MODULE 9: FORMS OF BUSINESS ORGANISATION AND FUNDAMENTALS OF THE

LAW OF CONTRACT

9.0. Learning Objectives

At the end of this module, you should be able to:

(a) State the types of companies that can be registered in Nigeria.
(b) List the requirements for registering each of the companies with the Corporate Affairs
Commission (CAC).
(c) List a checklist of documents required for the incorporation of companies.
(d) State what constitutes a contract and who may be bound by a contract.
(e) List why and how a contract may be invalid.
(f) State when and how the parties to a contract will cease to be bound.
(g) List the remedies that may be demanded by an aggrieved party to a contract.

PART A (FORMS OF BUSINESS ORGANISATION

9.1. Introduction
There are three (3) categories or forms of business organisations recognised and registrable in Nigeria.
These organisations are based on some form of ownership, size, control, process and procedure of
registration, and even winding up of the organisation. The choice of a particular form of a business
organisation affects several managerial and financial issues, which include:

(a) The amount of taxes the entrepreneur would have to pay.

(b) Whether the entrepreneur may be personally sued for unpaid business bills.
(c) Whether the venture will die automatically with the demise of the entrepreneur.
(d) Whether the business organisation will be different from the owners and the management or
fused.

9.2. Forms of Business Organisation

The forms of business organisation in Nigeria include individuals or sole proprietorships, partnerships,
co-operative societies, incorporated trustees, and registered companies.
9.2.1. Sole Proprietorship: This is also known as a one-man business, and is usually operated by an
individual, with the sole aim to make a profit. It is also the oldest and the most common form of business
enterprise in Nigeria. The popularity of this form of business unit is traceable to its simplicity and cost-
effectiveness in terms of formation and registration. It also affords privacy of operation and the possibility
of reaching commercial decisions quickly without the legal and technical constraints otherwise associated
with other forms of business organisations. Another major attraction is the fact that it ensures direct
personal relationships with employees.
Despite these sundry attractions of a sole proprietorship, it is marked with numerous disadvantages. The
commonest is the threat to the business's continuity after the owner’s demise. It is also common
knowledge that the business invariably suffers from the financial limitation of the sole proprietor. Also,
1
a sole proprietor does not enjoy limited liability as the business outfit is not conferred with a separate
legal personality.
9.2.2. Partnership: Partnership is one of the earliest forms of business associations known to law. It
usually involves a small number of persons doing business together in common with a view to make a
profit. Given the constant insufficiency of capital for business, modern commercial practice globally
generally favours the combination of efforts by entrepreneurs to break new business frontiers or
consolidate resources to gain a stronghold of a targeted market. Most of the disadvantages of a one-man
business are either totally absent or substantially mitigated in a partnership business. It is undoubtedly a
better business platform than a sole proprietorship.
However, a partnership, unless registered as a limited liability company, does not enjoy a corporate legal
personality distinct from the partners. Consequently, every partner is jointly and severally liable for the
liability of the firm. Unlike a company, a partnership consisting of more than twenty partners is illegal
except if it is a partnership of lawyers and accountants. Every partner is entitled to participate in the
management of the partnership business except a sleeping partner. Every partner in a partnership is an
agent of the other partner(s) and of the firm.
9.2.3. Incorporated Trustees
PART C of the Companies and Allied Matters Act (CAMA) provides a simple method of incorporation
that can be used by any community of persons bound together by custom, religion, kinship, or nationality,
or by anybody or association of persons established for any religious, educational, literary, scientific,
social or charitable purpose. Application is made to the Corporate Affairs Commission (CAC) which may
register the trustees as a corporation by the provision of PART C of the Act. This Part replaces the Land
(Perpetual Succession) Act of 1958 which was repealed by the Act. The procure and other matters relating
to the incorporation of the trustee are under PART C of CAMA.
9.2.4. Incorporated Companies or Registered Companies
An incorporated company is one that is duly registered by the Corporate Affairs Commission in
compliance with the provisions of the Companies and Allied Matters Act. Upon registration, a company
becomes a corporate personality distinct from the subscribers to the memorandum and articles of
association and by far, the most important unit of business organisation for modern economic activities.
Another opportunity of a registered company is investment and raising of capital, and strict legal control
and protection of members and creditors, the registered company has played and will continue to play an
ever-increasing role in the development of the national economy. The most outstanding feature of a
company is that it enjoys perpetual succession, a common seal and it is, therefore, capable of suing and
being sued in its corporate name. it can also own or dispose of all kinds of property.
By section 21 CAMA; there are three types of incorporated companies namely:
(a) Company limited by shares (Section 22 and 24 CAMA): This is a company in which the liability
of members, to contribute to the assets of the company in the event of winding up, is limited by
the memorandum to the amount contributed as a shared capital.
(b) Unlimited liability company (Section 25 of CAMA): An unlimited liability company is a company
without limit on the liability of the members. That is, when the company goes into liquidation,
the liability of the members will arise and they will be required to contribute without limit towards
the satisfaction of the company’s liabilities. The major disadvantage of this type of company is
the exposure of the members to unlimited loss that cannot be determined at the time of joining
the company because the loss of the member of an unlimited company in the event of winding up
of the company is unlimited.
(c) Company limited by guarantee (Section 25 of CAMA): A company limited by guarantee has the
2
 liability of its members limited by the memorandum/agreement to such amount as the members
have respectively undertaken to contribute to the assets of the company in the event of its being
wound up. It is very important to note that this type of company is not suitable for business.
Although it is permitted to do some businesses as allowed by its memorandum, the profit made
from such business is not to be shared by the members of the company, but it can only be applied
towards the promotion of the company’s aim and objectives. Some of the purposes for which this
type of company is formed are for charitable purposes, educational, social, or philanthropic in
nature.
Any of the foregoing companies may be private or public section 21(2). Consequently, CAMA recognises
Private Companies Limited by Shares, Private Unlimited Companies, or Private Companies Limited by
Guarantee.
9.2.5. Co-operative Society
A Cooperative has been defined as an association of voluntary individuals, united by a common bond,
who have come together to pursue their economic goals for their benefit.
The Co-operative societies have their laws they are exempted from the requirement of registering as a
company, and their members can be more than twenty. The Companies and Allied Matters Act does not
apply to cooperative societies.
There are 3 types of Co-operative Societies
(a) Primary Society: It must have 10 persons and such must have individually satisfied the provisions
of law S.24 which states that no person must be a member of more than one registered society whose
primary objective is to grant loans to its members except such a person has been given prior consent
to do so by the registered society concerned.
(b) Industrial Society: To qualify for registration under the Act it must have at least 6 persons, and be
economically viable.
(c) Secondary Society (also known as Cooperative Union): To be registrable it must have at least five
(5) registered Cooperative Societies; and in respect of a federal apex society, it must have at least five
(5) registered State apex societies. Generally, for any name to be used by a would-be cooperative
society or equivalent.
9.2.5.1. Important Facts about Cooperative Societies
(a) Effect of registration: Once a Society is registered, it becomes by the name with which it is
registered. A committee must be appointed by the members to administer and manage the affairs
of the society.
(b) Duties and privileges of registered society: The Society must make bylaws for such things as
are necessary or desirable for the purpose for which the society is established. It should be noted
above that such bylaws must accompany the application for registration.
(c) Rights and liabilities of members: Member must have paid or acquired an interest in the society
as prescribed by the by-laws. Each member must have one vote only.
(d) Qualification for membership: One must have attained the age of 16 years and be resident
within or in occupation of land within the registered society’s area of operation.

9.3. Factors that Determine the Choice of Business Organisation

(a) Nature, size, and extent of the business.
(b) Desire number of members.

3
 (c) Available capital and its sources.
(d) Knowledge of the comparative advantages of one type of company over another.

9.4. Checklist of Documents for Registration of Companies

(a) Memorandum and Article of Association duly stamped as deed/agreement.
(b) Availability and reservation of name (FORM CAC 1)
(c) Notice of address of the registered office of the company (FORM CAC 3)
(d) A statement of the list and particulars of the first Directors
(e) A statement of the available capital for the business or a statement of authorized share capital
and allotment of shares (CAC FORM 2).
(f) Evidence filing fee paid to CAC.
(g) A statutory declaration by a legal practitioner of compliance with the requirements of the Act.
(FORM CAC 4).
(h) Evidence of stamp duty paid to Federal Inland Revenue Services. And any other documents by
the Corporate Affairs Commission to satisfy the requirement of law relating to the formation of
a company in Nigeria.

PART B (LAW OF CONTRACT)

9.5. Definition
In the simplest terms, a contract is a legally binding agreement. The definition of a contract shows that
there is a certain level of legality entailed in its constitution, such that for an agreement to be a contract,
it must be something that the law would intervene in to enforce or something that the law recognises.

9.6. Classification of Contracts

A contract may be made orally (a parol contract) or in writing (a written contract).
(a) Oral contract: A contract may be expressed, in which it states clearly the intention of the parties
or implied, in which the intention of the parties must be derived from their actions or established
practice. A contract may be unilateral where one party furnishes consideration for the other, or
bilateral, where there is a mutual exchange of promises between the parties.
(b) Written contract: It may be made under seal, which means it carries the seal of a person, natural
or juristic. Where a contract is under seal, there will be no need for consideration, and where there
is no seal one of the parties must furnish consideration to enforce the promise of the other.

9.6. Elements of Contract

The main elements of a contract are offer, acceptance, consideration, intention to create legal relations,
and capacity to contract.
9.6.1. An Offer: An offer is a proposal to enter into an agreement and may be directed at a specific person
or group of persons or to the world. An offer is made by an offeror to an offeree.
There is also an invitation to treat, which means an open proposal to engage, which may be responded to

4
with an offer stating the terms of engagement, an invitation to treat also means an offer for negotiation.
An offer may be terminated by lapse of time, revocation before acceptance, or the lapse of time or
rejection by the offeree unless, under very special circumstances, termination of an offer will no longer
be possible once there has been communication of a valid acceptance of an offer.
9.6.2. Acceptance: An acceptance is a final, unqualified, unequivocal, and unconditional adoption of the
terms of an offer.
A counter-offer is a qualified assent to the terms of an offer and does not constitute a valid acceptance,
however, silence does not constitute a valid acceptance, but the conduct of the parties may indicate an
acceptance of the offer.
A conditional acceptance is not a valid acceptance, as it does not comprise an unqualified assent to the
terms of the offer and usually depends on the acceptance of the condition by the offeror. A written
acceptance becomes active from the time it is received by the offeror.
9.6.3. Consideration
For a party to make a legal claim based on a contract, they must show that they are entitled to a benefit
or have incurred a loss. The reason for this is that a party who makes a claim based on the promise of
another must show that they are entitled to make that claim based on some reciprocal action on their part
validating their claim to the execution of the promise.
Consideration refers to a benefit conferred or a loss incurred in exchange for a promise made by another.
Consideration must not be equal to the promise but must be sufficient as an exchange. Consideration
must be given after the promise is made, so it must be in exchange for a promise that has been made.
9.6.4. Intention to enter into legal relations
For a contract to be enforceable by the courts of law, the parties to such an agreement must show, not
only that there had been an offer, an acceptance, and consideration; but also, the parties intended to create
a legal relation. Where there is an offer, an acceptance, and consideration, this would almost always mean
that there is a valid contract, but the situation may be one in which the parties did not intend for their
agreement to be legally binding and therefore unenforceable, in which case, the courts would not be in a
position to compel fulfillment of such an agreement.
An agreement may have all the stated elements of a contract but exist in a relationship that is not governed
by legal obligations, but rather by social or other duty, and so would not be legally enforceable. For
example, the relationship between a parent and a child.
Privity of contract: It is only the parties to a contract that are entitled to enforce that contract, even if they
are not the only ones who benefit or suffer loss from the execution of the terms of the contract. However,
under certain circumstances, a person who is not a party to a contract may be entitled to enforce the
contract. These are:
(a) When a party has entered into a contract involving the land.
(b) In the case of consumers’ protection rights.
(c) Trusts (the person that is supposed to benefit from the trust agreement, though not a party to the
trust agreement itself he/she may sue the trustee to carry out the contract).
(d) Third-party insurance (even though the third party didn’t pay premiums, they can still claim on
an insurance policy made in their favour).
9.6.5. Capacity to contract: Apart from being a party to a contract, it is important to explain who can
be a party to a contract for a contract to be valid, and for its parties to make claims under it.
Certain groups generally do not have the capacity to enter into a valid contract, in which case the question
of capacity would not even arise. Some of these groups include children, illiterates, future companies,
5
persons of unsound mind or mentally incapacitated, and drunken persons.
The reason for denying certain people the capacity to contract is that such groups are regarded under the
law as lacking the necessary mental, physical, or social features necessary to enter into a legal contract
in which they bind themselves and others.

9.7. Terms of Contract

Terms of the contract refer to the conditions of the contract that govern the rights and obligations of the
parties under the contract. Different terms in a contract carry varying degrees of importance, as one term
may be fundamental to the existence or abidingness of the contract, while another term may be merely
declaratory.
Terms of the contract may also be expressed or implied, and the court will consider some factors to
determine the intention of the parties where there are implied terms in a contract. Implied terms may be
inferred from the trade custom or usage, based on necessity or business efficacy.
Express terms of a contract will override implied terms, no matter how established the custom
constituting the implied term is, because the express terms constitute the clearest expression of the
intention of the parties.

9.8. Vitiating Elements or Factors that make Contract Ineffective

A vitiating element makes a thing imperfect or invalid. That is, it vitiates or frustrates it. Therefore, a
contract may be made void or voidable by vitiating element, a contract is void ab initio if it missing a
fundamental or material element or if it is illegal, but a contract is voidable where it is valid and
enforceable until it has been set aside at the instance of any of the parties.
An illegal contract is a contract that is against the law, involves criminal liability, and is therefore
unenforceable by the courts. It is void ab initio. All illegal contracts are void contracts; hence an illegal
or void contract is unenforceable.

9.9. Illegality and Unenforceable Contracts

According to Halsbury’s Laws of England, 3rd Edition, vol.8, 126, paragraph 218, a contract is illegal
“where the subject matter of the promise is illegal or where the consideration or any part of it is illegal”
such a contract is void ab initio and unenforceable because the courts will not enforce illegality.
There are certain vitiating elements that would make a contract void or voidable. Usually, these elements
influence the decision of the parties in entering into the contract, and where they are false, the courts will
intervene to ensure that parties are not forced to enforce contracts that they have not freely or voluntarily
or voluntarily entered into. Some of the vitiating elements are:
(a) Mistake: A mistake is a situation under which the intention or consent of the parties into a
contract is nullified by the existence of a condition or circumstance that was unknown to the
parties at the time of entering into the contract.
(b) Misrepresentation: A misrepresentation is a false statement that influences the decision of a
party to a contract to enter into a contract. The statement comes from a party to the contract and
may be made fraudulently to influence the other party to enter into the contract based on the
wrong information provided by the other party.
(c) Duress: In entering into a contract, the parties must be clear as to the terms by which they intend
to bind themselves and their consent to being bound by those terms. The will and intention of the
6
 parties are therefore very important to the creation of a valid contract in law. Consequently, where
a party to the contract is forced to agree to terms that he/she would ordinarily not accept, then the
contract would be invalid. Duress involves the threat or use of force to induce a person to consent
to be bound by an agreement. The following example will show what kind of force or threats
could invalidate a contract.
(d) Undue influence: This vitiating element of a contract is very similar to duress, but here the
coercion is based on the relationship between the parties to the contract, so that one of them
exercises significant control over the decision-making process of the other in such a way as to
vitiate the consent of the latter.

9.10. Discharge of Contract

For a contract to be discharged means that the contract is brought to an end, and this can happen in a
number of ways and for a number of reasons. In this section, we will discuss the different ways in which
a contract can be brought to its end. Before a contract can be said to have been discharged, there must
have been in existence of a valid contract.
Some ways through which a contract may come to an end are:
(a) Performance: Performance refers to the fulfillment of contractual obligations under the terms of
the contract. Some cases suggest that performance must fit the requirements set out in the contract,
i.e., that the contracting parties must complete the contract.
(b) Prevention of Performance: Where one party to a contract performs part of the agreed obligation
and is then prevented from completing the rest by some fault of the other party, a quantum meruit
can be used to claim the cost of the work done.
(c) Agreement: Another way by which a contract can be discharged is by the agreement of the parties
involved. A contract comes into existence by agreement and the parties to the contract may also
choose to terminate the contract by an agreement between them. This is expressed as what has
been effected by agreement can be undone by agreement for example by way of Rescission.
(d) Breach: Another instance where a contract will be discharged is where there has been a material
breach of its terms.
(e) Frustration: frustration unlike performance, agreement, and breach, involves a kind of premature
interruption or the occurrence of an event or change of situation or circumstances that are beyond
what was contemplated by the parties at the time they entered into the contract. In other words,
neither party is responsible for the events that frustrate a contract. Therefore, for a contract to be
frustrated, the supervening event or unforeseen circumstances (e.g. coronavirus / COVID-19
pandemic) must be such that they make it impossible to perform the contract.

9.11. Remedies
There are several remedies available to an aggrieved party to a contract. Usually, a person seeks remedies
when the other party to the contract has broken a promise made under the contract. There are two options
for remedies, which are to:
(a) Insist on the actual performance of the contract, i.e., specific performance; or
(b) Seek damages for the breach.