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Business Law
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CAT QUESTIONS
QUESTION 1
The doctrine of frustration is a legal principle often taught in contract laws as a
principle that justifies the discharge of a contract in certain occurrences that make it nearly
impossible, unlawful, or impractical to perform contractual agreements as agreed. Over the
years, the courts have acknowledged and distinguished several kinds of occurrences as
possibly prejudicial to the contract execution, thus warranting its termination. These
categories are the general requirements for establishing when frustration might be applicable.
Destruction of the Subject Matter: Among the most widely known and unappreciated
frustrating events is the one happening to the substance of the contract (Leonard et al., 2020).
Under this category, one refers to circumstances where the very core of the bargain, the
subject matter, the good, property, or the specific item that was the object of the contract, has
been lost either through destruction or is useless to the degree that it ultimately cannot be
delivered to the other party. For instance, if a contract was entered in the sale of a particular
machinery and the machinery gets damaged by fire or any other cause you can imagine, such
as flood or any calamity before delivering the machinery, the subject matter of the contract is
gone, implying that the contract is frustrated.
Death or Incapacity of a Party: Some contracts depend on specific methods, abilities,
or work of specific people. In such circumstances, the death or disablement of that particular
person may be regarded as frustration since they are pivotal to executing the contract. This
category is usually used where the contract is for the supply of a person's services, the
contract of employment, the contract for the supply of artistic or professional services, the
contract for supplying special skills, etc. In a scenario where the core of the agreement is the
services of a specific individual, the contract may be frustrated by the death or disability of
the services provider (Merkin & Saintier, 2023).2
Illegality of Performance: If the parties can't perform the contract any longer because
of an event that the parties could not anticipate and has made the contract performance
unlawful, frustration occurs. This may happen in the following circumstances when the
government places new regulations, restrictive measures, or sanctions on the contractual
performance, making it unlawful or impossible to complete the contract without violating the
law. In such situations, the parties may be excused from performing their part of the bargain
where it would be against the law to go on with the performance.
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Failure of a Specific Event or Purpose: Certain contracts are made on the basis that
one part or all the parts will do something; for instance, a sure thing will happen, or a specific
objective will be accomplished (Haidar, 2021). The contract may be frustrated where the
event or purpose, which is the reason for the contract, cannot be attained any longer or if the
nature of the event or purpose that has to take place has changed dramatically and is not what
was envisaged by the parties at the time of entering into the contract. For instance, if there is
a contractual agreement for the hiring of a venue for a particular event like a concert or a
conference, and the event cannot take place because of several events like a calamity,
epidemic, or pandemic and so on the contractual agreement is frustrated since the particular
purpose for the agreement cannot be met.
Notably, the doctrine of frustration is used restrictively by the courts. Before they
accept that a contract has been frustrated, they are likely to demand that there should be an
apparent impossibility of performance or a significant change in circumstances. The
frustrating event must genuinely be something that could not be predicted, was not seen
beforehand, and is not the contracting party's or either party's negligence provider (Merkin &
Saintier, 2023).2 Also taken into account is the ability of the parties to envisage and provide
for the frustrating event in the contract.
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Question 2
There are two types of registered companies: companies limited by shares are also
called companies limited by shareholders, whereas companies limited by guarantee are also
known as limited guarantee companies. These types of business organizations differ in
ownership, how they acquire capital, how they distribute profits, how ownership can be
transferred, and their primary objective.
Company Limited by Shares:
Ownership Structure: A company limited by shares is one where the shareholders
have shares (Fairgrieve & Langlois, 2020). The ownership is with the shareholders, while the
management liability is limited to the investment he has made on the share or the face value
as agreed between the company and the shareholder.
Capital Formation: A company limited by shares obtains its capital from selling shares
to the investors or the public. This capital is then utilized to run the company,
reinvreinvestingand expanding the organization. A significant characteristic of this type of
company is that it can raise capital by issuing shares.
Profit Distribution: This enterprise type, a limited-by-shares firm, is usually
established to maximize shareholders' wealth. Dividend – company profits and retained
earnings mean that the money can be divided among shareholders in proportionality to the
amount of stock owned.
Transfer of Ownership: Another significant benefit associated with a company limited
by shares is the nature of transfer of ownership in this kind of business organization. This can
be quickly done since shares of such a company can be sold or transferred to another party,
and this will not affect the company's operations.
Governance: Companies limited by shares have a clear distinction of corporate
governance since the shareholders appoint a board of directors to head the company’s
management (Fairgrieve & Langlois, 2020). Companies limited by shares are the most
common type of business based on legal entity among publicly quoted corporations, private
enterprises, and start-ups because of the ease of financing and permission for share transfer
and distribution of profits.
Company Limited by Guarantee:
Ownership Structure: In general, the company limited by guarantee does not have
shareholders, as is the case with the company limited by shares – it is the main distinctive
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feature of the company limited by guarantee. Instead, it has members or guarantors who pay a
certain amount as a guarantee, usually a token or a fixed price.
Capital Formation: Unlike other companies, companies limited by guarantee do not
operate through shares issued to raise capital. They source their funds from their projects'
membership fees, donations, grants, or other legal finance means (Sikka & Stittle, 2019).
Non-Profit Nature: Companies limited by guarantee are formed for non-profit-making
businesses and issues; examples include charitable organizations, clubs, or societies. They
cannot declare bonuses to the members or guarantors in the society.
Transfer of Ownership: Unlike shares in a company limited by shares, the ownership
or membership in a company limited by guarantee cannot be transferred. Members or
guarantors can neither sell nor transfer their interest in the company.
Liability: The amount of money that can be recovered from the members or guarantors
is nothing more than the amount that has been agreed to be contributed by them in the shape
of a guarantee, primarily a token amount.
Governance: The organizations operating under this structure may include a board of
trustees or a management committee to supervise and monitor the company's affairs as set
down by the company's guarantee and its rules and regulations. Non-profit organizations,
associations of professionals and trades unions, clubs, and societies with charitable status
often register themselves as limited guarantee companies because this type of business
structure best suits its non-profit activities and requires any excess funds to be re-invested in
the company's operations (Sikka & Stittle, 2019).
Conclusively, a significant difference between a company limited by shares and a
company limited by guarantee is based on their charter objectives and ownership. Companies
limited by shares are business-oriented, belong to the shareholders, and are involved in
capital accumulation and profit distribution. In contrast, companies limited by guarantee are
non-profit organizations belonging to the members or guarantors who aim to achieve stated
goals without profit distribution (Leonard et al., 2020). Hence, the decision as to which type
of firm should be adopted mainly depends on the organization's objectives, whether the
company operates for commercial purposes or on a non-commercial basis, and ownership and
management. Every type of company has its advantages and disadvantages, and the choice
should be made based on the nature of the business and the goals set before it.
References
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Fairgrieve, D., & Langlois, N. (2020). Frustration and Hardship in Commercial Contracts: A
Comparative Law Perspective.2Jersey and Guernsey Law Review,224(2).
https://www.jerseylaw.je/publications/jglr/PDF%20Documents/JGLR2002_Fairgrieve
AndLanglois.pdf
Haidar, A. D. (2021). A–Z Guide to Contract Management and Law. In2Handbook of
Contract Management in Construction2(pp. 139-181). Cham: Springer International
Publishing. https://doi.org/10.1007/978-3-030-72265-4_7
Leonard, T., Pakpahan, E. F., Heriyati, L. K., & Handayani, I. G. A. K. R. (2020). Legal
review of share ownership in a joint venture company.2International Journal of
Innovation, Creativity and Change,211(8), 332-45.
https://www.ijicc.net/images/vol11iss8/11825_Leonard_2020_E_R.pdf
Merkin, R., & Saintier, S. (2023).2Poole's Casebook on Contract Law. Oxford University
Press. https://books.google.co.ke/books?
hl=en&lr=&id=aOK9EAAAQBAJ&oi=fnd&pg=PP1&dq=The+4+ways+to+legally+t
erminate+a+contract+-+Lincoln+
%26+Rowe&ots=blgOni0HAh&sig=FIekeNv7vJKCdvupX71ttAHhshA&redir_esc=y
#v=onepage&q&f=false
Sikka, P., & Stittle, J. (2019). Debunking the myth of shareholder ownership of companies:
Some implications for corporate governance and financial reporting.2Critical
Perspectives on Accounting,263, 101992. https://doi.org/10.1016/j.cpa.2017.03.011
