Business Law and Legal Environment

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Business Law and Legal Environment — Key Facts for Sri Lanka A/L Examination

Key Areas of Business Law:

• Contract Law: Enforceable agreements
• Law of Agency: Relationship between principal and agent
• Partnership Law: Business relationships between partners
• Company Law: Limited liability companies
• Sale of Goods Act: Rights and duties of buyers and sellers
• Employment Law: Employer-employee relationships

Essential Elements of a Valid Contract:

1. Offer: Clear proposal to be bound
2. Acceptance: Unequivocal agreement to offer
3. Consideration: Something of value exchanged
4. Intention to create legal relations: Both parties intend legal binding
5. Capacity: Legal ability to contract
6. Free consent: No coercion, fraud, misrepresentation
7. Legality: Purpose must be lawful

⚡ A/L Exam Tip: A contract is VOID if any essential element is missing. Know all elements and be able to apply them to scenarios!

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Business Law and Legal Environment — Detailed Study Guide

Contract Law Basics

Types of Contracts:

Classification	Description	Example
Express	Words explicitly state terms	Written agreement
Implied	Terms inferred from conduct	Bus fare, shop purchase
Bilateral	Both parties exchange promises	Simple sale
Unilateral	One party promises, other performs	Reward offer
Formal	Required form (deed, writing)	Memorandum of Association
Simple	No special form required	Most everyday contracts

Contract Classification by Performance:

• Executed contract: Fully performed at once
• Executory contract: Future performance outstanding

The Essential Elements in Detail

1. OFFER:

Concept	Explanation
Definition	Clear proposal to be bound on specific terms
Communication	Must reach offeree
Certainty	Must be certain and complete
Invitation to treat	Not an offer (display of goods, auction)
Termination	Lapse by time, revocation, rejection, counter-offer, death

Types of Offers:

• Specific offer: To a specific person or group
• General offer: To the world at large (e.g., reward)

Cross-Offer: Simultaneous identical offers — NO acceptance

Invitation to Treat (NOT offers):

• Display of goods for sale at price
• Advertisements
• Auction without reserve
• Tender invitations

2. ACCEPTANCE:

• Must be absolute and unconditional
• Mirror image rule: Must match offer exactly
• Communication to offeror (postal rule exception for post)
• Silence is generally NOT acceptance

Counter-offer: New proposal — terminates original offer

3. CONSIDERATION:

Consideration = Something of value exchanged
            = Benefit to one party / detriment to other

Rules of Consideration:

Rule	Example
Must move from promisee	A cannot give consideration for B’s promise to C
Past consideration is not	Doing something before promise doesn’t count
Existing contractual duty	Must provide NEW consideration
Must be sufficient (not token)	Consideration must have some value
Unilateral mistakes	May void contract

Adequacy of Consideration:

• Courts don’t judge adequacy (except token consideration)
• Consideration must be sufficient, not adequate
• “Nominal” consideration may be challenged

4. INTENTION TO CREATE LEGAL RELATIONS:

Type of Agreement	Presumption
Commercial/Business agreements	Intended to be legally binding (rebuttable)
Domestic/Social agreements	NOT intended to be legally binding (rebuttable)

5. CAPACITY TO CONTRACT:

Category	Capacity	Special Rules
Natural person (adult)	Full capacity	—
Minor (under 18)	Limited	Contracts for necessaries valid, others voidable
Person of unsound mind	Limited	Contract when lucid voidable
Corporation	Limited to powers	Ultra vires doctrine

Contracts by Minors:

• For “necessaries”: Binding if not paid for already
• For non-necessaries: Voidable at minor’s option
• Necessaries: Reasonable for age, station, and circumstances

6. FREE CONSENT:

Vitiating Factor	Description	Effect
Coercion	Threat, undue influence	Voidable
Fraud	False statement made knowingly	Voidable + damages
Misrepresentation	False statement without intent to deceive	Voidable
Mistake	Both parties mistaken as to basic fact	Void
Undue influence	Relationship exploited	Voidable

Types of Mistake:

• Common mistake: Both parties mistaken about same fact → VOID
• Mutual mistake: Parties misunderstanding each other → VOID
• Unilateral mistake: One party mistaken → Usually NOT void (unless known)

7. LEGALITY OF OBJECT:

Type	Effect
Illegal contracts	Void, no remedy
Contracts to defraud third parties	Void
Contracts opposed to public policy	Void
Immoral contracts	Void

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Business Law and Legal Environment — Complete Notes for A/L Sri Lanka

Sale of Goods Act

Sale of Goods Ordinance (No. 4 of 1896) — Key Provisions:

Contract of Sale of Goods:

• Transfer of property (ownership) for money price
• Goods must be existing and identified

Key Terms Under Sale of Goods Act:

1. Conditions (Essential terms):

• Breach allows rejection of goods
• Condition as to title
• Condition that goods correspond with description
• Condition that goods are of merchantable quality (if sale by description)
• Condition that goods are fit for purpose

2. Warranties (Lesser terms):

• Breach allows damages only (not rejection)
• Not essential to contract
• Can be express or implied

Implied Conditions:

Implied Condition	Explanation
Title	Seller has right to sell goods
Description	Goods match description
Quality	Goods are merchantable (fit for ordinary purpose)
Fitness for purpose	Goods fit buyer’s stated purpose (if made known)

Sale by Description:

• Goods must correspond with description
• “12 dozen eggs” must actually be 12 dozen

Fitness for Purpose:

• Buyer makes known purpose → goods must be fit
• Seller knows buyer’s purpose → reliance on seller’s skill

Merchantable Quality:

• Goods reasonably fit for all purposes for which goods of that kind are commonly bought
• Exception: Defects pointed out to buyer

“Sale by Sample”:

• Bulk corresponds with sample
• Goods free from defects making them unmerchantable

Law of Agency

Agency Relationship:

• Agent acts on behalf of Principal
• Principal-bound by agent’s actions within authority
• Agent owes fiduciary duties to principal

Creation of Agency:

Method	How
Express agreement	Written or oral appointment
Implied agency	Arises from conduct/necessity
Ratification	Principal adopts agent’s unauthorized act
Estoppel	Principal’s conduct leads third party to believe agency exists
Necessity	Emergency situation, presumed agency

Types of Authority:

Type	Description
Actual authority	Express or implied — agent actually has
Apparent/Visible authority	What principal has allowed third parties to believe
Usual authority	Customary for particular type of agent
Warranty of authority	Agent warrants authority to third party

Fiduciary Duties of Agent:

• Act in best interests of principal
• Not to make secret profit
• Not to act where conflict of interest
• Account for all profits
• Not to delegate without authority

Principal’s Liability:

Type	Agent’s Authority	Principal’s Liability
Disclosed principal	Within	Principal directly liable
Partially disclosed	Within	Principal liable, agent may also be
Undisclosed	Within	Principal or agent liable at election

Agent’s Liability to Third Party:

• Agent not personally liable if acting within authority
• Personal liability if: exceeds authority, acts as principal, guarantees performance

Termination of Agency:

• By agreement
• By completion of purpose
• By expiry of time
• By revocation (principal)
• By renunciation (agent)
• By death, insanity, bankruptcy of either party

Partnership Law

Partnership Act No. 21 of 1891:

Definition of Partnership:

“Relation between persons who agree to share the profits of a business carried on by all or any of them acting for all”

Key Characteristics:

Feature	Description
Legal entity	Partnership can sue/be sued
Separate from partners	But partners are jointly liable
Agency	Each partner is agent of firm and other partners
Sharing of profits	Essential element
Business	Must be a genuine business activity
Acting for all	Partners must be acting as agents

Tests for Partnership:

• Profit-sharing (evidence but not conclusive)
• Joint account — evidence of partnership
• Co-ownership ≠ necessarily partnership

Types of Partners:

Type	Description
General partner	Unlimited liability
Limited partner	Liability limited to capital contribution (but cannot manage)
Sleeping partner	Contributes capital, doesn’t manage
Nominal partner	Name used, may be liable
Partner by estoppel	Allows name used, is liable

Partnership Property:

• Property brought into partnership
• Property acquired for partnership purposes
• Property acquired with partnership money
• Held on trust for partnership

Liability of Partners:

• Unlimited joint liability for firm debts
• Joint and several liability for wrongful acts
• New partner: Not liable for past debts
• Retiring partner: Liable for debts up to retirement date (with notice)

Rights of Partners:

• Take part in management
• Access to books
• Interest on capital (if partnership agreement)
• Share profits
• No remuneration for management (unless agreed)

Dissolution of Partnership:

• By notice (if at will)
• By expiry (if fixed term)
• By completion of purpose
• By Court order (death, insolvency, etc.)

Company Law

Companies Act No. 7 of 2007:

Types of Companies:

Type	Liability	Description
Public company	Limited by shares	Can offer shares to public, 50+ members
Private company	Limited by shares	Cannot offer shares publicly, 2-50 members
Unlimited company	Unlimited	No limit on member liability
Company limited by guarantee	Guarantee amount	Non-profit associations

Private Company Privileges:

• Need not publish accounts
• Can restrict share transfers
• Can have only 2 members (minimum)
• Cannot invite public to subscribe

Promotion and Incorporation:

Stage	Activities
Promoter	Prepares company for formation
Memorandum of Association	Defines company’s relationship with outside world
Articles of Association	Rules for internal management
Certificate of Incorporation	Company legally comes into existence

Memorandum of Association:

• Name with “Limited” or “Private Limited”
• Registered office in Sri Lanka
• Objects (purposes company can pursue)
• Liability (limited by shares/guarantee)
• Capital (authorised share capital)

Articles of Association:

• Internal rules and regulations
• Directors’ appointment, powers, duties
• Shareholder rights
• Meetings and voting
• Dividends and reserves

Corporate Liability:

• Company is separate legal person
• Can own property, sue, be sued
• Directors have limited liability (but fiduciary duties)

Winding Up (Liquidation):

Type	Description
Compulsory	Court orders (insolvency)
Voluntary (members)	Company solvable, members decide
Voluntary (creditors)	Company insolvent, creditors decide

Employment Law

Employment Rights in Sri Lanka:

• Termination of Employment (Works Council Act No. 32 of 1950)
• Gratuity payments (Payment of Gratuity Act No. 37 of 1945)
• EPF/ETF (Employees’ Provident Fund, Employees’ Trust Fund)
• Shop and Office Act (Working hours, leave)

Employment Act Requirements:

Requirement	Details
Written contract	Terms and conditions
Working hours	8 hours/day, 45 hours/week ( Shop and Office Act)
Overtime	1.5x rate for excess hours
Leave	Annual, sick, casual leave entitlements
Gratuity	1 month salary per year after 5 years

Gratuity Calculation:

Gratuity = (Last drawn monthly salary) × (Number of years) × (1/12)

Termination Procedures:

• Notice period (based on contract, typically 30 days)
• Reason must be valid (retrenchment, misconduct, contract end)
• Retrenchment procedures (if no fault): Notice + severance pay

Employee Discipline:

• Code of discipline
• Fair hearing before dismissal
• Progressive disciplinary measures

Sri Lanka Labour Force:

• Minimum working age: 14 years
• Youth employment protections
• Maternity protection (12 weeks for female employees)

⚡ A/L Exam Tip: Case scenarios in business law questions require identifying the legal issue and applying the relevant law. Always identify which area of law applies first!

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