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SINGAPORE INSTITUTE OF MANAGEMENT

UOL FULL-TIME PROGRAMME

COURSE OUTLINE SUBJECT: LAW OF BUSINESS ORGANISATIONS LECTURER: RAM GANAPATHY Aims/Objectives

This course aims to provide students with the following:

1) a sound understanding of relevant legal principles that relate to business organisations such as partnerships and companies;

2) the ability to analyse such legal principles and to apply them to hypothetical situations.

Lecture Schedule

Session Number

Topic References

1-4 Sources of Law and Key Concepts

Chapters 1 & 2, Subject Guide (SG) Macintyre, Ewan - Business Law (latest edition) – Chapters 1-7, 12 & 13

5 -7 The Legal Classifications of Organisations

Companies General Partnerships Limited Liability Partnerships

Chapter 3 (SG) Bourne, N. Bourne on Company (latest edition) (hereafter referred to as the Recommended Text) – Chapter 1 Geoffrey Morse on Partnership Law (latest edition) – Chapters 1, 2 & 9

8 The Registered Company

Chapter 4 (SG) Chapter 6, pgs 76-88 of Recommended Text

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Macintyre, Ewan - Business Law (latest edition) – Chapters 16

9-10 The Principle of Separate Corporate Personality

Chapter 5 (SG) Chapter 2 of Recommended Text

11-13

Dealings between the following:

The Company & Third Parties Partnerships & Third Parties

Companies – Torts & Crimes Written Test (1)

Chapter 6 (SG) Chapter 6 (pgs 88-93, 97-98), Chapter 11, and Chapter 2 (pgs 28-38) of Recommended Text Geoffrey Morse on Partnership Law (latest edition) – Chapter 4 Macintyre, Ewan - Business Law (latest edition) – Chapter 15

14-15 The Constitutional Documents (and their effect and variation) Written Test (2)

Chapter 7 (SG) Chapter 7 of Recommended Text

16-17 Directors’ Duties

Chapter 8 (SG) Chapter 12 of Recommended Text Macintyre, Ewan - Business Law (latest edition) – Chapter 17

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18-19 Minority Shareholder Protection

Written Test (3)

Chapter 9 (SG) Chapter 14, pgs of Recommended Text

20-21

Corporate Insolvency Chapter 10 (SG) Chapters 20, 21 & Chapter 24 of Recommended Text Macintyre, Ewan - Business Law (latest edition) – Chapter 19

Tutorials Tutorial sessions will be incorporated into each lecture at the lecturer’s discretion. Recommended Texts: 1. Bourne, N. Bourne - Company Law (latest edition). 2. Blackstone’s Statutes on Company Law (latest edition) Recommended References: 1. Macintyre, Ewan - Business Law (latest edition) 2. Sealy, L M & Sarah Worthington: Cases & Materials In Company Law (latest

edition). 3. Morse, Geoffrey: Partnership Law (latest edition) Website 1. Relevant UOL websites including those on past examination papers (with

examiner’s reports). Lecturer’s Information Ram Ganapathy is a lecturer in law. He graduated with a Bachelor of Laws (LL.B) Hons degree from the National University of Singapore and was called to the local bar as an Advocate & Solicitor in 1982. He subsequently obtained his Master of Laws (LL.M) degree from the same university. His experience includes working as a corporate legal counsel and company secretary, conducting training, and also lecturing law to students pursuing degree programmes at various universities. He has been lecturing law in the Singapore Institute of Management since 2002 and currently teaches law to students pursuing UOL & RMIT programmes.

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Lecture 1 – Sources of Law & Key Conceptsp

© A G Ram

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Introduction

• Subject deals with particular concepts that are relevant to business organizations.

• Aims to develop your understanding of core principles of the laws that regulate businessprinciples of the laws that regulate business organizations.

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Course Outline

• Topics

• Textbooks

• Tests & Assignments

– Dates and expectations

• Examination:

– approach to answering questions

– revision and preparation

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Definition of “law”

• The law may be defined as “a body of rules established by parliaments and courts which will be recognized and enforced by the courts”courts .

• Law is therefore made by people for people.

• It is legally enforceable and has developed to set standards of conduct between people, business and government.

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• The rule of law by Professor Dicey:

• 1. Absolute supremacy of law excludes arbitrary power;

2 ll l b f h l• 2. All are equal before the law;

• 3. Rights of citizens are enforceable in the courts.

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Law, Morality & Justice

• How do they differ?

• Law from a higher order?

• Assumption that law gives effect to the moral values of society and is based on considerationsvalues of society and is based on considerations of justice e.g. offences of murder, theft etc.

• In other areas, law does not necessarily reflect morality but regulates behaviour for the orderly management of society e.g. illegal parking.

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Law and morality distinguished

• 1. Law deals with external behaviour; morality with internal processes of intention, motive and conscience;

• 2. Violation of law met by enforcement of the ylaw; breach of morality by social or religious condemnation;

• 3. Legal verdict – in black or white; is one person’s morality necessarily another’s?

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Law versus ethics

• Ethics: “a system of moral principles by which human actions and proposals may be judged good or bad or right or wrong” – Macquarie Encyclopedic dictionary.

• Ethics – an agreed standard of morality.• Professional bodies enforce professional ethics of its members.

• Code of practice – self regulation e.g. for marketing, telecommunications industry etc.

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Classification of law

• Common classification:

• Criminal law and Civil law:

• Criminal law includes all statute and case law which declares that certain conduct is anwhich declares that certain conduct is an offence.

• Civil law involves matters between person and person regarding the enforcement of rights and carrying out of obligations e.g. contract, tort and trust.

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• Criminal law concerned with anti‐social behaviour.  It’s purpose is to punish the wrongdoer, hopefully as a deterrent.  Punishment takes the form of fine or imprisonmentimprisonment.

• Who enforces criminal law?• In civil disputes, the aim is not punishment but rather to compensate the innocent party or victim e.g. typically by monetary compensation.

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Sources of law – where does the law come from? 

• 1. Legislation:

– enacted law made by Parliament and assented to by the Crown is known as legislation or statute law (referred to as “Acts”) Has precedence over case(referred to as  Acts ).  Has precedence over case law and can be created or amended from time to time.

• 2. Delegated legislation:

– Consists of regulations of government departments, by‐laws etc.  May be challenged as being ultra vires the parent Act.

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• 3. Case Law:

– Judge made laws e.g. Donoghue v Stevenson (1932),which established liability of a manufacturer in the tort of negligence to the g gultimate consumer of his defective product despite the absence of any contract between them.

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• 4. European Community Law– As a result of the UK joining the EEC, the UK Parliament passed the European Communities Act, 1972. ,

– This Act enacted that Community law should be applied in the UK courts and consequently the UK courts also have to have regard to EU legislation and judgments of the European Court of Justice (ECJ). 

– Read pages 16 & 17 of the Subject Guide for more detail.

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How Do Courts Interpret Legislation?

• General approaches

– a. The literal approach 

– According to this approach, Parliament means what it says and says what it means The literalwhat it says and says what it means. The literal meaning of the provision is given effect.

– IRC v Hinchy (1960) AC 748

• any person who lodged an incorrect tax return was liable to pay “treble the tax which he ought to pay under this Act” means? 

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– b. The golden rule approach:

– This qualifies the literal rule approach – the statutory provision must be construed literally 

l if d i ld l d b d lunless if doing so would lead to an absurd result. 

• e.g. Lee v Knapp [1967] 2 QB 44, Road Traffic Act (UK) required the driver to “stop” after being involved in a traffic accident – and this means?

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– c.  The mischief rule (purposive) approach

– Where a provision is ambiguous , consideration must be given to the purpose of Parliament in enacting the provision – what is the “mischief” that Parliament sought to address? 

• e.g. Smith v Hughes [1960] 2 All ER 589, what does ‘solicit in a street’ mean?

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The Common Law

• Could mean different things:

• 1. The law which was common to the whole country:

hi i h i i l i f l• This is the original meaning of common law –Henry II in England (around 1185) replaced the local courts with his own judges who applied the same laws throughout the whole country.

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• 2. Law which was made by judges:

• Most frequent meaning today i.e. judge made law as opposed to legislation which is made by ParliamentParliament.

• 3. Law which was developed by the common law courts rather the courts of equity:

• Original common law offered a limited range of remedies (rigid and inflexible).

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• The primary remedy was damages (monetary compensation).  This was insufficient. 

• People appealed to the King for justice or equityequity.

• Resulted in the King passing on cases to the Lord Chancellor.

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• Increase in volume of such cases resulted in the creation of the Court of Chancery which then developed its own rules and procedures, called “equity”.

• With the courts of equity came equitable• With the courts of equity, came equitable remedies such as specific performance and injunction.

• Until the latter part of the 19th century, England had two complimentary systems of law: common law and equity.

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• A claimant had to decide what remedy he was seeking and institute proceedings in the appropriate court.

• In 1878, the English Parliament decided to , gcombine the two systems, so that a successful claimant could be awarded common law or equitable remedies accordingly.

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Common law system versus the Civil law system

• Legal systems in the USA and Commonwealth countries inherited from England.  Basic principles may be essentially the same.  They are known as the common law countries.

• Continental Europe and countries influenced by them e.g. Indonesia and majority of South American countries have adopted a different system and are known as the civil law countries.

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• Civil law countries place more emphasis on codes and general legal principles and less emphasis on decisions of judges.

• A different approach is also taken in trials in ppcommon law (adversarial) as opposed to civil law countries (inquisitorial).

• Is there any other legal system you are aware of?

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Common law system of law

• Legal system comprises rules, procedures, institutions, personnel and values.

• Institutions that make up the system are:

• 1. Legislative (Parliament);

• 2. Judiciary (The Courts);

• 3. Public service departments (as part of the executive)

• 4. Administrative tribunals (e.g. Small Claims Tribunal).

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• Personnel that make up the system are:

• 1. Lawyers (barristers and solicitors) – those who advise on the law;

• 2 Magistrates & Judges – those who2. Magistrates & Judges  those who interpret and apply the law;

• 3. Parliamentarians – the law makers;

• 4. Enforcement agencies (e.g. the police) –those who enforce the law.

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• Procedures of the common law system are:– 1.  Procedures of court hearings are adversarial in nature.

– 2.  Appeal procedures.

• In criminal proceedings, the general principle is that a person is innocent until proven guilty beyond a reasonable doubt.

• In civil proceedings, he who asserts must prove on a balance of probabilities.

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History of judicial precedent

• Prior to the Norman conquest (11th century), no single legal system existed in England.

• Civil disputes settled according to customary law of each region in tribunals known as “moots”.

• In criminal matters, guilt or innocence settled by ordeal e.g. by fire or water.

• William the Conqueror set about unifying the country under a feudal system.

• He permitted local manorial courts to administer customary law as before.

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• In the 12th century, King Henry II introduced the circuit courts.

• Judges traveled across the country.  They resolved disputes according to agreed principles of law (rather than local custom).

• Criminal matters were settled by jury assisted by the• Criminal matters were settled by jury, assisted by the judge.

• Judges kept written records of the facts of the case and legal principles they applied.

• Subsequent disputes which were similar were resolved by the same reasoning and legal principles applied throughout the land.

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• Practice was the origin of the doctrine of judicial precedent.

• In the 13th century, the justice system became centralized.

• Practice was the origin of the doctrine of judicial precedent.

• During the 14th century, a court reporting system in which judgments were recorded and published developed.

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Reporting court decisions

• A precedent is a decision/judgment of a court which is used as authority for reaching the same decision in later cases.

• The doctrine of precedent achieves fairness, p ,consistency and predictability.

• Decisions of previous cases (judgments) contained in law reports.  Citation (reference) helps track the case.  It would contain the names of the parties, the volume of the law report, the year etc.

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Parties In a Legal Action

• Civil Cases:

• At first instance (heard for the first time):

– Plaintiff – the person bringing or initiating legal iaction;

– Defendant – the person against whom the action is brought.

• For example:  Bean (plaintiff) v Chaplin (defendant).  “v” read as “and”.

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• On appeal:– Appellant (the person bringing the appeal);– Respondent (the person against the appeal).

• Suppose in Bean v Chaplin, Bean won the caseSuppose in Bean v Chaplin, Bean won the case in the lower court.  Now, Chaplin is appealing.  Hence, the order of names would be “Chaplin v Bean”.

• Where “The Queen” appears in citation of a civil action, it means that the Crown is a party to the action.

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• Criminal Cases:

• In the intermediate and superior courts, the Crown is the prosecutor, and the accused is the person against whom criminal charges are p g gbrought.

• The names of the parties would appear as R (which stands for Rex or Regina i.e. the Crown) v Rowland Bean.  Here the “v” is read as “against”.

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Law Reports (abbreviations)

• All ER– All England Law Reports

• WLR– Weekly Law ReportsWeekly Law Reports

• AC– Appeal Cases

• QB– Queen’s Bench Division

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Doctrine Of Precedent

• What is a precedent?• Basically, it is the decision of the court that is used as an authority for reaching the same decision in a later case.

• The doctrine of precedent is a set of principles governing the way in which courts must deal with cases they are deciding.

• Also known as the doctrine of stare decisis i.e. let the decision stand. 

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1. The ratio decidendi

• Ratio decidendi means the reason for deciding.

• It is the ground/s or grounds upon which a case was decided.

• The ratio is a proposition of law (or a legal principle) that may bind future cases as a precedent.

• It is deduced from an analysis of the facts of case and written judgments of the judges.

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• What was the ratio in Donoghue v Stevenson(1932)?  It was taken from the majority view.

“ f d f• “A manufacturer owes a duty of care to ensure that what is produced will be safe to consume or use.  The duty of care exists even though the consumer does not directly purchase the product from the producer”.

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2. Obiter dictum

• What does “obiter dictum” mean?

• This means “a thing said by the way” or a “passing remark” made by a judge of principles of law relating to hypothetical facts p p g yprather than to the particular facts of the case being determined.

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3. The technique of “distinguishing”

• Distinguishing occurs when the court holds that the material facts of the case cited as precedent in another case are sufficientlyprecedent in another case are sufficiently different from those of the present case to justify a different legal conclusion.

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Principles of the doctrine of precedent

• The following are the main principles:

• 1. A decision of a superior court judge is binding on an inferior court judge if the facts of the two cases are substantially similar.  This yis known as a “binding precedent”.

• 2. A court is not bound to follow its own previous decision (although in practice, only in exceptional cases will the court so depart).

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• 3. The decision of an inferior court in the same judicial hierarchy, or of any court in a different hierarchy, may constitute persuasive authorityauthority.

• 4. Only the ratio decidendi of a case is binding (never the obiter dicta).

• 5. Precedents are not invalidated by the passage of time.  But can they be overruled?

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Hierarchical Court Structure

• The Supreme Court (formerly House of Lords)– The most senior of the English courts

– It is not bound to follow any previous precedents.  However, in practice, the court only rarely departs from its own previous judgment unless injustice would result from the strict application of a precedent

– Decisions are absolutely binding on all lower courts

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• The Court of Appeal:– Its decisions are binding on all lower courts and also binding on future Court of Appeal judges

– However, the court may depart from its own previous decisions if:

• There are two conflicting earlier Court of Appeal decisions 

• A previous decision of the Court of Appeal had been overruled by the House of Lords

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• The High Court– Judges sitting in the High Court are bound by decisions of the House of Lords and Court of Appeal

– Divided into three divisions:  The Queens Bench Division, The Chancery Division and The Family Division

• The lower courts– Judges here do not make binding precedents

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Jurisdiction – Civil Courts

• The County Courts– Unlimited jurisdiction for business disputes involving a claim for breach of contract or tort; equity actions where the trust or estate is not more than £30,000 

• The High Court– Chancery Division hears matters which originated in equity e.g. trust, company law and partnership issues; Family Division hears family matters; Queen’s Bench Division hears contract and tort cases

– Unlimited jurisdiction to hear contract and tort cases where the claim is for pure financial loss or economic loss of more than £15,000, or for personal injuries if the claim is more than £50,000

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• The Court of Appeal:– Purely an appellate court that hears appeals from the County Court and High Court

– Appeals heard by 3 Lord Justices of Appeal 

– Divided into Civil Division and Criminal Division

• The House of Lords– Purely an appellate court that hears appeals from the Court of Appeal

– Appeals usually heard by 5 Law Lords (or 7 if the case is considered to be of particular importance)

– Has been replaced by a new Supreme Court as of 1 October 2009

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Alternative Dispute Resolution

• An alternative to civil litigation which is likely to prove costly and acrimonious.

• Requires agreement of parties.

di h ld i i• Proceedings are held in private.

• Includes:

– Mediation

– Arbitration

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Activity 1.1

• Question– Tom sued Optics Ltd for breach of contract in the High Court and lost.  He appealed to the Court of Appeal and tried to persuade the judges to allow his appeal in view oftried to persuade the judges to allow his appeal in view of two prior decisions (substantially similar in facts) in his favour, one in the High Court and one in the Court of Appeal.  Can he succeed?

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Activity 1.2

• Question– What is the role of Parliament in making law and how is this role different from that of the courts?

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Key concepts in civil law

• Basic concepts in civil law:

• 1) Contract

• 2) Tort

• 3) Trust

• 4) Agency

• (Note: These topics will be dealt with in greater detail in future lectures).

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Contract 

• Is an enforceable agreement between two or more people.

• If a contract is broken, the injured party can sue the guilty party for breach of contract.sue the guilty party for breach of contract.

• It must be legally enforceable, and to be so the following ingredients must exist:– offer and acceptance

– intention to create legal relations

– consideration 

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Tort

• Basically, a civil wrong.

• Collection of legal principles which provide remedies to injured parties.

i h d bli i f i• Rights and obligations of parties are independent of any prior agreement.

– For example, if a pedestrian suffers injury when he is run down by a car, the pedestrian can sue the driver of the car in negligence and claim compensation.

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Trust

• Comes into existence when:– one person (the settlor) gives money or property to another person (the trustee) not for the trustee’s benefit but for the benefit of another 

(th b fi i )person (the beneficiary).

• Trustee has obligations to use the money or property only for the benefit of the beneficiary i.e. the former is entrusted with the latter’s property.  If the trustee breaches his obligations, he can be sued for breach of trust.

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Agency

• An agency relationship exists between two persons, the agent and the principal,

– whereby the agent is conferred authority to alter the position of his principal by virtue of actsthe position of his principal by virtue of acts performed by the agent on the principal’s behalf.

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• Have a nice day.

• Thank you.

55

Appendix 1

THE COURT STRUCTURE

Civil Criminal

Civil Criminal Division Division

Court of Appeal

Supreme Court (formerly House of

Lords)

Queen’s Bench Division Family Division Chancery Division

Crown Court High Court

Including Small Claims Procedure

County Court

Civil Criminal

Magistrates’ Court

Occasional appeals on point of law

1

Lecture 2 – The law of Business Organisations– The law of Contract (1)

©A G Ram

1

Basic Contract Law

• In the next few lectures, we will deal with certain fundamental principles of contract law that are relevant to the Law of Business Organisations.

• The topics of contract law will help you better understand the legal issues that arise in certain areas of the subject.

• (Read also pages 17‐25 of the Subject Guide).

2

Introduction

• Simple contracts may be made orally or in writing. Most commercial contracts are made in writing, but there is no requirement to do so.  Some exceptions i l dinclude:– A conveyance of legal estate in land must be by deed; a creation of a lease over three years must be by deed; the promise of a gift is not enforceable unless made by deed; contracts of guarantee or hire purchase.

3

2

Elements of a contract

• The following elements must be present before there can be a binding contract:

• 1) offer;

2)• 2) acceptance;

• 3) intention to create legal relations;

• 4) consideration

4

The Offer

• Definition:

‐ offeror gives a definite indication of his willingness  to contract on the terms stated in his offerhis offer

The offeree must accept the offer for a binding contract to come into existence.

5

To whom can an Offer be made?

–A specific person or specific group of persons;

– the world at large–Carlill v Carbolic Smoke Ball Co (1893)Carlill v Carbolic Smoke Ball Co (1893)

–An offer can be made not only to a specific person but also to the world at large.

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3

Offer  vs  Invitation to treat (ITT)

What is an ITT?

i)   invites others to make an offer

ii)  not an offer itself

Examples of ITT:

Display of goods in a shop window or self service store amount to an invitation –Fisher v Bell (1961)

7

Pharmaceutical Society v Boots (1953)

• In a self service store, the contract is not made when the customer puts the goods in the basket but when the cashier accepts the offer and receives the price.the offer and receives the price.

• The customer makes the offer to buy in response to an ITT (the price tag on the goods).

8

Tenders and Advertisements

• Tenders: Suppliers make an offer to supply goods/services by submitting tenders to companies ‐ a binding contract is created if th t th bidthe company accepts the bid.

• Is a quotation an invitation or an offer? Depends on whether all the essential terms are present.  If so, it is an offer.

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4

• Advertisements:

• Generally, advertisements are invitations ‐Partridge v Crittenden (1968).

E ti th d ti t f ff f• Exception: the advertisement for offer of a reward.

• Was the advertisement in Carlill v Carbolic Smoke Ball Co an invitation or offer?

10

Offer vs supply of information

• Harvey v Facey (1893)

– X to Y: Will you sell your property? Telegraph lowest price. 

Y X L i f i £900– Y to X: Lowest price for my property is £900.

– X to Y: I agree to buy your property for £900.

• Was there a contract between the parties?

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Communication of Offer

• An offer must be communicated to the offeree.

• Can an offeree accept an offer which he is not aware of?aware of?

• Communication may be made by post, fax, telephone etc.

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5

Termination of the Offer

Revocation by Offeror:

• must be done before acceptance

• must be communicated to the offeree by h ff b li bl hi dthe offeror or by a reliable third party –Dickinson v Dodds (1876)

• revocation by post is effective only when received by the offeree

13

Byrne v Van Tienhoven (1880)

• Oct 1:  D in UK posted letter of offer to P in USA;

• Oct 11: P received offer & telegraphed acceptance on the same day;

• Oct 8: D sent revocation letter to P by post;

• Oct 20: P received revocation letter;

• Was there a contract?

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Rejection & Counter offer

• Rejection terminates the offer

• Counter‐offer by the offeree – means that the offeree does not accept the original offer– to counter‐offer is to change the terms of the original offer

– original offeror may/may not accept the counter‐offer

– original offeree cannot go back to the original offer unless the offeror agrees 

15

6

Hyde v Wrench (1840)

• W offered to sell land for £1000.

• H counter‐offered £950.

• W refused to sell. H later accepted the original ff f £offer of £1000.

• Was there a contract between the parties?

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When does an offer lapse?

• Offeror/offeree dies before acceptance;

• If the offer is not accepted within a stated time period;

If th i t t d ti i d ff• If there is no stated time period ‐ offer lapses after a reasonable time – Ramsgate Victoria Hotel Co v Montefiore (1866) where defendant applied to buy shares in June and was only told that his offer was accepted in November that year.

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Acceptance

• Must be unconditional i.e. no conditions must be imposed.

• Usually, signified by the words such as “I agree”; “I accept”.  But what of words like “I g ; pagree, but….”.

• Must be communicated to the offeror in the manner prescribed by the offeror – Tinn v Hoffmann (1873).

• Silence shall not amount to acceptance.

18

7

Felthouse v Bindley (1862)

• The uncle said to his nephew regarding the possible sale of a horse:

• “If I don’t hear from you, the horse is mine.”Nephew did not respond.p p

• Was there a contract? 

• Can silence amount to acceptance if the parties so agree by placing a condition in advance to that effect?

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The postal rule

• The postal rule applies to acceptance only.

• What is the rule?

– acceptance is complete & effective if the letter of acceptance (properly addressed andletter of acceptance (properly addressed and stamped) is posted or telegram handed to the post office;

– even though it may not be received by the offeror.

20

Household Fire Insurance Co v Grant (1897)

• G applied for shares in the company.

• The letter of acceptance (duly addressed) was posted to him.  He never received it.

• The company went into liquidation He wasThe company went into liquidation. He was then asked to pay for the shares.

• Was he legally obliged to pay?

• Can the postal rule be avoided?

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8

• Telex and fax messages sent out during office hours are regarded as instantaneous communication and take effect when printed on the offeror’s telex or fax machine – Entores Ltd v Miles Far East Corporation (1955)/The Brimnes (1983).

22

Activity 2.1

• Question:

• List at least two (2) contracts that you have entered into today:

1• 1.

• 2.

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Intention to Create Legal Relations

• Means the agreement is legally binding i.e. the party that breaks the agreement is answerable in law.

• Generally, intention is present in commercial agreements Edwards v Skyways (1964)agreements – Edwards v Skyways (1964).– Position of “binding in honour” clauses, letters of intent and letters of comfort binding? 

• A (rebuttable) presumption that no intention is present in social and domestic agreements –Balfour v Balfour (1919)/Jones v Padavanton(1969).

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9

Consideration

• To enforce a simple contract, a party must provide consideration.

• May be defined as “something in h f thi ” E ti llexchange for something”.  Essentially, a 

benefit for a benefit.

– For example:  A agrees to sell his car to B for $50,000.  The consideration A provides is the car; whereas B provides the cash in return.

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Some rules on Consideration

• It must be real i.e. has some value. 

• It must be sufficient but need not be adequate i.e. each party’s consideration need not be equal in value.

f l• Performing an existing contractual obligation owed to the promisor is no consideration.

• Part payment of a debt is no consideration in support of a promise not to claim the balance – rule in Pinnel’s Case (1602).

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• Consideration must move from the promisee.  That is, only a person who has provided consideration can enforce the 

t t d t i f i it f t tcontract – doctrine of privity of contract (known commonly as the “privity rule”).

• In other words, a person who is not a party to the contract cannot enforce the contract.

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10

Exception to the privity rule

• Section 1(1) of the Contracts (Rights of Third Parties) Act, 1999, provides that a third party to a contract who is identified, may, in his own right, enforce a term of the contract if:contract if:– The contract expressly provides that he may do so; or

– The term purports to confer a benefit on him (unless on a proper construction of the contract the parties did not intend the term to be enforceable by the third party)

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• Consideration must not be past i.e. when a party has performed an act before the other party makes the promise.– Example: A on his own accord cuts down theExample:  A, on his own accord, cuts down the branches of a tree which had been obstructing the view from his neighbour’s house.   Later, B, the neighbour, is pleasantly surprised and promises to pay A $100.  But B breaks his promise.  Can A sue B on the promise?

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Activity 2.2

• Question:

– John made an online order to buy an oven “Cash on delivery”; delivery by 1 week.  The supplier confirmed the order by email.pp y

– It has now been 4 weeks and there is no delivery.  The supplier argues that there is no binding contract since no deposit was paid.  Do you agree?

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• Thank you.

• Have a nice day.

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Lecture 2A – The law of business organisations

The law of contract (2)‐ The law of contract (2)

©A G Ram

1

Terms

• Terms in a contract may be either:

• 1) express; or

• 2) implied.

• Basically they contain the rights and• Basically, they contain the rights and obligations of parties to the contract.

• An injured party may sue for a breach of a term of the contract. 

• “Puffs” or “sales talk” not terms.

2

1) What are express terms?

• When one party expressly communicates the terms to the other party.

• Such terms may be oral, in writing or a combination of both.

• Parol evidence rule: – A written contract cannot be varied or contradicted by parol (extrinsic) evidence.

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• Thus, where the express terms are in the written document:

– It is the parties’ final agreement;

The parties cannot add to change or contradict– The parties cannot add to, change or contradict the written document with oral evidence.

4

Limits to parol evidence rule

• i) where the written agreement is not the complete agreement and does not operate (as it is partly oral and partly in writing);

• ii) where it is necessary to prove a custom or ) y ptrade usage;

• iii) where the written agreement is questionable e.g. one party claims that he was forced to sign the agreement.

5

2) What are implied terms?

• These are terms which a party does not communicate to other party.

• Implied by law (included in the contract) to give effect to the presumed intention of the 

i T b i li d bparties. Terms may be implied by:

i) the courts, using the “business efficacy” or “officious bystander” test

ii)  statutes

iii) custom e.g. particular trade or industry practice. 

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ii) By statute

For example, under the Sale of Goods Act, it is an implied condition of sale that:– the seller is the legal owner of the goods or has the authority to sell – s12;

– The goods sold must correspond with their description – s13; 

– the goods must be of satisfactory quality –s14(2);

– the goods must be fit for its purpose – s14(3).

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Terms & Representations distinguished

Terms

• A contractual obligation which the parties have agreed to;

f il h l• A failure to carry out the contractual obligation allows the injured party to sue for breach of contract.

8

• Representations:

• Statements made during negotiation meant to induce a party to contract.

f h i h i j d• If the statement is not true, the injured party may sue the misrepresentor for misrepresentation.

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Conditions & Warranties

Condition:– a vital term of the contract;

– a breach destroys the root (or substance) of the contract;

– a breach which allows the injured party to treat the contract as discharged and to claim damages.

• Warranty:– Not a vital term ‐ it is subsidiary to the main purpose of the contract.

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– a breach does not destroy the substance of the contract;

– the injured party cannot treat the contract as discharged but can claim damages only.g g y

– In Poussard v Spiers & Pond (1876), the failure of a singer to turn up for a few performances was held to be a breach of condition entitling the management to terminate her contract.

11

– Whereas, in Bettini v Gye (1876), the failure of a singer to turn up for rehearsals was held to be a breach of warranty entitling the management to claim damages only.

• Innominate Term

– What is an innominate term?  Read Hongkong Fir Shipping Co v Kawasaki Kaisen Kaisha (1962)

• a breach which does not give the injured party an automatic right to repudiate the contract but remedies depend on the seriousness of the breach.

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Example

• John placed an order with Bliss Restaurant for a buffet wedding dinner.

• If Bliss Restaurant fails to honour the contract by not delivering the dinner at all, this would y g ,be a breach of condition.

• If Bliss Restaurant provides the dinner but fails to provide a single dessert that John ordered, this could be treated as a breach of warranty.

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Exemption Clauses

• This is an express term of the contract that seeks to exclude or limit the liability of the party in breach of contract.

“PARK AT YOUR OWN RISK”– PARK AT YOUR OWN RISK

• What is the rationale for the exclusion or limitation of liability?

• Is an exemption clause legally valid?

14

The court’s approach

An exemption clause (EC) is only valid if:1. It forms part of the contract between the

parties;2. It is properly constructed i.e. it covers p p y

the loss in question;3. There are no unusual factors (e.g. fraud

or misrepresentation) which prevent its operation;4. It does not violate the provisions of the

Unfair Contract Terms Act.15

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Incorporation

• An exemption clause may be incorporated into the contract by:

– 1)  Signature

2) N ti– 2)  Notice

– 3)  A consistent course of previous dealing.

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1) Signature

• The general rule is that parties are bound by all the terms in the written and signed contract even though they may not have read themread them.

• An exception arises if he can prove that he was induced to sign a contractual document as a result of a misrepresentation – Curtis v Chemical Cleaning & Dyeing Co (1951).

17

• L’Estrange v Graucob (1934):– P bought a machine and signed a sale agreement. There was an EC in fine print which excluded D’s liability for  the faulty machine. P did not read it b it i fi i tbecause it was in fine print.

– Could D rely on the EC?

– Yes, because the parties were bound by the signed document.

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2) Notice

• 1) To be effective, an exemption clause must be contained in a document in which the parties can reasonably expect to find contractual terms:

• Chapelton v Barry UDC (1940)– P hired a deckchair from D. P paid and was given a ticket which he did not read. He sat on the chair and it collapsed. P sued D for injury suffered. Could D rely on the EC? 

19

– Held: The notice advertising chairs did not give any warning of limiting conditions.  The ticket was a mere receipt and it was unreasonable to communicate the conditions on a receipt.

• 2) Reasonable steps must be taken to• 2) Reasonable steps must be taken to bring the exemption clause to the notice of the other party before or at the time the contract is made.  Two issues considered –contemporaneity and sufficiency.

20

• Olley v Marlborough Court Ltd (1949)– Husband and wife checked into a hotel. When they entered the room, there was a notice:‐“The proprietors shall not be responsible for ti l l t t l ”articles lost or stolen…”.

– The wife’s fur coats were stolen from the locked room.  Held: The hotel could not rely on exemption clause because reasonable steps had not been taken to bring the clause to the attention of the contracting party before or at the time of contract.

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• An exemption clause must be sufficiently conspicuous and legible – Thornton v Shoe Lane Parking Ltd (1971).

• The plaintiff’s illiteracy is no excuse –Thompson v London Midland ScottishThompson v London Midland Scottish Railway Co (1930).

• If the plaintiff was under a disability which the defendant knew of, then, the defendant cannot rely on the exemption clause.

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3) Previous course of dealing

• EC may be implied in the current contract if the EC had been in use by the parties in their previous dealings.

23

Construction

• An important question is whether on a literal construction the exemption clause covers the loss in question.

• If the clause is not clear the court will choose• If the clause is not clear, the court will choose the interpretation that is less advantageous to the party relying on the exemption clause.  This known as contra proferentem rule.

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• An exemption clause can still be valid even if there is a fundamental breach of contract.

• In Photo Production Ltd v Securicor Transport Ltd (1980)Transport Ltd (1980)– A guard burnt down (through his carelessness) the very premises that he was employed to patrol.  The exemption clause (which was contained in a written agreement) was held to be valid.

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Unusual factors ‐misrepresentation

• Curtis v Chemical Dying Co (1951)– P brought her dress to D for cleaning. P signed a receipt containing an EC which exempted D from ALL liability for damage. Before P signed it, P was told by D that the EC exempted the D from damage to beads & sequins only. The dress was badly stained when it was returned.  P sued D.  It was held that D could not rely on the EC because D misrepresented its application to P.

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Statutory Restrictions

• An exemption clause though validly incorporated, may be declared void under the:

• Unfair Contract Terms Act, 1977 (UK) if:Unfair Contract Terms Act, 1977 (UK) if:– it excludes liability for death or personal injury caused by negligence of the person who seeks to rely on the exemption clause – s2(1);

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– in relation to other losses (e.g. loss of or damage to property), a person cannot exclude or limit his liability unless the term satisfies the requirements of reasonableness – s2(2).

• “reasonableness” judged by taking into• “reasonableness” judged by taking into account the bargaining strength of the parties.

• The Act applies to exemption clauses not only in tort but also in contract.

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• Where a person deals as a consumer – s3, the implied terms under ss12‐15 of the Sale of Goods Act cannot be excluded – s6.

I t ti (i i• In non‐consumer transactions (i.e. in a written contract containing standard business terms) the exemption clause included must satisfy the test of reasonableness.

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Unfair Terms In Consumer Contracts Regulations, 1999

• These Regulations apply to any term in a contract between a supplier and a consumer (a natural person) who is acting wholly for purposes that are outside his trade, business or profession.

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– Regulation 5(1) provides that a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the party’s rights and obligationsimbalance in the party s rights and obligations arising under the contract to the detriment of the consumer.

– Regulation 8(1) provides that an unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer.

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• Thank you.

• Have a nice day.

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Lecture 3 – The law of business organisations – The law of contract (3)g f ( )

©A G Ram

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Vitiating factors

• A contract’s validity may be affected by certain factors (vitiating factors) which include:

• 1) misrepresentation;• 1) misrepresentation;

• 2) illegality

• 3) incapacity;

• 4) duress and undue influence;

• 5) mistake.

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• The effect of (1), (3) and (4) is to make the contract voidable i.e. the innocent party can choose to set aside the contract at its option.

• The effect of (2) and (5) could make the contract void i.e. it becomes unenforceable by the parties.

• For the purpose of this subject, our discussion will be limited to Incapacity, Misrepresentation and illegality only.

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Incapacity

• General rule: – All parties must have full capacity to contract. Contracts may be unenforceable by reason of incapacity.

• Who is a minor?– A person who has not reached the age of majority, which in England is 18 years of age. Minors have limited capacity.  Generally, contracts entered into by minors are not binding against them.

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Valid Contracts

• These contracts are fully enforceable against the minor and the other party:

• 1) Contracts for Necessaries– Not limited to mere necessities:

In Peters v Fleming (1840), gold rings and watch‐chain bought by an MP’s son were treated as necessaries.

– Goods and/or services reasonably required in his station in life ‐ Nash v Inman (1908) – they must be suitable and required at time of sale and delivery.

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• 2) Beneficial Contracts

– Contracts of service or employment which are beneficial to the minor and which enable the minor to earn a livelihoodminor to earn a livelihood.

– A contract that is not beneficial is not binding on the minor ‐ Francesco v Barnum (1890).

– Examples include training, education and medical treatment.

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Voidable Contracts

• These contracts, which involve continuous obligations, are valid and binding on the parties.

• However, the minor is entitled to repudiateHowever, the minor is entitled to repudiate the contract (i.e. opt out) during his minority or within a reasonable period after attaining majority.

• Examples include contracts for lease, partnership and the purchase of shares.

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Ratifiable contracts

• These contracts are not binding on the minor unless he ratifies them on or after attaining majority.

• Examples include loans for or purchase of p pnon‐necessaries and trading contracts.

• A minor cannot however recover the amount he paid for goods he has used or consumed ‐Valentini v Canali (1889).

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The Minors’ Contracts Act

• The Act applies to all contracts made with minors.

• Under s3 of the Act, the court may where it is just and equitable to do so require the minorjust and equitable to do so, require the minor to return the property acquired to the other party to the contract.

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Misrepresentation

• A misrepresentation is a false statement of fact.

• The innocent party (the representee) is induced by the representor to enter intoinduced by the representor to enter into contract.

• The false statement is material and the representee relies on it.

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– false statement of fact NOT opinion – Bisset v Wilkinson (1927)

– fact NOT law or puff.

– false statement of opinion can amount to  pmisrepresentation if the representor has special knowledge or expertise in the matter – Smith v Land & House Property Corporation (1884)

• Can silence amount to misrepresentation?

• What about half‐truths?

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Edgington v Fitzmaurice (1885)

• A company issued a prospectus stating that money raised would be used to improve buildings and extend the company’s business.  However, the real intention was to pay off its pressing debts.

• The court held that there was a misrepresentation justifying rescission of the contract of allotment of the shares purchased.

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Categories of Misrepresentation

• Misrepresentations are categorized into different categories depending on the state of mind of the representor (person making the statement)statement).

• Different remedies may be available to the representee (recipient of misrepresentation) depending on type of misrepresentation.

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1) Fraudulent Misrepresentation

• This arises when the representor makes a statement dishonestly, knowing it to be untrue or being reckless as to whether it was true or nottrue or not.

• Gives rise to a tortious action for damages for deceit as in Derry v Peek (1889).

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2) Innocent Misrepresentation

• This arises when a statement is made honestly with reasonable grounds for believing in its truth.

• The burden is on the representor to prove that• The burden is on the representor to prove that he had reasonable grounds for making the statement.

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3) Negligent Misrepresentation

• This arises when a statement is made honestly but without reasonable grounds for believing in its truth.

• The old position was that there was no pgeneral liability for negligent statements – fear of opening the floodgates to litigation.

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• In 1964, courts recognized a wider duty and extended liability for negligent statements where the parties were in a special relationship.

• In such situations, the maker of the statement owed a duty of care to the recipient i.e. to take reasonable steps to ensure the accuracy of that statement (whether it be advice or information).

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Hedley Bryne v Heller & Partners (1964)

• HB were advertising agents who were doubtful the financial position of one of their client, E Ltd.

• HB contacted E Ltd’s bankers H & P for• HB contacted E Ltd s bankers, H & P for references.  H & P gave a good report on E Ltd’s creditworthiness.  But H & P headed the document “without responsibility”.

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• HB relied and acted on the misleading report and suffered heavy financial loss when E Ltd went into liquidation.

• HB sued H & P to recover the loss on the ground that the report was given negligently and in breach of duty to exercise care.

• Held:  H & P would have been liable but for the disclaimer of liability; hence, no duty was owed in the instance.

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When does liability under Hedley Bryne arise?

• A duty of care arises if:

• 1) one person relies on the advice of another (arising from a special relationship) provided that such reliance is reasonable;that such reliance is reasonable;

• 2) the person giving such advice should realize that his advice will be relied on by a particular person and that if the advice is given negligently, loss will be suffered.

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Effects of misrepresentation:1) Fraudulent misrepresentation

• The consequences are:

• i) damages in the tort of deceit;

• ii) contract is voidable i.e. can be rescinded.

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2) Negligent misrepresentation

• The consequences are:

• i) damages in the tort of negligence or under the Misrepresentation Act, 1967;

• ii) the contract is voidable i.e. can be rescinded.

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3) Innocent Misrepresentation

• The consequence is that the innocent party may rescind the contract.

• However, the court has discretion to grant damages in lieu of rescissiondamages in lieu of rescission.

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Disregarding exemption clauses

• S3 of the Act (as amended by the Unfair Contract Terms Act) provides that:

– exemption clauses purporting to limit the remedies available for misrepresentation are of noremedies available for misrepresentation are of no effect UNLESS it is reasonable to allow reliance on the limiting clause.

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Remedies

• To summarize, the remedies available are:

• 1) Innocent misrepresentation:  rescission (but damages may be awarded in lieu);

2) li i i i i• 2) Negligent misrepresentation – rescission and damages;

• 3) Fraudulent misrepresentation – rescission and damages for the tort of deceit.

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Loss of the right to rescind

• The right to rescind may be lost if:

• 1) there is a lapse of time:

• Leaf v International Galleries (1950)

• L bought a painting from IG after being told that it• L bought a painting  from IG after being told that it was painted by a famous painter.  5 years later, L discovered that IG had innocently misled him.  He brought an action to rescind the contract.  Did he succeed?

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• 2) the party misled affirms the contract:

– E.g. A bought worthless shares in X plc after being misled by its prospectus.  Despite his knowing this, A attended the company’s general meetings, p y g g ,voted, received dividends and exercised his membership rights.  Could A then rescind the contract of allotment of those shares?

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• 3) restitution is impossible:– E.g. if a company has gone into liquidation, a member (shareholder) cannot then choose to rescind his contract of allotment of shares on the 

d f i t tiground of misrepresentation.

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Activity 3.1

• Question:

– May and June are shareholders and directors in MJ Ltd.  They persuade their mutual friend, Jess, to invest in their company by showing herto invest in their company by showing her falsified accounts.  In reality, the company is running at a loss.  Jess invests in the company but discovers the truth later.  What can she do?

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Illegal Contracts

• A contract is illegal if:

– the consideration is illegal;

– the purpose of the contract is illegal;

– it is against the public interest/policy.

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Contracts illegal at common law:

– the objective is to commit a crime

– that are sexually immoral

that promote corruption– that promote corruption

– interfere with the administration of justice

– contracts made illegal by statute

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• Transactions in breach of the English Companies Act e.g. the provision of financial assistance for the purchase of a company’s own shares i e a gift of shares or funds toown shares i.e. a gift of shares or funds to buy them.

• An illegal contract is void  and unenforceable.

• Generally, property or money that was transferred cannot be recovered.

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• Suppose the Companies Act is breached by its officers resulting in the company’s property being transferred to a third party.

• Assuming that the third party received the g p ycompany’s property with knowledge of that breach, then the third party may be held to be a constructive trustee i.e. he holds the company’s property on trust for the company.

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Restraint of trade

• This part of the lecture attempts to provide you with some knowledge of the above topic in so far as it is relevant and necessary to assist you in the understanding of certain parts of syllabus that deal with the concept of the “Lifting of the Corporate Veil”. 

• Discussion is however focused on restraint of trade arising from employment.

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1) Employer – Employee

• An employee owes a duty of confidence to his employer.  This may be expressly stated in the contract of employment, or it may be implied by law.

• An employee always has a duty to act in his employer’s best interest.  He also has a duty of good faith which includes a duty not to divulge to others, confidential information relating to his employer’s business e.g. a trade secret.

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• An employer may seek to control disclosure by imposing restrictive covenants.

• But such covenants must be reasonable in order to be enforceable – Faccenda Chicken Ltd v Fowlerbe enforceable  Faccenda Chicken Ltd v Fowler (1986); otherwise they would be struck out by a court as being in restraint of trade.

• Such covenants, to be reasonable, must not be against the public interest, be limited in time, and restricted in geographical area.  

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• Hence, restraint of trade arises where a person restricts another from carrying out his trade, business or profession.

I b l & l hi• In contracts between employer & employee, this may arise where the employee agrees that he will not:

– a)  work for a competitor of his ex‐employer; or

– b)  compete and set up a rival business in a specified location for a specified period.

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• Since public policy is against restrictions on future employment, the courts will not uphold clauses which restrict employees more than is absolutely necessary. 

• The obligations of the employee:• The obligations of the employee:– during employment, and

– after termination of the contract of employment, are quite different.

• These are examined below separately.

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a) Duties during employment

• A duty of fidelity exists in contracts of employment.  This may also be implied even if it is not expressly stated as a term.

• An express term may be supplemented with an implied term – Thomas Marshall v Guinle (1965).

• The duty of fidelity includes:

• 1. An obligation not to compete with the employer;

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• 2. An obligation to inform the employer of valuable information the employee has received in that capacity ‐ Cranleigh Precision Engineering v Bryant (1965);

• 3 An obligation not to disclose or use the• 3. An obligation not to disclose or use the employer’s confidential information (including trade secrets) during the course of employment for the benefit of himself or another – Faccenda Chicken v Fowler (1986).

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b) Post termination obligations(ex‐employees)

• Once employment ends, the law favors the employee and protects his ability to compete.  Though his duty to his ex‐employer is much narrower, he still has a duty not to use or disclose trade secretstrade secrets.

• The court has to balance the interest of the employer in protecting his confidential information as against the ex‐employee’s competing interest that he should be free to use his skill and knowledge to earn a living elsewhere.

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A test for ex‐employee’s obligation

• The more easily the information can be isolated from an employee’s general skill and knowledge, the more likely the courts will consider it as a trade secret.

• When the confidential information is inseparable from the employee’s general skill and knowledge, the courts will be inclined to treat it as property belonging to the employee.

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Faccenda Chicken Ltd v Fowler (1986)

• The case concerned an ex‐employee (a former sales manager) using his ex‐employer’s sales information (which comprised customers’ names and addresses, the most convenient routes to customers, suitable ti f d li i h d t ) i hitimes for delivery, prices charged etc) in his own business.   Held: The employer’s action for breach of confidence failed as the information was not of the type for which an employee was bound by an implied term in his employment contract.

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Covenants in restraint of trade

• Employers must be careful not to draft terms which are too wide in a contract of employment imposing a continuing duty of confidence after the employment is terminatedthe employment is terminated.

• Such wide terms may be in restraint of trade, and will be struck down by the courts if they are unreasonable.

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• The scope of the restraint, its duration and the geographical area it covers, define the extent of restraint.  If the covenant is too wide, the courts are unlikely to enforce it.

• In Fitch v Dewes (1921) a solicitor’s clerk was• In Fitch v Dewes (1921), a solicitor s clerk was prohibited from entering into the employment of another solicitor within a seven mile radius of a town.  Although the restriction was indefinite in terms of time, but nevertheless as the geographical area was small, it was held to be valid.

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• Covenants in restraint of trade often include non‐solicitation clauses i.e. ex‐employees may not do business with the employer’s customers.

• In GW Plowman & Sons Ltd v Ash (1964), a covenant not to carry on business in the same field for 2 years within 20 miles of Spalding after termination of employment was held to be valid.

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• However in Austin Knight (UK) Ltd v Hinds (1994), a covenant preventing an ex‐employee from soliciting or enticing away any person who had been a customer of the claimant during her employment was held to be unreasonably wide and thus voidwas held to be unreasonably wide and thus void.  This was because it purported to prevent her from approaching all former customers even though she had only dealt with a third of them during her employment.

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FSS Travel & Leisure Systems Ltd v Johnson, 1999 (CA)

• In the above case, the court set down certain principles, some of which are set down below:

• 1. The court will not uphold a covenant by an employer merely to protect himself fromemployer merely to protect himself from competition;

• 2. There must be some proprietary or legitimate interest which an employer can protect by such covenant e.g. a trade secret;

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• 3. Protection cannot legitimately be claimed in respect of the skill, experience, know‐how and general knowledge acquired by an employee as part of his job.  This is regardless of the fact that this may equip him as a competitor or potential employee of aequip him as a competitor or potential employee of a competitor.

• (Note:  Where a covenant is found to be reasonable by the court, an injunction may be granted prohibiting its future breach).

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2) Contracts for sale of business

• This may arise where the buyer of a business requires the seller of that business not to compete with the buyer by setting up rival business after the sale within a specified location for a specified duration.

• Such restraint is valid only if the geographical area and duration of the restraint are reasonable ‐Nordenfelt v Maxim‐Nordenfelt Co (1894).

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Activity 3.2

• Question:

• Sue covenanted with ABC plc, her employer that she would not approach any of their clients for three years after she left the company.  Sue has just resigned from ABC plc, and has formed a company in which she and her husband are shareholders and directors.  As director, she plans to win the business of her former clients for the new company.  Does Sue face any possible liability for breach of contract?

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• Thank you.

• Have a nice day.

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1

Lecture 3A – The law of business organisations – The law of contract (4)

©A G Ram

1

Remedies Generally

• What remedies can a plaintiff expect when a contract is breached?

• Remedies fall under two categories:

• 1) Common law remedies:1) Common law remedies:

– Under this category, the plaintiff is compensated with money

• 2) Equitable remedies:

– These are court orders and are granted when money is not an adequate remedy

• 3) Restitutionary remedies

2

Common Law Remedies

• If a party is found to have breached a contract:

1) the innocent party is entitled to common law remedies as of right;

2) h l d i D hi h i2) the common law remedy is Damages which is essentially monetary compensation for the loss suffered by the plaintiff because of the defendant’s breach of contract.

(What are nominal damages?)

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Damages

• Monetary compensation awarded to the innocent party to put the innocent party in the same position as if the contract had been performedperformed

• Damages may be liquidated (specified in the contract) or unliquidated (to be assessed by the court) and consist of:

(1) non‐pecuniary loss

(2) pecuniary loss

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• Non‐pecuniary loss– not a direct monetary loss and may be awarded for e.g. mental distress, disappointment etc.  Such loss may only be claimed where the very purpose of the contract is to pro ide pleas re rela ation or peace ofcontract is to provide pleasure, relaxation or peace of mind ‐ Jarvis v Swan’s Tours (1973)/Farley v Skinner (2001).

• Pecuniary loss– direct monetary loss e.g. loss of profits, extra expenses in getting a substitute and expenses incurred on repairs

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Assessment of Damages

• Not every loss for an unliquidated sum is recoverable ‐ the court will consider:

1) Remoteness of damages

2) Mitigation

• Court will not award damages:

if the loss is too REMOTE i.e. it is not connected with the breach and is thus not reasonably foreseeable.

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In Hadley v Baxendale (1854), the court held that the Plaintiffs could recover those damages that may reasonably be considered to:to:– arise naturally i.e. according to the ordinary course of things; or

– have been in the reasonable contemplation of the parties at the time of the contract.

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Victoria Laundry v Newman Ltd (1949)

The Plaintiffs wanted to expand their business. They bought a boiler from the Defendants to be delivered on 5th June. In expectation of the new facilities, the Plaintiffs contracted to dye fabrics with the Government, which contract would earn exceptional profits. The boiler was delivered six months late. 

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The Plaintiffs claimed for :

1) loss of ORDINARY profits caused by the defendants’ delay; and

2) l f XC IO AL fi d hi h2) loss of EXCEPTIONAL profits caused which they could have made with the Government.

Did they succeed?

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Mitigation

• In assessing damages, the plaintiff must take reasonable steps to reduce his loss. 

• Brace v Calder (1895)

– P was wrongfully dismissed by D and his partners when the partnership was dissolved. D and his partners offered to re‐employ the P. P declined the offer. P claimed the full loss. Did P succeed?

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Equitable Remedies

These are awarded at the discretion of the court – the plaintiff is not entitled as of right.

Specific Performance– a court order requiring a party to do what he promised to do under the contract (a positive obligation);

– is suitable if money is not adequate to compensate the innocent party.

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Court will not grant this remedy:

– to enforce a contract for personal services;

– if constant supervision is required to enforce the court order 

– if there is an unreasonable delay in applying for the remedy

• Granted usually in contracts for the sale of land or for the sale of an item that is rare or of unusual beauty.

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• Injunction

• This is a court order preventing a party from carrying out what he promised not to d d th t t ( tido under the contract (a negative restriction).

• Injunction is suitable if money is not an adequate compensation to the innocent party.

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Warner Bros Inc v Nelson (1937)

N, an actress, agreed with W not to work for any film co during her contract with W. She broke the promise & worked for a 3rd party.

W applied to court for an injunction to stop her from working with the 3rd party. Did W succeed?

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Restitutionary Remedies

• 1) Quantum Meruit

• Claiming for a reasonable sum for the work done.  For e.g:g

– A agreed to paint a portrait of B.  When the portrait was nearing completion, B cancelled the agreement. 

Can A claim against B for the work done?

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Quantum merit is an alternative to claiming for damages and a party can claim on this basis:– if the contract does not state the amount;

– a contract is discharged and claimant not the gcontract breaker.

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• 2) Refund of money paid

– There must be total failure of consideration.

• 3) Account of profits

R i h d f d f h fi– Requires the defendant to account for the profits made by him in breach of a fiduciary duty.

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• Thank you.

• Have a nice day.

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1

Lecture 4 – The law of business organisations– The law of torts

©A G Ram

1

Introduction (Torts generally)

• Torts are civil wrongs e.g. negligence, nuisance, defamation etc.

• The plaintiff (injured party) is entitled to monetary compensation i.e. damages.y p g

• A single act may be both a crime and a tort.  

• Similarly, a single act can give rise to a breach of contract or liability in tort.– What sort of liabilities would arise if, for example, a director of a company misuses or misappropriates company property?

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How Is Tort & Contract Different?

• In breach of contract, there is a breach of a contractual obligation under the contract and the contracting parties are affected.  The damages recoverable may be li id t d li id t dliquidated or unliquidated.

• Tort is a breach of duty.  The duty is imposed by law independent of agreement.  The damages are fixed by court.  Liability on tort is based on fault i.e. the tortfeasor has caused injury or damage.

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2

The Tort of Negligence

• Negligence is the omission to do something a reasonable man would do, or doing something a reasonable man would not do in a given situation.

• To succeed, the plaintiff must prove that:– The defendant owed the plaintiff a duty to exercise care;

– The defendant breached that duty;

– Injury or loss or damage resulted from breach of duty which is not too remote.

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1) Duty of Care

• A legal duty not moral one must be established by the plaintiff.

• Donoghue v Stevenson (1932)– P’s friend bought a bottle of ginger beer P– P s friend bought a bottle of ginger beer.  P drank it and found the remains of a decomposed snail.  She fell ill.  P could not sue the retailer in contract as she did not buy the drink.  She then sued manufacturer in negligence. 

– Did she succeed?

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– Held:  That the manufacturer owed a duty of care to the ultimate consumer as he could reasonably foresee that the plaintiff was likely to be injured by his negligence if the drink was unsafe to drinkunsafe to drink.

• “Neighbour principle” – The defendant owes a duty not to injure his neighbour.

• Who is your neighbour? – Any person who can reasonably be foreseen to be injured by the defendant’s action or omission.

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• Test of reasonableness is objective.

• Examples of duty of care imposed:– Highways – road users;

– Professional persons – clients/patients;Professional persons  clients/patients;

– Carriers – passengers.

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Activity 4.1

• Question:

– Does a partner or a director owe a duty of care to the firm or company in which he holds such a position?  If so, to whom?p ,

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2) Breach of Duty• This occurs when the defendant fails to take reasonable care.

• Determined by the standard of care – what precautions must a reasonable man take to avoid damage Roe v Minister of Healthavoid damage – Roe v Minister of Health (1954)? This depends on:– Profession of the defendant;

– Likelihood and magnitude of risk – the greater the risk, the greater the care required;

– Characteristics of victims e.g. children, the old and blind are relevant.

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4

3) Resultant Loss & Damage

• The plaintiff must prove he suffered loss because of defendant’s breach of duty (known as “causation in fact”).

• Loss: This may be injury/death to person; or• Loss:  This may be injury/death to person; or loss/damage to property; financial loss.

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• Loss must not be too remote i.e. plaintiff must prove that defendant’s act or omission was the proximate cause of loss (known as “causation in law”).

• The Wagon Mound No. 1 (1961)

• Stray spark igniting oil on water and causing extensive loss?  The loss was held not to be foreseeable.

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Activity 4.2

• Question:

– A is the managing director of XYZ plc.

– He arranges for the sale of the company’s land to ABC plc at a contract price of £1m.ABC plc at a contract price of £1m.

– In reality, the land is worth £1.5m, and A would have known this if he had arranged for a valuation prior to the sale.

– Do you think that A is negligent?  Why?

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5

Economic Loss

• General Rule: 

• The defendant is not liable for pure economic loss (financial loss) caused by his negligencenegligence.

• Rationale: To prevent the opening of the floodgates to litigation.

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• Exception to the rule:  Where economic loss is caused by the negligent statement of the defendant.

• Hedley Byrne v Heller & Partners (1964)Hedley Byrne v Heller & Partners (1964)

• What was the effect of the negligent statement made by the bank:  their report?

• Did they owe a duty of care?

• Impact of their disclaimer?

• Was the advice given in formal or social occasion?

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• The Hedley Byrne principle applies when:

– 1)  one person relies on the advice of another (arising from special relationship) provided that reliance is reasonable;;

– 2)  the person giving advice should realize that his advice will be relied on by a particular person and that if it is given negligently, loss will be suffered.

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• The above principle was reviewed and refined by the House of Lords in CaparoIndustries and Dickman (1990).– 1)  a special relationship exists between the maker of the statement and the recipient (this relationship arises if the statement is being directed towards specific persons knowing that it will be relied on, without independent inquiry):

– 2)  person making the statement has expertise in the matter;

– 3)  it is reasonable to impose a duty of care.

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Activity 4.3

• Question:– X buys shares in ABC Limited after relying on the company’s annual audited accounts prepared by ABC’s auditors appointed by the company.

– The accounts are negligently prepared.

– Can X sue the company’s auditors if his investment turns into a loss?

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Some defences

• 1) Volenti non fit injuria

• The acceptance of risk by the plaintiff e.g. in hazardous sports or adventurous activities.activities.

• 2) Contributory Negligence

• Here, both defendant and plaintiff are negligent.  The blame is apportioned i.e. the plaintiff’s contributory negligence reduces the amount of compensation that could be recovered by him.

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• Thank you.

• Have a nice day.

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1

Lecture 5 – The law of business organisations

• ©A G Ram

1

Classification of organisations

• Business organisations attract legal regulation.

• Fundamental distinctions between the following:

• 1) registered and unregistered;1) registered and unregistered;

• 2) incorporated and unincorporated.

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Registered & unregistered

• Distinction between organisations like limited companies and societies which come into existence following procedure f i i l id d i h lfor registration laid down in the relevant statute; and

• Partnerships and clubs created by agreements.

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2

• For registered organisations, a constitution and other legal documents complying with the law must be prepared.

• Unregistered organisations are governed by g g g ygeneral legal principles e.g. the law of contract i.e. partnership agreement.

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• Partnership will come into existence unless it offends the law in which case, it is void or voidable.  The latter will give rise to the remedy of rescission.

• Must a partnership agreement be in writing?  Or can it be an oral agreement?

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Incorporated & Unincorporated

• Organisation conferred with legal personality said to have been incorporated e.g. a company which is a separate legal entity that enjoys perpetual successionentity that enjoys perpetual succession.

• Where no such personality is conferred, e.g. in general partnerships, such organisation is called unincorporated.

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3

Types of corporations

• 1) Corporation sole

– consist only of one member at a time holding perpetual office e.g. the Public TrusteeTrustee.

• 2) Corporation aggregate

– consist of a number of persons so associated that in law they form a single person e.g. the registered company.

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Corporations aggregate may be divided into:‐

• 1) Chartered companies

– formed by grant of a charter of the Crown e.g. learned societies, professional bodies, public schools colleges and universities e g Eastschools, colleges and universities e.g. East India Company, BBC.

• Not used by trading concerns.

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• 2) Statutory companies

– formed by a special Act of Parliament e.g. for public utilities.

• 3) Registered companies3) Registered companies

– formed under the Companies Act, or previous Acts.

– See website:

–www.companieshouse.gov.uk

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The registered company

• Incorporated or formed under the Companies Act.

• Enjoys a legal personality independent of the legal personality of its members –g p ys16(2)/(3), CA 2006.

• In general, the debts of the company belong to the company and not to its members.

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• The company acts through its board of directors, who are its agents.

• The relationship between the company and it b i l t d d i li dits members is regulated under an implied statutory contract under s33, CA.

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• The company can raise money by borrowing (loan capital).

• Persons who lend money to the company may be issued with debentures as security.y

• Such persons are creditors not shareholders and have no voting rights.

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• A company may formed by one or more persons subscribing their names to the Memorandum of Association and by complying with the requirements of thecomplying with the requirements of the Companies Act – s7.

• A company may not be formed for an unlawful purpose – s7(2) – Bowman v Secular Society Ltd (1917).

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Classifications of companies

• Companies are divided into the following:

• Broad classification:– Limited or unlimited

– Public or private

• Specific classification:

– Public limited (by shares only);

– Private companies limited by:• Shares• Guarantee; or• Unlimited

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Limited or unlimited liability – s3, CA

• Concept of limited liability applies to the liability of members not the company.

• A company may be limited by shares or guarantee.

• In the event of liquidation, limited liability aims to limit the members’ financial obligation to the company.

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• Creditors cannot look to the members as guarantors of the company’s debts.

• This is a description of a company limited by shares.

• Loans to the company are provided usually on directors’ personal guarantees.

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• Liability of each member to contribute to the capital of the company is limited to the nominal value of the shares he has agreed to take up.to take up.

• On payment, the member cannot be made responsible for deficiencies of the company or of other members.

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• Member’s liability is fully discharged on payment; he also has no liability in respect of un‐issued shares.

• Possible that promoters may establish an unlimited company. If the company is insolvent, the creditors can look to the members to satisfy any shortfall.

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• Why then are they formed?

• Unlimited companies must be private companies.  Formed with or without share capital.

• Any special features for unlimited companies?

• Repayment of capital to the members without permission of the court one such feature (where no insolvency exists).

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• Privacy in relation to its financial accounts another special feature – s448, CA.

• For example, it need not deliver annual accounts and reports to the Registrar (unless it is subsidiary/holding company of a limited company).

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• With share capital, members must pay for the full value of their shares; if on liquidation this is inadequate to meet the d b h b ibdebts, the members must contribute rateably according to the nominal value of their shares.  If there is no share capital, members must contribute equally.

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• A company limited by guarantee is a private limited company.  It has no share capital. 

• Purposes are not usually the conduct of business for profits of its investors but forbusiness for profits of its investors but for conducting of public, scientific, cultural or other similar activities.

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• There are members not shareholders.  Has a memorandum and articles of association which prescribe its purposes and procedure for persons to become membersfor persons to become members.

• Liability for debts is limited to the amount stated as the guarantee in the memorandum e.g. £1 or £5.

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• Company limited by guarantee cannot alter the amount fixed by its memorandum –Hennessy v National Agricultural & I d i l D l A (1947)Industrial Development Assoc (1947).

• Rarely if the company also has a share capital, its members have two liabilities.

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• Once incorporated as a guarantee company, it cannot re‐register as a company limited by shares and vice‐versa.

• Accounts must be prepared and audited and filed at the Companies House.  Audit report is addressed to the members.

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Public Companies

• s4(2), CA – is a company limited by shares and whose memorandum states that the company is a public company.

N t d ith th d “ bli• Name must end with the words “public limited company” – s58, CA.

• Authorized capital at least £50,000 – s763, CA; at least 25% paid up.

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• Cannot commence business or borrow money unless the Registrar has issued under  s767, CA, a trading certificate.

• Certificate is conclusive evidence that• Certificate is conclusive evidence that company is allowed to do business and exercise borrowing powers.

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Private companies

• Smaller businesses which may be formed by one or more persons.

• Following categories:

Li it d b h– Limited by shares

– Limited by guarantee

– Unlimited

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• No restriction on share transfer unless the articles prescribe otherwise.  (In practice, the articles usually do have such restriction).y )

• Cannot offer securities to the public by prescribing them as unlistable.

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• Single member private limited companies permitted i.e. only one subscriber to the memorandum.  Minimum share capital is £1.

• But must have at least 1 director – s154(1), ( ),CA. However, not required to have a secretary – s270(1), CA.

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11

• Death of sole member/director paralyses company.

• Company secretary could be authorized to allow share transfer to personal representatives.

• Divided into small and medium sized companies – ss382, 444, 445, 477 & 465, CA.

31

Distinctions between public and private companies

• Private company need only have one director and not have a secretary, whereas a public company must at least have two di t 154(1)/(2) CA d t hdirectors – s154(1)/(2), CA, and must have a company secretary.

• Two or more directors may be appointed by a single resolution in private company. In the public company they must be voted on as individuals – s160, CA.

32

• Statutory age limit of 70 placed on directors of a public company is not applicable to a private company, unless it is a subsidiary of a public company.

• On registration: public company – “plc’; private company – “limited” or “ltd” – ss58 & 59, CA.

33

12

• Shares in a private company are usually subject to share transfer restrictions unlike in a public company where no such restrictions exist.

• A plc cannot validly acquire non cash assets• A plc cannot validly acquire non‐cash assets valued at 1/10 of the company’s issued share capital from subscribers 1/10 in the first 2 years following incorporation unless certain requirements are met – s598, CA.  This restriction does not apply to private companies.

34

• Commencing business & borrowing – plc must be issued with a trading certificate first unlike a private company – s761, CA.

• Plc has a minimum authorized share capital of• Plc has a minimum authorized share capital of £50,000 of which 25% must have been paid up; no such requirement for private company.

• The divide between ownership (through shareholders) and management (through directors) more marked in a public company.

35

• A plc can offer shares or debentures to the public; a private company cannot do so.

• Interim accounts used in plc to support distribution of profits and assets must be fileddistribution of profits and assets must be filed with the Registrar; no such filing need for private company.

36

13

• Move towards deregulation of private companies e.g. unanimous resolutions can be passed without need to hold meetings including the annual general meeting Theseincluding the annual general meeting.  These statutory provisions not available to plcs.

37

• Thank you.

• Have a nice day.

38

1

Lecture 6 – The law of business organisationsg

©A G Ram

•1

Sole Trader

• A natural person in business for himself with a view to profit.

• Advantages:– Takes all profit

– Liberty to make personal decisions

– Business assets are personal assets of owner as business and owner are not separate entities 

•2

• Disadvantages:– Business ceases on his death 

– Unlimited liability of owner to business debts; thus, his personal assets can be taken in satisfaction of such debts and he made bankrupt

– Liable for all tortious and criminal conduct arising from the business

•3

2

Partnerships

• Chief form of business before creation of the company.

• All unincorporated organisations formed by agreement.

• No separate legal personality, but with capacity to sue & be sued in its own name.

• Governed also by the Partnership Act, 1890.

•4

• S1(1) PA: “… the relation which subsist between persons carrying on business in common with a view to profit”.  Three key elements:elements:

• 1) a business (i.e. have commercial value);

• 2) carried on in common;

• 3) with a view to profit.

•5

• Definition excludes limited liability partnerships under LLP Act, 2000.

• s4 – partners collectively a “firm”. Is a relationship in which partners:relationship in which partners:

– collectively own assets of the firm

– are jointly liable for debts – s9, PA, and jointly and severally liable for torts – s10/12, PA, arising in the ordinary course of the firm’s business

•6

3

• s5 ‐ every partner is an agent of the partnership (who can bind the partnership to contracts). Read the exceptions to s5, PAPA.

• s24(5), each partner has a right to take part in the management of the firm’s business.

• However, partners are not to compete against each other.

•7

• s29 – any partner who has made profit from any transaction without the consent of the other partners is required toof the other partners is required to account for that profit to the partnership.

• s30 – partner under a duty not to compete with the business of the firm unless permitted by the other partners.

•8

• These duties are considered as fiduciary duties and the relationship between partners, a fiduciary relationship.

• Absence of limited liability for partners until the enactment of the Limited Partnerships Act, 1907, and later the Limited Liability Partnerships Act, 2000.

•9

4

Companies & Partnerships distinguished

• Creation:

• A company is created by registration or incorporated, whereas a partnership is 

t d b tcreated by agreement.

• Legal personality:

• The company is a separate legal person with perpetual succession as opposed to a partnership.

•10

• Number of Members:

• No ceiling, whether private or public company. For a partnership, the maximum number of partners is usually 20 (certain professional bodies excepted).  

• Is a contract entered into by a partnership in excess of 20 members valid?

•11

• Management & Agency:• Members in a company are not entitled to participate in its management unless appointed directors. However, partners pp pare entitled to share in the partnership management unless there is a contrary agreement.

• Members are not agents of the company but partners are agents of the partnership.

•12

5

• Liability of Members:

• Liability of members of a company may be limited by shares or guarantee.

• But the liability of a general partner isBut the liability of a general partner is unlimited, though in a limited partnership a partner may limit his liability to the debts incurred by the partnership.

•13

• Formalities:

• Company regulated by the Companies Act with a need to comply with several formalities imposed by legislation e.g. need to file accounts with the Registrar, comply with its memorandum and procedural requirements in the articles.

• Partnership subjected to lesser formalities by comparison.

•14

• Termination:

• Members’ death or bankruptcy does not affect the company.  It is terminated through a process of winding‐up.g p g p

• Partnerships, however, are dissolved by the death or bankruptcy of a partner unless there an agreement to the contrary (determinable at will or after expiry of fixed duration).

•15

6

Limited Partnership

• Formed and regulated by the Limited Partnership Act, 1907.

• Differs from ordinary partnership, particularly as regards formation and internal rules as provided in the 1890 Actinternal rules as provided in the 1890 Act.  Not a separate legal entity.

• No limit on number of members; new members admitted with agreement of existing members. Must have at least 1 general partner and 1 limited partner.

•16

• S4(2), Limited Partnership Act – a limited partner is defined as someone “who shall at the time of entering such partnership contribute to a sum/s as capital or property valued at a stated amount, and who shall not be liable for the debts or obligations of thebe liable for the debts or obligations of the firm beyond the amount so contributed”.

• With public registration with the Registrar of Companies, any creditor can discover the identity and liability of the limited partners.

•17

• S6(1) – “A limited partner shall not take part in the management of the partnership business and does not have power to bind the firm…”.  If a limited p f fpartner takes part in the management……, he shall be liable for all debts and obligations of the firm incurred while he so takes part ….. as if he were a general partner.”

•18

7

• No requirement but usual to have management powers set out in a formal document. 

• Each member is an agent of the gpartnership (LP may be held out as agent).  But the partnership is not bound if the third party is aware that the member has no authority to act.

•19

• The partnership and its assets are liable for the firms debts and obligations; limited partners will not be personally liable but could lose their capitalliable but could lose their capital (investment) if liabilities exceed assets.

• Partnership has unlimited power to act and will not face problem of ultra vires.

•20

• Dissolved by agreement of members, or if insolvent, by creditors initiating insolvency procedures. Limited partner has no right to dissolve the partnership by notice if it isto dissolve the partnership by notice if it is a partnership at will. 

• On dissolution, past and present members liable to contribute to the assets of the partnership up to the extent they agreed.

•21

8

Limited Liability Partnerships –formed under the Act, 2000

• Registered through an incorporation document filed with Registrar of Companies ‐ s2, LLP Act.– Is a body corporate which has a separate legal entity from its members – s1.

– Minimum two members; no upper limit.  Membership: subscription/agreement.

– “incorporation document” equivalent of a company’s memorandum.

•22

– Can only be formed for the purpose of “carrying on a lawful business with a view to profit”.

– LLP has unlimited capacity – so that no issueLLP has unlimited capacity  so that no issue of ultra vires can arise – s1(3).

– New members may be introduced subject to consent of existing members.  An existing member may cease to be such in accordance with the terms of the agreement.

•23

– The Act allows members to write agreements that will govern their mutual rights, duties and relationships – s5; but there is no requirement to register such an agreementrequirement to register such an agreement.

– Each member is an agent of the LLP and can take part in its management and bind the LLP – s6.  (Generally, a member is not an agent of another member).

•24

9

– LLP and its assets (not members) are primarily liable for the debts and obligations of the firm (unless the member has assumed personal liability). 

– A member’s liability is limited to the amount he has agreed to contribute to the assets of the firm. 

– (Note:  The court may however declare on the application of the liquidator under s214A, Insolvency Act, that a member is liable to contribute such an amount as it thinks fit if certain conditions apply).

•25

– It is treated as a company for insolvency and winding‐up purposes; thus provisions of the Insolvency Act apply.

It does not have shareholders directors or a– It does not have shareholders, directors or a share capital.

– LLP, for tax purposes, is treated as a partnership, that is, the members must declare their profits as income which is subject to personal tax.

•26

– LLP has a duty to appoint auditors, prepare and file audited accounts.  But small and medium sized LLPs will be able to take advantage of the provisions of the Companies Act that apply to small and medium sized companies (the qualifying thresholds being the same).

– LLP is vicariously liable for any wrongful act or omission committed by a member in the course of the business of the LLP or with its authority.

•27

10

Some advantages of incorporation generally

• 1) Perpetual succession;

• 2) Limited liability of members;

• 3) Liability of company for all contracts and y p ytransactions made in its name;

• 4) Entity’s property not affected by change in shareholders.

•28

Some disadvantages of incorporation generally

• 1) More formalities and regulations to be complied with including administrative costs like filing fees to be incurred;

• 2) Public inspection of accounts (unlimited companies excepted);

• 3) Costs of compulsory annual audit (small and medium sized companies excepted).

•29

Some issues relating to general partnerships

• 1) Lack of legal personality:

• Can partners in one firm bring a legal action or contract with another firm in which they are yalso partners?

• Answer seems to be in the negative – see Rye v Rye (1962).

•30

11

• 2) When is a partner bound by a contract?

If h t th t i l ti t f• If he was at the material time a partner of the firm – Sheppard & Cooper Ltd v TSB Bank plc (1997).

•31

• 3) Can partnerships be formed for benevolent or artistic purposes?– The answer appears to be in the negative.

– See s45, PA – “business” includes every trade, occupation or profession .

• 4) Social or marital relationships are not partnerships – Palter v Zeller (1997).

•32

• 5) At which point in time do partners in a joint venture become partners?

• Persons who agree to carry on a certain b d bbusiness activity do not become partners until they embark on that activity.  But there is no rule of law that parties do not become partners until actual trading commences – Khan v Miah (2000).

•33

12

• 6) Are promoters of a company partners?

• Generally, no.  The persons must be “in business carried on in common”. 

• There must be sufficientThere must be sufficient interdependence, profit sharing and joint participation in a common business –Saywell v Pope (1979).

•34

• s2(3) PA ‐mere receipt of a share in profits is prima facie evidence of but does not of itself make a person a partner – Cox Hi k (1860) (N h hv Hickman (1860).  (Note that the 

business must be carried on in commonwith a view to profit).

• What about a share in the losses?  Or risk sharing?

•35

• A persuasive (not conclusive) factor that a partnership exists i.e. a share in the profits and losses is an indication of participation in the business – Walker v Hirsch (1884).

• 7) Can a company be a partner?– Certainly yes.  See S1 of the PA.

•36

13

Establishing a partnership

• By way of a partnership agreement that takes the form of a deed.

• The partnership agreement is also subject t th i t t l l hto the various contractual rules such as those relating to misrepresentation, illegality etc.

• But terms and conditions may be varied by mutual agreement between partners –s19, PA.

•37

• Implied terms as to management, accounts, indemnity etc. in the PA can be varied by the partnership deed.

f l d ’• If a restriction is placed on a partner’s authority, no contract or transaction entered in violation thereof is binding on the firm with respect to persons having notice of the agreement.

•38

Commencement

• Partnership commences from the date stated in the deed.

• Can that date be retrospective?

A i f f b ll S ll• A question of fact, but generally, no ‐Saywell v Pope (1979).

•39

14

Dissolution

• 1) On giving notice (usually written) when no fixed term – s26(1) PA provided no contrary intention is expressed in the partnership deed e g “dissolution only bypartnership deed e.g.  dissolution only by mutual consent” – Moss v Elphick (1910);

• 2) Death or bankruptcy of partner;

• 3) Expiry of fixed term partnership.

•40

• What happens if fixed term partnership is carried on after that term?– It becomes a partnership at will – s27 PA.

• But on what terms does a partnership at will subsist?  S27 – “… rights and duties of the partners remain the same as they were at the expiration of the term..”.

•41

Who is not a partner?s2(3) PA

• 1) a servant (employee) or agent with a contract for remuneration;

• 2) spouse/child of deceased partner;

• 3) a creditor of the partnership;

• What if “creditor” was to receive a portion of the profits as repayment?  Pooley v Driver (1877) – combined effect of profit sharing and control, was clear evidence of partnership.

•42

15

• 4) a person receiving by way of annuity or otherwise a portion of profits in consideration of the sale by him of the 

d ill f b igoodwill of business.

• Intention is to protect the vendor of the business.

• What’s the position of a “salaried partner”?

•43

• Represented as a partner who may bind the partnership as a full partner.

• United Bank of Kuwait v Hammound (1988) – a person having actual authority(1988) – a person having actual authority to represent himself as a partner – but his rights within the partnership may be restricted in many ways e.g. by receiving salary instead of a share of the profits, being classified as an employee or partner.

•44

Partnership liability by representation

• Known as partnership by holding out, partnership by estoppel or quasi‐partnership.

• In reality no partnership by liability to third parties arising from the representation.p g p

• An action may lie for breach of warranty, misrepresentation or fraud.

•45

16

s14(1) PA

• “Every one who by words, spoken or written, or by conduct represents himself or knowingly suffers himself to be represented as a partner in a particular firm is liable as a partner to any one who has on the faith of such representation given credit to the firm…….”.

•46

• 1) there must be representation, either actually or knowingly made;

• 2) person misled must have acted (in reliance) on the strength of thatreliance) on the strength of that representation i.e. given credit.

• s14(2) ‐ use of deceased partner’s name does not make estate liable for partnership debts contracted after his death.

•47

• Thank you.

• Have a nice day.

•48

30/08/2012

1

Lecture 7 – The law of business organisationsg

©A G Ram

1

The trust

• Why a trust?

• Any tax advantage?

• An example, “unit trust”.

• Basically, an unincorporated organization, with popular commercial use.

• Replaced by the company as a trading medium.

2

Building societies

• Legislation provides for the establishment of “building societies”.

• Act provides for incorporation.

i i b d i i d b h• Registration to be administered by the Building Societies Commission.

• Are there any qualifications for registration?

3

30/08/2012

2

• Must satisfy the following definition laid down in s5(1) of the Building Societies Act:

– “its purpose or principal purpose is that of making loans which are secured on residential propertyloans which are secured on residential property and are funded substantially by its members”.

4

• Schedule 2 to the Act provides detailed list of matters to be included in each societies constitution

• Included in s6 is a limitation of liability of the• Included in s6 is a limitation of liability of the members for the society’s debts.

5

Industrial & Provident societies

• Registered under the Industrial and Provident Societies Act.

– “carrying on industry, business or trade, whether wholesale or retail if the society is a bona fidewholesale or retail if the society is a bona fide cooperative society……. business of the society is conducted for the benefit of the community….”.

• Limited liability for members in respect of the society’s debts under s3.

6

30/08/2012

3

Friendly Societies

• Friendly Societies Act, 1974 – friendly societies were registered not incorporated.

• New legislation in 1992 allows societies a wider range of services Requires societies towider range of services. Requires societies to be incorporated.

• Under what circumstances can a friendly society now be incorporated?

7

To provide the following:

• C.

• (a)  for the relief or maintenance of any persons during sickness or when in distressed circumstances; or

• (b)  to meet the funeral expenses of any persons.

• D. 

• Activities carried out in accordance with the society’s rules (or withActivities carried out in accordance with the society s rules (or with arrangements made under the rules) whereby discretionary benefits are provided—

• (a)  for the education of any persons;

• (b)  for the relief or maintenance of any persons during sickness, when out of employment or when in distressed circumstances; or

• (c)  for the funeral expenses of any persons.

8

• Benevolent societies, cattle insurance societies, working men’s clubs also recognized under the Act.

l l b l f b f• 1974 Act silent on liability of members for debts of society.

• Trustees of the society may sue and be sued on society’s behalf.

• But Friendly Societies Act, 1992, provides for registration and incorporation.

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• Society also has a memorandum, and rules similar to a company’s articles which is binding on members.

• Limited liability of members Schedule 3 s8• Limited liability of members – Schedule 3, s8 –provides that the liability of a member is limited to the amount of any subscription to the society which is outstanding.

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Trade Unions

• Basically, unincorporated associations.

• Unions are an organization of employees.

• Employees join as members.

• Relevant legislation is the Trade Union &• Relevant legislation is the Trade Union & Labour Relations (Consolidation) Act, 1992.

• Trade unions are not registered but list is maintained by authority.

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Raising of funds

• How can a company raise funds for its business operations?

• By the following methods:

• 1) the issue of shares;• 1) the issue of shares;– principle of limited liability ensures that personal assets of investors are untouched in the event of the company liquidation.

• 2) loans secured from banks with personal guarantees from directors;

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• 3) through secured debt financing i.e. debentures and charges;

– the company’s property is taken as security for the loanloan.

• 4) by way of a public offer (for plc) of securities.

– results in flotation through the issue of a prospectus.

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Share Capital

• Share capital – the amount contributed by the shareholders to the company’s resources.

• “Share” – may be defined as the legal interest of a shareholder in a company measured by p y ysum of money.

• Mutual covenants between company and shareholders – s33, CA.

• How is a member different from a shareholder?  Read s112, CA.

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• Ownership grants the right to participate on terms stated in the company’s constitution; if company is wound up, to receive the assets, if any after debts are paidany, after debts are paid. 

• Fundamental principle:  member of company has no legal interest in the company’s property. 

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Types of Share Capital

• Allotted or Issued Capital:

• That part of the authorized capital that has been issued to shareholders e.g. £1m authorized capital of which 500 000 £1 share have been issuedwhich 500,000 £1 share have been issued.

• Paid‐Up Capital

• The total amount paid up on the share issued by the company.  E.g. 100,000 shares of £1 each, of which £50,000 have been paid up.

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• Uncalled Capital:

• That part of the issued capital that has not been paid‐up – subject to payment when called upon by the company. 

• E.g. company issues 100,000 shares of £1 each and only £0.50 per share is paid – the amount of uncalled capital will be £50,000. 

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Types of shares: Ordinary shares

• Rights stated in the company’s articles.

• Entitled to dividend payments if the company makes a profit.

• A return of capital if the company is wound‐up (called equity shareholders); but preference shareholders have priority in payment.

• Have voting rights and eligible for rights issue.

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Preference shares

• Rights must be stated in company’s articles or terms of issue.

• Have first claim over capital if company is wound‐i i it di h h ldup i.e. priority over ordinary shareholders.

• Dividends: cumulative or non‐cumulative.  Have first claim in payment with priority over ordinary shareholders in payment.

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Borrowing powers of a company

• Trading company has implied power to borrow, but such power is usually stated in a company articles.

E i d b th b d f di t• Exercised by the board of directors.  

• Power to borrow implies a power to give security.  No limitation on power unless articles so provide.

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Debenture

• Is a document which creates and acknowledges a DEBT due from the company to the debenture holder.

M di t l t d bt t d b• Medium to long term debt created by a company.

• It is form of security for the lender.

• Usually gives lender a charge over company’s assets.

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• Debenture will set out period of loan, date of repayment, rate of interest, rights of lender etc.

• Once loan is repaid the debenture may be• Once loan is repaid, the debenture may be redeemed.

• Debenture holder is not a member of the company; he is a CREDITOR only.

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Shareholder vs Debenture Holder 

• Both shareholder and debenture holder own transferable securities.

• Issue and transfer procedure is similar.

h diff b h• But there are differences between them.

– 1)  shareholder is the owner of the shares he subscribes to but a debenture holder is a creditor of the company.  Each has different rights.

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– 2)  upon liquidation, debenture holders must be repaid in full first i.e. debenture holders have priority over shareholders;

– 3)  debentures – interest paid at fixed rate regardless of financial situation of company.

• BUT shareholder receives dividends only out of the profits of the company and provided company declares a dividend.

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Fixed ‐ Floating Charges

• Debentures secured by two kinds of charges:

• 1) Fixed Charge:

• A mortgage of specific assets owned by the company e g land machinery buildings etccompany e.g. land, machinery, buildings etc.

• The borrower retains possession of the asset BUT cannot dispose of it without lender’s consent.

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• A fixed charge attaches to the asset from the moment the charge is created.

• Gives the holder an immediate security over the property in question which is notthe property in question which is not postponed to preferential creditors.

• 2) The Floating Charge

• Does not attach to any specific asset; ambulatory & shifting in nature.

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Characteristics of a Floating Charge

• Is a charge on the present and future assets of the company.

• The assets are changing from time to time in the course of the company’s businessthe course of the company s business.

• Company can carry on business in the usual way without the consent of the lender.

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• Ability of borrower to dispose assets charged without lender’s consent is the hallmark of a floating charge.

• Floating charge becomes a fixed charge when g g git crystallizes.

• Crystallization takes place when receiver is appointed, company goes into liquidation, ceases to carry on business etc.

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Registration of Charges

• Under s870, CA, company must register a charge over its property with the Registry of Companies within 21 days of creation.

• Rationale:• Rationale:

• Persons dealing with the company should be able to find out what assets of the company are subject to charges.

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• If charge is not so registered, company can apply to court for extension of time.

• Once the charge is registered, the Registrar will issue a certificatewill issue a certificate.

• Certificate conclusive evidence that requirements as to registration have been met.

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What happens if charge is not registered at all?

• 1) The charge is void against the liquidator and the creditors if the company goes into liquidation – s874, CA.

• 2) The holder of the unregistered charge loses his security i.e. he becomes an unsecured creditor.  (But the charge is not void against the company before liquidation and can be enforced).

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• Once winding‐up commences, lender of unregistered charge will rank as unsecured creditor.

• Offence for company not to register a charge.p y g g

• S245 Insolvency Act, 1986:– A floating charge created within 1 year of commencement of winding up is void as security for any debt unless company was solvent immediately after creation of charge.

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Remedies of secured debenture holders

• The property charged may be sold or leased.

• Receiver may be appointed to take possession of the property which is the subject of the chargecharge.

• Question:  Can a shareholder also be a debenture holder of the company?

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• Thank you.

• Have a nice day.

34

SINGAPORE INSTITUTE OF MANAGEMENT

LAW OF BUSINESS ORGANISATIONS (FT) - TUTORIAL (LECTURE 1) 1. Define law and distinguish it from morality and ethics. 2. Explain fundamental differences between: i) criminal law and civil law; ii)

contract and tort; iii) common law countries and civil law countries. 3. What does the expression “common law” mean? How is it different from equity? 4. Which area of law do the following involve?

a) The taxi in which you are a passenger is involved in an accident due to the taxi driver’s fault, resulting in injury to you;

b) You make a valid claim, but your insurer refuses to pay you; c) You are assaulted following a “staring” incident; d) You desperately need to rush to the washroom at a shopping mall, but the

persons in front of you inconsiderately block your way, causing you discomfort;

e) Sam spat on the face of a traffic cop who gave him a speeding ticket; f) Ben, a surgeon, operates on a patient, but despite reasonable care being

taken, the patient dies due to complications; g) Sue, who is depressed, seeks advice from her ex-boyfriend, who tells her

to go and “jump” which she does from a rooftop, resulting in her death. 5. Explain the sources of English law. 6. Explain what is meant by ratio decidendi and obiter dicta. 7. Explain the hierarchy of UK courts. What conditions must be fulfilled for the

doctrine of judicial precedent to apply? 8. James sued Black for breach of contract for £100,000 and lost. The action is

being heard on appeal. Which courts are involved and by what name are the parties called in the first instance and on appeal?

9. Gives examples of common law and equitable remedies. 10. Read the case of Carlill v Carbolic Smoke Ball Co, 1893 at:

http://www.leeds.ac.uk/law/hamlyn/carlill.htm. What were the facts, who were the parties, who were the judges who decided the case, was the court one of first instance or was it an appeal court, and finally, do you agree with the outcome?

END OF DOCUMENT

1

SINGAPORE INSTITUTE OF MANAGEMENT

LAW OF BUSINESS ORGANISATIONS (FT)

TUTORIAL QUESTIONS

(Lectures 2 - 4 only) 1. Define: contract, tort and trust. Explain briefly the remedies that are available to an

innocent party in each of them?

2. What are the ingredients of a binding contract? 3. What legal presumption applies in respect of intention in commercial agreements?

4. State the common law remedies available for breach of contract. What are equitable

remedies and when are they usually awarded?

5. Identify two ways in which an offer may lapse, and one way that it may be rejected. 6. Identify ONE (1) situation where acceptance does NOT have to be communicated to

the person making the offer. 7. Explain: a) “privity of contract”, b) the postal rule. 8. Which of the following is an offer? : a) a pamphlet from a department store offering

50% discount on all children’s clothing; b) a display in shop window showing a hi-fi set with a price tag of £25; c) making a bid at an auction, d) a prospectus issued during an IPO.

9. Bill has a shop in Oxford Street, London that sells second-hand goods. Consider the

following situations:

a) Singh asks Bill: “How much is that vase? And Bill replied: “The lowest I will take is £100. Singh says: “I will take it, here is the £100”. Bill thinks that he could have gotten more and refuses to sell. Is there a contract?

b) Jane sees a large beautiful mirror in Bill’s shop with a price tag of £200 attached. Jane tells Bill that she will pay £150. Bill tells Jane that if the offer were £180 he would accept. Jane asks: “Would you be happy with £170?” Bill shook his head. Is there a contract?

10. Explain the difference between express and implied terms, conditions, warranties and

innominate terms and the remedies available to the innocent party for breach. 11. What conditions must be satisfied in order for an exemption clause to be valid and

binding on the parties? 12. Explain the following:

i) The general rule on contracts with minors and the exceptions to this rule.

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ii) The ingredients of an actionable misrepresentation and the different types including remedies.

iii) The distinction between void and voidable contracts.

13. Explain the elements of the tort of negligence. Under what circumstances does the

defendant owe a duty of care to the plaintiff in an action arising from a negligent statement?

14. On 1st January, Karl writes a letter to Edith offering to sell to her his boat for £6,000. On

5th January, Edith writes to Karl telling him she cannot afford £6,000 but is prepared to pay Karl £5,000 for his boat. On 8th January, Karl replies to Edith that he will accept £5,500 for the boat. On 12th January, Edith writes to Karl accepting his offer (of 8th January) and that same day Karl also writes to Edith telling her that he has decided not to sell the boat. Is there a binding contract between Karl and Edith? You may assume that all letters were posted on the same day they were written and delivered the following day.

15. Linda decided to sell her commercial property after she became aware of plans to build

a highway that would bypass her property. During her discussion with Sue, a prospective buyer, Linda came to know that Sue had no knowledge of the plans and decided not to tell her about them. Linda has 5 tenants to whom the property has been leased on a yearly basis. Unfortunately, all 5 tenants are not paying rent regularly and are facing bankruptcy. In reply to Sue’s query, Linda says that the property has been tenanted out to excellent tenants. Sue has now purchased the property from Linda and is much disappointed. Advise her on whether she has any legal recourse.

16. Terror, Philip’s racehorse, won 3 of its last 4 weekly races. The night before its 5th race,

the horse appeared very ill, so in middle of the night, Philip called Frenzy, the vet, who promised to come immediately. Frenzy never came as he fell asleep, and so Philip withdrew the horse from the 5th race. It was later discovered by another vet that the horse was fit to race as it had only been stung by a bee on its face. Philips now claims from Frenzy: a) the cost of the other vet’s fees; b) forfeited entry fee for withdrawing the horse, c) lost prize earnings of £20,000 if the horse had come first, d) £50,000 as damages because a prospective buyer of the horse had withdrawn an offer for its purchase because the horse had failed to run in the 5th race. Can Philip legally claim these losses?

17. Sam is an investment advisor who has been practising for 25 years. Sue has recently

won £100,000 in a lucky draw and seeks investment advice from Sam when she casually meets him at a party. He advises that she invests all her money in ABC plc. She is reluctant to invest in a mining company due to its high risk but Sam tells her “I know this company and it is totally profitable. I have been in this business for many years and I am the best in my job. If you don’t believe me, please go ahead and check it out”. Soon thereafter, Sue invests all her money in ABC plc. After only 3 months, the company goes into liquidation. Sue discovers that the company had been in financial trouble for over a year and this fact was well known in the financial market and was common knowledge to many investment advisors. Does Sue have any legal remedy against Sam?

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18. In 2003, the House of Lords decided in Jill v Jack Distributors Ltd that the importer of a

slimming drug owed a duty of care to ensure that it is safe for consumption, failing which, such person would be liable for all legal consequences arising as a result. Jill, an actress, who had consumed Triple-Slim which was imported from Utopia by Jack Distributors Ltd suffered kidney failure due to certain toxins later discovered in the slimming drug. Jill, who was ultra fit before then was awarded £500,0000 in damages. In 2007, Tom, an actor, who was keen to lose weight consumed Wonder-Slim100, a new slimming drug which he bought at the county pharmacy. He suffered a stroke and sued the importer, Dumbo Distributors Ltd in the High Court. Evidence was given by the pharmacist who attended to Tom that she warned him of the contraindications of the slimming drug, in particular, for those suffering from hypertension, but Tom insisted on trying out the drug despite being on medication for hypertension. Tom now seeks to rely on the decision in Jill v Jack Distributors Ltd (2003) and argues that it is binding on the High Court. Do you agree? Give reasons.

19. What is restraint of trade? When is a contract in restraint of trade enforceable?

END OF DOCUMENT

1

SINGAPORE INSTITUTE OF MANAGEMENT

LAW OF BUSINESS ORGANISATIONS (FT)

TUTORIAL (LECTURES 5-8) Question 1 Explain generally the distinctions between the following: a) Registered and unregistered organisations; b) Incorporated and unincorporated organisations; c) Private limited and public limited companies; d) Companies limited by shares and companies limited by guarantee. Question 2 Read the case of Saloman v Saloman Co Ltd (1897) AC 22 and answer the following questions: a) What were the material facts of the case? b) Who was Broderip? Whose interest was the liquidator representing? c) What was the ruling and ratio of the court of first instance and Court of Appeal? d) What was the ruling and ratio of the House of Lords? Do you agree with Lord

Macnaghten when he says that the unsecured creditors had only themselves to blame when they dealt with the company?

e) Who made the following statement and do you agree with it?

"Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not."

Question 3 During a train ride between London and King’s Cross, you overhear a discussion involving Porter, Frodo and Babe, who have just graduated with a degree in IT from the University of Hogwarts in England. The text of discussion is produced below. Your task is to comment on the accuracy of statements as made by them. Porter: My view is that a business must start small; that’s the law. So, a sole trader or

partnership is ideal. I will be happy to include you both if you provide finance and expertise. But only financiers will have a say in management, ok?

Frodo: A small business can only start as a private company. I am not interested in

partnerships as they are for life, just like marriages.

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Babe: I agree. Besides, as there are three of us, we have no option but to form a private company. PFB plc sounds like a great name!

Porter: Good thinking Babe! I heard that if you form a company, your creditors can’t

touch you if anything goes wrong – I mean our liability is always limited. The company is also not liable if it can’t pay its debts. I hate your proposed name though.

Frodo: I too heard that you can always issue shares to the public, and so this takes care of

our financing. Additionally, a company has perpetual life unlike partnerships. Porter: I am not so sure about that. Suppose all of us are killed in an accident, how can

the company be perpetual? I think a partnership has fewer formalities than a company, and is a better option since there are lesser formalities.

Babe: But if one of us stupidly enters into contract, then all of us will be bound in a

partnership. There will be no escape from liability. I even heard that if one of the partners commits a tort (you know – a civil wrong) during his work, the others partners will be liable too.

Porter: But we can have a limited liability partnership. This will be perpetual, and all our

liabilities will be limited. Babe: That’s nonsense. There is no such thing! There is however a limited partnership

in which one of us can be a sleeping partner with limited liability and yet be involved in management.

Frodo: There’s just one more thing. Cruella and Bean want to join us. I know you guys

hate them, but they really want to help. They have even offered some money. Babe: No way! A person who gives a loan is a partner, and I don’t want them in. They finally agree that a private company is the better choice. Porter: Just setting up one company is not enough. We must have a vision for the future. Frodo: We can always go public. All we need is two subscribers and 100,000 as

nominal capital and paid-up capital. Babe: Frodo you are confused. We need two directors and a company secretary, and not

two subscribers you silly! Porter: We must choose some good established name/s for our company and reserve

them. Perhaps, something that sounds of royalty. And once we incorporate the company, the company’s name will become our trademark.

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Babe: How many shareholders do you think we should have? Frodo: The more the merrier. After all, there is no limit on numbers in a private

company. The company is ours, and it’s up to us to decide. Porter: But there is something about companies being limited by guarantee and shares.

Which do we choose? Babe: We must seek legal help. I will ask my neighbour, Mrs Dolittle; she is a solicitor. Question 4 Using a table, compare the general partnership, limited liability partnership and registered company on the following bases:

a) Who are owner/s of the business? b) Does the business have a separate legal personality? c) Who is liable for business debts? d) Who is responsible for management of the business? e) Degree of regulatory compliance – high or low? f) Organisation’s access to finance? g) How do investors get a return on their investments? h) How are the parties’ taxed? Question 5 Explain the steps that must be taken for incorporating a registered company. You must in your answer set down the relevant sections of the Companies Act, 2006. Question 6 Humpty, Dumpty and King are shareholders in Cyclobs Ltd. They each own 40%, 35% and 25% of the company’s issued shares. The company is now insolvent. All the shareholders have only paid £0.50 per share. The company has debts totaling £1 million and the liquidator seeks contribution from the shareholders in the proportion of their shareholdings. Explain the liability of the shareholders. Give reasons for your answer. Question 7 Tony, Hilary and Bill are partners in THB Enterprise which is engaged in providing consultancy services. Without the knowledge of his partners, Bill entered into a contract with Monica for the supply of certain office equipment (valued at £10,000) with a view to upgrading. Tony and Hilary were totally against the idea of an upgrade when business is bad. Monica knew of their reservations but still went ahead and signed the contract with Bill. The firm has now failed to pay the amounts due under the contract. Advise Monica. Would your answer be different if the partnership was formed under the Limited Partnership Act, 1907, with Bill as limited partner, and Tony and Hilary as general partners? Why?

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Question 8 Funky gave a loan of £250,000 to SayBye Enterprise, a firm in which Michael and Jackson were partners. As a condition of the loan, Funky demanded not only timely repayment of the loan with interest pegged at 1% p.a. over 5 years, but also that he should receive a share of the profits amounting to 10% p.a. Chunky, Funky’s wife, was also given a job as salaried partner at a salary of £1000 per week. She consistently provided feedback to her husband about the business, but played no part in its management. Funky gave advise to the partners on a regular basis, but very often the partners turned down his advice because they felt it was impractical or plain silly. Of late, business has been bad, and the firm is facing financial difficulties. Some of its other creditors are considering legal action not just against Michael and Jackson but also against Funky and Chunky as potential defendants whom they consider to be “involved” in the firm (and also very rich). Advise the parties of their potential liability.

END OF DOCUMENT

©ram2009 1 | P a g e

Singapore Institute of Management

The Law of Business Organisations (FT) (Tutorial – Lectures 5 & 6)

Complete the following comparison which relates to the general partnership under the PA, 1890, LLP (LLP Act 2000) and the registered

company (CA, 2006):

S/No Comparison Partnership LLP Company1. Is it a separate

legal entity?

2. Formalities – which has more?

3. Costs of formation/ maintenance – which cost more?

4. Limited liability - who is liable for business debts?

5. Ownership & Management – who owns and manages the organization?

6. Who are the agents of the organization?

©ram2009 2 | P a g e

7. Secrecy – which enjoys privacy of its financial affairs etc.

8. Perpetual succession – does the organization enjoy this?

9. Tax – who pays this?

10. ROI – in what form is this received?

11. Financing – how is the organization financed?

12. Dissolution – how is the organization dissolved?

(Note: You must cite all relevant statutory provisions).

©ram2007

1

LAW OF BUSINESS ORGANISATIONS

A GUIDE TO ANSWERING PROBLEM BASED QUESTIONS The following is a guide only. It is a structured approach to answering problem based questions and is not meant to be an exhaustive (or model) answer nor the only approach for answering such questions. A sample question and suggested approach is provided below for students’ reference:

HYPOTHETICAL Tom, Dan and Harry are the directors and shareholders of YY Limited (YY), a company engaged in manufacturing. YY has adopted the Model Articles for Private Companies Limited in the Companies Act, 2006 (Model Articles). During a meeting with AA Limited (AA), a supplier, Tom and Dan said that Harry was the managing director of YY. The articles of YY provided for the appointment of an MD but none had been validly appointed. Harry entered into contract (purportedly on YY’s behalf) with AA for the supply of certain goods valued at $120,000 (the contract). YY’s new management now refuses to pay for the goods supplied on the ground that Harry is not its MD and hence he had no authority to enter into the contract with AA. Advise AA. Would your answer be different: i) if Harry was formally appointed as director and MD but his appointment was irregular because proper procedure prescribed by the company’s articles was not followed? ii) if there was a provision in the articles that required all contracts above $100,000 to be approved by a general meeting of shareholders of YY? The issue is whether AA can enforce the contract against the YY since it claims that it is not bound on the ground that Harry was not appointed as its MD and thus had no authority to enter into contract with AA on YY’behalf. In law, an agent is a person who acts on behalf of another person known as the principal. He is empowered by the principal to make binding contracts between the principal and third parties. An agent's power to bind the principal to a contract is derived from the principal's instructions. The power is referred to as the agent's authority. Such authority can either be actual, implied or apparent. In the case of a private company such as YY, Article 3 of the Model Articles provides that directors are responsible for the management of the company’s business and may exercise all powers for such purpose. Hence, the board of directors can collectively be considered as agents of the company (the principal). However, can one single director, who is not formally appointed as MD but acting as one, be considered to be the authorized agent of the company? Can such a person (who has no actual authority) effectively bind the company to a contract which he purportedly entered into on its behalf? The answer is yes, if he has implied or apparent authority.

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In Freeman & Lockyer v. Buckhurst Park Properties Ltd 1964 the defendant company allowed one Mr Kapoor (K) to act as the managing director when in fact he was never appointed to such a post in the first place. The other directors knew of K's actions but did nothing to stop him. K contracted with a firm of architects (T) on behalf of the company. The company later refused to pay T's professional fees. T thus sued the company. The company argued that K had no authority to contract on its behalf. It was held that the company knew of K's conduct and by agreeing to it, the company had represented that K was authorized to act as its managing director; T had relied on the representation and the company was prevented from denying (estopped) that K had the authority to act on its behalf. Thus, the company was liable to T for the unpaid professional fees. In order to give rise to apparent authority and estoppel all the following three (3) requirements must be satisfied: a] a representation (by word or conduct) by the principal that the agent has authority to act on the principal's behalf. In this case, two directors of YY represented that Harry was MD of YY, and this led AA to believe that Harry had the authority to contract on YY’s behalf. The representation was made by persons in authority and not by Harry himself – Armagas Ltd v Mundogas Ltd, 1986. b] a reliance on the principal's representation by the third party. AA had contracted with Harry and thus it must have relied on YY's representation that Harry had the authority to contract on its behalf. c] the third party must have suffered loss (detriment) as a result of relying on the representation. AA would have suffered a loss if it is not allowed to claim against YY for the supply of goods valued at $120,000. In view of the foregoing, it is clear that Harry had apparent authority to contract on YY’s behalf. AA relied on the representation and thus YY would be prevented from denying that Harry had the authority to contract on its behalf. My conclusion therefore is that YY is bound by the contract entered into on its behalf and must pay for the good ordered on its behalf. Would your answer be different if: i) Harry was formally appointed as director and MD but his appointment was irregular because proper procedure prescribed by the company’s articles was not followed? Under the rule in Royal British Bank v Turquand, 1856, an outsider dealing with the agents of the company (e.g. directors) in good faith is entitled to assume that the company's articles have been complied with by the company. The effect of the rule therefore is that it offers

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protection to an outsider dealing in good faith with the company where there is some irregularity in its internal management. In the instance, it may be argued that Harry as MD had implied authority to enter into the contract – Hely-Hutchinson v Brayhead Ltd, 1968. AA, an outsider, is entitled to assume that the company's articles in connection with Harry’s appointment as director were properly complied with. They had no way of knowing whether such procedure had been complied with and are entitled to assume compliance. AA is also entitled to assume that the requisite resolution for approving the contract had been properly passed by the company; besides, they had no knowledge of any procedural irregularity and should not be prejudiced by the company's act or omission. In addition, S161 of the Companies Act, 2006, regularizes all acts of a director despite any defect later discovered in his appointment. As such, AA should be able to enforce the contract against YY. ii) There was a provision in the articles that required all contracts above $100,000 to be approved by a general meeting of YY? If there is a specific provision in the YY's articles that limits the authority of the directors to approve loans only up to $100,000, can AA then plead ignorance of this fact? Is AA deemed to have constructive notice of the company's articles, a copy of which may be obtained at the Registry of Companies upon payment of the prescribed fee? This is an exception to the Turquand's Rule – Howard v Patent Ivory Manufacturing Co, 1888, and under this exception, AA would have not be able to enforce the contract against YY as it is not binding on the company. However, constructive notice has been abolished by virtue of S40(2) of the Companies Act, 2006, which provides that a person is not affected by or deemed to have notice of the contents of a company’s constitution (merely because it is available for inspection at the registered office of the company or the Registry of Companies). Thus, unless it can be proven that AA had actual knowledge (as opposed to constructive knowledge) of the lack of authority of the directors and had acted in bad faith, AA will be able to enforce the contract against YY.

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SINGAPORE INSTITUTE OF MANAGEMENT

THE LAW OF BUSINESS ORGANISATIONS (FT)

ASSIGNMENT (FT Programme: Sep 12 to Feb 13) Instructions: 1) Each student is required to complete and hand in this assignment by the stipulated

date which will be announced during class. 2) Answer ALL Questions: (Total: 50 marks) 3) Please write legibly. Question 1 (25 marks) Jack and Jill wish to carry on business as stationery suppliers. The business is to be jointly owned, and both of them intend to actively participate in the management of the business. However, they wish to avoid personal liability for debts incurred by the business. Additionally, they are anxious that the affairs of the business should be kept secret as far as possible and would like to be able to transfer their respective interests in the business without difficulty. Required:

i) Explain the process of setting up a company (including selection of a name), and the relevant documents to be filed; and

ii) Advise Jack and Jill on the advantages and disadvantages of forming a company limited by shares as opposed to a general partnership or limited liability partnership.

Question 2 (25 marks) Discuss, with reference to decided case law, whether the courts and legislature have adopted the appropriate approach to the question of when the “veil of incorporation” will be lifted.

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LAW OF BUSINESS ORGANISATIONS/

ELEMENTS OF THE LAW OF CONTRACT

SOME Do’s and Don’t’s in tests and examinations

DO

1. Answer each part of the Question separately if the question is divided into parts

2. Start with definitions, and then if applicable, the elements/conditions etc

3. Cite cases (You need not cite the year) 4. Cite relevant statutory provisions 5. Use the 4 step approach for problem based

questions a. Specify the issues b. Explain the law – legal principles – focus on

ratio/reasoning and not facts of the case c. Apply the law clearly – address alternative

arguments, if any d. Provide a conclusion

6. Make sure you ANSWER the question 7. Advise the parties, if required – your advice need

not necessarily be favourable 8. State remedies or reliefs

2

DON’T

1. Summarize the facts of the question or simply repeat the facts of the question

2. When citing case do not write out all the facts of the case (EXCEPT FOR A CASE SPECIFIC QUESTION) – focus on legal principles and the findings of the court; if you have forgotten the name of the case, don’t fret – use: “In a decided case, it was held by the *House of Lords/Court of Appeal that ______________”

3. Lump your answer into a single paragraph all the way; have appropriate paragraphing.

4. Write long and meaningless sentences; write short clear sentences as these are preferred

5. Pad answer with irrelevant material 6. Use table/diagrams for comparison – explain in

essay form with the aid of appropriate headings 7. Write out entire section of a cited statute –

paraphrase instead its meaning and effect

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