Introduction to Business Law

Offer- Acceptance-
Consideration - Remedies

Lecturer: Manawa
Nanayakkara
Definition of a Contract

• Professor G H Treitel:
‘an agreement given rise to
obligations which are enforced or
recognised by law’
Definition of Contract
The Necessary
Elements of a
Binding Contract
• Offer
• Acceptance
• Intention to create legal
relations
• Consideration
• Capacity
• Legality
Agreement
– “meeting
of minds of
the parties”
[T]he situation
where there is a
common
understanding in
the formation of
the contract’.
 Hi Alex, I’m
planning a picnic.
Sorry, it’s already
I’d like to rent your
rented to Eddie.
car for the next
You can have it
week.
Tuesday to
Thursday next week
though?

Deal!

‘consensus ad idem’ –meeting of the mind

 Types of Contracts
Bilateral Contracts Unilateral Contracts

• Both the promisor and • Only one party makes a

the promisee promise to promise. The other
do something and then accepts the offer by
carry out their promise. performing the condition
• E.g buying a latte from • e.g finding a lost dog.
the coffee shop See the case of Carlill v
Carbolic Smoke Ball Co
 Serious intention
+ legally binding
nature

This Photo by Unknown Author is licensed under CC BY-SA

 An Offer

An offer is an expression of willingness to contract on certain terms.

In other words, A statement of willingness to contract on specified terms

made with the intention that, if accepted, it shall become a binding
contract.

The person making the offer is the offeror (promisor) and the person to
whom the offer is made is called the offeree (promisee).
 Problems with offers
• Sometimes it is • Therefore, case law
not obvious has created rules about
whether or not an offers
offer has been • These are guidelines
made. only and there are
exceptions
Rules of Offer

• An offer may be express or implied.

• An offer may be specific or general.
• The offer must be communicated. Taylor v Laird (1856)
• An offer must be definite and not vague: (Note: Loftus
v Roberts (1902) 18 TLR 532
• Offer should not impose an unnecessary obligation to
communicate non-acceptance.
• Offer must be distinguished from a mere statement of
intention or a request for information (Harvey v Facey
[1893] AC 552).
• Offer must be distinguished from an invitation to treat.
 A: ‘Will you sell us Bumper Hall Pen? Telegraph lowest
price’

B: Lowest price for Bumper Hall Pen is, 900 pounds.

Harvey v A: ‘We agree to buy Bumper Hall Pen for 900 pounds asked
by you’
Facey B refused to sell the land to A, and A sued B claiming that B
made an offer in his telegram containing the lowest price
of Bumper Hall Pen.
Court: B’s reply to A’s telegram, was not an offer to sell,
but a mere response to the request for information.
Invitations to
Treat/Invitation
to offer.
• An invitation to treat is
essentially an invitation to
someone to make an offer. It is
not an offer.
• Display of goods in shops
• Tickets and Vending
Machines
• Auctions
• Tenders
• Advertisements
 Display of Goods

• Displays of goods in shops and on supermarket shelves are invitations

to treat.
❖Fisher v Bell [1961] 1 QB 394 : The defendant displayed for sale a
flick knife in his shop window with a price tag just behind it, contrary
to the Restriction of Offensive Weapons Act 1959 s.1(1).
❖Pharmaceutical Society of GB v Boots Cash Chemists
(Southern) Ltd [1952] 2 All ER: Goods on the shelf constitute an
invitation to treat not an offer. A customer takes the goods to the till
and makes an offer to purchase. The shop assistant then chooses
whether to accept the offer. The contract is therefore concluded at the
till in the presence of a pharmacist.
Tickets and Vending
Machines
Displays of goods in machines/ticketing
machines are usually offers.
• Thornton v Shoe Lane parking
[1971] 1 All ER:
• Held - The machine itself constituted
the offer. The acceptance was by
putting the money into the machine.
The ticket was dispensed after the
acceptance took place
 Request for bids is invitation for
offers, bidders make an offer which
auctioneer accepts by striking a
hammer.

Note: Payne v Cave (1789) 3 Term

Rep 148
 Tenders
Requests for tenders are usually
invitations to treat:
Note: Spencer v Harding (1870)
LR 5 CP 561.
However sometimes such requests
contain a promise which itself is
. an offer.
note: Blackpool & Fylde Aero
Club Ltd v Blackpool BC [1990]
1 1195.
Advertisements

• General rule they are

invitations to treat Not Offers
• Note: Partridge v Crittenden
[1968] 2 All ER 421.
Exception/Unilateral Offers

• Carlill v Carbolic Smoke

Ball Company [1893] 1 QB
256.
• Main Issue: whether the
language in Defendant’s
advertisement, regarding the
£100 reward was meant to be
an express promise or, rather,
a sales puff, which had no
meaning whatsoever.
Defence arguments
• Mere sales Puff
❖The offer was not an offer because it was vague
❖There was no consideration given
❖Mrs C did not communicate her acceptance
Held:
❖An advertisement amounted to an offer to the world (universal offer)
which could be accepted by anyone who performed the conditions set out
in it. The claimant did not have to notify the advertiser of her intention to
accept the offer prior to her performance of the conditions.
❖This was a unilateral offer; it was accepted; there was legal intent.
Carlill v Carbolic
Smoke Ball
Company
• Offer to the world at
large i.e. a unilateral
offer
• Mrs C accepted by
her behaviour
• The company
showed legal intent
by depositing £1000
to cover potential
claims.
Unilateral Offers – Rewards

• What about Rewards? Rewards are

offers. Example: I will give £100 to
the person who finds my dog.
• What happens if I find a dog that
is obviously lost, I see its name
and address on its collar and
return it to the owner. I then see
the reward notice in a shop
window. Can I then go back and
claim the reward?
Definition of
Acceptance
Professor Treitel:

a final unqualified expression of

assent to all the terms of an offer’

• Once an offer is accepted in this

way there is a contract

• There are rules that act as

guidelines as to whether or not
acceptance has taken place.
Rules of Acceptance

01 02 03 04
1. The offeree 2. The offer must 3. Acceptance of 4. The acceptance
must be aware of be accepted as it the offer must be must be in the
an offer or have it stands. communicated. right mode.
in mind in order to
accept it.
1. Awareness
of offer
• Taylor v Laird (1856) 1 H & N
266:

• The captain of a ship accepted a

contract to sail a cargo down the
Niger river but sailed half way then
gave up and brought the ship back.
He then wanted payment for the time
he spent.

• The court rejected this and said he

had not fulfilled the conditions of the
contract and had not communicated
the desire to return the boat to the
owners. There was no acceptance of
the new offer.
Exception:
Acceptance by
Post - The Postal
Rule
• When does acceptance
by post take effect?

• Offers need to
arrive in order to be
effective.

• Acceptances are
effective at the time
of posting.
Adams v Lindsell (1818) 106 ER 250
Offer posted on 2nd Sept Offeror, not receiving
(acceptance in course of acceptance, sold wool on
post) 8th

2 Sep. 5 Sep. 8 Sep. 9 Sep.

Offer arrived on 5 Sept Letter of acceptance

and the offeree posted posted before 8th but not
the letter of acceptance received until 9 Sep.
on same day.
 The Rule in Adams v Lindsell

The postal rule:

what if the Household Fire and
acceptance gets Carriage Accident
lost in the post or Insurance v Grant
(1879) 4 Ex D 216
is delayed?
 When does the postal rule apply?
a) Where it is reasonable to use the post - Henthorn v Fraser
[1892] 2 Ch 27.
b) When not excluded by words such as ‘to reach me by Friday
noon’ - Household Fire Insurance v Grant; Holwell Securities Ltd
v Hughes (‘notice in writing’ – could be a notice sent by post)
c) Postal rule can also be excluded by expressly saying so in the
offer. Manchester Diocesan Council for Education v Commercial
& General Investments Ltd [1969] 3 All ER 159. See Buckley J’s
comments in Richards page 43.
 Acceptance must be heard or read

Entores v Miles Far East Corp [1955] 2 QB 327

‘receiving a telex message to offeror’s machine is
Instantaneous considered as ‘communication of the acceptance’
modes of
Brinkibon v Stahag Stahl GmbH [1983] 2 AC 34
communication
eg; electronic
forms In both cases telexes were sent and received during
normal office hours.
 What is the case if acceptances
(and offers) are received outside
normal office hours?
 Instantaneous Communications
If an electronic • The Brimnes [1975] QB
communication is sent 925
and arrives out of
normal office hours, it • Mondial Shipping &
Chartering BV v
is not effective until Astarte Shipping Ltd
office hours the next [1995] CLC 1011
day.
Emerging Arguments
• Argument: Acceptance by email would be complete if
and when the offeree sends the acceptance email, while
being online.
• Contract inter praestentes and inter absentes.
• The application of the postal acceptance rule to email
acceptances.
• The Rule established in 1818 as a legal norm in contract
formation to modern communications like the email.
• Arguments and rationale behind the application of this
rule and contends its applicability to the modern
communication via e-mail.
Emerging Arguments

• Email is not an instantaneous

method of communication, but can
be viewed as a digital version of the
normal post and thus the postal
acceptance rule should apply to this
kind of contracting.
 E-commerce

1 2 3
Contracts made online: Note: emails: are excluded See Jill Poole Textbook on
acceptance will be when from Electronic Contract Law pp 71- 76 for
seller decides whether or not Commerce(EC Directive) interesting discussion of this
to accept your payment once Regulations 2002 and have to area.
it is validated. Seller will rely on the common law.
usually confirm acceptance
and send an email to buyer.
 Formation of E-contract
• Most of the principles under law of contract are applied on e-
Commerce, subject to modification considering nature and
behavior of electronic records.
• Difference between traditional contracts and e-contracts is the
medium of transactions. In e-Commerce, it is electronic
medium.
• Principles relating to offer and acceptance under law of contract
are applicable for e-transactions as well.
• Desplaying of goods and services on computer moniter is
considered an invitation to treat and not an offer.
• Computer oprator has to offer and the same will be accepted
by the advertiser.
 Formation of Contract:
Consideration
In the formation of a valid and binding
contract, something of worth or value
that is either a detriment incurred by
the person making the promise or a
benefit received by the other person.
Definition:
Currie v Misa (1875) LR 10 Ex 893
"a valuable consideration, in the sense of the
law may consist of some right, interest, profit,
or benefit accruing to one party or some
forbearance, detriment, loss or responsibility,
given, suffered, or undertaken by the other.”
Sale of Goods
Manawa Nanayakkara

39
 • The Law relating to Sales of Goods(SOG) in two
different ways. If the sale is between two ordinary
people the law is applicable in common law(law of
Definition of contract) but if it is a sale between a seller and a
buyer, it comes under Sales of Good Ordinance No
a Contract 11 of 1896.(SOGO)
• As per Section 2(1) of the Sales of Goods Ordinance
for Sale “ A contract of Sale of goods is a contract whereby
the seller transfers or agrees to transfer the property
in goods to the buyer for a money consideration
called the Price.”

40
 It is a contract between two parties.(seller
&buyer)

The subject matter of a contract is "goods”

The essentials to
constitute
contract of sale The seller should transfer or agree to
transfer the property (ownership) in the
goods to the buyer.

The consideration is known as the “price”

41
As per the Section 2 of SOGO
• Two important points can be identified.
• 1. Sale
• 2. Agreement to sale

Where under a contract of sale the property in the goods is transferred from the seller
to the buyer the contract is called a sale.

Where under a contract of sale the transfer of the property in the goods in the future
time or subject to some condition later to be fulfilled the contract is called an
agreement to sale.

42
 there are some other
transactions in which
Distinction property in goods passes but
between sale which are not sale of goods.
and other • Gift &free promotional offers
supply contracts • Barter or Exchange
• Work &Material
• Hire
• Bailment &pledge (Auction sale)
43
 Section 3 “Capacity to buy and sell is regulated by
the general law concerning capacity to contract, and
to transfer and acquire property:

Provided that where necessaries are sold and

CAPACITY TO delivered to a minor, or to a person who by reason of
mental incapacity or drunkenness is incompetent to
BUY AND SELL contract, he must pay a reasonable price therefor.

‘Necessaries’ in this section means goods suitable to

the condition in life of such minor or other person,
and to his actual requirements at the time of the sale
and delivery.”

44
Classification of Goods
• Existing goods (goods which are actually in existence,
capable of being transferred)
1. Specific Goods 2. Unascertained goods

• Future Goods (goods which are not in existence at the

time of contract. therefore there cannot be a sale of
them)

45
Existing Goods and
future goods
• Goods that are physically in existence and which are in the seller’s
ownership or possession, at the time of enter in to a contract of
sale.
• 1. Specific Goods – identify and agree at the same time
• 2. ascertain goods – first agree then identify

• Future goods are to be manufactured, produced, or acquired by

the seller after making of the contract of sale.

46
Maxim of “Caveat Emptor”

The meaning of this maxim is “let the buyer beware.” It does not mean that the
buyer must take a chance and he must take care.

Accordingly, the buyer must be careful while purchasing goods of his

requirement, and in the absence of any inquiry by him, the seller is not bound to
disclose every defect in goods of which may be cognizant.

The buyer must examine the goods thoroughly and must see the goods that he
buys are suitable for the purpose for which he wants them.

47
Conditions of a Contract

A condition is a vital term of a contract, going to the root of the contract.

If there is a breach of a condition the injured party can rescind the contract and
claim damages for non-performance.

This means that he has the right to decide to bring the contract to an end, or to
carry on with the contract. If he decides to bring it to end, the courts will grant
rescission (cancellation) on the contract.

48
Warranty of a Contract

A warranty is not a vital term in a contract, but one which is merely subsidiary, a
breach of which gives no right to rescind but only an action for damages from
the loss which he has suffered. It may be made orally or in writing.

Whether a term in a contract is a warranty or condition is a question of the

intention of the parties to be determined from the circumstances of the case.

49
Condition &Warranties

A condition is the term or

stipulation going to the root of Warranty is not that much
the contract. it is the essence of a important but it is collateral to
contract. condition makes the the main purpose of the contract.
very basis of a contract. A breach the breach of which gives rise to
of which gives rise to right to claim for damages.
treat the contract as repudiated.

50
Breach of condition/warranty

Sec.12(1) - where a contract of sale

Sec.12(3) - A buyer may elect to
is subject to any condition to be
treat a breach of condition as a
fulfilled by the seller, the buyer may
breach of warranty. but according to
waive the condition or may elect to
sec.12(3)the buyer is compelled to
treat the breach of such condition as
treat the breach of condition by the
a breach of warranty and not as a
seller as if it is a breach of warranty
ground for treating the contract as
and claim damages only.
required.

51
An Overview of Sri Lankan
Intellectual Property Law
and the Sri Lankan IP
Regime

This Photo by Unknown Author is licensed under CC BY-SA-NC

Manawa Nanayakkara

52
Road map
• What is IP?
• Value of IP rights
• IP as a property
• Justification of IP rights
• Theories of IP
• Development of IP at
international level
• IP balance
• Different types of IP
• Terminology
53
What is
Intellectual
Property (IP)?
• IP – creation of human mind/
result of an intellectual effort
• Creativity of human mind
associates with the intellectual
capacity of a person.
• Things made as a result of the
intellectual contribution of
human mind qualifies to be
considered as IP.
54
This Photo by Unknown Author is licensed under CC BY-SA-NC
“Imagination is more important than
knowledge”
Albert Einstein

Albert Einstein’s preference for imagination

over knowledge is a starting point, because IP
is based on the power of imagination. Einstein
understood that it is the ability to stand on an
existing foundation of accepted knowledge
and see beyond to the next frontier of
discovery that is the source of personal,
cultural and economic advancement.
55
 • Wide range of things come under the
definition of IP.
• World Intellectual Property Organization
(WIPO) 1967
• Literary, artistic and scientific works
• Performances of performing artists, phonograms and
Scope of IP broadcasts
• Inventions in all fields of human endeavour
• Industrial designs
• Trademarks, service marks, and commercial names and
designations
• Protection against unfair competition and
• all other rights resulting from intellectual activity in the
industrial, scientific, literary or artistic fields.
56
 tooth brush - patent/industrial design
brand - trademark

IP plays a Tea - geographical indication

the shape of the cup - industrial design

vital role tea brand - trademark

in day-to-
mobile phone - patent
shape of the phone - industrial design
brand - trademark
apps and mobile softwate - patent/copyrights

day life car - patent

shape of the car - industrial design
brand - trademark

computer - patent
shape of the computer - industrial design
brand - trademark
software - patent/copyright
57
 Cont…

This Photo by Unknown Author is licensed under CC BY-NC

58
Value of IP rights
• At the very basic level, an IP
right is a property right.
• Just like a car or house owner
has rights over that property
(owner may use, lend, rent,
sell the car or house), a
creator has rights over his
creations (he may make
copies, translate, and upload
the creation on the Internet,
etc.).
This Photo by Unknown Author is licensed under CC BY-SA-NC

59
 IP as property

‘property’ is an The entire notion An owner of IP can be owned –

object or objects of property is property has a: used and enjoyed
that belongs to founded on the and transferred.
someone concept of
(Cambridge ‘ownership’.
dictionary). Right to possess the property
Right to use and enjoy the property
Right to transfer the property

60
Cont…
• IP considers as an intangible Tangible property Intangible property (IP right)

property.
Book Copyright
• Intangible – ‘unable to be
Electric bulb Patent
touched; not having physical
presence’. Coke contour bottle Industrial design (shape of

• IP right is something which is the bottle)

bestowed upon the tangible Trademark (coca cola sign)

or physical assets.

61
Justification of IP rights
Rights can be simply defined as an entitlement which permits someone to perform or not
to perform some activities regarding a subject matter.
According to the Locke there are two types of rights as natural rights and legal rights.

Natural rights are sprung from the nature itself and so are inalienable, and universal; such
as right to life, liberty and property.
Legal rights originate as a result of law and function as law permits; such as right to vote.

IP originate as a result of the functioning of human mind; and thus, IP considers as ‘fruit of
the creator’s labour.’
IP can be considered as a natural right.
62
 Several theories have been advanced to
explain why the society needs to grant IP
rights.

IP and According to a leading study by Fritz

Theoritical Machlup, there are four well-known
justifications for IP protection.
Foundation
They are, namely, the ‘natural-law’ thesis, the
‘reward-by-monopoly’ thesis, the ‘monopoly-
profit-incentive’ thesis, and the ‘exchange-
for-secrets’ thesis.
 • The ‘natural-rights’ school of thinking
assumes that the creator or inventor has a
‘natural’ property right in his intellectual
achievement and society is morally obliged
Natural to recognize and implement his property
rights thesis right.
• See Lockean ‘labour desert theory’ in his
famous The Second Treaties on Government.

64
 • According to the utilitarian justification, IP
rights are necessary because they contribute
to general economic welfare.
Incentive • In order to achieve this goal, property rights
Theory are granted to authors and inventors as an
incentive to create and top invent, but some
aspects must remain in the public domain to
preserve future creations and innovations.

65
Utilitarian Theory/incentive theory explained by Prof Nic Suzor
66
IP rights can be
subjected to
theft,
exploitation or
misappropriation

67
68
 patents

plant
breeders trademarks
rights

Different
types of IP trade
IP industrial
secreats designs

geographical
copyrights
indications

69
Traditional division
of IP
• Copyrights and
related rights
• Industrial property

70
This Photo by Unknown Author is licensed under CC BY-NC
 Persons wishing to conduct a business in
Sri Lanka may do so through the following:

A Sole Proprietorship
Choices
available in A Partnership
Sri Lanka
A Company
 An individual carrying on a business in
his own name

A single person providing the capital

Sole for the business
Proprietorship
(Sole Trader) A single person holding full liability for
any debt/liability

No separate and distinct business

form.
 Definition

J.L. Hanson
• “A type of business unit where one person is solely
responsible for providing the capital and bearing the risk of
the enterprise, and for the management of the business.”

• A sole proprietor contributes and organizes the resources in a

systematic way and controls the activities with the objective of
earning profit.
Key Characteristics of
Sole Proprietorship

• Ease of formation
• Flexibility in Operation
• Single Ownership
• One man’s Capital
• One-man Control
• No sharing of Profit and Loss
• Unlimited Liability
• No Separate Entity
Limitations of Sole Proprietorship

Limited Lack of Unlimited

Resources Continuity Liability

Not Suitable Limited

for Large Scale Managerial
Operation Expertise
Partnership - Definition

• ‘Partnership’ is an association of two or more

persons who pool their financial and managerial
resources and agree to carry on a business and share
its profit.
• The persons who form a partnership are individually
known as partners and collectively a firm or
partnership firm.
Partnership

• The relation which subsists between persons

carrying on business in common with a view of
profit. – The Partnership Act 1890.

• As a result, a partnership exists where two or more

people carry on business together with an intention
of making a profit regardless of whether or not the
persons intended to form a partnership.
Characteristics of
Partnership
• Two or More Persons
• Contractual Relationship
• Sharing profits of business
• Existence of Lawful Business
• Principal Agent Relationship
• Unlimited Liabilities
• Voluntary Registration
 Demerits
Merits
- Easy to Form - Instability
- Flexibility in Operation -Unlimited Liability
Merits and - Availability of Larger Resources - Non-transferability of share
- Better Decision - Limited capital
Demerits of - Sharing of Risk - Possibility of conflicts
Partnerships - Active Participation
- Benefits of Specialization
-Protection of Interest
- Secrecy
 Company
• Meaning of the word company
• History of Company Law in SL
• Background of the 1982 & 2007
Act
• Positive & negative aspects of a
company
 The word ‘Company’ is an amalgamation of
the Latin word ‘Com’ meaning “with or
together” and ‘Panis’ meaning “bread”.
Company Originally, it referred to a group of persons
who took their meals together.
 • Company is an association of persons or
group of persons for a common goal to
continue business operations.
Chief Justice Marshall of USA
“A company is a person, artificial, invisible,
intangible, and existing only in the
Company contemplation of the law. Being a mere
creature of law, it possesses only those
properties which the character of its creation
confers upon it either expressly or as
incidental to its very existence”.
 Company
Company is a voluntary association of persons formed
for the purpose of doing business having a distinct
name and limited liability. It is a juristic person having
a separate legal entity distinct from the members who
constitute it, capable of rights and duties of its own and
endowed with the potential of perpetual succession.
 Company

A company is nothing but a group of persons who have

come together or who have contributed money for
some common purpose and who have incorporated
themselves into a distinct legal entity in the form of a
company for that purpose.
Governing law -
History

• During the British Rule Company Law in

SL has been mainly governed by the
following Ordinances:
• Joint Stock Companies Ordinance
No. 4 of 1861
• Companies Ordinance No 51 of
1938
Thereafter the following Acts were
enacted by the Parliament:
Companies Act No. 17 of 1982
Companies Act No. 07 of 2007
Creation of a Company

Companies are set up in a number of

ways:
• By Royal Charter
• By statute
• By registration.
 In order to be able to complete the form they
must decide the following:
• Whether the company will be a private or a
public limited company
• must decide who will be the member or
members of the company.
• must decide who will be the director or
directors and secretary or secretaries of the
company.
Completing the
Form
 • Must decide whether the company’s internal
managements will be governed by the model
articles contained in the first schedule of the
companies act or whether a constitution
replacing some or all of those rules is to be
adopted.
• They must choose a name for the company.
The application must be accompanied by a
declaration by the applicant/s that to the best
of their knowledge the proposed name of the
company is not identical or similar to an
Completing the existing company.
Form
Formation of a
Company
Pursuant to the Companies Act, 2007 , a company
may be registered either as:
a) a private company, or
b) a public company
as per the requirements and demand of
members or partners of a company.
• Whether the company is private or public, it can be
organized with limited liability (by shares or by
guarantee) or with unlimited liability.
 • Limits the number of its members to fifty,
excluding employees who are members or ex-
employees who were and continue to be members;
• A private company can be incorporated by a
minimum of two (2) members, as against a
minimum requirement of seven (7) members for a
public company
Private • It is possible for a private company to have only
Company one shareholder. This type of company is known
as a “single member company”
Ss. 27-31 • Restricts the right of transfer of shares, if any;
• Prohibits any invitation to the public to
subscribe for any shares
• A private company must use the word “Private
Limited” at the end of its name.
 Minimum members are seven and there is no maximum limit and the
company can issue shares to public in order to raise capital for day to
day business operations.

In case of a public company, it can choose either to list its shares on

the Sri Lankan stock exchange or to be an unlisted public company.

Public Have an advantage that competition on the stock market can increase
the value of their shares
Company
A Public company must use the word “Limited” or the abbreviation
“Ltd” at the end of its name.

Public company which is a listed company must use the word “Public
Limited Company” or the abbreviation “PLC” at the end of its name.
 THREE CATEGORIES OF
REGISTERED COMPANIES

• Registered companies may further be divided

into three categories. S. 3, 2007 Act
- Companies Limited By Shares

- Companies Limited By Guarantee

- Unlimited Companies
 -unlimited companies
- limited companies
Types of - company limited by guarantee
- company limited by shares
Companies - private companies
- public companies
- listed companies
- non-listed companies
Formation of a
Company
The formation of a company involves preparation and
filing of several essential documents.
The preparation of Article of Association is the first
step in the formation of a company.
It is the main document and the charter of the
company which the company is allowed to be formed.
 Articles of Association
• A company may draft or adopt the standard set of
articles of association (Model Article) according to the
First Schedule in the Companies Act of 2007 (Page
414).
• Professional charges are higher for drafting new articles
of association than for adopting the standard articles.
• The articles of association must be submitted in
duplicate to the Registrar of Companies with the
balance of documents for incorporation.
• No prior approval from the Registrar General of
Companies is required for the articles of association.
Company Constitution- Early Stage

Memorandum of Association Articles of Association

This was considered an unalterable Contained rules for the internal
except in very specific instances. regulations for the management of
The purpose of it was in the interest the company and the conduct of its
of the shareholders(particularly business.
minority), the creditors, and the This was freely alterable by the
public. shareholders at a general meeting.
 Company Constitution- Early Stage
• The MOA is designed to make the outside world know the state of
affairs of the company. This helps various stakeholders of the
company to evaluate the extent of their risk and also possibilities
of the company to overcome them at a future date.
• Sec 2 of the Company Act No 17 of 1982, “number of persons may
incorporate a company by subscribing their names to a MOA and
by complying with other requirements if the Act.”
• The object clause ( as per sec 3)gave the company its identity or
status.
• The Articles of Association of a company were considered
subordinate to and controlled by the MOA , which was the
dominant instrument.
• The MOA contained the conditions upon which alone the
company was granted incorporation. (Company Law,
Kanaganayagam Kanag-Isvaran, P54)
Company Constitution- Early Stage
The purpose of sating “objects "of a company in its MOA was to
• Narrow down the main purpose for which a company was incorporated,
• Thereby giving an investor a definite idea as to the type of business the company would
be investing in,
• A business transaction which did not fall within the category of the object clause was
considered to be ultra vires the power of company,
• Then company was able to lawfully disclaim liability arising out of such a transaction.
• This in effect, made third parties tread with caution in their dealings with a company, for
fear that the transaction may not fall fairly and squarely within the objects of the
company. (Void transaction)
 MOA is the document that governs the relationship
between the company and the outside world.
• It was one of the documents required to incorporate a
company in Sri Lanka under previous Act. (Company
Act No 17 of 1982) Sec. 3-7
• It is also used in many of the common law jurisdictions.
• Section 3 – A MOA is required to state the name of
the company, the type of the company (Public,
Private), the objects of the company, its authorized
share capital, the district in which the registered office
of the company is to be situated, the subscribers (the
original shareholders of the company), and the
number of shares taken by the subscribers.
• Section 7 – A company may alter objects of the
Memorandum of Association company by special resolution of its share holders,
(MOA) provided that the amendment complies with the Act
1982.
The Object Clause

Under the old Act (No 17 of 1982), the legal personality of a company
existed only for the particular purpose of its incorporation, as defined and
described in the object clause of MOA.

The transactions that did not fall within the objects of the company were
considered ultra vires and were declared null and void.

Though an ultra vires ex facie deemed void, whether it affects a third

person or not, depends on the degree of knowledge of that third person.
 • In common law, “knowledge "of a
The Object third party meant not only actual
knowledge but also “constructive • Re Jon Beauforte London
Clause knowledge”. Ltd (1953) 1 All ER 634
• “the company’s objects 'in
• Royal British bank V Turaquand the MOA were to manufacture
(1856) 6E dress, but the company had,
for some-time been making
• “anyone dealing with a company veneered panels. The court
was deemed to have notice of the
contents of its public documents
was of opinion that the
which were its MOA & AOA. The doctrine of constructive notice
result was that anyone dealing with resulted in the creditors claim
a company was deemed to have being ultra vires the power of
knowledge of the of the object company and that creditor’s
clause of a company.” right against the company was
ill funded.”
Articles of Association
• The AOA contain the provisions for the domestic
regulations of a company, that is the internal regulation
of the management of the affairs of the company and
conduct of its business over which the shareholders
have full control.
• In other words, the MOA delt with the company’s
relationship with the outside world and the AOA
regulated the internal affairs of the company.
 Ashbury Railway Carriage & Iron Co vs. Richer
(1875)LR 7 HL 653

“the memorandum is as it were, the area beyond

which the actions of company cannot go: inside that
area the shareholders may make such regulations for
Articles of their own government as they think fit.”
Association Holmes vs Keyes(1958)2 All ER 129CA

“the AOA of a company should be regarded as a

business document and should be construed so
as to give them reasonable business efficacy,
where the construction tending to that results is
admissible in the language of the articles.”
AOA- Sri Lankan Legal landscape
• Keeping inline with the trends and developments in other jurisdictions, replaced the No
17 of 1982 CA by No 7 of 2007 Company Act.
• The CA 2007, abolished the requirement of the MOA and the object clause contained
therein,
• Retained the concept of AOA as the sole document.
• The AOA became the constitution of a company under 2007 Act.
• Now, under the CA Act 2007, shareholders are free, subject to certain legal constraints
contained in the Act, to make their own rules about the internal affairs of the company.
• Previously any business transaction which did not fall within the category of the object
clause was considered ultra vires and the company was able to lawfully disclaim liability
for it.
AOA- Sri Lankan Legal landscape

• According to the section 17 of CA 2007, the

liberation of third parties from the doctrine of
ultra vires is a salient feature.
• However, companies are still at liberty to state
their objects , if they so desire, in the articles of
association, but they are not mandatory
required or compelled so as before. (Section 13)
• The legal consequences of a company opting to
have its objects stated in its AOA have been laid
down in the Act. (The Company has a discretion
to add or not objects) ( Section 17)
Certificate of Incorporation

• The certificate of incorporation is the birth

certificate of a company. The company is ‘born’
and is capable of exercising all the functions of
an incorporated company
• The company comes into existence from the date
mentioned in the certificate of incorporation.
• The certificate is ‘conclusive evidence that all the
requirements of this Act in respect of registration
and matters precedent and related thereto have
been fulfilled and that the association is a
company duly registered under this Act.
Deciding Company Name
(S. 6 & 7)

• Another important task is deciding a name of your company

before applying for company registration.
• Depending on the Type of the Company Name should
end with following words:
• Listed Company "Public Limited Company", or "PLC"
• Other limited company "Limited" or 'Ltd'
• Private Company "(Private) Limited", or "(Pvt) Ltd."
• Avoid Undesirable Names
Too similar to the name of another company
Misleading Prohibition of use of certain names
 Qualified Restrictions
(S. 7)

• - Not to use the following words without the

Minister's consent
• * 'President' or 'Presidential'...............
• * 'Municipal' or 'other Local Authority' or suggesting
connection with any Society or body incorporated by
an Act of Parliament
• * 'Co-operative' or 'Society'
• * 'National', 'State' or ' Sri Lanka ' or similar
words........
Thank you!