agrees to act for the principal. [Section 186]
In many cases, the relationship is established formally, in writing. This written agreement
would be a contractual agreement between principal and agent.
An agency agreement may also be established by verbal agreement (although both parties
may need to provide proof of a verbal agreement in the event that one party subsequently
denies that the agreement ever took place).
The principal may wish to give the agent the power to execute deeds. (A deed is a form of
written legal document, and it is executed by signature.) In these cases, the agent must be
appointed by a deed. When an agent is appointed by deed, he is ‘given a power of
attorney’ to act for the principal.
When an agency is created by agreement, the agreement will usually specify the ways in
which the agent has authority to act on behalf of the principal. The agreement should
therefore make it clear, between the principal and the agent, what the agent is allowed to
do on behalf of the agent (and so what he is not allowed to do).
Agency by ratification
An agency relationship may be created retrospectively, by ratification. This may happen when a
person who does not actually have actual authority as an agent negotiates with a third party,
claiming to be an agent of a named principal. The agent may negotiate a transaction between the
third party and the so-called principal.
At this stage, there is no agency relationship. However, the person who has been named as
principal might then choose to accept the contract with the third party. This gives validity in
retrospect to the actions of the person claiming to act as agent of the named principal, and an
agency relationship is created by ratification. (‘Ratification’ means ‘giving approval to’ or ‘giving
validity to’ something.) [Section 196]

If the actions of a person claiming to be an agent are not ratified by the person named as
principal, and there is no proof that an agency arrangement exists by agreement, the contract is
between the agent personally and the other party.
If the other party suffers a loss due to breach of contract by the so-called agent, he would have to
take action against the so-called agent to recover any losses suffered, because the so-called
agent is actually the other party to the contract.
Effect of ratification
Ratification is established from the time of formation of contract between the ratifier of the
act and the person who did of the act.
A contractual relationship is established between the ratifier and the third party.
Requisites of valid ratification
Following are the requisites for a valid ratification: [Section 198 to 200]
An act to get ratified should be done on behalf of the person who wants to ratify it.
Since ratification has a retrospective application it is necessary that the ratifier must be in
existence at the time when the contract is entered into and also at the time of ratification.
Since ratification has a retrospective application it is necessary that the ratifier must be
competent to contract at the time when the contract is entered into and also at the time of
ratification.
Only lawful acts can be ratified.
There cannot be ratification of partial transaction, for a ratification to be effective whole
transaction must be ratified.
The person ratifying the transaction must have complete knowledge of the transaction in
question else ratification will not be valid.
No act can be ratified which result in third party to damages.
Ratification must be made within a reasonable time, what is the reasonable time is a
question of facts.
Agency by estoppel
‘Estoppel’ is a word used in law to mean ‘stop’ or prevent’.
An agency relationship may be created when someone has led others to believe that a person
has the authority to act on his behalf. An express agency agreement does not in fact exist, but it
may seem to other people that it does. If a third party then agrees a transaction with the person
who appears to be an agent, the ‘principal’ can be prevented (‘estopped’) from denying that an
agency agreement does not exists. In other words, the principal cannot reject the agreement by
saying that the person who was apparently acting as an agent was not in fact an agent.
In this situation, the agent has ‘ostensible authority’ or ‘apparent authority’, even though he
does not have actual authority to act as an agent. [Section 237]
For a third party to rely on the existence of an agency by estoppel, the following conditions must
apply.
A person (the principal) must give a clear representation to others that someone has the
authority to act as his agent. The representation must be made by the principal. If a person
claims to be an agent but the principal has given no representation to others that this
person is an agent, an agency by estoppel cannot exist.
This representation must have been made to the third party who then relies on the
existence of the agency relationship.
The third party who then negotiates the transaction with the ‘agent’ must have relied on the
existence of the agency relationship in reaching a decision about the transaction.
If these circumstances apply, a third party who suffers losses resulting from the situation can hold
the principal as liable, and take legal action against the principal.

Business Law
In a simple situation, suppose that a father regularly pays the debts of his daughter to a particular
shop. He may be denied (estopped) from denying that she acts as his agent, so that if he decides
that he will not pay a particular bill to the shop for his daughter, he may nevertheless be legally
obliged to do so.
Agency by necessity
Agency by necessity occurs in circumstances where there is no agreement between the parties,
but an emergency requires that one party (the agent) has to take action to protect the interests of
the other party (the principal).
A typical situation that might create agency by necessity happens when one person (the agent) is
in possession of property belonging to another person (the principal), and as a result of an
unexpected emergency, the agent takes action to protect or safeguard the property of the
principal. Unless the agent takes action, the principal will lose the property, or the property will
suffer significant damage.
For agency by necessity to exist, the following conditions must apply.
There must be a real emergency.
It must be impossible for the person acting as the agent to contact the owner of the
property and obtain instructions.
The person acting as agent by necessity must act as far as possible, in the best interests
of the principal.
In most cases involving agency by necessity, the person acting as agent by necessity is in
charge of goods or other assets owned by the principal, and there is an emergency in
relation to those assets or goods.
Agency by operation of law
Sometimes an agency arises by operation of law.
When a company is formed its first directors are its agents by operation of law.
A partner is agent of the firm for the purposes of the business of the firm.
1.6 Authority of an agent

Agent’s authority and the power to bind the principal
A principal does not give an agent unlimited authority to enter into any contract on behalf of the
principal. There are limits on the authority of an agent that restrict the type of agreement that the
agent can enter into, and the principal is only bound to honour agreements that the agent makes
within the limits of his authority.
When a third party deals with an agent who does not have the authority to make the transaction,
the principal may or may not be bound by such transaction as it depends upon the knowledge of
a third party regarding the authority of an agent. [Section 188]
Example: Agent’s authority and the power to bind the principal
An agent A is acting on behalf of a principal P. He enters into a contract with another party T,
stating that he is acting as agent for P. However, A has actually acted outside his authority. P
refuses to carry out the terms of the contract. In this situation, the agent A would be liable to both
the third party T and to the principal for breach of warranty of authority.
However, there might be problems in identifying the authority of a particular agent. These arise
mainly when an agent makes an agreement with another party, and the other party genuinely
believes that the agent has the necessary authority, but in fact the principal has not given the
agent that authority.
The authority of an agent to act on behalf of the principal may be any of the following types of
authority:
Express authority
Implied authority
Ostensible authority (apparent authority)

Express authority
An agreement is ‘express’ if both parties by words spoken or written agree to create an agency
relationship. A written agency agreement may give the agent express authority. [Section 186]
Express authority is not unlimited power to do anything on behalf of the principal. The principal
should specify what task or tasks the agent is required to perform, and what power and authority
the agent can exercise.
If the agent subsequently acts outside the limits of his express authority, this will affect the
contractual relationship between the principal and the third party. In such a situation, express
authority does not exist, but there may be implied authority or ostensible authority. The legal
consequences will depend on whether the third party knew that the agent was acting outside
the limit of his authority.
Implied authority
Implied authority is authority of an agent in excess of his express authority i.e. which is inferred
from the circumstances of the case. The scope of an agent’s authority may be increased by
implied authority.
Unless the third party has knowledge to the contrary, he is entitled to assume that an agent
holding a particular position has all the powers that are normally given to a person in such a
position. [Section 187]
Example: Implied authority

The purchasing director of a company may order a quantity of goods from a supplier. In doing so,
the director might exceed the scope of his express authority, because the company policy might
be that purchases above a certain value must be made by the managing director. Unless the
supplier has knowledge that the purchasing director has exceeded the limits of his authority, he
is entitled to assume that the director does have the authority to purchase the goods. The
company must accept that in the circumstances the purchasing director had implied authority.
Ostensible authority (apparent authority)

Ostensible authority, also called apparent authority, is an aspect of agency by estoppel.
Ostensible authority arises in two ways.
Where a person makes a representation to third parties that another person has the
authority to act as his agent, even though he has not actually been appointed as agent.
Where a person has previously represented to a third party that another person has the
authority to act as his agent and:
x the authority was subsequently taken away/ended, but
x the third parties who previously dealt with the agent have not been informed of this
fact.
A person who is agent by estoppel has the ostensible authority that would be assumed for any
such agent. The existence of ostensible authority is therefore found in cases of agency by
estoppel. [Section 188]

Business Law
2 RIGHTS AND DUTIES OF THE AGENT AND PRINCIPAL
Section overview
Duties of agent
Rights of agent
Duties of principal
Rights of principal
In a normal agency agreement, the principal appoints an agent to perform a task (or several tasks, or a
particular function) on his behalf, and the agent agrees to carry out the task or the function.
The agreement between the principal and agent is a contractual agreement that should give both
parties certain rights and duties. (The duties of an agent are rights of the principal, and rights of the
agent are duties of the principal.)
An agency relationship also gives the agent certain authority and powers.
2.1 Duties of agent

The duties of an agent are as follows:
Duty to carry out mandate
Every agent should perform the work for which he has been appointed to do.
Duty to follow instructions
It is the duty of the agent to follow all the lawful instructions of his principal. If the agent deviates
from the instructions of the principal then any loss arising will be compensated by the agent.
[Section 211]
Duty to reasonable carefulness and proficiency
An agent should conduct the business of agency with reasonable carefulness and proficiency.
[Section 212]
Duty to maintain and render accounts
An agent should render true accounts to the principal when demanded. [Section 213]
Duty to communicate
An agent should communicate to the principal in cases requiring principal’s instructions /
directions. [Section 214]
Duty not to deal personally
An agent must not deal in his own account in the course of agency without getting prior approval
from principal. [Section 215 & 216]
Duty to pay sums received
An agent is bound to pay all sums received to the principal after deducting amounts due to him in
the course of the business of agency. [Section 218]
Duty in case of principal’s death or insanity
When an agency is terminated by the principal death or unsoundness, the agent is bound to take
on behalf of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him. [Section 209]
Duty not to use critical information
An agent is bound to keep the information of principal secret not only during the course of agency
but also after its termination.

Duty not to make secret profit

An agent must not secure secret profit from agency without getting prior consent from principal.
[Section 217 & 218]
Duty not to delegate authority
An agent is not entitled to delegate his authority to another person without the consent of his
principal or unless under certain circumstances. [Section 190]
Duty in selecting sub-agent and substituted agent
An agent is bound to exercise the same amount of discretion as a man of ordinary prudence
would exercise in his own case while selecting a sub-agent or substituted agent. [Section 195]
Duty in case of emergency
An agent has authority in emergency to do all such acts for the purpose of protecting his principal
from loss as would be done by a person of ordinary prudence in his own case under similar
circumstances. [Section 189]
2.2 Rights of agent

An agent has the following rights against the principal:
Right to receive remuneration
The agent is entitled to his agreed remuneration or if there is no agreement to a reasonable
remuneration unless he agrees to act without it. If a transaction for which the agent claims
remuneration is the direct or indirect result of his services or efforts he is entitled to remuneration.
[Section 219 & 220]
Example: Right to receive remuneration

A has employed an agent to sell a property on the terms that he would be paid commission
on the completion of sale. He produced a person ready and willing to buy but the owners
refused to sell. Held, the agent was not entitled to commission as sale had not been
completed.
An agent was appointed to introduce a customer to purchase the principal's property. He
did introduce one customer the amount was fixed and earnest money paid. The sale fell
because of the customer's inability to find money. Held, the agent was entitled to his
agreed commission.
Right of lien
Subject to contract to contract an agent has a lien on goods, papers and other properties of the
principal received by him, until the amount due to himself for commission, disbursements and
services in respect of the same has been paid or accounted for, to him. [Section 221]
Right of retainer
An agent has a right to retain his principal’s money in his hands for all money due to himself in
respect of:
Remuneration as may be payable to him for acting as agent
Advances made or
Expenses properly incurred
by him in conducting the business of agency. [Section 217]
Right of indemnify for lawful acts
The agent has a right to be indemnified against the consequences of all lawful acts done by him
in exercise of the authority conferred upon him. [Section 222]

Business Law
Example: Right of indemnify for lawful acts

A, an agent refused to deliver goods of T a third party, at the instructions of B (Principal). T sued A
for the goods to which A incurred expenses in defending the suit. A is entitled to be indemnified
from his principal.
Right of compensation
The agent has a right to be compensated for injuries caused by neglect or want of skill of the
principal. [Section 225]
Right of stoppage in transit

An agent has a right to stop the goods in transit to the principal just like an unpaid seller if:
he has bought goods for his principal by incurring personal liability for the price and
the principal has become insolvent.
2.3 Duties of principal

The duties of a principal towards his agent are the rights of the agent against the principal. The
rights of an agent have already been discussed.
The principal owes the following duties to an agent:
Duty to indemnify for lawful acts

The principal has a duty to indemnify the agent against the consequences of all lawful acts done
by his agent in exercise of the authority conferred upon him. [Section 222]
Duty to indemnify against consequences of acts done in good faith

Where the principal employs an agent to do an act, and the agent does the act in good faith, the
principal has a duty to indemnify the agent against the consequences of that act, even though it
causes an injury to the rights of a third person. [Section 223]
Duty to compensate
The principal has a duty to compensate the agent for injuries sustained by him by neglect or want
of skill on the part of the principal. [Section 225]
Duty to pay
It is the duty of the principal to pay to agent the agreed remuneration or if there is no agreement
to a reasonable remuneration, unless he agrees to act without it. [Section 219 & 220]
2.4 Rights of principal

The principal can enforce all the duties of the agent which are indirectly the rights of the principal.
The principal has the following rights against the agent:
Right to revoke
The principal can revoke the authority given to his agent except in case of irrevocable agency or
where authority has been exercised. [Section 203]
Right in case of departure from direction

Where an agent conducts the business of agency otherwise than the instructions of the principal
than the principal: [Section 211]
must be compensated by the agent for any loss sustained
is entitled to profit (if any) that accrues from the transaction.

Right in case of misconduct

The principal is entitled to compensation for any loss which is the direct consequence of agent’s
[Section 212]
neglect
want of skill or
misconduct.
Right to accounts
It is the right of the principal that proper accounts are provided to him by the agent when he
demands. [Section 213]
Right to repudiate
If an agent deals on his own account in the business of agency without first getting prior consent
of his principal, it is the right of the principal to repudiate the transaction. [Section 215]
Right to claim benefit

If an agent secured secret profit during the course of agency without getting prior consent from
the principal then the principal is entitled to claim all the benefits resulting from the transaction.
[Section 216]
Right to refuse remuneration

If an agent has committed misconduct in the business of agency then the principal can refuse to
pay remuneration, or for that part which has been misconducting. [Section 220]

Business Law
3 IRREVOCABLE AGENCY
Section overview
Agency coupled with interest

Revocation would cause the agent personal loss
Authority partly exercised
When an agency cannot be terminated or put an end to by the principal, it said to be an irrevocable
agency.
3.1 Agency coupled with interest

Where the agent has himself an interest in the subject-matter of agency, the agency is said to be
coupled with interest. Such an agency is created with the object of protecting or securing any
interest of the agent.
Such agency cannot be terminated by the
Death or
Unsoundness of mind or
Insolvency
of the principal.
However, it may be revoked by the principal for the agent’s misconduct in the performance of
duties. Such agency may be revoked only if the contract of agency contains an express provision
for the revocation of agency. [Section 202]
Example: Agency is coupled with interest

A gives authority to B to sell A's car and to pay himself, out of the proceeds, the debts due to him
from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.
3.2 Revocation would cause the agent personal loss

Where an agent, while acting in the course of business of agency, carries a transaction in his
own name he is personally liable to the third party, unless and until the adventure is completed.
Example: Revocation would cause the agent personal loss

A authorize B to buy 10,000 bales of cotton on account of A, and to pay for it out of A's money
remaining in B's hands. B buys 10,000 bales of cotton in his own name so as to make himself
personally liable for the price. A cannot revoke B's authority so far as regards payment for the
cotton.
3.3 Authority partly exercised

If an agent has exercised his authority partly then the authority of the agent to the extent of acts
and obligations arising from acts already done cannot be revoked. [Section 204]
Example: Authority partly exercised

A authorizes B to buy 10,000 bales of cotton on account of A, and to pay for it out of A's money
remaining in B's hands. B buys 10,000 bales of cotton in A's name and so as not to render
himself personally liable for the price. A cannot revoke B's authority so far as regards buying the
cotton but can revoke B's authority to pay for the cotton.

4 TERMINATION OF AGENCY
Section overview
Termination by acts of parties

Termination by operation of law
Agency can be terminated in the following ways:
4.1 Termination by act of parties

Mutual agreement
A contract of agency can be terminated at any time by mutual agreement of principal and agent.
Revocation by the principal
Unless the agency is irrevocable, the principal may revoke the authority of the agent at any time
before the agent has exercised his authority so as to bind the principal. [Section 205 to 207]
Compensation
Where there is an express or implied contract that the agency should be continued for any
period of time the principal must make compensation to the agent for revocation of the
agency without sufficient cause.
Reasonable notice
Reasonable notice must be given of revocation of agency where agency is for a fixed
period of time otherwise the damage thereby resulting to the agent must be compensated
by the principal to the agent.
Express or implied
Revocation may be expressed or may be implied by the conduct of the principal.
Termination
The termination of the authority of an agent takes effect:
As regards to the agent from the time when it becomes known to him
As regards third persons from the time it becomes known to them
Even when the agency is terminated on the death of the principal the termination is
effective when it comes to the knowledge of the third party.
Effect of termination
The agent would be entitled to indemnity for acts done and to receive remuneration for the
period before termination.
Renunciation by the agent
An agent may renounce the business of agency at any time and in the same manner in which the
principal has the right of revocation. [Section 205 to 207]
Compensation
Where there is an express or implied contract that the agency should be continued for any
period of time the agent must make compensation to the principal for renunciation of the
agency without sufficient cause.
Reasonable notice
Reasonable notice must be given of renunciation of agency where agency is for a fixed
period of time otherwise the damage thereby resulting to the principal must be
compensated by the agent to the principal.
Express or implied
Renunciation may be expressed or may be implied by the conduct of the agent.

Business Law
4.2 Termination by operation of law

Completion of business
An agency is automatically terminated when its business is completed. [Section 201]
Expiry of time
When the agent is appointed for a fixed period of time the agency comes to an end after the
expiry of that time.
Death of the principal or agent

Unless the agency is irrevocable, a contract of agency is terminated on the death of the principal
or agent. [Section 201]
Insanity of the principal or agent

Unless the agency is irrevocable, a contract of agency is terminated on the insanity of the
principal or agent. [Section 201]
Insolvency of the principal

An agency is also terminated by the insolvency of the principal. [Section 201]
Destruction of subject matter

An agency is terminated automatically due to destruction of the subject-matter for which it was
created.
On winding up of company
An agency is automatically terminated when the principal or agent is a company and the
company is wound up.
Principal or agent becoming an alien enemy

When the agent or principal becomes an alien enemy the contract of agency is terminated.
[Section 208]

5 UNDISCLOSED AGENCY
Section overview
Meaning of undisclosed agency

Position of agent
Position of third party
Position of principal
5.1 Meaning of undisclosed agency

Where an agent while acting in the course of business of agency
does not disclose at the time of formation of contract the existence of his
x principal or
x representative character and
x enters into the contract with third party in his own name
this is called undisclosed agency. [Section 231]
5.2 Position of agent

As the agent has entered into a contract in his own name his position is exactly as that of a
contracting party. The agent is bound by the contract. He may be sued on it and he has the right
to sue the third party.
5.3 Position of third party

The position of third party is exactly that of a contracting party. On discovering about the
existence of agency, the third party contracting with the agent may seek his remedy against
either:
the agent or
the principal or
both of them.
Example: Position of third party

A enters into contract with B to sell him 100 cars and afterwards discovers that B was acting
as an agent for C. A may sue either B or C, or both for the price of the cars.
5.4 Position of principal

As the agent was acting in the course of business of agency the principal may be allowed to
intervene in the contract provided the following requirements are fulfilled:
Consent of third party
If the principal discloses himself before the contract is completed:
the other contracting party may refuse to fulfil the contract
if he can show that he would not have entered into the contract if he had known
who was the principal in the contract or
that the agent was not principal.

Business Law
Example: Consent of third party

A employed B to bring a theatre ticket for him. A was banned in entering the theatre and if A
would have collected the ticket himself the management would have refused to give the ticket. In
such a case the theatre management may subsequently refuse A to enter the theatre.
Terms unchanged
The terms of the contract between the agent and the other contracting party will remain
unchanged if the principal is allowed to intervene in the contract.

6 PERSONAL LIABILITY OF AN AGENT
Section overview
Circumstances where agent is personally liable
6.1 Circumstances where agent is personally liable

It’s a general rule that an agent is not liable if he acts on behalf of the principal. However, in
certain circumstances agent is personally liable which are discussed below:
Foreign principal
When an agent contracts for a principal resident abroad he is presumed to be personally liable.
[Section 230]
Unnamed principal
If an agent declines to disclose the identity of his principal then he is personally liable to the third
party.
Principal cannot be sued
An agent is also presumed to incur personal liability where he contracts on behalf of a principal
who though disclosed cannot be sued. E.g. where promoters contract for a projected company,
they are held liable personally as the company being non-existent at the time of the contract but
cannot be sued. [Section 230]
Undisclosed Principal
Where an agent acts for an undisclosed principal and contracts in his own name then he is
personally liable to the third parties. [Section 231]
Agency coupled with interest
In case of agency coupled with interest, since the agent has himself an interest in the property
which forms the subject matter of the agency therefore the agent is personally liable to the extent
of his interest. [Section 202]
Custom
An agent is personally liable on a contract if there is any usage or custom of a market or trade to
that effect. e.g. stock brokerage business.
Agent exceeding his authority
Where an agent while acting in the course of business of agency exceeds his authority, he is
personally liable for the excess part if it is a separable transaction otherwise for the entire
transaction. [Section 227 & 228]
Improperly appointed sub-agent
An agent is personally liable to third parties for the acts of an improperly appointed sub-agent.
[Section 193]
Agent incurring personal liability
Where an agent, while acting in the course of business of agency incurs personal liability he is
personally liable on the contract.
Criminal act
Where an agent has been employed to do a criminal act, the agent is not entitled to indemnify
himself against the consequences of that act and is personally liable for it.
Special contract
If an agent, while acting in the course of business of agency enters into a special contract with
the third party that he will be personally liable on the contract then the agent is personally liable.

Business Law
7 CHAPTER REVIEW
Chapter review
Define the terms agent and principal
Discuss the general rules of agency
Explain the various modes by which an agency may be created
Define the different types of authorities and explain the extent
Discuss the extent of principal’s liability and cases where agent is personally liable
Briefly explain the rights and duties of agent and principal
Describe briefly the various modes by which an agency may be terminated

Business Law
CHAPTER
17
Partnership Act
Contents
1 The nature of partnership
2 Relations of partners to one another
3 Relations of partners to third parties
4 Chapter Review

Business Law
INTRODUCTION
Learning outcomes
Partnership Act 1932

knowledge of laws relating to partnership
LO3.1.1 Define the terms.
LO3.2.1 Understand and describe the partnership relationship, its creation and identify and explain the
types of partnership and the mode of determining existence of a partnership.
LO3.3.1: Determine and explain the rights and duties of partners of the firm under various
circumstances
LO3.3.2: Explain the provisions of the law relating to conduct of the business, property of the firm and
personal profits earned by partners.
LO3.4.1: Describe the relationship of partners with third parties
LO3.4.2: Identify and explain the concepts of implied authority of the partner in relation to third parties,
partner’s authority in an emergency, mode of doing act to bind the firm, effect of admissions
by a partner, effect of notice to acting partner, liability of a partner for acts of the firm and
liability of the firm for wrongful acts of a partner or misapplication by partners, principle of
holding out in given situations
LO3.4.3: Identify and explain the rights of transferee of a partner’s interest and the rights and liabilities
of a minor admitted to the benefits of partnership.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 17: Partnership Act
1 THE NATURE OF PARTNERSHIP
Section overview
Definitions
Essential elements of a partnership
Test of partnership
Types of partnership
Types of partners
Difference between a partnership firm and a joint stock company
Difference between a partnership firm and co-ownership
1.1 Definitions
Definition: Partnership [Section 4]
“Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all”.
Definition: Firm and partners [Section 4]

“Persons who have entered into partnership with one another are called individually “partners”
and collectively “a firm” and the name under which their business is carried on is called the “firm
name”.
Definition: Act of firm [Section 2(a)]

“An act of firm means any act or omission by all the partners, or by any partner or agent of the
firm which gives rise to a right enforceable by or against the firm.”
Definition: Third party [Section 2(d)]

“Third party used in relation to form or to a partner therein means any person who is not a
partner in the firm.”
1.2 Essential elements of a partnership

The definition of partnership indicates the following essential elements in a partnership: [Section
6]
Association
of two or
more
persons
Mutual
Agreement
agency
Essential
elements of
partnership
Sharing of
Business
profit

Business Law
Association of two or more persons

The partnership is an association between two or more persons and all persons must be
competent to contract. Thus, there can be no partnership consisting of a single individual. If the
number gets reduced to one, for any reason, it ceases to be a partnership. The partnership Act
does not say anything about the maximum number of partners. But Companies Ordinance fixes
the following maximum numbers:
1. In case of a partnership firm carrying on banking business maximum number is 10.
2. In case of a partnership firm carrying on any other business maximum number is 20.
3. In case of a partnership firm of professional persons maximum number may exceed 20.
If the number of partners exceeds in 1 & 2 then the partnership firm becomes an illegal
association.
Agreement
A partnership is a contractual agreement between the partners. This agreement may be express
(whether written or oral) or implied. The written agreement is known as ‘partnership deed’. In
Pakistan partnership arises from contract and not from status such as, (Joint Family Business)
operation of law inheritance, or succession.
A partnership deed usually sets out the following:
Firm name
Place or principal place of business of the firm
Names of any other places where the firm carries on business
The date when each partner joined the firm
Number of partners
Names in full and permanent addresses of partners
Duration of partnership (if any)
Purpose of the partnership
Rights and duties of the partners.
Amount of capital that each partner should put into the business, and keep in the business
until the partner retires or the partnership is dissolved
In Pakistan, if the partnership agreement does not specify what the rights or duties of the
partners should be in particular circumstances, the rules set out in the Partnership Act 1932 are
assumed to apply. These are the ‘default rules’ in the absence of anything else.
This means that if a partnership exists but does not have a written agreement, it will be assumed
(unless there is evidence to suggest otherwise) that the rules of the partnership agreement are
those contained in the Partnership Act.
Carrying on business
To constitute a partnership, the parties must have agreed to carry on a business. Where there is
no business to be done, there can be no question of partnership. Business here includes any
lawful trade, occupation and profession. An agreement to carry on business at a future time does
not result in partnership unless that time arrives and the business is commenced. If the purpose
is to carry on some charitable work it will not be a partnership.
Example: Carrying on business
Ghaffar and Jabbar purchased a shop, incurred additional expenses to renovate it contributing in
the ratio of 50:50 and then leased out the shop on rent which was shared equally by them. It
won’t be a partnership as they are co-owners and never carried out any business.
Sharing of profits
The next essential element of partnership is that there must be an objective to make profit. The
partners may agree to share profits in any manner they like. The sharing of profits is a prima

facie evidence and not a conclusive evidence of partnership. Partners may share it equally or in
any other proportion. Further, it is not necessary that the partners should agree to share losses. It
must be noted that even though a partner may not share in the losses of the business, yet his
liability towards outsiders shall be unlimited.
A person receiving profits is not necessarily a partner, such as:
Lender of money to persons engaged or about to engage in any business
Servant or agent as remuneration
Widow or child of a deceased partner as annuity
A transferee of a partner’s interest
A minor who is admitted to the benefits of an existing partnership
Previous owner or part owner as consideration for the sale of goodwill or share of it.
Mutual agency
There must exist a mutual agency relationship among partners. Mutual Agency relationship
means that each partner is both an agent and a principal. Each partner is an agent in the sense
that he has the capacity to bind other partners by his acts done. Each partner is principal in the
sense that he is bound by the acts of other partners.
Example: Mutual agency
A, B and C are partners in a business. D an outsider deals with the firm through A. As between A
and D, A is the principal. But as between A, B and C, A is also the agent of B and D. As such A, B
and C can all sue D. D can also sue A, B and C. Furthermore A is accountable to B and C because
he is an agent of B and C.
Mutual agency relationship in case of a firm of A, B and C
When A does an act When B does an act When C does an act
Who is an agent A B C
Who are principals B and C A and C A and B
Note
Following two important features of the partnership need to be understood.
A partnership does not have a legal personality. Unlike a company, it is not a legal person.
A third party entering into business transaction with a partnership does not have a
contractual agreement with the partnership; the contractual agreement is between the third
party and all the partners as individuals.
Partners in a partnership do not have limited liability, and are personally liable for any
liabilities of the partnership business that the partnership cannot pay.
1.3 Test of partnership

In determining
whether a group of persons is or is not a firm or
whether a person is or is not a partner in a firm regard shall be given to the real
relationship between the parties as shown by ALL RELEVANT FACTS TAKEN
TOGETHER i.e. [Section 6]
1. Association of two or more persons
2. Agreement
3. Carrying on business
4. Sharing of profits
5. Mutual agency

Business Law
1.4 Types of partnership

Partnership-at-will
Where no provision is made between the partners for the duration of their partnership, or for the
determination of their partnership, the partnership is called partnership at will. In such partnership
there is no provision as to when the partnership will come to an end. Any partner is free to
dissolve the partnership by giving a notice in writing to all other partners of his intention to
dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or if no date is mentioned as from the date of the communication of the notice.
[Section 7 and 43]
If freedom to dissolve the firm at will is curtailed by agreement, like if the agreement provides that
the partnership can be dissolved by mutual consent of all the partners, only then will it not
constitute a partnership at will.
Particular partnership
Where a partnership is created for any particular adventure or undertaking or for a specific time
period it is called a particular partnership. Such partnership comes to an end on the completion of
venture or on the expiry of the period.
If the partners decide to continue such a partnership even after the expiry of the specific period or
completion of specific venture then it becomes partnership at will. [Section 8]
1.5 Types of partners

Actual or ostensible partner
A partner who is actively engaged in the conduct of a business is called actual or ostensible
partner. Such a partner is an agent of all other partners for the purposes of the business of the
firm. He can bind himself and other partners for the acts done in the ordinary course of the
business.
Sleeping or dormant partner
A sleeping partner is not known as such as a partner to third parties dealing with the firm. He
may or may not take active part in the conduct of the business of the firm. He, like other partners,
invests capital and shares in the profits of the business. He is equally liable along with other
partners for all the debts of the firm, even though his existence is kept a secret from the outsiders
dealing with the firm.
Note
A sleeping partner is not required to give public notice of his retirement and he is not liable for
any act done by the firm after his retirement.
Nominal partner
A partner who does not contribute any capital or share in profits, but lends his name to the firm is
called a nominal partner. He along with other partners is liable to the outsiders for all the debts of
the firm.
Partner in profits only
A partner may agree that a partner shall get a share of the profits only and that he shall not be
liable to contribute towards the losses. But for third parties he is liable for all the debts of the firm.
Sub-partner
When a partner agrees to share his profits derived from the firm with a stranger, that stranger is
known as a sub-partner. A sub-partner is in no way connected with the firm and cannot represent
himself as a partner of the firm. He has no rights against the firm nor is he liable for the acts of
the firm.
Silent partner
Those who by agreement with other partners have no voice in the management of the
partnership business. They share profit and losses, are fully liable for the debts of the firm and
may take active part in the conduct of the business.

Partner by estoppel or holding out

Where a person
Holds himself out as a partner or
Allows other to do it
they are then stopped from denying the character he has assumed and upon the faith of which
creditors may be presumed to have acted. [Section 28(1)]
The holding concept is discussed in 3 section of this chapter in detail.
1.6 Difference between a partnership firm and a joint stock company
S.no Partnership firm Joint stock company
1 Formation
It is created by an agreement alone. It is created by law.
2 Registration
Registration is optional. Registration is compulsory.
3 Legal entity
It is not a separate legal entity. It is a separate entity or an artifical
person distinct from it members.
4 Nature of liability
Partners have joint and seversal liability It has limited liability i.e. liability is
i.e. unlimited liability. restricted to the amount of capital
5 Perpetual sucession
A firm is dissolved on the death or A joint stock company continues to exist
insolvency of a partner. It has no irrespective of death or insolvency of its
perpetual succession. members or directors.
6 Agency
A partner is an agent of the firm for the Directors are agent of the company.
purpose of business of the firm. Shareholders are not agents.
7 Transfer of interest
A partner cannot transfer his interest There is no such restriction for transfer of
without getting consent from other shares.
partners.
8 Number of persons
Minimum two competent to contract Minimun one person can carry single
persons are required and a maximum of member company and and no limit on
20 persons can carry partnership other shareholders for a public company.
than banking business.
9 Management
All partners can take part in the All shareholders cannot take part in the
management. management.

Business Law
1.7 Difference between a partnership firm and co-ownership
S.no Partnership firm Co-ownership
1 Formation
It is created by an agreement alone. Co-ownership is not necessarily a result
of an agreement.
2 Business
In partnership carry on business in an Co-ownership does not necessarily
essential. If there will be end of business involve the carrying on of a busines.
it will ultimately result in end of
partnership firm.
3 Number of persons
Minimum two competent to contract No limit on maximum number of co-
persons are required and a maximum of owners.
20 persons can carry partnership other
than banking business.
4 Sharing of profit
Sharing of profit is one of the essential It does not involve sharing of profit.
elements.
5 Agency
A partner is an agent of the firm for the Co-owners are not agents to one
purpose of business of the firm. another.
6 Transfer of interest
A partner cannot transfer his interest Co-owner can transfer his interest
without getting consent from other without getting consent from other co-
partners. owner(s).

2 RELATIONS OF PARTNERS TO ONE ANOTHER
Section overview
General duties of partner

Qualified duties of partner
Rights of partner
Mutual rights and liabilities
Partnership property
The duties, rights and liabilities of the partners are shown below:
The liabilities are discussed in section 3.3 of this chapter.

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2.1 General duties of partner

These are mandatory duties of a partner that cannot be changed by an agreement amongst the
partners. These are:
Duty to be just and faithful
An ideal partnership is one where there is mutual trust and confidence, and spirit of helpfulness
among partners. As such every partner must be just and faithful to his co-partners. He must
observe utmost good faith and fairness towards other partners of the firm. [Section 9]
Duty to carry on business to the greatest common advantage
Every partner is bound to carry on the business of the firm to the greatest common advantage. It
implies that every partner must use his knowledge and skill for the benefit of the firm and not for
his personal gain. He must conduct the business with the best of his ability and secure maximum
benefits of the firm. [Section 9]
Duty to render true accounts
Every partner must render true and proper accounts to his co-partners. It implies that each
partner must be ready to explain the accounts of the firm and produce vouchers in support of the
entries. No partner should think of making a secret profit at the expense of the firm. [Section 9]
Duty to provide full information
A partner must give full information to the other partners, in relation to everything affecting the
partnership. [Section 9]
Duty to indemnify for loss caused by fraud
Every partner shall indemnify means (compensate) the firm for any loss caused to it by his fraud
in the conduct of the business of the firm. [Section 10]
Duty to be liable jointly and severally – unlimited liability
Every partner is liable jointly with all the other partners and also severally means separately, to
third parties for all acts of the firm done while he is a partner. The third party may take legal
action for non-payment of a debt or losses incurred as a result of a breach of contract against:
all the partners jointly, or
any individual partner.
The liability of all the partners is not only joint and several but is also unlimited. [Section 25]
Example: Joint and several liability

B, C and D are in partnership. Partner B purchases equipment for the partnership business. The
equipment itself cost Rs. 20,000 and the installation costs were Rs.15,000. There is a dispute
with the supplier, and the firm refuses to pay the installation costs. The supplier decides to sue
for the unpaid Rs.15,000.
If the supplier succeeds in his action, all the partners will be liable jointly for the Rs.15,000
liability.
If the dispute goes to court, the supplier can either:

sue all three partners jointly, or
he can sue any individual partner, B, C or D. If he chooses to sue B personally, and
succeeds with his claim, B will be required to pay the supplier. It will then be for B to obtain
from his partners C and D their share of the liability that they now owe.
Duty to act within authority

Every partner is bound to act within the scope of his actual or apparent authority. Where he
exceeds the authority conferred on him and the firm suffers a loss he shall have to compensate
the firm for any such loss, unless the other partners ratify i.e. accept such acts. [Section 19]

Duty in case of emergency

It is the duty of the partner to do all such acts for the purpose of protecting the firm from loss as
would be done by a person of ordinary care, in his own case acting under similar circumstances.
He can even exceed his authority in order to save the firm from any loss. [Section 21]
Example: Duty in case of emergency

A, a partner receives goods at Karachi for being sent to a purchaser at Lahore. A may sell
the goods at Karachi, if the goods will not bear the journey to Lahore without spoiling.
X, Y and Z are partner in a firm. By an agreement, they decided that no partner would have
authority to sell goods of the firm above the value of Rs.50,000/- without the consent of
other partners. Owing to a sudden slump in the market, the prices crashed. One partner, in
order to save the firm from loss, sold all the stock worth Rs. 5,000,000 without consulting
any other partner. Such an act would bind the firm.
2.2 Qualified duties of partner

The qualified duties of a partner can be changed by an agreement amongst the partners. Unless,
otherwise agreed by the partners, every partner has the following duties:
Duty to attend diligently to his duties
Every partner is bound to attend diligently to his duties in the conduct of the business. A partner
is not entitled to receive remuneration for taking part in the conduct of the business. [Section 12]
Duty to contribute to the losses
The partners are bound to contribute to the losses sustained by the firm. An agreement to share
profits may imply an agreement to share losses also. [Section 13]
Duty to indemnify for wilful neglect
Every partner is under a duty to indemnify the firm for any loss caused to it by his wilful neglect
(i.e. failure to perform a duty or to do something which the partner should have done) in the
conduct of the business of the firm. [Section 13]
Duty to use firm’s property exclusively for the firm
It is the duty of every partner to use the property of the firm exclusively for the purposes of the
business. No partner should use partnership property for his personal benefit. [Section 15]
Duty to account for personal profits derived
A partner must ‘account to the firm’ for any benefit obtained, without the consent of the other
partners, from any transaction involving the partnership, the partnership property, the partnership
name or the partnership’s business connection. In other words, if a partner uses the partnership
property, name or business connections to make a secret profit (a personal profit that the other
partners do not know about), the other partners can claim those profits for the partnership.
[Section 16(a)]
Example: Duty to account for personal profits derived

Tom and Jerry are in partnership. The partnership purchased an item of equipment costing
Rs.30,000. It was discovered later that the equipment had actually been purchased by Tom for
Rs.18,000, and Tom had re-sold it to the partnership without revealing that he was the owner of
the property.
In this case, since the other partner did not know that Tom had made a personal profit from the
transaction with the partnership, he can claim successfully that Tom should hand over to the
partnership the Rs.12,000 profit that he made.
If Tom had informed Jerry in advance that he was the owner of the equipment and intended to
keep the profit himself, and if Jerry agreed to this, Tom would have been able to keep all the
profit for himself.

Business Law
Duty not to compete with the business of the firm

Similarly, if a partner competes in business (as in the case of personal profit) with the
partnership, without the consent of the other partners, he is liable to account to the partnership
for all the profits that he earns from the competing business. [Section 16(b)]
Example: Duty not to compete with the business of the firm

A, B, C and D are in partnership. Without informing the other partners, D sets up a sole trader’s
business in competition with the partnership, and makes a profit of Rs. 50,000 by either, using
firm name or property or connections of the firm. When the other partners find out what D has
been doing, they can require D to account to the partnership for the profits he has made while
operating in competition (and hand over the Rs. 50,000 to the partnership).
Duty not to assign his interest

No partner can assign or transfer his partnership interest to any other person so as to make him
a partner in the business without the consent of all other partners. He can, however, assign his
share of the profit and his share in the assets of the firm but the transferee shall not have any
right to interfere in the conduct of the business during the continuance of the firm. [Section 29]
2.3 Rights of partner

Right to take part in the conduct of the business
Every partner irrespective of the amount of capital contribution has an inherent right to take part
in the conduct of the business of the firm. Although one may agree not to participate but right of
participation should be available to each partner. [Section 12]
Right to be consulted
Every partner has the right to be consulted before any matter is decided. Any difference arising
as to ordinary matters connected with the business may be decided by a majority of the partners
in good faith but no change may be made in the nature of the business without the consent of all
the partners. [Section 12]
Right to have access to the books
Every partner has a right to have access to and to inspect and copy any of the books of the firm.
[Section 12]
Right to share the profits
In the absence of a contract to the contrary every partner has a right to share profits equally
earned by the firm. [Section 13]
Right to interest on capital
No partner is allowed to receive any interest on capital as a general rule because a partner is not
a creditor of the firm. Interest on capital is allowed only when agreed among the partners.
Where a partner is entitled to interest on the capital subscribed investment by him such interest
will be payable out of the profits, earned by the firm. [Section 13]
Right to interest on advances
Where a partner makes for the purpose of the business, any payment or advance beyond the
amount of capital he has agreed to subscribe, he is entitled to interest on it at the rate of 6% per
annum or as agreed upon. [Section 13]
Right to indemnity
Every partner has a right to claim indemnity from the firm in respect of payments made or
liabilities incurred by him:
In the ordinary and proper conduct of the business and
In doing such act, in an emergency, for the purpose of protecting the firm from loss, as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances. [Section 13]

Right to retire
A partner has a right to retire.
With the consent of all the partners or
In accordance with an express agreement between the parties or
Where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire. [Section 32]
Right of outgoing partner to share in the subsequent profits
Where a partner has died or has ceased to be a partner by retirement, expulsion, insolvency or
any other cause, the surviving or continuing partners may carry on the business with the property
of the firm without any final settlement of accounts as between them and the outgoing partner. In
such a case in the absence of a contract to the contrary, legal representative of the deceased
partner or the outgoing partner, is entitled at his option to:
Such share of the profits as in proportionate to his share in the property of the firm or
Interest at the rate of 6% on the amount of his share in the property of the firm. [Section
37]
Rights after reconstitution of firm
Where a change occurs in the constitution of a firm or a firm constituted for a fixed term
continues to carry on business after the expiry of that term, the mutual rights and duties of the
partners in the reconstituted firm remain the same as far as may be possible, as they were
immediately before the change
2.4 Mutual Rights and Liabilities

Partners have the following mutual rights and liabilities which are subject to contract between
them:
1. Duty to work without remuneration
2. Rights to share profits and losses equally
3. Right to interest on capital
4. Rights to interest on subsequent advance
5. Right to indemnity
6. Duty to indemnify for wilful neglect
These have been discussed earlier. [Section 13]
2.5 Partnership property

Subject to contract between the partners, the property of the firm includes: [Section 14]
All property originally brought into the common stock of the firm
All rights or interest in the property originally so brought
All property acquired, by purchase or otherwise, by or for the firm and all rights and interest
in any property so acquired and
Goodwill of the business of the firm
Note
Unless, any contrary intention appears any property purchased with partnership money
without other partners consent will be deemed to be partnership property.
Example: Partnership property

A, B and C are partners in a business. They buy a property in the name of fictitious person
with the money of the partnership. The property is a partnership property.

Business Law
Example: Partnership property (continued)

A, a partner in a firm, buys shares of a company in his own name, without the authority of
the other partners, but with the money and on account of the firm. The shares may
deemed to be partnership property.
Goodwill
Goodwill is an accounting concept meaning the value of an intangible asset which has a
quantifiable value in a business. An example would be the reputation the firm enjoys with its
customers. This reputation enables the firm to earn more than the normal profits earned by the
business as a whole.
Goodwill can be thought of as the value of the business as a whole (i.e. what

3 RELATIONS OF PARTNERS TO THIRD PARTIES
Section overview
Agent of the firm

Authority of partners
Liabilities of partner and firm
Holding out
Rights of transferee of a partner’s interest
Minor’s admission to the benefits of partnership
3.1 Agent of the firm

A partner is the agent of the firm for the purpose of the business of the firm. [Section 18]
3.2 Authority of partners

The authority of a partner means the capacity of a partner to bind the firm by his act. Since the
partnership is not a legal person, a partner acts as an agent for the other partners. The authority
of a partner may be actual or implied.
Actual authority
The authority of each partner to take decisions for the business, and enter into transactions with
other parties, may be specified in the partnership agreement. Since the partnership agreement is
a contract, its terms are the terms of a contractual agreement between the partners.
Implied authority
The act of a partner done by him: [Section 19]
as an agent of the firm
in the course of business of the firm
in the name of the firm, or in any other manner expressing an intention to bind the firm.
An authority to bind the firm is known as implied authority of a partner.
In a trading partnership, all the partners have the implied authority to borrow money on the
credit of the partnership, and a lender is under no particular obligation to investigate the purpose
of the loan. This means that unless a lender has knowledge that a partner does not have the
actual authority to borrow on behalf of the partnership, he can rely on the partner’s implied
authority.
Every partner within the scope of his implied authority may bind the firm by the following acts:
Buying and selling good, on behalf of the firm and giving valid receipts for them
Receiving payments of the debts due to the firm and giving valid receipts or discharge for
them
Contracting debts and paying debts on behalf of the firm
Settling accounts with persons dealing with the firm
Employing servants for the partnership of the firm
Drawing cheques, accepting or endorsing bills of exchange and promissory notes in the
name of the firm
Pledging movable property of the firm
Suing on behalf of the firm and defending suits in the name of the firm

Business Law
Example: Implied Authority

A and B are partners. A with the intention to bind the firm, goes to a shop and purchases
certain articles on behalf of the firm which are generally used in the partnership business.
Here firm will be liable for the price of the goods because A acted within his authority.
A, a partner in the firm of chartered accountants, borrows money and executes a
promissory note in the name of the firm. The other partners won’t be liable on the note
because it is not part of the ordinary business of chartered accountants to draw, accept or
indorse a promissory note.
Restrictions on the implied authority of a partner

Following acts are not included in the implied authority of a partner unless there is any usage or
custom of trade: [Section 19(2)]
Arbitration
Submit a dispute relating to the business of the firm to arbitration
Bank account
Open a banking account on behalf of the firm in his own name
Compromise
Compromise or relinquish any claim or portion of a claim by the firm
Withdrawal of suit
Withdraw a suit or proceeding filed on behalf of the firm
Acceptance of liability
Admit any liability in a suit or proceeding against the firm
Acquisition
Acquire immovable property on behalf of the firm
Transfer
Transfer immovable property belonging to the firm
Partnership
Enter into partnership on behalf of the firm.
Statutory restrictions
The restrictions imposed by law are statutory restrictions and is applicable against the whole
world whether a particular person dealing with the firm has knowledge of it or not e.g. about the
name of the firm, etc.
Restrictions by partnership deed
A restriction which is specifically written in partnership deed is effective only against the person
dealing with the firm having knowledge of it. [Section 20]
Example: Restrictions by partnership deed

The partnership deed of a trading firm placed a restriction on the authority of the partners to sell
the goods. One of the partners sells the good. If the third party did not know of the restriction the
firm is liable toward such third party and if the third party know of the restriction the firm will not
be liable.
Ratification of actions taken by a partner outside his actual authority

When a partner exceeds his authority, that is act outside his actual authority, the other partners
may approve such unauthorized act with retrospective effect. This is known as ratification.

By giving their retrospective approval to the contract made by another partner, even though it
was outside the partner’s actual authority at the time, the partners can remove any questions
about whether implied authority existed or whether the other party knew that the partner did not
have the actual authority to make the contract.
3.3 Liabilities of partner and firm

Liability of a partner for acts of a firm
In order to make a partner liable for any act of the firm, the same must have been done while he
was a partner. The liability of the partner is both joint and several, so that the creditor may
compel any one or more of the partners to discharge the whole of the debts of the firm. [Section
25]
Example: liability of a partner for acts of a firm

B, C and D are in partnership. Partner B purchases equipment for the partnership business. The
equipment itself cost Rs. 20,000 and the installation costs were Rs. 15,000. There is a dispute
with the supplier, and the firm refuses to pay the installation costs. The supplier decides to sue
for the unpaid Rs. 15,000.
If the supplier succeeds in his action, all the partners will be liable jointly for the Rs. 15,000
liability.
If the dispute goes to court, the supplier can either:
sue all three partners jointly, or
he can sue any individual partner, B, C or D. If he chooses to sue B personally, and
succeeds with his claim, B will be required to pay the supplier. It will then be for B to obtain
from his partners C and D their share of the liability that they now owe.
Liability of the firm for wrongful acts of a partner

Where by the wrongful act or omission of a partner acting in the ordinary course of the business
of a firm, loss or injury is caused to any third party or any penalty is incurred the firm is liable to
the same extent as the partner.
In case of fraud, although the firm is liable to the third party for loss caused to the third party by
fraud committed by a partner but as between partners same must be borne by the partner
committing the fraud and cannot be shared among all the partners. [Section 26]
Example: Liability of the firm for wrongful acts of a partner

One of the partners who was an active partner in the firm, knowing that the goods were stolen,
purchased and sold them in the name of the firm. The other partner knew nothing about this
theft. In this case all the partners will be liable.
Liability for misapplication by partners

A partner acting within his apparent authority receives money or property from a third party
and misapplies it or
A firm in the course of its business receives money or property from a third party, and the
same is misapplied by any of the partners while it is in the custody of the firm, the firm is
liable to make good the loss. [Section 27]
Example: Liability for misapplication by partners

A, B and C are partners in an instalment sales business. A asked one of the customer to deposit a
security worth Rs. 100,000 in order to purchase goods on instalments. Subsequently, A
misappropriated the security and absconded. The other partners will be liable for the
misappropriation as security was given to A while he was acting within his scope of his apparent
authority.

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Liability to indemnify for wilful neglect

Every partner is under a liability to indemnify the firm for any loss caused to it by his wilful neglect
(i.e. failure to perform a duty or to do something which the partner should have done) in the
conduct of the business of the firm. [Section 13]
Liability to share losses
The partners are bound to contribute to the losses sustained by the firm. An agreement to share
profits may imply an agreement to share losses also. [Section 13]
Liability to account for personal profits
A partner must ‘account to the firm’ for any benefit obtained, without the consent of the other
partners, from any transaction involving the partnership, the partnership property, the partnership
name or the partnership’s business connection. In other words, if a partner uses the partnership
property, name or business connections to make a secret profit (a personal profit that the other
partners do not know about), the other partners can claim those profits for the partnership.
[Section 16(a)]
Liability to account for profit of competing business
If a partner competes in business (as in the case of personal profit) with the partnership, without
the consent of the other partners, he is liable to account to the partnership for all the profits that
he earns from the competing business. [Section 16(b)]
Effect of admissions by a partner
Any admission or representation made by a partner is evidence against the firm if the following
two conditions are fulfilled:
Such admission or representation must relate to the affairs of the firm and
Such admission or representation must be made in the ordinary course of business.
[Section 23]
Effect of notice to an active partner
Any notice to a partner operates as a notice to the firm if the following conditions are fulfilled:
Such notice must relate to the affairs of the firm
Such notice must be given to a working partner and not to a sleeping partner
There must not be any fraud committed by the partner receiving the notice. [Section 24]
3.4 Holding out

Where a person
Represents himself or
Allows partners to do it, he is then estopped from denying the character he has assumed
and
Upon the faith of which creditors may have acted. [Section 28]
Requirement
In order to render a person liable as a partner on the ground of estoppel or holding out:
Direct Representation
He must have by words spoken or written or by his conduct represented himself to be a partner
Indirect Representation
He must have knowingly permitted himself to be represented as a partner to the other person.
Knowledge of the third party
The other person must have acted on the faith of such representation and gives credit to the firm.
It does not matter whether the person representing himself or represented to be a partner does
or does not know that the representation has reached the other person giving credit.

Example: Knowledge of the third party

A tells B (supplier) within the hearing of C (partner) that he (A) is a partner in partnership firm of
C. C does not object to this statement of A. Later B supplies certain goods to A who pretends to
act as partner with C. C will be liable to pay the price. C by keeping quiet had led B to believe that
A is a partner.
Examples of applications of holding out partner

Retiring partner
Where a retiring partner does not give a public notice of his retirement and the continuing
partners still use his name as a partner he will be personally liable on the ground of holding
out to third parties. [Section 35]
A Minor on attaining majority
If a minor (who was admitted to the benefits of an existing partnership) after attaining
majority act as a partner without giving public notice, he will be liable as a partner by
estoppel. [Section 34]
Exceptions of holding out
Deceased partner
After a partner’s death if the business of the firm is continued in the old firm’s name the
continued use of that name or of the deceased partner’s will not itself makes his legal
representatives liable for any act of the firm done after his death.
Insolvent partner
Where a partner is adjudicated as insolvent he ceases to be partner on the date on which
the order of adjudication is made whether or not the firm is dissolved. The estate of the
insolvent partner is not liable for any act of the firm and the firm is not liable for any act of
the insolvent.
3.5 Rights of transferee of a partner’s interest

A partner may transfer his interest in the firm by sale, mortgage or charge fully or partially.
[Section 29]
Rights of Transferee
He is entitled to receive the share of the profits of the transferring partner.
On the dissolution of the firm or on retirement of the transferring partner he is entitled to
receive:
x the share of the assets of the firm to which the transferring partner is entitled.
x an account from the date of the dissolution for the purpose of ascertaining the share.
Disabilities of Transferee
No status of a partner.
Disability to interfere in the conduct of the business during the continuance of the firm
Disability to require accounts.
Disability to inspect the books of the firm.
Disability to challenge the accounts of profits agreed to by the partners.
Disability to sue for dissolution of the firm.
3.6 Minor’s admission to the benefits of partnership

Since a minor is not capable of entering into a contract, a contract by or with a minor is void ab-
initio i.e. from the beginning. Since partnership is formed by a contract, a minor cannot enter into
a partnership agreement but with the consent of all the partners for the time being a minor may
be admitted to the benefits of partnership. [Section 30]

Business Law
An analysis of the above provision highlights the following three conditions:

Before admission of a minor there must be an existence of partnership
There must be mutual consent of all the partners
A minor can be admitted only to the benefits of partnership
Benefits of partnership include benefits, which the minor would enjoy if he was a major.
Position of a minor before attaining majority
Rights
Right to share property and profits of the firm as agreed by the partners
Right to have access to accounts of the firm ONLY and not to the secret books
Right not to be adjudged insolvent
Liabilities:
Personally not liable i.e. limited liability.
His share is liable for the acts of the firm.
Disabilities:
No status of a partner.
No suit against partners for profit and property except after disconnecting his relation with
the firm.
Not entitled to have access to books other than accounts.
Position of a minor on attaining majority
On attaining majority the minor partner has to decide within six months whether he shall continue
in the firm or leave it.
These six months run from the date:
of his attaining majority or
when he first comes to know that he had been admitted to the benefits of partnership,
whichever is later.
Within this period he should give a public notice of his choice:
to become or
not to become a partner in the firm.
If he fails to give a public notice, he is deemed to have become a partner in the firm on the expiry
of the six months after obtaining majority.
Where such person elects to become a partner
The following holds;
Personal liability since the date of admission to the benefits of the firm
Same share in the profits and property of the firm to which he was entitled as a minor.
Where such person elects not to become a partner
The following holds:
The status of a minor up to the date of public notice
His share not liable for any act of the firm after the date of public notice
Right to sue partners for share of the property and profits

4 CHAPTER REVIEW
Chapter review
Understand the concept of partnership and determine whether a group of persons has constituted
a partnership
Explain the different types of partnerships and partners
Explain role and relationship of partner among themselves and with outsiders
Summarise the authority of the partner
Describe the liabilities for acts of the firm
Understand the status of a minor in a partnership and rules governing his rights and liabilities

Business Law

CHAPTER
Business Law
18
Negotiable Instruments Act
Contents
1 Meaning and characteristics of negotiable instruments
2 Promissory Note
3 Bill of Exchange
4 Cheque
5 Discharge of liability
6 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Negotiable instruments Act

knowledge of laws relating to Negotiable Instruments.
LO4.1.1 Define and explain terms
LO4.1.2 Explain provisions relating to types of negotiable instruments and their maturity.
LO4.2.1 Identify and explain how the maker of a negotiable instrument is discharged from his liability
under given scenarios.
LO4.3.1 Describe provisions relating to crossing of cheques
LO4.3.2 Briefly describe and differentiate between a cheque crossed generally and a cheque crossed
specially and their payment modes.

otherwise stated:
Act Chapters

Section A: Mercantile Law - Chapter 18: Negotiable instruments act
1 MEANING AND CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
Section overview
Definition of negotiable instrument

Characteristics of negotiable instrument
Parties to negotiable instrument
Types of instrument
Amount on negotiable instrument
Endorsement
Negotiation
Material alteration
Payment in due course
1.1 Definition of negotiable instrument
Definition: Negotiable instruments [Section 13]

A negotiable instrument means a:
Promissory note
Bill of exchange or
Cheque
payable either to order or to bearer.
In simple terms, negotiable means transferable by delivery and instrument means a written
document by which a right is created in favour of some person. Thus negotiable instrument may
mean a written document transferable by delivery.
Thus, from the above definition it reveals that promissory note, bill of exchange and cheque can
be termed as negotiable instruments.
1.2 Characteristics of negotiable instrument

The essential characteristics of a negotiable instrument are shown below:
These essential characteristics are discussed below:

Business Law
Payable to order or bearer

Payable to order
A promissory note, bill of exchange or cheque is payable to order which is expressed to be so
payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable is called payable to
order. e.g. Pay A, Pay A or order and Pay A or B.
However, there is an exception in favour of cheque. A crossed cheque "Account Payee only" can
still be negotiated further.
Payable to bearer
A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so
payable or on which the only or last endorsement is an endorsement in blank. If an instrument is
payable to any person whosoever bears it than it is called payable to bearer. Thus a note, bill or
cheque in the form “Pay to A or bearer or pay bearer is payable to bearer.
Example: Payable to bearer

A cheque is payable to A. A endorses it merely by putting his signature on the back and delivers it
to B with the intention of negotiating it (without making it payable to B or B’s order). In the hands
of B the cheque is a bearer instrument.
Easy transferability
They are transferable from one person to another by mere delivery if payable to bearer and by
endorsement and delivery if payable to order.
Transferee can sue in his own name
A bill, note or a cheque represents a debt and implies the right of the creditor to recover
something from his debtor. The creditor can either recover this amount himself or can transfer his
right to another person. In case he transfers his right, the transferee of a negotiable instrument is
entitled to sue on the instrument in his own name in case of dishonour, without giving notice to
the debtor of the fact that he has become holder.
Example: Transferee can sue in his own name

A B
To pay To receive
A gave a cheque to B who transfers it to C. If the cheque dishonours C can sue A in his own name
without giving notice to A that he has become the holder.
Title of holder in due course

It means that once an instrument is received in the hands of holder in due course it becomes free
from all defects.
Example: Title of holder in due course

A gives a promissory note to B. B lost the instrument and it was found by C. C cannot recover the
amount on the negotiable instrument as he is not the holder in due course but if C transfer the
instrument to D and D becomes holder in due course he can recover the amount on the
instrument from A or all prior parties.
Presumptions
Following presumptions in respect of negotiable instruments, unless the contrary is proved;
[Section 118]
Consideration
Every negotiable instrument was made, drawn, accepted, endorsed or transferred for
consideration.
Date

Every negotiable instrument bearing a date was made or drawn on such date.
Time of acceptance
Every bill of exchange was accepted within a reasonable time after its date and before its
maturity.
Time of transfer
Every transfer of a negotiable instrument was made before its maturity.
Order of endorsements
The endorsements appearing upon a negotiable instrument were made in the order in which they
appear.
Stamp
A lost negotiable instrument was duly stamped.
Holder in due course
A holder of negotiable instrument is a holder in due course but this presumption would not arise
where it is proved that the holder has obtained the instrument from its lawful owner, or from any
person in lawful custody thereof, by means of an offence, fraud or for unlawful consideration and
in such a case the holder has to prove that he is a holder in due course.
1.3 Parties to negotiable instrument

Drawee in case of need
The person whose name is given in addition to the drawee to be referred in case of need.
[Section 7 & 115]
By whom the name is given
By the drawer while drawing the bill
By the endorser while indorsing the bill.
When dishonoured
Such a bill is not dishonoured until it has been dishonoured by such a drawee in case of
need.
Acceptor for honour
When a bill of exchange has been noted or protested for non-acceptance or for better security
and any person accepts it supra protest or honour of the drawer or of any one of the endorsers,
such person is called an acceptor for honour. [Section 7, 108 to 112]
The conditions for a valid acceptance for honour are as follows:
The bill must have been noted or protested for non-acceptance or for better security.
The acceptance for honour must be made with the consent of the holder.
It must be written on the bill and it must indicate that it is an acceptance for honour of a
party who is already liable on the bill.
It must be signed by the acceptor for honour who must not already be liable on the bill.
Where the acceptance does not specify to whose honour it is made it shall be deemed to be
made for the honour of the drawer.
Rights and liabilities of acceptor for honour
On acceptance the acceptor for honour takes exactly the same position as the party for whose
honour he accepts. His rights and liabilities are the same with the only difference that his liability
is conditional and arises only after:
The bill is once more presented to the drawee for payment at maturity and has been
dishonoured.
Noting or protesting has been done for such dishonour by non-payment.

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The bill should be presented or forwarded to the acceptor for honour not later than the next
day after the date of its maturity.
If the acceptor for honour makes payment without the fulfilment of the above conditions none will
be liable to him not even the original drawer.
Right of acceptor for honour
On paying the bill, the acceptor for honour can sue the party for whose honour the bill is
accepted.
Payment for honour
The following conditions are essential for the payment for honour: [Section 113 & 114]
Bill must have been dishonoured for non- payment
Bill must have been noted or protested for non-payment.
Person paying or his agent must declare before the notary public, the party for whose
honour he accepts otherwise it is deemed to be accepted for drawer.
Such declaration must have been recorded by the notary public.
Payment for honour must be made for the honour of any party liable to pay the bill.
Right of payer for honour
Any person making payment for honour is entitled to all the rights, in respect of the bill, of the
holder at the time of such payment. He may recover from the party for whose honour he pays all
sums so paid with interest thereon and all expenses properly incurred in making such payment.
A drawee in case of need may, however, accept and pay the bill of exchange without previous
protest.
Holder
A person is called holder of a negotiable instrument if he satisfies the following two conditions:
He must be entitled to the possession of the instrument in his own name and
He must be entitled to receive / recover the amount due on the instrument from the parties
liable under the instrument
Thus a holder means the bearer of the bearer instrument and the endorsee or payee of the order
instrument.
When the note, bill or cheque is lost and not found or is destroyed, the person in possession of it
or the bearer at the time of loss or destruction shall deemed to continue to be its holder. [Section
8]
A person becomes holder in due course when he fulfils the following conditions: [Section 9]
Conditions to be holder in due course
Holder
He must be a holder i.e. He fulfils the essentials of a holder.
Holder for valuable consideration
There must be a lawful and adequate consideration.
Before maturity
A person should receive the instrument before its maturity. In case of instrument payable on
demand, he must have taken the instrument within a reasonable time of its issue.
Complete and regular
It is the duty of every person who takes a negotiable instrument to examine its form and contents
thoroughly, for if it contains any material alteration which has not been confirmed by the drawer
through his signature or it is incomplete like drawer name is missing or not properly stamped.
Holder in good faith

A person should take the instrument without any negligence on his part and in good faith without
having any reason to believe that any defect existed in the title of the transferor. If there is any
suspicion and he takes the instrument without making proper inquiries he cannot be said to be
acting in good faith.
1.4 Types of instrument

Order instrument
A promissory note, bill of exchange or cheque is payable to order if either of the following two
conditions is fulfilled:
Which is expressed to be so payable or
Which is expressed to be payable to a particular person
and does not contain words:
which prohibit transfer or
indicate an intention that it shall not be transferable. [Section 13]
Note:
An order instrument can be transferred by an endorsement on it and then its delivery.
Bearer instrument
A promissory note of bill of exchange or cheque is payable to bearer if either of the following two
conditions if fulfilled:
expressed to be so payable, or
last endorsement must be an endorsement in blank. [Section 13]
Note:
A promissory note cannot be made payable to the bearer.
A bill of exchange cannot be made payable to bearer on demand.
Demand instrument
Instruments payable on demand means the instrument in which no time for payment is
mentioned. A cheque is always payable on demand. A promissory note or bill of exchange is
payable on demand where:
It is expressed to be so or
It is expressed to be payable “at sight” or “presentment”; or “on demand”
No time for payment is specified; or
The bill or note accepted or endorsed after it is overdue, as regards to person accepting or
indorsing it. [Section 19 & 21]
Notes
'At sight' and presentment means on demand.
An instrument on demand is payable immediately.
Time instrument
An instrument payable after a fixed time or on a specified date is called Time Instrument. A
promissory note or bill of exchange is a time instrument when it is expressed to be payable.
After a specified period
On a specific day
Certain date after sight
On the happening of event which is certain to happen e.g. death.

Business Law
Note
There can be a “time bill”, “time note” but not a “time cheque” because the cheque cannot be
expressed to be payable otherwise than on demand.
Maturity of negotiable instrument
‘Maturity’ means the date on which the payment of an instrument falls due. The question of
maturity arises only in the case of a promissory note or a bill of exchange which is expressed to
be payable otherwise than on demand.
An instrument payable on demand or at sight such as a cheque becomes payable immediately
on the date of issue. [Section 22 to 25]
Every Promissory note or Bill of Exchange expressed to be payable:
On a specified day, or
At a certain period after date, or
At a certain period after happening of a certain event
Matures on third day after the day on which it is expressed to be payable. i.e. a grace period of
three days is allowed.
Example:
A bill of exchange is payable on 1St January, will have maturity on 4th January.
Rules for calculating maturity

If it is made payable a stated number of months after date or after sight, or after a certain
event, it matures three days after the corresponding date of the month after the stated
number of months.
Example: Payable stated number of months

A negotiable instrument dated 30Th August 2013 is made payable three months after date. The
instrument is at maturity on the 3rd December, 2013.
If the month in which the period would terminate has no corresponding date, the period
shall be held to terminate on the last day of such month.
Example: Payable stated number of months

A negotiable instrument dated 30 January, 2013 is made payable at one month after date. The
instrument is at maturity on the third day after the 28th February, 2013.
If it is made payable a certain number of days after date or after sight, or after a certain
event, the maturity is calculated by excluding the day on which the instrument is drawn or
presented for acceptance or sight or on which the event happens. Note that only one day
is to be excluded.
Example: Payable after certain number of days

A bill of exchange dated 1st March is made payable 20 days after date. The period of 20 days will
be counted from 2nd March and the bill will be at maturity on 24th March.
If the date on which a bill or note is at maturity is a public holiday, the instrument shall be
deemed due on the next preceding day. Thus, if the maturity of an instrument falls on
Sunday, it shall be deemed to be due on Saturday. If the maturity falls on an emergency
holiday, the instrument shall be deemed to be due on the next succeeding business day.
If an instrument is payable by instalments, three days of grace are to be allowed on each
instalment.

Inland instrument
A promissory note, bill of exchange or cheque which is:
Made or drawn in Pakistan and also made payable in Pakistan, or
Made or drawn in Pakistan upon any person resident in Pakistan, although it may be
payable in a foreign country.
is called an inland instrument. [Section 11]
Example: Inland instrument

A promissory note made in Multan and payable in Peshawar.
A bill of exchange drawn in Sukkur on a person resident in Toba Tek Singh although it may
be payable in Afghanistan.
Note:
An inland instrument remains inland even if it has been endorsed in a foreign country.
Foreign instrument
An instrument, which is not an inland instrument, is deemed to be a foreign instrument. [Section
12]
Example: Foreign instrument

Promissory note made in Pakistan but payable in Myanmar.
A bill of exchange drawn in Pakistan on a person residing outside Pakistan, and made
payable outside Pakistan.
Inchoate instrument
An incomplete or blank negotiable instrument is one which is
properly stamped and
signed
but where the name or amount is missing. [Section 20]
The following points should be noted in connection with inchoate instrument.
The liability of a person who signs and delivers an inchoate instrument arises only when
the blanks are filled in and the instrument is completed.
To make the signer liable on an inchoate instrument, it is necessary that the instrument
should be delivered to the transferee.
The instrument must be stamped and the stamp affixed must be sufficient to cover the
amount filled in the instrument.
If an inchoate instrument is completed and negotiated to a holder in due course, he can
claim payment of full amount covered by the stamp.
Note
The provisions in this section cannot be applied to a cheque which is not required to be stamped.
Example: Inchoate Stamped Instrument

P owes Q some money on account of credit purchases made by him. P gives a promissory note,
after affixing a stamp on which a person can claim up to Rs. 1,000 and signing, leaving the
amount blank to Q authorising him to fill it up in accordance with the account. Q fills Rs. 1,000
while actual amount due is Rs. 500 only. Q cannot recover more than Rs. 500. But if Q transfers it
to R, a holder in due course, R can recover Rs.1, 000, the full amount from P. If however the
amount filled in by Q is Rs. 1,200 R cannot recover it as the amount is not covered by the stamp.

Business Law
Example: Inchoate Stamped Instrument (continued)

Holder
A holder can recover only the amount receivable from the signer.
A holder in due course can recover the whole amount made payable by the instrument provided
that
It is covered by the stamp
Even though the amount authorized was the smaller.
Ambiguous instrument
An instrument which may be interpreted as either promissory note or bill of exchange is called an
ambiguous instrument. Its holder must elect once for all whether he wants to treat it as a
promissory note or bill of exchange. [Section 17]
Example: Ambiguous instrument

A bill of exchange where the drawer and the drawee are the same person
Where the drawee is a fictitious person
Bills drawn by an agent on his principal
1.5 Amount on negotiable instrument

If the amount stated in figures and words is different the amount stated in words shall be the
amount undertaken or ordered to be paid.
Provided that if the words are ambiguous, the amount may be ascertained by referring to the
figures. [Section 18]
1.6 Endorsement
Definition: Endorsement [Section 15]

“When the maker or holder of a negotiable instrument signs the same, otherwise than as such
maker, for the purpose of negotiation on the back or face or on a slip of paper annexed to it
thereto, or so signs for the same purpose a stamped paper intended to be completed as
negotiable instrument he is said to endorse the same and is called the endorser.”
The term endorsement may be defined as signing one’s name on the negotiable instrument for
the purpose of transferring it to another person.
Essentials of valid endorsement

It must be on instrument itself, if no space is left on the back of the endorsement, further
endorsements are signed on a slip of paper attached to the instrument called allonge.
It must be signed by the endorser for the purpose of negotiation. Signature of the endorser
on the instrument without any additional words is sufficient.
No particular form of words is necessary for an endorsement
It must be completed by the delivery of the instrument. The delivery of the instrument with
the intention of passing the property in it.
Negotiation by endorsement must be of the entire instrument. Endorsement for part of the
amount or to two or more endorsee severally is invalid.

Kinds of endorsements
Blank or general endorsement
If the endorser signs his name only and does not specify the name of the endorsee, the
endorsement is said to be blank. The effect of a blank endorsement is to convert the order
instrument into bearer instrument which may be transferred by delivery. [Section 16 & 54]
Example: Blank or general endorsement

A bill is payable to the order of Imran. Imran signs on the back of the bill and does not specify the
name of the endorsee; this is an endorsement in blank by Imran.
Endorsement in full or special endorsement

If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in
the instrument to or to the order of a specified person the endorsement is said to be full. [Section
16 & 54]
Example: Endorsement in full or special endorsement

A holder of a bill of exchange wants to make an endorsement in full to B he would write “Pay to B
or order. After such an endorsement it is only the endorsee i.e. B who is entitled to receive the
payment of the instrument and to further negotiate the instrument by his endorsement.
A blank instrument can easily be converted into an endorsement in full. The holder of a
negotiable instrument endorsed in blank may without signing his own name by writing above the
endorser’s signature a direction to pay to any other person as endorsee, convert the
endorsement in blank into an endorsement in full, and since such holder does not sign himself on
the instrument he does not thereby incur the responsibility of an endorser.
Example: Endorsement in full or special endorsement

A is the holder of a bill endorsed by B in blank. A writes over B’s signature the word Pay to C or
order. A is not liable as an endorser but the writing operates as an endorsement in full form B to
C.
1.7 Negotiation
Definition: Negotiation [Section 14]

"When a promissory note, bill of exchange or cheque is transferred free from defects to any
person, so as to constitute that person the holder of it, the instrument is said to be negotiated.
The analysis of the definition reveals that negotiation takes place when the negotiable instrument
is transferred from one person to another and the transfer is made in such a manner so as to
make the transferee the holder of the negotiable instrument and it must be transferred free from
defects.
Modes of negotiation
Negotiation by mere delivery
x A negotiable instrument payable to bearer is negotiable by delivery (voluntary
delivery with the intention of transferring the ownership)
x It does not require signature of the transferor i.e. endorsement and the transferee
becomes the holder by mere possession.
x The transferor of a bearer instrument is not liable on its dishonour because by not
signing as endorser he has not added his credit to the instrument. [Section 47]
Negotiation by endorsement and delivery
x A negotiable instrument payable to order is negotiable by the holder by
endorsement and delivery.

Business Law
x The negotiation of an order instrument requires two formalities
The holder should endorse it and
Then deliver to his endorsee (voluntary delivery with the intention of

transferring the ownership) [Section 48]
1.8 Material alteration

An alteration is material which:
Alters the character or identity of the instrument or which shakes the very foundation of the
instrument or
Changes the rights and liabilities of the parties or
Alters the operation of the instrument.
The following alterations are material:
Date
Sum payable,
Time of payment,
Place of payment,
Addition of place of payment,
Rate of interest.
In the following cases the alteration of a negotiable instrument is not material:
A material alteration made before the instrument is issued.
An alteration made for the purpose of correcting a mistake. e.g. The correction of mistake
in a bill dated 2031 instead of 2013.
An alteration made to carry out the common intention of the original parties.
An alteration made with the consent of the parties.
An alteration which is not material.
Alterations permitted by the Act
The following alterations are permitted by the Act, and do not invalidate the instruments.
Filling blanks of inchoate instruments. [Section 20]
Conversion of a blank endorsement into an endorsement in full. [Section 49]
Crossing the cheques [Section 125]
Effect of material alteration:
Any material alteration renders the instrument void. But if an alteration is made in order to carry
out the common intention of the original parties, it does not render the instrument void. [Section
87 & 88]
1.9 Payment in due course

Means payment in accordance with the apparent tenure of the instrument in good faith and
without negligence to any person in possession of it. Apparent tenure means the period of time
as expressed in the instrument, after which it is payable. [Section 10]
Payment in due course, which results in discharge of a negotiable instrument, must fulfil the
following conditions.
The payment must be in accordance with the apparent tenure of the instrument. It
should be made at or after maturity. A payment before maturity is not a payment in due
course so as to discharge the instrument.

Example: Payment in accordance with apparent tenure

If a banker makes payment of a post-dated cheque before the date mentioned on the cheque, he
acts against the apparent tenor of the instrument. Hence the payment will not be treated as
payment in due course.
The payment must be made in good faith and without negligence. It must be honestly
in the bonafide belief that the person demanding the payment is legally entitled to it. The
payer must not be guilty of any negligence in making the payment.
Example: Payment in good faith

Bill of Exchange is paid without enquiry as to the payee or cheque with forged signature of the
drawer is paid will amount to negligence on the party of the payer and the payment will not be
treated as payment in due course.
The payment must be made to a person in possession of the instrument under

circumstances which do not arouse the suspicion about his title to possess the instrument
and to receive payment of the amount therein mentioned.
The payment must be made in money only, unless the holder agrees to accept payment
in any other medium i.e. by cheque or draft.

Business Law
2 PROMISSORY NOTE
Section overview
Definition of promissory note

Parties to a promissory note
Specimen of a promissory note
Essential elements of a promissory note
2.1 Definition of promissory note
Definition: Promissory note [Section 4]

“A promissory note is an instrument in writing (not being a bank note or currency note) containing
an unconditional undertaking, signed by the maker, to pay on demand or at a fixed or
determinable future time a certain sum of money only, or to the order of a certain person, or to
the bearer of the instrument.
The analysis of the definition shows that, a promissory note is a written and signed promise to
pay a certain sum of money to a specified person or his order.
2.2 Parties to a promissory note

Following are the two main parties in a promissory note:
Maker
It is a person who makes the promissory note and promises to pay the money stated in it.
Payee
It is a person to whom the amount of promissory note is payable i.e. to whom the promise to pay
is made.

2.3 Specimen of a promissory note
Date: September 15, 2013

Rs. 10,000/- only
Three months after date I promise to pay ABC or to his order the sum of Rupees Ten
Thousand, for value received
To Sign: __________
ABC XYZ
Jail Road Saddar
Karachi Karachi
In the specimen XYZ is the maker and ABC is the payee.
2.4 Essential elements of a promissory note

The essential elements of a promissory note are shown below:

In writing
A promissory note has to be in writing. An oral promise to pay does not become a promissory
note. The writing may be on any paper, on any book. The words used must impart a clear
undertaking to pay, but it is not necessary that the word promise should be used.

Business Law
Example: It must be in writing

A signs the instruments in the following terms
a) “I promise to pay B or order Rs.500”.
b) “I acknowledge myself to be indebted to B in Rs.1,000 to be paid on demand, for value
received”.
c) A promise to pay B a sum of Rs. 500 on telephone. This promise will not make a
promissory note because it is not in writing.
In the above example (a) and (b) are promissory notes while (c) is not a promissory note.
Promise to pay
There must be a promise or a clear undertaking to pay. A mere acknowledgement of
indebtedness is not a promissory note, although it is valid as an agreement and may be sued
upon as such.
Example: Promise to pay

A signs the instruments in the following terms:
a) Mr. B I owe you Rs. 1,000
b) I am liable to pay to B Rs. 500
c) I have taken from B Rs.2,000 and I am accountable to him for the same with interest.
The above instruments are not promissory notes as there is no clear undertaking or promise to
pay. There is only an acknowledgement of indebtedness.
Where A signs instrument in the following terms:
“I acknowledge myself to be in debited to B in Rs.1,000 to be paid on demand for value received.
There is a valid promissory note
Definite and unconditional

The promise must not depend upon the happening of some uncertain event. i.e. a contingency or
the fulfilment of a condition. If an instrument contains a conditional promise to pay, it is not a valid
promissory note and will not become valid and negotiable even after happening of the condition.
Example: Definite and Unconditional

A signs the instrument in the following terms:
a) I promise to pay B Rs.500 seven days after my marriage with C.
b) I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay the sum.
c) I promise to pay B Rs. 500 as soon as I can.
The above instruments are not valid as the payment is made dependent upon the happening
of an uncertain event which may never happen and as a result the sum may never become
payable.
Exception
But a promise to pay is not conditional if the amount is made payable
at a particular place or
after a specified time or
on the happening of an event which must happen, although the time of its happening may
be uncertain.

Example: Exception
If A signs an instrument stating “I promise to Pay B Rs.500 seven days after C’s death”, the
promissory note is valid because it is not considered to be conditional, for it is certain that C will
die one day.
Signed by maker
It is imperative that the promissory note should be duly authenticated by the signature of the
maker. If the maker is illiterate he may place his thumb mark.
Certain parties
The instrument point out with certainty as to who is the maker and who is the payee. Where the
maker and the payee cannot be identified with certainty, the instrument even if it contains an
unconditional promise to pay is not a promissory note.
A promissory note cannot be made payable to the maker himself. But if it is endorsed by the
maker to some other person or endorse in blank it will become valid.
Sum payable must be certain
It is essential that sum of money promised to be payable must be certain and definite. The
amount payable must not be capable of contingent addition or subtraction.
Example: Sum payable must be certain

A signs instrument in the following term
a) I promise to pay B Rs.500 and all other sums which shall be due to him
b) I promise to pay B Rs.500 and all fines according to rules.
The above instruments are invalid as promissory notes because the exact amount is not certain.
Sum payable must be legal tender
A promise to pay a certain amount of foreign or to deliver a certain quantity of goods is not a
promissory note. Thus, an instrument signed by A, “I promised to pay B Rs.500 and to deliver
him my black horse” is not a valid promissory note.

Business Law
3 BILL OF EXCHANGE
Section overview
Definition of bill of exchange

Parties to a bill of exchange
Specimen of a bill of exchange
Essential elements of a bill of exchange
3.1 Definition of bill of exchange
Definition: Bill of exchange [Section 5]

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay on demand or at a fixed or determinable future time a
certain sum of money only, to or to the order of, a certain person, or to the bearer of the
instrument.”
The analysis of the definition shows that, a bill of exchange is a written and signed order directing
a person to pay a certain sum of money to the bear or of the instrument or to a specified person
or his order. Generally, a bill of exchange is drawn by a creditor, who directs his debtor to pay the
money to the person specified in the instrument.
3.2 Parties to a bill of exchange

Following are the three main parties in a bill of exchange:
Drawer
It is a person who draws a bill of exchange.
Drawee
It is a person who is ordered to pay the amount of the bill of exchange (on whom the bill is
drawn). When drawee accepts the bill of exchange (when he gives consent to make the
payment) he is called the acceptor.
Payee
It is a person to whom the amount of bill of exchange is payable.

3.3 Specimen of a bill of exchange
Date: September 15, 2013

Rs. 10,000/- only
Three months after date pay to XYZ or to his order the sum of Rupees Ten Thousand, for
value received.
Accepted
ABC
To Sign: __________
ABC MNO
Jail Road Saddar
Karachi Karachi
In the specimen MNO is the drawer, ABC is the drawee and XYZ is the payee.
3.4 Essential elements of a bill of exchange

The essential elements of a bill of exchange are shown below:

In writing
A bill of exchange is required to be in writing. Like promissory note, a bill of exchange also
cannot be oral.
Order to pay
A bill of exchange contains an order to pay instead of a promise to pay like in promissory note.
This feature distinguishes it from promissory note. Further, a request to pay money is not
considered to be a bill of exchange.

Business Law
Example: Order to pay

The following instruments signed by A are valid bills of exchange as they contain an order to
pay, though the language used is very polite:
a) B, please pay Rs. 500 to C or order.
b) B will much oblige me by paying to C Rs. 500.
The following instruments signed by A are not valid bills of exchange as they contain only a
request to pay and no order to pay:
a) B, please let C have Rs.500, and place it to my account and oblige,
b) B, I shall be highly obliged if you make it convenient to pay Rs.1,000 to C.
Definite and unconditional

In other words, the order to pay should not depend upon a condition or upon the happening of an
uncertain event. This point has already been discussed in detail in case of a promissory note.
Signed by drawer and drawee
The instrument must be signed by the drawer and drawee.
Certain parties
All the parties must be certain i.e. indicated in a bill of exchange with reasonable certainty.
Sum payable must be legal tender
If the instrument contains an order to pay something other than money or something in addition
to money, it will not be valid bill of exchange.
Sum Payable must be certain
It is essential that sum of money ordered to be payable must be certain and definite. The amount
payable must not be capable of contingent addition or subtraction.

4 CHEQUE
Section overview
Definition of cheque
Parties to a cheque
Specimen of a cheque
Essential elements of a cheque
Method of crossing
Types of crossing
Crossing of a cheque after issue
Protection to the collecting banker
Rights of holder against the banker
Circumstances in which a banker must refuse to honour a cheque
Circumstances in which a banker may refuse to honour a cheque
4.1 Definition of cheque
Definition: Cheque [Section 6]

Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand.
The analysis of the above definition reveals that a cheque is a bill of exchange but is different in
following two characteristics:
Drawee will always be a banker
Always payable on demand
4.2 Parties to a cheque

Business Law
Following are the three main parties in a cheque:

Drawer
It is a person who draws a cheque.
Drawee
It is a banker who is ordered to pay the amount of the cheque.
Payee
It is a person to whom the amount of cheque is payable.
4.3 Specimen of a cheque

ABC Bank Limited Date: September 15, 2013
Main Branch, Karachi Cheque no:______
Pay _____________________________________________________ OR BEARER
Rupees _______________________________________
Rs.
Account no: _____________
Title of account
Do not write below this line Signature
4.4 Essential elements of a cheque

The essential elements of a cheque are shown below:
These essential characteristics are mentioned below:

It must be in writing
There must be an express order to pay and not a request to pay
The order must be definite and unconditional
It must be signed by the drawer
The three parties (drawer, drawee and payee) must be certain.
The order must be to pay a certain sum
The order must be to pay money only
It must always be drawn upon a specified banker
It must always be payable on demand
4.5 Method of crossing

A cheque is said to be crossed when it bears across its face two parallel transverse lines which
are usually drawn on the left hand top corner of the cheque. It is an instance of an alteration
which is authorised by the Act. A crossing is a direction to the director of the paying banker not to
pay across the counter.
Purpose of crossing
The purpose of crossing is to direct the drawee (banker) to pay the amount of the cheque only to
a banker so that the party who receives the payment can easily be traced.
4.6 Types of crossing

General crossing
A cheque is said to be crossed generally where it bears across its face an addition of:
The words “and company” or any abbreviation of it between two parallel transverse lines.
[Section 123 ]
Effect of general crossing
When a cheque is crossed generally the banker on whom it is drawn shall not pay it otherwise
than to a banker. [Section 126]
Example: General crossing
Special crossing
A cheque is said to be crossed especially where it bears across its face an addition of:
Name of the banker
Parallel lines are not necessary. [Section 124]
Effect of special crossing
When a cheque is crossed specifically the banker on whom it is drawn shall not pay it otherwise
than to a banker to whom it is crossed or his agent for collection. [Section 126]

Business Law
Example: Special crossing
Restrictive crossing
Restrictive crossing may be added with general crossing by adding the words “A/c Payee” or “A/c
Payee only”. [Section 123A]
Effect of restrictive crossing
Strictly speaking, the amount collected on the cheque must be credited only to the account of
payee.
Example: Restrictive crossing
Not negotiable crossing

The effect of the words “not negotiable” on a crossed cheque is that the title of the transferee of
such a cheque cannot be better than that of its transferor. The addition of the words not
negotiable does not restrict the further transfer ability of the cheque. It only takes away the main
feature of negotiability, which is transferability free from defects. Therefore, a holder with a
defective title cannot give a good title to a subsequent holder. The object of crossing a cheque
not negotiable is to afford protection to the drawer or holder of the cheque against miscarriage or
dishonesty in the course of transit by making it difficult for the cheque so crossed cashed, until it
reaches its destination. [Section 131]
Example: Not Negotiable Crossing
4.7 Crossing of a cheque after issue

A cheque may be crossed after its issue in the following manner: [Section 125]
Case Right to cross

Where a cheque is uncrossed The holder may cross it generally or specially.
Where a cheque is crossed generally The holder may cross it specially by adding the
name of the banker.
Where a cheque is crossed generally or The holder may add the word “Not negotiable”.
specially
Where a cheque is crossed specially The banker to whom it is crossed may again cross
it especially to another banker (his agent) for
collection.

4.8 Protection to the collecting banker

A collecting banker is one who receives the payment of a crossed cheque on behalf of his
customer. If the collecting banker has collected a cheque on behalf of a person whose title to the
cheque was defective, he would be protected and would not be held liable in conversion to the
true owner, provided he proves that:
He acted in good faith and without negligence
The cheque was already crossed before it reached his hands and
He received the payment on behalf of a customer and not on his own account i.e. he acted
as an agent for collection and not in the capacity of holder for value.
It may be noted that if the banker credits his customer’s account with the amount of the cheque
before receiving payment, he does not become a holder for value and the protection shall be
available to such a collecting banker as well. This protection is not available where the banker
allows the proceeds of an “Account payee crossed cheque” to be credited to any account other
than the payee and the endorsement in favour of the last payee is proved forged.
The protection afforded to the collecting banker is very valuable in view of the fact that when one
person deals with the goods of another without his permission, he is liable to an action for
conversion and in the absence of this protection the position of the banker would not be different
from that of any other person. [Section 130]
4.9 Rights of holder against the banker

The holder has no right of action against the banker for refusing to pay the cheque because there
is no privity of contract between him and the banker. But the holder is entitled to enforce payment
from the banker in the following two cases:
Where the holder does not present the cheque within reasonable time of its issue and on
account of the delay the drawer suffers actual damage by the failure of the bank and is
therefore discharged to the extent of such damage. The holder in this case becomes the
creditor of the banker.
Where a banker pays a cheque crossed generally over the counter or a cheque crossed
specially otherwise than to the banker to whom the same is crossed, he is liable to the true
owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
The banker can recover from the wrong payee, if traceable.
4.10 Circumstances in which a banker must refuse to honour a cheque

Where the customer has stopped the payment of the cheque.
When a garnishee order or any other legal order of the court prohibits payment of cheque.
When the banker receives notice of customers death. But a payment made before
receiving the notice of death is valid.
When an order of adjudication has been passed against the customer by the insolvency
court.
When the banker receives the notice of customers insanity.
When the customer has given a notice to the banker for the assignment of the credit
balance of his account.
When the banker has reason to believe the holder title is defective.
When the banker receives a notice of loss of cheque from his customer.
When there has been material alteration in the cheque and such alteration has not been
authenticated by his customer by putting his signature.
When the signature of the drawer does not tally with the specimen signature kept by the
bank.
When the banker receives notice in respect of closure of account.

Business Law
4.11 Circumstances in which a banker may refuse to honour a cheque

When the balance in customers account is insufficient to meet the cheque.
When the balance in the customer’s account cannot be properly allocated to the payment
of the cheque.
When the cheque is presented at a branch other than the one where the customer has
account.
When the cheque is presented after banking hours.
When the cheque has become stale.
When the cheque is undated.
When the cheque is post-dated.

5 DISCHARGE OF LIABILITY
Section overview
Discharge of the negotiable instrument

Discharge of party or parties
Discharge of liability means that the party’s liability, on instrument comes to an end. The term
“discharge” in relation to negotiable instrument has the following two meanings:
Discharge of the negotiable instrument
Discharge of one or more parties from their liability
The chart below shows the various ways in which an instrument and party may get discharged.
5.1 Discharge of the negotiable instrument

A negotiable instrument is said to be discharged when the rights against all the parties to it
comes to an end and the instrument ceases to be negotiable. No party even a holder in due
course can claim the amount of the discharged instrument from any party. An instrument can be
discharged in following ways:
Payment in due course
The instrument is discharge by payment made in due course by the party who is primary liable to
pay. A payment by a party who is secondary liable does not discharge the instrument because in
that case the payer holds it to enforce it against the prior endorsers and the principal debtor.
[Section 82]

Business Law
Negotiation back
If the party primarily liable on the instrument becomes the holder at or after its maturity in his own
right, the instrument is discharged. [Section 90]
Example: Negotiation back

A issued a note to B, B endorses it to C and C endorses it back to A.
Release
When the holder of a negotiable instrument at or after its maturity absolutely and unconditionally
renounces in writing and gives up his rights against all the parties to the instrument, the
instrument is discharged. [Section 82]
Cancellation
Where an instrument is intentionally cancelled by the holder or its agent the instrument is
discharged and ceases to be negotiable. Cancelation may take place by;
crossing out signatures on the instrument, or
by physical destruction of the instrument
with the intention of putting an end to the liability of the parties to the instrument. [Section 82]
Discharge as a simple contract
A negotiable instrument may be discharged in the same way as any other contract for the
payment of money. This includes, for example, discharge of an instrument by novation or
rescission or by expiry of limit of limitation.
5.2 Discharge of party or parties

A party or parties to a negotiable instrument is/are discharged in any one of the following ways;
Payment
The party is discharge by payment made in due course by the party who is secondary liable to
pay. [Section 82]
Cancellation
When the holder of a negotiable instrument or his agent cancels the name of a party on the
instrument with the intent to discharge him, such party and all subsequent parties who have a
right of action against the party whose name is so cancelled are discharged from liability.
[Section 82]
Release
Where the holder of a negotiable instrument releases any party to the instrument by any method
other than cancellation, the party so released is discharged from the liability. [Section 82]
Allowing drawee more than 48 hours
If the holder of a bill of exchange allows the drawee more than 48 hours exclusive of public
holidays, for the purpose of acceptance than all previous parties not consenting to such
allowance are discharged from liability to such holder. [Section 83]
Non-presentment of cheque
Where a cheque is not presented by the holder for payment within a reasonable time of its issue
and the drawer suffers damage through the delay because of the failure of the bank, he is
discharge from the liability to the extent of such damage. [Section 84]
Example: Non-presentment of cheque

A draws a cheque of Rs.1,000 and when the cheque ought to be presented, has funds at the
Bank to meet the cheque. The Bank fails before the cheque is presented and pays 25 paisa in
Rupee. The drawer is discharged to the extent of Rs.750..

Qualified acceptance
If the holder of a bill agrees to a qualified acceptance all prior parties whose consent is not
obtained to such an acceptance are discharged from liability. [Section 86]
The qualified acceptance can be in any of the following ways:
Conditional: the payment is dependent on the happening of an event.
Part payment: Where he undertakes the payment of part only of the sum ordered to be paid.
Place of payment: No place of payment is specified in the order, it undertakes the payment at a
specified place and not anywhere else or where place of payment is specified in the order it
undertakes payment at some other place and not anywhere else.
Time of payment: Payment at a time other than it is legally due.
Operation of law
This includes discharge;
By an order of insolvency court, discharging the insolvent.
By merger. When a judgement is obtained against the acceptor, maker or endorser, the
debt under the bill is merged into the judgement debt.
By lapse of time i.e. when the remedy becomes time barred.
Material alteration
A material alteration of a negotiable instrument renders the same void as against anyone who is
a party to it at the time of alteration and does not consent to it, unless it was made in order to
carry out the common intention of the original parties. [Section 87]
Persons who become parties to the instrument after the alteration are liable under the instrument
as altered.
Discharge by payment of altered instrument
When an instrument has been materially altered but does not appear to have been so altered, or
where cheque is presented for payment which does not at the time of presentation appear to be
crossed, payment on such an instrument discharges the party liable if he pays according to the
tenure of the instrument at the time of payment and in due course. Such a payment is a valid
payment even if it is proved that the instrument has been altered or the cheque was originally
crossed. [Section 89]
Not giving notice of dishonour
Any party to a negotiable instrument to whom notice of dishonour is not sent by the holder is
discharged from liability as against the holder unless no notice of dishonour is required to be
sent.
Non-presentment for acceptance of a bill
When a bill of exchange is payable certain period after sight, its holder must present it for
acceptance to the drawee within a reasonable time after it is drawn. If he makes a default in
making such presentment the drawer and all endorsers who were liable towards such a holder
are discharged from their liability towards him. [Section 61]
Negotiation back
When a bill of exchange comes back to the drawer or endorser by process of negotiation and he
becomes its holder then all the parties in between are discharged from the instrument unless the
person to whom the instrument is re-endorsed did sans recourse endorsement. [Section 90]

Business Law
6 CHAPTER REVIEW
Chapter review
Define the term negotiable Instrument and different types of negotiable Instrument
Discuss the essential characteristics of Negotiable Instrument
Understand the effect of crossing a cheque and various types of crossing
Indicate the cases in which banker must and may refuse to honour a cheque
Discuss the protection granted to the collecting banker and rights of holder against the banker
Explain the terms Holder, Holder in due course, Acceptor for Honour, Payer for Honour, Material
alteration, Negotiation and Endorsement
Explain the various ways in which negotiable instrument or party in a negotiable instrument is
discharged
Define maturity and state the rules determining the maturity of negotiable instrument

Business Law
CHAPTER
19
Company
Contents
1 The features of a company
2 Types of companies
3 Association not for profit
4 Securities and Exchange Commission of Pakistan
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Sources and process of legislation

knowledge of the legal terminology of company law and the basics of company
incorporation.
LO 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 5.2.1 Explain subsidiary and holding company and when a company becomes a subsidiary or
holding company of another company
LO 5.2.2 Apply the concept of subsidiary in simple scenarios
LO 5.3.1 Demonstrate familiarity with the powers and functions of the Commission
LO 5.8.1 Comprehend the nature of association not for profit

otherwise stated:
Act Chapters
Companies Act 2017 19-27

Section B: Company Law - Chapter 19: Company
1 THE FEATURES OF A COMPANY
Section overview
Comparison of companies with other forms of business

The meaning of separate legal personality
Limited liability
Transfer of ownership and perpetual succession
1.1 Comparison of companies with other forms of business

Various forms of doing business
Companies differ significantly from other forms of business.
A sole trader is an individual who owns and runs his or her own business. The law does
not recognize the business: the law recognizes only the individual who runs it. The
individual is liable for the debts of the business and is also personally liable for any
breaches of the law by the business.
A partnership is a group of individuals who own and run their own business. Each partner
contributes capital to the business. A partnership business is not recognised as a ‘person’
by the law. Individual partners are personally liable, jointly with the other partners, for the
debts of the business.
Most companies are companies limited by shares. The capital of a company is
represented by shares, and the shareholders are its owners. Companies Act 2017 may
refer to shareholders who are owners of the company as members of the company.
x Companies are created by a process established by The Companies Act 2017. A
company must also have a written constitution (Termed as Memorandum of
Association-Explained later in this book. Partnerships often have a constitution in
the form of a partnership agreement, but this is not a legal requirement.)
x Unlike sole traders and Partnerships, a company is a legal person, separate from its
owners. This is the doctrine of corporate personality.
x The law recognises a company as a person, with legal rights and obligations similar
to those of ordinary individuals.
x Companies are managed by their directors, who should be members of the
company as well (with a few exceptions). In small companies, the shareholders and
directors may be the same individuals, but in large companies, the directors might
hold a small proportion of the shares or even no shares at all.
x Any legal person can own shares in a company. This includes other companies. It is
very common in practice for some companies to own some or all of the shares of
other companies.
1.2 The meaning of separate legal personality

Separate legal personality
It is important to understand what separate legal personality means. The law regards a company
as a person, separate from its owners. For example, suppose that Mr X sets up a limited
company, New Company with ten shares of Rs. 10 each which he owns. Mr X the individual and
New Company, for the purpose of the law, would be two separate persons - both would have
separate legal existence.
A company is an ‘artificial person’, whereas individual people are ‘natural persons’.
Essentially, however, the law treats persons in the same way, whether they are artificial or
natural.

Business Law
Because it is a person, a company can enter into contractual agreements with other
persons – individuals or companies.
If a company incurs a debt, the company itself is liable and its owners (the shareholders)
are not.
A company owns its own assets. Although the members (ordinary shareholders) own the
company, they do not own the assets of the company. The shareholders are simply
owners of the shares in the company. The company itself is the legal owner of its assets.
The debtor of the company owes the money to the company, and not to its owners.
A company is personally liable to pay tax on its income (profits).
If a company breaks the law, it is usually the company itself that is liable, although there
are circumstances in which its owners or its ‘officers’ (mainly directors) may be personally
liable.
The effects of separate legal personality
The separate legal personality of companies has several consequences:
limited liability of the owners of business
separation of ownership from control i-e members and directors
transfer of ownership and perpetual succession/perpetual existence.
1.3 Limited liability

Explanation
The concept of limited liability applies to the owners (shareholders) of a company. The liability of
the owners of a company for the debts of the company is limited to the amount of their
investment in the company.
If a company is unable to pay its debts, it may be forced into liquidation. The assets of the
company will then be used to pay some of its unpaid liabilities. However, the shareholders of the
company will not be required personally to pay the remaining unpaid debts of the company. The
shareholders will lose what they have invested, but will not be required to pay any more.
For example, if Mr X owns 100% of the share capital of New Company, and New Company goes
into liquidation with assets of Rs.200,000 (realizable value) and liabilities of Rs.500,000, the
company’s creditors will be unpaid for Rs 300,000 of the Rs.500,000 they are owed, when the
company is liquidated. There is no requirement on Mr X personally to pay the remaining
Rs.300,000 that the creditors are owed.
In this respect, limited companies are very different from partnerships. Limited liability applies to
all limited companies.
This is why private limited companies in the country are required to include the word
“(Private) Limited” in their name.
It is also why public companies in the country are required to include the words “Limited” in
their name.
The word ‘limited’ in the name of the company draws the fact of limited liability to the attention of
anyone dealing with it.
Illustration: Limited liability

There is an exception to this rule of no further liability, but only when the shares issued by a
company have not yet been fully paid up. For example, suppose that a company has issued
1,000,000 shares with a face value (nominal value) of Rs.10 each, and Rs.7.5 of the face value
has been paid (subscribed) by the shareholders. If the company goes into liquidation, the holders
of the 1,000,000 shares will be liable to subscribe the remaining Rs.2.5 per share, and this
money can be used to pay the company’s debts. This amount may be called by the directors of
the company even during the life time of the company if they so decide.

The liability of a company itself and its directors

Limited liability applies to the shareholders of a company. It does not apply to the company itself.
A company is fully liable for all its debts and other liabilities; just as any other person is fully liable
for the debts that he or she incurs.
The directors and other officers of a company act on behalf of the company, and provided that
they act within their powers and in accordance with the law, they will not be personally liable for
debts of the company.
1.4 Transfer of ownership and perpetual succession

Explanation
Another feature of the separate legal personality of a company is that its shareholders can
transfer their share in the ownership of the company to someone else, but this change of
ownership does not affect the company in any way.
Shareholders can transfer some or all of their shares to another person (who may be a natural
person or an artificial person). The most common methods of share transfer are sale, gift and
inheritance. Shares can also be transferred by putting them into trust.
When shares are transferred, the rights associated with the shares, such as the right to
receive a portion of any dividend paid by the company or the right to attend and vote at
general meetings of the company, are transferred to the new owner.
However, the transfer of shares does not affect the legal status or legal existence of the
company. The company continues to exist and its existence is unaffected by the change in
share ownership.
In practice, it is common for shares to be transferred many times during the life of a company.
Some companies have been in existence for many years, during which time its ownership has
changed many times. The company has continued, even when its owners have changed. This
phenomenon is called ‘perpetual succession’ or ‘perpetual existence’

Business Law
2 TYPES OF COMPANIES
Section overview
Definition of company and body corporate

Companies limited by shares, companies limited by guarantee and unlimited companies
Private company and public company
Public listed company and un-listed company
Holding company and subsidiary company
2.1 Definition of company and body corporate
Definition: Company [Section 2(17)]

Companies Act 2017 defines a company as a Company formed and registered under this Act or
the company law.
Company law – 2(18)
The repealed Companies Act, 1913 (VII of 1913), Companies Ordinance, 1984(XLVII of 1984),
Companies Ordinance, 2016 (VI of 2016) and also includes this Act unless the context provides
otherwise
Generally there would be no difference in the term Company and Body Corporate or Corporation
however Companies Act 2017 defines the body corporate or corporation separately. We can
generally say that the word ‘company’ means a setup formed and registered under the company
law and the body corporate can be regarded as any company registered under any law..
Definition: Body corporate [Section 2(9)]

"Body corporate" or "corporation" includes
a company incorporated under this Act or company law;
a company incorporated outside Pakistan, or
a body corporate declared as body corporate in the relevant statute but does not include
A co-operative society registered under any law relating to the registration of co-
operative societies; or
Any other entity, not being a company as defined in this Act or any other law for the time
being which the concerned Minister of the Federal Government may, by notification,
specify in this behalf
2.2 Companies limited by shares, companies limited by guarantee and unlimited

companies [Section 2(19), Section 2(20) and Section 2(71)]
Explanation
Limited liability may be in the form of a company limited by shares or a company limited by
guarantee.
With a company limited by shares, the limited liability of its owners is restricted, in law, to
the face value of the shares they own. This is the limited liability described above.
With a company limited by guarantee, its owners may or may not have shares. Their
share of the ownership of the company is recognised, and they are ‘members’ of the
company. Their liability to the company is limited to an amount that the member
guarantees to contribute in the event that the company goes into liquidation for a company
not having share capital and for a company having share capital this shall also include the
amount of share capital he subscribed to the company.

It is also possible to register a company as an unlimited company. This has all the advantages
of a normal company except that the liability of its members is not limited. In practice unlimited
companies are fairly rare but are sometimes used by a ‘partnership style’ business.
Businesses that incorporate as companies are companies limited by shares. The great
advantage of this form of company is that the company is able, if the shareholders approve, to
raise additional capital by issuing new shares. (Companies limited by guarantee are not able to
raise capital in this way. A company limited by guarantee is a form often used by charities, trade
associations and private members’ sports clubs, where the club is owned by the members).
2.3 Private company and public company [Section 2(49)]

Private Company
Private company is of two types; Single Member Company and other than Single Member
Company
Single Member Company – It is a company which consists of a single member who is
also the director of the company. These companies are governed by special rules
implemented by Securities & Exchange Commission of Pakistan for such companies. In
these companies (SMC-PVT) Limited is added to the name of the company.
Private Company (Other Than Single Member Company) – Such type of a company
can be registered by at least two members and it restricts:
x The maximum number of members to fifty; members jointly holding shares shall be
counted as one member,
x The right to transfer the shares by its members,
x The invitation of subscriptions from general public for its shares or debentures or
Redeemable capital.
2.4 Public listed company and un-listed company [Section 2(52)]
Definition: Public company

Public company means a company which is not a private company it can take two forms:
Public listed company
Public unlisted company
Public listed company [Section 2(38)]

Such form of public company whose securities are listed on an exchange and they are traded as
per regulations of that stock exchange. The process of listing and public offering is explained in
detail in other chapter of this book.
Public unlisted company
Public unlisted companies have not made an offer of their shares to general public hence there
shares are not traded on a stock exchange.
A public unlisted company however is entitled to make an offer to the general public as and when
it thinks fit unlike private companies which are forbidden to invite subscriptions from general
public
2.5 Holding company and subsidiary company [Section 2 (68), (37)]

Holding Company
It means a company or body corporate which holds (directly or indirectly) more than fifty percent
(50%) in the voting securities of any other company, or controls the composition of the board of
such other company. Holding company can be defined in context only of subsidiary company.

Business Law
Subsidiary Company
It means a company or body corporate whose more than fifty percent (50%) voting securities are
held or controlled (directly or indirectly), by some other company or such other company controls
the composition of the board of such company.
Example: Holding company

Hill Limited shall be considered as a holding company of Stone Limited if;
a. Hill limited owns more than fifty percent of the voting shares of Stone Limited,
b. Hill Limited controls the composition of board in Stone Limited.
How does Hill Limited controls the composition of the board?
Usually the power to control composition of board is associated with the holding of voting
securities (ordinary shares). However, at certain times the power to appoint or elect the directors
may emanate from any contractual arrangements with other shareholders or it may become
available from the condition imposed or privilege granted by any authority etc.
Now if Stone Limited is a holding company of Stylish Stones Limited then being the holding
company of Stone Limited the Hill Limited shall also be considered as holding company of Stylish
Stones Limited.

3 ASSOCIATION NOT FOR PROFIT
Section overview
Association not for profit
3.1 Association not for profit [Section 42]

Concept
People working for useful objects of the society sometimes need protection of limited liability for
such work. Companies Act allows the registration of companies as associations not for profit if
they satisfy certain conditions to Securities and Exchange Commission of Pakistan.
If the Securities and Exchange Commission of Pakistan is satisfied with an association is to be
formed as a limited liability company that it meets the conditions specified by the Companies Act,
2017 the Commission may, by a license for a period to be specified, permit for the association to
be registered as a limited company without the addition of word “Limited”, or “(Guarantee)
Limited”, to its name.
License
Not for profit association shall be licensed by Commission to get registered and work as a limited
liability company without using the words Limited or (Guarantee) Limited.
Such association may be set up for any of the following purposes
x commerce, x health, x protection of environment

x art, x education, x social welfare,
x science, x research, x charity or
x religion, x sports, x any other useful object,
Such Association shall apply its profits, if any, or other income in promoting its objects;
Such Association shall prohibit the payment of any dividend to its members; and
Its objects and activities are not and shall not, at any time, be against the laws, public
order, security, sovereignty and national interests of Pakistan.
License shall be granted by Commission on such conditions and subject to such regulations as it
thinks fit. Those conditions and regulations shall be binding on the association and shall on
directions of Commission be inserted in the memorandum and articles, or in one of those
documents.
The association shall on registration enjoy all the privileges of a limited company and be subject
to all its obligations, except those of using the word or words "Limited"or "(Guarantee) Limited",
as the case may be, as part of its name.
A license under this section may be revoked at any time by the Commission but Commission
shall give to the company, a notice in writing of its intention to do so, and shall provide an
opportunity to be heard to the association before such revocation.
Upon its revocation the registrar shall enter the word or words "Limited"or "(Guarantee) Limited",
as the case may be, at the end of the name of the association upon the register, and the
association shall cease to enjoy the exemptions and privileges granted by that license.

Business Law
4 SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN
Section overview
The Commission
Registrar
4.1 The Commission
Definition: The Commission [Section 2(16)]

The Commission means the Securities and Exchange Commission of Pakistan constituted under
Section 3 of Securities and Exchange Commission of Pakistan Act, 1997.
Organization
Securities and Exchange Commission of Pakistan (SECP) established under the Securities and
Exchange Commission of Pakistan Act 1997 was operationalized on 1st January 1999. SECP
replaced Corporate Law Authority, the former corporate regulatory body. It has been vested with
adequate operational, administrative and financial autonomy.
The SECP’s head office is at the Federal Capital, Islamabad and it has eight regional offices
(Company Registration Offices), one at Federal Capital, four at provincial capitals and three in
other major cities i.e. Multan, Faisalabad and Sukkur.
Functions [Section 7]
Commission has been vested with lot of powers under the Companies Act 2017 and other
relevant laws. Commission has got powers to regulate the affairs of all the companies and
Insurance Companies, Banking Companies, Modarbas and Non-Banking Finance Companies
etc.
Law has vested various powers to Commission and the Commission is also empowered by the
Securities and Exchange Commission of Pakistan Act, 1997 to exercide many powers and
functions in addition to the functions prescribed under the Companies Act 2017.
4.2 Registrar
Definition: Registrar [Section 2(57)]
“Registrar” means a registrar, an additional registrar, an additional joint registrar, a joint
registrar, a deputy registrar, an assistant registrar or such other officer as may be designated by
SECP, performing duties and functions under this Act
Powers and Duties

The powers and duties of registrar start from registration of companies to receiving various
documents which the companies are required to submit to the authorities under the Act.
He keeps the record of mortgages and charges also keeps track of company routine documents
besides his powers to call the officers of the company including directors for information and
explanations and also empowered to inspect the books and records of the company. He may
seize the books and records if he believes that seizure is necessary to reach out certain facts by
Commission.

5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
What is a company and what are the distinctive features of a company from other forms of
business.
The various types of companies including associations not for profit and how they differ from
each other.
The various authorities under the Act including Commission and Registrar.

Business Law

CHAPTER
Business Law
20
Incorporation of Company
Contents
1 Incorporation of company
2 Name of company
3 Memorandum of association
4 Articles of association
5 Commencement of business and registered office
6 Chapter review

Business Law
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system and
commercial laws; and build a knowledge base of corporate laws.

LO On the successful completion of this paper, candidates will be able to
demonstrate knowledge of the legal terminology of company law and the
basics of company incorporation.
LO5.4.1 Describe the business and objects of a company
LO5.5.1 Describe the memorandum of association and state its purpose
LO5.5.2 List/explain the clauses of memorandums of association of various types of
companies
LO5.5.3 Describe the purpose and procedure of alteration to different clauses of a
memorandum of association
LO5.5.4 Describe the effect of alteration/noting of alteration of memorandum of association
LO5.6.1 Define the articles of association and state its purpose
LO5.6.2 State the information which should be contained in the articles of various companies.
LO5.6.3 Describe the procedure for alteration of articles.
LO5.6.4 Describe the procedure of registration of the memorandum and articles of association
LO5.6.5 Describe the effects of registration of the memorandum and articles of association.
L05.6.6 State the provisions relating to printing, signing and date of memorandum and article
of association
LO5.7.1 Describe with examples the procedure / prohibitions with regard to the selection of
the name of a company /change of name
LO5.7.2 Identify/explain the actions and procedures needed to be taken by company and
registrar, if a company is registered by a prohibited name.
LO5.9.1 Understand the provisions regarding divisible profit and dividing the undertaking into
shares or interest.
LO7.1.1 Discuss with simple examples the provisions with regard to having a registered
office, publication of name and publication of paid-up capital.
LO7.2.1 State the conditions to be fulfilled before commencement of business by a company
LO7.2.2 State the applicability and non-applicability of the conditions on different kinds of
company.
LO7.2.3 State the consequences of non-compliance of Section 19

Section B: Company Law - Chapter 20: Incorporation of Company

Section number references embedded in the learning materials refer to the following legal acts
unless otherwise stated:
Act Chapters

Business Law
1 INCORPORATION OF COMPANY
Section overview
Process of incorporation
1.1 Process of incorporation

The company being a separate legal person is created by filing Memorandum and
Articles of Association and certain other documents with the registrar of companies. The
registrar registers those documents and the registration of those documents implies that
company has been incorporated as a separate legal entity. Effectively following steps
are involved in formation of the company
Getting availability of suitable name from the registrar of companies
Preparing Memorandum of Association
Preparing Articles of Association
Filing the Memorandum and Articles of Association and other documents with the
registrar and obtaining the certificate of incorporation of company
Filing documents necessary for obtaining certificate of commencement of
business if the company is required to obtain it
All of these documents require detailed insight so we shall discuss them one by one in
detail.

2 NAME OF COMPANY
Section overview
Restrictions regarding names

Publication of names
2.1 Restrictions regarding names [Section 10]

Prohibited names
After striking the idea of formation of a company the first thing to do is to choose a
suitable name of the company but only choosing such a name is not sufficient and the
persons desirous of forming a company (named as promoters here-in-after) should get
the approval of the name from registrar. In case the approval is not so obtained or the
approval is not granted by the registrar, the company cannot be established.
While selecting the name it should be considered that the name:
should not contains word or expression notified by the Commission;
is not inappropriate, undesirable or deceptive;
is not designed to exploit or offend the religious sentiments of the people;
is not a name identical with the name of the company already registered and does
not closely resemble with the name of the company already registered.
Whatever name is proposed, the final authority to decide whether or not a name is in
line with the provisions of the Act lies with the Commission.
Names which require prior approval of Commission
Prior approval of Commission shall be required if the proposed name contains any
words suggesting
the patronage of any, past or present, Pakistani or foreign, Head of State;
any connection with the Federal Government or a Provincial Government or any
department or authority of any such Government;
any connection with any corporation set up by or under any Federal or Provincial
law; or
the patronage of, or any connection with, any foreign Government or any
international organization.
establishing a modarba management company or to float a modarba
any other business requiring a license from the government
Application for reservation of a name
A person may make an application in specified form and manner with a specified fee, to
the registrar for reservation of any name for a period not exceeding 60 days.
If the application is refused by registrar, aggrieved person may within 30 days of the
order of refusal prefer an appeal to Commission. Order of the Commission shall be final
and shall not be called in question before any court or authority
Rectification of names [Section 11]
Although due care is exercised at the time of registration that the company is not
registered with a name which is defective due to any reasons whatsoever. However, a
company, due to any reason, may change the name with the approval of the registrar.

Business Law
The registrar may also direct the company to change its name within thirty (30) days of
the receipt of such directions. The registrar shall give to the company an opportunity of
being heard before issuing such direction.
If the company fails to comply with the above direction within the specified period, the
registrar may register the company under a new name selected by him, and issue a
certificate of incorporation on change of name accordingly
Change of name [Sections 12, 13 and 50]
Companies sometimes wish to change their name due to various reasons. Sometimes it
is due to the changing requirements of business or may be when the company is
acquired by a new management and they wish to change the name of the company.
A company can change its name by passing a special resolution and obtaining written
permission of the registrar for the new name.
The permission of the registrar shall not be required if the only change is the addition or
deletion of the word and parenthesis ‘(Private)’ or (SMC-Private) or (Limited) or
(Guarantee Limited) or (Unlimited) as the case may be upon the change in the status of
a company.
Upon the change of name, the registrar shall enter the new name on the register in
place of the former name and shall issue a ‘Certificate of Incorporation on change of
name’. On the issue of this certificate, the change of name shall be complete.
After the change of name, the former name shall also be mentioned for ninety days from
the date of issue of the certificate outside every office or place of business of the
company and on every document and notice of the company. The change of name shall
not affect any legal proceedings that might have commenced by or against the company
under its former name. It would also not affect the rights and obligations of the company.
Definition: Special resolution [Section 2(66)]

"Special resolution" means a resolution which has been passed
by a majority of not less than three-fourth of such members entitled to vote as are
present in person or by proxy or through postal ballot
at a general meeting
of which not less than twenty-one days’ notice specifying the intention to propose
the resolution as a special resolution has been duly given.
Provided that, if all the members entitled to attend and vote at any such meeting so
agree, a resolution may be proposed and passed as a special resolution at a meeting of
which less than twenty-one days’ notice has been given.
2.2 Publication of names

Publication of names [Section 22, 23]
The name and incorporation number of every limited company shall be displayed
outside company’s every office or place of business in a conspicuous position. Company
shall display a certified copy of certificate of incorporation at every place of business
The name of the company shall also be engraved in English or Urdu on the seal of the
company; and
The name, address of registered office, telephone, fax number, e-mail and website
addresses, if any shall be mentioned on all documents of the company which are
purported to be the documents of the company.

Penalties for non-publication of names [Section 23, 24]

A penalty of level 1 be levied on following offences:
not displaying its name in the manner provided for by this Act
name not engraved on the seal
using or authorising the use of another seal that purports to be company‘s
common seal
issuing / authorizing any document without mentioning the name (defaulter would
also be personally liable to holder of such promissory note etc)

Business Law
3 MEMORANDUM OF ASSOCIATION
Section overview
Introduction to memorandum of association

Clauses of memorandum of association
Alteration in memorandum of association
Registration of memorandum of association
3.1 Introduction to memorandum of association

Memorandum of association (MOA)
Company is an artificial person who must be registered in order to exist; this existence is
a process which requires certain things undertaken by the members of the company.
MOA is the constitution of the company. It defines in brief what the company is, what it is
for, where it will be and what shall be liability of the members of the company.
It further states the amount of share capital with which the company proposes to be
registered and the persons who are the initial members of the company, the signatories
to the MOA.
Registration of company is actually the registration of its constitution, the memorandum
of association, so the memorandum when registered binds the members of the
company. It binds all the members of the company irrespective of the fact that any
members has subscribed to it or not. The person becoming member of the company is
deemed to have read and understood the memorandum of the company and the
memorandum shall be binding on him in such a way as if he has signed the
memorandum himself.
3.2 Clauses of memorandum of association [Sections 26-29]

Memorandum of association consists of various clauses which contain variety of
information and it may vary from company to company on the basis of the type of the
company or the business of the company. Following clauses usually exist in the
memorandum of association of the company.
Name clause
Registered office clause
Principal line of business clause
Undertaking clause
Liability clause
Authorised capital clause
Subscription clause
We shall discuss each of these clauses at length hereunder.
Name clause
As we discussed the company has got the availability of name certificate from the
registrar till the date of preparation of memorandum of association hence the first clause
of the memorandum is the name clause of the company which contains the name of the
company with the addition of the following words at the end of the name in case of each
of the following companies

Public Company: "Limited"

Private Company: "(Private) Limited"
Single Member Company “(SMC-Private) Limited”
Guarantee Limited Company "(Guarantee) Limited"
Unlimited Company: “Unlimited”
We have already discussed the complexities about the name of the company so we
move forward to the next clause.
Registered office clause
For registered office clause the province or the part of Pakistan not forming part of a
province, as the case may be, in which the registered office of the company is to be
situate.
Illustration: Registered office

If the company proposes to have a registered office in Lahore, they will write in their
memorandum that ‘the registered office of the company shall be situated in province of
Punjab’, However if the company will have a registered office in Islamabad, it would write
that ‘the registered office of the company shall be situated in Islamabad’ reason being
that Islamabad is capital territory and it is a part of Pakistan that does not for part of any
province.
Principal line of business clause

A company may carry on or undertake any lawful and unrestricted business and enter
into any incidental and ancillary activities which is necessary in attaining its business
objectives provided that the principal line of business will be mentioned in the
memorandum which shall be commensurate with its name and in case of any change it
shall be reported to the registrar within 30 days and the registrar may give directions for
change in name in case of any violation with the above requirement
The existing companies may continue with their existing memorandum and the object
clause be treated as the principal line of business.
Undertaking Clause

The company shall add an undertaking, as may be specified by the Commission, in their
memorandum
Liability clause
In case of a company limited by shares and limited by guarantee, the liability clause
states that ‘the liability of the members is limited’. In case of an unlimited company, the
liability clause states that ‘the liability of the members is unlimited’.
In case of a company limited by guarantee, an additional sentence is added to clarify the
extent of liabilities of the members of that company in the event of its being wound up.
Note: You shall be covering / understanding that additional requirement at a later stage
of your studies (i.e. CFAP-02) becaue it pertains to the winding up which is not a subject
matter at this level (i.e. CAF-03)
Authorised capital clause
This clause contains the amount of share capital with which the company proposes to
be registered, and the division thereof into shares of a fixed amount. This is the
maximum number of shares that can be subscribed.

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In the same clause, every subscriber of the memorandum is required to agree at least
one share in the share capital of the company and each of them is required to write
opposite to his name the number of shares he has agreed to take in the share capital of
the company.
In case of a company limited by guarantee not having share capital, this clause shall not
be included.
Association or subscription clause
All of the above clauses are undertaken to be abide by, by the subscribers of the
memorandum, they are the first members of the company, they write as follows,
We, the several persons whose names and addresses are subscribed, are desirous of
being formed into a company, in pursuance of the memorandum of association, and we
respectively agree to take the number of shares in the capital of the company set
opposite our respective names
Then they write their names addresses and other required particulars and sign the
memorandum of association in presence of at least one witness who is required to write
his own particulars as well.
Provision as to companies limited by guarantee [Section 45]
In the case of a company limited by guarantee and not having a share capital any clause
giving right to any person other than a member to participate in the divisible profits of the
company will be void.
Every provision in the memorandum or the articles or in any resolution, declaring to
divide the undertaking of the company into shares or interests, shall be treated as a
provision for a share capital (even if the nominal amount or number of the shares or
interests is not mentioned at all).
Printing and signature of memorandum of association [Sections 31]
The memorandum shall be printed, divided into paragraphs numbered consecutively,
signed by every subscriber to the memorandum and dated.
The subscribers shall add his present name in full, his occupation and father’s name or,
in the case of a married woman or widow, her husband’s or deceased husband’s name
in full, his nationality and his usual residential address and such other particulars as may
be prescribed, in the presence of a witness who shall attest the signature and shall
likewise add his particulars; and they shall be dated as well.
3.3 Alteration in memorandum of association [Section 32 to 35]

Alterations
Act allows the alterations of various clauses of the memorandum of association of the
company however there is difference as to the procedure or requirements of law in
altering various clauses of the memorandum.
We have already seen the procedure of alteration in the name clause of the company
and the procedure for change in the authorised capital clause shall be discussed in
more detail in next chapter of this study text.
Liability clause is only altered at the time of conversion of the status of the company
(e.g. from limited to unlimited etc). Subscription clause of the memorandum of the
company cannot be altered in the life time of the company.

Reasons for alteration in principal line of business and registered office clause
As per the Act, a company may alter the provisions of its memorandum so as to:
change the place of its registered office from one Province to another or from
Islamabad Capital Territory to a part of Pakistan not forming part of a Province and
vice versa;
change its principle line of business; or
adopt any business activity or any change therein which is subject to licence,
registration, permission or approval under any law.
The alteration shall not take effect until and except in so far as it is confirmed by the
Commission on petition of the company filed for this purpose.
As we already know that the company is required to write only the province or part of
Pakistan not forming part of a province in its memorandum of association. Therefore, the
company is not required to alter its memorandum of association if it intends to shift its
registered office within a province from one place to another.
Alteration in registered office clause
For alteration in the registered office clause of the company,
Company shall pass a special resolution
Company shall apply to the Commission for obtaining its approval
When the company actually shifts its registered office, it shall inform the registrar
within 15 days of the date of such shifting.
Where alteration involves a transfer of registered office from jurisdiction of one
company registration office to another, physical record of company shall be
transferred to the other registrar (where the registered office has been shifted)
Alteration in principal line of business clause
For alteration its object clause, company shall pass a special resolution and shall only
file the amended memorandum with registrar within 30 days of the change
Commission’s approval for alteration
For approval of Commission in both of the above cases the company shall file an
application to the Commission on the basis of special resolution as discussed above.
The Commission must be satisfied that:
The circumstances, as discussed above for the alteration of object and registered
office clauses of the memorandum, exist and
Sufficient notice regarding alteration of memorandum has been given by the
company to every creditor and member of the company.
The Commission may make an order confirming the alteration either wholly or in part,
and on such terms and conditions as it thinks fit.
A copy of duly certified order of SECP shall be forwarded to the company and to the
registrar within 7 days from the date of the order.
A certified copy of the order confirming the alteration and a printed copy of the altered
memorandum are required to be filed with registrar within thirty days from the date of the
order for registration. The period of thirty days may be extended by the Commission
Registrar shall register it and issue a certificate which shall be conclusive evidence of
compliance with the above rules.

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Effect of failure to register within given period

Alteration of memorandum is effected upon its registration and it becomes null and void
if not registered within time. Commission may, however, on sufficient cause shown,
extend the time for filing the memorandum for such period as it thinks proper
Effect of alteration
If the memorandum of association or articles of association are altered and such
alteration requires the members to take more shares in the company than they already
have or to undertake more amount of guarantee than the existing amount, such
alteration shall be applicable to a member only if he gives his consent to the alteration
otherwise this shall not be applicable to the company.
3.4 Registration of memorandum of association [Section 16]

Registration
For registration of a memorandum of association, it shall be filed with the registrar of
companies. A declaration of compliance with requirements of the Act in getting the
company registered shall be provided to the registrar along with the memorandum.
Registrar shall register the memorandum of association only if it satisfied that
the company is being formed for lawful purposes,
all the requirements of this Act and the rules made thereunder have been
complied with in respect of registration.
If registrar think that any document or information contains any matter contrary to law or
is not complete (have defect, error or omission, or is not properly authenticated), he may
require company to file a revised document or remove deficiencies within specified
period. If applicant fails to remove the deficiencies, registrar may refuse registration of
company
If the registration of the memorandum is refused, the company may file an appeal before
the Commissionwithin 30 days of refusal. Order of Commission on such appeal shall be
final.
Effect of registration [Sections 16(5) and 18 ]
Registration of memorandum and articles means the registration of the company. The
registrar if satisfied regarding the above mentioned, shall register the company and shall
issue a certificate that the company is incorporated.
The certificate of incorporation shall state
Name and registration number of the company;
Date of its incorporation;
Whether it is a private or a public company;
Whether it is a limited (limited by shares or guarantee) or unlimited company;
The registration of the company has the following effects as from the date of
incorporation.-
the subscribers to the memorandum, and subsequent members of the company,
are a body corporate by the name stated in the certificate of incorporation;
it is capable of exercising all the functions of an incorporated company, having
perpetual succession and a common seal;
the status and the registered office of the company are as stated in the application
for registration;

in case of a company having share capital, the subscribers to the memorandum

become holders of the initial shares;
the persons named in the articles of association as proposed directors are appointed to
that office.
Definition: Member [Section 118]

The subscribers to the memorandum of association are deemed to have agreed to
become members of the company and become members on its registration and every
other person-
to whom is allotted, or who becomes the holder of any class or kind of shares; or
in relation to a company not having a share capital, any person who has agreed to
become a member of the company;
and whose names are entered; in the register of members, are members of the
company.

Business Law
4 ARTICLES OF ASSOCIATION
Section overview
Introduction to articles of association

Alteration in the articles of association
4.1 Introduction to articles of association

Articles of association [Section 36]
The byelaws of the company, subordinate to the constitution of the company and further
subordinate to the Act. They contain the guidelines on day to day issues faced by a
company.
Example: Articles of association

For example, the Act requires that a public company which is not listed shall have at
least three directors. Law requires minimum three directors; hence company may write
in its articles that the company shall always have not less than five directors if the
members of the company want to do so. Further the company may make various
classes of its shares, the exact rights and liabilities of the each class of shareholders
shall be stated in the articles of association.
It is the option for the company limited by shares to get the articles registered or adopt
Table A of the first schedule to the Companies Act 2017 as its articles.
However the registration of the articles of association is compulsory requirements for a
company limited by guarantee and an unlimited company.
The articles of an unlimited company or a company limited by guarantee (if both have a
share capital) shall state the amount of share capital with which the company proposes
to be registered.
The articles of an unlimited company or a company limited by guarantee (if both have no
share capital) shall state the number of members with which the company proposes to
be registered.
Articles shall list and enumerate the voting and other rights attached to different classes
of shares and securities issued or to be issued by the company.
Copies of memorandum and articles [Sections 39 and 40]
Every company, upon the request and payment of a prescribed amount by its member,
shall supply within a period of fourteen days a copy of the memorandum and articles of
the company.
Every copy issued after the date of the alteration in the memorandum or articles of a
company shall contain such alteration and the officers of the company liable to
contravention shall be liable to a fine.

4.2 Alteration in the articles of association [Section 38]

A company may, by special resolution, alter its articles and any alteration so made shall
be as valid as if originally contained in the articles and be subject in like manner to
alteration by special resolution:
If such alteration affects the substantive rights or liabilities of members or of a class of
members, it shall be carried out only if a majority of at least three-fourths of the
members or of the class of members affected by such alteration, as the case may be,
exercise the option through vote personally or through proxy vote for such alteration.
A copy of the altered articles of association shall be filed by the company with the
registrar within thirty days from the date of passing of the resolution. Registrar shall
register the same.

Business Law
5 COMMENCEMENT OF BUSINESS AND REGISTERED OFFICE
Section overview
Commencement of business
Registered office
5.1 Commencement of business [Section 19, 20(2)]

Requirements for commencement of business
Private company and a guarantee limited company not having share capital can
commence their business and exercise all of the powers regarding borrowings after the
incorporation of the company without needing to do anything further. However other
companies are required to commence the business only after they obtain certificate of
commencement of business from the registrar.
For obtaining the certificate of commencement of business company has to meet certain
requirements which are as follows.
In order to get a certificate of commencement of business the company should have
allotted shares against cash for an amount which is at least equal to the amount of
minimum subscription.
Illustration: Minimum subscription

That minimum amount of money which is required to commence the business, for
example company would need a building, machinery, equipment and working capital
budget for starting the business, if company has not got sufficient funds for all this
company would not be able to commence its business hence this amount must be
available in order to obtain a certificate of commencement of business.
Further the directors of the company should have paid to the company full amount on
each of the shares taken or contracted to be taken by them and for which they are liable
to pay in cash.
No money is or may become liable to be repaid to applicants for any shares which have
been offered for public subscription;
Illustration: Repayment against a prospectus

Whenever the company issues shares or debentures to the general public, it is required
to get those shares or debentures listed on an exchange before allotment of shares. The
procedure is as follows
Company issues prospectus and fixes a date for payments from applicants against
its securities and simultaneously files an application for listing of securities to the
exchange
People deposit money into the banks as required by company
Company waits for the listing from exchange and provides for any further
information or deficiencies as pointed out by the exchange.
The company is given certificate of listing and it can now use the money of
applicants and allot them shares
If listing is refused, the money from applicants must be repaid forthwith.
Until such money is repaid, company shall not be allowed to commence business.

For obtaining certificate of commencement of business there should be filed with the
registrar a duly verified declaration by the chief executive or one of the directors and the
secretary that the aforesaid conditions have been complied with.
In the case of a company which has not issued a prospectus inviting the public to
subscribe for its shares, there has been filed with the registrar a statement in lieu of
prospectus.
On the basis of these documents and after satisfying himself that all the necessary
requirements of this act have been followed, the registrar may accept and register all the
relevant documents .
Any contract made by a company before the date at which it is entitled to commence
business shall be provisional only, and shall not be binding on the company until that
date, and on that date it shall become binding
5.2 Registered office [Section 21]

Registered office
Registered office is a place which is the address of the company for receiving all of its
communications. It does not necessarily require being the head office of the company.
There may be more than one office for business of the company but registered office
shall be single.
A company shall have a registered office to which all communications and notices shall
be addressed and and it shall notify the registrar within a period of thirty days of its
incorporation. Notice of the situation of the registered office and of any change therein
shall be given within fifteen days after the date of the change to the registrar who shall
record the same.

Business Law
6 CHAPTER REVIEW
Chapter review
How to register a company.
The various clauses of memorandum and articles of association.
Procedure for alteration in memorandum and articles of association.
The requirements of Act regarding names of companies
The requirements of the Act regarding commencement of business and registered
office of the company.

CHAPTER
Business Law
21
Share Capital –
Types and Variations
Contents
1 Shares in companies
2 Variation in share capital
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes

familiarity with the provisions governing the issuance of shares.
LO 6.2.1 Describe the nature of shares and share certificates
LO 6.2.2 Describe the classes and kinds of shares
LO 6.2.3 Describe with simple example the condition of fully paid shares
LO 6.2.4 State the provision relating to alteration of share capital / kinds of alterations that can be
made to the share capital
LO 6.2.5 State the rules on prohibition of purchase of a company’s own or its holding company’s
shares
LO 6.2.6 Understand the meaning of variation of shareholders’ right
LO 6.2.7 Demonstrate familiarity with the procedure for cancellation of variation of shareholders’ right

otherwise stated:
Act Chapters

Section B: Company Law - Chapter 21: Share capital – types and variations
1 SHARES IN COMPANIES
Section overview
Division of share capital into shares of fixed amounts

The nature of shares and share certificates
Authorised share capital
Issued and paid up share capital
Kinds and classes of shares
1.1 Division of share capital into shares of fixed amounts

Share capital
In a company limited by shares, the share capital represents capital introduced into the company
by the company’s ‘shareholders’, the members.
The share capital of a company may be divided into several different ‘classes’, or there may be
just one class of shares. Within each class of shares, all the shares must be of the same fixed
amount. This is the nominal value of the shares.
Example: Division into fixed amounts

The ordinary shares in a company may be divided into 500,000 shares, all of Rs.10 each. Within
the same class, there cannot be shares for differing nominal amounts and all the shares carry
equal rights and privileges.
Issuance of shares is the first step of offering shares by the company, then people or promoters
pay for the shares, this is termed as subscription of shares and finally shares are allotted to
respective names of applicants this is paying up of the capital.
1.2 The nature of shares and share certificates [Section 60-62]

Shares and share certificates have several characteristics.
A share is a form of property, carrying rights and obligations, and is transferable from one
person to another. In other words, ownership of shares can be transferred as per the terms
of articles of association.
A share must be paid for. It must be paid for in full when it is allotted to the shareholder.
Every share in a company having a share capital shall be distinguished by its distinctive
number.
A certificate issued in physical form under common seal of the company or issued in book-
entry form (i.e. Electronic) shall be the main evidence of the title of the person to such
shares.
The manner of issue of a certificate of shares, form of such certificate and other matters
may be specified.
1.3 Authorized share capital

Authorized share capital
The Act requires companies to have an authorised amount of share capital. Authorised share
capital is the maximum amount of shares (in each class) that the company may issue. It is
expressed in terms of the nominal value of the shares.

Business Law
In Pakistan all companies limited by shares are required by the Companies Act, 2017 to have an
authorised share capital, and the amount of the authorized share capital has to be specified in
the company’s memorandum of association.
The authorised share capital can be increased, but only with the approval of the shareholders.
1.4 Issued and paid up share capital

Issued and paid up share capital [Section 58]
The issued share capital, also called allotted share capital, is the nominal value of the shares (in
each class) that have been issued to shareholders. The issued share capital may be less than
the authorised share capital, but cannot exceed it.
When shares are issued, they must be paid for, the shareholders must pay for the shares in full
when the shares are issued.
Issued share capital and the liability of shareholders
A share represents the maximum liability of a shareholder in a limited liability in the event that the
company is wound up with unpaid debts. The actual liability of the shareholders is limited to any
unpaid capital on their shares (which shall be zero in most cases as partly paid shares are not
allowed to be issued in Pakistan).
When issued shares are fully paid, the shareholders have no further liability for the unpaid debts
(liabilities) of the company. If the company goes into liquidation with unpaid debts, the
shareholders will not be required to contribute anything to the payment of the company’s debts.
The maximum amount they will lose is the amount already contributed as share capital.
When shares are partly-paid, the maximum liability of the shareholders is the unpaid portion of
the share capital. If the company goes into liquidation with unpaid debts, the shareholders will be
required to contribute extra capital up to the amount unpaid on the shares.
Example: Liability of shareholders

ABC Limited, a public company has authorised share capital of 800,000 ordinary shares of Rs.10
each (Rs. 8,000,000 in total). The nominal value of the shares is Rs.10 per share.
The issued share capital is 400,000 ordinary shares. All of these, 400,000 shares are fully paid.
In this example:
Authorised share capital is Rs. 8,000,000 (800,000 shares of Rs. 10).
Issued share capital is 4,000,000 (400,000 shares of Rs. 10).
The maximum liability of the shareholders for the unpaid debts of the company, in the event of the
company’s liquidation, is zero as all of the nominal value is fully paid.
Adverts and notices [Section 25]

Whenever a company mentions its authorized capital in any advertisement or notice or in any
statement, it shall mention the amount of its subscribed and paid up capital as well in equally
conspicuous letters and in equally prominent position.
1.5 Kinds and classes of shares [Section 58]

Various kinds and classes
A company limited by shares may have different kinds of share capital and various classes under
each kind. Common examples of kinds of shares are:
Ordinary shares
Preference shares
Company can have more than one kind of share capital only if it has got authorized capital for all
kinds of share capital.

Ordinary shares
The ordinary shareholders are the owners of their company. Ordinary shares are often called
‘equity’ shares.
The ordinary shareholders ‘own’ the distributable profits of their company, after preference
dividends have been paid, but are only entitled to a dividend:
if the directors propose a dividend and
(in the case of a final dividend) the shareholders vote for the payment of a dividend.
There is no limit to the amount of dividends that a company can pay to its ordinary shareholders
out of its distributable profits.
Ordinary dividends cannot be paid until all unpaid cumulative preference dividends payable have
been paid to the preference shareholders, and until all preference dividends for the current year
have been paid to all classes of preference shareholders. In a way they are entitled to residual
profit after payment of preference shareholders. In return to this risk (if there is no residual profit)
that they accept the reward they get when the company makes large profits, the preferred
shareholders are paid the fixed amounts to which they are entitled, while the ordinary
shareholders divide the remaining profit among themselves
In a winding up of the company, the ordinary shareholders are not entitled to receive payment of
any capital from the liquidation of its assets until all creditors have been paid and the nominal
share capital of all preference shareholders has been repaid.
The ordinary shareholders are entitled to vote at general meetings of the company. Normally, all
ordinary shareholders have one vote per share. (However, this general rule does not apply all the
time in the rare cases where a company has more than one class of ordinary shares – ‘class A’
and ‘class B’ ordinary shares will usually have different voting rights.
Company may make various classes of shares by writing in the articles of association. Different
classes may enjoy different voting rights, voting rights disproportionate to the paid up value of the
shares of the company or no voting rights at all, or otherwise different classes may be made on
the basis of different entitlements to dividends or right or bonus shares etc.
Preference shares
A preference share normally carries a prior right (ahead of ordinary shares) to:
receive a dividend: the dividend payable on preference shares is normally a fixed amount
each year
receive a repayment of capital in the event that the company is wound up.
Holders of preference shares therefore receive preferential treatment, ahead of the ordinary
shareholders.
Preference shares may be of different classes on the basis of accumulation or otherwise of the
dividend on preference shares, on the basis of redemption or conversion of preference shares
into ordinary shares etc.

Business Law
2 VARIATION IN SHARE CAPITAL
Section overview
Alteration in capital
Restriction on purchase of own shares by a company
Variation in rights of the shareholders
2.1 Alteration in capital [Sections 85]

Capital clause of memorandum of association
The company, if allowed by its articles and by passing a special resolution can alter the capital
clause of its memorandum of association so as to
Increase the authorized capital whenever it requires;
Cancel that part of its authorized capital which has not been paid up till the date of
cancellation and such cancellation shall not affect the rights of paid up shareholders;
Consolidate the share capital into shares of a larger amount;or
Divide and subdivide the share capital into shares of an amount smaller than the one fixed
by the memorandum of association initially.
Example: Variation in capital

ABC (Pvt) Limited has got an authorised and paid up share capital of Rs. 500 million divided into
5 million shares of Rs. 100 each. The company may by passing a resolution in its general
meeting alter this capital and declare that the authorised and paid up share capital of the
company is Rs. 500 Million but now it is divided into 50 million shares of Rs. 10 each. This is
division of capital into shares of a smaller amount than originally fixed by the memorandum.
Every member possessing one share shall now possess 10 shares but overall paid up value of
shares will remain the same.
Now suppose ABC (Pvt) Limited has got an authorised ordinary share capital of Rs. 500 million
divided into 50 million ordinary shares of Rs. 10 each, out of total authorised capital Rs. 200
million is already paid up. The company if so resolve in the general meeting may subdivide the
unissued authorised capital into preference and ordinary shares by stating in the authorised
capital clause of the memorandum that the authorised capital of the company is Rs. 500 Million
divided into 25 million ordinary shares for Rs. 10 each and 25 million preference shares of Rs. 10
each.
The company is required to file the resolution and the related documents i-e altered copy of the
memorandum of association with the registrar within fifteen days of passing the same, failing
which the resolution shall not be effective and shall ultimately lapse.
Further due to the consolidation or subdivision of shares, the rights attaching to the shares shall
not be affected in any way and the new shares issued by the company shall rank equally with the
existing shares of the company.

2.2 Restriction on purchase of own shares by a company [Section 86, 87 & 88]
Restrictions Exceptions
Purchasing own shares Listed Commpany is allowed to but back its own shares
Purchasing the shares If subsidiary company carries on a business of brokerage, on

of holding company behalf of its clients (shall not exercise voting rights on shares of
holding company)’
Subsidiary company acting as a trustee (unless holding
company is beneficially interested in the trust); or
If shares are held by a company by operation of law.
Providing the financial A Private company (not being a subsidiary of a public

assistance (loan or company);
advance etc) to anyone
Lending of money by a banking company in ordinary course of
for purchase of its own
its business;
shares or shares of its
holding Provision of money in accordance with any scheme approved
through special resolution and in accordance with specified
requirements, if purchase of the shares held by a trust for
benefit of employees or such shares held by employee of the
company; or
Provision or securing an advance to any of its employees
(including chief executive who, before his appointment was not
a director; and excluding all directors of company) for such.
2.3 Variation in rights of the shareholders [Section 59]

Procedure for variation in rights
Variation in rights of the shareholders can be made only by an alteration of the articles of
association by passing a special resolution of the members of the company. By a special
resolution, the company shall alter the conditions as to various classes of shareholders. If
however, the variation affects the substantive rights of any particular class of shareholders, it
shall not be deemed to have been carried out unless three fourth majority of that particular class
of the members agree to the alteration.
Right to challenge the variation in rights
Although the resolution to vary the rights of the members needs approval by three fourth
majorities of the members of the particular class affected by the variation however any member
or members of the affected class representing at least ten percent shareholding of that class may
apply to the court for an order against the resolution varying their rights. The court has got the
powers to declare the resolution null and void if it feels that either;
the company withheld certain facts while getting the resolution passed, had the members
been in knowledge of those facts, they would not have passed the resolution varying the
rights of a particular class; or
the change is otherwise prejudicial to the interest of members.
Such application for getting an order against the resolution should be filed by the persons
aggrieved by the change within 30 days of the date of resolution. The decision of the court on
such matter shall be final and appeal cannot be filed against such decision and the company is
required to file a copy of the order of the court to the registrar within fifteen days of receipt of the
order.

Business Law
3 CHAPTER REVIEW
Chapter review
About shares and share certificates
About kinds and classes of shares
About authorised and paid up capital
About the variation of authorised capital
About the restrictions on purchase of own shares by a company
About the variation in rights of the shareholders.

CHAPTER
Business Law
22
Share Capital-Prospectus
Contents
1 Introduction to prospectus
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
LO6.1.1 Define a prospectus and explain its purpose
LO6.1.2 Understand the requirements relating to a prospectus as laid down in Section
87(2),(4),(5),(6),(7), 88(1-8), 90, 91, 92 and 93 of the Securities Act 2015
LO6.1.5 Understand/explain the provisions regarding statement and consent of expert.

otherwise stated:
Act Chapters

Section B: Company Law - Chapter 22: Share Capital-Prospectus
1 INTRODUCTION TO PROSPECTUS
Section overview
Basics
Approval of prospectus
Availability of prospectus
Contents of prospectus
Timing of prospectus
Expert to be independent
Expert’s consent to issue of prospectus containing statement made by him
Criminal liability for defective prospectus
Compensation for false or misleading prospectus
1.1 Basics
Definition
Definition: Prospectus (Section 2(41) Securities Act, 2015)

“prospectus” means any document described or issued as a prospectus and includes any
document, notice, circular, material, advertisement, offer for sale document, publication or
other invitation offering to the public (or any section of the public) or inviting offers from the
public for the subscription or purchase of any securities of a company, body corporate or entity,
other than deposits invited by a bank and certificate of investments and certificate of deposits
issued by non-banking finance companies;
As per the above definition it can be construed that the prospectus:

is a document issued for general public;
invites offers for sales of company’s securities; and
prohibits companies from inviting deposits from public other than deposit invited by a bank
and certificate of investment and certificate of deposits invited by a Non-Banking Finance
Company
Shelf-Prospectus
A shelf-prospectus is a single offering document allowing companies to make multiple offerings
as disclosed in the offering document within a prescribed time and subject to prescribed
conditions.
Supplement to Prospectus
A supplement to the prospectus invites the general public for subscription of the security(ies)
earlier offered to the public through shelf-prospectus. The supplement to the prospectus for each
offering contains updated disclosures. It also provides such information as prescribed by the
Commission.
Purpose of the Prospectus

The purpose of prospectus as indicated above is to invite offers from public for the subscription
or purchase of any securities of a company. The term “public” is specific for prospectus because
securities can be issued by the Company by private arrangement with some friends or relatives
of the promotors or directors etc. but if the company wants to issue securities to large number of
persons it has to offer this to the general public and the requirement of the law is to issue a
prospectus along with such public offer of securities.

Business Law
The friends or relatives of the promoters and directors can get all information about the objects,
prospects and operations of the company. However, if the general public wants to subscribe or
purchase any securities in the company, it shall have no avenue available regarding the
company to take decision about investment in the company’s securities.
Prospectus comes to play in these situations and provides the readers with all the information
required by them before making any investment decision or otherwise in the company.
1.2 Approval of prospectus (section 87 and 88, Securities Act, 2015)

The prospectus is issued, published or circulated with the approval of the Commission. The same
condition also applies on shelf-prospectus or supplement to the prospectus. Moreover, the
Commission may also impose further conditions or restrictions in this regard.
A prospectus approved by the Commission shall be valid for a period of sixty days from the date
of such approval. However, the time period of sixty days may be extended by the Commission by
reasons to be recorded in writing.
In case of shelf registration approval for a period longer than sixty days may be approved by the
Commission.
The issuer or the offeror shall, not less than twenty one days before the proposed date of
publication of the prospectus, submit a copy to the Commission for approval.
Illustration: Approval from the Commission

ABC Limited, a listed company, has decided to issue shares to the general public. Let us consider
two scenarios:
a) The company has submitted a copy of prospectus to the Commission for its approval. At the
same time it is planning to publish and circulate the prospectus to inform the general public.
b) The prospectus is approved by the Commission. Due to some unavoidable reasons the
company could not circulate the prospectus. After three months the company decides to issue
those shares based on the prospectus approved by the Commission.
In case of (a) the Securities Act, 2015 does not allow a company to circulate the
prospectus unless the Commission approves the prospectus.
In case of (b) a prospectus approved by the Commission is valid for sixty days from the
date of approval or such longer period as approved by the Commission. ABC limited
shall have to apply for grant of extension for the validity of the prospectus beyond sixty
days if the Commission has not approved it for a longer period.
1.3 Availability of prospectus (Section 88, Securities Act, 2015)

The prospectus in its full text or in such abridged form, shall be published at least in one Urdu
and one English daily newspaper. It shall not be published in the newspapers less than seven
days or more than thirty days before the commencement of the public subscription.
A sufficient number of copies of the prospectus, as approved by the Commission, shall be made
available, free of charge, from the date of its publication in the newspapers till the closing of the
subscription at the registered office of the issuer, with all the securities exchanges of the country,
with all the bankers to the issue, the concerned share registrar, the concerned ballotter and the
concerned credit rating agency, if any.
The prospectus along with subscription form shall be uploaded on the website of the issuer and
shall remain there from the date of its publication in the newspapers till the closing of the
subscription.
1.4 Contents of prospectus (Section 89, Securities Act, 2015)

The Commission may approve a prospectus if it contains such information and reports as may be
prescribed.

Primarily, the prospectus must contain sufficient material to enable any person to reach a
decision on the investment in the securities of the company.
The prospectus is a formal document and needs approvals from the Commission and clearance
from the stock exchanges as well because any security which is offered to the general public
should be listed on stock exchange otherwise company is not allowed to allot that security to the
applicants. Hence the stock exchanges in addition to the Commission are also regulators, who
regulate the listings of securities and issuance of prospectus.
The purpose of the prospectus is to enable the investor to decide whether to subscribe the
shares or debentures of the company or not. The company would surely want that all the good
aspects are shown and people are attracted to invest in the company but this is the time when
regulators like, Commission, Stock exchange and Registrar come to the rescue and ask the
company about every fact written in or omitted from the prospectus, before approving the
prospectus for issue to the general public.
It is customary for the authorities to require the company to arrange and write the risk factors
separately. All the factors that could be risky for investment in the company are written and
readers of the prospectus are specifically advised to read the same before making any
investment decision.
It does not however mean that the authorities act just to discourage the company and its
promoter but it is the duty of authorities to make sure the provision of accurate information to the
prospective shareholders or members.
1.5 Timing of prospectus

The company may issue a prospectus at any point in time of its life. If the company wants to
issue shares to the public before commencement of business it may opt to do so, Otherwise the
company may opt to not to issue shares to the general public initially and start the business
without involving the general public in the company, in such a case however company would be
required to file a statement in lieu of the prospectus with the registrar before obtaining a
certificate to commence the business.
In future whenever the company decides to issue shares or debentures to the general public, it
shall be required to issue a prospectus and get the shares or debenture, as the case may be,
listed on stock exchange.
Once issued and securities allotted under a prospectus, its existence ends and it is not like
something the memorandum or articles of association. It is intact for a certain period of time for
which company is in a process to issue shares or debentures etc.
1.6 Expert to be independent (Section 90, Securities Act, 2015)
A prospectus shall not contain a statement purporting to be made by an expert unless the expert
is a person who is not, and has not been, engaged or interested in the formation or promotion or
in the management of the company.
Definition: Expert
“Expert” includes banker, securities advisor, engineer, valuer, accountant, lawyer and any other
person whose profession gives authority to a statement made by him.

Business Law
1.7 Expert’s consent to issue of prospectus containing statement made by him (Section
91 Securities Act, 2015)
A prospectus that contains a statement purporting to be made by an expert or to be based on a
statement made by an expert shall not be issued, circulated or published unless:
i. The expert has given, his written consent to the issue of the prospectus with the
statement in the form and context in which it is included; and
ii. There appears in the prospectus a statement that the expert has given and has not
withdrawn his consent.
1.8 Criminal liability for defective prospectus (Section 92, Securities Act, 2015)
A person commits an offence, who:
i. Makes a misleading, incorrect, untrue or deceptive statement in a prospectus; or
ii. Omits information or a statement from a prospectus that Securities Act, 2015 or any rule
or regulation made under Securities Act, 2015, requires to be included in the prospectus.
1.9 Compensation for false or misleading prospectus (Section 93, Securities Act, 2015)
Every offeror, issuer, director of an offeror or issuer or any person who has signed the
prospectus shall be liable to pay compensation to any person who acquires any of the securities,
in reliance upon the prospectus, to which the prospectus relates and suffers loss in respect of
them as a result of any incorrect, untrue or misleading statement in the prospectus or the
omission from it of any matter required to be included under Securities Act, 2015.

2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
The concept, need and contents of a prospectus
The concept of experts in context of a prospectus and provisions regarding their statements

Business Law

CHAPTER
Business Law
23
Mortgages and Charges
Contents
1 Borrowing powers of a company
2 Registration of mortgages and charges
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes

familiarity with the provisions governing the issuance of shares
LO 6.3.1 Discuss the meaning of mortgage/charge with simple examples, and the duty of company and
the procedure for registration of charges
LO 6.3.2 State the right of an interested party in respect of a registration of mortgage/charge
LO 6.3.3 State the duty and procedure of payment or satisfaction of mortgage/charge
LO 6.3.4 Demonstrate familiarity with the right to inspect the instrument creating a mortgage/charge
LO 6.3.5 Discuss the consequences of registered and unregistered mortgages/charges

otherwise stated:
Act Chapters

Section B: Company Law - Chapter 23: Mortgages and Charges
1 BORROWING POWERS OF A COMPANY
Section overview
Inherent borrowing powers of a company

Forms of borrowings
Types of security
1.1 Inherent borrowing powers of a company

General permission to borrow
Memorandum of association of the company is deemed to contain the powers to borrow money
as loans, advances or credit from the scheduled banks or financial institutions. It also includes
the powers to issue securities not based on interest for raising resources.
Restriction on borrowing
As studied in earlier chapters, few companies are required to obtain a certificate of
commencement of business before commencing their business, such companies cannot exercise
any borrowing powers until the date they obtain a certificate of commencement of business.
Ultra-Vires borrowings
The power to borrow money rests with the directors of the company and they are allowed to
borrow money once they have passed a resolution in their meeting in this behalf. Company may
restrict their powers to borrow by its articles of association, by mentioning, as such, that the
borrowings exceeding a certain amount may be made only with the prior approval of members in
a general meeting. Hence if the directors exceed their authority in such a case and borrow in
excess of the limit, the borrowing so made shall be considered as ultra-vires borrowings.
1.2 Forms of borrowings

Debentures
The securities issued to borrow money are named as debentures.
Definition: Debenture [Section 2(12)]

Debenture includes debenture stock, bonds, term finance certificate or any other instrument of a
company evidencing a debt, whether constituting a mortage or charge on the assets of the
company or not;
It means that the company may name its securities anything they shall effectively be a debenture
if they are debt obtained by the company.
A public company may issue debentures to public or otherwise issue debentures to any persons
privately. The debentures often carry certain fixed interest however the companies are also
allowed to issue debentures which do not carry interest rather such debentures are allowed to
participate in the profits of the company. Holders of debentures are not allowed to cast votes in
the general meetings of the company. They have the right to vote in their own or creditor’s
respective meetings, if called for any purpose.
Debentures may be secured or unsecured. The secured debentures are the ones against which
company has provided any collateral as a security. It may be any property of the company or any
other asset of the company having value equivalent or in excess of the amount borrowed against
debentures. Normally such agreements do not require the physical transfer of the asset at the
time of making a borrowing agreement. This takes place at some future date if the company does
not honour its obligations to pay interest or principal at relevant time.

Business Law
Borrowings from credit institutions

Credit institutions include the commercial banks, investment banks, non-banking finance
companies, modarbas and all other business organisations providing facilities for loan against the
interest or sometimes against participation in profits of the company as per agreed terms.
These loans too, usually are secured against the assets of the company.
Borrowing from other sources
Other sources for obtaining loans may include the sponsors or controlling shareholders of the
company who at times facilitate the company with financial help whenever it is required. Utilizing
this option company at times may stabilize its financial situation. This type of financing is usually
unsecured, however, it may be secured against the assets of the company.
1.3 Types of security

Pledge
Definition: Pledge
Contract Act defines pledge as a ‘bailment’ of goods as security for the repayment of a debt or
performance of a promise.
As the definition implies, the goods or valuables of the company are physically given in
possession of the lender till the debt or obligation is satisfied by the company. Although, the
contracts for pledge are in writing and signed by both the parties but this contract is not required
to be registered with registrar of companies as both lender and borrower are secured by the
valuables of each other, the lender holds the right to the goods and the borrower uses the money
instead.
Example: Pledge
Company ABC textiles Limited needs funds for procurement of raw material which shall be used
by the company over next six months. The company is not financially capable of purchasing the
inventory for next six months but they cannot delay the procurement because the raw material
shall not be available in next few months.
The company may make an arrangement with a financial institution to borrow money for the
procurement of inventory and against such borrowing provide the same inventory as a security and
ask the financial institution to take the possession of the inventory. The company shall get the
inventory for usage as and when required when it pays the liability of the financial institution.
The above arrangement is an example of pledge contract in which physical possession of the asset
was handed to the lender and released once his outstanding balance was cleared.
Mortgage
Definition: Mortgage [Section 2 (42)]

A mortgage means an interest or lien created on the property or assets of a company or any of its
undertakings or both as security.
The definition implies that the term ‘mortgage’ shall be used when the company agrees to
transfer the title in any of its ‘immoveable property’ to any person against the loan or any other
debt provided by that person.
The company does not transfer the physical possession of the asset to the lender in case of a
mortgage and continues enjoying benefits of the asset unless and until it fails in complying with
the terms of the loan contract giving rise to physical transfer of the property to the lender.

Example: Mortgage
If the company ABC Textiles Limited as in previous example required the loan for construction of a
new factory, it would have an option to get the long term loan on the basis of the mortgage of the
same property on which they shall construct the factory.
Title of the property and factory will be in the name of the financial institution however the
company will continue to use its asset and pay the amount of the financial institution as agreed
between them.
This set up is a mortgage contract.
Charge
Definition: Charge
A charge is security for the payment of a debt or other obligation that does not pass ‘title of the
property’ or any right to its possession to the person to whom the charge is given.
Evident from its definition the term charge shall be used when there is mere contract of
transferring the title and physical possession of the asset in the event of company’s failure to
abide by the terms of the loan contract.
Example:Charge
Suppose the company ABC textiles Limited requires funds off and on because sometimes their
receivables take longer than usual time to pay. The management of the company feels that they
can manage their short term needs of funds if they get a facility of overdrawing from their bank as
and when required up to an amount of Rupees 500 Million. Now it is not the case that they will be
using entire amount of Rupees 500 million all the times however they will use any funds they
need to the tune of this amount.
Bank shall surely ask for some security against such loan. Company can make an arrangement of
creating a charge on the current assets of the company, say on receivables. The broader terms of
the contract shall state that company shall continue its business in its ordinary course and
overdraw from bank as and when they require. If the company fails to do so, bank shall be entitled
to receive the money from receivables of the company.
Charge can be of two different types

Fixed charge
x created on a specific asset for a defined amount,
x the asset under fixed charge cannot be replaced or sold without prior approval of
beneficiary of charge,
x in the event of winding up of the company, holder or beneficiary of the fixed charge
possess right of priority in respect of asset secured under the fixed charge.
Floating charge
x may be created on any class of assets meaning thereby that the asset is not fixed
under the floating charge,
x may be created on the entire undertaking of the company,
x the assets under floating charge may be replaced by the company however overall
value of class of assets under the charge should not reduce below an agreed
amount

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2 REGISTRATION OF MORTGAGES AND CHARGES
Section overview
Registration of mortgage or charge

Procedure for registration of mortgage or charge
Payment or satisfaction of mortgage or charge
Right to inspect the copies of instruments creating charges
2.1 Registration of mortgage or charge

Types of mortgage and charge liable for registration [Section 100]
The Companies Act 2017 requires that the following mortgages and charges, whenever entered
by a company, must be registered with the registrar:
A mortgage or charge, including pledge:
On any immovable property wherever situate, or any interest therein; or
For the purposes of securing any issue of debentures;
On book debts of the company;
On the undertaking or property of the company, including stock-in-trade; or
On a ship or aircraft, or any share in a ship or aircraft;
On goodwill or on any intellectual property;
On any movable property of the company;
Based on agreement for the issue of any instrument in the nature of redeemable capital, or
any other interest therein; or
Based on conditional sale agreement, namely, lease financing, hire-purchase, sale and
lease back, and retention of title, for acquisition of machinery, equipment or other goods:
2.2 Procedure for registration of mortgage or charge [Section 100 & 105]
Duty of registration
Whenever the company enters into any of the mortgages and charges (which required to be
registered) it is the duty of the company to get the particulars of charge registered with the
registrar within thirty days of the creation of the same. The particulars required to be produced to
the registrar include the agreements for loan or debt and other information prescribed.
Upon registration, the registrar shall issue a certificate of registration under his signatures or
authenticated by his official seal in specified manner.
It is usually pre-decided among the parties as to who shall get the mortgage or charge registered
with the registrar.
Whether the charge is registered by company or the interested person, the cost of registration
shall be borne by the company and the interested person registering the charge shall be entitled
for reimbursement of the costs properly incurred in getting the mortgage or charge registered.
Consequences of non-registration
If the company or interested persons fails or neglects to register the mortgage or charge as
aforesaid, the mortgage or charge would become void and shall not be accepted as such by the
liquidator or any creditor.
However this shall not affect any contract or obligation for repayment of the money thereby
secured.

Registration of mortgage or charge created outside Pakistan on a property situated outside Pakistan
In such a case where the mortgage or charge has been created outside Pakistan on any property
of the company which is situated outside Pakistan, the rest of the procedure for registration of the
charge is same with the exception that the period of thirty days shall start from the day when the
documents should reach Pakistan if sent with due care from that other country.
Registration of mortgage or charge created in Pakistan on a property situated outside Pakistan
In such a case where the mortgage or charge has been created in Pakistan on any property of
the company which is situated outside Pakistan, the rest of the procedure for registration of the
charge is same with the exception that the registration of charge with the authorities of that other
country shall also be required for completion of registration of mortgage or charge.
Constructive notice regarding existence of mortgage or charge
Every person buying any property of the company shall be deemed to have a constructive notice
of the fact that the asset is subject to mortgage or charge. This is the reason any person buying
any asset from the company needs its checking with the registrar to confirm whether or not the
asset is free from any mortgage or charge.
2.3 Payment or satisfaction of mortgage or charge [Section 109 & 110]

Satisfaction of mortgage or charge
Satisfaction of mortgage or charge means that the company has paid for the amount of debt or
loan against which the property of the company was secured. The company may partially pay the
amount of loan or debt and if the relevant loan contract allows, get the charge satisfied.
It is in the company’s own interest to inform the registrar that the charge has been fully or
partially satisfied so that the stakeholders i.e. investors and lenders should know that all of the
debt has been paid off.
The particulars of satisfaction of mortgage/charge shall be submitted to the registrar concerned
on prescribed form within thirty days from the date of satisfaction/repayment.
Duty of company and right of registrar
It is the duty of the company to inform the registrar regarding satisfaction of mortgage or charge
as discussed above.
The registrar shall register the satisfaction of mortgage or charge only after verifying from the
interested person (the lender) regarding the repayment of the loan and shall grant him a time of
fourteen days to file any objection to the satisfaction of mortgage or charge.
If no objection is filed by the lender, the registrar shall register the satisfaction of the mortgage or
charge as requested by company, otherwise he shall communicate the company regarding
objection raised by the lender.
The registrar is entitled, even if no information is received from company, to enter the satisfaction
of mortgage or charge if he is aware that a particular mortgage or charge has been repaid or the
property subject to the charge no longer the property or part of the undertaking of the company.
2.4 Right to inspect the copies of instruments creating charges [Section 112]
Company is required to keep the copies of the instruments creating charges or relating to the
registration of charges or any rectifications therein at its registered office.
Further, the company is required to keep at its registered office a register regarding the
mortgages or charges created by it. This register contains fullest information as to identify the
property mortgaged or charged as well as the terms and conditions and the beneficiary of the
charge.
Any creditor or member of the company can inspect the copies of the instruments so placed and
the register of mortgages or charges of the company free of cost at all reasonable times.
The register of the mortgages or charges as above is also open to inspection of any person other
than members or creditors against payment of fee.

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3 CHAPTER REVIEW
Chapter review
What are the inherent borrowing powers of a company,
What are different modes of borrowings by the companies
What are different types of mortgages and charges and what is the procedure of their
registration and satisfaction.

CHAPTER
Business Law
24
Meetings
Contents
1 Company meetings
2 General provisions as to company meetings
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes

knowledge of the management of companies
LO 7.3.1 State the timing, matters and reports relating to statutory meetings
LO 7.3.2 State the timing, matters and reports relating to an annual general meeting using simple
examples
LO 7.3.3 State who can call an annual general meeting
LO 7.3.4 State the timing, matters and reports relating to an extraordinary general meeting
LO 7.3.5 State who can call an extraordinary general meeting
LO 7.3.6 State the quorum for a general meeting
LO 7.3.7 State the entitlement of a member in respect of appointment of proxy and conditions
applicable thereon
LO 7.3.8 Describe the provisions relating to agenda/ resolution /minutes of meetings
LO 7.3.9: State the circumstances in which proceedings of the general meeting may be declared invalid

otherwise stated:
Act Chapters

Section B: Company Law - Chapter 24: Meetings
1 COMPANY MEETINGS
Section overview
Types of company meetings

General meetings
Statutory meeting
Annual General Meeting (AGM)
Extraordinary General Meeting (EGM)
Calling of meetings by the Commission
Declaring meeting as invalid
Filing of resolutions
1.1 Types of company meetings

The companies have to hold and conduct a variety of meetings during their life and even during
winding up as well. Some of them are mandatory as per the Act and the others are conducted on
‘as and when required’ basis. The broader categories of the meetings are as follows:
Board of directors meetings
General meetings
For the directors there may be certain committees in place so the meetings of those committees
may also be held, termed as ‘Committee Meetings’. In certain cases companies have more than
one class of members, so there may be meetings of various classes of members, termed as
“class meetings”.
1.2 General meetings
Definition: General meeting

A general meeting is a meeting of the shareholders (members) of the company who are
entitled by the company’s articles to attend and vote at such meetings.
In theory, general meetings allow the members to make decisions on matters of importance, and
at times, restrict the powers of the directors. For example, the members in general meeting may:
remove directors from office
restrict the powers of the directors by altering articles of association of the company
approve or disapprove dividends
In practice, however, the power of the shareholders in general meeting is often fairly limited.
Resolutions at general meetings are usually proposed by the directors. Individual shareholders or
a number of shareholders acting together possessing a described voting power may have the
right to propose resolutions that all the members will vote on, but it is unusual for shareholders to
exercise this right.
Many of the resolutions voted on by the members, particularly at annual general meetings, are
routine.
General meetings are chaired by the chairman of the board of directors, and other directors also
attend. However, the directors do not have a right to vote at a general meeting unless they are
also a member of the company. They can then vote at the meeting as a member.

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A general meeting may be:

a statutory meeting,
an annual general meeting, or
an extraordinary general meeting.
1.3 Statutory meeting [Section 131]

Introduction
In case of a public company, the law requires it to hold a general meeting known as statutory
meeting and deliver a report in such meeting called as a statutory report. This is actually the
beginning phase of the company and the members usually do not know all other members nor all
of them are familiar with management (directors and chief executive) of the company, so this
meeting provides an opportunity to get to know each other and also the statutory report is an
indicative of financial start-up of the company that can be helpful for understanding of the
members of the company.
Requirement to hold statutory meeting
Every public company having share capital is required to hold statutory meeting
However, a private company is not required to hold a statutory meeting but if such private
company converts itself into a public company within one year of its incorporation, it shall also be
required to hold a statutory meeting.
Timing of statutory meeting
Companies as above are required to hold the statutory meeting within, the earlier of:
x 180 days from the date at which the company is entitled to commence business; or
x Nine months from the date of its incorporation
No statutory meeting shall be required if the AGM is held before the due date of statutory
meeting.
The meeting shall consider and approve report called “Statutory Report” which is sent to each
member at least twenty one days before the date of statutory meeting (along with notice of the
statutory meeting).
Matters to be stated in statutory report
The statutory report shall include:
total number of shares allotted by the company. The company shall distinguish between
shares allotted for cash and otherwise than in cash. In case of shares allotted for a
consideration otherwise than in cash, the consideration shall also be discussed in detail in
the statutory report.
total cash received against shares allotted;
summary of receipts and payments prepared to a date not earlier by 15 days of the date of
report;
particulars of directors chief executive, secretary, auditor and legal adviser;
particulars of any commission paid on issue of shares particularly against the shares
issued to directors, chief executive and to the companies in which such persons are
directors;
particulars of any contract to be modified of which approval is required in the meeting; and
extent of carrying out or not carrying out any underwriting contract along with reasons for
not carrying out.
Statutory Report should also contain a brief review of the state of affairs of the company
since its incorporation and the business plan.

Auditors’ report on statutory report

The statutory report should be accompanied by an auditor’s report in respect of correctness or
otherwise of
Allotment of shares;
Cash received against shares allotted; and
Receipts and Payments account of the company.
Certification and filing of report
Report shall be certified by the chief executive of the company and at least one director
and in the case of a listed company also by the chief financial officer.
One copy of the report, along with the auditor’s report, shall be filed with the registrar
forthwith after sending report to the members.
The members may discuss any matter pertaining to the company in statutory meeting. However,
resolution shall be passed only for those matters of which prior notice as per articles of the
company has been duly given.
Directors shall make available a list of members, along with their particulars, to be produced at
commencement of meeting and shall be open for inspection by any member during meeting
Meeting may be adjourned from time to time and any resolution passed in the adjourned meeting
will be as effective as the original one.
1.4 Annual General Meeting (AGM) [Section 132]

Requirement & purpose
All companies, except single member companies, are required by law to hold an annual general
meeting (AGM), at which the members should be entitled to vote on certain resolutions. The
meeting is called by the board of directors.
An AGM gives the members an opportunity to assess and discuss the company’s performance
and situation because one of the main agenda items of such a meeting is consideration and
discussion of audited annual financial statements. Without a meeting of this kind, the members of
a large company that are not connected with the directors would be deprived of the opportunity to
hear the directors give an account of themselves and the company’s achievements.
Besides consideration and adoption of audited financial statements, auditors’ and directors’
report, an AGM is also used to obtain shareholder approval for certain matters such as:
the election or re-election of directors, if due on the date of AGM
the approval of a final dividend, if declared by the directors
the appointment or re-appointment of the auditors.
The AGM is therefore normally used to consider routine business. Most of the resolutions at an
AGM are (ordinary) resolutions, but there may also be some special resolutions (defined in
earlier chapters).
Timing, place and notice period
The first annual general meeting of a company shall be held within 16 months from the
date of its incorporation and thereafter at least once in a calendar year.
Subsequent annual general meeting shall be held within 120 days from closure of its
financial year.
The SECP, in the case of a listed company and the Registrar, in the cases of other
companies may extend the time for holding of such meetings upto a maximum of 30 days.
At least 21 days’ notice shall be given to members for holding of a meeting, Further, in the
case of listed companies such notice shall also be published in an Urdu and an English
daily newspapers each having nationwide circulation and also the said notice to be
transmitted to the Commission

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AGM of a listed company is held in the town in which the registered office is situated or in
a nearest city. Members of listed company, not residing in city where AGM is taking place
and holding at least ten percent of share capital, on written request at least seven days
before such meeting may require the company to provide the facility of video-link to attend
annual general meeting of the company.
AGM is called on the order of directors and not of the members
Annual General Meeting-Scenarios:

Suppose ABC limited is incorporated on 1st April 2010 and it opts for a financial year end of 30th
June every year. It would be required to hold its first annual general meeting in next sixteen month
time period. So it can opt to hold the first annual general meeting till 31st July 2011.
We assume that the company opted to hold the annual general meeting on 31st July 2011. From
this date onward company will be required to hold the annual general meeting within 120 days of
the close of financial year and at least once in a calendar year. Keeping all the above in view, what
shall be the latest time on which company can hold its AGM in 2012?
The next financial year will close on 30th June 2012, so till when would the company be required
to hold its AGM;? It should be 28th October 2012 because it cannot wait for more than 120 days
from close of financial year.
XYZ limited, another company registered on 1st September 2010, Its financial year closes in 30th
September each year. It held its first annual general meeting on 1st November 2011 which was
well within 16 months from the date of its incorporation.
What is the latest date by which company can hold its second AGM? Come on, it’s within 120 days
of close of financial year. I am sure you are not missing the point of holding at least one AGM a
year, so latest date should be 31st December 2012.
1.5 Extraordinary General Meeting (EGM) [Section 133]

Purpose
As seen in last chapters, Act requires various matters of the company to be approved by its
members by a resolution, for example alteration in articles or memorandum of association of the
company. For this purpose it is not always possible to defer the approval of such matters till
annual general meeting hence the directors need to call a general meeting for obtaining
approvals of members, such meeting is known as extraordinary general meeting (EGM).
Definition: Extraordinary General Meeting (EGM)

Every general meeting of a company other than annual general meeting and the statutory meeting
is called extra-ordinary general meeting.
Calling of EGM
Directors of the company are entitled to call and hold an EGM on their own motion whenever
they feel the need for it to get some approvals from shareholders. Members holding more than
ten per cent of total voting power of the company in case of a company having share capital and
ten percent of all members in case of other companies may also require the holding of such a
meeting. They shall file a proper written requisition for this purpose which shall include the
objects of the meeting and shall be signed by the rquisitionist in this behalf.
Directors should call the meeting on such valid requisition as discussed above, however, if they
do not proceed to call a meeting within twenty one days of filing of the requisition, the rquisitionist
themselves should call a meeting. The meeting so called by the rquisitionist should be called as
nearly possible in such a way as the meetings called by the directors are held. After filing a
requisition for the holding of an EGM, the meeting should be held and conducted within 90 days
of filing of the same either by the directors or by the requisitionists otherwise the requisition shall
be expired.
Any reasonable expenses incurred by the rquisitionist due to failure of the directors to convene a
meeting shall be repaid by the company to the requisitionists and company shall deduct this
money from the remuneration payable to the directors in default.

The notice of the meeting is required to be sent to the member’s at least twenty one days before
the date of the meeting similarly as of the notice of AGM. However, in case of unlisted
companies, if all the members entitled to attend and vote at any extraordinary general meeting so
agree, a meeting may be held at a shorter notice. .
1.6 Calling of meetings by the Commission

Commission’s power to call meetings [Section 147]
Commission has been given powers to call general meeting of the company if the company
makes a default in calling an annual general meeting or a statutory meeting or the directors do
not proceed to call an extraordinary general meeting on the requisition the member.
While calling such meetings, the commission may give such incidental directions as it deems fit.
Such directions may include a direction that even one member present in the meeting shall be
treated as a quorum of the meeting for the purpose of that meeting. The Commission may also
advise the cost and expenses of such meeting to be borne by any officers of the company
including directors of the company.
1.7 Declaring meeting as invalid [Section 136]

When there are material defects or omission in the notice or irregular proceedings of the meeting,
members having ten percent or more voting rights can apply to court within 30 days of the
meeting.
Court may on such a petition declare such proceedings or any part of the such meeting invalid
and may also direct holding of fresh general meeting
1.8 Filing of resolutions

Filing of resolutions [Section 150]
Company is required to file all special resolutions passed by it with the registrar. The company
shall file all the special resolutions passed by it within fifteen days of passing the same with the
registrar. Such copy to be filed shall be authenticated by a director or secretary of the company.
Company shall keep all the special resolutions currently intact with its articles of association and
whenever any person asks for a copy of the articles of association he shall be provided with a
copy of such special resolutions as well.
Normally the resolutions require certain additional documents to be filed with the registrar as well.
For example, if the company passes a special resolution to alter the articles of association, it
shall file the altered copy of articles of association as well to the registrar along with the special
resolution. However, sometimes the special resolutions may be filed alone for example if the
company has passed a special resolution for investment in associated company, it shall only file
the copy of resolution.

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2 GENERAL PROVISIONS AS TO COMPANY MEETINGS
Section overview
Notice of meeting
Quorum of meeting
Voting in meetings
Proxies
Minutes and Resolution
Representation at meetings
2.1 Notice of meeting [Section 134 and 140]

General provisions
Notice of meeting is a formal document sent to each member at his registered address or such
address which he has supplied to the company for communication purpose in case where he has
no registered address in Pakistan.
Further the notice of a general meeting shall also be sent to the auditors of the company.
This notice shall state place, day and time of the meeting and in case any resolution is to be
passed in the meeting which is other than the ordinary business. The notice may be served to
members against an acknowledgement or by post or courier service or through electronic means
or any other specified manner.
If the meeting is required to discuss and transact any special business, there shall be annexed to
the notice of the meeting all material facts concerning such business. This statement is
commonly known as statement of material facts. Theoretically, this statement must be so
comprehensive and self-explanatory that every member of the company can reach a decision on
the proposed resolutions after studying this statement.
Definition: Business in context of meeting

Any activity or agenda item to be discussed in a meeting is known as a business. The businesses
in general meetings of the company are of two types:
Ordinary business
Special business
Following are four ordinary businesses and apart from this rest of all are special businesses to be
undertaken in a general meeting.
Consideration of financial statements and the reports of the directors and auditors;
The declaration (approval) of a dividend;
The appointment and fixation of remuneration of auditors; and
The election or appointment of directors.
Point to be noted here is that ordinary business is conducted by way of an ordinary
resolution except the election of directors which has its own procedure discussed later.
The members having not less than ten per cent voting power in the company may also give
notice of a resolution.

2.2 Quorum of meeting [Section 135]
Definition: Quorum
Quorum means certain minimum number of members of a company as is fixed as competent to
transact business in a general meeting of members in the absence of the other members. Any
business transacted in a meeting without quorum shall be void.
Quorum of meeting
The minimum quorum of the meeting has been fixed by the Act, however, the company may fix a
larger number of members as quorum of the meeting by its articles of association.
The Act provides that unless a larger number is fixed by the articles, the minimum quorum shall
be:
in case of a public listed company - Ten members, present personally or through video
link in the meeting, representing 25% voting powers, either on their own account or as
proxies, in the meeting.
in case of any other company having share capital - two members, present personally
or through video link in the meeting, representing 25 % of total voting powers, either on
their own account or as proxies.
in case of a company not having share capital - as provided in the articles.
Presence/Absence of quorum
If the required quorum is not present at the meeting within half an hour from the time appointed
for the meeting, it shall be:
dissolved, if called upon the requisition of members; and
adjourned to the same day in the next week at the same time and place if called by the
directors on their own.
If a quorum is not present at an adjourned meeting, as above, within half an hour from the time
appointed for the adjourned meeting, the members present in the meetings either personally or
through video link, not being less than two, shall be a quorum, unless the articles of association
provide otherwise.
2.3 Voting in meetings [Sections 135, 141 and 142]

In a company having share capital a member shall have votes proportionate to the paid up value
of the shares held by him and in a company not having share capital, each member shall have
one vote.
In any company voting is done by show of hands unless a poll is ordered by chairman of the
meeting or the demand for poll is raised by any person having not less than 10% of the voting
power. On show of hands every member shall exercise one vote however on a poll votes may be
casted personally or through proxy.
The chairman of the meeting shall declare the results of the show of hands i.e. whether a
resolution has been carried or not, unanimously or by a particular majority. An entry in the minute
books of the company shall be the evidence of such result unless contrary is proved.
Note: please note carefully that we have used the word ‘proportionate to the paid up value of
shares’ rather than ‘equal to the paid up value of shares’. This is because of the various classes of
share capital in the company. If the company has more than one class of shares then voting
rights of one class may differ from other but whatever the difference may be the voting rights
shall have regard to the paid up value of shares.

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Provisions relating to poll [Section 143]

Demand for poll
Chairman of the meeting may order a poll to be taken instead of voting by show of hands or after
seeing the result of voting by show of hands; however persons having at-least 10% of the voting
power are entitled to demand a poll from chairman before or on the announcement of result of
polling by show of hands by the chairman of the meeting
The demand for poll may be withdrawn at any time by the person or persons who made the
demand.
Time of taking poll [Section 145]
A poll demanded on the election of a chairman or adjournment of a meeting shall be taken
forthwith. In all other cases, poll shall be taken at such time as the chairman of the meeting may
decide; however, such time shall not be more than fourteen days from the day on which it is
demanded.
When a poll is taken, the chairman or his nominee and a representative of the members
demanding the poll shall scrutinize the votes given on the poll and the result shall be announced
by the chairman.
The chairman shall have power to regulate the manner in which a poll shall be taken.
The result of the poll shall be deemed to be the decision of the meeting on the resolution on
which the poll was taken.
Although it is significant to note that the resolution passed at an adjourned meeting is considered
to have been passed on the day on which it is actually passed and not on any earlier date
[Section 146].
However this shall not be the case with the date of poll being other than the date of meeting itself
because the result of the poll, whenever it is taken, shall be considered as the decision of the
meeting in which poll is demanded.
2.4 Proxies [Section 137]

Requirements for a proxy
Proxy is a person appointed to vote and speak on behalf of a member in a general meeting of the
company. Proxy is entitled to, on behalf of the original shareholder, all the acts which the original
shareholder is entitled to do himself in the meeting. Broadly proxy has got following rights
to speak and vote at the meeting;
to demand a poll;
to abstain from voting, on a question on which poll is demanded.
Notice of meeting must specifically mention the right of the shareholder to appoint proxy on his
behalf and attached to the notice should be a blank proxy form for facilitation of the shareholder.
The document to appoint proxy shall be in writing and signed by the appointer or his authorized
agent
A member cannot appoint more than one proxy to attend any one meeting. If more than one
proxy is appointed for any one meeting, all appointments of proxies shall be invalid. Further a
proxy must be a member unless articles permit to appoint a non-member as proxy.
The instrument for appointment of proxy has been provided in Regulation 43 of table A in the first
schedule to the Companies Act 2017. If the instrument is valid as per that regulation, company
shall not reject or question its validity for non-compliance of any additional terms or conditions
attached to such instruments by the company itself and shall accept the instrument as proper.
In order to be effective, proxies shall be lodged with the company at least 48 hours before the
meeting.

Note:
In case of companies not having share capital members are not entitled to appoint another
person as their proxy.
2.5 Minutes and Resolution [Section 146, 151, 152 and 178]
Minutes of proceedings of general meetings and meeting of directors
Every company is required to maintain records of copies of all resolutions of members passed
otherwise than at general meetings and a fair and accurate summary of all proceedings of
meetings of directors, member or committees of directors along with names of participants in
properly maintained books at it registered office. A copy of the minutes of meetings of the board
of directors shall be furnished to every director within fourteen days of the date of meeting.
Signatures of the chairman of meeting or of the chairman of next succeeding meeting shall be
sufficient evidence of the proceedings unless contrary is proved.
The books containing the minutes of proceedings of the general meetings shall be open to
inspection by members for at least two hours on each day without charge during the business
hours.
Members of the company can demand a certified copy of the minutes of general meeting, any
time after 7 days from meeting, which the company shall provide to them within seven working
days of receipt of his request.
The records must be kept at the registered office of the company from the date of the resolution,
meeting or decision in physical and electronic form and it shall be preserved for at least twenty
years in physical form and permanently in electronic form.
Resolution passed at adjourned meeting [Section 146]
Where a resolution is passed at an adjourned meeting it shall be treated as having been passed
on the date on which it was in fact passed. It shall not be deemed to have been passed on any
earlier date.
Passing of resolution by the members through circulation [Section 149]
Except for ordinary businesses of AGM, members of a private company or a public unlisted
company (having not more than 50 members), may pass a resolution (ordinary or special) by
circulation signed by all members for time being entitled to receive notice of a meeting.
Resolution shall be circulated, together with necessary papers, if any, to all the members. Such
resolution shall be noted at subsequent meeting of the members and made part of the minutes of
that meeting. Any such resolution shall be as valid and effectual as if it had been passed at a
duly convened general meeting
A members’ agreement to such a written resolution, once signified, may not be revoked.
2.6 Representation at meetings

Representation of certain corporations at meetings of companies and of creditors [Section 138]
If a company is a member of another company, it may authorise any of its officials or any other
person to act as its representative at any meeting of that other company and such representative
shall be entitled to exercise, on behalf of the company, the same powers, which an individual
shareholder of that other company possesses at the meeting.
Similarly if a company is the creditor of another company, it may authorize any of its officials or
any other person to act as its representative at any meeting of creditors of that other company
held in pursuance of the Companies Act, 2017 and such representative shall be entitled to
exercise all such powers as the company has as a creditor of that other company.

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Representation of federal government and provincial government at meetings of companies:

[Section 139]
Being a member of the company the Federal Government or Provincial Government may appoint
any person to act as its representative at:
any meeting of the company; or
any meeting of any class of members of the company.
Such person shall be deemed to be a member of such company and he shall be entitled to
exercise the same rights and powers, including the right to appoint proxy, which the Federal
Government or the Provincial Government has as a member of the company.

3 CHAPTER REVIEW
Chapter review
Different types of meetings of the company
Rights and duties regarding calling and holding of meetings
Various provisions regarding notices, quorum and minutes of the meetings.

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CHAPTER
Business Law
25
Management
Contents
1 Appointment and election of Directors
2 Powers duties and limitations of directors
3 Other Officers
4 Chapter review

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INTRODUCTION
Learning outcomes

knowledge of the management of companies
LO 8.4.1 Explain and apply in given scenarios, the legal provision with respect to directors’:
x Eligibility/ineligibility
x Number
x First, subsequent and independent directors
x Term / tenure of office of directorsElections
x Removal/vacation of office
x Filling of casual vacancies
x Remuneration
x Powers, duties, rights and limitations
x Assignment of office and alternate directors
x Proceedings
x Code of Corporate Governance
x Passing of resolution
LO 8.4.2 State the legal provisions relating to loans to directors
LO 8.5.1 Explain the appointment of first chief executive and subsequent chief executives using simple
examples
LO 8.5.2 State the provisions/conditions applicable on appointment, removal, engagement in any
business
LO 8.5.3 State the provisions relating to appointment of a chairman/ share registrar/ sole
purchase/sales agents/ secretary
LO 9.3.1 Explain the requirements of disclosure of interest by director in contract/arrangement entered
into by or on behalf of the company
LO 9.4.1 Explain the requirements of disclosure of interest by officers in contract/arrangement entered
into by or on behalf of the company
LO 9.5.1 Describe the provisions relating to participation of interested director in the proceedings of
directors in contract / arrangement entered into by or on behalf of the company

Section B: Company Law - Chapter 25: Management

otherwise stated:
Act Chapters

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1 APPOINTMENT AND ELECTION OF DIRECTORS
Section overview
Directors
Number and appointment of directors
Election of directors
Selection of independent directors
Eligibility to act as director
Vacation of office by directors
1.1 Directors
Introduction
A company is an artificial person, and cannot manage itself. Companies therefore have
individuals to give it leadership and direction. This is provided by the board of directors. Most of
the powers of a company are given to its directors by the Act and company’s articles of
association. Directors are collectively named as ‘board’ or ‘board of directors’ (we may use
abbreviations as ‘BOD’ for board of directors)
For the purpose of Act, a person is a director if he or she occupies the position of a director by
whatever name.
The word ‘director’ in a job title does not mean that a person is legally a director: for example, a
‘human resources director’ or an ‘IT director’ is not a director for the purpose of the Act unless,
for example, he or she is appointed or elected as director in accordance with the process
provided in the Act.
Directors must be member of the company except where law specifically allows the non-
members as directors. Sometimes in small companies the directors are the only members of the
company or in other words all the members of the company are directors. In such cases the
directors have a dual role, as a member and as a director. Being director, in the board of
directors meeting every director shall have one vote but the same persons while sitting in a
general meeting as members may have different voting rights based on the number of shares
they hold.
Directors act collectively or by majority, every decision to be taken by the directors is taken in a
board meeting of the directors in which every director has got one vote.
Directors in fiduciary relationship
Definition: Fiduciary
Fiduciary is defined as ethical or legal relationship of trust between two or more parties. Typically,
a fiduciary (being a person or entity) prudently takes care of money for another person.
A fiduciary relationship is generally established only when the confidence given by one person is
actually accepted by the other person. Directors and companies therefore establish a fiduciary
relationship.
Directors of the company may well be said as agents of the company whom members have given
the right to make financial decisions on their behalf. They are supposed to make decisions in the
best interest of the company and its stakeholders. They must be vigilant and should not be
negligent in performance of their duties.
The director is said to be lacking a fiduciary behaviour if he deliberately keeps the company and
members at a disadvantage. No director can hold office of a director if he is declared as lacking
fiduciary behaviour by the court.

Compliance with the Code of Corporate Governance [Section 156]

The Commission may provide for framework to ensure good corporate governance practices,
compliance and matters incidental and axillary for companies or class of companies in a manner
as may be specified.
Natural persons only to be directors [Section 154(2)]
Under the provisions of the Act only natural persons can be directors of the company. No
company can be a director of any other company. Further when appointed as a director, every
director is an equal director and there are no differences between their authorities, rights and
liabilities, so no director can claim to be a variable representative of the company. It means that
no director can claim relief from his responsibility as a director claiming that he is not concerned
with any particular area of the company’s business. When he is a director, he is a director in
entirety.
Nominee directors [Sections 164 and 165]
In additions to the directors elected and appointed in the general meeting, the creditors may also
nominate directors on the board of the company if they are empowered to do so by virtue of any
agreement in this regard. Remember that the directors nominated by the creditors are in addition
to the minimum number of directors fixed by the Act.
The Federal Government, Provincial Government and any company, if hold shares in any other
company, can nominate any person to represent them as a director on the board of directors of
the company. Such person shall be considered to be an elected director termed as ‘deemed to
have been elected director’ and shall be considered for the calculation of minimum number of
directors required for any company.
Assignment of office and alternate directors [Sections 174]
A director of any company shall not assign his office to any other person and any such
appointment shall be void ab-initio.
However the appointment by a director, with the approval of the board, of an alternate or
substitute director to act for him during his absence from Pakistan of not less than ninety days,
shall not be deemed to be an assignment of office. Such director shall vacate office if and when
the director appointing him returns to Pakistan.
Consent to act as director [Section 167]
No person shall be elected or appointed as a director or a chief executive if such person has not
filed his consent in writing for becoming the director or chief executive. The company shall file
such consent to the registrar within fifteen days of the date of appointment or election of the
director or chief executive as the case may be.
1.2 Number and appointment of directors

Minimum number of directors [Section 154]
Act has provided for the minimum number of directors of each company, it is equal to the
required minimum number of members for that company.
As per the act, every
single member company shall have at least one director
other private company shall have at least two directors
public company other than a listed company shall have at least three directors
listed company shall have at least seven directors
Number of directorships [Section 155]
No person shall hold office as a director, including as an alternate director at the same time in
more than such number of companies as may be specified; however this limit shall not include
the directorships in a listed subsidiary.

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Any casual vacancy on the board of a listed company shall be filled up by the directors at the
earliest but not later than ninety days from the date, the vacancy occurred.
First directors [Section 157]
The names and number of first directors shall be decided by the subscribers of memorandum
and their particulars shall be submitted along with the documents for incorporation.
Number of 1st directors may be increased by appointing additional directors in general meeting.
Illustration: directors
The company can be a subscriber of memorandum to any other company however any company
cannot be a director of any other company.
The first directors shall retire at the date of first annual general meeting and in such a meeting an
election of directors shall be conducted to elect and appoint subsequent directors.
1.3 Election of directors [Section 159]

Elections procedure
In the first annual general meeting, all the first directors shall retire and election of directors shall
be held to appoint new directors. The directors so appointed shall hold office of the directors for
next three year, however, a company limited by guarantee may through its articles may reduce
the period, after which they retire and elections are held afresh.
Whenever an election of directors is required the following procedure for is as followed:
Existing directors decide the number of directors for the next term at least thirty five days
before the date of meeting. Such number once fixed cannot be changed by the directors
themselves without the approval of members in a general meeting.
A general meeting of the members of the company is called for the elections and the
notice of general meeting, in addition to its routine contents, includes the number of
directors to be elected and the names of the retiring directors as its extra contents.
Every members interested in contesting the election of directors sends the notice of his
interest to the company at least fourteen (14) days before the date of meeting. However
any such member may withdraw such notice at any time before the election, if he so
desires. Company sends such notices (of interest to contest the election of directors) to all
the members in the same manner as a notice of general meeting is given to the
shareholders and in case of a listed company it is published in one issue of a daily
newspaper in English Language and a daily newspaper in Urdu language in the respective
language having wide circulation.
If the number of persons offering themselves to be elected as director is not more than the
number of directors fixed for election by the directors, the directors shall stand elected
unopposed.
Illustration: Unopposed directors

For example directors had planned for eight directors in the next term and only eight persons have
sent notices of interest to contest the election of directors, all applicants shall stand elected
unopposed. If more than eight persons send notice of interest to become a director, poll shall be
taken for election.
During a poll for election of directors every member is entitled to cast the number of votes equal
to the product of number of shares held and the number of directors to be elected, a member can
give all his votes to any one contestants or he may distribute it to more than one contestant as he
deems appropriate.

Illustration: Number of votes

If Mr A has got 10,000 shares of Rs.10 each and he is entitled to caste vote for the purpose of
election of directors. Company has to elect 8 directors for the term. Mr A shall have 80,000 votes
to cast. He may cast all the votes in favour of any one person or may so distribute as he may
better like.
The person getting the highest number of votes shall be considered as a director then the second
and then third until the number of directors fixed for election is reached.
In case of a company not having share capital, the procedure for election of directors shall be
mentioned in its articles of association.
After election as a director, every director shall have equal authority and they shall not be
superior or inferior on the basis of number of votes they got in election or on any other grounds.
Fresh election of directors on request of substantial acquirer [Section 162]
As discussed earlier, the directors elected in a general meeting are entitled to hold the office of
the directors for three years. However, there may be a case when the elections of directors are
held on such time before the expiry of the three years period.
Where a person acquires the requisite shareholding to get him elected as a director on the board
of a company, he may require the company to hold fresh election of directors in accordance with
the procedure laid down in this act. However the number of directors fixed in the preceding
election shall not be decreased .
The board shall, upon receipt of such requisition, as soon as practicable but not later than thirty
days, proceed to hold fresh election of directors of the company.
A listed company for the purpose of fresh election of directors under this section shall follow such
procedure as may be specified by the Commission
Declaring election of directors invalid [Section 160 and 168]
The court has got the authority to declare the directors’ election invalid on certain grounds.
Members holding at least ten percent of the voting power in the company may make an appeal in
the court to declare the election of all directors or any one or more of them invalid.
Such appeal may be made within thirty days from the date of election and the court shall declare
the elections invalid if it is satisfied that there has been material irregularity in the holding of the
elections and incidental or relating matters.
Actions of directors taken within their scope of being a director are considered as valid whatever
invalidity may be subsequently discovered in their election or appointment or he was disqualified
from holding office or he had ceased to hold such office.
1.4 Selection of independent directors [Section 166]

Independent director is a director who is not connected or does not have any other relationship,
whether pecuniary or other, with company, associates, subsidiaries, holding or directors; and he
can be reasonably perceived as being able to exercise independent business judgment without
being subservient to any conflict of interest
No director shall be considered independent if one or more of following circumstances exist:
Has been employee of company, its subsidiaries or holding company within last 3 years;
Is or has been Chief Excutive of subsidiaries, associated undertaking or holding company
in last 3 years
Has, or has had within last 3 years, a material business relationship with company either
directly, or indirectly as a partner, major shareholder (10% voting power individually or in
concert with his family or as part of group) or director of a body having such relationship.
Has received remuneration in 3 years preceding his/her appointment as a director or
receives additional remuneration, excluding retirement benefits from company apart from a
director’s fee or has participated in stock option or a performance-related pay scheme;

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Is a close relative (spouse, lineal ascendants and descendants and the siblings) of the
company’s promoters, directors or major shareholders:
Holds cross-directorships or has significant links with other directors through involvement
in other companies or bodies not being associations licenced u/s 42;
Has served on board for more than 3 consecutive terms from date of his first appointment,
and for more than 2 consecutive terms in case of a public sector company. However such
person shall be deemed “independent director” after a lapse of one term
Person nominated as a director or representing special interest (u/s 164 & 165)
Note: For public sector companies, time period shall be taken as 2 years instead 3 years in first 3
conditions. An independent director in case of a public sector company shall not be in service of
Pakistan or any statutory body or any body or institution owned/controlled by Government.
Independent director of a listed company shall be elected in the same manner as other directors
are elected (u/s 159) and the statement of material facts annexed to the notice shall indicate the
justification for choosing the appointee for appointment as independent director.
Maintenance of a databank of independent directors

An independent director to be appointed under any law, rules, regulations or code, shall be
selected from a data bank containing names, addresses and qualifications of persons who are
eligible and willing to act as independent directors
It shall be maintained by any institute, body or association, as notified by SECP, having expertise
in so; and post on their website for use by the company making appointment
The manner and procedure of selection of independent directors on the databank who fulfill the
qualifications and other requirements shall be specified by the Commission.
Note: Requirements of maintaining databank shall be deemed relaxed till such time a notification
is issued by the Commission and may be relaxed by Commission on an application made by
company supported with the sufficient justification or the practical difficulty, as the case may be.
1.5 Eligibility to act as director [Sections 153 and 177]

Eligibility to act as director
The Act has not specifically provided for any eligibility of any person to act as a director of the
company, however, the company may by its articles fix any conditions to become the director of
the company. These may include a specific number of shares as a minimum to become a
director or may be of specific educational requirements. The banking companies and insurance
companies as well as non-banking finance companies can appoint a person as director only if he
has got certain qualifications and experience. The Act only describes certain in-eligibilities, i-e the
persons who cannot become directors of the company are as follows.
No person shall be appointed as a director of a company if he:
is a minor;
is of unsound mind;
has applied to be adjudicated as an insolvent and his application is pending;
is an un-discharged insolvent;
has been convicted by a court of law for an offense involving immorality
has been debarred from holding such office under any provision of this Act;
has betrayed lack of fiduciary behavior and a declaration to this effect has been made by
the Court at any time during the preceding five years;
does not hold the national tax number as per the Income Tax Ordinance, 2001

Illustration: Lacking fiduciary behaviour

Court can declare a person lacking fiduciary behaviour if he fails to comply with certain provisions
relating to the disclosure of his personal interest in company’s transactions or contracts. We will
discuss it later in this chapter.
is not a member however this ineligibility shall not apply in the case of
x a person representing a member who is not a natural person;
x a whole-time director who is an employee of the company;
Illustration: Whole time director

This is commonly termed as an executive director. They are senior employees of the company who
are authorised to act as directors and involve in the board of directors’ decision making.
a chief executive; or
a person representing a creditor or other special interests through contractual
arrangement.
Further for listed companies a person shall not be appointed as a director if he:
has been declared by a Court as defaulter in repayment of loan to a financial institution,
is engaged in the business of brokerage, or is a spouse of such person or is a sponsor,
director or officer of a corporate brokerage house
Illustration: Broker
Broker under Securities Act, 2015 means any person engaged in the business of effecting
transactions in securities for the account of others or self.
1.6 Vacation of office by directors

Casual vacancy [Section 161, 155(3)]
Directors are appointed for a term of three years, however they may earlier resign from the office
and casual vacancy shall be filled by the remaining directors. There is no time limit specified in
the Act for the filling of casual vacancy. The company should not work with less than required
minimum number of directors at any time, however if the number of members of the company is
equal or above the minimum number of members required for that company, such directors may
not fill in the casual vacancy and complete the term without filling such vacancy.
However, any casual vacancy on the board of a listed company shall be filled up by the directors
at the earliest but not later than ninety days from the date, the vacancy occurred.
The director appointed under a casual vacancy shall be appointed for the remainder of the term
of the directors and shall vacate the office when the term of routine directors end.
Removal from office [Section 163]
Director may be removed from the office by the members of the company by passing a resolution
in their meeting. No director has power to remove any other director from office.
For removal of an elected director, a resolution shall be passed in the general meeting and
number of votes shall be calculated in the same manner as are calculated at the time of election
of directors, implying thereby that every member has such number of votes which are equal to
the product of his number of shares and number of directors for the term. The director shall not
be considered to have been removed if the number of votes casted against the resolution equals
or exceeds the least number of votes which were enough to qualify a person as a director in the
last election of directors.
Similarly removal of a director appointed as first director or under the casual vacancy or director
elected unopposed shall not be removed from the office if number of votes cast against the
resolution equals or exceeds the number of votes calculated as per following formula:

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Number of director for the term multiplied by the number of shares divided by number of directors
for the time being
Example: Removal of director

Mr. Aslam was elected as a director in ABC Limited one year ago; company has 2.0 million shares
and seven directors. He was the last one to become a director by securing 1.5 million votes. A
resolution has been moved in the general meeting to remove Mr. Aslam from his position.
He can be removed from the office by passing a resolution, in order that he is not removed from
his office, he will have to secure at least 1.5 million shares against the resolution, which is the
least number of shares sufficient to make a person director in the last election of directors.
Other things remaining the same now suppose that Mr. Aslam is a director appointed in casual
vacancy, how much votes would he require against the resolution to save his seat?
Answer: Number of director for the term multiplied by the number of shares divided by number
of directors for the time being
Which comes as follows 7*2,000,000/7=2,000,000 votes.
Vacation by contravention of provisions of the Act [Section 171]

A director shall be treated to have vacated the office of director if he becomes subject to any of
the ineligibilities as discussed above or he absents himself from three consecutive meetings of
the board without seeking leave of absence.
Further a director shall be treated to have vacated the office of director if he, his partnership firm
in which he is a partner or any private company in which he is a director,
accepts any loan or guarantee in contravention of the provisions of this Act; or
Accepts any office of profit without sanction of the company in a general meeting. However
office of chief executive, legal advisor and technical advisor are not covered by the above
prohibition.
In addition to the above, the company may also add in its articles any other clauses to get the
office of director vacated.

2 POWERS, DUTIES AND LIMITATIONS OF DIRECTORS
Section overview
Powers of directors
Duties of directors
Loans to directors
Quorum and frequency of meeting
Limitations of directors
Disclosure of directors’ interests
2.1 Powers of directors

Powers of directors [Section 183]
Directors are overall managers of the company's business they are empowered to take a lot of
decisions in the interest of the company. They are empowered to pay all the costs incurred in
promotion and registration of the company and can exercise all the powers regarding company
which have not been vested with the members.
Certain powers have been vested in members by the Act like approval of issuance of shares at a
discount or alteration in the articles of association. Company can vest certain other powers in
members through articles or special resolution.
Directors shall exercise the following powers by ‘passing a resolution’ in board meeting:
To issue shares, debentures or other redeemable capital or to otherwise borrow money or
invest the funds of the company
To make loans; provided in case of banking companies, the acceptance of deposits
and other amounts from account holders and placements of own funds in other banking
companies shall not be considered as incurring or making of a loan.
To approve annual and periodical accounts and to approve bonus for employees
To incur capital expenditure exceeding or undertake leasing obligations exceeding Rupees
one million or to sell/dispose of assets having book value exceeding Rupees one hundred
thousand.
To undertake leasing obligation exceeding one million rupees.
To take over a company or acquire a controlling or substantial stake in another
To declare interim dividend
To authorize any of the following for entering into transactions with the company
Director of the company
Partnership firm in which director of the company is a partner.
Private Company in which director of the company is a director.
If the amount is material as per generally accepted accounting principles.
To write off bad debts
To write of inventories and other assets
To determine the terms and circumstances on which a law suit may be compromised
or a claim in favor of company be vanished or reduced.
Any other specified matter

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Directors of a public company can exercise the following powers by resolution in their meeting
only if they are authorized in this regard by the company in a general meeting:
Sell, lease or otherwise dispose of the undertaking or any sizable part (i.e. 25% or
more of the value of the assets in that class as per audited financial statements of
preceding financial year) unless it is the company's business.
Sell or otherwise dispose of the subsidiary of the company
Remit, give relief or extension of time for loans or advances provided under the provisions
of the Act.
The authorization for exercise of such powers may be either specific for transaction to transaction
basis or it may take form of a general authorization by the members of the company. Any such
resolution, if not implemented within 1 year from date of passing, shall stand lapsed.
Furthermore a listed company is not entitled to sell or otherwise dispose of the undertaking,
which results in or may lead to closure of business operation or winding up of the company,
without there being a viable alternate business plan duly authenticated by the board
2.2 Duties of directors [Section 204]

Act in accordance with the articles of the company.
Act in good faith in order to promote the objects of the company for the benefit of its
members as a whole, and in the best interests of the company, its employees the
shareholders the community and for the protection of environment.
Discharge his duties with due and reasonable care, skill and diligence and shall exercise
independent judgment.
Shall not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
Shall not achieve or attempt to achieve any undue gain or advantage either to himself or to
his relatives, partners, or associates and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal to that gain to the company.
Shall not assign his office and any assignment so made shall be void.
The Commission may provide for the extent of duties and the role of directors as may be
specified.
Any breach of duty, default or negligence by a director in contravention of articles or any of its
policy or decision of the board may be ratified by the company through a special resolution and
the Commission may impose any restriction as may be specified.
2.3 Loans to directors [Section 182]

Prohibition of granting loans, providing guarantees or securities etc.
Directors of the company being in the management capacity of the company may at times wish
to use some of the company’s funds or other facilities that they can otherwise obtain by virtue of
the office of directorship. They may expect loans from the company or may otherwise require
some guarantee or security for the amounts borrowed by them for personal purpose. However,
the company is not allowed, without approval by members through resolution, additionally
approval of SECP is also required in case of a listed company, to provide any of these financial
facilities to:
a director of the company, a director of the holding company or any of their
relatives(spouse and minor children);
Provide guarantee or security in connection with a loan made by any person to such a
director; or to any of his relatives;
Exceptions
The above restrictions do not apply to a company which in the ordinary course of its business
provides loans or gives guarantees or securities for the due repayment of any loan.

2.4 Quorum and frequency of meeting [Section 176]

The quorum for a meeting of directors of a listed company will not be less than one-third of their
number or four, whichever is greater and the participation of the directors by video conferencing
or by other audio visual means shall also be counted for the purposes of quorum
Quorum for other than listed company shall be as provided in the articles.
Provided if there are not enough directors to form a quorum to fill a casual vacancy, all the
remaining directors shall be deemed to constitute a quorum for this limited purpose.
The directors of a public company are required to meet at least once in each quarter of a year.
Passing of resolution by the directors through circulation (Sec 179)
A resolution in writing signed by all the directors/committee of directors for the time being entitled
to receive notice of a meeting shall be as valid and effectual as if it had been passed at a
meeting of directors/committee duly convened and held.
Before passing it, the resolution should be circulated with necessary papers to all directors. Such
resolution shall be noted at a subsequent meeting of board/committee and made part of the
minutes of such meeting.
Directors’ agreement to a written resolution, passed by circulation, once signified, may not be
revoked.
2.5 Limitations of directors

Prohibition regarding making of political contributions and distribution of gifts [Section 184 and
185]
A company is not allowed to contribute any amount—
to any political party; or
for any political purpose to any individual or body.
A company is also not allowed to distribute gifts in any form to its members in its meeting.
Restriction on director's remuneration, etc.- [Section 170]
The remuneration of a director for performing extra services, including the holding of the office of
chairman, is determined by the directors or the company in general meeting in accordance with
the provisions in the company's articles.
The remuneration to be paid to any director for attending the meetings of the directors or a
committee of directors shall not exceed the scale approved by the company or the directors, as
the case may be, in accordance with the provisions of the articles.
Restriction on non-cash transactions involving directors [Sec 211]
Unless prior approval is accorded by a resolution of general meeting of company or its holding
company, no company shall enter into an arrangement by which
A director of company/holding/subsidiary/associated or a person connected with him
acquires or is to acquire assets for consideration other than cash, from the company; or
Company acquires or is to acquire assets for consideration other than cash, from such
director or person so connected;
Notice for approval of resolution shall include the particulars of arrangement along with the value
of the assets involved in such arrangement duly calculated by a registered valuer.
Restriction on cash transactions involving directors [Sec 211]
The company shall ensure that all cash transactions with its directors are conducted only through
banking channels.

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2.6 Disclosure of directors’ interests [Section 205]

Why to disclose interest or concern
As discussed earlier, the directors are agents of the member of the company and they are in a
fiduciary relationship with all the members of the company. So they are required to make all
contracts and all transaction in good faith and in the best interest of the company. Hence if they
make any transaction or enter into any contract on behalf of the company in which they are
themselves interested by any means, they should give a complete disclosure of the fact so that
their integrity is not questioned. There must not be any conflict of interest between the company
and the directors.
Example: Interest of director

For example, company has to purchase a specific property and that property relates to the
spouse of a director, he shall be required to make a disclosure of his interest to other directors.
As a director of the company he shall be working for the company and should try to bargain at
lowest possible price, but on the other hand his spouse is owner of the property, he should also
be naturally interested that his spouse to get highest possible price for that property. You see
conflict of interest arises, so whenever there is such a situation, a complete disclosure from the
director must be given to the other directors and then after disclosing interested director should
not be part of the directors meetings in which such contract or transaction is to be discussed.
Further, if directors are forbidden to make transactions with the company by provisions of any
other law, those provisions shall prevail.
Timing of disclosure
The director should give the notice of his interest in any transaction or arrangement of the
company in which he is directly or indirectly interested and such notice shall be given
if the transaction or arrangement requires the directors' approval before start-up of the
contract or transaction as the case may be then in the first meeting of directors in which
discussion is started regarding the transaction or arrangement and in case the directors
was not interested at the time of first discussion regarding the matter, such disclosure shall
be given at the first meeting after he becomes so interested.
in case where the transaction or arrangement does not require directors' approval before
its start up or commencement then the director concerned shall give the notice of his
interest in first meeting held after the transaction or arrangement is entered into.
General notice of ownerships and directorships
Instead making a disclosure at separate intervals on each transaction, the director may give a
general notice regarding his directorships in other body corporate or partnership in firms so that
he may be considered as interested in any transaction, contract or arrangement entered into with
these businesses.
Such notice should be given at the directors' meeting or the concerned director may take
reasonable steps to ensure that the notice is read by other directors.
This general notice shall expire at the end of the financial year in which it is given and may be
replaced by fresh notice to be given in last month of financial year.
Interested director not to vote [Section 207]
Interested director shall not participate in the discussion for the matter in which he is interested.
He shall not be counted for the purpose of quorum for that part of the meeting of the board and
further he shall not be allowed to vote on such matter. If the director votes for such transaction or
arrangement in which he is interested, his vote shall be void.
However, in the following circumstances the provisions of this section shall not apply:
when the company is a private company and it is neither a subsidiary nor a holding
company of any public company.
when the director has acted as surety of the company and the resolution under
consideration relates to the indemnification or insurance coverage of the surety director
against any loss incurred by the director for becoming surety of the company.

Provided that the company shall only insure the liability of interested director where such liability
arises out of a transaction validly approved by the board or the members of the company.
In case of a listed company the interested director shall not be present at the board meeting in
which the matter, in which he has material personal interest, is being considered.
Interest of other officers, etc. [Section 206]
An officer of a company who is in any way, directly or indirectly, concerned or interested in any
proposed contract or arrangement with the company is required to:
x disclose the nature and extent of his interest in the transaction; and
x obtain the prior approval of the directors.

Business Law
3 OTHER OFFICERS
Section overview
Chief executive
Chairman
Sole purchase, sale or distribution agent
Company secretary
Share registrar
3.1 Chief executive

Definition
Definition: Chief Executive [Section 2(14)]

"Chief executive", in relation to a company means an individual who subject to the control and
directions of the directors, is entrusted with the whole, or substantially the whole, of the powers of
management of the affairs of the company, and includes a director or any other person occupying
the position of a chief executive, by whatever name called, and whether under a contract of service
or otherwise;
He is subject to control and directions of the directors, means that he is an agent of the directors
and is vested with the powers granted by the directors.
Role and responsibility
The Act has not fixed any specific role and responsibility of a chief executive. It simply states that
a chief executive shall be a person who is vested with whole or substantially the whole powers of
the management of the affairs of the company. He is often empowered by directors to do various
acts on behalf of the company. He enjoys implied powers as a business manager of any
company. However, he cannot exceed his authority which has been granted by board of
directors.
Although being part of the board of directors, he reports to the board. Any person can be
appointed as a chief executive. If the company wants to fix some qualifications for appointment of
a chief executive, it may do so by means of provision in the articles of association.
Usually, companies appoint one of the elected directors as chief executive of the company.
However, any person other than such director may also be appointed as a chief executive and in
such a case the person so appointed, if not already a directors, shall be deemed to be a director
in addition to his being a chief executive of the company.
Restriction on appointment of chief executive
A person who is ineligible to become a director of a company under section 153 cannot be
appointed or continue as the chief executive of any company.
First chief executive [Section 186]
Name of first chief executive shall be determined by subscribers of MOA. His specified
particulars shall be submitted along with the documents of incorporation.
First chief executive can be appointed for a period of maximum up to the first AGM. He may
earlier resign or be removed from his office. We shall discuss the procedure for removal in
forthcoming paragraphs.
Federal Government shall have the power to nominate and appoint chief executive of a company
where majority of directors are nominated by the Federal Government,

Subsequent chief executive [Section 187]

First chief executive shall retire on the date of first AGM. Subsequent chief executive shall be
appointed within 14 days of the election of the directors themselves or office of the chief
executive falling vacant as the case may be.
Subsequent chief executive shall be appointed for a maximum period of three years. However he
may be earlier removed from office or he may otherwise cease to hold office. Retiring chief
executive can be re-appointed. the chief executive appointed against a casual vacancy shall hold
office till the directors elected in the next election appoint a chief executive.
Retiring chief executive shall continue to perform his services until his successor is appointed but
in the following circumstances he shall not so hold the office:
His office was expressly terminated
He is the cause of non-appointment of new chief executive.
Articles of the company state the authority for determination of terms and conditions of chief
executive.
As discussed above, by virtue of his being chief executive, he shall be considered as a director of
the company and shall enjoy and be liable to all the rights and liabilities attached to the office of
the director.
Terms of appointment of chief executive and filling up of casual vacancy [Section 188]
The terms and conditions of appointment of a chief executive are determined by the directors or
the company in general meeting in accordance with the provisions in the articles.
The terms and conditions of appointment of a chief executive nominated by the Federal
Government shall be determined by the Federal Government
Removal of chief executive [Section 190]
Chief executive can be removed through any of the following modes at any point in time
regardless of any provisions in the articles of association or in his appointment to the contrary:
by passing a special resolution in general meeting of the company; or
by passing a resolution in the board of directors supported by at least three-fourth of the
number of directors.
By Government/authority/person nominated authorised by it, where more than 75% of the
voting rights are held by the Government.
Illustration: Removal of chief executive

Board of directors of ABC Limited consists of 12 directors. The chief executive of ABC Limited was
appointed for a term of three years. It was specifically mentioned in his contract that he shall not
be terminated before the expiry of term of his office. The directors are not satisfied with the
performance of the chief executive and want to remove him. Can they remove the chief executive
in presence of such clauses in the contract which do not allow his early termination? The answer is
yes. Directors may pass a resolution for his removal, if the resolution is voted in favour by at least
9 directors (three-fourth of total number of directors). They may decide to pass a special resolution
for his removal by calling an extraordinary general meeting of the members of the company.
Chief executive and competing business [Section 191]

In case of a public company a chief executive, his spouse and minor children are prohibited to
engage in a business which competes with the business of the company in which he is a chief
executive or with the business of any of its subsidiary company.
Illustration: Competing business

Business is considered to be a competing business if it is of same nature and is in the same
markets, this has nothing to do with the volume of the business. The test is basically of the
fairness of the person with the objects of the company.

Business Law
Chief executive is required to furnish to the company the detail of every such business carried on
by him and his interest in it forthwith at the time of his appointment.
3.2 Chairman [Section 192, 193]
Board of a listed company shall within 14 days from date of election of directors, appoint a
chairman from among the non-executive directors. The chairman shall be responsible for
leadership of board and ensure that the board plays an effective role in fulfilling its
responsibilities.
Annual financial statements shall contain a review report by the chairman on the overall
performance of board and effectiveness of role played by board in achieving the objectives.
Chairman shall hold office for 3 years unless he earlier resigns, becomes ineligible or disqualified
under any provision of this Act or removed by the directors.
Board shall clearly define the respective roles and responsibilities of chairman and Chief
Executive. The Commission may specify the classes of companies for which the chairman and
chief executive shall not be the same individual.
3.3 Sole purchase, sale or distribution agent
No company (incorporated in Pakistan or outside) which is carrying on business in Pakistan shall,
without the approval of Commission, appoint any sole purchase, sale or distribution agent:
Exception to this rule
Company incorporated, or person ordinarily residing, outside Pakistan are not required to obtain
the approval of Commission for such appointment. (unless the major portion of business of such
company or person is conducted in Pakistan)
3.4 Company Secretary [Section 194]
The Act requires the appointment of a qualified company secretary for public companies. He
shall be an employee of the company and his responsibilities include making sure that company
complies with all relevant corporate requirements.
3.5 Share registrar [Section 195]
Listed companies are further required to appoint independent share registrar to handle the
transfer of shares and all other obligations of the company as an issuer towards shareholder. In
case of listed companies all applications for transfer of shares are directed to the share registrar
instead of company. The name of share registrar of the company is mentioned in the notice of
general meetings as well.

4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now:

Understand the role, powers and responsibilities of directors
Understand the procedure for appointment, election of various directors, their term of office and
their casual vacancies
Understand the requirements of disclosure from directors regarding their personal interest in
the contracts or transactions of the company.
Understand the role, appointment and other provisions regarding chief executive of the
company.
Understand the provisions of the act about chairman, company secretary and the independent
share registrar.

Business Law

CHAPTER
Business Law
26
Investments and dividends
Contents
1 Investments of company
2 Dividends
3 Payment of dividends
4 Unclaimed shares, modaraba certificates and dividend
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes

familiarity with investment by companies, financial accounts and distribution of profit
LO 9.1.1 Describe the conditions applicable to a company for making investment in associated
companies and undertakings
LO 9.2.1 Discuss with simple examples as to how a company can hold its investment in names other
than its own name
LO 9.7.1 Explain the requirement relating to declaration of dividend and identify/explain certain
restrictions on declaration of dividend
LO 9.7.2 Describe the provisions applicable to payment of dividend
LO 9.7.3: Describe the provision applicable to unclaimed share and dividend to vest with the Federal
Government

otherwise stated:
Act Chapters

Section B: Company Law - Chapter 26: Investments and dividends
1 INVESTMENTS OF COMPANY
Section overview
Investment in associated company

Investments of company to be held in its own name
1.1 Investment in associated company [Section 199]

Associated company/undertaking
Definition: Associated company/Associated undertaking [Section 2(4)]

Associated companies and Associated undertakings mean any two or more companies or
undertakings, or a company and an undertaking, interconnected with each other in the following
manner, namely:
if a person who is the owner or a partner or director of a company or undertaking, or who,
directly or indirectly (through his spouse or minor children), holds orcontrols shares carrying
not less than twenty per cent of thevoting power in such company or undertaking, is also the
owneror partner or director of another company or undertaking, ordirectly or indirectly, holds or
controls shares carrying not lessthan twenty per cent of the voting power in that company
orundertaking; or
if the companies or undertakings are under commonmanagement or control or one is the
subsidiary of another; or
if the undertaking is a modaraba managed by the company; (Modarba is an Islamic financing
activity, a set up created in order to ensure interest free financing. Modarba Management
Company is established as a public company which is licensed to float Modarbas which are
separate legal entities)
However following directorships or shareholdings shall not be considered while ascertaining the
status of companies to be associated.
directorship of a person by virtue of nomination bythe Concerned Minister of the Federal
Government or a Provincial Government or a financial institution directly or indirectly owned or
controlledby such Government; or
directorship of a person appointed as “Independent Director”
shares owned by the National Investment Trust or theInvestment Corporation of Pakistan or a
financial institutiondirectly or indirectly owned or controlled by the FederalGovernment or a
Provincial Government; or
shares registered in the name of a central depository
Illustration: Associated companies and associated undertakings

Suppose Mr. A is a director in ABC Limited, a public company limited by shares, If he is also a
director in DEF Limited then both ABC Limited & DEF Limited shall be considered as associated
companies of each other due to presence of a common director (Mr. A) among both the
companies.
Further suppose that the same Mr. A is also a partner in a partnership firm named GHI Enterprises,
then all the above named three businesses (‘the undertakings’) shall be considered as associated
undertakings of each other. The point to note here is that they are known as associated
undertakings rather than associated companies because all the three business involved in the
relationship are not companies under the Companies Act 2017.
Further suppose Mr. A is also owner of more than 20% shares of JKL (Private) Limited. Common
presence of Mr A in all the businesses shall make the undertakings as associated undertakings

Business Law
Power to make investments

Under the provisions of the Companies Act 2017, the power to make investments in a company
rests with directors of the company who can make an investment or disinvestment decision,
usually in a meeting through a resolution. This investment may be made in securities (shares or
debentures) of other companies or otherwise may be a joint venture with some other persons.
However, investment in associated company cannot be made by the directors themselves. They
will have to get its approval from members in a general meeting through a special resolution.
Condition for investment
As discussed above company can make investment in any of its associated companies or
associated undertakings only under the authority of a special resolution. The special resolution
shall indicate the nature, period and amount of investment and terms and conditions attached to
the investment.
The company shall not make an increase in amount or any variation in the nature and terms and
conditions of investment without passing a special resolution in the general meeting.
Definition: Investment
For the purpose of this section, the expression ‘investment’ shall include loans, advances, equity,
guarantees by whatever name called, or any amount, which is not in the nature of normal trade
credit.
If the investment has been made in the form of a loan, then it should be done through a written
agreement specifying the terms and conditions and the return on investment in the form of loan
shall not be less than the borrowing cost of investing company or the rate as may be specified by
Commission. If the investing company itself can borrow at an interest rate of 10% per annum, it
shall not grant loan at lower than this rate to any of its associated companies and the directors of
the investing company shall certify that the investment is made after due diligence and that the
borrower has the ability to repay the loan.
The Commission has specified certain classes of companies including private companies on
which requirements of passing a special resolution etc. are not applicable. It further has made
regulations for imposing conditions on making investments by companies in associated
companies.
1.2 Investments of company to be held in its own name [Section 200]

Investments always to be kept in the name of the company
Being a separate legal person, a company can make investments in any other company or
security in its own name. Companies Act 2017 requires that all the investments of the company
must be made and held in the name of the company itself and not in the name of any other
person. However there are a few exceptions to this rule.
Exceptions
Following are exception to this general rule of keeping the investments of company in its own
name:
If a company has made equity investments in any other company. Due to this investment,
it enjoys the right to nominate any person as director of the investee company. The
investor company is allowed to hold such number of shares in the name of that nominee
who shall be appointed as a directors of investee company and would require certain
qualification shares of investee company.
A holding company may hold any shares in its subsidiary company in the name of its
nominees if the number of members of the subsidiary company has reduced below
required minimum number of members required for that company.
Company may also place its investment in securities in the name of central depository
company if it so desires and the securities are allowed to be kept in central depository
system.

Illustration: deposit/transfer of securities into Central Depository

The shares can be transferred in the name of central depository company (CDC) and in such a
case the shares get registered in the name of central depository company as a trustee. However,
beneficial ownership remains in the name of actual owner of shares. So if company puts its
invested shares or securities in central depository it would not be in a state of non-compliance of
this section.
Register for investments of company not held in its own name

Company is required to keep a register for all of its investments not held in its own name. The
register so required shall contain the nature, value and such other particulars of the investment
as may be necessary fully to identify such shares or securities.
Inspection of register
This register is open to inspection of the members of the company free of cost for at least two
hours daily. Any other person may also inspect the register on payment of such fee as company
may specify. The company may impose certain restrictions on such inspection.Any member may
require a certified copy of register or any part, on fee fixed by company. Certified copies
requested shall be issued within 7 days.
If any inspection is refused, Registrar may on an application direct immediate inspection.

Business Law
2 DIVIDENDS
Section overview
Dividend meaning
Final and interim dividend and time restriction for its payment
Restriction on declaration of dividend
2.1 Dividend meaning

Concept
Dividends are payments made to shareholders by a company, out of its distributable profits.
Unless there are specific restrictions in the company’s memorandum and articles, every company
has an implied power to use its profits to pay dividends to its shareholders. [Section 241]
The dividends will be either in cash or in shares of listed company held by the distributing
company. The power to declare a dividend should be specified in the company’s articles of
association. The articles should provide for the company to declare a dividend in a general
meeting, by means of an ordinary resolution of the shareholders (requiring a majority vote), and
should specify the procedures for agreeing to a dividend payment.
Companies normally make one dividend payments each year, but sometimes number of dividend
payments can be more than one. For example, a listed company might pay an interim dividend in
the middle of its financial year, and then a final dividend after the end of the financial year.
2.2 Final and Interim Dividend & time restriction for its payment
Final dividend
The amount of final dividend is proposed by directors and approved by members in annual
general meeting of the company. The directors propose this amount along with the approval of
annual financial statements. The members may reduce, accept or reject the dividend as
proposed by the director. However, they cannot resolve to increase the amount as proposed by
directors.
Final dividend is paid within thirty days of the date of annual general meeting for all companies
Interim dividend
The directors of the company may propose and pay interim dividend before end of the year. This
dividend is usually announced with interim results (quarterly or half yearly accounts) of the
company in addition to the final dividend.
The interim dividend must be paid within 30 days of commencement of book closure for this
purpose or if share transfer books were not closed for this purpose such dividend shall be paid
within 30 days of date of directors meeting.
Illustration: Closure of share transfer books

Listed companies usually comprise of large number of member possessing shares. These shares
are readily saleable in the stock exchange and the company cannot be sure of who are its
members at any given date unless transfers of shares are suspended for some days by giving a
prior notice to the members. This procedure is commonly known as ‘Book Closure’. All of the
persons who possess the shares of the company as of the start of the book closure are considered
as members of the company and served notices of meetings and paid dividends etc. accordingly.

2.3 Restriction on declaration of dividend [Section 240]

Gain arising out of sale of immoveable properties and items of capital nature
For any financial year, dividend is not declared out of the profits from sale of immovable property
or item of capital nature; except after such profits are adjusted against losses on sale of
immovable properties or assets of capital nature sold by the company and only a company which
is in the business of buying and selling items of capital nature can pay dividend out of such profit.
Illustration: Sale of immovable properties

ABC Limited incorporated on July 1, 2015 to manufacture and trade soaps. By the end of the first
half of the year it accumulated operational loss of Rs. 4 million and made gain of Rs. 52 million on
sale of a plot of land meant for a manufacturing facility. The company have Rs. 48 million (Rs. 52-
4 million) available as undistributed profit, but in this financial year, i.e. by June 30, 2016, the
company cannot use it for distribution of dividend, as the company is not in the business of buying
and selling of plot of land.
Dividend from gain arising out of investment properties

Investment property can be recognised and carried in books of accounts on fair value basis as
per relevant International Financial Reporting Standard. Any gain arising out of re-measurement
of investment property directly credited to Income statement shall also be excluded for the
purpose of declaration of dividends.
Illustration: Investment property

Investment properties are the immovable properties of the company kept for gain in market value
of such property or for the purpose of rental to others. These are allowed to be recognised and
carried on fair value model by the international accountings standard.

Business Law
3 PAYMENT OF DIVIDENDS
Section overview
Payment of Dividend
Consequences of delay in payment
Withholding of Dividends
3.1 Payment of Dividend [Section 242]

Payment of Dividend
Dividends can be paid, at the order of the shareholder entitled to receive the dividend, through:
Cheque or warrant; or
Electronic mode
Dividend warrants are a type of a crossed cheque and can be credited into the bank account of
member of the company.
In case of a listed company, any dividend payable in cash shall only be paid through electronic
mode directly into the bank account designated by the entitled shareholders.
3.2 Consequences of delay in payment [Section 243]

Penalty for default
In case of default regarding period of payment, Chief executive of the company may be fined for
an amount up to Rs. five million along with imprisonment for a term which may extend to two
years. He shall further be ineligible to become a director or Chief Executive of any company for
next five years.
3.3 Withholding of dividends [Section 243]

Circumstances in which delay in payment of dividend shall not be an offense
In the following cases, the company may withhold dividend after obtaining prior approval of
Commission within 45 days of declaration of dividend:
If dividend cannot be paid due to operation of any law,
If the shareholder has given instructions regarding payment of dividend and such
instructions cannot be followed,
Where there is a dispute regarding the right to receive the dividend,
If company has withheld the payment of dividend against any sum recoverable from
shareholder,
If the non- payment of dividend or non -posting of the warrant was not due to any default
on part of the company,
A company may also withhold the payment of dividend of a member where the member has not
provided the complete information or documents as specified by the Commission.

4 UNCLAIMED SHARES, MODARABA CERTIFICATES AND DIVIDEND
Section overview
Unclaimed shares, modaraba certificates and dividend to vest with the Federal Government
4.1 Unclaimed shares, modaraba certificates and dividend to vest with the Federal
Government (Sec 244)
This section shall be applicable to following
Shares or modaraba certificates which have been issued, and remain unpaid for 3 years
from the date it is payable; or
Where dividend (or any bonus shares or certificates) has been declared by a company or
Modaraba, and remain unclaimed for 3 years from the date it is due;
Any other instrument or amount which remain unclaimed or unpaid, having such nature
and for such period as may be specified;
Notice to the shareholder / certificate holder

Company shall give a 90 days notices to shareholders, certificate holders or owner to file a
claim by a registered post acknowledgement due on his last known address
After expiry of 90 days, final notice in specified form shall be published in 2 daily
newspapers, one in Urdu and one in English, having wide circulation.
Transferring to the Federal Government

If no claim is made, company shall after 90 days from date of publication of 2nd notice:
x Deposit any unclaimed or unpaid amount to the credit of FG (in case of sum of
money)
x In case of shares, modaraba certificates or other instrument; Report and deliver
these to SECP and the SECP shall, after selling these in specified manner and
period, deposit the proceeds to the credit of FG
After transferring company shall preserve and continue to preserve all original record
pertaining to those and provide copies of relevant record to the SECP
(until it is informed by SECP in writing that they need not to be preserved any longer)
Such amounts shall be maintained in a profit bearing account with SBP or NBP to be
called “Companies Unclaimed Instruments and Dividend and Insurance Benefits and
Investors Education Account” as may be notified by concerned Minister of FG
It shall be deemed to be part of public accounts and interest/profit accumulated on it shall
be credited on quarterly basis to the “Investors Education and Awareness Fund” (u/s 245)
Procedure to Claim after the transfer

Any claimant may apply to SECP in such manner with such documents as may be
specified
SECP after necessary verification from company concerned, forward claim to SBP/NBF for
making payment (equivalent to his unclaimed or unpaid dividend or amount of proceeds)
Payment shall be made within a 30 days from date of verification by the company.
While making payment, expenses incurred for sale of those shares etc shall be deducted

Business Law
If the relevant shares/certificates have not been sold as on date of claim, the person shall
be entitled to receive those shares/modaraba certificates/ other instrument.
Where any dispute regarding those arises or is pending adjudication before the competent
authority or Court, SECP shall process claim in accordance with the final decision.
No claim shall be entertained after 10 years from the credit of any amount FG
Every company, within 30 days of close of each financial year, shall submit to SECP a
return of all unclaimed shares certificates, instruments or dividend in manner specified by
SECP.
Contravenes of this section shall attract a penalty of level 3
“Companies Unclaimed Instruments and Dividend and Insurance Benefits and Investors
Education Account” shall be available on direction of Minister to serve as a collateral in
order to facilitate the provision of credit facility to clearing house to address any systemic
risk in the capital market:
This option shall only be exercised where, in opinion of SECP, resources of clearing house
are or likely to be insufficient for timely settlement of trades executed at the exchanges.

5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
Associated companies and undertakings,
Procedure for and restrictions on investment in associated companies and undertakings,
Provisions about investment of companies to be held in its own name and exceptions thereof,
Types of dividends and restrictions on declaration of dividends,
Time limitation for payment of dividends and consequences in case of default.
Treatement of unclaimed shares, modaraba certificates and dividend

Business Law

CHAPTER
Business Law
27
Accounts and audit
Contents
1 Books of accounts
2 Directors’ report
3 Audit
4 Chapter review

Business Law
INTRODUCTION
Learning outcomes

knowledge of the appointment of auditors and their responsibilities and duties
LO 9.6.1 Describe the provisions relating to / list the books of accounts to be kept by the company
LO 9.6.2 Explain the requirements with respect to the annual accounts and the balance sheet
LO 9.6.3 Describe directors’ report / duty to prepare directors’ report and statement of compliance
LO 9.6.4 Describe the authentication of balance sheet and profit and loss account
LO 9.6.5 Discuss requirements of filing of balance sheets and profit and loss accounts with the
registrar
LO 10.1.1 Explain the provisions applicable to
x Appointment, removal and remuneration of auditors
x Qualification and disqualification of auditors
x Powers/duties of auditors and an auditor’s right to access the record and information
x An auditor’s duty to report and contents thereof
x Signature on an audit report

otherwise stated:
Act Chapters

Section B: Company Law - Chapter 27: Accounts and audit
1 BOOKS OF ACCOUNTS
Section overview
Books of accounts to be kept by a company

Annual accounts
Authentication of accounts
Filing of accounts
1.1 Books of accounts to be kept by a company [Section 220]

Books of accounts
The company being a business concern should always keep a full record of its financial and
operational activities so that all the stakeholders of the company are provided with appropriate
and adequate information as and when required by them. Every stakeholder needs to rely on the
records of the company, the government for revenue collection, the members for ascertaining
profit and loss and all other stakeholders for their own justified reasons.
The Act requires that a company must maintain proper books of accounts ie. such set of books of
accounts, which fairly present the state of the affairs of the company and a fair record of all its
transactions.
In order to achieve the above stated objective the books and records that are required to be kept
by the company may take the form of hardcopy books or any other accounting system which is
capable of achieving the above referred objective.
Definition: Books of Accounts [Section 2(11)]

Include records maintained in respect of
all sums of money received and expended by a company and matters in relation to which
the receipts and expenditure take place;
all sales and purchases of goods and services by the company;
all assets and liabilities of the company; and
items of cost in respect of production, processing, manufacturing or mining activities;
On the basis of these books of accounts, the company draws its financial statements which
indicate its profits or losses, its assets and liabilities and ownerships. These books must provide
for all this information fairly and correctly. Whether it is a computerized or manual system of
bookkeeping, we shall use the words books of accounts in rest of the chapter.
In the case of a company engaged in production, processing, manufacturing or mining activities,
relevant cost accounts shall also be maintained.
Books of accounts for a period of at least ten years must be preserved in good order under the
requirements of the Act. The liquidator of the company appointed for winding up of the company
is also required to maintain the above stated books of accounts for the company during its
winding up.
Keeping the books
Such books must be kept at the registered office of the company. However, the directors of the
company may opt to keep these books at some other place. For this purpose, the directors shall
be required to pass a resolution in their meeting and the intimation of such resolution shall be
given to registrar within seven days of passing the same.
In case the company has a branch office, proper books of that branch may be maintained at the
branch office itself. Proper summarized returns should periodically reach the registered office of
the company or other place where books of accounts for the company are kept. If the returns as
such are reaching the registered office properly, this shall be considered as a sufficient
compliance for the branch office regarding the maintenance of books of accounts.

Business Law
Inspection of books of accounts

The directors are entitled to inspect the books of accounts during business hours. If some
financial information is maintained outside country, copies of such financial information shall be
maintained and shall be make available for inspection by any director. Officers and other
employees shall give full assistance to director making such inspection
1.2 Annual accounts [Section 223]
Presentation of Financial Statements
Definition: Financial Statements [Section 2(33)]

a statement of financial position as at the end of the period;
a statement of profit or loss and other comprehensive income or in the case of a company
carrying on any activity not for profit, an income and expenditure statement for the period;
a statement of changes in equity for the period;
a statement of cash flows for the period;
notes, comprising a summary of significant accounting policies and other explanatory
information;
comparative information in respect of the preceding period; and
any other statement as may be prescribed;
Once in every calendar year, the directors of the company, other than a single member company,
are required to present the financial statements for the period, in a general meeting of the
company, in the case of first since incorporation and in any other case since the preceding
financial statements within four months of the close of the financial year of the company. In case
of first financial statements of the company, it shall be presented before the meeting within
sixteen months of date of incorporation of the company.
Such financial statements shall be audited by the auditor of the company and the auditor’s report
shall accompany the financial statements. The reuiqrement of audit is not applicable to a private
company having paid up capital not exceeding Rupees 1 million or such higher amount as may
be notified by the Commission.
The copy of these financial statements along with auditor’s and directors’ report and in the case
of a listed company chairman’s review report shall be sent to every member of the company at
least twenty one days before the date of the meeting (Usually sent with the notice of the
meeting).
Company shall also retain a copy of these documents at its registered office and every member
of the company shall be allowed to inspect such copy.
Further a listed company is required to dispatch at least three copies of these documents to the
Commission, registrar and Stock exchange simultaneously with the dispatch of the same to the
members and the same shall also be uploaded on the company’s website. A copy of these
documents should also be filed electronically to the Commission.
Upon an application of the company in this behalf, an extension of thirty days may be granted to
a company for presentation of the financial statements as aforesaid. Such extension in case of
the listed company shall be granted by the Commission and in case of any other company, shall
be granted by registrar.
Company should not prepare the above accounts for a period more than twelve months however
on application of the company the registrar may extend this period on specific request of the
company.

1.3 Authentication of Accounts [Section 232]

Power to approve
Authentication means the process of approval of accounts for the purpose of issuance of the
same to the members of the company.
As from the above it is evident that the members are only asked to review the financial
statements and ask any question if they so require, it is actually the directors of the company who
are empowered as well as responsible for approval and issue of accounts of the company.
Directors authenticate the financial statements of the company in their meeting by passing a
resolution. The members only receive the financial statements and can ask any questions arising
out of these financial statements and finally adopt in annual general meeting.
As a token of approval of financial statements, the chief executive and at least one director of the
company put their signatures on the financial statements in case of a listed company also by the
chief financial officer. If the chief executive is out of Pakistan at the time of signing then at least
two directors shall sign the financial statements .
In case of a private company having a paid up capital not exceeding one million rupees, the
financial statements shall also be accompanied by an affidavit executed by the chief executive if
the accounts are signed by him or by any of the directors if the accounts has been signed by two
directors, as the case may be, that the financial statements have been approved by the board
The financial statements of a single member company shall be signed by one director.
1.4 Filing of accounts [Section 233]

Filing of accounts
As discussed earlier, a listed company is required to send three copies of its financial statements
along with directors, chairman’s review and the auditors report thereon to Commission and stock
exchange. In addition to that all the companies are required by law to send one copy of its
financial statements which are adopted in the annual general meeting along with reports &
documents required to be annexed to same, signed as per the requirements of act, to the
registrar within 30 days of the said annual general meeting in case of listed companies and
fifteen days in the case of other companies.
If the general meeting to which such accounts and reports are presented does not adopt these
accounts and reports, the fact shall be mentioned to the registrar along with the copies of
documents to be filed as above.
This filing requirement shall not apply to a private company having paid up capital not exceeding
Rupees 10 million or such higher amount as may be notified by the Commission

Business Law
2 DIRECTORS’ REPORT
Section overview
Directors report
2.1 Directors Report [Section 226, 227]

Why should directors report?
By now we know that the directors are the persons who are elected and appointed by the
members of the company to run and manage the company on their behalf and with a few
exceptions all the directors must be members of the company.
It is the shareholders’ or members’ money with which they run the business. The decisions of the
directors regarding company directly affect the company and its members. We can broadly say
that the directors are agents of the shareholder so they should report the matter pertaining to the
company to its members.
The accounts of the company are also a report from the directors to its members but it is
expected out of directors that they should add wording to those accounts as well, that wording,
we can say, is their report, which they approve in their meeting for sending to its members.
Board shall prepare a directors’ report for each financial year. However this requirement is not
applicable to a private company, not being a subsidiary of public company, having the paid up
capital not exceeding Rupees 3 million
Commission may by general or special order, direct such class or classes of companies to
prepare a statement of compliance with such contents as may be specified.
Contents for every directors report
Director of every company shall make out and attach to the accounts, a report containing
following particulars, namely:
Statements regarding the state of the affairs of the company and a fair view of its business
Particulars of any amount recommended as dividend
Particulars of any amount transferred or proposed to be transferred to any reserve
account.
Illustration: State of the affairs

The state of the affairs may be summarised by the directors in one broad paragraph or it may be
discussed by them at length, depending upon the quality of information available to share with the
members of the company.
Additional contents for directors report of public company and their subsidiaries
In case of a such companies, there shall be additional matters to discuss in the directors’ report.
The directors’ report shall state the names of persons who, at any time during the financial year,
were directors of company.
The directors’ report shall address any specific changes and commitments affecting the financial
position of the company, occurring between the financial year end date and the date of the
report.
Illustration: Changes and commitments

Say, the year end date of company is 30th June 2012 and directors’ report is dated for 01st
October, 2012. On 3rd September company has entered into a major joint venture with a foreign
company. This joint venture is a matter that needs to be discussed in the directors’ report; similarly
if government has imposed certain additional taxation on the company between the date of
balance sheet and the date of directors’ report, directors’ report would have addressed this matter
as well.

The directors’ report of a public company shall address all the material changes occurred during
the financial year which affect:
the business of the company
its holding company
any of its subsidiaries
any other company where it has made investments
Also the directors’ report shall discuss the reservations, observations, qualification etc. or any
adverse remarks pointed out by the auditors.
Illustration: Auditor’s observations etc.

Auditor’s report of the company is addressed to the members of the company, if the auditor has
pointed out any observation or has in any way modified his opinion, the directors should address
the matter and provide the members with their version of situation so that the members can
better assess the situation as highlighted by the auditor’s report.
Directors’ report shall state the earnings per shares and the reasons for incurring loss and also
contain the reasonable indication of future profit, if any.
Pattern of shareholding shall be circulated along with the directors’ report and the report shall
state the name and place of incorporation of its holding company if such holding company is
incorporated outside Pakistan.
Directors’ report shall contain the information regarding default in repayments of loans or
interests on loans, if any.
Directors’ report shall state the description of principal risks and uncertainties facing the company
and shall contain the comments in respect of adequacy internal financial controls.
Business review of listed company
The business review of a listed company must at least cover the following:
the main trends and factors likely to affect the future development, performance and
position of the company’s business;
the impact of the company’s business on the environment;
the activities undertaken by the company with regard to corporate social responsibility
during the year;
directors’ responsibility in respect of adequacy of internal financial controls as may be
specified
Authentication of directors’ report
Director’s Report and the statement of compliance must be approved by the board and signed by
the chief executive officer and a director of the company.

Business Law
3 AUDIT
Section overview
Appointment and remuneration of auditors

Qualification and disqualification of auditors
Auditor’s right to access the records and information
Auditors’ report
3.1 Appointment and remuneration of auditors [Section 246]

Introduction of auditor
As discussed earlier, the annual financial statements of the company should be audited by an
auditor before they are sent to the members or filed to Commission or registrar and also they
shall be accompanied by the auditor’s report. Company should always have an auditor appointed
under the Companies Act 2017 except for a private company having paid up capital not
exceeding Rupees 1 million or such higher amount as may be notified by the Commission. Audit
is not only a year end task rather office of the auditor should not be vacant and any vacancies
should be filled in within given timeframes.
The auditors’ duty is to express an opinion on the truthfulness/fairness or otherwise of the
accounts.
Auditor may be appointed in his individual capacity or in the capacity of a firm. Auditors must be
eligible to work as auditors under the relevant provisions of the Companies Act 2017 as well as
the other applicable laws.
Usually companies appoint only one auditor however for large companies two or more joint
auditors may be appointed but the expression used in the Act is a plural as the ‘auditors’ even for
a single auditor.
Most of the companies are required to appoint the practicing Chartered Accountants as their
auditors and the exception is only for the private companies with a paid up capital of less than
Rupees three millions.
Appointment and removal of first auditors and their remuneration [Section 246]
After the incorporation of the company, first auditors of the company shall be appointed by the
directors of the company within ninety days after the date of incorporation of the company, the
directors are also entitled to fix the remuneration of the auditors so appointed by them.
If the first auditors are not appointed as such by the directors, Commission may appoint the
auditors and fix their remuneration. The company shall be required to give a notice to the
Commission regarding its powers becoming exercisable.
Appointment of subsequent auditor
First auditors shall retire on the date of first annual general meeting and in their place the new
auditors shall be appointed. New auditor shall be appointed by members by passing a resolution
in the general meeting.
Notice for appointment of the auditor shall be sent by any member having 10% or more of share
holding of the company at least seven days before the date of meeting and the company shall
circulate this notice to the retiring auditor and shall also upload it on its website.
If more than one persons are proposed as auditor of the company by its members, then
resolution of the members in the general meeting shall decide as to who shall be appointed in the
office of the auditor of the company.
The auditor so appointed shall hold the office of the auditor till conclusion of next annual general
meeting. The members may remove him from office before the expiration of the term of the office
by passing a special resolution, in this case the new auditor will be appointed by the board with
the approval of the Commission.

Right of retiring auditor to make representation

If a notice is received from any person appointing any person other than the existing auditor, then
such notice from the member shall be sent to the retiring auditor forthwith. The retiring auditor
has got right to make representation in writing at least two days before the general meeting. The
representation shall be read out at the meeting before taking up the agenda for appointment of
the auditor it shall be mandatory for the auditor or a person authorized by him in writing to attend
the general meeting in person.
Casual vacancy
Casual vacancy in the office of the auditor arising due to the resignation or death etc. of the
auditor shall be filled by the directors within 30 days of such casual vacancy. Until such vacancy
is so filled, the surviving auditor if any may continue to act as auditor.
If auditors are not appointed in case of casual vacancy by the directors of the company within
thirty days of the occurrence of vacancy then Commission shall appoint auditor to fill in the
casual vacancy. Commission shall also be empowered to appoint auditors and fix their
remuneration when the auditors appointed by the company are unwilling to act as auditors.
An auditor appointed to fill the casual vacancy shall hold the office of the auditor till the
conclusion of next annual general meeting.
Notice to registrar
Company is required to inform the registrar within fourteen days of every appointment, removal
or retirement of the auditor. In case of appointment the consent of the concerned auditor is also
required along with intimation.
3.2 Qualification and disqualification of auditors [Section 247]

Qualification of auditors
For a public company and its subsidiaries and a private company having paid up capital of more
than or equal to Rupees 3 million, the qualification of auditors is a Chartered Accountant within
the meanings of Chartered Accountants Ordinance 1961. Further a firm majority of whose
partners practicing in Pakistan are Chartered Accountants may be appointed by its firm name as
auditors of a company and may act in its firm name.
As per relevant provisions of the Chartered Accountants Ordinance 1961, only those persons can
act as auditors who have obtained a valid certificate of practice from the Institute of Chartered
Accountants of Pakistan. Furthermore, a body corporate cannot be appointed as auditor of any
company – the auditor has to be a natural person or the firm of natural persons who have
obtained a valid certificate of practice from the Institute of Chartered Accountants of Pakistan.
In the case of a company other than those specified above, the auditor must be a Chartered
Accountant or Cost and Management Accountant having valid certificate of practice from the
respective institute or a firm of Chartered Accountants or Cost and Management Accountants,
having such specified criteria.
Disqualification of auditors
The following named persons cannot act as auditors of the company.
a person who is a director, other officer or employee of the company or held such a
position at any time during the preceding three years;
a person who is a partner of a director, officer or employee of the company or is in the
employment of any of these persons;
the spouse of a director of the company
a person who is indebted to the company other than in the ordinary course of business of
such company. A person is not considered as indebted:
if the company is a utility provider and the unpaid bills are not for more than ninety
days
if the company is a credit card issuer and outstanding credit card amount is not more
than Rupees one million

Business Law
Illustration: Indebtedness of auditor

Q: Before the annual general meeting of ABC Bank Limited, a banking company issuing credit
cards as well, a notice has been received from a member of the company for appointment of
Mr Zaid ACA as auditor of the company. During the meeting the company secretary of ABC
Bank Limited identified that Mr Zaid is a credit card holder of the company and owes Rupees
four hundred thousand against the credit card utilisation. Is Mr Zaid disqualified to become
auditor of ABC Bank Limited?
A: No, because he owes less than Rupees one million, which is the threshold beyond that a debtor
of the Bank will be considered disqualified.
a person who has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company other than in the ordinary course of
business of such entities;
Person or a firm who, directly or indirectly, has business relationship with the company
other than in the ordinary course of business of such entities
A person who has been convicted by the court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction;
A body corporate;
A person who is not eligible to act as auditor under the code of ethics as adopted by the
Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management
Accountants of Pakistan; and
a person or his spouse or minor children, or in case of a firm, all partners of such firm who
holds any shares of an audit client or any of its associated companies. There is as an
exception if such a person holds shares prior to his appointment as auditor, the fact shall
be disclosed on his appointment as auditor and such person shall disinvest such shares
within ninety days of such appointment.
If at the time of appointment there was no defect or disqualification in the appointment of the
auditor and afterwards the defect or disqualification appears, then the auditor shall vacate the
office of the auditor immediately.
A person shall also not be qualified for appointment as auditor of a company if he is, by virtue of
above stated disqualifications, disqualified for appointment as auditor of any other company
which is that company’s subsidiary or holding company or a subsidiary of that holding company
If an unqualified or disqualified person is appointed as auditor; It shall be void and Commission
may appoint a qualified person in place of the auditor appointed by the company.
3.3 Auditor’s right to access the records and information [Section 248]
Auditor’s right to access information
Every auditor of a company has a right to access at all times to the books, accounts and
vouchers of the company, in whatever form they are held,
Auditor’s right to call branch’s information
Auditor has right to access to such copies of, extracts from, the books and accounts of the
branch as have been transmitted to the principal office of the company;
Auditors’ right to demand information from certain persons
Auditor has the right to require any of the following persons to provide him with such information
or explanations as he thinks necessary for the performance of his duties as auditor:
any director, officer or employee of the company;
any person holding or accountable for any of the company’s books, accounts or vouchers;
any subsidiary undertaking of the company;

any officer, employee or auditor of any such subsidiary undertaking of the company or any
person holding or accountable for any books, accounts or vouchers of any such subsidiary
undertaking of the company.
Auditor’s right in respect of general meetings
The auditor is entitled to attend, receive all notices of any general meeting.
The auditor is entitled to be heard at any general meeting which he attends on any part of the
business which concerns him as auditor
3.4 Auditors’ report [Section 249]

Duty of the auditor
The auditor’s duty is to express an opinion in form of a report to the members of the company on
the accounts and books of accounts of the company.
The auditor makes a report on balance sheet, profit and loss account or income and expenditure
account and every other statement, which is to be presented to the members of the company in
annual general meeting including notes to the accounts. The report of the auditor shall be
discussed in lot more detail in your future studies in paper of ‘Auditing’ however we briefly
summarize as to what the auditor is required to include in his report. Following are matters to be
stated by the auditor in his report:
The auditors shall state in the auditors’ report that they have obtained all the information
and explanations which in their knowledge and belief were necessary for the purposes of
the audit; however if any information or explanation is not provided by the company or any
of its officer, the auditors shall report that they were not provided with all the required
information and explanations.
The auditor shall further express a opinion about the books of accounts as to the
adequateness of them as per the requirements of the Companies Act 2017.Opinion shall
also be expressed as to the conformity of the accounts with the requirements of the Act
and with books of accounts.
Auditors shall also state that whether or not in their opinion the said financial statements
give the information required by this Act in the manner required by the Act and give a true
and fair view:
x of the state of the company’s affairs as at the end of its financial year;
x of the profit or loss or surplus or deficit, as the case may be, for its financial year; and
x generation and utilisation of the cash and cash equivalents of the company for its
financial year;
Opinion of the auditors shall also be required on expenditure incurred, investments and
guarantee extended by the company during the year were for the business of the company
and were in line with the objects of the company.
Auditor shall also report as to the responsibility of the company regarding deduction and
payment of Zakat under relevant law has been discharged.
The auditor shall state the reasons and factual position known to him if any of his above stated
opinions is negative or is qualified (positive opinion but with exceptions)
If auditor's report makes reference to some other report or statement, such report be annexed to
auditor's report and be considered a part of report.
Commission may also direct any company or class of companies that the auditor’s report shall
also include a statement of such additional matters as may be so specified.
Where any reservation is put in auditor's report, there shall be added the reasons for it and the
true position of Company to the best of auditor's knowledge.
For listed company, auditor or a person authorized by him in writing shall be present in the
general meeting in which financial statements and auditor’s report are to be considered.

Business Law
Commission may direct, that the statement of compliance to be attached with Directors Report,
shall be reviewed by the auditor who shall issue a review report to the members on the format as
specified.
Signature of an audit report [Section 251]
The auditor’s report must
state the name of the auditor and the engagement partner
be signed
be dated
indicate the place at which it is signed.
If the auditor is an individual then the report must be signed by him, if it is a firm then it must be
signed by the partnership firm with the name of the reporting partner.

4 CHAPTER REVIEW
Chapter review
Before concluding your studies of this chapter check that you now know:
What books of account are required to be maintained by the company
What are the requirements for presentation of accounts by the company
What are the contents of a directors report
How auditors are appointed, what power and obligations do they have and what do they report.

Business Law

Business Law
I
Index
Agent authority 188

a Agent definition
Agent of the firm
183
215
Absence of
Agent’s authority and the power to bind the
consent 61 principal 188
free consent 61 Agreement/s
Acceptance 38 by persons of unsound mind 46
Acceptor for honour 227 contingent on impossible events 90
Act of firm 203 contingent upon impossible events 96
Act or omission 160 in restraint of legal proceedings 89
Active concealment 66 in restraint of marriage 89
Actual in restraint of trade 86
authority 215 opposed to public policy 79
breach of contract 135 the consideration or object of which is
or ostensible partner 206 partly unlawful 55
performance 109, 126 the consideration or object of which is
Additional partly unlawful 78
District Judge 16 to create monopoly 80
Sessions Judges 15 to do impossible acts 90
Advantages to enter into an agreement in the future 90
and disadvantages of binding precedent 5 with a minor 45
of ADR 19 with persons disqualified by law 47
of delegated legislation 11 without consideration 55
Agency by Allotted share capital 286
estoppel 187 Alteration 127, 129, 159
express appointment 186 in memorandum of association 274
necessity 188 Alterations permitted by the Act 234
operation of law 188 Alternate Dispute Resolution 19
ratification 186 Ambiguous Instrument 232
Agency coupled with interest 194 Amount of damages 145

Business Law
Amount on negotiable instrument 232 Body corporate 258

Annual accounts 356 Books of accounts 355
Annual General Meeting (AGM) 311 Borrowing powers of a company 301
Anticipatory breach of contract 136 Breach of contract 135
Apparent authority 189 Broker 184
Appeal to Supreme Court 19 Burden of proof 7, 47
Appellate Court 18
Appointment and remuneration of auditors 360 c
Appropriation of payment 120 Carrying on business 204
Arbitration in Islamic way 20 Casual vacancy 329, 361
Arbitration 20, 216, 366 Certiorari 14
Areas of jurisdiction of the High Court 14 Characteristics of contingent contracts 95
Arrangement 159 Characteristics of Negotiable Instrument 225
Articles of association 279 Charge 303
Artificial person 255 Charitable subscription 56
Associated company/Associated 343 Cheque 243
Association Chief executive 336
not for profit 261 Circumstances
of two or more persons 204 in which a banker may refuse to honour
or subscription clause 274 cheque 248
Attempted performance 109, 126 where agent is personally liable 199
Auctioneer 184 where object or consideration is
Audit 360 unlawful 77
Auditors’ report 363 where surety is not discharged 160
Authentication of Civil Courts 16
accounts 357 Civil court Appeals 17
directors’ report 359 Civil Judge 16
Authorised Civil law
capital clause 273 and criminal law 5
share capital 285 Classifications of contract 29
Authority of Partners 215 Coercion 62
Commencement of business 280
Commercial agent 184
b Commission’s approval
Common law remedies
275
141
Bailment 165 Communication of revocation 40
on the basis of Companies 258
benefit 167 Company
reward 166 Courts 17
Bearer instrument 229 directors 184
Bilateral limited by guarantee 258
mistake as to the possibility of limited by shares 258
performance 72
meetings 309
mistake as to the subject matter 72
Company Secretary 338
mistake 71
Competent to contract 45
Bill of Exchange 240

Index
Composition of Judge of Supreme Court 14

Federal Shariat Court 18 Cross offers 36
National Assembly 9 Crossing a cheque 245
Conciliation 19 Crossing of a cheque after issue 246
Condition precedent to surety’s liability 156 Customs 4
Conditions to be holder in due course 228
Consensus-ad-idem 61
Consent of parties
Consent
154
61
d
Damages for inconvenience and
Consequences of uneasiness 145
actual breach 135 Damages 142
treating contract as operative 136 Death of surety 155, 159
Consideration 27, 53 Death 129
Contingent Debenture 301
contract 95 Declared act 66
on impossible events 89 Definition of
Continuing guarantee 155 a contract 25
Contract of contract of indemnity 151
agency 56 Law 3
guarantee 56, 153 Mercantile Law 3
indemnity 151 proposal / offer 35
Contracts Delegated Legislation 11
contingent upon the future conduct of a Demand for poll 316
living person 96
Demand Instrument 229
contingent upon the happening of an
uncertain future event 96 Devolution of joint rights 114
contingent upon the happening of an Difference between
uncertain specified event within a fixed coercion and undue influence 64
time 96 contingent contract and wagering
contingent upon the non-happening of a agreement 97
certain future event 96 pledge and bailment 179
contingent upon the non-happening, of Direct Representation 218
an uncertain specified event within a
fixed time 96 Directors 324
Control over delegated legislation 11 Report 358
Counter offer 40 Disabled to perform promise 136
Course of performance 135 Disadvantages
Court of first instance 18 of ADR 19
Creation of agency 186 of delegated legislation 12
Creditor 153 Discharge by
Criminal Act 199 breach 135
Criminal court Appeals 16 impossibility of performance 131
Criminal Courts 15 lapse of time 134
Criminal law or civil law? 6 mutual agreement 127
Criminal law 6 operation of law 129
Criteria to be performance 126
Judge of High Court 14

Business Law
Discharge of Effect on agreement collateral to void

a contract 125 agreement 85
liability 249 Effects of
party or parties 250 coercion 62
surety by invalidation of contract 160 fraud 67
surety by revocation 159 misrepresentation 70
surety by the conduct of the creditor 159 supervening impossibility 131
surety 158 Wagering Agreement 88
the negotiable instrument 249 Election of directors 324
Disclosure of directors’ interest 334 Eligibility to act as director 328
Disqualification of auditors 361 Empty promise 66
District Magistrate 15 Endorsement 232
Dividend warrants 348 Enforceability 26
Dividends 346 Equitable remedies 141
Divisible contract 104 Essential elements of
Doctrine of a cheque 244
binding precedent 4 a partnership 203
corporate personality 255 a Promissory Note 237
Drawee in case of need 227 Bailment 165
Duties of Bill of exchange 241
Agent 190 Essentials of a
Bailee 170 contract of guarantee 154
Bailor 168 contract 154
finder of goods 175 valid contract 26
partner - general 210 valid tender 110
partner - qualified 211 Essentials of
Principal 192 acceptance 38
Duty to an offer 35
bear the risk of loss 170 consideration 53
disclose faults 168 fraud 67
indemnify bailee for loss in case of early misrepresentation 69
termination of gratuitous bailment 169 valid endorsement 232
receive back the goods 169 Estoppel 187
Exceptions of agreements in restraint of
trade 86
e Exemplary damages
Existence of a debt
144
154
Effect of Expert 295
general crossing 245 Express authority 189
material alteration 234 Extraordinary General Meeting (EGM) 312
ratification 187
refusal to perform 111
restrictive crossing
special crossing
246
245
f
undue influence 63 Failure of co-surety to join surety 160
False assertion 66

Index
Family Courts 17 Implied authority 189, 215

Features of a company 255 Impossibility of performance 131
Federal Shariat Court 18 Impossible
Fiduciary relationship 324 acts 90
Filing of accounts 357 events 90
Final dividend 346 Inchoate instrument 231
Finder of goods 102, 175 Indemnified / Indemnity holder (Promisee) 151
Firm and partners 203 Indemnity 151
First chief executive 336 Indirect Representation 218
First directors 326 Indivisible contract 104
Fitted act 66 Industrial Tribunal 17
Fixed charge 303 Initiation surety’s liability 156
Flexibility in the law 5 Injunction 143
Floating charge 303 Inland Instrument 231
Forbidden by law 77 Insolvency 129
Foreign Instrument 231 Inspection of books of accounts 356
Forfeiture of Security Deposit 145 Interested director not to vote 334
Fraud 66, 155, 160 Interim dividend 346
Free consent 27, 61 Introduction
Fresh election of directors 327 of contract act 25
Future consideration 54 to legal system 3
Investment 344
in associated company 343
g properties
Investments of Company to be held in its
347
General own name 344

crossing 245 Investments of company 343
meetings 309 Irrevocable agency 194
offer 36 Issued share capital 286
Gifts 56
Goods being inseparable 170
Grounds of supervening impossibility 131
j
h Joint and several liability of joint promisors 113
Joint promisor 112
High Courts 14 Judiciary makes the law (The) 5
Holder in Due Course 228 Jurisdiction of Supreme Court 13
Holding Juveniles 17
Company 259
out 218
How can precedents be altered or avoided? 5
k
Kinds of
i damages
endorsements
144
233
Immovable properties 347 guarantee 155

Business Law
Knowledge of the third party 218 Minor’s admission to the benefits of

partnership 219
Minutes 317
l Misrepresentation
Fraud
69, 155
160
Lapse of an offer 40 Mistake
Large number of precedents 5 of foreign law 71
Legality of of Pakistan law 71
object and consideration 77 Modarba 343
object, consideration and agreements Modes of discharge of a contract 125
opposed to public policy 77
Modes of negotiation 233
Legislation 4, 8
Money bills 10
Liabilities of partner and firm 217
Mortgage 302
Liability clause 273
Mutual agency 205
Limitation
Mutual Rights and Liabilities 213
of surety’s liability 156
period 134
Limited liability
Liquidated damages
256
145 n
Loans to directors 332 Name clause 272
Lunatic 46 Name of company 269
National Assembly 9
Natural love and affection 55
m Nature of
bailment 165
Magistrates’ courts 15
partnership (The) 203
Maintenance and champerty 79
relationship 63
Making a distinction between cases 5
surety’s liability - it is co-extensive 156
Mandamus 14
surety’s liability 156
Marriage brokerage agreement 80
Negotiable Instrument 225
Material alteration 129, 234
Negotiation 19, 233
Maturity of Negotiable instrument 230
Negotiation by
Meaning of
endorsement and delivery 233
acceptance 38
mere delivery 233
appropriation of payment 120
Nominal
Crossing 245
Damages 145
reciprocal promises 117
partner 206
undisclosed agency 197
value of shares 285
Mediation 19
Non-gratuitous act / goods 102
Memorandum of association 272
Not an excuse of supervening impossibility 132
Mercantile agent 178
Not Negotiable Crossing 246
Minimum
Notice 314
number of directors 325
Novation 127, 159
subscription 280
Minor 45

Index
Payment by
o interested person 101
mistake or under coercion 102
Object clause 273
Payment for Honour 228
Obligations of parties to contracts 109
Payment in due course 234
Offer 26
Penalty 145
On due date of performance 135
Performance of a contract 109
Operation of law 251
Perpetual existence 257
Options to the aggrieved party 136
Person enjoying benefit of non-gratuitous act
Order instrument 229
/ goods 102, 103
Ordinance 10
Personal liability of an agent 199
Ordinary
Persons who can
business 314
demand performance 112
damages 144
perform and demand performance 111
shares 287
Persons who can perform 112
Ostensible authority 189
Persuasive authority 4
Other modes of revocation of continuing
Pledge 167, 176, 302
guarantee 156
Pledge by non-owners 178
Other VOID agreements 89
Powers of directors 331
Overruling a precedent 5
Precedent 4
Preference shares 287
p Present consideration
President
54
8
Particular Prime Minister 8
partnership 206 Principal debtor 153
state of things ceases to exist or occur 132 Private companies 259
Parties in a Process of legislation 10, 11
contract of guarantee 153 Process 18
contract of indemnity 151 Prohibited names 269
Parties to Prohibition 14
a Bill of Exchange 240 Promise 25
a Cheque 243 to compensate 56
a Promissory Note 236 Promisee’s refusal / neglect 128
Negotiable Instrument 227 Promissory Note 236
Partner Proposal 25
by estoppel or holding out 207 Prospectus 293
in profits only 206 Protection to the Collecting Banker 247
Partnership 245, 291 Proxies 316
property 213 Public company 259
Partnership-at-will 206 Purpose of Crossing 245
Past consideration 54
Pawn 167
Payable to
bearer 226
q
Qualification
order 226
of auditors 361

Business Law
to be an arbitrator 20 a continuing guarantee 155

Quantum offer and acceptance 40
meruit 102, 143 Rights and duties of the agent and principal 190
meruit claim 141 Right of
Quasi contract 101 acceptor for honour 228
Quorum of meeting 315 bailee 172
bailor 171
finder of goods 175
r payer for honour
Right to
228
Reciprocal promises 117

claim contribution 113, 157
Rectification of names 269
claim set off 157
Refusal to perform 111
demand return of goods 172
promise 136
indemnity 157, 212
Registered office clause 273
share the profits 212
Registrar 262
subrogation 157
Registration of
Rights against
a company 272
co-sureties 157
memorandum of association 276
creditor 157
mortgage or charge 304
principal debtor 157
Release of
Rights and liabilities of acceptor for honour 227
one joint promisor 114
Rights of
principal debtor 159
agent 191
Remedies for breach of contract 141
Holder against the banker 247
Remission 128
indemnity holder 151
Remoteness of damages 146
partner 212
Removal of chief executive 337
Pawnee 176
Representation
Pawnor 177
at meetings 317
Principal 192
to others 187
surety 156
Rescind the contract 68
transferee of a partner’s interest 219
Rescission of Contract 142
Role of an agent 183
Restitution 142
Rules for calculating maturity 230
Restraint of
Rules regarding
legal proceedings 89
appropriation of payment 120
marriage 89
contingent contracts 95
parental rights 80
performance of reciprocal promises 117
personal liberty 80
the performance of joint promise 113
trade 86
Restrictions
by partnership deed
on the implied authority of a partner
216
216 s
Restrictive crossing 246 Sale of public offices 80
Retiring auditor 361 Same identity 130
Revocation of Satisfaction of mortgage or charge 305

Index
Save time and expense 5 Stranger to contract 55

Securities and exchange commission of Structure of courts in Pakistan 13
Pakistan 262 Sub-Bailment 167
Senate 8 Subordinate Magistrate 15
Separate legal personality 255 Sub-partner 206
Sessions Judge 15 Subsequent chief executive 337
Share Subsidiary Company 260
capital 285 Supervening
certificate 285 illegality 133
registrar 338 impossibility 131
Shares in companies 285 Supply of necessaries 101
Sharing of Supreme Court 13
loss in contribution 114 Surety 153
profits 204
Signature of an audit report 364
Silence as to fraud
Silent partner
68
206
t
Single Member Company 259 Tender of goods or services 110
Sleeping or dormant partner 206 Tender of money 110
Sole trader 255 Termination by
Sound mind 46 act of parties 195
Sources of law in Pakistan 3 operation of law 196
Special Termination of
business 314 agency 195
contract 199 all contract of bailment 174
crossing 245 gratuitous bailment 174
damages 144 Test of partnership 205
resolution 270 Third party 219
Specific Time
guarantee 155 and place of performance 114
offer 36 as essence of contract 115
performance 142 instrument 229
persons 46 is essence 135
Specimen of a is not essence 135
Bill of Exchange 241 of commencement of the indemnifier’s
liability 151
Cheque 244
Timing of revocation 40
Promissory Note 237
Trading with enemy 79
Standing / Open / Continuing offer / Tender 37
Tripartite agreement 154
Statutory
Types of
meeting 310
agent 184
report 310
bailment 166
restrictions 216
companies 258
Steps of registration 276
crossing 245
Stifling prosecution 79
instrument 245
Stipulation for Interest 145
mistakes 71

Business Law
offer 36
partners 206
partnership
performance
206
109
v
Vacation of office 329
precedent 4
Variation in rights 289
Quasi Contracts 101
Variation in share capital 288
reciprocal promises 117
Vindictive damages 144
tender 110
Void agreements 85
Voting in meetings 315
u
Ultra-Vires Borrowings
301
89
w
Wagering agreement 88
Undisclosed agency 197
Waiver 128
Undue influence 63
Where to apply law in practical life 3
Unilateral mistake 72
Who are competent to contract? 45
Unjust precedents 5
Why Chartered Accountants study law 3
Unlimited company 259
Withholding of dividends 348
Unsound mind 46

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© Emile Woolf International, September 2017

© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Syllabus objectives and learning outcomes v

© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Section B: Company Law

© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

ASSESSMENT OF FUNDAMENTAL COMPETENCIES

The candidate will be able to demonstrate:

1 basic knowledge of the legal environment

2 comprehension of laws governing contracts, partnership and negotiable instruments

4 familiarity with the provisions governing the issuance of shares

5 knowledge of the management of companies

6 familiarity with investment by companies, financial accounts and distribution of profit

7 knowledge of the appointment of auditors and their responsibilities and duties.

© Emile Woolf International v The Institute of Chartered Accountants of Pakistan

Negotiable Instrument Act 1881 10-15

Sections 57 to 112 of the Companies Act, 2017 and Sections 87 to 93 of 8-15

Sections 118 to 196 of the Companies Act, 2017 8-15

Sections 199 to 245 of the Companies Act, 2017 8-15

© Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

LO 2.1.3: Be aware of factors which might affect

© Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

9 Quasi contract 2 LO 2.9.1: Know meaning of quasi contract

© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

LO 2.13.6: Understand the kinds of guarantees

© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xi The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xiii The Institute of Chartered Accountants of Pakistan

x Powers, duties, rights, liabilities and

© Emile Woolf International xiv The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xv The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xvi The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Introduction to the legal system

References to Legal Acts

Contract Act 1872 3-16

Partnership Act 1932 17

Negotiable Instrument Act 1881 18

Companies Act, 2017 19-27

Securities Act 2015 22

© Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

1 INTRODUCTION TO THE LEGAL SYSTEM

1.1 Definition of Law

1.2 Definition of Mercantile Law

1.3 Why Chartered Accountants study law

1.4 Where to apply law in practical life

1.5 Sources of law in Pakistan

© Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

1.6 Doctrine of Binding Precedent

© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

1.7 Criminal law and civil law

© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

Example: Civil law

Example: Criminal law and Civil law

© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

The burden of proof

© Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

2.2 Prime Minister

© Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

 Fourteen shall be elected by members each Provincial Assembly

Fourteen shall be elected by members each Provincial Assembly

And specify the day on which decision shall take effect.