BUSINESS &

COMMERCIAL LAWS
Complete Study Notes + MCQs + Expected Questions

ICMA Pakistan | Operational Level — 1

Course Code: 03 | All 6 Chapters Covered

Chapters Covered:

1. Legal System of Pakistan

2. Contract Act, 1872
3. Sales of Goods Act, 1930
4. Partnership Act, 1932
5. Negotiable Instruments Act, 1881
6. Business Ethics & Threats

Prepared for ICMA Students — Comprehensive Revision Resource

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CHAPTER 1 Introduction to Legal System of Pakistan
Understanding the foundation of law, its sources, and Pakistan's judicial framework.

1.1 Need / Importance of Law

Law is the set of rules and regulations that govern human conduct in society. It is essential for maintaining
order, protecting rights, and ensuring justice. Without law, society would descend into chaos.

Need Explanation

Maintenance of Order Law prevents chaos by defining what is permissible and what is
prohibited. It creates a framework within which individuals and businesses
can operate.

Protection of Rights Law safeguards fundamental rights of citizens such as the right to life,
property, and freedom from arbitrary actions.

Resolution of Disputes Courts and legal mechanisms provide peaceful ways to resolve conflicts
between individuals, businesses, and the state.

Social Justice Law ensures equitable treatment and protects weaker sections of society
from exploitation.

Regulation of Business Commercial laws govern business transactions, contracts, partnerships,

and trade, ensuring fairness and predictability.

Enforcement of Law compels parties to honor their promises and fulfil their duties,
Obligations underpinning the entire commercial system.

1.2 Sources of Law in Pakistan

Pakistani law derives from multiple sources, reflecting its colonial history, Islamic heritage, and constitutional
framework:

• The Constitution of Pakistan 1973

The supreme law of the land. All other laws must conform to it. It provides fundamental rights and
defines the structure of the state.
• Legislation (Statute Law)
Laws enacted by Parliament (National Assembly + Senate) or Provincial Assemblies. Examples:
Contract Act 1872, Companies Act 2017.
• Islamic Law (Shariah)
Under Article 227 of the Constitution, all laws must be consistent with Islamic injunctions. The Federal
Shariat Court can strike down un-Islamic laws.
• Customary Law
Long-established customs and usages recognized by courts, particularly in family matters and local
traditions.
• Judicial Precedent (Case Law)

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 Decisions of superior courts (Supreme Court, High Courts) form binding precedents for lower courts
under the doctrine of stare decisis.
• English Law (Common Law)
Pakistan inherited English common law principles from British colonial rule. Courts often refer to
English judgments for guidance.
• Ordinances
Emergency laws promulgated by the President or Governor when the legislature is not in session.
They have the force of law but must be ratified later.

1.3 System of Courts in Pakistan

Pakistan has a hierarchical court system. Higher courts supervise lower courts and their decisions are
binding on courts below them.

Court Level Jurisdiction / Role

Supreme Court of Apex / Highest Final court of appeal. Interprets the Constitution.
Pakistan Decisions bind all courts.

Federal Shariat Court Special Examines laws to determine if they comply with Islamic
(Federal) injunctions.

High Courts (4 + 2) Provincial Apex One per province + Islamabad + AJK. Appellate +
original jurisdiction in major cases.

District / Sessions Courts District Level Civil and criminal jurisdiction at district level. Headed
by District Judge.

Civil Courts Lower Handle civil disputes (property, contracts, money).

Senior Civil Judge → Civil Judge.

Criminal Courts Lower Handle criminal cases. Sessions Judge → Magistrates

(1st, 2nd, 3rd class).

Special / Tribunal Courts Specialized Banking Courts, Labour Courts, Tax Tribunals,
Consumer Courts, etc.

1.4 Doctrine of Precedent (Stare Decisis)

Key Concepts:
• Binding Precedent: A precedent that must be followed. Lower courts are bound by decisions of higher
courts.
• Persuasive Precedent: A precedent that a court may consider but is not obliged to follow (e.g., foreign
court decisions).
• Obiter Dicta: Statements made by a judge 'by the way' — not part of the core decision. Persuasive but
not binding.
• Ratio Decidendi: The legal reason/principle on which a case decision is based. This is the binding part
of a judgment.

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 • Distinguishing: When a judge decides that the facts of the current case are sufficiently different to
avoid following a precedent.
• Overruling: A higher court overturns a precedent set by a lower court in a later case.

1.5 Pakistan's Law-Making Authority

Pakistan's legislative structure is federal in nature, with law-making powers distributed between federal and
provincial legislatures.

Authority Role / Scope

Parliament (Federal) Consists of National Assembly + Senate + President. Makes laws on

matters in the Federal Legislative List.

Provincial Assemblies Each of the 4 provinces has its own assembly that legislates on
provincial matters.

President / Governor Can promulgate Ordinances when the legislature is not in session.
These have temporary force of law.

Concurrent List Both Federal and Provincial legislatures can make laws. Federal law
prevails in case of conflict.

Sub-ordinate Legislation Rules, regulations, and bye-laws made by executive authorities

under powers delegated by statutes.

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Chapter 1 — MCQs (Multiple Choice Questions)

Q1. Which is the supreme law of Pakistan?

A) Contract Act 1872
B) Constitution of Pakistan 1973
C) Criminal Procedure Code
D) Civil Procedure Code
✔ Answer: B) Constitution of Pakistan 1973
Explanation: All other laws must conform to the Constitution. It is the supreme law of the land.

Q2. The doctrine of stare decisis means:

A) Every citizen is equal before law
B) Courts must follow decisions of higher courts in similar cases
C) Parliament can make any law
D) President can issue ordinances
✔ Answer: B) Courts must follow decisions of higher courts in similar cases
Explanation: Stare decisis = 'stand by what has been decided'. It ensures consistency in law.

Q3. Which court is the apex court of Pakistan?

A) Lahore High Court
B) Federal Shariat Court
C) Supreme Court of Pakistan
D) District Court
✔ Answer: C) Supreme Court of Pakistan
Explanation: The Supreme Court is the highest court. Its decisions bind all other courts.

Q4. The legal reason on which a court bases its judgment is called:
A) Obiter Dicta
B) Ratio Decidendi
C) Stare Decisis
D) Persuasive Precedent
✔ Answer: B) Ratio Decidendi
Explanation: Ratio Decidendi is the binding part of a judgment — the core legal reasoning.

Q5. Which court examines whether laws conform to Islamic injunctions?

A) Supreme Court
B) High Court
C) District Court
D) Federal Shariat Court

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 ✔ Answer: D) Federal Shariat Court
Explanation: Under Article 227, Federal Shariat Court examines laws for compliance with Islamic law.

Q6. Customary law derives its authority from:

A) Parliament
B) Long-established practices recognized by courts
C) English common law
D) Presidential ordinances
✔ Answer: B) Long-established practices recognized by courts
Explanation: Customary law is based on traditions and practices that courts have recognized over time.

Q7. When a higher court overturns a lower court precedent in a later case, it is called:
A) Distinguishing
B) Obiter Dicta
C) Overruling
D) Ratio Decidendi
✔ Answer: C) Overruling
Explanation: Overruling occurs when a higher court declares that a previous precedent was wrongly decided.

Q8. A Presidential Ordinance is promulgated when:

A) Parliament is in session
B) Parliament is not in session
C) High Court directs it
D) A law is unconstitutional
✔ Answer: B) Parliament is not in session
Explanation: The President can promulgate ordinances only when parliament is not in session.

Chapter 1 — Expected Exam Questions

Q1. What is the need and importance of law in society?

Law is essential for maintaining social order, protecting individual rights, resolving disputes peacefully,
ensuring social justice, regulating business activities, and enforcing obligations. Without law, there would
be chaos and injustice. In a business context, law provides the framework within which commercial
transactions are conducted with certainty and fairness.

Q2. Explain the sources of law in Pakistan.

Pakistani law derives from: (1) Constitution 1973 — the supreme law; (2) Legislation — acts of
Parliament/Provincial Assemblies; (3) Islamic Law (Shariah) — all laws must be consistent with Islamic
injunctions under Article 227; (4) Customary Law — long-standing practices; (5) Judicial Precedent —
binding decisions of superior courts; (6) English Common Law — inherited from British colonial rule; (7)
Ordinances — emergency laws by President/Governor.

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Q3. Describe the hierarchy of courts in Pakistan.

The court hierarchy from highest to lowest is: (1) Supreme Court of Pakistan — apex court, final
appellate authority; (2) Federal Shariat Court — examines conformity of laws with Islam; (3) High Courts
— one per province + Islamabad, appellate and original jurisdiction; (4) District/Sessions Courts — at
district level; (5) Civil and Criminal Courts — handle routine matters; (6) Special Courts/Tribunals —
banking, labour, tax, etc.

Q4. What is the doctrine of precedent? Explain its key elements.

The doctrine of precedent (stare decisis) requires courts to follow legal principles established in earlier
decisions of higher courts when deciding similar cases. Key elements: Ratio Decidendi — the binding
legal reason of a judgment; Obiter Dicta — persuasive but non-binding remarks; Binding Precedent —
must be followed; Persuasive Precedent — may be considered; Distinguishing — avoiding a precedent
due to different facts; Overruling — higher court overturning a prior precedent.

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CHAPTER 2 The Contract Act, 1872
The backbone of commercial law — governing agreements, obligations, and enforcement of promises.

2.1 Contract — Definition & Essentials

Formula: Agreement + Enforceability = Contract

Essential Elements of a Valid Contract:

Element Explanation

1. Offer and Acceptance There must be a lawful offer by one party and its absolute,
unconditional acceptance by the other.

2. Consideration Something of value must be exchanged. 'An agreement without

consideration is void' (Section 25).

3. Capacity of Parties Parties must be competent — of legal age (18+), of sound mind, and
not disqualified by law.

4. Free Consent Consent must be free — not obtained through coercion, undue
influence, fraud, misrepresentation, or mistake.

5. Lawful Object The purpose/object of the contract must be legal and not opposed to
public policy.

6. Lawful Consideration Consideration must be lawful — not illegal, immoral, or contrary to

public policy.

7. Certainty of Terms Terms of the contract must be clear and not vague or uncertain (Section
29).

8. Possibility of The contract must be capable of being performed. Impossible

Performance agreements are void (Section 56).

9. Not Expressly Declared The contract must not be one that the Act itself declares to be void.
Void

10. Legal Formalities (if Some contracts require writing, registration, or stamping (e.g.,
required) mortgage, insurance).

2.2 Kinds of Contracts

Basis Type Description

Validity Valid Contract All essentials present; enforceable by law.

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 Void Contract Not enforceable by law (Section 2(j)). Was valid but ceased
to be (e.g., impossible to perform).

Void Agreement Never enforceable from the start (e.g., agreement with
minor, uncertain terms).

Voidable Contract Valid until rescinded by aggrieved party (where consent was
not free — fraud, coercion, etc.).

Illegal Contract Forbidden by law. Void + connected transactions also void.

Unenforceable Valid in substance but cannot be enforced due to technical

Contract defect (e.g., missing stamp).

Formation Express Contract Terms stated explicitly in words (written or spoken).

Implied Contract Terms inferred from conduct, circumstances, or course of

dealing.

Quasi Contract Not a true contract but law imposes obligations to prevent
unjust enrichment (Sections 68–72).

Performance Executed Contract Both parties have fully performed their obligations.

Executory Contract Performance is still to be done — either by one or both

parties.

E-Contracts Electronic Contract Contracts formed electronically via email, website, or digital
platforms. Recognized under Pakistani law.

Digital E-Signature Electronic signatures with legal validity under the Electronic
Signatures Transactions Ordinance 2002.

2.3 Offer and Acceptance

Rules for Valid Offer:

• Must be communicated to the offeree.
• May be express (spoken/written) or implied (by conduct).
• Must be certain and definite — not vague.
• Must be made with the intention of creating legal relations.
• An invitation to offer (e.g., a shop displaying goods) is NOT an offer.
• Offer lapses on death of offeror, rejection, expiry of time, or counter-offer.

Rules for Valid Acceptance:

• Must be absolute and unconditional (Section 7). A conditional acceptance is a counter-offer.
• Must be communicated to the offeror.

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 • Must be in the prescribed manner (if specified); otherwise, in a reasonable manner.
• Must be given within the time specified or within a reasonable time.
• Acceptance by post: complete when the letter is posted (Postal Rule).
• Mental acceptance is not enough — it must be expressed/communicated.
• Acceptance must be by the person to whom the offer was made.

2.4 Consideration

Rules of Valid Consideration:

• At the desire of the promisor: The act must be done at the promisor's request, not voluntarily.
• May move from promisee or any third party: Unlike English law, Pakistani law allows consideration
from a third party.
• May be past, present, or future: Past consideration is valid in Pakistan (unlike English law).
• Must be real and not illusory: Something of value — nominal consideration is acceptable.
• Need not be adequate: Law does not require equal exchange, but there must be something.
• Must be lawful: Not illegal, immoral, or contrary to public policy.

Agreements Valid Without Consideration (Exceptions — Section 25):

• Natural love and affection between near relatives (must be in writing and registered).
• Past voluntary services — compensating someone for something done voluntarily in the past.
• Promise to pay a time-barred debt (must be in writing and signed).
• Completed gifts — gifts already made do not require consideration to be valid.
• Agency contracts — no consideration needed to create an agency.

2.5 Capacity of Parties

Section 11 states: Every person is competent to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he
is subject.

Category Legal Status Effect on Contract

Minor (below 18) No capacity Contract is VOID AB INITIO (void from the
beginning). Minor cannot be held liable. However,
minor can receive benefits.

Person of Unsound No capacity during Contract made during unsound mind is void. If made
Mind insanity during lucid interval, it is valid.

Disqualified Persons No/Limited capacity Includes alien enemies, convicts, insolvent persons,
and companies acting beyond their powers (ultra
vires).

2.6 Free Consent

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 • Coercion (S.15)
Committing or threatening to commit an act forbidden by law, or unlawfully detaining or threatening to
detain property. Effect: Contract is VOIDABLE at the option of the aggrieved party.
• Undue Influence (S.16)
One party is in a position to dominate the will of the other and uses that position to obtain an unfair
advantage. Effect: Contract is VOIDABLE.
• Fraud (S.17)
Active concealment of facts, false representation made knowingly, or any deceptive act to induce the
other party to enter a contract. Effect: Contract is VOIDABLE + right to claim damages.
• Misrepresentation (S.18)
An innocent false statement of fact that induces the other party to contract. No intention to deceive.
Effect: Contract is VOIDABLE but no damages (unlike fraud).
• Mistake (S.20-22)
An erroneous belief about something. Bilateral mistake of fact = VOID. Unilateral mistake or mistake of
law = generally does NOT affect contract.

2.7 Void Agreements

The following agreements are expressly declared void by the Contract Act:

• Agreement in restraint of marriage (Section 26).

• Agreement in restraint of trade (Section 27) — except reasonable restraints in partnership/sale of
business.
• Agreement in restraint of legal proceedings (Section 28).
• Agreements with uncertain or ambiguous terms (Section 29).
• Wagering agreements / betting contracts (Section 30).
• Agreements to do an impossible act (Section 56) — physical or legal impossibility.

2.8 Performance of Contract

Performance means the fulfilment of obligations as specified in the contract. Parties must perform or offer to
perform (tender) their respective promises.

Types of Performance:
• Actual Performance: The promisor has done exactly what was promised. Contract is discharged.
• Attempted Performance (Tender): The promisor offers to perform but the promisee refuses. The
promisor is not liable for non-performance.

2.9 Discharge of Contract

Mode of Discharge Explanation

By Performance Both parties fulfil their obligations. Most common mode of discharge.

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By Agreement/Consent Novation (new contract), Rescission (cancellation), Alteration,
Remission, or Waiver.

By Breach One party fails to perform. Actual breach (refuses to perform) or

Anticipatory breach (declares in advance he won't perform).

By Impossibility/Frustration (S.56) Contract becomes impossible to perform due to unforeseen events

beyond parties' control (e.g., war, destruction of subject matter).

By Operation of Law Through merger, insolvency, death (personal contracts), or material

alteration of the contract.

By Lapse of Time If contract is not enforced within the limitation period (Limitation Act),
the right to sue is lost.

2.10 Remedies for Breach of Contract

Remedy Details

Damages (S.73-75) Monetary compensation. Types: Ordinary/General damages (arising

naturally), Special damages (consequential losses), Exemplary/Punitive
damages (in exceptional cases), Nominal damages (breach proved but no
real loss).

Specific Performance Court orders the defaulting party to actually perform the contract. Available
when damages are inadequate (e.g., unique property, rare goods).

Injunction Court order restraining a party from doing something that would breach the
contract.

Rescission Cancellation of the contract. The aggrieved party is restored to their original
position.

Quantum Meruit Reasonable payment for work already done when a contract is partly
performed and then broken by the other party.

2.11 Special Contracts

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Chapter 2 — MCQs

Q1. According to Section 2(h), a contract is defined as:

A) Any agreement between two parties
B) An agreement enforceable by law
C) A promise supported by consideration
D) A written document signed by both parties
✔ Answer: B) An agreement enforceable by law
Explanation: Section 2(h): Contract = Agreement + Enforceability by law.

Q2. A contract with a minor is:

A) Voidable
B) Valid
C) Void ab initio
D) Illegal
✔ Answer: C) Void ab initio
Explanation: A contract with a minor is void from the very beginning — it has no legal effect at all.

Q3. Consent is said to be free when it is not caused by:

A) Offer and acceptance
B) Consideration
C) Coercion, fraud, misrepresentation, undue influence, or mistake
D) Capacity of parties
✔ Answer: C) Coercion, fraud, misrepresentation, undue influence, or mistake
Explanation: Section 14 defines free consent as absence of these five vitiating factors.

Q4. Which of the following agreements is NOT void?

A) Agreement in restraint of trade
B) Wagering agreement
C) Agreement supported by past consideration
D) Agreement in restraint of marriage
✔ Answer: C) Agreement supported by past consideration
Explanation: Past consideration is valid in Pakistan. The other three are void under the Contract Act.

Q5. Quantum meruit means:

A) As much as has been earned/deserved
B) A court order to perform a contract
C) Cancellation of a contract
D) Restraint of a breach

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 ✔ Answer: A) As much as has been earned/deserved
Explanation: Quantum meruit allows reasonable payment for partial work done when the contract is broken.

Q6. In a contract of guarantee, how many parties are involved?

A) Two
B) Three
C) Four
D) Five
✔ Answer: B) Three
Explanation: The three parties are: Principal Debtor, Creditor, and Surety.

Q7. Pledge is defined as:

A) A contract of indemnity
B) Bailment of goods as security for a debt
C) A contract of agency
D) Transfer of ownership of goods
✔ Answer: B) Bailment of goods as security for a debt
Explanation: Section 172: Pledge = bailment of goods as security for payment of debt or performance of a promise.

Q8. Anticipatory breach of contract occurs when:

A) A party fails to perform at the due date
B) A party declares before the due date that it will not perform
C) Both parties agree to cancel the contract
D) The court orders specific performance
✔ Answer: B) A party declares before the due date that it will not perform
Explanation: In anticipatory breach, the promisor repudiates the contract before the time of performance arrives.

Q9. Which of the following is NOT an essential of a valid contract?

A) Free consent
B) Lawful consideration
C) Certainty of terms
D) Notarization
✔ Answer: D) Notarization
Explanation: Notarization is not required for a valid contract. Only specific contracts (mortgage, etc.) need registration.

Q10. A voidable contract is one that:

A) Is void from the beginning
B) Can be enforced or rescinded by the aggrieved party
C) Is forbidden by law
D) Has no consideration

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 ✔ Answer: B) Can be enforced or rescinded by the aggrieved party
Explanation: A voidable contract is valid until the aggrieved party (e.g., victim of fraud) chooses to void it.

Chapter 2 — Expected Exam Questions

Q1. What are the essentials of a valid contract?

A valid contract requires: (1) Offer and acceptance — a definite offer and unconditional acceptance; (2)
Consideration — something of value exchanged; (3) Capacity of parties — parties must be adults of
sound mind; (4) Free consent — consent free from coercion, fraud, undue influence, misrepresentation,
and mistake; (5) Lawful object and consideration — not illegal or against public policy; (6) Certainty of
terms; (7) Possibility of performance; (8) Not expressly declared void.

Q2. Explain the vitiating factors of free consent.

Free consent is absent when caused by: (1) Coercion (S.15) — use of force or threat; contract voidable;
(2) Undue Influence (S.16) — domination of will; contract voidable; (3) Fraud (S.17) — deliberate
deception; contract voidable + right to damages; (4) Misrepresentation (S.18) — innocent false
statement; contract voidable but no damages; (5) Mistake (S.20-22) — bilateral mistake of fact makes
contract void; unilateral mistake generally has no effect.

Q3. What are the different modes of discharge of contract?

A contract can be discharged by: (1) Performance — both parties fulfil their obligations; (2) Agreement
— novation, rescission, alteration, remission, or waiver; (3) Breach — actual or anticipatory
non-performance; (4) Impossibility/Frustration (S.56) — unforeseen events make performance
impossible; (5) Operation of law — insolvency, death (personal contracts), merger; (6) Lapse of time —
limitation period expires.

Q4. Distinguish between contract of indemnity and contract of guarantee.

Indemnity: Two parties (indemnifier and indemnified); protects against loss from promisor's/third party's
conduct; liability arises on actual loss; e.g., insurance. Guarantee: Three parties (principal debtor,
creditor, surety); surety promises to perform if principal debtor defaults; liability is secondary (conditional
on default); can be specific or continuing; surety has right of subrogation after paying.

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CHAPTER 3 Sales of Goods Act, 1930
Governing contracts for the sale and purchase of movable goods in Pakistan.

3.1 Contract of Sale — Definition & Essentials

Essentials of a Valid Contract of Sale:

• Two parties — seller and buyer (must be different persons).
• Goods — movable property (not immovable property like land).
• Transfer of property — ownership must transfer (or agree to transfer).
• Price — must be in money (exchange of goods for goods is barter, not sale).
• All essentials of a valid contract must be present (offer, acceptance, consideration, capacity, free
consent, lawful object).

Sale vs. Agreement to Sell:

Basis Sale Agreement to Sell

Transfer of Property Immediate Future / Conditional

Type of Contract Executed contract Executory contract

Risk Passes to buyer immediately Remains with seller until sale

Remedy on Breach Buyer can sue for recovery of Only damages (not goods)
goods

Insolvency of Seller Buyer can claim goods from official Buyer is only unsecured creditor
receiver

Insolvency of Buyer Seller must deliver; can claim price Seller may refuse to deliver
as debt

3.2 Conditions and Warranties

Implied Conditions (automatically part of every sale contract):

• Title — seller has the right to sell (S.14(a)).
• Sale by description — goods must correspond to description (S.15).
• Merchantable quality — goods must be reasonably fit for ordinary use (S.16(2)).

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 • Fitness for purpose — if buyer tells seller the purpose and relies on seller's skill (S.16(1)).
• Sale by sample — bulk must match the sample shown (S.17).

Implied Warranties:
• Quiet possession — buyer shall have quiet enjoyment of the goods (S.14(b)).
• Freedom from encumbrances — goods are free from any charge or encumbrance in favour of third
parties (S.14(c)).
• Disclosure of dangerous nature of goods — seller must warn buyer about dangerous goods.

3.3 Transfer of Property in Goods

The passing of property (ownership) is crucial because it determines who bears the risk of loss or damage to
goods. The general rule is: risk follows property (ownership). Risk passes when property passes.

Type of Goods When Property Passes

Specific/Ascertained Goods Property passes when the parties intend it to pass (Section 19).
Intention is determined from contract terms, conduct, and
circumstances.

Unascertained Goods (S.18) Property does NOT pass until goods are ascertained and
unconditionally appropriated to the contract by both parties.

Goods on Approval/Sale or Return Property passes when buyer signifies approval, or retains goods
beyond the return period, or acts inconsistently with seller's
ownership.

Delivery to Carrier Property passes to buyer when goods are delivered to carrier for
transmission (unless seller reserves right of disposal).

3.4 Performance of Contract of Sale

Delivery of goods by the seller and acceptance of goods and payment by the buyer constitute performance.

Aspect Details

Delivery The voluntary transfer of possession of goods from seller to buyer. Can be actual,
symbolic (key to warehouse), or constructive (goods already with buyer).

Rules of Delivery Must be at a reasonable hour, in correct quantity, of correct quality, and at the
agreed place. Buyer bears delivery expenses unless otherwise agreed.

Acceptance Buyer is deemed to have accepted when: he informs the seller, he does an act
inconsistent with seller's ownership, or after a reasonable time he retains the
goods.

Payment Delivery and payment are concurrent conditions unless agreed otherwise (C.O.D.
— Cash on Delivery principle).

3.5 Rights of Unpaid Seller

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Rights Against the Goods:
Right Details

Lien (S.47) Right to retain possession of goods until payment is made. Available when goods
are still with the seller.

Stoppage in Transit Right to stop goods in transit and reclaim possession if buyer becomes insolvent.
(S.50) Available only while goods are in transit.

Right of Resale If buyer is in default, the unpaid seller can resell the goods (after giving notice). If he
(S.54) suffers a loss, he can sue the original buyer.

Rights Against the Buyer Personally:

• Suit for price — when property has passed and buyer refuses to pay (S.55).
• Suit for damages — when buyer wrongfully refuses to accept goods (S.56).
• Suit for repudiation of contract (anticipatory breach).
• Suit for interest on the price.

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Chapter 3 — MCQs

Q1. The price in a contract of sale must be:

A) In goods
B) In services
C) In money (monetary consideration)
D) Any valuable consideration
✔ Answer: C) In money (monetary consideration)
Explanation: Sale requires money as consideration. Exchange of goods for goods is barter, not sale.

Q2. Breach of condition gives the buyer the right to:

A) Claim damages only
B) Treat the contract as repudiated and claim damages
C) File a criminal case
D) Demand a replacement
✔ Answer: B) Treat the contract as repudiated and claim damages
Explanation: A condition is essential to the contract — breach allows rejection of goods and/or damages.

Q3. 'Risk follows property' means:

A) Risk passes to buyer only on delivery
B) Risk passes when ownership passes
C) Seller always bears the risk
D) Risk passes on signing of contract
✔ Answer: B) Risk passes when ownership passes
Explanation: Under the Sale of Goods Act, risk follows the property — whoever owns the goods bears the risk of loss.

Q4. The right of stoppage in transit is available to the unpaid seller when:
A) Buyer refuses to accept goods
B) Buyer becomes insolvent while goods are in transit
C) Goods are damaged in transit
D) Buyer delays payment
✔ Answer: B) Buyer becomes insolvent while goods are in transit
Explanation: Section 50: Right of stoppage in transit requires insolvency of buyer + goods still in transit.

Q5. An implied condition of merchantable quality means:

A) Goods must be of the highest quality
B) Goods must be fit for the purpose buyer told seller
C) Goods must be reasonably fit for ordinary use
D) Goods must match the description

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 ✔ Answer: C) Goods must be reasonably fit for ordinary use
Explanation: Merchantable quality (S.16(2)) means goods of a description which are commonly bought must be
reasonably fit for ordinary use.

Q6. In a sale by sample, the bulk must:

A) Match the price of the sample
B) Correspond with the sample in quality
C) Be delivered immediately
D) Be inspected by both parties
✔ Answer: B) Correspond with the sample in quality
Explanation: Section 17: In a sale by sample, there is an implied condition that the bulk shall correspond with the
sample.

Q7. When does property pass in unascertained goods?

A) When the contract is signed
B) When goods are identified and appropriated to the contract
C) When payment is made
D) When goods are shipped
✔ Answer: B) When goods are identified and appropriated to the contract
Explanation: Section 18: Property in unascertained goods passes when goods are ascertained and unconditionally
appropriated.

Chapter 3 — Expected Exam Questions

Q1. Distinguish between 'Sale' and 'Agreement to Sell'.

Sale: Ownership transfers immediately, executed contract, risk passes to buyer, buyer can claim goods
from official receiver in seller's insolvency. Agreement to Sell: Ownership transfers in future/on condition,
executory contract, risk stays with seller until actual sale, buyer is only an unsecured creditor in seller's
insolvency. An agreement to sell becomes a sale when the conditions are fulfilled or the time lapses.

Q2. What are the rights of an unpaid seller?

Rights Against Goods: (1) Lien — right to retain goods until price is paid; (2) Stoppage in transit — can
stop goods in transit if buyer is insolvent; (3) Resale — can resell after giving notice if buyer defaults.
Rights Against Buyer Personally: (1) Sue for price if property has passed; (2) Sue for damages if buyer
wrongfully refuses delivery; (3) Sue for repudiation (anticipatory breach); (4) Sue for interest.

Q3. Explain implied conditions and warranties under the Sale of Goods Act.

Implied Conditions: (1) Title — seller must have right to sell; (2) Sale by description — goods must match
description; (3) Merchantable quality — fit for ordinary use; (4) Fitness for purpose — if buyer disclosed
purpose; (5) Sale by sample — bulk matches sample. Implied Warranties: (1) Quiet possession —
buyer's peaceful enjoyment guaranteed; (2) No encumbrances — goods free from third-party charges;
(3) Dangerous goods — seller must warn of any danger.

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CHAPTER 4 Partnership Act, 1932
Governing business partnerships — rights, duties, liabilities, and dissolution of firms.

4.1 Definition and Essential Features

Essential Features of Partnership:

Feature Explanation

Two or More Persons Minimum 2 persons required. Maximum: Banking business — 10

persons; Other business — 20 persons.

Agreement Partnership arises from a contract (express or implied), not from status.
It must be a voluntary agreement.

Business Must be for carrying on some business (trade, occupation, or

profession). Charitable activities do not form a partnership.

Sharing of Profits The primary object must be to share profits. However, sharing profits
alone does not make someone a partner — mutual agency is also
essential.

Mutual Agency Every partner is both an agent and a principal. A partner's acts in the
firm's business bind all other partners. This is the TRUE test of
partnership.

Lawful Business The business carried on must be lawful. A partnership for illegal
activities is void.

No Separate Legal Entity Unlike a company, a partnership firm has no separate legal existence
apart from its partners.

4.2 Kinds of Partners

Type Key Characteristics

Active / Working Partner Takes active part in business management. Agent for all partners. Fully
liable for all debts.

Sleeping / Dormant Contributes capital but takes no part in management. Not known to
Partner outsiders. Still fully liable for debts.

Nominal Partner Lends name to the firm without contributing capital or taking profit. Still
fully liable to third parties.

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Partner by Estoppel Not a real partner but represents himself as one. Liable to those who
relied on that representation.

Partner by Holding Out A person who is declared as a partner (without their objection) is liable as
if they were a partner.

Minor Partner (S.30) A minor can be admitted to benefits of partnership (not made a full
partner). Minor shares profits, not losses. On attaining majority, has 6
months to decide whether to become a full partner or leave.

Limited Partner In a limited liability partnership — liability limited to their capital

contribution. Not allowed in traditional partnership.

Secret Partner Active in management but not known to outside world. Fully liable.

Sub-Partner Existing partner who shares his own profit share with an outsider. The
outsider has no relation with the firm.

4.3 Partnership vs. Co-Ownership

Basis Partnership Co-Ownership

Origin Arises from contract only Can arise by contract, law, or status

Business Carrying on a business is essential Not necessary to carry on business

Agency Each partner is agent of all others Co-owners are NOT agents of each
other

Transfer of Share Cannot transfer share without Can transfer share without consent
consent of all partners of others

Liability Jointly and severally liable for all Liable only to extent of their share
debts

Profit Sharing Profits shared as per agreement No automatic right to share profits

4.4 Formation, Types, and Registration of Partnership

Formation:
A partnership is formed by an agreement (oral or written) among the partners. The written agreement is
called the Partnership Deed. It typically contains: names of partners, firm name, nature of business, capital
contributions, profit-sharing ratio, rights and duties of partners, duration (if any), and procedures for
admission, retirement, and dissolution.

Types of Partnership:
• Partnership at Will (S.7): No fixed duration. Can be dissolved by any partner by giving notice in writing
to all other partners.
• Particular Partnership (S.8): Formed for a specific venture/project or for a fixed period. Dissolves on
completion of the venture or expiry of period.

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Registration of Firm (S.58-59):
Registration is NOT compulsory in Pakistan, but is highly advisable. A registered firm has several
advantages over unregistered firms.

Aspect Details

Consequence of An unregistered firm: (1) Cannot file a suit against third parties to enforce a
Non-Registration contractual right; (2) Partners cannot file suit against each other to enforce
rights arising from the contract; (3) Cannot claim set-off in a suit by a third
party.

Effect of Registration Registered firm can sue third parties, partners can sue each other, and
set-off claims are available.

Registration Process Apply to Registrar of Firms with: Statement in prescribed form, signed by all
partners; Payment of prescribed fee; The Registrar records it in the Register
of Firms and issues a Certificate of Registration.

4.5 Rights and Duties of Partners

Rights of Partners:
• Right to take part in the conduct of the business (S.12(a)).
• Right to be consulted on all matters affecting the partnership.
• Right of access to books and accounts.
• Right to share profits in the agreed ratio.
• Right to receive interest on capital at agreed rate (if provided in the deed).
• Right to receive interest on advances/loans at 6% per annum (S.13(d)).
• Right to be indemnified for acts done in good faith and for liabilities incurred in the ordinary course of
business.
• Right to prevent introduction of a new partner without unanimous consent.

Duties of Partners:
• Duty to carry on business to the greatest common advantage.
• Duty to be just and faithful to each other.
• Duty to maintain and render true accounts.
• Duty not to carry on any competing business.
• Duty to indemnify for wilful neglect.
• Duty to act within authority.
• Duty not to make secret profits from firm's business.
• Duty to devote time and attention to the firm's business (active partners).

4.6 Implied and Non-Implied Authority of Partners

Examples of Acts within Implied Authority:

• Purchase goods on credit in the name of the firm.

Business & Commercial Laws | ICMA Pakistan | Page 23

 • Sell goods or property of the firm.
• Receive payments of debts due to the firm.
• Engage servants for the firm.
• Draw, accept, or endorse negotiable instruments.
• Enter into contracts on behalf of the firm.

mplied) — Section 19(2)

• Submit a dispute relating to the business to arbitration.

• Open a bank account in the partner's own name.
• Compromise or relinquish any claim of the firm.
• Withdraw a suit filed on behalf of the firm.
• Admit any liability in a suit against the firm.
• Acquire immovable property on behalf of the firm.
• Enter into a partnership on behalf of the firm.

4.7 Reconstitution — Incoming & Outgoing Partners

Event Legal Position

Admission of New Partner Requires consent of all existing partners. New partner is not liable for acts of
(S.31) the firm before his admission. He is liable for all acts after joining. A minor
can only be admitted to benefits (not full partnership).

Retirement of Partner A partner may retire: (a) by consent of all partners; (b) as per the partnership
(S.32) agreement; (c) by giving notice (for partnership at will). Retiring partner is still
liable for acts done BEFORE retirement. Not liable for acts AFTER
retirement IF proper notice is given to third parties.

Expulsion of Partner (S.33) A partner can be expelled only if the partnership deed expressly provides for
it, and the power is exercised in good faith and for the benefit of the firm.
Wrongful expulsion = expulsion is void.

Insolvency of Partner An insolvent partner ceases to be a partner from the date of insolvency, not
(S.34) from the date of court order. The firm is not automatically dissolved.

Death of Partner Subject to the partnership agreement, the death of a partner dissolves the
firm unless the deed provides for continuity.

4.8 Dissolution of a Firm

Mode Details

Dissolution by Agreement With the consent of all the partners, or in accordance with a contract
(S.40) between them.

Compulsory Dissolution On occurrence of: (a) all partners becoming insolvent; (b) business
(S.41) becoming unlawful due to change in law.

Contingent Dissolution On: (a) expiry of fixed term; (b) completion of specific venture; (c) death of a
(S.42) partner; (d) insolvency of a partner — subject to partnership deed.

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Dissolution by Notice For partnership at will — any partner can dissolve by giving notice in writing
(S.43) to all other partners.

Dissolution by Court (S.44) Court can order dissolution on grounds of: partner's insanity, permanent
incapacity, misconduct, persistent breach of agreement, business at a loss
(just and equitable ground), transfer of share to outsider.

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Chapter 4 — MCQs

Q1. The true test of partnership is:

A) Sharing of profits
B) Written partnership deed
C) Mutual agency
D) Equal capital contribution
✔ Answer: C) Mutual agency
Explanation: Mutual agency — each partner being the agent and principal of others — is the defining characteristic of
partnership.

Q2. Maximum number of partners allowed in a banking partnership is:

A) 20
B) 50
C) 10
D) Unlimited
✔ Answer: C) 10
Explanation: Banking business: max 10 partners. Other businesses: max 20 partners.

Q3. A minor can be admitted to partnership:

A) As a full partner
B) Only to the benefits, not as a full partner
C) Not at all
D) With unlimited liability
✔ Answer: B) Only to the benefits, not as a full partner
Explanation: Section 30: A minor can be admitted to benefits (share profits) but not as a full partner. Minor is not liable
for losses.

Q4. Which of the following is OUTSIDE the implied authority of a partner?

A) Purchasing goods on credit
B) Receiving payments due to the firm
C) Submitting a dispute to arbitration
D) Selling goods of the firm
✔ Answer: C) Submitting a dispute to arbitration
Explanation: Section 19(2): Submitting disputes to arbitration is outside implied authority and requires all partners'
consent.

Q5. Registration of a partnership firm in Pakistan is:

A) Compulsory
B) Prohibited

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 C) Not compulsory but advisable
D) Required only for banking
✔ Answer: C) Not compulsory but advisable
Explanation: Registration is not mandatory but unregistered firms cannot sue third parties or each other in contract
matters.

Q6. A retiring partner remains liable for:

A) Acts before and after retirement
B) Acts before retirement only (if proper notice given)
C) Acts after retirement only
D) No liability after retirement
✔ Answer: B) Acts before retirement only (if proper notice given)
Explanation: A retiring partner is liable for all acts before retirement but freed from future liability if proper notice is given
to third parties.

Q7. Dissolution by court on the ground of insanity of a partner is covered under:

A) Section 40
B) Section 41
C) Section 43
D) Section 44
✔ Answer: D) Section 44
Explanation: Section 44 deals with dissolution by court, which includes insanity, incapacity, misconduct, and just and
equitable grounds.

Q8. Partnership at will can be dissolved by:

A) Court order only
B) Any partner by giving written notice to all other partners
C) Majority vote of partners
D) Death of any partner
✔ Answer: B) Any partner by giving written notice to all other partners
Explanation: Section 43: A partnership at will has no fixed term and can be dissolved by any partner giving written
notice.

Chapter 4 — Expected Exam Questions

Q1. What are the essential features of partnership?

Essential features: (1) Two or more persons (min 2, max 20 / 10 for banking); (2) Agreement —
voluntary contract; (3) Business — carrying on trade/profession; (4) Sharing of profits — primary
purpose; (5) Mutual agency — each partner acts as agent for all; (6) Lawful business; (7) No separate
legal entity — firm = partners collectively.

Business & Commercial Laws | ICMA Pakistan | Page 27

Q2. Distinguish between partnership and co-ownership.

Partnership: Arises from contract, business is essential, mutual agency exists, share cannot be
transferred without consent, partners are jointly and severally liable. Co-ownership: Can arise by law or
status, no need for business, co-owners are NOT agents of each other, share can be transferred freely,
liability limited to individual share. The key distinguishing factor is mutual agency.

Q3. Explain the modes of dissolution of a partnership firm.

Modes: (1) By Agreement (S.40) — all partners consent; (2) Compulsory (S.41) — all insolvent or
business illegal; (3) Contingent (S.42) — fixed term expires, venture complete, partner dies or becomes
insolvent; (4) By Notice (S.43) — for partnership at will, written notice by any partner; (5) By Court (S.44)
— on grounds of insanity, incapacity, misconduct, persistent breach, business loss, or just and equitable
reasons.

Q4. What are the rights and duties of partners?

Rights: To participate in management, be consulted, access books, share profits, receive interest on
capital/advances, be indemnified for good faith acts, prevent admission of new partners without consent.
Duties: Act for greatest common advantage, be faithful, maintain accounts, not compete with the firm,
not make secret profits, indemnify for wilful neglect, act within authority.

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CHAPTER 5 Negotiable Instruments Act, 1881
Governing promissory notes, bills of exchange, and cheques — the instruments of commercial payments.

5.1 Negotiable Instrument — Definition & Features

Characteristics of Negotiable Instruments:

• Free Transferability — Can be transferred by endorsement and delivery (order) or by mere delivery
(bearer).
• Transferee gets good title — A holder in due course gets a better title than the transferor (even if the
latter had a defective title).
• Right to sue — The holder in due course can sue in his own name.
• Presumption — Every negotiable instrument is presumed to be made for consideration, dated on the
date of making, and accepted within reasonable time.
• Unconditional obligation — Must be payable unconditionally.

5.2 Types of Negotiable Instruments

Comparison: Promissory Note vs. Bill of Exchange vs. Cheque

Feature Promissory Note Bill of Exchange Cheque

Parties 2 (Maker, Payee) 3 (Drawer, Drawee, 3 (Drawer, Bank, Payee)

Payee)

Drawee N/A Any person Always a bank

Acceptance Not required Required (by drawee) Not required

Payable On demand or fixed On demand or fixed Always on demand

time time

Noting/Protest Not required Required on dishonour Not required

Days of Grace 3 days 3 days None (demand only)

Stamp Duty Required Required Not required

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5.3 Parties to Negotiable Instruments

Party Description

Maker Person who makes/creates a promissory note — promises to pay.

Drawer Person who draws a bill of exchange or cheque — gives the order to pay.

Drawee Person ordered to pay. In a bill: any person/entity. In a cheque: always a bank.

Acceptor Drawee who accepts a bill of exchange by signing it. Now obligated to pay.

Payee Person to whom payment is to be made. Named in the instrument.

Holder Person in possession of the instrument and entitled to receive payment (payee or
endorsee).

Holder in Due Course A holder who takes an instrument: (a) before maturity, (b) in good faith, (c) for
(S.9) valuable consideration, (d) without notice of any defect. Gets the best protection
under the Act.

Endorser Person who endorses (signs on the back) to transfer the instrument.

Endorsee Person to whom the instrument is endorsed/transferred.

5.4 Presentment and Negotiation

Presentment:
Presentment means presenting the instrument to the drawee for acceptance (bills) or to the payer for
payment. It must be made at the proper time and place and to the proper person.

Negotiation (Transfer):
• Bearer Instrument: Transferred by mere delivery (no endorsement required).
• Order Instrument: Transferred by endorsement + delivery.

Types of Endorsement:
Type Description

Blank/General Endorsement Endorser signs only. Instrument becomes payable to bearer.

Full/Special Endorsement Endorser signs and specifies the name of the endorsee. 'Pay to Ahmed —
Signed: Ali'

Restrictive Endorsement Restricts further negotiation. 'Pay Ali only' or 'Pay Ali for collection'.

Conditional Endorsement Endorsement subject to a condition. 'Pay Ali on arrival of goods'.

Sans Recourse Endorsement Endorser excludes personal liability if dishonoured. 'Pay Ali, sans
recourse'.

Partial Endorsement For part of the amount — NOT valid.

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5.5 Dishonour of Negotiable Instrument

Notice of Dishonour:
When an instrument is dishonoured, notice must be given to all prior parties (drawer, endorsers) who are to
be held liable. Notice must be given within a reasonable time. Failure to give notice discharges the party from
liability (except the acceptor/maker who is primarily liable).

Noting and Protest (Bills only):

Noting: When a bill is dishonoured, it is taken to a Notary Public who re-presents it, and if still dishonoured,
records the fact on the instrument — this is noting. Protest: A formal certificate by the Notary Public certifying
the dishonour. Required for foreign bills but optional for inland bills in Pakistan.

5.6 Banker and Customer Relationship

Relationship Explanation

Debtor-Creditor When customer deposits money, the bank becomes the debtor and the
customer is the creditor. Bank owes money to customer.

Creditor-Debtor When customer takes a loan, the customer becomes the debtor and the
bank is the creditor.

Agent-Principal Bank acts as agent when collecting cheques, paying bills, buying/selling
securities on customer's behalf.

Trustee-Beneficiary Bank acts as trustee for securities, valuables, and documents deposited for
safekeeping.

Bailee-Bailor For articles left in safe custody (lockers), the bank is bailee and customer is
bailor.

When Bank can Refuse Payment of Cheque:

• Insufficient funds in the account.
• Cheque is post-dated (before the date arrives).
• Cheque is stale (more than 6 months old).
• Signature does not match the specimen.
• Notice of customer's death, insolvency, or mental incapacity received.
• Court order to stop payment.
• Amount in words and figures differ.
• Material alteration on the cheque without counter-signature.

Business & Commercial Laws | ICMA Pakistan | Page 31

Chapter 5 — MCQs

Q1. The drawee of a cheque is always:

A) The payee
B) A bank
C) The drawer
D) An endorsee
✔ Answer: B) A bank
Explanation: Section 6 defines a cheque as a bill drawn on a 'specified banker' — the drawee must always be a bank.

Q2. A holder in due course must take the instrument:

A) After maturity, in good faith, without consideration
B) Before maturity, in good faith, for value, without notice of defect
C) At maturity, with notice of all defects
D) From the original maker only
✔ Answer: B) Before maturity, in good faith, for value, without notice of defect
Explanation: Section 9: All four conditions must be met to qualify as a holder in due course.

Q3. Which of the following is NOT a negotiable instrument under the Act?
A) Promissory note
B) Bill of exchange
C) Cheque
D) Fixed deposit receipt
✔ Answer: D) Fixed deposit receipt
Explanation: The Negotiable Instruments Act 1881 only covers promissory notes, bills of exchange, and cheques.

Q4. A bill of exchange is dishonoured by non-acceptance when:

A) Drawee pays on time
B) Drawee refuses to accept within 48 hours
C) Payee refuses to collect
D) Endorser fails to sign
✔ Answer: B) Drawee refuses to accept within 48 hours
Explanation: Section 91: Non-acceptance includes refusal within 48 hours, qualified acceptance, or drawee not found.

Q5. In a partial endorsement:

A) Only part of the instrument is endorsed — this is valid
B) Endorsement for only part of the amount — this is NOT valid
C) Two persons share the endorsement
D) Endorser limits liability

Business & Commercial Laws | ICMA Pakistan | Page 32

 ✔ Answer: B) Endorsement for only part of the amount — this is NOT valid
Explanation: A partial endorsement (for part of the amount) is invalid under the Negotiable Instruments Act.

Q6. The noting of a dishonoured bill is done by:

A) The payee
B) The drawer
C) A Notary Public
D) The bank
✔ Answer: C) A Notary Public
Explanation: Noting is performed by a Notary Public who re-presents the instrument and records the dishonour.

Q7. A cheque becomes stale after:

A) 3 months from date of issue
B) 6 months from date of issue
C) 1 year from date of issue
D) 30 days from date of issue
✔ Answer: B) 6 months from date of issue
Explanation: A cheque older than 6 months (stale cheque) may be refused by the bank.

Q8. Endorsement by merely signing on the back without specifying the endorsee is called:
A) Full endorsement
B) Restrictive endorsement
C) Blank endorsement
D) Conditional endorsement
✔ Answer: C) Blank endorsement
Explanation: Blank/General endorsement — only the endorser's signature, no name of endorsee. Instrument becomes
payable to bearer.

Chapter 5 — Expected Exam Questions

Q1. Define and distinguish between Promissory Note, Bill of Exchange, and Cheque.

Promissory Note (S.4): Written unconditional promise by maker to pay — 2 parties. Bill of Exchange
(S.5): Written unconditional order by drawer to drawee to pay — 3 parties; requires acceptance. Cheque
(S.6): Bill drawn on specified banker, payable on demand — 3 parties; no acceptance required; no days
of grace; no stamp duty. Key difference: Cheque's drawee is always a bank and it is always payable on
demand.

Q2. Who is a 'Holder in Due Course'? What are the privileges of a holder in due course?

Business & Commercial Laws | ICMA Pakistan | Page 33

 A holder in due course (S.9) is one who takes an instrument: before maturity, in good faith, for valuable
consideration, without notice of any defect in title. Privileges: (1) Gets a good title free from defects of
previous holders; (2) Can sue all prior parties; (3) Every prior party is liable to him; (4) Presumption of
consideration in his favour; (5) Protected from conditional delivery defences.

Q3. What is endorsement? Explain the different types of endorsement.

Endorsement is the signing of a negotiable instrument by the holder to transfer it to another person.
Types: (1) Blank/General — endorser signs only, becomes payable to bearer; (2) Full/Special — names
the endorsee; (3) Restrictive — 'Pay Ali only', restricts further transfer; (4) Conditional — subject to a
condition; (5) Sans Recourse — endorser excludes personal liability; (6) Partial — invalid, cannot
endorse for part of the amount.

Business & Commercial Laws | ICMA Pakistan | Page 34

CHAPTER 6 Business Ethics and Threats
Ethical conduct in business, professional ethics for accountants, and cybersecurity threats.

6.1 Corporate Code of Ethics

Benefits of a Corporate Code of Ethics:

For the Organization:
• Provides clear guidelines for decision-making.
• Builds reputation and public trust.
• Reduces legal risks and compliance issues.
• Attracts ethically minded investors and stakeholders.
• Creates a positive organizational culture.

For Employees:
• Gives clear behavioral expectations.
• Protects employees from pressure to act unethically.
• Provides a basis for reporting unethical behavior (whistleblowing).
• Helps in resolving ethical dilemmas.

Typical Contents of a Corporate Code of Ethics:

• Vision, mission, and core values of the organization.
• Conflict of interest policies.
• Confidentiality and data protection requirements.
• Anti-corruption and bribery policies.
• Fair dealing with customers, suppliers, and competitors.
• Health and safety commitments.
• Environmental responsibility.
• Procedures for reporting violations (whistleblower protection).
• Disciplinary procedures for breaches.

6.2 Fundamental Principles of Professional Ethics

ICMA Pakistan and IFAC (International Federation of Accountants) require professional accountants to
comply with five fundamental principles:

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Care

6.3 Ethical Responsibilities of Management Accountants

A Management Accountant plays a crucial role in preparing and reporting financial information. Their ethical
responsibilities include:

• Preparing financial statements that are true, fair, and complete.

• Not manipulating financial data to meet targets or satisfy management pressure.
• Disclosing all material information that affects users' decisions.
• Maintaining independence from undue management pressure.
• Reporting any fraudulent or illegal activities they discover.
• Ensuring compliance with accounting standards (IFRS, local GAAP).
• Protecting confidential financial information from unauthorized disclosure.
• Advising management on the legal and ethical implications of business decisions.
• Refusing to sign off on financial statements they know to be false.

6.4 Ethical Conflicts and How to Deal with Them

Situations that can lead to Ethical Conflicts:

• Management pressure to overstate profits or understate losses.
• Being asked to omit negative information from reports.
• Personal financial interest in a decision being made (conflict of interest).
• Being offered gifts or inducements that could affect professional judgment.
• Instructions from superiors that violate accounting standards.
• Discovery of fraud by colleagues or management.
• Pressure to cut corners on audit work to meet deadlines.

Steps to Resolve Ethical Conflicts:

1. Gather all relevant facts about the situation.
2. Identify the ethical issues involved and the principles at stake.
3. Consult the organization's code of ethics and relevant professional standards.
4. Discuss the issue with the immediate supervisor (if not part of the problem).
5. If unresolved, escalate to higher management or the audit committee.
6. Seek advice from the professional body (ICMA) confidentially.
7. As a last resort, refuse to act unethically, even if it means resignation.
8. Consider legal obligations — some situations may require mandatory reporting.

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6.5 Threats to Ethical Behaviour

IFAC identifies five main categories of threats to compliance with fundamental ethical principles:

Safeguards Against Threats:

Created by profession/legislation:
• Education and training requirements for entry into the profession.
• Continuing professional development (CPD) requirements.
• Professional standards and codes of ethics.
• Corporate governance regulations.
• Legal requirements (e.g., independence requirements for auditors).

Created by firms/organizations:
• Quality control procedures.
• Strong internal controls and compliance functions.
• Rotation of audit partners/team members.
• Ethics hotlines and whistleblower protection.
• Clear policies on gifts, conflicts of interest, and related party transactions.

6.6 Cybersecurity Threats in Digital Transactions

In today's digital economy, businesses face significant cybersecurity threats that can compromise financial
data, customer information, and overall business operations. Management accountants must be aware of
these threats to properly advise on risk management.

• Phishing: Fraudulent emails or messages that appear to come from legitimate sources, designed to
trick recipients into revealing sensitive information (passwords, bank details) or clicking malicious links.
• Ransomware: Malicious software that encrypts the victim's data and demands a ransom payment for
decryption. Can paralyze entire business operations. Example: Locking all company accounting records.
• Data Breaches: Unauthorized access to confidential business, financial, or customer data. Can result in
financial loss, regulatory fines, and reputational damage.
• Man-in-the-Middle Attack: Interception of communications between two parties to steal data or alter
transactions. Particularly dangerous in online banking and e-commerce.
• Insider Threats: Security threats from within the organization — disgruntled employees, contractors, or
business partners who misuse their access to systems.

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 • Social Engineering: Psychological manipulation of people into performing actions or divulging
confidential information. Exploits human trust rather than technical vulnerabilities.
• SQL Injection: Inserting malicious code into a database query to access, modify, or delete data in a
database system.
• Denial of Service (DoS): Overwhelming a system with traffic to make it unavailable to legitimate users.
Disrupts e-commerce and online financial services.

Safeguards Against Cybersecurity Threats:

• Strong password policies and multi-factor authentication (MFA).
• Regular software updates and security patches.
• Encryption of sensitive financial data.
• Employee cybersecurity training and awareness programs.
• Regular data backups (offline and cloud).
• Firewall and antivirus software.
• Access controls — employees only access data needed for their role.
• Regular security audits and penetration testing.
• Incident response plan for breach scenarios.
• Compliance with data protection regulations.

Business & Commercial Laws | ICMA Pakistan | Page 38

Chapter 6 — MCQs

Q1. How many fundamental principles of professional ethics are identified by IFAC?
A) Three
B) Four
C) Five
D) Six
✔ Answer: C) Five
Explanation: The five fundamental principles are: Integrity, Objectivity, Professional Competence & Due Care,
Confidentiality, and Professional Behaviour.

Q2. A self-interest threat arises when:

A) A professional reviews their own previous work
B) An accountant is too friendly with a client
C) A financial or other interest will inappropriately influence judgment
D) Management intimidates the accountant
✔ Answer: C) A financial or other interest will inappropriately influence judgment
Explanation: Self-interest threat involves personal financial interests compromising professional objectivity.

Q3. Which principle requires an accountant to not disclose client information without authority?
A) Integrity
B) Objectivity
C) Confidentiality
D) Professional Behaviour
✔ Answer: C) Confidentiality
Explanation: Confidentiality requires that information acquired in professional relationships must not be disclosed
without proper authority.

Q4. A familiarity threat occurs when:

A) A professional's own work is reviewed
B) Management threatens dismissal
C) A professional becomes too sympathetic due to close relationships
D) Professional promotes client's position aggressively
✔ Answer: C) A professional becomes too sympathetic due to close relationships
Explanation: Familiarity threat = long-standing personal relationships leading to loss of objectivity.

Q5. Ransomware is a cybersecurity threat that:

A) Steals passwords through fake emails
B) Encrypts data and demands ransom
C) Overwhelms servers with traffic

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 D) Intercepts communications between parties
✔ Answer: B) Encrypts data and demands ransom
Explanation: Ransomware encrypts the victim's files and demands payment for the decryption key.

Q6. Which of the following is a safeguard against threats to ethical behaviour?

A) Close relationship with client
B) Personal financial interest in client
C) Rotation of audit partners
D) Suppressing negative financial information
✔ Answer: C) Rotation of audit partners
Explanation: Rotation of audit partners is a firm-level safeguard that reduces familiarity and self-review threats.

Q7. Professional competence requires an accountant to:

A) Always agree with management
B) Keep client information confidential
C) Maintain skills and act diligently according to professional standards
D) Avoid conflicts of interest
✔ Answer: C) Maintain skills and act diligently according to professional standards
Explanation: Professional competence = staying up-to-date with knowledge + applying professional standards
diligently.

Q8. An intimidation threat arises when:

A) Accountant reviews their own work
B) Professional is deterred by threats from acting objectively
C) Professional holds shares in a client company
D) Accountant is too friendly with a client
✔ Answer: B) Professional is deterred by threats from acting objectively
Explanation: Intimidation threat = actual or perceived pressure (e.g., threatened dismissal) deterring objective
professional judgment.

Chapter 6 — Expected Exam Questions

Q1. What is a Corporate Code of Ethics and what does it typically contain?

A Corporate Code of Ethics is a formal document setting out the values, principles, and ethical standards
guiding an organization's conduct. It typically contains: core values and mission, conflict of interest
policies, confidentiality requirements, anti-corruption policies, fair dealing standards, health and safety
commitments, environmental responsibility, whistleblower procedures, and disciplinary measures for
breaches. Benefits: clear decision-making framework, builds trust, reduces legal risks, attracts ethical
investors, creates positive culture.

Q2. Explain the five fundamental principles of professional ethics for accountants.

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 (1) Integrity — honesty and straightforwardness in all professional relationships; (2) Objectivity —
freedom from bias, conflict of interest, or undue influence; (3) Professional Competence and Due Care
— maintaining current knowledge and skills, acting diligently; (4) Confidentiality — not disclosing client
information without authority; (5) Professional Behaviour — complying with laws and not bringing the
profession into disrepute.

Q3. What are the main threats to ethical behaviour? How can these be safeguarded against?

Five threats: (1) Self-interest — financial interests affecting judgment; (2) Self-review — reviewing own
previous work; (3) Advocacy — promoting client position beyond objectivity; (4) Familiarity — close
relationships leading to sympathy; (5) Intimidation — deterred by actual/perceived threats. Safeguards:
Professional safeguards: education/training, CPD, professional standards, legal requirements.
Organizational safeguards: quality controls, partner rotation, ethics hotlines, whistleblower protection,
conflict of interest policies.

Q4. What are cybersecurity threats in digital transactions? How can businesses protect
themselves?

Major threats: Phishing (fake emails to steal credentials), Ransomware (encrypts data for ransom), Data
Breaches (unauthorized access), Man-in-the-Middle attacks (interception), Insider Threats, Social
Engineering, SQL Injection, Denial of Service attacks. Safeguards: Strong passwords + MFA, regular
updates, data encryption, employee training, regular backups, firewalls/antivirus, access controls,
security audits, incident response plans, regulatory compliance.

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 END OF NOTES
Business & Commercial Laws
ICMA Pakistan — Operational Level 1

All 6 Chapters Covered:

Ch.1 Legal System of Pakistan | Ch.2 Contract Act 1872

Ch.3 Sales of Goods Act 1930 | Ch.4 Partnership Act 1932

Ch.5 Negotiable Instruments Act 1881 | Ch.6 Business Ethics & Threats

Best of Luck in Your Exams! ■

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