Legal and Regulatory Framework Manual PDF

CHAPTER ONE THE REGULATORY SYSTEM OF FINANCIAL SECTOR 1. Introduction 3 2. Objects and Functions of Regulators in the Financial Sector 3 3. Working Relationship among the Financial Regulators...

CHAPTER ONE THE REGULATORY SYSTEM OF FINANCIAL SECTOR 1. Introduction 3 2. Objects and Functions of Regulators in the Financial Sector 3 3. Working Relationship among the Financial Regulators 6 This syllabus area will provide approximately 4 of the 50 questions. 1.1.0 Introduction 1.1.1 The financial regulatory system in Ghana consists of the statutory bodies set up to regulate the financial system in the country. Financial services generally refer to the provision by companies, including banks and finance companies, of services in finance. Finances are described as the income of a state or person, resources, funds or capital. The financial system in Ghana consists of the financial services providers, theirrespective regulators and any other related players. The regulators supervise and give directives concerning the financial markets, which consists of individuals and institutions and they also set the rules and practices that facilitate the flow of funds from savers to users. The following are the statutory regulatory institutions for the financial sector: 1. Securities and Exchange Commission 2. Bank of Ghana 3. National Pensions Regulatory Authority 4. National Insurance Commission 1.2.0 Objects and Functions of Regulators in the Financial Sector Learning Objective To know the objects and functions of regulators in the financial sector. 1.2.1 Securities and Exchange Commission The Securities and Exchange Commission (hereinafter called “the Commission”) was established under the Securities Industry Act, 2016 (Act 929) which repealed the Securities Industry Act, 1993 (PNDCL 333) and the Securities Industry (Amendment) Act, 2000 (Act 590). Act 929 was passed to revise and consolidate the Securities Industry Act, 1993 (PNDCL 333) and provide for related purposes. Section 2 of Act 929 states that the object of the Commission ‘is to regulate and promote the growth and development of an efficient, fair and transparent securities market in which investors and the integrity of the market are protected.’ In 2021, the Securities Industry (Amendment) Act, 2021 (Act 1062) was passed ‘to amend the Securities Industry Act, 2016 (Act 929) to provide for the conduct of investigation by the Commission when the Commission is assisting other domestic or foreign regulatory authorities, the procedure for dealing with a request for assistance from a foreign securities regulatory authority, the issuance by the Commission of codes, directives, guidelines and circulars and for related matters.’ 1.2.2 Bank of Ghana The Bank of Ghana, which is the central bank, was made to continue in existence by section 1(1) of the Bank of Ghana Act, 2002 (Act 612). Section 1(2) of Act 612 further provides that “In accordance with clause (1) of article 183 of the Constitution, the Bank referred to in subsection (1) shall be the Central Bank of Ghana….”. The primary objective of the Bank as stated in Section 3(1) of Act 612 is to maintain stability in the general level of prices. Section 3 (2) further provides that: ‘Without prejudice to subsection (1), the Bank shall support the general economic policy of the Government and promote economic growth and effective and efficient operation of banking and credit systems in the country, independent of instructions from the Government or any other authority’. Section 4 (1) of Act 612 sets out the functions of the Bank of Ghana as follows: (a) Formulate and implement monetary policy aimed at achieving the objects of the Bank; (b) Promote by monetary measures the stabilisation of the value of the currency within and outside the Republic; (c) Institute measures which are likely to have a favourable effect on the balance of payments, the state of public finances and the general development of the national economy; (d) Regulate, supervise and direct the banking and credit system and ensure the smooth operation of the financial sector; (e) Promote, regulate and supervise payment and settlement systems; (f) Issue and redeem the currency notes and coins; (g) Ensure effective maintenance and management of the Republic’s external financial services; (h) License, regulate, promote and supervise non-banking financial institutions; (i) Act as banker and financial adviser to the Government; (j) Promote and maintain relations with international banking and financial institutions and subject to the Constitution and any other relevant enactment, implement international monetary agreements to which the Republic is a party; and (k) Do all other things that are incidental or conducive to the efficient performance of its functions under this Act and any other enactment. Banks and specialised deposit-taking institutions are regulated by the Bank of Ghana under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930). Section 18 of Act 930 provides for the activities which the Bank of Ghana shall permit banks and specialised deposit- taking institutions to undertake. These include investment in financial services; trading for own account or for account of customers in money market instruments, foreign exchange, or transferable securities; participation in securities issues and provision of services related to those issues; portfolio management and advice; and keeping and administration of securities. Section 18(3) provides that ‘A bank or specialised deposit-taking institution that is engaged in activities that are subject to the Securities Industry Act, 1993 (PNDCL 333), Foreign Exchange Act, 2006 (Act 723), the Credit Reporting Act, 2007 (Act 726), the Insurance Act, 2006 (Act 724) or any other relevant enactment shall comply with the requirements of that enactment, including any registration, licensing or other authorization requirements.’ The Bank of Ghana has a role to play in the securities industry as the regulator of the banks licensed by the Commission, and the money market, as well as being the monetary agent of the Government. 1.2.3 National Pensions Regulatory Authority The National Pensions Regulatory Authority was established under section 5 of the National Pensions Act, 2008 (Act 766). Section 2 of Act 766 describes the object of the Authority as ‘to regulate and monitor the operations of the Scheme and ensure the effective administration of pensions in the country’. Act 766 was passed ‘to provide for pension reform in the country by the introduction of a contributory three-tier pension scheme; the establishment of a National Pensions Regulatory Authority to oversee the administration and management of registered pension schemes and trustees of registered schemes, the establishment of a Social Security and National Insurance Trust to manage the basic national social security scheme to cater for the first tier of the contributory three-tier scheme, and to provide for related matters.’ The object of the scheme under section 2 of Act 766, is to (a) provide pension benefits to ensure retirement income security for workers, (b) ensure that every worker receives retirement and related benefits as and when due, and (c) establish a uniform set of rules, regulations and standards for the administration and payment of retirement and related benefits for workers in the public and the private sector. Section 175 of Act 766 provides that a ‘trustee or pension fund manager shall invest pension contributions received under this Act in order to obtain safe and fair returns on the amount invested. The suggested investment instruments include: bonds, bills, and other securities issued or guaranteed by the Bank of Ghana or the Government of Ghana or issued by listed companies; debt instruments and equities of corporates listed on a stock exchange registered under the Securities Industry Act, 1993 (PNDCL 333) (now the Securities Industry Act, 2016); investment certificates of closed-end investment fund or hybrid investment funds listed on a stock exchange registered under PNDCL 333 (now Act 929); units sold by open-end investment funds or specialist open-end investment funds listed on the stock exchange recognized by the Board; or real estate investment. According to section 178, a trustee or pension fund manager shall not invest pension fund assets in the shares or any other securities issues by: - the trustee or pension fund manager or custodian, - a shareholder of the trustee or pension fund manager or custodian.’ This should avoid any unfair dealings to other managers as well as conflict of interest situations. 1.2.4 National Insurance Commission The Insurance Act, 2021 (Act1061) was passed ‘to establish the National Insurance Commission, to provide for the regulation and supervision of the insurance market and for related matters.’ The National Insurance Commission was established under section 1 of Act 1061. Like the other three regulatory bodies aforementioned, the Commission is a body corporate with perpetual succession and a common seal and may sue and be sued in its corporate name. The objects of the Commission as stated in section 2(1) of Act 1061 are to (a) promote a fair, safe, efficient and dtable insurance market and the development of a sustainable insurance market; (b) secure protection for past, current and prospective customers; (c) contribute to the stability of the financial system of the country; (d) support and encourage financial inclusion within the insurance market; and (e) support and promote insurance penetration. 1.3.0 Working Relationship among the Financial Regulators Learning Objective To know the working relationship among the financial regulators. 1.3.1 The working relationship between the regulatory bodies can be seen in their supervisory roles over their licensees or participants. For instance, the Commission regulates banks, licensed by the Central Bank, who perform the function of custodians as well as those which are public companies listed on the securities exchange. Fund managers regulated by the National Pension Regulatory Authority who perform similar functions like those under Act 929, are also licensed by the Commission. Section 63(1) of Act 929 provides that the Commission may license a unit trust if the Commission is satisfied that (c) the trustee is a bank, an insurance company or a financial institution or a wholly owned subsidiary of any of them approved by the Commission. In section 114 of Act 929, a bank or other financial institution which intends to do business in the capital market other than the business of trustee, custodian, primary dealer, nominee, registrar, issuing house and underwriter, shall incorporate a subsidiary company under the Companies Act, 1963 (Act 179) and apply for the relevant license. As part of the establishment of fidelity fund, section 194 (1) of Act 929 provides that a stock exchange may enter into a contract with an insurer in the country to be insured or indemnified against liability in respect of claims under this Part. Section 170 of Act 929 also requires that where an order made under section 169, as regards a trust account held by a broker-dealer or fund manager, is directed to a banker, the banker shall (a) disclose to the Commission every account kept at the bank in the name of the person to whom the order relates, and an account that the banker reasonably suspects is held or kept at the bank for the benefit of that person; and (b) permit the Commission to make a copy of, or to take an extract from, an account of the person to whom the order relates or any of the books of the banker relating to that person. End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. What are the statutory regulatory bodies in the financial sector? Answer Reference: Section 1.1.1. 2. What were the regulatory bodies set up for under their respective Acts? Answer Reference: Sections 1.2.1, 1.2.2, 1.2.3 and 1.2.4. 3 According to section 3(2) of the Bank of Ghana Act, 2002 (Act 612), what does the Bank of Ghana support and promote? Answer Reference: Section 1.2.2 4. What shall a bank or specialised deposit-taking institution which engages in activities subject to the Securities Industry Act, 2016 (Act 929) do? Answer Reference: Section 1.2.2. 5. What is the role of the Bank of Ghana in the securities industry? Answer Reference: Section 1.2.2. 6. What instruments can a trustee or pension fund manager licensed by the National Pensions Authority invest pension contributions in? Answer Reference:Section 1.2.3. 7. What are the objects of the National Insurance Commission under section 2 of Insurance Act, 2021 (Act 1061)? Answer Reference: Section 1.2.4. 8. Which financial sector regulators license and regulate companies that function as custodians and may be listed on the securities exchange? Answer Reference:Section 1.3.1. 9. What must a bank that intends to do business in the capital market do? Answer Reference: Section 1.3.1. 10. What other regulator regulates fund managers who perform similar functions under the National Pensions Act, 2008 (Act 766)? Answer Reference: Section 1.3.1. CHAPTER TWO THE COMPANIES ACT, 2019 (ACT 992) 1. Introduction 8 2. The Corporate Status of Companies 11 3. Acts done by or on behalf of the Company 15 4. Evidence of Ownership Interest in Companies 19 5. Winding up of Companies 21 This syllabus area will provide approximately 7 of the 50 examination questions. 2.1.0 Introduction Learning Objective To describe the corporate status of company. 2.1.1 The Companies Act, 2019 (Act 992) is a key part of the legal and regulatory systemof securities markets. It was passed to amend and consolidate the law relating to companies. Section 4 of Act 992 provides that Act 992 ‘does not abrogate or affect legislation relating to companies carrying on the business of banking, insurance or any other business which is subject to special regulation’. In that regard, the Securities and Exchange Commission which operates under the Securities Industry Act, 2016 (Act 929) continues to carry out its mandate and shall be recognized by the Companies Act provisions. The Companies Act, 2019 provides for the setting up and regulation of companies, which includes the entities licensed by the Securities and Exchange Commission. 2.1.2. Types of Companies In the First Schedule of Act 992 with reference to section 383 a ‘company’ means “a body formed and registered under this Act;”. Section 7(4) provides that ‘a company of a type specified under subsection 1, may either be a private company or a public company’. Section 7(7) states that ‘a company which is not a private company is a public company…’. In section 7(5) ‘a private company, is a company which by virtue of its constitution (a) restricts the right to transfer the shares of the company, if any, (b) limits the total number of the members and debenture holders to fifty, not including (i) persons who are genuinely in the employment of the company, and (ii) persons who, having been formerly in the employment of the company, were while in that employment, and have continued after the determination of that employment to be members or debenture holders of the company; (c) prohibits the company from making any invitation to the public to acquire shares or debentures of the company; and (d) prohibits the company from making an invitation to the public to deposit money for fixed periods or payable at call, whether bearing or not bearing interest.’ Consequently, a public company is a company that in its constitution has no restriction on the right to transfer its shares, has no upper limit on the number of its shareholders or debenture holders and is not restricted in making invitations to the public. Section 7 (1) and (2) lists and describes the types of companies respectively as: (a) a company limited by shares: a company which has the liability of its members limited to the amount unpaid on the shares respectively held by them; (b) a company limited by guarantee: a company which has the liability of its members limited to an amount that the members may respectively undertake to contribute to the assets of the company in the event of its being wound up; (c) an unlimited company: a company which does not have a limit on the liability of its members; or (d) an external company: defined under section 329 (2) as a body corporate formed outside the Republic of Ghana which, has an established place of business in the country. 2.1.3. Formation of Company Section 12 provides that a person of at least eighteen (18) years may apply for the incorporation of a company. Section 13 provides that the application for incorporation shall be made in the prescribed form and delivered to the Registrar. The application shall include - the name of the company as required by section 21; - an indication of the type of proposed company; - the nature of the proposed business in the case of a company registered with an object; - the address of the proposed registered office and principal place of business of the company in the Republic, the telephone number and the post office box, private mail bag or digital address of the registered office of the company; - electronic mail address and website of the company, if available; - date and place of birth, present full and any former name, particulars of any business occupation and other directorships held, residential, occupational, postal and electronic mail addresses and telephone contact, and nationality of each subscriber; - present full and any former name, residential, occupational, postal and electronic mail addresses and telephone contact, and nationality of each proposed director; - a statutory declaration by the proposed director of the proposed company that five years prior he has not been charged with or convicted of a criminal offence involving fraud or dishonesty, or relating to the promotion, incorporation or management of a company, or declared insolvent stating the date and particulars of the insolvent company; - consent of each proposed director; - particulars of the Company Secretary: present full and any former name, usual postal, occupational and electronic mail address, residential address in the case of an individual, and business occupation; - particulars of the auditor: present full and any former name, usual postal, occupational and electronic mail address, residential address in the case of an individual, and the consent of the auditor; - particulars of each subscriber of company with shares: full and any former or other name, date and place of birth, nationality and proof of nationality, residential, postal or email address, place of work and position held; - particulars of each beneficial owner of the proposed company: full and any former or other name, date and place of birth, telephone number, nationality, national identity number and proof of identity, residential, postal or email address, place of work and position held, nature of interest including details of legal, financial, security, debenture or informal arrangement giving rise to the beneficial ownership; and confirmation as to whether the beneficial owner is a politically exposed person; - amount of proposed stated capital, number of authorised shares of the company for each class. Incorporation is completed according to section 14 when the Registrar is satisfied that the application for incorporation of a company complies with the Act, and after payment of the prescribed fee, certifies under the seal of the Registrar that the company is incorporated. According to section 15, the certificate of incorporation, or a copy of that certificate certified as correct by the Registrar, is conclusive evidence that the company has been duly incorporated under the Act and proceedings shall not be brought in a Court to cancel or annul the incorporation. Section 23 of Act 992 provides that a company has the option to have a registered constitution. The constitution of the company contains the rights, powers, duties and obligations of the company, the Board, each director and each shareholder of the company. Unless there are restrictions, limitations or modifications in the constitution, the registered constitution shall have effect as provided in the Second Schedule of the Act. Section 26 makes provision for the contents of the registered constitution as follows: - name of the company, with the last words of the name described by subsection (1) of section 21 for the type of company; - names of the first directors of the company; and - that the powers of the directors are limited in accordance with section 189 of the Act. The company may state the nature of business that it is authorised to carry on or the nature of objects for which it is incorporated. In the case of a company registered with shares, the number of shares to be registered must be stated. In section 26(4) ‘a registered constitution may contain any other lawful provisions relating to the structure and administration of the company’. 2.2.0 Corporate Status of Companies 2.2.1. When a company is incorporated it becomes a distinct, separate and artificial legal person. This principle was firmly established in the English case of Salomon vrs. Salomon & Co. Ltd [1895-99] AER. 33. The facts are as follows: Mr. Salomon, previously a boot manufacturer, formed a Company to take over his boot manufacturing business. The Company was called Salomon and Co. Ltd. The Company had seven members – Mr. &Mrs. Salomon and their five children. Mr. Salomon had 20,000 shares, and Mrs. Salomon and the children had one share each. Mr. Salomon sold his boot making business to the Company at the price of £38,782.00. The Company purported to pay for Mr. Salomon’s interest by the Company allotting to him 20,000 shares at £1 each, making him a payment of £20,000.00. The Company also issued him debentures of £10,000.00. The Company further paid Mr. Salomon the balance of £8,782.00 in cash. The Company owed him £10,000.00 since he was a debenture holder secured by a charge on the Company’s assets in his favour. Mr. Salomon and two of his sons were appointed Directors of the Company, with Mr. Salomon himself as the Managing Director. The boot business however ran into difficulties and the Company had to be wound up a year later. The value of the Company’s assets as realized amounted to only £6,000.00, but the Company owed £7,733.00 to unsecured creditors, and £10,000.00 to Mr. Salomon whose debt was secured as a debenture holder. In the circumstances the unsecured creditors were going to receive nothing because the Company’s debts exceeded its assets. The unsecured creditors therefore challenged Mr. Salomon’s right to receive payment on the grounds that, although the Company was incorporated it was a sham because it was merely Mr. Salomon doing business under a different name. Another argument that they raised was that the business still belonged to Mr. Salomon and that it carried on business as Mr. Salomon’s agent with Mr. Salomon acting as the principal, and as such Mr. Salomon as the principal had the duty of indemnifying the agent – Salomon & Co. Ltd. for liabilities incurred in the course of the agency. The Judges’ ruling summarized the legal position as follows: “The Company is in law a different person altogether from the subscribers to the memorandum and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are the Managers, and the same hands receive the profit, the Company is not in law an agent of the subscribers or a trustee for them. Nor are the subscribers as Members liable in any charge or form except to the extent and manner prescribed by the Act. In Appenteng and others vs. The Bank of West Africa Ltd. and others GLR.199, the plaintiffs sued the defendant bank for damages arising to them as shareholders of a ccompany, Mpotima Ltd. The case of the Plaintiffs was that the Bank had given their Company, Mpotima Ltd. negligent advice leading to severe losses in excess of £42,000.00. The defendants moved for summary judgment to dismiss the suit on the grounds that the Plaintiffs had no cause of action against the defendants, in that the damage was done to the Company and not the Plaintiffs who were the Company’s shareholders. Ollenu J. as he then was, stated inter alia: “In law the Company is a separate legal personality, quite apart from its members (Shareholders). The Company is not an agent of its members ……… the Directors of the Company are agents of the Company ……. they are however not agents of Shareholders ……… therefore in a transaction with the defendants the only person who in law could be entitled to a duty of care from the defendants is the legal entity Mpotima Ltd. and not the members thereof or any one of them.” Companies are “artificial legal persons”. They are bodies that have a separate legal identity and are the creation of the law. As an “artificial” legal person: 1. A company may do all the things that a natural legal person can do namely: - own property - enter into contracts/agreements - sue and be sued - its rights belong to the Company alone and cannot be enforced by or against its Directors, agents, members or employees in their individual capacity. 2. A company has a common seal 3. It has perpetual succession. 4.Criminal Liability: A company is treated as having a mind capable of committing a criminal offence i.e. it has ‘mensrea’. The mental state of its agents in senior managerial positions is synonymous with that of the company. In Tesco Supermarkets Ltd v Nattrass (1971) a shop manager contravened the Trade Descriptions Act (1968) by charging a customer more for an article than the price specified in the special offer poster. The company was prosecuted but was found not guilty of an offence under the Act as the manager was not a senior official of the company and was one of the hands of the company and not part of its brain. Section 144(1) states that ‘A company shall act through the members of the company in general meeting or the board of directors or through officers or agents appointed by, or under authority from the members in general meeting or the board of directors.’ It is provided in section 147 that an act of the members in general meeting, of the board of directors, or of a managing director while carrying on in the usual way the business of the company, is the act of the company; and accordingly, the company is criminally and civilly liable for that act to the same extent as if the company were a natural person. 2.2.2 Lifting the Veil In some cases, the law will ignore the separate legal entity status of a corporation and ascribe liability to various individuals or corporate bodies related to it. The corporate veil may be lifted: - Companies Act itself, for acts such as: a) when it ceases to have a member and it carries on business without at least one member (section 41) b) when the number of directors fall below two and the company continues to carry on business for more than four weeks c) by its failure to display its name conspicuously in legible letters; - Other legislation, for example for fraudulent trading and tax issues, and - The courts, when it is just and in the public interest. In Akoto v Akoto SCGLR 533 it was held that a corporation or a limited liability company would be looked upon as a legal entity as a general rule but when the notion of legal entity had been used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law would regard the corporation or company as an association of persons. 2.2.3 Members According to section 33, the members of the company are the subscribers to the documents of incorporation of a company and upon incorporation shall be entered as members in a register of members and any other person who agrees with the company to become a member of the company and whose name is entered in the register of members. In the case of a company with shares, each member is a shareholder. Membership continues till the shareholder validly transfers his shares or the shares are transmitted by operation of law to another person, or forfeited for non-payment of calls, or the member of the company dies. 2.2.3.1 Meetings of the Members of the Company Section 157 of Act 992 provides that ‘a company shall (a) in each year hold a general meeting of the company in addition to any other meetings in that year, and (b) specify the meeting as the annual general meeting in the notice calling the meeting.’ The annual general meeting is usually referred to as an AGM. Section 158 of Act 992 provides that an Extraordinary General Meeting (EGM) may be convened by the directors whenever the directors think fit. Members, directors and anyone entitled to attend must be given adequate notice of meetings together with notice of the business to be transacted at the meeting, in order for the member/director to take an informed decision about whether to attend the meeting or not. To this end the relevant documents should be circulated before the meeting in order for members to make meaningful contributions at the meeting. 2.2.3.2. Rights of Members The Companies Act, 2019 lists the following as the rights of members of a company. - To receive proper notice of general meetings and to receive various statutory reports such as a copy of all directors and auditors reports, financial statements and other documents. All materials required for the meeting are to be given to members in advance. - To attend general meetings or appoint a proxy to attend on their behalf. - To speak at general meetings. - To vote on any resolution at general meetings. - To have the member’s name and shareholding duly registered and to receive a share certificate in respect of same. - To receive dividends duly declared under the Regulations. -To exercise pre-emption rights. (A pre-emption right is conferred on as shareholder/memberby the Regulations. It permits the shareholder to subscribe to any new shares issued by the Company such that the balance of control between the shareholders is maintained). - To have the Members capital returned in the proper order of priority on a winding upof the Company or in case of a properly authorized reduction of capital. - To transfer shares, unless otherwise restricted after the shares have been duly issued. -Not to have the members financial obligations to the Company increased without their consent. - To inspect the Company’s registers relating to members, debentures, mortgages or charges and the records of the Company’s directors and other such records. - To obtain a copy of the Regulations on payment of a nominal fee. - To recover compensation from the promoters and directors for misrepresentation, even if the misrepresentation is not fraudulent - To obtain repayment from the Company if money is paid for shares that cannot be legally allotted - To take legal action against the Company - To determine who should manage the affairs of the Company 2.2.3.3. Resolutions A resolution according to the Merriam-Webster’s Dictionary of Law, is ‘a formal expression of opinion, will or intention voted on by an official body or assembled group; an expression or document containing an authorization usually by a corporate board of directors of a particular act, transaction, agent, or representatives’. In section 14 of the Eighth Schedule of Act 992, two types of resolutions are defined. They are ordinary and special. - Ordinary: when a decision is passed by a simple majority of votes cast by the members of the company who, being entitled so to do, vote in person or, where proxies are allowed, by proxy at a general meeting; and - Special: when the decision is passed by not more less than three-fourths of the votes cast by the members of the company who, being entitled so to do, vote in person or, where proxies are allowed, by proxy at a general meeting of which, notice specifying the intention to propose the resolution as a special resolution, has been duly given. A member may also vote by proxy under section 160 of Act 992. Section 9 of the Eight Schedule provides that a member who is entitled to attend and vote at a meeting of a company is entitled to appoint another person, whether a member of the company or not, as a proxy to attend and vote on behalf of that member, and the proxy shall have the same rights as the member to speak at the meeting. The proxy is appointed by an instrument in writing and signed personally by the appointor or the agent of the appointor. In the case of a corporate body, the appointment must be under seal and signed personally by an officer or an agent duly authorised. 2.2.3.4 Liability of Members (Section 40 of Act 992) Prior to winding up, the member is liable to contribute to the balance of the amount payable in respect of shares. - In case the company winds up its affairs, the past members of the company are liablefor the debts, liabilities, costs and charges and expenses of the winding up, if thewinding up occurs within one year of their ceasing to be members. - In any event for limited liability companies the contributions by past and presentmembers is linked to the unpaid value of shares. The shareholders may: - make recommendations to the board - ratify or confirm decisions taken by the board - institute legal proceedings in the name and on behalf of the company, if the board of directors refuse or neglect to do so - act, if members of the board are disqualified or are unable to act because of a deadlock on the board or otherwise The following decisions are however taken by resolution of the members at their meeting: - declaration of dividends [upon recommendation from the board] - consideration of the companies accounts and the report of directors and auditors - removing and electing directors and auditors - fixing remuneration of the auditors. 2.3.0 Acts done by or on behalf of the Company To know the acts done by or on behalf of the Company 2.3.1 Section 144(1) of Act 992 provides as follows: ‘A company shall act through the members of the company in general meeting or the board of directors or through officers or agents, appointed by, or under authority derived from the members in general meeting or the board of directors. The powers of the members in general meeting and the board of directors may be determined by the constitution of the company. Per section 147(1), an act of the members in general meeting, of the board of directors, or of a managing director while carrying on in the usual way the business of the company, is the act of the company, and accordingly, the company is criminally and civilly liable for that act to the same extent as if the company were a natural person. The exception against any such liability is where the person who transacted business with the company knew at the time of the transaction that the general meeting, the board of directors, or managing director did not have the power to act in the matter or had acted in an irregular manner or if, having regard to the position with, or relationship to the company, that person ought to have known of the absence of the power or of the irregularity. The company shall not however escape liability merely because, the business in question was not among the businesses authorised by the constitution of the company. Section 150 of Act 992 provides that a person having dealings with a company or with any other person who derives title under the company is entitled to presume that (a) the company has been duly incorporated, (b) a person described in the particulars filed with the Registrar has been duly appointed to carry on business of the type that company carried on by the company or customarily exercised or performed by an officer or agent of the type concerned; (c) the Company Secretary, any other officer or agent of the company having authority to issue documents or certified copies of documents on behalf of the company has authority to warrant the genuineness of the documents or the accuracy of the copies so issued; or (d) a document bearing the seal of the company has been duly authenticated. However, a person is not entitled to make any of those assumptions if that person had actual knowledge to the contrary or if, having regard to the position with, or relationship to, the company, that person ought to have known the contrary. 2.3.2 Directors Section 170 (1) defines directors as ‘persons, by whatever name called, who are appointed to direct and administer the business of the company’. A company shall have at least two directors, one of whom being ordinarily resident in Ghana. It is an offence to carry on business for more than four weeks with less than two directors. The appointment of directors is regulated by the company’s constitution which may provide for the appointment of directors by certain class of shareholders, debenture holders, creditors, employees or indeed any other person. The first directors are however normally named in the constitution. Directors may be called by whatever name. The following according to section 173(1) are not qualified to be directors: (a) an infant; (b) a person adjudged to be of unsound mind; (c) a body corporate; (d) a person who is prohibited from being a director or promoter as a result of an order made by the Court; and (e) anundischarged bankrupt. The constitution may provide that classes or persons additional to those provided in section 173(1) are incompetent to be directors. Section 174(1) provides that a director need not be a member of the company or hold a share in the company. Except otherwise provided in the constitution of a company under section 183(a) a director may hold any other office or place of profit under the company, other than the office of an auditor, in conjunction with the office of the director. The executive director may be remunerated by way of salary, commission, share of profits, participation in pension and retirement schemes. The directors may from time to time appoint one or more of their body to the office of managing director (section 184) and the provisions under section 183 will apply. The appointment terminates automatically with the termination of the person’s appointment as a director. The directors may entrust to and confer on a managing director any of the powers exercisable by them on the terms and with the restrictions that the directors think fit. The directors are appointed by the shareholders in a general meeting, except for casual vacancies in the number of directors which may be filled by the Board of Directors. The Company may also appoint a substitute director or alternate director. A substitute director is one who is appointed to act as a deputy for another named director and as a substitute in the absence of that director (Section 180). An alternate director is one appointed in respect of a period of not more than six months in which a director is absent from the country or unable for a reason to act as a director (Section 181). Where a person who is not duly appointed as a director holds himself out or knowingly allows himself to be held out as a director, he may be saddled with the duties and liabilities of a director. Section 144 (3) of Act 992 provides that ‘except as otherwise provided in the constitution of a company, the business of the company shall be managed by the board of directors who may exercise the powers of the company that are not by this Act or the constitution required to be exercised by the members in general meeting. Section 144(4) further provides that unless the constitution otherwise provides, the board of directors when acting within the powers conferred upon them by this Act or the constitution of the company, are not bound to comply with the directions or instruction of members in general meeting. Section 190 sets out the duties of the directors as follows: - A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith in any transaction with or for the company - To act at all times in what the director believes is the best interest of the company as a whole so as to preserve the assets, further its business and promote the purposes for which the company was formed, in the manner that a faithful, diligent, careful and ordinarily skilful director would act in the circumstances. - To act in accordance with the constitution of the company and only exercise the powers for the purpose for which the powers are conferred; and - To exercise independent judgment; According to section 191, the directors shall not, without the approval of an ordinary resolution of the company, exceed the powers conferred on the directors by this Act, and the constitution of the company, or exercise those powers for a purpose different from that for which those powers were conferred. The directors shall also (section 192) not place himself in a position in which his duties as a director to the company conflicts or may conflict with the personal interests or duties to other persons. 2.3.3 Company Secretary The Company Secretary is usually appointed upon terms and may be removed by the Directors according to section 211(5). The qualifications of a Company Secretary are set out in section 211(3) and that person must have a professional qualification or a tertiary level qualification that makes the person have the requisite knowledge and experience to perform the functions of a Company Secretary, or has held such office as a trainee for at least three years, or is a member in good standing of the Institute of Chartered Secretaries and Administrators, or the Institute of Chartered Accounts,, Ghana or has been enrolled to practice and is in good standing as a barrister or solicitor in Ghana, or by virtue of an academic qualification, or as a member of a professional body appears to the directors as capable of performing the functions of secretary of the company. As an administrative assistant and officer of the Company has the authority to bind the company in administrative matters. According to section 212 of Act 992, the duties of a Company Secretary include: - assisting the Board to comply with the constitution of the company and with any relevant enactment; - keeping the books and records of the company; - ensuring that the minutes of the meetings of the shareholders and the directors are properly recorded in the form required by this Act; - preparing and issuing out notices in the name of the company; - ensuring that the annual financial statements of the company are despatched to every person entitled to the statement as required by this Act; - ensuring that all statutory forms and returns are duly filed with the Registrar; - maintaining the statutory registers of the company; - providing the Board with guidance as to the duties, responsibilities and powers of the Board and on the changes and development in the laws affecting the operation of companies; - informing the Board of legislation relevant to or affecting meetings of shareholders and directors and their failure to comply with the legislation and reporting accordingly at any meeting; and advising the directors on their responsibilities as directors. 2.3.4 Register of directors and Company Secretary (section 215) The Company must have a register containing the particulars of the Directors and Secretary. The information must contain their full names, residential addresses, business occupation, and in the case of Directors particulars of any other directorships or alternate directorships that they hold. The register of Directors is supposed to be available for inspection by the public during business hours. 2.3.5 Auditors (sections 138 to 143) The Company’s Auditor is not an officer of the Company but has a fiduciary relationship with the company. They are required to be qualified accountants who have responsibility to report on the accounts and confirm that they give a true and fair view of the state of affairs and the profit and loss of the Company. They have the right of access to all the books of the Company and have the right to attend the Company’s General Meetings to deal with issues in respect of the accounts. The Auditors are appointed and removed at the Annual General Meeting of the Company. 2.4.0 Evidence of ownership interest in Companies To describe the ownership interest of Companies 2.4.1 Shares Shares are instruments used by the company to raise capital. The ownership of shares in the company confers on the owner or holder certain rights in the company and is described under section 42(1) as movable property. A shareholder contributes to the capital of the company and as a business venture or undertaking, may suffer a loss of his capital. Shares are of no par value (section 43) and unless otherwise agreed must be paid for in cash. The shares of the member entitle him to the payment of dividends when profit is made and declared. The shareholder is entitled to attend and vote at general meetings, and to have his capital returned when the company is wound up. The shareholder’s liability to the company is the potential loss of the capital that he has contributed to the company if it is wound up. He is also bound to pay the balance on his shares if they have not already been paid to the company where the company when it is to be wound up. The company can create different classes of shares with different voting rights and rewards under section 49 of Act 992. There can be ordinary, preferred, deferred, or any other special rights or restrictions, whether as regards dividend, voting, repayment or otherwise, as evidenced by the share certificate that is issued to the holder of shares in a company. Preference shares under section 51(1) means a share, which does not entitle the holder of the share to a right to participate beyond a specified amount of money in a distribution whether by way of dividend, on redemption, in a winding up, or otherwise. Any other share shall be referred to as an “equity share”. Under section 53 (1) of Act 992, equity shares carry the right on a poll at a general meeting of the company to one vote only, in respect of each share. The company is obliged to file every year its annual returns and information on the current shareholding status of the company. The company can vary the number of shares it has and the rights attached to those shares under Section 50(1) as expressly provided for in its constitution. 2.4.2 Debentures Companies can raise loan capital by issuing a debenture or series of debentures or of a debenture stock (section 83). A debenture holder is not a member of the company and despite any provision in the debenture or the constitution of the company is not entitled to attend and vote at a general meeting. A debenture includes a written acknowledgement of indebtedness issued by a company in respect of a loan made or to be made to it or to any other person or money deposited or to be deposited with the company or any other person or the existing indebtedness of the company or any other person whether constituting a charge on any of the assets of the company or not. 2.4.3 Registration of Particulars of Charges (Section 99) The Act requires that a company shall maintain a register of the holders of the debentures with details of the charges. 2.4.4 Public Invitations Section 294 prohibits a person from making an invitation to the public to acquire or dispose of any shares or debentures of the company or deposit money with a company for a fixed period or payable at call, whether bearing or not bearing interest unless that company concerned is a public company. Section 295 describes an invitation to make an offer to the public if the offer is: (a) advertised or disseminated in Ghana by newspaper, broadcasting, cinematography, electronic communication or any other means; (b) made to or circulated among persons whether selected as members or debenture holders of the company concerned or clients of the persons making or circulating the invitation or in any other manner; (c) made to one or more persons on the terms that the person or persons to whom it is made may renounce or assign the benefit of the invitation or of the shares or debentures to be obtained under the invitation in favour of any other person; or (d) made to one or more persons to acquire shares or debentures dealt in on the stock exchange or in respect of which the invitation states that application has been or will be made for permission to deal in those shares or debentures on a stock exchange. Where a private company makes an invitation to its members only, it is not recognised as an invitation to the public under section 295(3) where the number does not exceed the prescribed number. 2.5.0 Winding Up of Companies Learning objective To explain the procedures on how companies are wound up. The winding up of a company under section 274 may be by an official liquidation in accordance with the Bodies Corporate (Official Liquidations) Act, 1963 (Act 180), or by a private liquidation under Act 992. Under section 276, the process of liquidation commences with the passing of a special resolution by the company calling for its liquidation. Prior to the date of the resolution, the directors may by an affidavit declare that the company is solvent in accordance with section 275 of Act 992. The resolution for the private liquidation shall include the appointment of a liquidator in accordance with section 278 of the Act. The liquidator stands in a fiduciary relationship to the company (section 281 of Act 992) as if that liquidator were a director of the company. When a liquidator is appointed the Directors are rendered functus officio (having discharged their duties). The liquidator takes control of the affairs of the company, collects its assets, pays the debts and then distributes any surplus to members in accordance with their rights. The company continues as a corporate entity until its dissolution when it ceases to do any business except as is required for its beneficial winding up. The financial year of the company shall be deemed to end just before the commencement of winding up and therefore the preparation, auditing and dispatch of all statements, accounts and reports have to be done. Transactions entered into within certain periods before the commencement of liquidation may be invalid on the grounds of being fraudulent preferences or fraudulent conveyances. An example of a fraudulent transaction is where the company as a debtor settles all or parts of its debt with a particular creditor as against other creditors knowing that the company will soon proceed into liquidation or where a conveyance is executed giving property to a third party making it almost impossible for the creditors to be repaid. All actions against the company except by secured creditors who are taking action for the realization of their security shall be stayed unless the Court grants leave to proceed. Any transfer of shares during this period is void. Under section 286 if in the course of liquidation the liquidator forms the opinion that the Company may be unable to pay its debts he shall notify the Registrar and add a statement of the Company’s liabilities and assets. The Registrar must then register this notice and cause publication of the notice in the gazette. The liquidator is not a director of the company but has the powers of a director to continue with the company’s business during this period for the purposes of facilitating its winding up. At this time all the company’s letters, documents and correspondence should contain statements to the effect that the company is being wound up. When the registrar is satisfied that the winding up process is complete he issues a series of notices in the Gazette, the Company’s name will be struck off the registrar of companies and publish the record of the strike off in the Companies Bulletin as required by section 288(1). End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. Which types of companies are recognized in the Companies Act, 2019 (Act 992)? Answer Reference: Section 2.1.2. 2. What is a public company? Answer Reference: Section 2.1.2. 3. What is the conclusive evidence that a company has been duly formed and registered? Answer Reference: Section 2.1.3. 4. What are the contents of the registered constitution of a company? Answer Reference: Section 2.1.3. 5. How is a company described as an ‘artificial person’? Answered Reference: 2.2.1. 6. What may lead to the veil of the company being lifted? Answered Reference: Section 2.2.2. 7. What are the rights of a member of a company? Answered Reference: Section 2.2.3. 8. What is a person dealing with a company presumed to know? Answered Reference: Section 2.3.1. 9. Who does not qualify to be a director of a company? Answered Reference: Section 2.3.2. 10. What are the duties of a director of the company? Answered Reference: Section 2.3.2. 11. What are the duties of a company secretary? Answered Reference: Section 2.3.3. 12. How does a company create different classes of shares? Answered Reference: Section 2.4.1. 13. How is a debenture described? Answered Reference: Section 2.4.2. 14. What is an invitation to make an offer to the public on its shares? Answered Reference: Section 2.4.4. CHAPTER THREE LAW OF CONTRACT 1. Introduction 24 2. Formation of Contract 24 3. Classification of Contracts 33 4. Contractual Terms 33 5. Vitiation of Contract 34 6. Non-performance and Breach of Contract 37 This syllabus area will provide 4 of the 50 questions for the examinations. 3.1.0 Introduction 3.1.1A contract is an agreement between two parties that creates in each party a duty to do or not to do something and the right to performance of the other’s obligation and a remedy for breach of the other’s duty. Contracts must be made by the parties with the necessary capacity, must be lawful, supported by consideration and with the parties having a meeting of minds. 3.2.0 Formation of Contract Learning Objective To describe how valid contracts are formed. 3.2.1A contract is an agreement enforceable or recognised by law whose essential feature is a promise by one party to another to do or forbear from doing certain specified acts. For a contract to be valid and legally enforceable there must be - Offer and acceptance resulting in an Agreement - Capacity to contract - Contractual intention – to create legal relations - Certainty of terms - Legality of purpose - Consideration – element of value A contract that does not satisfy the relevant requirements may be either void or voidable. A void contract has no legal effect. In this case an attempt has been made to contract but the law will not give effect to it e.g. where there is a common mistake on some major term like the existence of the subject matter. A voidable contract is where the law permits one party to withdraw if it wishes, thus rendering it void e.g. agreements made by minors or contracts induced by duress, misrepresentation or undue influence. A voidable contract remains valid unless and until the innocent party chooses to terminate. In the case of an infant he must terminate while as an infant or within a reasonable period after becoming an adult. 3.2.2 Offer and Acceptance An agreement is reached when one party makes an offer which is accepted by the other. The test for an agreement is that both parties should have agreed in the same terms on the same subject matter. An offer is “an expression of willingness to contract made with the intention (actual or apparent) that it shall become binding on the person making it as soon as it is accepted by the person to whom it was made” (Treitel, G.H). The conduct of the offeror must be such as to induce a reasonable person to believe that he is making the alleged offer and that the alleged offeree must actually hold that belief. An offer must be distinguished from the following: - a mere request for information (i.e. an enquiry whether the offeror would vary a term of his proposal) - a mere indication of good intentions (i.e. a statement as to future conduct) and - an invitation to make an offer (i.e. an invitation to treat). An offer, capable of being converted into an agreement by acceptance, must consist of a definite promise to be bound provided that certain specified terms are accepted. An invitation to treat is a communication by which a party is invited to make an offer. It is usually not made with the intention to become binding as soon as the person to whom it is addressed simply communicates his assent to its terms. An advertisement for instance may be an invitation to treat or an offer, depending on how it is formulated. In Dormenyor v Johnson Motors Ltd [1989-90] GLR 145, a newspaper advert stated that the defendant had spare parts and could repair damaged cars, including Peugeot cars. P sent his car based on the advert and left the car there without any instructions. Later, D sent a letter that the repair would start after the acceptance by the P of the estimates. P ignored the letter. P later wrote for the release of the car but D indicated that he had to pay for storage and risk charges. It was held that the advert constituted an invitation to treat. The letter D sent was the offer to him which he failed to accept. However, an advert made in the Carlill v. Carbolic Smoke Ball Co. case was considered to be an offer and therefore binding on the defendant.In this case, the defendants (Carbolic Smokeball Co.) advertised for the offer of £100 to any person who succumbed to influenza after having used one of their smoke balls in a specified manner and period. Also that they have deposited £1000 with their bankers ‘to show their sincerity’. Based on the advert, plaintiff bought the product and used as specified but succumbed. She therefore applied for the £100 as advertised. It was held that the advert was made to those who performed hence plaintiff succeeded. An invitation to treat is a request from one person to another asking the other person to make a proposal for consideration by the one requesting the proposal. In Deegbe v. Nsiah& Another [1984-86] 1 GLR 545 (CA) the Plaintiff, a tenant in the first Defendant’s house, received a letter from the second Defendant’s lawyers giving him notice to vacate the house. The Plaintiff sued, originally claiming an oral offer to him to buy from the Defendant, which he accepted by letter, but asking for a reduction in price. It was held that the Plaintiff’s letter to the first Defendant was an invitation to the Defendant to make a fresh offer, which the first Defendant did not do. There was thus no contract. In Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd, a distinction was made between an offer and an invitation to treat. The defendants had a self-service shop where a customer upon entering the shop took a basket and selected from the shelves the items that he required. He took them to the cash desk. Near the desk was a registered pharmacist who was authorized if necessary to stop a customer from leaving with any particular drug. It was held that the mere fact that a customer picks up a bottle of medicine from the shelves in this case does not amount to acceptance of an offer to sell. It is only an offer by the customer to buy and there is no sale effected until the buyer’s offer to buy has been accepted by the seller of the acceptance price. An offer must be communicated to be effective. In Fofie v. Zanyo 2 GLR 475 (SC) it was held that an uncommunicated acceptance was ineffective in constituting an agreement. Before it can be said that there had been an acceptance of an offer, there had to be positive evidence by words, in writing or by conduct from which the court might infer acceptance; and the acceptance had to have been communicated to the offeror. If no time had been stipulated in the offer for acceptance, then acceptance must be made and communicated within a reasonable time. What is reasonable being a question of fact to be determined after considering all of the circumstances of a case. An offer sent through the post is made where it was posted and takes effect when it was posted. An offer must be accepted totally – by express oral or written words or by conduct - to constitute an agreement. It must be accepted within reasonable time where no time had been stipulated. Acceptance is the “final and unqualified expression of assent to the terms of an offer” (Treitel, G. H). A mere intention to accept or silence does not constitute an acceptance. In Felthouse v. Bindley, 1863, P negotiated to purchase his nephew’s horse and wrote to his nephew adding, ‘If I hear no more about him, I consider the horse mine at £30 15s’. The horse at the time was with the auctioneer, D. The nephew wishing to sell at the price given by P told D, the auctioneer not to sell but D had already sold the horse inadvertently. The auctioneer had no knowledge at the time of the sale of the negotiation. The court held that there was no valid agreement between P and his nephew at the time of the sale because the nephew had not communicated his acceptance of the offer. The court remarked further that ‘Silence is usually equivocal as to consent but failure to reply to letters is a common human weakness.’ Any form of alteration of an offer amounts to a counter offer and thereby cancels or destroys the original offer. In this respect the acceptance becomes an offer, which the offeror can accept or reject. In Hyde v Wrench, D offered an estate for £1000 on 6th. June. P offered to buy at £950. D rejected by 27th June. P on 29th June offered to buy at £1000. D refused. P sued D for specific performance. It was held that the original offer was not opened to P to accept by accepting to buy the estate for £950 instead of £1000, which was offered. They rejected the original offer and made a counter offer. A counter offer creates an obligation if accepted, either expressly or by conduct. An acceptance in ignorance of an offer does not amount to an acceptance. This is an act which merely coincides with the requirements of the offer. In R v Clarke (1972) the defendant was ruled not entitled to a government reward of GBP1, 000 for information about murderers of two police officers when at the time the information was given, he had forgotten about the reward. For ignorance of the offer is the same thing whether it is due to never hearing of it or to forgetting it after hearing of it. A cross offer occurs when two identical offers are sent by two parties to each other by post or by any other means and the offers cross in the post or en route. This does not constitute an acceptance since they are both offers nor was there consensus ad idem. Where a purported acceptance is qualified by the term ‘subject to contract’, liability is postponed until the formal agreement or the document is signed and therefore, either party may withdraw before the actual contract is made. However, where there is an agreement before the terms are reduced into a proper legal form, it will constitute a binding contract. In Medz-Moroukian v. Haroutunian (1963) it was held that the offer made in the Defendant’s letter to the Plaintiff and the acceptance of the offer by the Plaintiff, though subject to a formal agreement being drawn up, constituted a valid contract even though the terms of the agreement were never embodied in a formal contract. Communication of the acceptance. The general rule is that an acceptance must be communicated to the offeror in writing or orally or by conduct. By communication the acceptance must be brought to the notice of the offeror or by the method proposed by the offeror. The person accepting an offer must indicate it either by words, in writing or by conduct. Acceptance must be expressed and a mere intention to accept or silence cannot pass as acceptance (Felthouse v. Bindley). Where the method is prescribed, but not insisted on as the only mode of acceptance; any mode safer and faster can be used other than the one prescribed otherwise. If the mode is insisted upon it must be complied with. Acceptance by post takes effect the moment the letter is posted. In Adams v. Lindsell, by a letter dated 2nd September 1817, D, wool merchants offered to sell a quantity of wool to P’s wool manufacturers and required a reply by post. D misdirected the letter and it did not reach P until 5th September. The same night, P posted a letter of acceptance, which reached D on 9th September. If the offer letter had been properly addressed an answer ought to have been received by 7th September. Meanwhile on 8th September not having received the reply from P, D sold the wool to another person. P sued for breach of contract. D argued that there was no contract until the acceptance was actually received. Held that in a contract concluded by post, the contract comes into effect the moment the letter of acceptance is posted - 5th. September and D committed a breach by selling the wool to third parties on 8th September. The reason given for this rule is that the post office is the common agent for the parties so a letter put in the post is technically an acceptance communicated to the offeror and with that a contract is completed. An offeror can make it a term of his offer that there can be no valid acceptance until he receives the letter of acceptance. However, where the rule will produce manifest inconvenience, or the letter is wrongly addressed or inadequately stamped or the letter is improperly posted, it will not apply. With instantaneous communication, using the telephone, e-mail, fax, telex and other electronic data interchange, the parties are regarded as being in the presence of the other and are only separated by space. The offeree must ensure that his acceptance has been understood by the offeror in the case of the telephone conversation, and in the case of the fax that it has gone through and the message is legible, while in the case of the e-mail that it has been delivered. Revocation of acceptance and offer. Acceptance can be revoked before it reaches the offeror while an offer can also be withdrawn or revoked at any time before it is accepted. The offer can also be revoked through lapse of time, death, rejection or if a condition upon which it is subject fails to materialize. Per section 8(1) of the Contracts Act, 1960 (Act 25) an offeror is at liberty to withdraw his offer at any time before the offeree’s acceptance, if any, is communicated to the offeror. This provision must be considered carefully by the HR Manager in the appointment of persons and a subsequent indication of not wanting to offer the said appointment. Failure to do so before the person accepts the offer makes the employer liable for breach of contract. 3.2.3 Capacity to contract The law presumes that everybody has the capacity to contract. The claimant of an exemption from liability for want of capacity must strictly establish this. The following classes of individuals, however, are subject to some degree of personal contractual incapacity: minors, mentally disordered persons and drunken persons, enemy aliens, corporate bodies and governments. The immaturity of reason in one who has attained full age, or abnormal weakness of mind short of such mental disorder as prevents a person from understanding the nature of the transaction, or the mere absence of skill upon the subject of the particular contract does not afford a person a ground of relief at law or equity. A minor is a person who has not attained the age of eighteen according to Article 28 (5) of the 1992 Constitution which defines a child as ‘a person below the age of eighteen years’. Section 1 of Children’s Act, 1998 Act 560, supports this. The only contracts, which bind a minor, are - contracts for necessaries - contracts that are beneficial to infants - beneficial contracts of service, and - when the infants have themselves performed their side of the bargain. Necessaries are defined as goods suitable to a minor’s condition in life and to his actual requirements at the time of sale and delivery. Necessaries may not be restricted to only food and clothing but could also be extended to contracts of apprenticeship, education and service. Since it is of obvious advantage to a minor that he should be able to fit himself for the future trade or profession and to obtain a livelihood, a minor may enter into contracts of apprenticeship, service, education and instruction, provided that these are beneficial to him. Apart from contracts of necessaries and contracts of apprenticeship, education and service, the general rule is that a minor’s contract is voidable at his option but binding on the other party. Whether an article is capable of being a necessary depends on the social standing, profession and duties of the minor. Things like food, clothing, shelter, means of transport and contract for the burial of a minor’s wife and children have been held to be ‘necessaries’ (Chappelvrs. Cooper (1844). In the case of contracts other than for necessaries, the general rule is that a mentally disordered person is bound by his contract unless he can show that owing to his mental condition he did not understand what he was doing, and that the other party was aware of this incapacity to make the contract voidable. A person in a state of complete intoxication has “no agreeing mind” (Lord Ellenborough, 1811). Any agreement signed by such a person is voidable at the option of the drunken person, and could accordingly be ratified when he becomes sober. Apart from alcohol, drugs could be considered under intoxicating substances. Courts cannot enforce contracts between parties including an enemy alien. An enemy alien is a national of a country at war with that other person’s country. Corporate bodies may enter into agreements in furtherance of their business as legal entities that have the power to enter into contracts. Such agreements are governed by procedures under the law and usually by use of resolutions. Government can also enter into contracts in conformity with provisions in the Constitution or other enactments. 3.2.4 Intention to contract or create legal relations An intention to create a contract can be determined by the importance of the agreement and by the fact that one of the parties acted in reliance to it. The test for intention is an objective one. An intention should be distinguished from a mere puff or where there is a clause expressly excluding the intention to enter into a legal relation. Domestic agreements, like a husband agreeing to make a monthly allowance to his wife for her personal enjoyment, would not be considered as creating legal relations, as held in Balfour v Balfour, 1919 where the husband worked abroad while the wife stayed at home in England on medical grounds. However, in the case of McGregor v McGregor (1888) where the promise was made in pursuance of an agreement to live apart i.e. where the husband and wife were separating, the parties will be taken to have intended that the agreement be legally binding. 3.2.5 Certainty of terms An agreement may be too vague or uncertain that it cannot give rise to a binding contract. For instance where an offer for employment is made “subject to satisfactory references” it was held to be vague and subjective (Wishart v. National Association of Citizen’s Advice Bureaux ). The court suggested that it was possible to a conditional offer of employment subject to something which could be objectively determined e.g. the passing of a medical examination. The vagueness and uncertainty in a contract can be qualified as follows. Custom and trade usage: these are words or terms that have come to be accepted in the particular trade or the custom of the parties or commonly used. For instance, where a shop is to be leased “in prime position” it was held to be a common phrase dealing with shops. Reasonableness could also be applied to where the parties were well acquainted with the subject business of the contract. Where a phrase is meaningless, the court will try to give it a meaning. However, a meaningless phrase will not vitiate the entire contract, since such clauses can be severed from the entire contract. But whether or not this can be done depends on the importance which the parties attach to that clause. 3.2.6 Legality of Purpose A contract may be illegal at the time of formation or during its performance if it may involve a breach of the criminal law or where the subject matter was forbidden by the law or where both parties or one of them intends to perform the contract in an illegal manner or effect some illegal purpose. Ignorance of the law will still make the contract void. In Miller v. Karlinski, (1945) an employee, whose mode of payment amounted to a fraud (fraud is illegal and criminal) on the Revenue, was held unable to recover arrears of salary, whether or not the parties knew about the illegality. 3.2.7 Consideration To constitute a simple contract an agreement must amount to a bargain, each of the parties paying a price for that which he receives from the other. This price is referred to as consideration. In Currie v. Misa (1875) consideration was defined as “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. Consideration moves from the promisee, i.e. the party entitled to sue on the contract. In this case a person can only enforce a promise if he himself provided consideration for it. Consideration may be supplied by someone other than the promisee (Section 10 of Contracts Act). Consideration must have value even though the value need not be adequate. It must be real or sufficient. In Kwadey v Okantey (1972) it was held that Plaintiff was entitled to judgment since the Defendant’s offer for the Plaintiff to stop further litigation on being paid GBP200 was good consideration from which the Defendant could not resile or withdraw. In the case of Stilk v Myrick (1809) two sailors deserted during the course of a long voyage and the captain promised the rest of the crew the deserters’ wages if they would work the vessel home. It was held that there was no contract because the seamen or crew had given no extra consideration. They were already bound by their original contract to work the ship home. Section 9 of the Contracts Act however provides that ‘the performance of an act or promise to perform an act may be sufficient consideration for another promise notwithstanding that the performance of that act may be already enjoined by some legal duty, whether enforced by the other party or not.’ In Kessie v Charmant (1973), where a fresh or additional promise was made even though there was an existing contractual obligation it was held that the performance of the act constituted sufficient consideration. The Contracts Act 1960 in its Section 8 has provided as follows: - a promisor who has promised to keep an offer open for a specified period is not at liberty to withdraw his offer before the expiration of that period on the ground that the promisee has not provided any consideration for the offer - a creditor who promises without receiving consideration for the whole or part of a debt or to waive the performance of some other contractual or legal obligation can be held to his promise - if one is bound to perform a legal duty, the performance or promise to perform that act may be sufficient consideration. 3.2.8 Privity of Contract The doctrine of privity of contract is that a stranger to a contract cannot sue on it (Pneumatic Tyre Co. Ltd. V. Selfridge & Co. Ltd. AC 847). In that regard, only persons who are parties to a contract and those on whom a contract expressly reserves a benefit can enforce a contract. In Nartey-Tokoli v Volta Aluminium Co. Ltd. [1987-88] 2 GLR it was held that the purported ‘leave of absence without pay/recall programme’ (LOA) negotiated between the respondents on one part and the appellants on the other part did not bind the appellants since the appellants could only be properly represented by the ICU. In this case the ICU did not participate in the negotiations nor had the ICU authorized the WDC and the local union to negotiate on its behalf. The WDC and the local union lacked capacity to negotiate on behalf of the ICU and the appellants. Therefore the purported LOA did not bind the ICU and the appellants. Section 5 of the Contracts Act 1960 has also extended the benefits of contracts to third parties if so contemplated by the contracting parties and if sufficient consideration has been given. In Koah v Royal Exchange Assurance GLR 398, P got injured in a motor accident. D was the insurer of the vehicle involved. The policy was for the owner when driving. Therefore, both the owner and driver could not recover from the insurance company because no benefit accrued. The third-party insurance did not cover the driver at the time and therefore no benefits accrued to him. It was held that third parties not parties to a contract can sue but if and only if and when the contract purports to confer a benefit on that third person. 3.3.0 Classification of Contracts Learning Objective To classify contracts. 3.3.1 Contracts may be classified as follows: Simple (or ordinary): where the contract is between two persons and may require consideration. They may be written or oral. Specialty or ‘contract under seal’ or ‘a deed’ where the written instrument is signed, sealed and delivered. In a specialty contract, consideration is not required. Oral or verbal or parole: Section 11 of the Contracts Act supports the validity of a contract not made in writing. In Addison v A/S Norway Cement Export Ltd. 2 GLR 151 it was noted that ‘the Plaintiff’s case was based on an oral contract. That case was supported by oral evidence not in dispute and by reasonable inferences from documentary evidence accepted by the trial court’. The case dealt with oral transactions between the parties concerning the supply of clinker and remuneration to the Plaintiff for his services in both regards. However, in certain cases the law requires the contract to be in writing, such as guarantees (S.14 Contracts Act). Unilateral: where one party makes an offer to the world at large, which is taken up by another, who may not be personally known to the offeror (Carlill v Carbolic Smoke Ball Co.). Bilateral: where two parties or their agents negotiate specific terms. 3.4.0 Contractual terms Learning Objective To know the terms of a contract 3.4.1 A term is an obligation each party undertakes and the representations made in respect of discharging the contractual obligations. Contractual terms may be a warranty or condition. A warranty creates minor obligations, a breach of which entitles the party to damages only. Breach of a warranty generally does not constitute a breach of the entire contract. A condition creates a fundamental obligation on the contractual parties, a breach of which entitles the other party to repudiate the contract. An example of a condition of a contract is the subject matter. The terms of a contract may also be express or implied. Express terms are clearly discussed and agreed to by the parties. It is created by the explicit language of the parties. Implied terms are not categorically discussed by the parties but if brought to their attention, the parties would have agreed to the said terms. The test for construing implied terms is on what the reasonable man would have done. Terms can be implied by the courts, by statute (the parties need not provide for such terms) and by custom (where the parties have established a pattern of consistent behaviour). Exemption Clauses Exemption clauses are clauses in an agreement incorporated to abridge the rights and limit the liabilities of the parties or where one party may agree to accept a reduction in liability by the other party. Exemption clauses may be contained in Standard Form Contracts or in individually drafted contracts. There are four types of exemption clauses: - Litigation-limiting clauses: these are clauses that postpone litigation till after other specified dispute-resolution methods have been unsuccessfully resorted to. However, if the contract seeks to oust the jurisdiction of the court, it is void and will be ignored by the court. - Liability-limiting clauses: they are clauses to limit or exclude their contractual liability by one party to the other in the event of a breach by that party. Courts are reluctant to enforce contracts that limit liability. - Implied term-modifying clauses: these seek to exclude the operation of terms that would otherwise be implied by legislation. The typical wording used in legislation is ‘subject to any agreements to the contrary by the parties, the following provisions shall apply’. In this regard the parties have the liberty to contract out of the regime implied by law. - Restrictive covenants: this is usual in cases where the employer seeks to protect his business from a former employee. This is usually done when an employee is leaving an employment with special knowledge about that employment which needs to be protected against immediate competition. 3.5.0 Vitiation of contract Learning Objective To explain the vitiation of a valid contract. 3.5.1A contract may not be enforced as a result of factors which vitiate its performance such as mistake (including non est factum) undue influence, duress, public policy, illegality, unconscionability, misrepresentation or fraud. 3.5.2 Mistake: as a general rule, a mistake does not enable one party to avoid the contract except where it is so fundamental in its nature that it will seriously affect or undermine the agreement between the parties. This is known as operative mistake. A mistake may be unilateral, cross-purpose or common. It is unilateral when one party is wrong about an aspect of the contract and the other party is aware that the first party was mistaken. In Smith v Hughes LR 6 QB 597 where the Defendant was sold new oats when he wanted to buy old oats, it was held that ‘the defendant believed the oats to be old and was thus induced agreed to buy them, but he omitted to make their age a condition of the contract. That the two minds were not ad idem as to the age of the oats; they were certainly ad idem as to the sale and purchase of them’. Cross-purpose or mutual mistake is where the parties are thinking of different things. In Addai v Pioneer Tobacco Co. Ltd. where the defendants sold to the Plaintiff a car fitted with a new engine thinking it was an old engine, it was held that the mistake was so fundamental and basic such as to wipe out the consensus between the parties and destroy the foundation of the agreement. In this case PTC auctioned certain cars. Unknown to PTC, Leyland Motors had installed a new engine in the vehicle before the auction. The value was therefore enhanced. PTC asked Addai to pay for the new engine but Addai insisted on the advertised price. Defence of mistake was upheld. Common mistake is where the contracting parties made an identical error about the same subject matter. Where the mistake affects only the quality of the subject matter, the contract is not void. Non est factum (not my deed): it is a mistake over documentation where a party relies on the plea of non est factum to claim that the document bearing his signature is in fact not his because he was misled into signing a document that was completely different from that which he was made to sign. This plea especially protects the illiterate and the blind. The general rule is that a person who signs a written document or contract is bound by its terms, whether he has read it or not. In Wilson v Brobbey (1973) it was held that a party of full age and understanding would normally be bound by his signature to a document whether or not he read it or understood it. Mere negligence in not reading a document before signing it is not a good defence so as to establish non est factum. To protect the party who is not illiterate or blind a clause should be included in the agreement stating that the terms of the contract were read over to the illiterate or blind person and that the said person understood the said terms before appending his signature or thumbprint. The person who read over the terms of the agreement has to sign against his name in support of his function. 3.5.3 Duress: is described as a wrongful and unlawful compulsion (such as threats of physical violence) that induces a person to act against his or her will. To be capable of giving rise to duress, the threat must be illegitimate either because what was threatened was a legal wrong or because the threat itself was wrongful or because it was contrary to public policy. Duress nullifies consent and therefore the contract. In the case of Hemans v Coffie [1996-97] SCGLR 596 the entire transaction was ‘achieved through the unlawful arrest of the plaintiff and his son on an alleged fraud, coupled with the naked show of unlawful force and pressure exerted on the plaintiff at the time he was unlawfully incarcerated in police cells for eight weeks, because he owed a debt. His son had been incarcerated earlier because the Police was looking for P. Police decided to release P if he sold his house to pay off his debt. P agreed in order to get his freedom. P sued for an order to set aside as a nullity the purported sale and purchase of his house on grounds of duress. The Supreme Court held that the transaction or contract could not be enforced. In Orthodox School of Peki v Tawlma-Abels 1 GLR 419, it was held that ‘the party relying on the plea of duress must establish that there was actual or threatened physical violence to, or unlawful constraint of, the person of the contracting party’. 3.5.4 Undue influence: is a defence to avoid a contract where the relationship between the contracting parties is such that one party, being the dominant party, will presumably or in fact have taken advantage of the dominant position over the servient party. In Mercer v Brempong II 2 GLR 376 undue influence was described as ‘any influence by which the exercise of free and deliberate judgement is excluded at a time when some benefit or interest is given another by someone over whom such influence was exercised.’ Influence comes from the power to affect another person’s character, beliefs or action through admiration, example, relationship, office, fear, etc. 3.5.5 Public policy: a contract is contrary to public policy if it offends against the public interest such as promoting immorality, illegality, disorderly conduct, discrimination on grounds of ethnicity or religion or gender, stifles free and fair competition, injures the environment or public safety or health. The following are examples of contracts opposed to public policy and therefore illegal: - Contract tending to impede the administration of justice. In Okantey v Kwaddey where an agreement not to pursue or execute a judgement in favour of the Plaintiff in consideration of the defendant assisting the Plaintiff to be appointed a magistrate was held to be against public policy. - Contract which tends to corrupt the public service. In Ampofo v Fiorini it was held that a civil servant who engages in any activity that is likely to lead to his taking improper advantage of his position in the civil service for his private gains, commits an illegal act under the civil service Act, 1960 and any contract and the consideration given for it in that respect is illegal. - Contract in unreasonable restraint of trade, occupation or profession may be illegal. 3.5.6 Unconscionability: where the transaction is oppressive, grossly unfair or patently unreasonable. They are usually between powerful parties on one hand and a poor and ignorant party on the other hand. Section 18 of the Conveyancing Act 1973, NRCD 175 states that ‘the court shall have power to set aside or modify an agreement to convey or a conveyance of an interest in land on the ground of unconscionability’. In the case of Campbell Soup Co. v Wentz (1948) a major food processing company and farmers, it was agreed that the farmers deliver special carrots exclusively to the company. Rejected carrots could only be sold with the permission of the company. Company also decided the standards for the carrots and the company’s decision was final. Farmers could be held liable but not the company for any breach. It was held that the bargain was too hard and one-sided and therefore not equitable. 3.5.7 Misrepresentation: a misrepresentation is a false statement of fact that is made by one party to another intended to induce the other to enter into a contract. In Kpeglo v SCOA Motors Ltd where a misrepresentation that a car bought from the Defendants was new whilst it was not, the court held that the Plaintiff was entitled to have the contract of the hire-purchase rescinded or set aside for misrepresentation. The issue of inducement relates to the party relying on that statement made to enter into the contract. Where the statement is an opinion it would not constitute a false misrepresentation. Misrepresentation may be: - innocent: contained a falsehood that was unknown to the declarant or that the declarant believed to be true - negligent: made by a person who had a duty of care towards the other party - fraudulent: declarant knew very well that the statement being made was false or it was recklessly made without caring that it was true or false, or stated a material untruth, which brought about wholly or partially the contract. 3.5.8 Fraud: is to induce by willful falsehood or to obtain by false pretence by word or conduct. The state of facts presented is with the knowledge that it was false or without the belief that it was true and made with the intent to defraud. Fraud vitiates everything: fraud omnia vitiate. 3.6.0 Non-performance and Breach of Contract Learning Objective To know how a contract cannot be performed. 3.6.1 There may be reasons for not performing a contract. A contract may not be performed due to circumstances beyond the control of the parties. However, if substantial performance has taken place, the party who has the obligation to pay for the services rendered cannot treat himself as discharged from performing his obligations under the contract, though he may not be expected to pay for full performance of the contract. 3.6.2 Repudiation: where one of the parties shows by actions or words that he does not intend to honour his obligations when they are due. Repudiation can in some circumstances constitute a breach of contract. 3.6.3 Fundamental breach: the person expressly or impliedly refuses to perform the contract. 3.6.4 Remedies for Breach of Contract 3.6.4.1 Specific performance: this is a discretionary remedy given by the courts to compel a party to specifically perform the contract, such as for the sale, purchase or lease of land, or for the recovery of unique chattels (i.e. not obtainable on the markets). It is usually given when damages would be inadequate compensation for the breach of the agreement. Specific performance will not be decreed for contracts of personal service, but a defendant may be restrained by injunction from the breach of a negative stipulation in such a contract, e.g. the covenant not to give services elsewhere during the term of the contract. 3.6.4.2 Damages: this is the monetary value placed on the breach of contract.The principle of payment of damages is to effect ‘restitutio in integrum’ ie to bring the party into the position in which he would have been had the breach not occurred. The plaintiff however is required to take steps to mitigate his losses. 3.6.4.3 Quantum meruit: if a party performs his part and is then prevented by the fault of the other from finishing the work, he can sue the defaulting party for breach of contract or for quantum meruit and so obtain reasonable compensation for the work done. In S.A. Turqui& Bros. V Lamptey 1961, it was held that a motor mechanic was entitled to be paid for work so far done on a truck after the contract had been cancelled. 3.6.4.4 Part Performance: this is where the court would intervene to order the defaulting party to also perform his side of the promise or obligation. End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. What constitutes a valid contract? Answer Reference: Section 3.2.1 2. What is the rule in Adams vrs. Lindsell? Answer Reference: Section 3.2.2 3. How can the capacity to contract be limited? Answer Reference: Section 3.2.3 4. What are exemption clauses? Answer Reference: Section 3.4.1 5. What factors can vitiate a contract? Answer Reference: Section 3.5.1 6. What are the remedies for a breach of contract? Answered Reference: Section 3.6.4