ICAP CAF CAF-4: Business Law Dynamics Syllabus

Under Section 35, when is a contingent contract on an event happening/not happening within a fixed time void?

A contract contingent on an event happening within a fixed time becomes void if the event does not happen or becomes impossible within that time. A contract contingent on an event NOT happening within a fixed time can be enforced if the event does not happen, or becomes impossible, within that time.

Who must perform a contract, and can performance be made by a third person?

The promisor must perform, or offer to perform, his promise. If the contract involves personal skill (e.g. an artist), only the promisor can perform. Otherwise the promisor may employ a competent person, and a promisee who accepts performance from a third person cannot afterwards enforce it against the promisor (Sec 40-41).

What is a 'tender' (attempted performance / offer to perform), and what are the essentials of a valid tender under Section 38?

A tender is an offer of performance which the promisee refuses to accept; a valid tender discharges the promisor from liability. Essentials: it must be unconditional, at the proper time and place, give a reasonable opportunity to inspect, and be made to the proper person; a tender of money must be of the exact amount.

Define 'breach of contract' and distinguish actual breach from anticipatory breach.

Breach is the failure of a party to perform his contractual obligation. Actual breach occurs at the time performance is due or during performance. Anticipatory breach occurs when a party repudiates the contract before the due date of performance, giving the other party an immediate right to sue (Sec 39).

List the main remedies available for breach of contract.

(1) Rescission of the contract; (2) Damages (Sec 73); (3) Suit for specific performance; (4) Suit for injunction; (5) Quantum meruit (payment for work done); and (6) Suit upon quantum meruit / restitution.

State the rule in Hadley v. Baxendale on measure of damages, as reflected in Section 73.

The injured party may recover (1) damages arising naturally in the usual course of things from the breach (ordinary/general damages), and (2) damages the parties knew, when contracting, to be likely from the breach (special damages). Remote or indirect losses are not recoverable, and the injured party must mitigate.

Distinguish liquidated damages from a penalty (Sec 74 approach).

Liquidated damages are a genuine pre-estimate of probable loss agreed by the parties and recoverable. A penalty is a sum stipulated to coerce performance, disproportionate to actual loss. Under Sec 74, the court awards reasonable compensation not exceeding the named sum, whether it is a penalty or liquidated damages.

Define a contract of agency and who an 'agent' and 'principal' are (Sec 182).

An agency is a relationship where one person (the agent) is employed to do an act for another or to represent another (the principal) in dealings with third persons. The agent brings the principal into legal relations with third parties. No consideration is necessary to create an agency (Sec 185).

Name the ways in which an agency can be created.

(1) By express agreement (oral/written); (2) by implied agreement (conduct/situation); (3) by necessity; (4) by estoppel/holding out; and (5) by ratification of an unauthorised act done on the principal's behalf.

State the conditions for valid ratification of an agent's unauthorised act.

(1) The act must be done on behalf of an identifiable principal; (2) the principal must have been in existence and competent to contract both at the time of the act and at ratification; (3) ratification must be of the whole act; (4) it must be within a reasonable time and before the third party withdraws; and (5) the act must be lawful.

How is an agency terminated under the Contract Act?

By act of the parties: revocation by the principal, or renunciation by the agent. By operation of law: completion of the agency's business, expiry of time, death/insanity of principal or agent, insolvency of the principal, or destruction of the subject-matter. An agency coupled with interest cannot be terminated to the agent's prejudice.

Define a partnership under the Partnership Act, 1932 (Sec 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. Persons who entered into partnership are individually 'partners' and collectively a 'firm'; the name under which they carry on business is the 'firm name'.

What are the essential elements (the 'true test') of a partnership?

(1) An agreement between persons; (2) to carry on a business; (3) sharing of profits; and (4) the business carried on by all or any of them acting for all (mutual agency). Mutual agency is the conclusive/true test of partnership; profit-sharing alone is only prima facie evidence.

List the main types of partners in a firm.

(1) Active/Ostensible partner; (2) Sleeping/Dormant partner; (3) Nominal partner; (4) Partner in profits only; (5) Partner by estoppel/holding out; (6) Sub-partner; and (incoming/outgoing) minor admitted to benefits of partnership.

What is the maximum number of partners permitted in a firm under Pakistani law?

Generally a maximum of 20 partners (and a minimum of 2). For a banking business the maximum is 10. Beyond these limits the association must be registered as a company. (Note: professional firms of accountants/lawyers may be exempt.)

Distinguish a 'partnership at will' from a 'particular partnership'.

A partnership at will is one with no fixed period/duration and no provision for determination; any partner may dissolve it by giving notice (Sec 7). A particular partnership is formed for a single venture or for a fixed term and ends on completion of the venture or expiry of the term.

Can a minor be a partner, and what is a minor's position in a firm (Sec 30)?

A minor cannot be a full partner (the agreement would be void), but with the consent of all partners may be admitted to the benefits of partnership. He shares profits and assets, his liability is limited to his share, and he is not personally liable. On attaining majority he must, within 6 months, elect to become or not become a partner.

State the general duties partners owe to one another (relation of partners inter se).

Partners must: carry on the business to the greatest common advantage; be just and faithful; render true accounts and full information; indemnify the firm for loss caused by fraud; act within authority; and not make secret profits or carry on a competing business without consent (must account for profits).

What are the implied rights of a partner in the absence of a contrary agreement?

Each partner has the right to: take part in the conduct of the business; be consulted (decisions by majority, but fundamental changes need unanimous consent); access and inspect the books; share equally in profits; receive interest on advances (6% p.a.); be indemnified for authorised acts/emergency acts.

What is the position of partners regarding sharing of profits and interest where the deed is silent?

Partners share profits and losses equally regardless of capital contributed; they are not entitled to interest on capital, but are entitled to interest at 6% per annum on advances/loans made to the firm beyond agreed capital; no partner is entitled to remuneration for taking part in the business.

Explain the principle of 'implied authority' of a partner in relation to third parties (Sec 19).

Every partner is an agent of the firm. Acts of a partner done to carry on, in the usual way, business of the kind carried on by the firm bind the firm and all partners. This implied authority does not (without express authority) extend to acts like submitting disputes to arbitration, opening a bank account in own name, compromising claims, transferring immovable property, or admitting liability in a suit.

What is the nature of partners' liability to third parties for the acts of the firm (Sec 25)?

Every partner is jointly and severally liable, along with all the other partners and also individually, for all acts of the firm done while he is a partner. Third parties may proceed against any one partner for the whole firm debt.

State the liability of an incoming partner and a retiring (outgoing) partner.

An incoming partner is not liable for acts of the firm done before he joined (unless he agrees). A retiring partner remains liable for acts done before retirement unless discharged by novation; he is also liable for acts after retirement to third parties dealing with the firm until public notice of his retirement is given.

Define a promissory note under the Negotiable Instruments Act, 1881 (Sec 4).

A promissory note is an instrument in writing (not a bank/currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. It has two parties: the maker and the payee.

Define a bill of exchange (Sec 5) and name its parties.

A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. Its three parties are the drawer, the drawee (who becomes acceptor on acceptance), and the payee.

Define a cheque (Sec 6) and state how it differs from a bill of exchange.

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand (including electronic/truncated cheques). Differences from a bill: a cheque is always drawn on a banker, always payable on demand, needs no acceptance, requires no stamp, and may be crossed.

Compare a promissory note, a bill of exchange and a cheque on key features.

Promissory note: 2 parties, contains a promise to pay, no acceptance needed, maker is primarily liable. Bill of exchange: 3 parties, contains an order to pay, requires acceptance, drawer is liable. Cheque: a bill drawn on a banker, always on demand, no acceptance, can be crossed, no stamp duty.

What is the primary objective of the Anti-Money Laundering Act, 2010?

To prevent money laundering and the financing of terrorism by criminalising laundering of proceeds of crime, providing for forfeiture of property derived from such offences, and establishing institutions (such as the Financial Monitoring Unit) for investigation, reporting and prosecution.

Under the AML Act, 2010, what constitutes the offence of money laundering?

A person commits money laundering if he: (a) acquires, converts, possesses, uses or transfers property knowing or having reason to believe it is proceeds of crime; (b) conceals or disguises the true nature, origin, location, ownership or control of such property; or (c) holds, participates in, assists or counsels such acts or knowingly aids in their commission.

What is the role of the Financial Monitoring Unit (FMU) under the AML Act, 2010?

The FMU is the central agency that receives, analyses and disseminates Suspicious Transaction Reports (STRs) and Currency Transaction Reports (CTRs) from reporting entities (banks, financial institutions, etc.), and shares information with investigating/supervisory agencies to combat money laundering and terrorist financing.

State the punishment for the offence of money laundering under the AML Act, 2010.

Rigorous imprisonment of up to ten years and a fine which may extend to twenty-five million rupees, together with forfeiture of property involved in money laundering. (For a company, the fine may extend to one hundred million rupees.)

What is the purpose and scope of the Arbitration Act, 1940?

It provides the legal framework for settlement of disputes by arbitration (outside ordinary courts) by referring them to one or more arbitrators whose decision (award) is binding. It covers three kinds: (1) arbitration without court intervention, (2) arbitration with court intervention where no suit is pending, and (3) arbitration in suits (pending court proceedings).

Define an 'arbitration agreement' and an 'award' under the Arbitration Act, 1940.

An arbitration agreement is a written agreement to submit present or future differences to arbitration, whether or not an arbitrator is named. An award is the decision/determination made by the arbitrator(s) on the matters referred; once filed and a decree is passed upon it by the court, it is enforceable like a court decree.

On what grounds may a court set aside an arbitration award under the Arbitration Act, 1940?

An award may be set aside if: (a) an arbitrator/umpire has misconducted himself or the proceedings; (b) the award was made after the court superseded the arbitration or after proceedings became invalid; or (c) the award was improperly procured or is otherwise invalid. Application must generally be made within 30 days of notice of filing of the award.

What does a company's 'object clause' in its memorandum determine, and what is the doctrine of ultra vires?

The object clause states the purposes for which the company is formed and the scope of its activities. Under the doctrine of ultra vires, any act beyond the company's stated objects/powers is void and cannot be ratified even by all shareholders, protecting both shareholders and creditors.

What is meant by 'incorporation' of a company and what is its key legal effect?

Incorporation is the process of legally registering a company with the registrar (SECP) to bring it into existence as a body corporate. Its key effect is separate legal personality (Salomon v. Salomon): the company is distinct from its members, has perpetual succession, can own property, sue and be sued, and members enjoy limited liability.

List the documents required to be filed with the SECP for incorporation of a company.

(1) Memorandum of Association; (2) Articles of Association; (3) declaration of compliance; (4) particulars/address of registered office; (5) particulars and consent of directors, chief executive, etc.; and the prescribed registration fee. On approval the registrar issues the Certificate of Incorporation.

Classify companies on the basis of members' liability.

(1) Company limited by shares (liability limited to unpaid amount on shares); (2) Company limited by guarantee (liability limited to the amount members undertake to contribute on winding up); and (3) Unlimited company (members' liability is unlimited).

Distinguish a private company from a public company under the Companies Act, 2017.

A private company: restricts the right to transfer shares, limits members to 50 (excluding employees), and prohibits public invitation to subscribe for shares; minimum 1 member (single-member) or 2. A public company: has no such restrictions, may invite the public, requires minimum 3 members, and minimum 3 directors (7 if listed).

What is a single-member company (SMC) and what is the minimum/maximum membership for private and public companies?

An SMC is a private company with only one member (one director plus a nominee director required). Membership: SMC = 1; private company = 2 to 50; public company = minimum 3, no maximum; listed public company requires minimum 7 directors.

Distinguish between a holding company and a subsidiary company.

A holding company controls another company (the subsidiary) by either holding more than 50% of its shares/voting power or controlling the composition of its board of directors. The subsidiary is the controlled company. This relationship requires preparation of consolidated financial statements.

What are the two main methods by which a company issues shares?

(1) Issue of shares for cash through a prospectus / offer for sale to the public (public offer), and through (2) private placement or rights issue. Shares may also be issued for consideration other than cash. A public company inviting the public must issue a prospectus complying with the Companies Act.

What is a 'right issue' of shares and on what basis are such shares offered?

A right issue is a further issue of shares offered first to existing shareholders in proportion to their existing shareholding (pre-emptive right), so as not to dilute their proportionate interest. Shareholders may accept, renounce, or reject the offer; shares not taken up may be offered to others as the directors decide.

Distinguish between shares issued at par, at a premium, and at a discount.

At par: issued at face value. At a premium: issued above face value; the premium is credited to a share premium account with restricted use. At a discount: issued below face value, allowed only subject to strict statutory conditions (authorisation, time limits and approvals) under the Companies Act.

What is a 'charge' or 'mortgage' on a company's assets, and why must it be registered?

A charge/mortgage is security created over a company's assets/property in favour of a creditor to secure repayment of a debt. It must be registered with the SECP so that the public and other creditors have notice of the encumbrance and the priority of secured creditors is established.

Within what time must a charge or mortgage be registered with the registrar, and what is the effect of non-registration?

Particulars of the charge must be filed with the SECP within 30 days of its creation (extendable for a further period on payment of additional fee). If not registered, the charge is void against the liquidator and other creditors (though the debt itself remains payable and immediately repayable), and the company/officers may face penalties.

What is meant by registration of 'modification' and 'satisfaction' of a charge?

Modification of a charge (change in terms, amount, or property charged) must be notified to and registered with the SECP. On full repayment, the company must report 'satisfaction' (memorandum of complete discharge) of the charge so the registrar enters a memorandum of satisfaction and the asset is freed of the encumbrance.