CHAPTER 1: THE NATURE OF LAW
CHAPTER 2: THE LAW MAKING
CHAPTER 3: RESOLVING DISPUTES
CHAPTER 4: AN INTRODUCTION TO TYPES OF BUSINESS ORGANIZATIONS
CHAPTER 5: NON CORPORATE ORGANISATIONS: SOLE TRADERS AND
PARTNERSHIPS
CHAPTER 6: COMPANIES
CHAPTER 7: FORMING BUSINESS CONTRACTS
CHAPTER 8: THE TERMS OF BUSINESS CONTRACTS
CHAPTER 9: ENDING BUSINESS CONTRACTS
CHAPTER 10: LAW OF AGENCY
CHAPTER 11: CONTRACTS FOR THE SUPPLY OF GOODS AND SERVICES
CHAPTER 12: BUSINESS AND THE LAW OF TORT
CHAPTER 13: CREDIT
CHAPTER 14: CONSUMER PROTECTION
CHAPTER 15: BUSINESS PROPERTY
CHAPTER 16: EMPLOYING LABOUR
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FOREWORD
I wrote this summary but I have to say that I know very little about business law, in fact, I
am an Argentinean physician who decided to help his wife while she was preparing an
exam as part of her Human Resources studies.
When I was a student I always needed to study with a notebook and a pen; It was the only
way to remember the main ideas and definitions from the book.
Together with my wife we began reading the book and underlying the important ideas or
concepts, afterwards we put it on writing and then as a way to remember what we had
studied we decided to do the typing in a Word document. We got very excited when we
realized that the job we were doing was a great help when she wanted to do a review of
the chapter, and it came to our minds that if we put the summary available on the web
many students could find a material that could make their studies easier, hence the
decision to make this summary. Our only purpose is to create a tool for a better
understanding of the wonderful Keenan & Riche´s Business Law book. We have no
commercial interests (at all).
A summary does not replace a book, therefore we recommend you to read it together with
the book; first of all because this summary does not include the cases for discussion that
you can find in the book, secondly because the summary could have spelling mistakes,
since my mother tongue is Spanish and my wife´s first language is Siswati from Swaziland
in Southern Africa, and thirdly and mainly because we are not expert in the area of
business law; since I am a physician and my wife is a Human Resources student. However
we believe that this paper will help you a lot in your studies.
Dr Francisco Moròn Maldonado
If you want to contact us for suggestions or comments you can write to
khumalobaylor@yahoo.com.ar
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CHAPTER 1
THE NATURE OF LAW
The law is a set of rules enforceable by the courts which regulate the government of the state and govern
the relationship between the state and its citizens and between one citizen and another.
A”rule” is merely a reflection of what a community regards to be appropriate behaviour; for example, the
rules of a club, the rules in a meeting, sport rules, etc.
We don’t expect that a rule to have force of a law and to be enforced by the courts.
The Business world has many rules that a person must consider and observe before to start a business
venture: The rights and duties which arise from business transactions and the consequences of business
failure.
CLASSIFICATION OF LAW
There are many ways to classify law. The most important are as follows:
1. Public and Private law
2. Criminal and Civil law
3. Common law and Equity
I. Public and Private law
LAW
PUBLIC
LAW
Constitutional
Administrative
PRIVATE
or
CIVIL LAW
Criminal
Contract
Tort
Property
Trust
Family
Public Law
It is concerned with the relationship between the state and its citizens. This includes several specialist
areas such as:
a) Constitutional law: Concerned with the workings of the British Constitution. It covers such matters
as the position of the Crown, the composition and procedures of Parliament, the functioning of
central and local government, citizenship and the civil liberties and individual citizens.
b) Administrative law: Government agencies are involved, for example, in the provision of a state
retirement pension, income support and child benefit. A large number of disputes arise from the
administration of these schemes and a body of law, (the administrative law) has developed to deal
with the complaints of individual against the decisions of the administering government agency.
c) Criminal law: The Criminal law makes certain antisocial behaviour, which can threat the good
order of society. An offence against the state and the offenders are liable of punishment. The
states accept responsibility for the detection, prosecution and punishment of the offenders.
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Private Law
It is primarily concerned with the rights and duties of individuals towards each other. The states will
provide a civilized method of resolving the dispute.
Private Law is also called Civil Law.
II. Criminal and Civil Law
Criminal Law
It is concerned with forbidding certain forms of wrongful conduct and punishes those involved.
Criminal proceedings are normally brought in the name of the Crown and are called Prosecutions.
In criminal cases there is a Prosecutor who prosecutes a Defendant in the Criminal Courts
The allegations of criminal conduct are so serious that they must be proved beyond a reasonable doubt. If
the prosecution is successful the defendant is found guilty (convicted) and may be punished by the courts.
Punishment includes: Imprisonment, fines or community orders such as unpaid work requirement.
If the prosecution is unsuccessful, the defendant is found not guilty (acquitted).
The difference between criminal and civil law
Criminal law
Offences against the state
To preserve order in the community by punishing
offenders
The parties
A prosecutor prosecutes a defendant
Prosecutions are brought in the name of the
Crown, signified by R for Rex (king) or Regina
(Queen)
Where the action is The criminal court, i.e. magistrate’s court or Crown
heard
Court
Standard and burden The prosecutor must prove his case beyond a
of proof
reasonable doubt
Decision
A defendant may be convicted if he is guilty and
acquitted if he is innocent
Sanctions
Imprisonment, fine, community order
Concerns
Purpose of the action
Examples
Civil law
Disputes between private individuals
To remedy the wrong which has
been suffered
A claimant sues a defendant
The civil courts, i.e. county court or
High Court
The claimant must establish his case
on the balance of probabilities
A defendant may be found liable or
not liable
Damages,
injunction,
specific
performance, rescission
Murder, theft, driving with excess alcohol, Contract, tort, trust, property law
engaging in an unfair commercial practice
The distinction between the criminal and civil law does not depend on the nature of the wrongful act;
because the same action may be give both: Civil and Criminal proceedings.
For instance; if a person who is driving under the effects of alcohol has an accident which produced
injuries to another person; he or she may be liable by the Civil court because of the drink and driving, and
also by the Criminal court, due to the severe injuries given to he other person.
III. Common Law and Equity
To understand the distinction between these two systems we need to examine the origins of English law
in history.
In 1606 William of Normandy gained the Crown of England by defeating King Harold
Before the Normans arrived in power, there was no such thing of English law. the legal system was based
on the local community which each had its own local rules.
The Normans were great administrators and they soon started the creation of a uniform system of law for
the whole country.
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The common Law
The Norman kings ruled with the help of the Curia Regis (King’s Council). The Curia Regis had meetings of
two types:
- Occasional assemblies
- Meetings of royal officials
Later they started the development of courts to hear different kind of cases
The first court to appear was the Court of Exchequers, this court dealt with taxation disputes.
The second court was the Court of Common Pleas, which heard civil disputes between one citizen and
another.
The court of King’s Bench had jurisdiction over civil and criminal cases and also supervision to the inferior
courts.
The King use to send representatives to supervise and control the rest of the county. These royal
commissioners performed different types of tasks, like make records of lands, collect taxes, resolve
disputes, etc.
Their judicial powers become more important and a body of rules started to be implemented to the whole
country.
The representatives returned to discuss the cases and customs that they had encountered and then a
uniform pattern of law was created throughout England. This was the beginning of the Common Law.
They used a writ or a court order, which is an official document that orders someone to do something.
Equity
Over a period of time the common law become a very rigid and strict system of law.
Some of the mains defects or flaws of the common law were as follows:
o The system was too slow
o The wrist system was very complicated
o The only remedy available was an award of damages. This was not always a suitable or adequate
remedy
o Men of wealth and power could bribe and intimidate jurors
Many citizens felt aggrieved or angry and seek for king assistance. The number of petitions increased and
the king passed them to the Curia Regis; then the Chancellor started to hear petitions on his own and the
Court of Chancery was established.
The body of rules applied by the Court was called Equity.
Equity is not a complete system of law. Equitable principles were formulated to correct the defects in the
Common law.
They were designed to complement the Common law rules but not to replace them.
Equity has made an important contribution to the development of English law, particularly in the
following areas:
- Recognition of new rights
- Introduction of new remedies or solutions
Recognition of new rights: The Common law didn’t recognize the concept of the trust. A trust is an
arrangement in which a person or an organization manages someone else’s money or property. The
trustee is someone who is responsible for looking after money or property that belongs to another
person.
Introduction of new remedies: The new equitable rights were enforced by means of new equitable
remedies.
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Differences between Common law and Equity
COMMON LAW
EQUITY
Developed by circuit judges from English Developed by Chancellors in dealing with petitions
customary law
addressed to the king from citizens complaining about the
rigidity of the Common law
Is a complete system of law
Complements the Common law but could not replace it
Does not recognize the existence of Acknowledges the Common law and tries to provide
equity
alternative solutions
Upholds rights irrespective of the Originally a court of conscience which ordered the parties to
motives or intentions or the parties
do what was just and fair. These principles are contained in
equitable maxims, e.g. “He who seeks equity must do
equity” and “Delays defeat equity”
Remedies available as of right
Discretionary remedies (based on someone’s personal
judgment)
SOME BASIC PRINCIPLES OF LEGAL LIABILITY
Legal liability describes a situation where a person is legally responsible for breaking a law or a rule
(breaching an obligation imposed by the law).
Such obligations may arise from the Civil or Criminal law
Civil Liability
- Contractual liability
- Tortious liability
Criminal Liability
Civil liability
The civil law is concerned with the rights and duties which arise between private individuals. The aim of
taking legal action is to put right or wrong which has occurred, often by means of an award of
compensation.
o Contractual liability
It arises when two or more persons enter into a legally enforceable agreement with each other. The law
of contract is concerned with determining which agreements are binding, the nature and extent of the
obligations taken by the parties and the legal consequences of breaking the contractual promises.
Every type of business transactions, from buying and selling goods and services to employing staff, is
governed by the law of contract.
o Tortious liability
A tort consists of the breach of a duty imposed by the law. The law of tort seeks to compensate the
victims of certain forms of harmful conduct by an award of damages or to prevent harm occurring by
granting an injunction.
Examples of torts include:
- Negligence
- Nuisance
- Trespass
- Defamation (libel and slander)
- Conversion
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Criminal liability
A crime is an offence against the state. The sanctions are so severe that the criminal law normally requires
an element of moral fault on the part of the offender. Thus the prosecution must establish two essential
requirements:
- Actus Reus (prohibited act)
- Mens rea (guilty mind)
For most criminal offences, both elements must be present to create criminal liability. If you pick
someone’s umbrella up thinking that it is your won, you cannot be guilty of theft, because of the absence
of a guilty mind.
LAW OF PROPERTY
The law of property is concerned with the rights which may arise in relation to anything that can be
owned. Thus, property covers land, goods and intangible rights such as debts, patents or the goodwill of a
business.
Rights of ownership and possession
Ownership: Ownership describes the greatest rights that a person can have in relation to property. An
owner enjoys the fullest powers of use and disposal over the property allowed by law. However, an owner
does not enjoy absolute rights; restrictions may be imposed to protect the right of other members of the
community.
Possession: The ownership, control, or occupancy of a thing, most frequently land or Personal Property,
by a person.
Possession consists of two elements: Physical control and the intention to exclude others.
Although the two terms are often confused, possession is not the same as ownership. No legal rule states
that "possession is nine-tenths of the law," but this phrase is often used to suggest that someone who
possesses an object is most likely its owner. Likewise, people often speak of the things they own, such as
clothes and dishes, as their possessions. However, the owner of an object may not always possess the
object. For example, an owner of a car could lend it to someone else to drive. That driver would then
possess the car. However, the owner does not give up ownership simply by lending the car to someone
else.
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CHAPTER 2
THE LAW MAKING
The law is a living creation that reflects the need of the society it serves, each generation leaving its mark
on the law.
Ideally business requires a stable environment within which to operate.
The business person will need to keep himself informed of general legal changes which will affect his dayto-day running of the business. Almost every aspect of his business will be subject to legal regulation and
the law could always change.
In this chapter we will explore why the law changes and the mechanism by which takes place.
CAUSES OF LEGAL CHANGE
Legal changes can be divided into two categories according to their causes:
- In response to the changes taking place in society: Political, social and economic changes,
technological advancements and changing moral beliefs.
- In response to the need to keep the law in good working order
Legal change and the changing world
The scientific and technological achievements of the past century –motor vehicles, aircraft, the telephone,
radio and TV, computers and genetic engineering. Each new development creates its own demand for
legal change.
The role and functions or the elected government, the changes in the law relating to trade union rights,
the creation of the European Community (EC) in 1973, the changes in moral beliefs and social attitudes
are potent causes of legal changes.
THE SOURCE OF LEGAL CHANGE
Ideas for changing the law can come from many sources:
- Official law reform agencies
- Government departments
- Political parties and pressure groups
Official law reform agencies
The main agent of law reform in England and Wales is the Law Commission, which was established to
keep the law as a whole under review, with a view to its systematic development and reform. Its statutory
duties include;
- codification of the law
- elimination of anomalies
- repeal of obsolete and unnecessary enactments
- securing a reduction in the number of separate enactments
- simplification and modernization of the law
Another law reform agency is the Civil Justice Council. The council has a duty to keep the civil system
under review; to consider how to make the civil justice system more accessible, fair and efficient.
Government departments
Each government department is responsible for keeping the law in its own field of interest under constant
review. Where issues involving policy consideration rather than technical law reform arise, ministers may
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prefer to set up a departmental committee to investigate the subject, rather than leave it to the Law
Commission. Particularly important or controversial matters may lead to the setting up of a Royal
Commission by the Crown on the advice of a minister.
Political parties and pressure groups
At election time, the political parties compete for our votes on the basis of package of social and
economic reforms which they promise to carry out if elected.
One of the most significant extra-parliamentary policies is pressure-group activity. Pressures groups are
organized groups of people seeking to influence or change government policy without wishing to form a
government. Pressure groups use a variety of techniques to promote their causes, from holding public
demonstrations to more direct attempts to gain the support of MPs (known as “lobbying”).
LAW-MAKING PROCESS
The main sources of law today are:
1. Legislation
2. Case Law (Judicial precedent)
3. European Union Law
LEGISLATION
Legislation is law enacted by the Queen in Parliament in the form of Acts of Parliament of statutes.
Parliament is made up of two chambers:
- House of Commons (elected by people)
- House of Lords (It’s not an elected body – Subject to reform)
Parliament sovereignty
The supremacy of Parliament in the legislative sphere is known as the doctrine of parliamentary
sovereignty. Parliament can make any type of law but this law should not be in conflict with the European
Commission law.
o The making of an Act of Parliament
The procedure for making a law is long and complicated.
The first stage in the process is called a BILL
Types of Bills
1. Public Bills: The law affect the whole country
2. Private Bills: Affecting only communities (local)
3. Government Bills: To implement government policies fast
4. Private member’s Bill: Through Parliament (long process)
A bill must pass through several stages receiving the consent of the Commons and Lords before it is
presented for the Royal Assent.
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Procedure
House of Commons
Comment
First Reading
The title of the Bill is formally read out. It is then printed and published.
Second Reading
The minister (or MP) in charge explains the purpose of the Bill and debate on its general principles
follows.
Provided the Bill survives any vote, it passes to the Committee stage
Committee stage
The bill is discussed in detail by a Standing Committee or the whole House sitting as a Committee.
The bill is examined clause by clause and any amendments are voted on.
Report stage
The Bill is formally reported to the House and amendments made in Committee are considered
Third Reading
The Bill is debated again in general terms. Only minor verbal amendments can be made.
If there is a majority in favour, the Bill proceeds to the other House
House of Lords
The Bill passes through a similar procedure in the Lords. As a non-elected body, it does not have an
absolute right to veto buy it may delay the progress of a Bill.
This is something of a formality as the Queen’s approval es never refused these days. The bill is now an
Act of Parliament
Royal Assent
o Delegated Legislation
The parliament gives a basic structure to other bodies or people to draw up the detailed rules necessary.
The main forms of delegated legislation are as follows:
1. Orders in council: these are rules made under the authority of an Act by the Queen.
2. Rules and regulations: These are made by a minister in respect of the area of government for
which he is responsible.
3. Byelaws: These are made by local authorities and certain other public and nationalized bodies to
regulate their area of activity.
Legislation and the judiciary
The court will interpret how the law is applied into practical problems.
Every Act of Parliament will be analyzed by the judges in the course of cases which appear before them.
The judges will interpret the meaning of the words used by parliament in the law.
The judges will follow rules of interpretation which are classified according to their origin in:
- Statutory rules
- Common law rules
o Statutory rules – Interpretation section contained in the Modern Acts
1. Interpretation Act 1978
2. Internal or Intrinsic aids
3.
o Common law rules (are tools for the judges on how to interpret legislation)
1. Literal rule: The court gives to the words the plain meaning regardless of the result
2. Golden rule: If the words of law are capable of two meaning, the judges must use the meaning
with the more common sense
3. Mischief rule: If the law has a defect or “mischief”, the judge must interpret the in the light of his
knowledge
4. Ejusdem generic rule: The words must be interpreted as person or thing of the same class or genus
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5. Expressio unius est exclusion alterius rule: When the rule mentions particularly one or more things,
the other are excluded
6. Oscitus a soccis rule: a word should take its meaning from the context which it is found
7. The presumptions: Unless there are clear words to the contrary, the court will make a number of
assumptions. They include:
- The Act is not retrospective
- The Act does not:
1. bind the Crown
2. alter the Common law
3. restrict personal liberty
4. create criminal liability
8. Use of extrinsic material: They are sources of information about a piece of legislation apart from
the Act itself.
a) International Conventions and treaties
b) Reports of the law Commission
c) The previously strict rule that Hansard must not be consulted as an aid to statutory
interpretation has now been relaxed.
CASE LAW (Judicial Precedent)
In common law legal systems, a precedent or authority is a principle or rule established in a previous legal
case that is either binding on or persuasive for a court or other tribunal when deciding subsequent cases
with similar issues or facts. The general principle in common law legal systems is that similar cases should
be decided so as to give similar and predictable outcomes, and the principle of precedent is the
mechanism by which that goal is attained.
The principal underlying of this doctrine is that a decision made by a court in a case involving a particular
set of circumstances is binding on other courts in later cases, where the relevant facts are the same or
similar.
o Precedent in action
Based on the speech of the judge in his or her judgment
o European Court of Justice
Since 1973, all English courts are bound by the European Court of Justice in matters of European law.
Definitions: BIND. To limit what someone is allowed to do by making obey the rule or agreement.
o The Supreme Court (Formerly the House of Lords)
The judicial authority previously exercised by the House of Lords, acting as the highest domestic court
of appeal, has been now transferred to the Supreme Court.
o Court of Appeal
Their decisions is bound by the decision to the Supreme Court
The court of Appeal decisions are binding on High Court
Decisions of the Criminal Division of the Court of Appeal are binding on lower criminal courts. E.g. The
Crown court or to the Magistrate court
o Divisional Courts
It is bound by the decisions of the Supreme Court and Court of Appeal
o High Court
A High Court judge is bound by the decision of the Supreme Court, the court of Appeal and Divisional
court, but it is not bound by another High Court judge.
EUROPEAN COMMUNITY LAW
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Historical background
The first step towards the creation of the EU (European Community) started in 1951 Treaty of Paris.
Then the Treaty of Rome in 1957 created the European Economic Community and the European
Atomic Energy Community.
Many treaties and agreements were signed between European countries in order to unify Europe in
many matters like, economic, health policy, unemployment, external policy, etc.
The treaty of Amsterdam (1997) covers the following areas:
- Freedom, Security and Justice
- Union Policies to benefit citizens
- External Policy
- Union’s institution and legislation procedures
1- Freedom, Security and Justice: It states agreement on visas, asylum and immigration policies.
Cooperation between polices forces and security agencies.
2- Union Policies to benefit citizens: Developing a coordinated strategy for employment.
- Achievement of sustainable development in relation with environmental matters
- Achievement of high level of human health protection
- Protection of consumers
- Principles of Subsidiarity and Proportionality
a) Subsidiarity: Principle or allowing the individual members of a large organization to
make decisions on issues that affect them, rather than leaving those decisions to be
made by the whole group.
b) Proportionality: An action should not be more severe than necessary
3- External Policy: Measures to improve the coherence and effectiveness of the Common Foreign and
security policy
4- Union’s institutions and legislative procedures
COMMUNITY INSTITUTIONS OF EUROPEAN UNION
1) The Council of the European Union
2) The Commission
3) The European Parliament
4) The European Court of Justice
1) The Council of the European Commission
A council is a group of people elected to govern a local area.
The EU council is made up by the head of state of each member state, sitting together with the ministers
of the areas involved in the discussion; for instance, the minister of transport if a common transport
policy is under discussion.
The Council is the Supreme law maker for the European Community but the approval of the law must
come from a proposal put forward by the Commission..
Although the decision can be taken by the vote of the majority, the tendency is to adopt unanimity for
decisions of vital interest.
2) The Commission
It is formed by 27 commissioners, one from each country member of the EU. Each commissioner is
assisted or advised by a Cabinet (6 or more people advising the Commissioner).
The Cabinet members make proposals to be approved by the commission.
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The Commission is divided by departments known as Directorates – General.
Roles of the Commission:
- Formulate Community policy
- To propose drafts of the legislation to be approved by Council\
- Implement Community legislation
- Ensure that treaty obligations are respected by the countries members of the EU
3) The Parliament (EP)
Since 1979, members of European Parliament have been directly elected by citizens of the countries.
There are currently 736 members of the EP
Despite its name, the European Parliament is an advisory or consultative body rather than a legislative
one.
The Parliament has important powers for supervision of the activities of the Council and the Commission.
The EP can dismiss the full Commission, they can also reject budgets, and also they have the power of
Veto to some proposals from the Commissions.
4) The European Court of Justice (ECJ)
Composed by 27 judges (one from each country member)
The judges are assisted by several Advocates – General.
Its right or power to make legal decisions covers the following areas.
- Preliminary rulings
- Actions against member states
- Actions against community institutions
- Community employment cases
a) Preliminary rulings: A ruling is an official decision. Any tribunal in a member state may ask the
court to give a preliminary ruling concerning the interpretation of the treaties or community
legislation ratified or enacted under the treaties.
b) Action against member states: In the case that a member state makes a violation of a treaty of to
the European community legislation, the European Commission or another country can take the
case to the European Court of Justice which will decide the necessary measures including financial
sanctions.
c) Actions against community institutions: The ECJ can also consider that an Act approved by the
Council or Commission are against European treaties and also can proceed defining the
compensation that a country or individuals will obtain because of that unlawful Act.
Court of First Instance (CFI)
Court of First Instance was established in 1989 to help and to relieve the ECJ of some of its workload.
Other Institutions
1) Court of Auditors: Its job is to scrutinize and report on the Community’s financial management and
oversee the implementation of the budget.
2) The Economic and Social Committee (ECS): It is an advisory body whose opinion is sought by the
Council and Commission proposed legislation and other matters.
3) The Committee of the Regions: The committee is consulted on proposed legislation in such areas
as education; culture and public health to ensure that regional interest are considered.
4) The European Investment Bank (EIB): It lends money to finance capital investment projects
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5) The EC Ombudsman: He has the task of receiving and dealing with complaints from citizens of
member states concerning maladministration by any community institution of body, except the
European Court of Justice. He or she must submit an annual report to the European Parliament.
SOURCES OF THE EUROPEAN COMMUNITY LAW
1) The Treaties
2) The Secondary law
3) Decisions of the European Court of Justice (ECJ)
1) The Treaties
The treaties are the primary source of the EC law.
Treaties are only binding on countries at government to government level and cannot normally be
enforced by individuals in national courts.
However, the European Court of Justice has developed the doctrine of “Direct Effect”, which enables an
individual citizen to use European Community rights derived from the treaties in domestic courts.
2) The Secondary Law
The treaties empower the European Council and the European Council and E. Commission to make three
types of legislation.
Regulations
Directives
Decisions
Regulations: Are designed to achieve uniformity of law among the member states
Directives: Seek to harmonize the law of member states. They are instructions to member states
to bring their laws on time; the countries are free on the methods by which the changes are
implemented.
Decisions: May be addressed to a state a company or an individual and are binding on the
addressee.
3) European Court of Justice
Judgments of the Court of Justice on matters of European are binding on Courts within the member states
The law-making process in the EC
The laws will come into effect by a number of different procedures; these changes had been changing
over time.
- Consultation procedure (It was the first procedure)
- Cooperation procedure (It was introduced by the SEA)
- Co-decision procedure (Introduced by the TEU)
- Assent procedure
1- Consultation procedure: It is the one that involves the Commission, the Parliament and the
Council.
2- Cooperation procedure: Involves the European parliament more fully in the decision making.
Parliament has more opportunity to influence, although has not the right of Veto under this
procedure.
3- Co-decision procedure: It is a complex procedure in which the Parliament can have the power of
veto; even if the Council adopts a unilateral decision for the approval.
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4- Assent procedure: The Council may only adopt a Commission proposal under this procedure by
obtaining the formal approval of Parliament.
Impact of the community membership on English law
In 1972 UK signed a treaty accepting the European Community law as part of the English law. Treaty
obligations in UK became a law after passing through the British parliament.
The European law has supremacy over the English law
The future of the European Union – the European Constitution
In December 2000 the heads of state held a meeting to create a Constitutional reform for the European
Commission.
In 2004 they agreed on the Constitutional treaty.
The Constitutional treaty aimed to create a single text for a European Constitution and replace all existing
treaties; but France and Netherlands voted “NO” for this new constitution.
This new situation led to a new treaty: The Treaty of Lisbon in December 2007; which after discussion was
finally agreed in 2009.
The main changes of the treaty of Lisbon include:
- Appointment of a permanent President of the Council, which his or her mandate will last for two
and a half years instead of 6 months.
- The creation of a new post of European Minister of Foreign Affairs
- Qualified Majority Voting (QMV) system of voting in the Council
HUMAN RIGHTS
European Convention of Human Rights and the Human Rights Act 1998
In 1950 the Council of Europe adopted a European Convention on Human Rights (ECHR) which is based on
the United Nations’ Universal Declaration on Human Rights.
Rights under the Convention are not all the same.
There are three types of convention rights:
- Absolute rights
- Limited rights
- Qualified rights
a) Absolute rights: Cannot be restricted in any circumstances including times of war
b) Limited rights: Are rights limited under certain circumstances like for instance, times of war or
other public emergency
c) Qualified rights: Which are those rights that may be limited or restricted provided the interference
with rights is prescribed by law, is done to pursue a legitimate aim set out in the relevant Article
(e.g. prevention of crime, interest of national security), the interference is necessary in democratic
society by fulfilling a pressing social need, pursuing a legitimate aim and is proportionate to the
achievement of the aim.
The European convention of human Rights (ECHR) established institutions and procedures for protecting
the rights included in the convention.
- European Court of Human Rights
- European Commission on Human Rights
The court of human Rights has no power to force states to apply their judgments.
Some countries have adopted the ECHR into their domestic legislation in issues related to Human rights;
whereas other countries for example UK put their own legislation above the ECHR
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Victims are those individuals who are affected by an unlawful act. Public authorities such as police forces,
governments, immigration and prison officer’s army cannot be considered victims.
The European Court of Human rights can define the compensation to be given to a victim. The court can
quash (to say officially that a decision taken by another court was wrong) the conviction.
European Union Charter of Fundamental Rights
It was agreed by the European Council, Commission and Parliament on behalf of their respective
institution in December 2000 in Nice.
The Charter extends beyond the scope of the Convention covering for example, economic and social
rights.
Contents of the Charter
- Dignity
- Freedoms
- Equality
- Solidarity
- Citizen’s rights
- Justice
The Lisbon treaty says that freedoms and principles officially accepted in the Charter of Fundamental
rights will have binding force in respect of the European Union law.
16
CHAPTER 3
RESOLVING DISPUTES
In all type of business there is law application.
A business person needs to understand the basics of the principles of law; but at same stage, however
they will need legal advice.
Legal services
It is important to define who is allowed to provide a particular service
The legal profession
It is divided in two branches:
- Barristers
- Solicitors
They both have different functions but sometimes there are overlaps in their activities
o Solicitors
They are general Practitioners of all legal services. They are usually the first call port for everyone with
legal problems, therefore the area of work if very varied: Claims of accidents, Legal formalities of buying /
selling a house, Matrimonial problems, Forming companies, Employees legal problems, etc.
The solicitors appeal in court on behalf of this client; this right was used to be limited to the magistrate
court or county court, but in 1996, the changes introduced in Advocacy rights allow the solicitors to
appear in a higher court in limited circumstances.
The Court and legal service Act also opened the way for solicitors to obtain higher judicial office, e.g.: To
be able to occupy a position as a high Court judge.
o Barristers
If solicitors are the GP (the General Practitioner) of the legal world; Barristers are the consultant
specialists.
The have the right to appear in any court or tribunal such as a House of Lords (now the Supreme Court).
There are two types of barristers:
- Queens’ counsel barrister (after 15 – 20 years practice)
- Junior barrister
Queen’s Counsel barrister enjoy higher status, higher fees and they don’t do the “paper work” which in
general is done by the junior barrister.
But in 2004, changes were introduced in the selection process of a QC barrister. Those changes include a
fair assessment of competences, interviews; references form other judges, etc.
The relationship between solicitors and barristers
The first person that a client with a legal problem will consult is the solicitor, who will deal with the issue
until he reaches the point where will need the assistance of a barrister.
There are agreements between solicitors and barristers for the payment (called honorarium) of these
services; However the General Council makes rules to prohibit the barristers from entering in these
contracts.
In the past the client only could go to the barrister if they were referred by the solicitors; but nowadays
the system is more flexible allowing certain organizations and individuals to contact a barrister directly
under the agreement of the Bar Council (They must send an application first in order to have this
possibility).
17
Legal Service Act 2007
- Establishment of a Legal System Board (LSB)
- Reserved Legal Activities: There are some activities that are reserved only for lawyers; if a person
carries on a reserved legal activity and he is not an advocate, the action is considered an offence.
Duties of the Legal System Board (LSB)
- Promote and protect the Public Interest
- Improve access to justice
- Protect interest of consumers
- Increase public understanding of their legal rights and duties
The LSB has a number of powers and sanctions available
The LSB is required to establish a Consumer Panel
OTHER LEGAL PERSONNEL
Public Notaries: A Notary public is an officer of the law who is authorized, among other things, to
draw up attest and certify deeds and other documents to prepare wills and probate documents, to
administer oaths and take statements of truth. Most notaries are also solicitors.
Legal Executives: Staff who are not qualified as lawyers but are employed by companies to deal
with routine work for example conveyance.
They received official recognition in 1963
Licensed Conveyancer: It is the person who prepares documents relating to the transfer of title of
property for gain. The licenced conveyancers are trained, licenced and admitted into the Council of
Licenced Conveyancers
Lawyers in Industry, commerce and public service: There are lawyers contracted by private firms
or government to perform “in house” functions. They are specialized in fulfilling specialist legal
requirements, for instance: Drawing up contracts, advice on employment matters, administration,
etc.
OTHER SOURCE OF INFORMATION AND ADVICE
Information and advice for business
Lawyers are not the only source of information and advice for a business person.
- Accountants are very well aware about tax laws
- Government department also can provide useful information
- Government sponsored organizations
- A business person can also benefit from joining a trade association which periodically can inform
their members about changes in the law
Information and advices for citizens and consumers
Many people are discouraged from seeking legal advice and taking legal action because of fear of the cost
that this action will bring. However, there are plans developed by a government or large organizations in
order to provide low-cost legal help.
o Community Legal Service Fund (Legal Aid)
Established for private individuals with the aim to obtain financial help in legal matters
The help includes:
- Civil Legal Aid
- Criminal defence service
18
1) Civil Legal Aid
Available for individuals requiring help in relation to civil matters, for example, housing problems,
contract disputes, divorce, etc.
To receive the legal aid the person must apply and then the solicitor must assess if the person is eligible
for that benefit.
The help is limited on the number of hours that the solicitor will work in the case, which is 2 hours (3
hours for divorce work)
2) Criminal defence service
Advice, assistance and representation in criminal matters are available for people who are unable to
afford a lawyer and are involved in a criminal case.
The solicitor must be registered in the Legal Service Commission if they want to provide this service.
3) Conditional fees
Advocates can sign agreements with clients whereby the lawyer receives a normal fee plus uplift in the
event of success (known as success fee) but nothing if unsuccessful. The maximum uplift permitted is
100%.
Conditional fee arrangements are now an important method of funding civil actions.
o The Coroners and Justice Act 2009
The Act is a regulation of damages-based agreement in employment matters, whereby a person
representing a client receives a percentage of any compensation received by the client.
The amount of payment must not exceed 35% of any damages recovered by the client.
o Other organizations providing legal advice
There is a range of voluntary organizations which provide legal advice to individuals.
Examples:
- Citizens advice Bureaux
- Law Centers, specialized on Social Welfare matters, e.g. Women Centers
- Advice Centers, for housing and consumers problems
- Trade Unions, providing assistance to the members on for example, employment issues
METHODS OF DISPUTE SETTLEMENTS: THE COURT
The Courts are the focal point of the legal system.
They provide final settlement in disputes
Functions of the Court:
- Establish the fact of a case
- Identify legal rules to be applied
- Formulate solutions
Its decision also affects similar cases which may arise in the future (Judicial precedent)
o Classification of the system of the courts
1) Civil and Criminal Courts
2) First instance and Appeals Courts
3) Courts and Tribunals
19
- Civil and Criminal Courts: They deal in the majority of the cases, with both civil and criminal cases.
- First Instance and Appeal Court: The First Instance Court is a court which hears a case for the first time,
also called Court of Original Jurisdiction.
If this court makes a mistake the case will be re-heard by an Appeal Court.
- Courts and Tribunals: The Parliament has created special courts, specialized to deal with specific topics,
for example social and Welfare legislation.
Alternatives to going to Court: Other means of resolving disputes:
- Arbitration
- Conciliation
- Mediation
- Ombudsmen
Classification of Criminal offences
There are 3 types, according to the seriousness of the offence.
- Summary offences: Minor offences tried in the Magistrate’s Court
- Indictable offences: More serious offences, tried in the Crown Court. E.g. Murder and robbery
- Either way offences: Offences which may be tried either in the Crown Court or in the Magistrate’s
Court. Examples: Theft and engaging in an unfair commercial practice.
CRIMINAL COURTS
- Magistrate Court
- Crown Court
- High Court
- Court of Appeal
- Supreme Court
Criminal Court review
In 1999 Sir Robin Auld was appointed to undertake a review of the criminal court
His report includes the following recommendations
- The Criminal Court should be codified for offences, evidence, procedure and sentencing
- Establishment an overall direction of the Criminal Justice system
- Creation of a Unified Criminal Court organized into three divisions:
The Crown division
District division
Magistrate division
- The defendant should not have the right to elect which division will be tried
- An executive agency should take over administrative arrangements
- Juries should be more representatives of national and local communities
- Changes on the eligibility and right to be excused to become a member of a jury
- More flexibility in the deployment of judges
- Greater use of fixed penalty noticed
- Complete review of the law of criminal evidence
- The routes of appeal should be simplified and limited
The Government response to that review was the set out in a White paper “Justice for All” (In July 2002.
Important definition: Jurisdiction: Is the right or power to make legal decisions
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Magistrate Court
Magistrate is a judge in a court for minor crimes.
Magistrate courts handle over 95% of all criminal cases.
There are two kinds of Magistrates (also known as Justice of Peace).
- Unpaid amateurs judges (Lay Magistrates)
- District Judges (Magistrate’s court)
The lay magistrates are people trained in basic legal matters but are not lawyers
The District Judges are persons with seven years qualification in general advocacy. They are lawyers.
o Jurisdiction of the Magistrate Court
It is the right or power to make legal decisions of the Magistrate Court.
Magistrates deal with the following criminal matters:
1) Trial of Minor offences
2) Sending for trial and committal proceeding
3) Youth Court
4) Criminal administration
Trial of Minor offences: The magistrate’s courts can give both verdicts and sentences; but if the
sentence of the offence is for more than 6 months of imprisonment or a fine more than £ 5000
(Pounds); the case will be referred to the Crown Court.
- Sending for trial and committal proceedings: In 1998 it was introduced the “Sending for trial
procedure”; this document explains the steps that the accused will take before going for trail to
the Crown Court.
- Youth Court: When a child (10 to 13 years old) or a young person (14 to 17 years old) commits a
criminal offence he or she is brought to a Magistrate Court.
- Criminal Administration: Magistrates will issue the summons (an official document that orders
someone to appear in a court) and warrants of arrest.
The Magistrates can grant a bail to people waiting for trial.
-
Crown Court
Normally is led by a judge assisted by a Jury of 12 jurors.
The most serious cases such as murder must be heard by a High Court
In 2003 it was defined when the judge will take decision without a jury. Those cases are stated as follows:
- In presence of trial of serious complex fraud cases
- When danger of jury tampering
Also in 2003 the Criminal Justice Act made some clarifications on the eligibility for being a member of a
jury and limiting the excuses for being disqualified from a jury service.
o Functions of the judge of the Crown Court
- Responsible for the conduct of the trial
- Summarizes the case to be presented to the jury
- Play the final part of the proceeding passing sentence
o Functions of the Jury of the Crown Court
It considers all the evidences to decide whether the accused is guilty or innocent (Dictates the
Verdict of the case)
o Jurisdiction of the Crown Court
The Crown Court has the power to deal with the following criminal matters:
1) Trial of serious offences
2) Committals for sentencing from the Magistrate’s court
3) Appeals from Magistrate’s court
21
High court
The High Court is split into three divisions
1) Queen’s Bench
2) Family
3) Chancery
A single judge of the High Court is able to hear judicial review applications, appeals and applications for
habeas corpus in criminal cases.
o Jurisdiction of the Crown Court
1) Appeals from Magistrate’s courts: An appeal may be made by way of “case stated” by either the
prosecution or the defence; which it is a sort of summary of the case to be analyzed in the High
Court.
The High Court can confirm, reverse or amend the decision of the Magistrate’s court.
The High Court can also send the case back to the Magistrate’s court with an opinion on the case
2) Appeals from Crown Court
3) Judicial review: Not all the cases sent by the magistrates will be reviewed in the High Court. The
High Court will monitor if there is an abuse of the right of appeal from the Magistrate court.
Court of Appeal (Criminal division)
It is composed by the Lord Chief of Justice and approx. 37 Lords or Ladies of Justice.
When a case is under discussion, 3 of them will be appointed to deal with it.
o Jurisdiction of the Court of Appeal
1) Receive appeals from trials of the Crown Court
The defence (but no the prosecution) may appeal the decision of the Crown Court. The defence can
appeal the conviction (verdict) or the sentence.
The Court of Appeal deals with serious offences
2) Reference by the Attorney General
The attorney-general is the main legal advisor to the government, and in some jurisdictions he or she may
also have executive responsibility for law enforcement or responsibility for public prosecutions.
The Attorney General can present the case to the Court of Appeal for review
The Court of Appeal can proceed in the following way:
- Review the case when a person was declared not guilty and the Genera Attorney asks the Court of
Appeal for its opinion on that verdict. The opinion of the Court of Appeal cannot modify the
outcome of the trial.
- Review the Sentence given by the Crown Court: In that case the Court of Appeal can give a more
severe sentence if the Crown court sentence was not severe enough (unduly lenient)
Basically the prosecutor can present the case to the Court of Appeal; but this court cannot modify the
verdict.
However in 2003, they make a modification which consists in the following principle:
- To avoid the “double jeopardy”, a person cannot be declared not guilty by the Crown Court and then be
sent again for a new trial; but there are some severe situations in which the accused could have been
sentenced for life in case the verdict confirm his culpability, like for example, murder or rape; in this case,
and if there are new evidences that came out after the verdict where the Attorney General can request to
the Court of Appeal for a new trial.
3) References by the Criminal Cases Review Commission
The Commission is an independent body to investigate some cases involving a possible wrong decision
made by the Crown Court in its conviction or sentence.
22
The case will be referred to the Court of Appeal when there is “real possibility” that the conviction, verdict
or sentence will not be considered correct.
Supreme Court
The Supreme Court was created in 2005, replacing the Appellate Committee of the House of Lords.
It is formed by 12 judges.
The Supreme Court is the final court of appeal; normally 5 judges sit together to hear an appeal. Decisions
are made by majority judgment.
o Jurisdiction of the Supreme Court
- Appeals from the Court of Appeal
- Appeals from the Divisional Court of the High Court
CIVIL COURTS
Reform of civil legislation
In 1995 Lord Wolf reviewed the procedure of the Civil Court and he found some problems, like for
instance, the lack of equality between wealthy and poor people, the system was too slow and
complicated, the system was too expensive, etc.
Following his recommendations some changes were made:
1. Development of a new terminology
2. Encouraging settlements to solve disputes
3. A single jurisdiction
4. Case management
1. New terminology: The new rules are expressed in more modern language
2. Encouraging settlement: This includes a number of features which are designed to encourage the two
parts of a dispute to end an argument (to settle their dispute).
- Alternative Dispute Resolution (ADR): The two sides are actively encouraged to use ADR
- Pre-Action protocols: Which operates like codes of practice; for example: Both parties agree on
having a simple expert witness rather than each side bringing their own expert witness, which can
make the process more expensive and complicated.
- Cost of payments into court: The judge now has more powers to decide about the award, which is
a sum of money that a court decides should be given to someone.
With the new reform, it is possible to make an offer to settle on the matter of costs
3. A single jurisdiction: the High Court and county courts become a single jurisdiction operating to a
common set of procedural rules.
4. Case Management: Cases are allocated to one of the three tracks, depending on their value and
complexity.
- Fast Track: For claimants between £ 5000 and £ 25000. The cases are going to be hearing within
30 weeks.
- Small case track: For claims up to £ 5000
- A Multi track: For all cases over £ 15000
A High Court deals with multi track cases
Appeals – Access to Justice Act 1999
Reforms of the system of Appeals
- To appeal it is necessary to get a permission in all civil cases
- For a second appeal there are limits
- The Lord Chancellor defines the route of appeal
23
CIVIL
COURT
COUNTY
COURT
MAGISTRATE’S
COURT
HIGH
COURT
CROWN
COURT
COURT of
APPEAL
SUPREME
COURT
1) County Courts
It was established in 1846 to provide a cheap and fast method of settlement of small civil disputes.
The county courts are staffed by circuit judges. They usually sit alone to hear a case, but a jury may be
called where, for example fraud has been alleged.
o Jurisdiction of the County court
The type of action which the court can deal with is as follows:
1. Action in contract and tort: A tort is something that somebody does or fail to do which harms
somebody else.
2. Action for the recovery of land
3. Actions in equity. This category includes proceeding involving: Mortgages and trusts (A trust is an
arrangement in which a person or an organisation manages someone else’s money or property)
4. Bankruptcies
5. Company winding-ups: When the company has an unplanned or unexpected situation that affects
its capital
6. Contested probate proceedings
7. Family matters: For example a divorce; but the jurisdiction of the court regarding financial
maintenance of children whose parents are divorce is a responsibility of the Child Support Agency
8. Consumer Credit: Issues between Landlords and tenants. Also racial discrimination cases.
9. Patents: Following the recommendation of the Oulton Committee, the Copyright, Designs and
Patents Act 1988
Actions which exceed the limits of the county court are normally heard by the High Court. However,
the parties may agree to such an action being dealt with by the lower court.
Small claims
Small claims are usually heard by a district judge who will follow any procedure he or she considers
fair. The parties are encouraged to do without legal representation. The hearing can be held in private
in an informal atmosphere and there are strict rules for the procedure.
Magistrate’s Court
The majority of cases heard by the magistrates are criminal, but in some special situations the
Magistrate’s court can have jurisdiction on civil matters.
o Jurisdiction of Magistrate’s Court in civil matters
1. Family proceedings
2. Recovery of certain civil debts
3. Licensing
24
- Family proceedings include:
a) Matrimonial proceedings.
- Separation orders, when the parties to a marriage are not seeking for divorce, the Magistrate
court can intervene if the situation is risky for any of them.
- Orders for financial maintenance: The jurisdiction of the Magistrate court in this issue has been
transferred to the Child Support Agency
b) Child Care proceedings: For contact orders and residency orders, which defines the place where
the child should stay
c) Care proceeding orders, whereby a child can be taken into the care of a local authority
- Recovery of certain civil debts: E.g. income taxes, electricity and water charges
- Licensing: magistrates used to have a role in liquor licensing. This responsibility has been transferred to
local authorities.
High Court
Each division of the High Court is presided by a senior judge: The Lord Chief Justice
The head of the Chancery division is the Chancellor of the High Court
There is a president of the Family division
They are assisted by approx. 106 High Court judges, who are distributed between the divisions. When
the High Court operates as a court of First Instance, the trial is usually done by a judge alone; however
a jury of 12 may be called in special cases.
o Jurisdiction of the High Court on civil matters
The High Court is divided in three divisions:
- Queen’s Bench division
- Chancery division
- Family division
1) Queen’s Bench division: The jurisdiction of this division covers:
- Civil and Criminal matters
- Cases at First Instance
- Cases on appeal
When sitting as an ordinary court, it hears the following cases:
a) Actions in contract and tort
b) Judicial review
c) A commercial court: For interpretation of commercial documents
d) An admiralty court: The admiralty is the government department that is in charge of
the navy
e) A Technology and Construction court: Dealing with cases involving technical issues such
as construction and engineering disputes
The Queen’s Bench hears the following matters
a) Civil appeals: By way of case stated from the Magistrate’s court and from the Crown court.
b) Judicial review of the actions of inferior courts, tribunals and administrative bodies
25
2) Chancery division
It hears the following actions:
a) Equity matters: Actions involving trust, mortgages, partnership, contracts, deeds (official
documents that gives the details about who owns a building or piece of land), taxation, etc.
b) Court of Protection: Involving management of the Property and affairs of mental patients
c) Companies court: Applications relating to companies
d) Patents Court: Matters outside the jurisdiction of the patents county court
e) Appeals from the commissioners of Taxes matters
3) Family Division
a) Matrimonial matters, e.g. defended divorces
b) Action involving children: for instance, adoption and legitimacy
Crown court
The Crown court is mainly a Criminal court, but it also has civil jurisdiction, hearing appeals from the
Magistrate’s court
Court of Appeal (Civil division)
The civil division of the Court of appeal is headed by the Master of Rolls. Normally three judges sit to hear
an appeal. The decisions are made by a simple majority.
The Court of Appeals now has more flexibility to decide the number of judges being able to operate in
court of appeal.
o Jurisdiction of Civil division of Court of Appeal
It hears appeals from the High Court, county courts and various tribunals.
It may uphold (sustain) or reverse the decision of the lower court or change the award of damages; or
even it may order a new trial.
Supreme Court
The Supreme Court is the final court of appeal in civil matters. The Supreme Court is formed by 12
members and decisions are made by majority judgment.
o Jurisdiction of the Supreme Court
It hears appeals from the following sources:
1) The Court of appeal
2) The high Court: Normally the appeals from the High Court go to the Court of Appeal, but
some cases are suitable to appeal straight to the Supreme Court under the “leap-frog”
procedure, “leapfrogging” the Court of Appeal. Theses cases are those involving point of
law or general public importance.
OTHER IMPORTAN COURTS
1. Court of Justice of the European Community
2. Judicial Committee of the Privy Council
3. European Court of Human Rights
Court of Justice of the European Community
The Supreme Court is the final court of appeal for domestic matters, but when the dispute has issues
related to European treaties or European Legislation, any English Court may seek the opinion of the
European Court
26
Judicial Committee of the Privy Council
The Committee advises the Queen on criminal and civil appeals from British colonies and some of the
Commonwealth countries.
The Committee also deals with domestic matters, for instance Church of England.
European Court of human Rights
The cases may be brought by individuals or by one state against another.
The court is formed by 47 judges, one from each country.
Although the UK Court is not bound to the European Court of Human Rights, they can take into account
their judgements when deciding a case in relation with Human Rights.
TRIBUNALS
The work of the ordinary courts is supplemented by a large number of tribunals to hear and decide upon
disputes in specialized areas.
In 2000, Sir Andrew Legatt was called to make a review of the tribunal system.
Tribunals deal with a wide range of subjects such as social security, employment, immigration and mental
health.
The Tribunals should operate cheaply and quickly without excessive formalities.
The Chairman is usually a lawyer but other members of the tribunal are drawn from non-legal experts.
The work of the tribunal is supervised by the Courts.
An appeal to the decision of a tribunal can normally be made to the ordinary court.
- Employment tribunals: Established in 1964; it hears complains by employees about contracts, dismissals,
discrimination and equal pay. The tribunal normally consist of a legal qualified chairman who will hear the
case.
Reforms of the tribunal system
Sir Andrew Legatt noted that in the tribunal system there was a waste of resources, old fashioned
procedures, the system was not user friendly and there was a lack of independence since the tribunals are
established and supported by the government.
Recommendations of Sir Legatt:
- To establish a common, unified administrative service known as Tribunal Service
- To establish a single Tribunal system, operating in divisions according to subject matter
- The tribunal system should be headed by a Senior President who should be a High Court judge
- The right of appeal is made by previous permission. The appeal is presented to an appellate
tribunal and from there to the Court of Appeal
- The members of the tribunal are appointed by the Lord Chancellor
- Tribunals should work with user groups to improve the accessibility of tribunals.
The government established in 2006 the tribunal service which introduces a simplified framework for
tribunals.
All the previous tribunals will be unified in two new tribunals; which are organized into chambers.
First Tier Tribunal:
- Social entitlement,
- General Regulatory
- Health
- Education and Social Care
- Taxation and Land
- Property and Housing
27
Upper Tier
- Administrative appeals
- Finance and Tax
- Lands
ALTERNATIVE DISPUTE RESOLUTION (ADR)
The vast majority of disputes are settled by other means outside the formal court system.
Some reasons why people prefer to resolve a dispute seeking for ADR
- Fear of spoiling a satisfactory relationship with the opponent
- The cost of a legal action
- The difficulty of predicting the outcome of the case
- The likelihood of bad publicity
The role of the court is to encourage resolution of cases through ADRs
Disadvantages of Litigation
-
-
It’s adversial and more confrontational
(promotes conflict between the two parts)
Need of a lawyer to represent and pay their
services
Slow process
Can be daunting (intimidating) for lay
persons. The person may feel worried
Limited remedies. Limited solutions
Public process which can make the
information available to the general public
affecting confidentiality
It takes place at a fixed time and location
Benefits of ADR
-
Simpler procedures and more user friendly
They have special techniques that make the
process more relaxed
Wider range of remedies or solutions
The case may be dealt with privacy
It is more flexible and the time and location can
be defined by mutual agreement
Main types of ADR
1. Arbitration
2. Early neutral evaluation
3. Expert determination
4. Mediation
5. Conciliation
6. Med-Arb
7. Neutral fact finding
Arbitration
Arbitration allows the parties to present their argument to an independent arbitrator of their choice, in
private and at their own convenience.
The arbitrator may be legally qualified (a lawyer) or he/she has special knowledge or experience of the
subject matter.
Nowadays in many contracts for partnership or insurance they include a clause that arbitration should be
the first step to take in case of dispute
Early Neutral evaluation
This is a person who may be a lawyer or an expert in the field in conflict. To look in each side of the given
case and then will give a neutral opinion.
28
His opinion doesn’t bind the parties but it can be used for further agreement.
Expert determination
The parties appoint an expert in the field to decide the dispute. The parties agree to be bound by the
decision.
Mediation
This form consists of using a neutral third party (mediator) to help to reach an agreement.
Suitable for the following types of disputes:
- Divorce, separation and other family problems
- Neighbouring disagreements for example, about noise or boundaries
- Work issues, for ex: discrimination
- Education. E.g. exclusion from schools
If mediation is successful, the parties may record their agreement in the form of binding contract.
Conciliation
A third party helps the parties to reach a resolution, like in Mediation, but in conciliation the third party
plays a more active role in bringing the parties together and suggesting solutions.
An agency can also act as a third part; for example, the Advisory Conciliation and Arbitrations Service
(ACAS) tries to resolve disputes between employers and employees by mean of conciliation.
Med-Arb
This is a combination between mediation and arbitration.
An independent person will try first mediation but if it fails, the parties agree to refer the dispute to
arbitration which it can be done by the same person, who from being a mediator becomes an arbitrator.
OMBUDSMEN
The Swedish term ombudsmen describe an official or commissioner who acts as an independent referee
between a citizen and his government.
In UK it was also called the PCA (Parliament Commissioner for Administration)
The PCA does not deal with cases which could be resolved through a court or tribunal
The PCA or Ombudsmen cannot receive complains directly from an individual. They receive the cases that
are referred from a MP
The PCA can conduct on investigation on a specific matter and transform it into complain and if the
complain is justified recommend a remedy.
REGULATORS
When some companies which provide a public service like gas, electricity, water or communication are
under private management; the government will supervise them through the oversee done by the
regulators.
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CHAPTER 4
AN INTRODUCTION TO TYPES OF BUSINESS ORGANIZATIONS
A Business can by run in what is called the private sector of commerce and industry through one of three
of business organisations.
- The sole trader
- The partnership
- The company
Business law, as policy area, falls under the remit of Department of Business, Innovation and Skill (BIS).
The key role of BIS is to “build Britain’s capabilities to compete in the global economy”
It is important to introduce the concept of Liability before commencing with the explanation of the
different types of business organisations.
In Financial accounting Liability is defined as an obligation of an entity arising from past transactions or
events, the settlement of which may result in the transfer or use of assets, provision of services or other
yielding of economic benefits in the future. A liability is defined by the following characteristics:
1) Any type of borrowing from persons or banks for improving a business or personal income that is
payable during short or long time;
2) A duty or responsibility to others that entails settlement by future transfer or use of assets,
provision of services, or other transaction yielding an economic benefit, at a specified or
determinable date, on occurrence of a specified event, or on demand;
3) A duty or responsibility that obligates the entity to another, leaving it little or no discretion to
avoid settlement; and,
4) A transaction or event obligating the entity that has already occurred.
CLASSIFICATION OF BUSINESS ORGANISATIONS AND LIABILITY OF THE PROPRIETORS
- The Private Sector
- The Public Sector
The Private Sector
The Private sector includes:
- The sole trader
- The partnership
- The company
o The Sole trader
It is a one person business. A sole trader owns all the assets and takes all the profits out of the business.
However, a sole trader is liable for the debts of the business to the extent of everything he owns; even his
private possessions may be ordered to be sold to pay the debts of the business.
There is no such thing called Limited Liability for the sole trader.
o The partnership – generally
There are three types of Partnership
- An unlimited partnership
- A limited partnership
- A limited liability partnership
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1. An unlimited partnership
Partnership Act 1890 sets out the rules which apply to partnership.
The partners share the losses (if any), the problems and the worries. The profits must also be shared. This
is the case called full or equity partners.
The partners are joined by the debts and other liability of the firm.
The liability extends to the private assets of the partners. While it is not legally required, it is normally
sensible for the partners to make a contract called a partnership agreement. However writing is not
necessary, a verbal agreement will do and a partnership can in some cases by inferred from conduct.
The liability of the partners is unlimited, so if the firm cannot pay its debts, each general or equity partner
is liable to pay them with a right to ask later for compensation from the other partners.
2. A limited partnership
In this type of partnership some of the partners have fully liability, whereas others have limited liability to
the investment that they have made.
One or more of the partners has only limited liability for the firm’s debts.
They are used for collective investment such as unit trusts.
As explained before, one of the partners has full liability when the firm cannot pay a debt, but the others
may have limited liability; this means that if the business falls on hard times, they may loose the capital
that they have invested in but those with limited liability will not have further liability to his private
properties.
The limited partners cannot take part in the management of the firm.
3. A Limited Liability Partnership (LLP)
The LLP is fully liable for its debts but there is no personal liability in the members.
If the LLP becomes insolvent (Insolvency is the inability of a debtor to pay their debts in other words, not
having enough money to pay its amount overdue), the members may well lose the capital that they had
contributed but beyond this they have no duty to contribute to the assets of the LLP if because of an
unexpected situation (winding-up) there is a shortage.
o The Company
A company is a business organization. It is an association or collection of individual real persons and/or
other companies, who each provide some form of capital. This group has a common purpose or focus and
an aim of gaining profits. This collection, group or association of persons can be made to exist in law and
then a company is itself considered a "Legal person".
A registered company is commonly formed by one or more people who become its shareholders.
A shareholder or stockholder is an individual or institution (including a corporation) that legally owns any
part of a Share (finance) of stock in a public or private corporation.
Directors must be appointed to manage the company and they act as its agents helping the company to
deal with the business.
To become a company there is a need of registration procedure to follow in the Registrar of Companies.
The process for a company to get a Charter is by sending a petition to the Privy Council. The petition asks
for the grant of a charter and sets out the powers required. If the Privy Council considers that it is
appropriate to grant a charter, the Crown will be advised to do so.
The Public Sector
At the end of the Second World War certain organizations providing good or services to the public were
brought to the public sector for their management.
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Public corporations were formed to manage these organizations; nowadays these services have been
returned to the private sector.
NATURAL AND JURISTIC PERSONS
- Natural persons
- Juristic persons
Natural persons
These are human beings who are known to the law as Natural persons.
An adult human being has legal right and legal duties. The law gives different status to the human beings,
which means that they have different rights and duties than the other people. Examples are minors
(persons under the age of 18) and persons who lack mental capacity.
Animals may also be protected by the law for certain purposes such as conservation.
Juristic persons
Legal personality is not given only to human beings.
Persons can form a corporation and that corporation will have a legal personality with similar rights and
duties to human beings. For example, if person A and person B form a registered company A-B Ltd. The
separate legal personality of AB Ltd is created; A and B can now, as directors of the company make
contracts on behalf of AB Ltd as its agents. The rights and duties under those contracts will belong to AB
Ltd and not to A and B as individuals.
o Looking behind the corporate personality; Lifting the corporate veil
The idea of corporate personality can lead to abuse and it has been used to avoid legal obligations. The
court will not hesitate to ignore the separate personality of the company (or draw aside the corporate
veil) if the company had been used for fraudulent purposes.
o Corporation sole
English law also recognises the idea of the corporation having only one member.
Church lands needed to be under the name of the bishop or vicar, but it was a problem it this person died;
because the land had no legal owner until a successor was appointed.
To deal with this particular problem the law allows the creation of a company with one member, and in
the case of the example mentioned, the land will belong to the Bishop’s company, and if the bishops dies
another person will take his position as director of that sole company.
COMMENCEMENT OR INITIATION OF THE BUSINESS
Sole traders, Ordinary partnerships and Limited partnerships
They can initiate their business merely by opening the door of the premises. It is usual to register for value
added tax, though this is not compulsory unless the turnover of the business is at registration level.
The organization must comply with the requirement of the Companies Act 2006, which contains
restrictions about the choice of the business name.
Limited Liability Partnership (LLP)
To become an LLP they have to send an application to the Registrar of Companies. If the Registrar is
satisfied with the application because fulfils the requirements the Registrar will give a certificate that the
LLP is incorporated.
Before the LLP receives that certificate, the partnership can operate as an ordinary partnership.
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Companies
A Private company cannot trade until its application for registration has been discussed by the Registrar of
Companies and a certificate of incorporation has been given to the company.
It is essential for the company to begin trading to have an authorized and issued share capital of at least £
50.000 in nominal value.
o Community Interest Companies
They are designed for use by social enterprises wishing to operate under a corporate structure.
Organisations working in areas such a childcare, social housing, leisure and community transport may
wish to make use of the corporate structure of a Community Interest Company (CIC).
CICs are also registered with the Registrar of Companies.
RAISING BUSINESS FINANCES – Generally
Sole Traders and All Partnerships
Small businesses need money for the beginning of the trading. Most people use their own savings to start
a business. They can also loan from the banks. The bank will normally want some security for its money,
using for example a mortgage on the house of a sole trader or houses of the partner’s members of a
partnership.
Interest rates can differ according to the deal given by the bank.
A partnership can attract more capital by admitting new partners.
Companies
In companies the capital structure is more complicated. If two people from a company and be its directors
can contribute for instance, £ 10.000 each to form the company; each of these two members taking
20.000 shares of £ 1 each, then:
5) All the company’s current capital is official available
6) The £ 20.000 cash received by the company is its paid-up capital (the amount of money that has
been received by shareholders who have completely paid for their purchased shares)
A company may also raise money by borrowing from the bank
A lending bank will take security, (called debenture) over the company’s assets and will usually ask the
directors to give another security over personal properties to guarantee the devolution of the loan.
There is no limit on the number of shareholders that a company may have; and so it can raise as much
capital as it wishes.
RAISING BUSINESS FINANCE – Securities
The advantage of a company is the ability to issue share capital. The share capital can be organized in a
different ways, for example, giving more number of votes to a member who has more share capital or
giving to him more dividends .
A dividend is a part of the profits of a company that is paid to the people who own share in the company.
For the sole trader and partnerships it is important to consider the method of repay the loan capital.
Floating charge: Is the charge that is not fixed or permanent and therefore likely to change.
The company has the advantage of being able to receive a floating charge.
Partnership and sole trader cannot do this; but Limited Liability Partnerships (LLP) can be given this
floating charge.
Sole traders and partners can mortgage its business premises and also their own private property.
In the companies, Directors are asked to give their own private properties to secure a bank loan to a
company.
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CHARGES
A charge is a type of security by which a person who borrows money gives the lender rights over his (the
borrower’s) assets to support the duty of the borrower to repay what is owed under the contract of loan.
The lender thus has two rights:
- To sue the borrower on the contract of loan
- To sell the assets which the borrower has charged in order to recover what is owed to him
but no more
Mortgage: If you mortgage property, you borrow money from a bank and agree to give the property to
the bank if you do not pay the money back
Fixed charges
A fixed legal charge can be given over identify property belonging to the borrower. This property may be
either real property, (ex: land and buildings), or personal property, (e.g. machinery and equipment.)
The lender can sell this property being used as a charge. He can sell it without the assistance or
agreement of the borrower in the case that the borrower doesn’t pay the loan.
Floating charges
It’s a form of security granted to a creditor over general assets of a company which may change from time
to time in the normal course of business.
The company can continue to use the assets in its business until an event of default occurs and the charge
crystallises.
Only Companies and LLPs are allowed to receive floating charges.
The legislation doesn’t allow the sale trader or other partnerships to use a floating charge
GUARANTEES
Generally
If a bank lends money to a business it will normally want, in addition to a charge over the assets, a
guarantee from the sole trader or partner, or the directors of the company.
These persons promise to meet the business debt from their personal resources if the business cannot.
Independent advice
To understand the meaning of Independent advice we need to know the ruling of the House of Lords in a
case Royal Bank vs. Etridge
Undue influence When the influence of one person over another is abused. In everyday life people
constantly seek to influence the decisions of others. They seek to persuade those with whom they are
dealing to enter into transactions, whether great or small. Mrs Etridge plead that her husband was an
undue influence towards her.
The facts of Etridge case is that a wife called Mrs Etridge, had not fully understood legal advice that she
had received when her spouse’s business had gone broke and the house where the family was living was
taken back. She stated that the agreement with her husband was done under Undue influence.
The wife had agreed to put the family home in favour of the bank as security for the debts of her husband
without really knowing the consequences that it would produce to her.
The House of Lords dismissed Mrs Etridge’s argument. However, they were forced to develop a guideline
for lenders and legal advisers.
The most important point of this guideline is that the lender must ensure that the wife (or partner)
receives independent legal advice and will provide that adviser with all the financial information needed
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to give appropriate advice. The wife ensures that is has the husband’s authority to give the necessary
information.
Where the legal adviser has failed in his or her duties in terms pf giving proper advice, the wife may make
a claim against the adviser.
MORTGAGES
Generally
A Mortgage is a type of loan. It is special because the borrower (called a mortgagor) has not just promised
to repay the loan to the lender (called the mortgagee) but has given him also a charge on his own
property. If the borrower fails to pay the lender can sell the property and pay himself from the sale price.
Legal Mortgages of Land
If someone wants to borrow money from a bank by giving the bank a legal mortgage of his property or
private house, the borrower (mortgagor) will normally create a charge by way of legal mortgage over the
house. This is done by means of a short deed (mortgage deed), which states that a charge on the lan is
created.
A deed is an official document that gives the details about who owns a building or piece of land.
The mortgage deed usually provides that the money is to be repaid six months after the date of the deed.
However, the borrower is not expected to repay the loan by this date; it is only put in so that the lender
has all his remedies from that date since he can consider himself as being owed the principal sum.
Equitable mortgages of land
In the past the lender and borrower could make an agreement of mortgages without following the formal
procedure of the mortgage deed; where the borrower could just leave at the bank the title deed of his
house. This was on equitable mortgage, but law has changed, and nowadays a contract for the sale or
other disposition of an interest in land can only be made in writing in one document and this document
must be attached to the title deeds.
If the borrower does not pay the loan, the lender is able to sell the property but must first apply to the
court for an order of sale. Another option is that the lender can be the receiver of the rents coming from
that property.
The borrower right of redemption
In the common law, the land used as a security became the property of the lender as soon as the date for
repayment has passed, unless the loan had been repaid by then, even if only a small amount was still
owed. However, equity allows a borrower the right to redeem the land and free it from the situation of
being the security of the loan even if the date for repayment has passed.
Consumer Credit Act 2006
The Court must regulate agreements between the creditor and the debtor; coming out from a
relationship considered “unfair”. In that case the court can reduce the sum to be paid by the debtor.
This intervention can be applied for sole traders or individuals but not in agreements that involve
companies or partnerships of more than four members.
MORTGAGES OF PERSONAL PROPERTY
Not only land can be used as a mean of security debts. The person who borrows the money can use the
business assets like equipment and machinery to secure the loan.
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MORTGAGES OF CHOSES IN ACTION
The term “Choses’ derives from the French language which means “things”.
Personal property (property other than the land) is divided into two types:
- Choses in Possession
- Choses in Action
A chose in possession is an item of tangible (touchable) personal property that can be physical possessed
by the owner and can be transferred by delivery. Choses in possession are goods such as jewerly and
furniture which can be physically tangible.
A chose in action is essentially a right to sue. It is an intangible personal property right recognized and
protected by the law, which has no existence apart from the recognition given by the law.
Choses in Action are intangible form of property that is not really capable of physical use or enjoyment
It is possible to use a chose in action as security for a loan.
Shares in Companies are perhaps the commonest chose in action to be used as security. Shares can be
subject to a legal mortgage but the shares must be transferred to the lender.
PUBLICITY AND EXTERNAL CONTROL OF THE UNDERTAKING
To undertake is to promise to do something
Sole traders and ordinary partnerships: These organisations don’t have a lot of obligations
attached by the law regarding publicity and external control. They can keep their account for their
own administration but there are no legal formalities and no filling of documents or account for
the public to see.
Limited Liability Partnership (LLP): Regulations impose a disclosure and filing requirements in
terms of accounts and reports. LLPs will have to fill forms and send reports to the Registrar for
public disclosure of profits and the distribution among the partners.
Companies: The Company must present its account and reports to the Registrar. The Registrar can
send an auditor with the aim to do an audit of these reports.
An audit is an official examination of company financial records.
Some companies are exempted (excluded) to be audited, meaning that they can present the
records to the Registrar but they will not be audited for verification.
Other companies are not able to receive the benefits of being exempted for an audit. These
companies are:
a) Public Companies
b) Group of companies that include a public company among them
c) A bank
d) An Insurance company
The companies excluded for an audit are those whose directors acknowledge their responsibility
to ensure that the company keeps accounting record which gives a true and fair view of the affairs
of the company.
o Types of companies:
- Big companies
- Medium companies
- Small companies
The small and medium companies are allowed to send to the Registrar and abbreviated or
summarized version of its balance instead of the full report.
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Small Companies: To be considered a small company it has to satisfy the following requirements:
1) Turnover: (The value of goods and services that the company sells in a particular
period of time). Not exceeding £ 6.5 millions
2) Total assets, not exceeding £ 3.2 millions
3) Employees, not exceeding 50 employees
Medium Companies: To be considered a medium company it has to satisfy the following
requirements:
4) Turnover: Not exceeding £ 26 millions
5) Balance sheet total: Not exceeding £ 16 millions
6) Employees: Not exceeding 250
In conclusion, those who run companies and LLPs will have to spend some time ensuring that the business
is carried on in such a way as to comply with relevant legislation.
The sole trader and ordinary partnerships have a much less complicated legal environment which can be
to their advantage.
TAXATION AND NATIONAL INSURANCE
Income Tax – Generally
Income tax is the main tax which is paid by people who have earnings either from an occupation or from
investment alone.
Employees pay income taxes under Schedule E.
Self-employed pay income tax under Schedule D, and are responsible for making the relevant payments.
Taxation and the self-employed sole trader
Account can be made up to the end of the trading year (5 April) or to the end of the Calendar year (31
December).
The method of taxation
Assessment of income tax is made for tax years which run from 6 April in each year. Thus, for example,
the tax year 2009/2010 runs from 5 April 2009 to 5 April 2010.
Payment of tax – Method of assessment
This is based upon a tax return.
The return requires the trader to give all the information required to calculate income tax and capital gain
tax due for the year.
The Calculation can be done by the HRMC (Her Majesty Revenue and Custom) or by a private accountant.
Where accounts are prepared
An accountant should normally be employed to draw up the business accounts. However, it should be
taken into consideration that HMRC can ask t see the business records in order to check the figures to
verify if these numbers presented by the sole trader are true and accurate. HMRC can make a random
selection of the traders that are going to be verified.
Employing labour
If the trader employs someone the HMRC must be informed.
The trader will receive a new Employer’s Starter Pack with the necessary instructions, tables and forms.
The trader will be responsible for deducting income tax in accordance with the “Pay as You Earn” (PAYA).
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National Insurance
Most people who are working pay national insurance contributions. The class of contributions paid
depends upon whether the person concerned is employed (Class 1) or Self employed (Class 2).
Class 1: The contributions are paid by the employee and by the employer
Class 2: The contributions must be paid by self-employed traders
Schedule D – advantages
A major advantage is that the trader can deduct expenses from the amount of taxes to be paid, for
example, in his office he can deduct (to take an amount from the total) some payments, for instance,
electricity, over the total amount of taxes to be paid.
Partnership
Partnerships are charged to tax under Schedule D
The tax that each partner should pay is calculated separately taking into account personal circumstances,
e.g. whether they are married or single or if they are entitled in mortgage, etc
Companies
Companies pay what is called Corporation taxes
The taxes are charged on the profits of the company and this includes income from all sources.
Large companies pay their corporation tax every three months (quarterly payments)
PLANNING
For the development of the business it may be necessary to obtain at one point a planning permission.
To obtain this permission it is necessary to apply to the relevant local planning authority.
Before giving the permission the authority will consider the following points:
- The planning is in accordance with the authority development plan for that area
- Matters such as road safety and congestion were considered
- Water supply and sewage disposal
- The planning respects building regulations
Extension to premises may require planning permission
Outline planning permission
It means to give the main ideas of the plan.
The aim of this outline is to see if the permission will be given in principle; this can be followed with an
application for full planning permission.
Statements of Development principles (SDP)
Councils will be required to indicate whether they agree or disagree with the principles of the proposed
development
Appeals
If the permission is refused, an appeal can be made to the Secretary of State for the environment
The appeal can be made also to the conditions imposed by the Council for the approval and the applicant
does not wish to accept
Going ahead without permission
If the authority thinks the development is unacceptable it may make enforcement notice to put matters
right. This may even involve the demolition of any building work carried out.
Planning and environmental considerations
The applicant must submit an Environmental Impact Assessment setting out likely environmental effects
of the proposed development. Examples of environmental offences are the noise produced by some
machinery in some factories which can affect the people if this factory is settled in a residential part of the
town.
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CRIMES RELEVANT TO BUSINESS
Classification
I. Theft
a) Actus Reus
- Partial assumption of rights
- Authorised appropriation
- Property received of behalf of another
- Receiving property under a mistake
b) Means rea
- Dishonesty
- Intention permanently to deprive
II. Fraud and Malpractice
- Fraud by false representation
- Fraud by failing to disclose information
- Fraud by abuse of position
III. Market Abuse
IV.
Theft
A person is guilty of theft is he/she dishonestly appropriates property belonging to another with the
intention of permanently depriving the owner of it.
o Actus reus
Appropriation occurs when a person other than the owner assumes the rights of that owner over the
property.
- Partial assumption of rights
Example: someone takes a label of from a product in a supermarket and put it in another product
that is more expensive, so when he is in the cash he will be charged less than the real price of the
product that the product that he is taking.
- Authorised appropriation:
Example: A person persuaded a man of limited intelligence to withdraw and give her a sum of
£60.000; the court considered that she could be charged for theft. There was an appropriation
although the transfer was in nature a gift.
- Receiving property under a mistake
Example: An employee was paid in his bank account an extra salary for overwork that he knew
that he didn’t do but he did not report the mistake. The Court of Appeal decided that there had
been an appropriation
o Mens rea
1) Dishonesty
2) Intention permanently to deprive
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Dishonesty
There are some situations in which as a matter of law an individual is not dishonest:
a. Where the defendant believes that he has the right to deprive the owner of the property
b. Where the defendant believes that the victim could have consent or agreed if the victim
had known the circumstances
c. Where the defendant finds property that the owner could have not found under normal
circumstances by taking reasonable steps
The test for deciding dishonesty was laid down in R v. Ghosh case. The defendant was a surgeon who
claimed fees from a hospital for operations he had not performed.
-
- Intention permanent to deprive
Its main purpose is to prevent most unauthorized borrowings from being considered a theft action.
An intention to return the property sooner of later is not an intention permanently to deprive at the
time of taking, giving the property back will not change the fact of theft and the charge of theft will be
made out.
Fraud and Malpractice
Fraud is the crime of obtaining money from someone by tricking them or by lying.
The Fraud Act 2006 aims to protect consumers and business against fraud by giving prosecutors power to
cope with fraud.
- Fraud by false representation: The e-mails requesting people’s bank account number are good
examples of this type of fraud
- Fraud by failing to disclose information: An example is when a person applies for a life insurance
but the person did not disclose an existing terminal illness
- Fraud by abuse of position: For instance, an employee working in certain company, dishonestly
copies customer’s details or software containing information and use them for sale or may be
giving to a competing business
o Insider dealing
Persons may indulge in what is called insider dealing or trading. E.g. buying or selling shares of a
company on the basis of inside knowledge not available to others about matters likely to influence
the price of the shares
o Meaning of dealing
The person can be liable if using some private information from the company uses it for personal
benefit in terms of buying or selling shares, even if he advises someone else to make some
transactions with those shares.
o Insider information: Is information which relates to the securities or to the state of the company. It
may be specific and precise. The information must not have been made public and should have a
significant effect on the price of the securities, e.g. falling or rising profits, decisions to pay a higher
dividend that expected, etc.
Insider
When the person has information considered from an “inside source” is called an Insider
The person can access this information through being a director, employee with some privileges or
shareholder of the company or by having access to it by reason of his employment, like in the case of an
auditor.
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o Necessity for intent
It means to pay a great attention to what the insiders are doing.
Since insider dealing is a crime, it requires a determination and concentration to see that dealing can
secure profit or prevent loss
o Penalty for insider dealing
The sanctions are criminal; the maximum sentence can be up to seven years imprisonment and/or a fine
of unlimited amount
o Exemptions
Persons operating as dealers, for example, those who are buying or selling shares of companies are
exempted because could be difficult for them to operate if they are not allowed to use inside information.
It means that the dealer can use the insider information and he is not committing an offence because he
is not considered as an “insider”.
They commit an offence if they encourage the insiders to proceed illegally passing in the inside
information.
Market Abuse - The civil powers of the Financial Service Authority (FSA)
The Financial Service Authority (FSA) is the regulator of the UK financial sector.
They provide guidance in determining whether certain behaviour can be considered Market Abuse
according to FSA.
Detailed rules can be found in the FSA’s market abuse sourcebook and in particular in the Code of Market
Conduct.
To be included as market abuse the behaviour must be included in at least one of the following tests:
The misleading impression test: Giving to those participating in the Stock Exchange Market (buying or
selling company’s shares) a wrong or mistaken information about the real situation of the company
The distortion test: Distortion means to change the way that something looks, sounds or behaves so that
it becomes strange or difficult to recognize. This concept can also be applied to the markets and if so it
can be considered market abuse
The privileged information test: When information is not available to the participants in the market and
this information can be used when deciding whether or not to trade
A person will not be found to have engaged in abuse if he has complied with rules made by the FSA
The penalty to be imposed must consider and take into account whether the behaviour has had an
adverse effect on the market.
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CHAPTER 5
NON CORPORATE ORGANISATIONS: SOLE TRADERS AND PARTNERSHIPS
THE SOLE TRADER
FORMATION of the BUSINESS
Name of the organisation
o Business name
1. Generally
Every company must display its registered name:
- at its registered office and its inspection place
- at any place where the company carries on business, unless that place is mainly used as a home,
e.g. the director's address
2. Restriction on choice of business name
The business cannot select the name if:
- If the name leads people to believe that it is connected with a local or control government
authority. This is to prevent to false sense of security in the public who deal with them
- Names that imply a National or International connection when this link does not exist; for
example: “The International Metal Co.” , when the business operates only in the local
market
- Using names like “Society” or “Institute” when they are not officially recognized as such
type of institution
- The use of the word “Charity” requires the permission of the Charity Commissioners
- Under obscene names or misleading names
3. Disclosure of true owner’s name: What must be disclosed?
A sole trader must disclose his or her name together with the address of the business. The address should
be the address where any kind of document will be sent from those dealing with the trader
4. Where the information must be disclosed?
All the information regarding the name of the trader and the address must be written in letter, orders for
supply, receipts and invoices issued by the business
In a visible place in the premises where the business operates
In business cards if the sole trader uses
5. What happens if an owner does not comply with the law in regarding with the name?
The sole trader commits a criminal offence and is liable to a fine. On the Civil side he can lose some rights
and not be able to proceed with claims, for instance, it the trader doesn’t write the address of the
business the other party can say that he was unable to contact him because of the lack of knowledge of
the name and address of the owner.
o Protection of business name
The Registrar of Companies keeps and index of companies name and a company cannot be registered in a
name that is the “same” name as another name already registered in the index.
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In addition, the secretary of state can direct a company to change its name within 12 months of
registration if it is too likely or similar to another name already registered in the index.
o Passing off
The legal definition of Passing off is to make some false representation likely to induce a person to believe
that the goods or services are those of another.
If this does happen, the sole trader will be liable to a civil action for the tort of passing off and the court
can request to stop the use of its name.
But if the sole trader uses his own name as the name of the business, even if this could cause confusion,
he can continue using that name. For example a sole trader called “Giorgio Armani”, for example, could
continue using this name for business purposes, however in this case the sole trader should not advertise
the goods in a way that promotes confusion or to deceive people and customers.
DISSOLUTION
The business can be sold and all the assets of the business will be transferred to the new trader.
To be able to sell the business the trader should pay first his debts generated by the business. If he cannot
pay his debts the business may be dissolved by his creditors under a process called bankruptcy.
DEBT RECOVERY
It is important to know the previous steps that the system provides prior to declare the insolvency and
bankruptcy.
Interest on debt – generally
It will be necessary to look first at the contract to see if there is any provision for interest
Late payment of commercial debts legislation (Act 2002)
It gives to creditors the right to claim interest from the debts relating to commercial contracts
o Application of the Act: The act applies to contracts for the supply of goods or services
where the purchaser and the supplier are acting in the course of a business
o What is the rate of interest? Interest is calculated al 8% above the Bank of England base
rate. The Act gives suppliers an entitlement to simple interest only and not to a worse
interest, for example, charging interest of interests
When the customers still don’t pay
If the debtor does not pay despite of all the previous warnings given; the creditor will try to get the money
by asking the county court for any of the following:
- A warrant of execution
- A third-part debt claim
- Charging order
1- Warrant of execution
A bailiff is an official whose job is to take away the possessions of someone who has not paid money that
they owe.
The bailiff has the authority to visit the debtor’s home or business
The bailiff will try either:
- To collect the money owed, or
- To take goods to sell at auction to pay the debt
An auction is a public event when things are sold to the people who offer the most money for them
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2- Third party debt claims
If a creditor knows that the debtor is owed money by a third party, the creditor may wish to divert the
payment away from the debtor to himself. This can be done by the creditor applying to the court for an
order for enforcement of a third party debt claim.
3- Charging order
This order prevents the debtor from selling property over which it is made, e.g. a house, land, business
premises and any shares the debtor may have, until the creditor is paid.
Debt enforcement reform
The reform of the Act 2007 is to improve the working of the system of tribunal by providing a new
statutory framework, offices and bodies that will deliver improvements in services to those who use
tribunals
BANKRUPTCY PROCEDURE – Generally
Bankrupt: A person or business that is bankrupt has officially admitted that they have no money and
cannot pay what they owe.
Bankruptcy procedures must be taken against the debtors by the creditors
The business affairs of the debtor will be taken over by an Insolvency practitioner who is usually an
accountant.
On bankruptcy the creditors will have to press the insolvency practitioner to pay.
THE PETITION
A petition to the court for a bankruptcy order may be presented by the creditor only if:
a) The creditor who presents the petition is owed £ 750 or more (called the bankruptcy level)
Two creditors may present a joint petition to reach the bankruptcy level
b) The debt is defined as a debt due and the debtor appears unable to pay
c) The creditors send to the debtor a demand asking for payment. If the demand is not complied
within three weeks, the court accepts that the debtor cannot pay the debt
d) The debtor does not show evidence that will be able to pay a future debt
e) The debt is not secured, as for example a debtor’s property. A secured cannot present a
petition. A secured creditor is the one who has taken a property of the debtor to secure the
payment, for example when the bank secures the loan with a deed title.
SCHEMES of ARRANGEMENT UNDER THE DEEDS of ARRANGEMENT Act 1994
This is an alternative procedure for the debtor to avoid being declared bankrupt.
A deed of arrangement is an agreement between an insolvent debtor and consenting creditors as a more
advantageous alternative to the debtor’s bankruptcy.
There are different scenarios of the way this agreement would take place:
o The debtor can propose to the creditors that his business will be hand over to a trustee for the
benefit of his creditors.
o The debtor can propose a scheme of arrangement, for example, proposing to pay 50% of the total
amount owed. For some creditors this alternative can be acceptable taking into account the costs
that the bankruptcy process will involve
The scheme proposed by the debtor must need consent of a majority of the creditors. This majority could
be in regard of the number of creditors or according to the value claimed by each creditor.
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THE INTERIM ORDER AND VOLUNTARY ARRANGEMENT UNDER THE INSOLVENCY Act 1986
An interim order is an order passed by a court during the trial where the final order is not yet passed.
Such order is temporary.
When the creditors present the petition for bankruptcy, the debtor can apply to the court to make what is
called the interim order. The interim order can protect his property and stops the proceedings for a
bankruptcy. As part of the process to obtain the interim order the debtor must propose a qualified
Insolvency practitioner (called the Nominee). The court must be satisfied that:
a) The Nominee is qualified and considers that the arrangement has a reasonable chances of success
b) The Nominee will report to the court on the proposals of the debtor and if the court think that
they are reasonable it will direct the holding of a meeting of creditors
Voluntary Arrangements (IVAs) – Fast Track
The fast track IVAs is only available for undischarged bankrupts. It will be used most often by consumers’
bankrupts who have not properly considered the option to avoid the bankruptcy or can also be used by
professionals who discovered that a bankruptcy will affect their professional status.
If a post-bankruptcy IVA is accepted, the bankruptcy will be annulled or cancelled.
The fast track procedure is as follows:
- The Official Receiver, who is a servant from the Official Receiver’s Department, act as the
Nominee
- He puts the proposal to the creditors on the way of “Take it or leave it”
- Over this proposal there is no chance for the creditors to propose changes of this proposal
- The Official Receiver will inform by correspondence the reasons of the IVA
- If the IVA is approved the Official Receiver will report to the Court and the bankruptcy will
be declared annulled or cancelled
- The Official Receiver will act as the supervisor of the arrangement.
THE EFFECT OF BANKRUPTCY ORDER - Generally
If a scheme is not accepted the court will proceed with the bankruptcy order.
Once the order is made and the debtor becomes bankrupt, his property is automatically transferred to the
control of the Official Receiver
The transfer of the debtor properties to the Official Receiver does not apply to: tools, books, vehicles or
other equipment used for job purposes; neither all the necessary for the basic domestic needs, such as
clothes, furniture, house equipment; but very expensive tools and/or household items may be sold and be
replaced by cheaper ones.
The debtor must submit a statement of affairs within 21 days of becoming bankrupt
Contents of the statement of affairs
- Particulars of the debtor’s assets and liabilities
- Names, residences and occupations of his creditors
- The securities held by the creditors
The debtor’s income
The debtor can continue receiving income from his trading or from his profession. However the trustee
may apply to the court for an income payments order under which a specified sum of money will be paid
to the trustee. If the petition is accepted the court can assure that a certain amount of the income will be
transferred to the trustee to be used to pay part of the amount owed to the creditors; the court will keep
other part of the income for the debtors to meet his reasonable needs and also for his family.
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Income payment agreement
It is a written agreement made between the bankrupt and the trustee about the earning of the trustee for
the job that he is doing in relation to the administration of the debtor’s affairs, without obtaining a court
order
Credit and other disabilities
An undischarged bankrupt is guilty if the bankrupt obtain credit to the extent of £ 500 or more without
disclosing to the new creditors about his bankrupt status. He is also guilty if he engages in new business
without disclosing the name in which he was made bankrupt.
An undischarged bankrupt commits a criminal offence if he acts as a company director or takes part in the
management of a company unless the court gives the permission for that.
In the past undischarged bankrupts were automatically disqualified from sitting in Parliament, but now
this restriction is applied only to those bankrupts who are subject to a BRO (Bankruptcy Restriction Order)
as we will see later.
The BRO is an order made by the court for the “culpable” bankrupts (those who are considered guilty for
acting purposely to mislead or deceive the public or people who traded with him).
Pensions
A bankrupt order made against a person should not include for the bankruptcy proceedings the rights that
this person has in a Revenue pension.
COMMITTEE OF CREDITORS
The creditors may set up a committee of at least three creditors who will observe closely the way the
debtor deals with the assets.
The trustee is not bound to set up a committee of creditors; however, they can be a good help for the
trustee because those creditors may advice the trustee in regards of matters related to the debtor’s
activities that the trustee could not be aware of.
THE PUBLIC EXPLANATION
The Official Receiver may apply to the court for a public examination of the debtor activities.
At the public examination the debtor can be questioned on the subject of his business affairs and dealing.
The purpose of the public examination is to help the Official Receiver to find out why his business failed
and if he did some type of fraud
THE FAMILY HOME
If the family home is on the debtor’s name, the right of the house is given to the trustee for the
administration.
The property can be sold to pay the creditors, but there are some rights for the debtor to continue in
occupation. Some or these rights are:
- If minors (under 18 yrs old) are living in the house from the commencement of the
bankruptcy process
- The debtor can request to postpone the selling of the property up to 12 months in order to
find another place to live
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The family home. Act 2002
It deals with a problem of the price of the family’s house and the increasing of the house prices.
PROOF OF DEBTS
The creditors will send to the trustee the details of the debts. The claims can be sworn (done by a
promises to tell the truth) or unsworn. Both are called Proof of debts.
MUTUAL DEALINGS - Set off
Sometimes between the creditor and the debtor there are special situations, for example, the debtor
owes to the creditor certain amount, but at the same time the creditor also owes money to the debtor in
relation to another deal; to solve this situation they have agree on the bet deal to sort out the way of
payment.
CARRYING ON THE BUSINESS AND DISCLAIMER
The trustee will request to carry on the debtor’s business aiming to bring more money for the creditors.
The debtor will transfer to the trustee the properties for the benefit of his creditors, however the trustee
will request for a disclaiming the property, and then the trustee will not have personal liability that the
debtor is doing wrongly, for example, if the debtor is renting a house and produces damages in the
property, the trustee cannot be liable for those damages.
TRANSACTIONS AT UNDERVALUE AND PREFERENCES
Undervalued is when something is worth less money than it really value is.
Transactions at undervalue is when someone transfers a property to other person receiving little or
nothing in return. For example, a debtor transfers some properties to his wife
Transactions under preference: When the debtor pays to some of the creditors the full amount of the
debt but nothing to other creditors.
The trustee can recover property or money that was passed in transaction at undervalue or as a
preference.
In order to achieve that the trustee must act as follows:
- He must prove that the transactions at undervalue was done in the five years before the
presentation of the petition of bankruptcy. If the court accepts that the debtor was
insolvent at the time of the transaction, the court can set aside (keep it aside in order to
use it later) the transaction.
- The trustee must prove that the debtor was insolvent at the time of the preference or
became insolvent as a result of that preferential operation
Transactions defrauding creditors
The section 423 of the Insolvency Act 1986 is designed to operate regarding transactions at undervalue
and preferences
Enterprise Act amendments
A trustee in bankruptcy needs a permission of the court or a Creditors committee before proceeding in
regard to transactions at undervalue, at preferences and transactions defrauding creditors. The creditors
committee would like to know in advance if it is worthy to embark in some procedures, taking into
account the costs of the court action.
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Protection of innocent third parties
For instance, if the debtor makes a transaction at undervalue to his wife; and then she sold the property
to someone who is not aware of the legal situation and buy the property in good faith; the law protects
the buyer and he can retain the property.
PAYMENT OF THE CREDITORS – PREFERENTIAL PAYMENTS
As the trustee gets some money from the debtor’s business, he can start making payments to the
creditors. Insolvency Act 1986 sets the order of priority to receive the payment.
Salaries and pensions of the employees are the first priority in the list.
PROTECTION OF EMPLOYEES
An employee who loses his job when his employer becomes bankrupt can claim through the Department
for Business, Innovation and Skills (BIS).
Any payment must be authorized by the BIS, and the right to recover the money for payments must be
transferred to the BIS.
Type of creditors
As we have seen there are:
a) preferential creditors (with first priority for payment),
b) trade creditors
c) deferred creditors
Deferred creditors: these are, for example, the wife of the debtor. They are not paid until all other
creditors have been paid.
DISCHARGE OF THE BANKRUPT
- “Culpable” bankrupt: Responsible for doing something wrong or illegal which caused the
bankruptcy.
- “Non-culpable bankrupt”: Are those who for reasons beyond his or her control and despite best
efforts have suffered business failure that led to bankruptcy.
For non-culpable bankrupts there is an automatic discharge from bankruptcy after 1 year of the
bankruptcy order.
For the culpable bankrupt there will be normally a BRO which is a Bankruptcy Restriction Order, with a list
of restrictions that will affect the bankrupt in the present and in the future.
Bankruptcy Restriction Orders (BRO)
The restriction can affect the bankrupt for a period between 2 to 15 years.
The Official Receiver has to show to the court that the conduct of the bankrupt has been reprehensible
for the public interest.
o Effects of the BRO
For example: For a period between 2 to 15 years the person subject to the BRO cannot:
- Act as a company director
- Obtain credit above a specified amount without disclosing the existence of the BRO
- Trade in a name other than the name under which he or she was made bankrupt
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o Bankruptcy restriction undertaking (BRU)
Undertaking is a promise to do something
Under this procedure the bankrupt person accepts the terms of the Bankrupt Restriction Order
o The 12 months rule
If the bankrupt is not culpable bankrupt he can be discharged even sooner than 12 months, after the
Official Receiver conducted a small investigation regarding the bankrupt financial behaviour
THE ORDINARY PARTNERSHIP
All the previous previsions discussed in this chapter were related to the Sole trader. We now turn to the
legal environment of the ordinary partnership.
DEFINITION AND NATURE OF A PARTNERSHIP
The partnership Act 1890 sets out the basic rules which apply to this type of business organisations.
The legal environment of the ordinary partnership is much more complex than that of the sole trader.
There are much wider rules to consider in partnership; for example, the ability of a sole trader to contract
on behalf of the business but in partnership the partner cannot make contract in representation of the
business if he is not authorized by the other partners.
Definition
An informal partnership is defined as “The relation that subsists between persons carrying on a business
in common with a view of profits”.
This definition is not saying that must be an agreement between partners to be partners, meaning that
just having a business in common with the aim to make profits make them partners even if they have not
expressly agreed to be. This is the “informal partnership”.
1)
2)
3)
4)
5)
6)
7)
Explanation and consequences of the definition
The relation which subsists is one of contract. A partnership is a contract based on being in
business together with the intention to a joint venture, new business or activity as partners.
It is essential that the partners have taken some steps to give evidence that the joint venture has
began.
A partnership is “between persons”, but as we have seen there are natural and juristic persons,
and a company being legal person can be a partner with a human person (natural person).
Two or more limited companies can be in partnership, forming a Consortium
Partners must be carrying on a joint business venture, and for this reason a group of people who
run a social club would not be an informal partnership
Partners must act in common: Every partner must be allowed to have a say in management and
decisions of the business
There must be a view of profit: Although in connection with this point, the Court of Appeal has
ruled that it is not necessary a profit sharing to become a partnership, because some partners can
be paid a salary instead of sharing the profits and they are still forming a partnership.
The sharing of gross return: Sharing of gross returns does not, (by itself), provide evidence of
partnership
Joint ownership does not itself make the co-owners partners. If two persons share a property
which is rented and they share the monthly payment, this situation does not make them partners.
English law does not recognize joint ownership of property as business.
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Formalities: Writing document is not required for a partnership agreement. In fact there is not
need to be a contract at all. However it is recommended to have a written agreement to set down
rules in case one of the partners wants to change thins that were agreed verbally.
IS THE SHARING OF PROFITS AN EVIDENCE OF PARTNERSHIP?
In the past sharing of profits was almost conclusive evidence of informal partnership; but legal cases
presented to the court led to review this concept. Let’s see examples of such situations:
1) Creditors who become part of the management of the firm in order to supervise the business and
take share of profits: In this case a person (the creditor) is sharing the profits of the firm but his
intentions are not to be a partner of the persons that owe him money. The creditor will not be
considered a partner
2) Sharing profits with the employees: Some organizations use to pay the employees as part of their
salaries by some profit sharing scheme. This is possible without putting the employees at risk of
being considered partners and liable for the debts of the firm.
3) Lenders or creditors receiving a percentage of the profits as part of payment of money borrowed
by the firm: Some creditors can agree with the firm that for the payment of a loan they can take a
percentage (e.g. 8%) of the profits. As we can see the creditor is sharing profit but it does not
make him a partner.
8)
Deferred creditors
Lenders of money are not given a priority at the moment of the payment of a bankruptcy process. As we
could see, employees are put in preferential order for the payment, meaning that at the time of payments
they will be first in the list.
The deferred creditors, in this case, the lender of money, will not get any of the money owed until all the
other creditors have been fully paid.
TYPES OF PARTNERS
- The general partner
- The dormant partner
- The salaried partner
- The partner by holding out (by estoppels)
The general partner
This type of partner has the right to take part in the management of the business; unless there is
an agreement between himself and the other partners that he should not; however if this partner
ignores the agreement and starts, for example, to order goods to a supplier or signing checks on
behalf of the firm, the law gives him the right to do so despite of the previous arrangement he has
done with the other partners; This could be a source of internal conflict which could lead to the
dissolution of the partnership.
The dormant partner
He is a partner who puts money (capital) into the firm but does not take active part in the
management. If he does take part in the management of the business he changes his status from
dormant partner to general partner.
The salaried partner
These are partners who usually do not put money (capital) into the firm as the general partners
do. They are just paid a salary as an employee. In case they want to leave the firm it is not
necessary to request for dissolution of the firm. They are not liable as the other general partners
except on the following situation:
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If the salaried partner is a very recognized person and the fact that his name appears on the firm’s
letter-heading can make some customers rely or trust to deal with that firm because the presence
of this partner; in this case the salaried partner could be liable.
An alternative that this recognized partner can take to avoid liability is describing publicly and
visible himself as “salaried partner” or “consultant” on the firm’s letter-heads; however the court
will analyze each particular case to define the liability of the salaried partner.
The partner by holding out (or by estoppels)
It occurs when a person allows his or her name to appear on the firm’s letter-heading whether
that person is or is not a full partner.
An example of partner by holding out is when the partner has retired of the partnership but his
name continues appearing on the firm’s letter-headings.
If the partner is aware about that his name is on the letter-headings and consents with that and
the client has relied on his name as partner; the holding out partner will be liable.
MEMBERSHIP OF THE FIRM
There is no limit on the number of persons who may be partners in a partnership.
There is no space for discrimination of membership regarding sex, race, sexual orientation, religion and
belief, disability or age.
A minor may become a partner but may become out of contracts while he or she is less than 18 years old.
Regarding mental capacity, a person is assumed to have capacity unless it is established that he or she
lacks it. The Court will make an assessment of the mental capacity of the person through professional’s
consultancy.
THE FIRM AND THE FIRM NAME
Generally
The name of the firm is a way to shorten the full list of the names of all the partners, hence the
judgement against the firm can also be enforced in the same way against the private property of any
partner if the assets of the firm are not enough.
Choice of name
o Passing of at Common law
Partners can trade under any name that suits them so long the name does not suggest that their business
is the same as the competitor. The name must not deceive or confuse the customer.
People can use their own names even if there is some confusion with another person’s business, but the
selection should not be make purposely to deceive the public. In that case the court can give an injunction
(official order to stop someone from doing something) to stop using this name.
o Business name and company legislation
The names of all partners and their addresses must be stated in a noticeable way so that can be easily
read at the firm’s business premises. Also the names must be stated in all forms, documents and business
letters. However this requirement is not so strict in firms with more than 20 partners.
Under the Companies Act 2006 the use of descriptions like “company” or “and company” are allowed for
partnerships even though they suggest that they are companies when in fact they are not Registered
Companies. However they cannot use expressions like “Public Limited Company” or its abbreviation plc.,
or “Limited” and Ltd.
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THE RELATIONSHIP BETWEEN PARTNERS AND OUTSIDE
The power of a partner to make him liable for transactions made on behalf of the firm is based on the
laws of agency. Each partner is an agent of his co-partners.
PARTNER’S POWERS
Actual authority
The firm can be liable for the acts of the partners done on behalf of the firm and also of employees
of the firm.
Actual authority inferred
Sometimes if some partners take a decision but the other partners are not aware of that, the firm
is bound to the decision taken if there are reasonable circumstances for that transaction. The
Court in one case, which can be used as an example for inferred authority, stated that the there
was an inferred consent from the other partners who did not participate in the transaction
because the transaction made sense with the business
o Apparent or “ostensible” authority
If a partner enters into a transaction on behalf of the firm without authority, the person he deals
with may bind the firm to the transaction if he didn’t know that the partner had no authority
(meaning internal authority according to agreement between partners) to make such operation.
The transaction must be connected with the business and must be clearly assumed that it was not
a personal deal of the unauthorized partner.
The business deal must be something usual for this type of business.
Finally, the outsider must know or believe that he is dealing with an active partner with
management powers in the firm.
Even dormant partners can perform unauthorized operations which will bind the firm if the
outsider believed that he was a general partner, for instance, if the dormant partner’s name was
written in the letter-heads of the firm but without explaining his status as dormant partner,
salaried partner or consultant.
o Examples of apparent authority as laid down by case law: The Court has decided that there are
some areas in which the partner has apparent authority:
- All partners in all business: Here there is apparent authority to sell the goods (but no the land) of
the firm and to buy goods (but no land) on behalf of the firm; to receive money in payment of
debts due to the firm and give valid receipts
- All partners in trading partnership: It was important to define the world “trader”, and one
important element in the definition of trading could be that trading implies buying or selling.
This point is important because a partner of a partnership that is not trading has not implied
power to borrow on behalf of the firm.
If the firm is engaged in trade, the main additional implied powers of the partner are:
- To borrow money on the credit of the firm
- To secure the loan
o Situations of no apparent authority
The partner has no authority to do:
- He cannot make the firm liable on a deed. He needs the authorization of the other
partners. This authority must be given by deed.
- He cannot give a guarantee, e.g. of another person’s debt on which the firm will be
liable
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He cannot accept payment of a debt from a debtor to the firm by accepting a discount
proposed by the debtor, e.g., the debtor proposes to pay 75% of the total amount
owed. A partner cannot accept this deal without being authorized by his partners
- He cannot bind the firm by agreeing to go to arbitration in a dispute when it can make
loose the right of the firm to go to the court of law and have the case heard by a judge.
A partner cannot compromise the legal rights of the firm
A partner’s liability for debt and breach of contract by the firm
If because of actual or apparent authority, a partner makes the firm liable to pay a debt of carry out a
contract, the usual procedure of the creditor is to sue the firm; if the court decides that the claimant is
right but the firm has no sufficient assets for the payment, the partners are liable to pay it from their
private assets of properties.
A partner can be, therefore, required to pay the firm’s debts from his private assets. From this we can
see that only if all the partners are unable to pay the firm’s debts will the firm be considered fully
insolvent.
-
Torts
A tort is something that you do or fail to do which harms someone else for which you can be sued
The firm is liable for the torts of partners which they commit in the ordinary course of business, but no
where the partner acts outside the scope of the firm’s usual activities.
At common law the firm is also liable for the torts of its employees committed in the course of their
employment.
Misappropriation of property
Partners are liable to make a good loss incurred if partners misapply or mismanage money or property
received from a third person such as a client
LIABILITY OF INCOMING AND OUTGOING
We need to define now the period of time in which the partner is liable for the firm’s debts
There are four points to define:
- Admission as a partner
- Retirement as a partner
- Novation and indemnity
- Notifying retirement
1. Admission as a partner: A new partner does not take the liability for debts of torts incurred by the
firm before the date he become a partner. If he wishes to take this liability he must do it by a
process called novation.
2. Retirement as a partner: If a partner retires from a partnership, he will still be liable for the debts
and obligations assumed by the firm during the time he was a member of the partnership, in other
words, the law does not allow a partner to avoid his liabilities simply by retiring from the firm.
On the other hand, a partner is not liable for future debts or liabilities taken by the firm after his
retirement, unless the partner has not given proper notice of his retirement as we will see later.
3) Novation and indemnity: The use of novation is rare except the case of bank which may release a
retiring partner from his liabilities if the partnership has enough assets to pay the debts from the
other partners including the new ones who are now liable by the process called novation.
Creditors are not forced to accept the new partner in novation and may continue to regard the
retiring partner for debts incurred while ha was a partner.
Indemnity, the meaning of indemnity is an amount of money paid to someone because of some
damage or loss that he or she has suffered. The indemnity is often found in the partnership
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agreement which may have a clause such as “In the event of retirement of one of the partners the
remaining partners shall take over the liabilities of the firm”.
4) Notifying retirement: The law requires a retiring partner to notify his retirement.
Depending on the type of creditors this notification must be done accordingly, or rather, the
retiring partner’s obligations will depend on the type of creditor and the way they were notified of
this retirement.
a) Creditors who have previously dealt with the firm and who knew about the retirement of the
partner: This creditors may be notified by letter from the firm
b) Creditors who have not had previous dealing with the firm buy who knew that the retiring
partner was a member of the firm: These creditors must be informed by publishing the
retirement in a bulletin (The London Gazette, for example), which contains all sort of public
announcements: bankruptcies, company liquidations and partnership dissolutions.
c) Creditors who have not had previous dealings with the firm and do not know that the retiring
partner was a member of the firm: No legal obligations of give notice from the firm to them.
RELATIONSHIP OF PARTNERS WITHIN THE PARTNERSHIP
We shall now deal with the relation of partners to one another
The ability to change the partnership agreement
Partners can change the business of the firm but all the partners must be in agreement about this;
internally the partners can change the terms of agreement that they have signed.
The relationship between the partners and the outsiders cannot be changed in that way. Internal
restrictions on the authority of partners have no effect on an outsider unless he has actual notice of the
restriction.
Partnership property
Whether property becomes partnership property or remains in the separate ownership of a particular
partner depends upon the intention of the partners.
In the absence of an express agreement between partners, the property will be regarded as one of the
firm property if:
a. It is purchased with partnership money
b. It is brought into the firm by a partner who has the value of the property credited to his capital
account in the assets of the firm
c. It is treated as an essential part of the firm’s property by the partner
o The commercial importance of identifying partnership property
To identify who is the owner of the properties of the firm is very important for the following reasons:
1) Important for the partners themselves: Because if the property increases its value, we need to
know if the benefit of this increase is advantageous for the firm (if the property belong to the firm)
or if the partner is the sole owner, is him who gets the benefit. The opposite situation happens
when the property losses its value.
2) To the creditors of the firm and to the creditors of the individual partner: The ownership of the
properties is important for the creditors to know whether this property is available or not to pay
the debts that the firm or one of the partners have with the creditor
3) If the property is owned personally by a partner: He can do what he likes with it unless the firm
has some contractual rights over it in a written agreement
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Implied financial terms
We will describe the relationship between partners in regards to financial matters
- Profits and losses: Unless there is other agreement between the partners; all the partners are
going to share equally in the capital and profits of the business. If some partners have contributed
more capital will receive more profits at the moment of the distribution of the profits generated
by the firm; but this clause must clearly define it in the partnership agreement
- Interest on capital: Unless the other partners agree, no partner is to get interest on the capital he
puts into the firm. The interest on capital belongs to the firm
- Interest on advances (loan): If the firm borrows money to one of the partners and he decides to
loan the money from his personal funds, giving it as an advance; he cannot receive an interest
more than 5% per annum.
- Indemnity: The firm must pay the money back to a partner who made payments with his own
money, that should have been done by the firm
Implied management powers
The way the firm will distribute or delegate the powers for the management of the business is usually
explained in the partnership agreement.
If there is nothing written in the agreement, the following rules will be applied:
1) Every partner may take part in the management of the business: Partnership is defined as the
carrying on of business “in common”; and taking into account that a partner is liable for the
firm’s debts, he should have at least the chance to manage part of the business. Any
unjustified exclusion of a partner from be part of management will enable him to request the
dissolution of the partnership.
2) A partner is not entitled to a salary. Here we talk about the general partners and we do not
include the salaried partner who receives a salary but does not share profits.
General partners share profits, but in some firms there is one or more partners who are more
active in the business and invest more of his time than the others; for these cases, it is possible
that this partner can receive a salary which will boost his income in addition to the share of
profits. Everything must be proper and clearly explained in the agreement.
3) No new partners can be brought into the firm and no changes can be made in the direction of
the business without the consent agreement of all the partners: This is a fair provision. If some
partners refuse that a new member is included as partner in the firm the other members
cannot push or thrust for the incorporation of this new member. Mutual confidence is
essential. The same concept regarding changes on the direction of the business. If there are
some special clauses for these two situations they must be well addressed in the partnership
agreement.
4) Every partner is entitled to access to the firm’s books: Including the right to inspect and copy
them: The court will make an order (an injunction) preventing the partner of this right if he is,
for example, taking the names of customers from the books to try to get them to use for a
separate and personal business that he is doing out of the firm.
5) Every partner shall attend at and work in the business: If he does not, the other partners have
a ground to dissolve the firm.
Expulsion of a partner
The partners have no power to expel another partner even if the majority of them want to do so, unless it
is written in the agreement that partners can be expelled under certain circumstances.
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If a partner does not want to leave the firm and the majority of the other partners want the expulsion the
case will be taken to the Court which will consider if there are enough reasons to justify the expulsion or
not.
The Court will assess the following:
- If the complaint justifies the expulsion: For example, if one member has personal behaviour in his
private life but although the other partners don’t like his way, but this behaviour does not affect
the development of the business of the firm; the Court would say that the request of the other
partners for expulsion is not justified
- Even if the partner agreement allows the expulsion by the majority of the others, there should be
a good reason for that expulsion. The court can say that unfair expulsion t a partner who had done
nothing wrong to hurt the firm is not effective because was done in bad faith
The expelled partner is entitled to the right of withdraw his part of the firm’s assets
Relationship of utmost good faith
“Utmost” means the maximum degree possible
Each partner must treat his co-partners with utmost fairness and good faith
The Act 1890 sets out certain areas to which the good principle is applied. They are as follows:
1) Duty of Account: Every partner must give true accounts and full information regarding all things
that affect the firm to any partner; for example, if one partner knows that some of the assets of
the firm have increased its value, he has the obligation to share this information with his partners.
This is a positive duty to disclose fact. It is not merely a negative duty of not to mispresent facts.
2) Duty of not to compete with the firm: Partners may have other business either personal (as a sole
trader) or being part of another partnership; however the business that he does out of the firm
must not compete with the one that the firm does. If there is no consent of this situation by the
other partners, he must share with them the profits of this business that he is doing as a sole
trader, for example.
DISSOLUTION
The dissolution of the partnership can be made by mutual agreement (non-judicial dissolution) or by the
intervention of the court (judicial dissolution).
One of the most important points of the dissolution is the distribution of the assets of the firm.
Non-judicial dissolution
Any of the following events will normally lead to the dissolution of a partnership;
1) The ending of the period for which the partnership was to exist
2) The achievement of the purpose for which the partnership was formed
3) By the giving of notice
4) Death of a partner
5) Bankruptcy of a partner
6) Illegality
-
-
The ending of the period: Some partnerships are agreed for a fixed term and it is agreed in the written
agreement. In that case the partnership is dissolved after the expiration of the date of the agreement
of partnership.
The achievement of the purpose: We will explain it with an example: A group of investors formed a
partnership for the construction of a shopping-mall; once the building is finished the partnership is
over.
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By the giving of notice: A partner may produce the dissolution of the partnership, by informing
verbally or written the decision to leave the firm. This decision may be accepted but it needs the
consent of all the other partners, otherwise if the other partners do not accept the retirement of the
partner and his right to withdraw the capital of the firm the case will be taken to the Court, which can
refuse or accept the terms of the request (judicial dissolution)
- Death of a partner: the death of a partner dissolves the firm. The shares of the deceased partner will
be given to the spouse of children or other person mentioned by his will. The death of one partner
does not imply that the business of the firm must stop; as we said, the share will be passed to his
relatives but the firm can carry on with the business. In this case we say that the dissolution is just
technical. Obviously, if in the partnership there are only two partners and one dies, there is no more
partnership, the remaining partner becomes a sole trader if he wants to continue the business.
- Bankruptcy of a partner: The bankruptcy of a partner from business he made out of the firm dissolves
the partnership. The partnership agreement can say that the business shall continue under the nonbankrupt partners. The bankrupt partner’s shares are given to his trustee of the bankruptcy
proceedings.
- Illegality: There are two types of illegality:
a) Where the business is unlawful: Sometimes could happen that at the beginning of the partnership the
business was allowed by the law, but if the legislations changes, the same business can become illegal
according to new legislation. In that case the partnership must be dissolved.
b) Where the partners cannot legally form a partnership to carry on what is otherwise an illegal business:
there is no law for partnership between gangsters, because the activities that they do are illegal per
se.
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Judicial dissolution (dissolution by the court)
This type of dissolution is necessary when:
o A partner wants to leave before the ending of the period or before the achievement of the
purpose of the partnership and there is nothing written in the partnership agreement
which allows this
o Any other situation which prevents the non-judicial dissolution
The intervention of the court for dissolution must be justified by one of the following possible scenarios:
1) Partner’s mental incapability: mental Capacity Act 2005 states: The partner concerned must be
incapable, because of mental incapacity of managing his property and affairs. Any of the partners
can make the petition
2) Partner’s physical incapacity: The incapacity of the partner must be permanent. Partner’s
agreements often contain clauses which allow dissolution after a stated period of incapacity. It is
important to mention that the incapacitated partner cannot make the petition. It is up to his copartners to do so, otherwise he continues as a partner.
3) Conduct prejudicial to the business: the misconduct must be related to the business. Moral
misconduct is not enough reason unless, in the view of the court, it is likely to affect the business.
4) Wilful or persistent breach of the agreement or conduct affecting the relationship between
partners: Wilful is something done deliberately in order to cause damage or harm.
It includes, for example, refusal to participate in meetings, or in case of manager’s refusal to
organize meetings, failing to keep accounts of the business, continue quarrelling and very serious
internal disagreements. For the court to order dissolution the conduct must be “serious”, thus
occasional rudeness or bad temper would not be sufficient motive to order the dissolution.
5) The business can only be carried on at a loss: Partners are doing business together with a view of
profit. But if a firm is permanently looking money and no generating profits, the sensible decision
should be to stop the business, but if there are disagreement and some partners refuse to dissolve
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the firm the other partners can ask the intervention of the court to force the dissolution. The court
will assess the situation and will define whether or not to order the dissolution. One of the main
factors that the court will assess is to confirm that the loss is not something temporarily.
6) The just and equitable ground: If there are situations not contemplated or mentioned in the five
points previously listed, it appears that the Court has powers to hear any petition for dissolution.
The dissolution will occur if the Court says that the dissolution for that particular case “is fair and
equitable”.
Effects of dissolution
After the dissolution the most important point is the distribution of the assets of the firm
Realisation and distribution of the assets
1) Realisation: If the process of achieving something that you have planned or hoped for, or the
moment when it happens.
In business, the agreement between partners can state that the retirement of one partner will not
affect the continuation of the business and the firm can seek for its realisation, but if there is
nothing mentioned in the agreement, the retirement of one partner (deceased or retiring partner)
will lead to the dissolution of the partnership.
Every partner has a right over the assets (called lien) which become effective after the dissolution.
The assets will be sold and the money collected distributed accordingly.
In a contractual arrangement, a lien is the right of a contracting-party to take possession of a
specific asset.
2) Sale of goodwill: Goodwill is the reputation of the firm. This goodwill can represent a valuable
asset for the firm, as it can give a feeling of security and trust to the customers. The goodwill can
be sold. At the moment of selling the assets; the reputation of the firm can be given a value and
the buyer can pay for it.
In financial terms, the goodwill is an excess of the price that the purchaser will pay over the
tangible assets. For example, the tangible assets (machinery, equipment, etc) has a value of
£100.000, but the purchaser pay for the transaction £150.000, we can imply that the £50.000 paid
over the value of the tangible assets are in concept of goodwill.
The payment of the goodwill gives to the purchaser some rights over the seller, some of these
rights or conditions are;
- The purchaser must be seen by the customers as a continuation of the business
- If the seller will continue doing the same type of business he should not put the business next
to the business that the purchaser bought
- The seller should not use the same name of the already sold firm
3) Final Account: Is the record of transactions from the date of the last account up to the date of the
dissolution. The dissolution of the firm leads to the distribution of the account (tangible assets and
money0 among the partners.
4) Distribution of assets: Each partner is paid the amount of capital due to him
The insolvent partnership
Insolvent partnership Order 1994 provides a code for dissolution of insolvent partnership and introduces
two new procedures:
o Voluntary agreements
o Administration orders for insolvent partnership
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Voluntary agreements: the members of an insolvent partnership make a proposal to the firm’s creditors
for the payment of its debts. The creditors are bound to the agreement if they accept the proposal.
Administration orders: The Court will appoint an administrator for the survival of the firm, so he can
improve the financial condition of the firm, increase the assets and achieve a more convenient
distribution of the assets at the moment of the dissolution.
The Court will appoint the administrator if there is a petition requesting to do so.
Winding-up by the court
To wind up is to close, to end something.
In financial terms, the Winding up is the process that entails selling all the assets of a business entity,
paying off creditors, distributing any remaining assets to the principals, and then dissolving the business.
Insolvent partnerships may be wound up by the court when no concurrent petition is presented against
the partners.
A petition against the firm may be presented by a creditor, by the administrator or by a former partner.
Application of Company Directors
Disqualification Act 1986
When there is a winding-up of the firm by the court each partner has the status of officer and director of
the firm.
If the court believes that the partners have not run the firm responsible, the partners can be prevented to
act as directors of being part of management of companies for up to 15 years.
ORDINARY LIMITED PARTNERSHIPS
Generally
Limited Partnership Act 1907: The Act regulates the formation of limited partnerships in which one or
more of the partners have only limited liability for the firm’s debts.
In this type of partnership there must be at least one general partner whose liability for the debts of the
firm is unlimited.
Registration
Every limited liability partnership must be registered in the Registrar of Companies.
They have to include the following information at the Registrar:
- Firm’s name
- Nature of the business
- Principal place of business
- Full name of each partner
- Date of commencement
- A statement that is a Limited partnership
- The details of the contribution to the capital of the firm
Failure to register the firm means that the firm is an ordinary partnership with unlimited liability.
Rights and duties of the limited partner
The limited partner is not liable for the debts of the firm beyond the capital that he has contributed. It
means that he has not liability to his private properties.
A limited partner cannot take part of the firm’s management
He can give advice to the managers of the firm and can inspect the account books
The death, bankruptcy, mental or physical incapacity of a limited partnership does not dissolve the
partnership
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LIMITED LIABILITY PARTNERSHIP (LLP)
We have studied Ordinary Partnerships and Ordinary Limited Partnerships.
We will see now matters related to the Limited Liability Partnership which has been recently designed
mainly for the professional firms of lawyers and accountants who have been for so long liable unlimited of
their capital in the firm and also with personal liability to personal property when they receive claims for
negligence.
The Limited Liability Partnership Act 2000
It gives an important change in relation to the liability of the partners and the firm for those who adopt
this new form of business organisation.
The firm (the LLP) will be liable by the creditors;
The personal liability of the partners in the LLP has a particular clause that makes the LLP different than
the ordinary partnership: In the LLP the one who will be exposed to be liable to personal properties is the
negligent partner. For example, In an LLP formed by accountants, a client asks for the professional service
requesting to make a year account, and one of the accountants is in charge for this assignment; in case
that the appointed accountant makes mistakes or works negligently the client will have the right to claim
for damages suffered; To compensate the damages that affected the client the LLP assets will be fully
liable for the payment of the inconveniences caused to the clients but only the negligent accountant will
be liable to his personal properties and not all the partners as it happens in the ordinary partnership.
The Act 2000 is divided in sections. Here we explain the subjects that each section states.
- Section 1: This section states that an LLP is a legal person with unlimited capacity
- Section 2: It deals with the incorporation documents that are necessary to present to the Registrar of
Companies
- Section 3: This section deals with the issue of a Certificate of Incorporation by the Registrar of
Companies
- Section 4: Explained everything related to the membership of the partners
- Section 5: This is concerned with the relationship of the members which is governed by any agreement
between them
- Section 6: This section is the particular importance in terms of liability, which provides that a member of
an LLP is liable to any person as a result of a wrongful act or omission of his responsibilities in the course
of a business of the LLP. The LLP is liable at the same extent as the member; but this provision does not
make the other members of the LLP personally liable.
The other partners may lose their capital in the firm but no more, whereas the negligent partner will be
personally liable only when the assets of the firm are not enough to pay the damages caused to the third
party.
- Section 7: Gives a member’s representative (ex: a trustee) a right to receive amount due to the member
but with no power to interfere in management.
- Section 8: This deals with designated members (those involved in the management of the LLP)
- Section 9: Registration of membership changes
- Section 10 to 13: Concerned about taxations
- Section 14 to 17: Regulation making powers
LLPs: The regulations
The Act 2000 is supported by the LLP Regulations 2001.
The Regulations 2001 gives a more complete understanding of the law. They are quite detailed. The
following provisions of the Regulations 2001 are important to mention:
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o Account and audit exemption
The provisions explain the requirement to keep accounting records and the preparation and publication
of annual accounts. The requirement for an audit in the same way as the companies but in LLP there is no
need to prepare a director’s report as it is necessary for the companies.
Small and Medium LLPs can send to the Registrar of Companies and abbreviated (a summary) of the
accounts instead of the full account books.
o The disadvantage of financial disclosure
One of the major disadvantages of the adoption of LLP status is the company style for financial disclosure.
When the LLP presents the account to the Registrar it makes its figures available to the public, creditors,
clients and staff have access to the financial situation of the LLP; moreover, even the salary of the
Directors must be stated in the account.
In some other countries, for example, US; LLPs do not have the obligation for financial disclosure.
o Other provisions of the Regulation 2001
- Execution of documents: Two members of an LLP must sign the documents
- Register of debenture holders: LLP must keep a Register of debenture holders
- Registrar of Companies must receive notice of the address of the registered office
- Identification: The name of the LLP must appear outside of the premises where they perform business
and in headletters and correspondences.
- Deliver of annual return to the Registrar
- Auditors: Subject to exemption rules for audits; the LLP are required to appoint auditors. Auditors have
the rights to access to LLPs books, accounts and the right to attend meetings of the LLP.
- LLP is required to register charges with the Registrar of Companies
- An investigation of an LLP may be required by its own members
- Fraudulent trading is punished in the same way as a company
- There is a remedy for members of an LLP who suffer unfair prejudice
- Disqualifications: Members of an LLP will be subject to the same penalties that apply to company
directors
- Insolvency: The regulation 2001 gives provisions for voluntary arrangements, administration orders,
receivership and liquidation.
There are two important differences to the Company’s rules for the insolvency procedures:
a) Withdrawals made by members in the two year prior to winding up will be subject to clawback (to
return) if at the time of the withdrawal the member knew that the LLP would be insolvent
b) In a winding up process, both, past and present members are liable to contribute to the assets to
the LLP.
Act 2000 it is not completely clear regarding the position of the LLP at the moment of liquidation and in
certain circumstances insolvency practitioners may find difficulties in determining the liability of members
of LLP liquidation.
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Need for membership agreement
The provisions of the Regulation 2001 are very rigid and without flexibility which makes them not very
suitable for business.
The best way for an LLP to avoid the rigidity of the provisions of Reg. 2001 is by developing a detailed
agreement between the partners.
For the construction of an agreement this list can help the partners and their professional advisers to
cover all the points:
- Type of business conducted by the LLP
- The ownership of property
- Capital
- Profit and loses
- Banking arrangements
- Member’s entitlement, e.g.: salaries, pensions, insurance, etc
- Authority of members
- Retirement of members
- Rights and obligation of the retiring members
- Serving of notices
- Arbitration provisions
- Winding-up issues: This point if important because as we have seen, the regulation 2001 is
not very specific about member’s liability
Membership agreement: Confidentiality
The contents of the agreement is not registered with the Registrar of Companies, therefore it does not
become known to the public
Insolvency
LLPs follows insolvency patterns in line with companies regulations
REFORM: A partnership with legal personality
The law Commission has sent a Consultation paper requesting for reforms on the provisions of
Partnership Acts.
It is important to mention that they are just proposals and they are under discussion
The three main proposals are:
1. Proposal to introduce separate legal personality to the members of a partnership
2. Proposal to avoid the unnecessary discontinuance of business caused by dissolution of the firm
3. Proposals to provide a more efficient and cheaper mechanism for the dissolution of a solvent
partnership
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CHAPTER 6
COMPANIES
This chapter is concerned with one type of corporation: the Registered Company, because this is the basic
form of corporate business organization.
TYPES OF REGISTERED COMPANIES
Classifications
Limited by shares
Limited
Registered Company
Limited by guarantees
Unlimited
Public
Registered Company
Private
Limited Liability Companies (LLP)
- Most registered companies are limited by shares: The liability of the members of the company is limited,
but the liability of the company is unlimited.
The company must pay its debts so long as they have funds to do so.
The liability of the members is limited by their shares. It means that once they have paid the debt with
their own shares they cannot be asked to pay any more, even if the company is dissolved and cannot pay
its creditors in full.
- Companies can also be limited by guarantee: They are mostly formed for charitable, social, political or
other non-trading purposes. The members are liable only to the amount that they have agreed upon in
the statement. Every member of the company commits to contribute a fixed amount to the company
assets in case of winding-up of the company. The liability arises only if the company is wound-up.
Guarantee companies only get their income from members’ subscriptions, as it is the case of a club, for
example.
Unlimited Companies (Unlimited liability companies)
The liability of its members is unlimited. No many companies adopt this system because the liability of
their members is unpopular.
The main advantage over the limited company is that unlimited companies do not have to show accounts
to the Registrar, so the public has no access to know how are their financial statements. We can say that
the price of financial secrecy or confidentiality is the unlimited liability.
The companies are always private companies.
PUBLIC AND PRIVATE COMPANIES
Company Act 2006 defines a public company, but there is not a clear definition of the private company,
which can lead to assume that private company is the one that cannot be included on the definition of a
Public Company.
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Private companies are not allowed to offer their shares to the public.
The public company is limited by shares. It needs two directors; it cannot start trading until they receive a
trading certificate from the Registrar of Companies. If the Company does trade without the Certificate,
the directors can be severely liable for the damages caused to the other party of the transaction.
FORMATION OF THE COMPANY
It is now possible to use an electronic, online service to incorporate a company. One person is now able to
form any type of company if they fulfill the requirements for registration.
Memorandum of association: Memorandum is a written report. In the past a memorandum was a
major constitutional document; today is just a merely document that will be attached to other
registration documents.
o Requirements for Registration:
1. Registration documents: The application for registration must state:
- The name of the company
- The location of the company
- The company directors consent
- The subscriber details
- If the liability is limited and if so whether limited by shares or by guarantee
- For companies limited by shares, information about the share capital
- Public or Private company
A Memorandum of association must also be submitted. This contains the names and signatures of
the subscribers; the purpose of the memorandum of association is to confirm the subscriber
intention to form a company.
2. Statement of initial shareholding and share capital
The statement contains the following:
- Total number of shares of the company
- The nominal value of them
- The class of shares
- The total number of shares in each class
- The amount paid of the shares
3. Statement of guarantee
Company limited by guarantee: Name of subscribers, contribution and the statement that the
subscriber is going to contribute to the assets of the company in case of winding-up.
4. Statement of proposed Offices
Information must include the name and addresses of the Directors and secretary. This information
can be kept in a separate file in order to preserve the privacy of them and also for security
reasons.
5. Certificate of Incorporation
After all this requirements were presented and the Registrar of Companies is satisfied with the
documentation, a Certificate of incorporation will be issued.
The certificate is the conclusive evidence that the company is properly and duly registered.
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The Company Act 2006 allows the electronic filling of all the above mentioned documents; also an
electronic statement issued by a solicitor engaged in the formation or a person named as director will
complete the formation process of the company.
PRE-INCORPORATION CONTRACTS
Generally
A company cannot make contracts until it has been incorporated. Sometimes the company wants to start
business before been officially registered; but we need to know that contracts made before the company
is registered do not bind the company when it is incorporated; however if promoters of business of a
company not yet registered can be liable by the other party who signed the contract with this “Preincorporated” company.
Solutions to the problems of personal liability of the promoters
A promoter or other person who does company’s business when the company is not yet incorporated has
ways to avoid personal liability if follows any of these options:
a) Doing the right procedure, meaning, not doing transactions until the company is registered
b) By agreeing a draft contract with the other party. Although this agreement does not bind the
partners
c) By making a personal binding contract between the promoter and the other party and a draft
contract with the Company. Once the company is registered the promoter is released from the
first contract.
d) By making a draft contract with an specific clause saying that the promoter is not liable; it seems
that this option is not very convenient for the other party to sing a contract that the other parties
are not liable (neither the promoter, nor the company)
e) Some agents take the task to go through the whole process of registration of the company, and
when the company is registered they sell it. It is possible to purchase this type of companies
avoiding the time of the registration process. It is important to mention that it will be necessary to
change the directors and also the name of the company because most likely the name will not suit
the object of the company.
THE COMPANY CONSTITUTION
A company constitution includes the Articles of association and any resolution and agreements affecting
the articles.
An article is a formal agreement or document for the company.
The certificate of incorporation is very relevant for the constitution of the company; it is the conclusive
evidence that the requirements of Act 2006 have been complied.
The Memorandum of association becomes just a merely “historical” document and it is not any more part
of the company’s constitution.
The company’s name
A company needs a name to start operation
o Rules for names on the registration process
1) The final words of the names - Generally
- Private company: Whether limited by shares or guarantee, must end its name with the word “Limited”
or its abbreviation “Ltd.”.
- Public Companies: Must end with “Public Limited Company” or “plc”.
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2) The final words of a name – An exemption
Private companies limited by guarantee are allowed to apply for an exemption of remove the word
“limited” or “Ltd” from its name.
For this exemption the guarantee company must declare that the following points are true:
- The object of the company are: To promote commerce, art, science, education, religion, charity or
any profession
- The profits will be applied to promote these objects
- The payments of dividends of company assets is prohibited
- The assets of the company in case of winding up will be transferred to another company of the
same type or to an organization with charitable objects.
3) Same, similar or offensive names
- Same: A name will not be accepted by the Registrar if it is the same as one already in the Index
of names.
- Similar: The name will be registered but the Trade Secretary will request the company to
change it within 12 months if it is “too like” that of a name that another company has already
registered in the Index
- Offensive: A name will not be registered if according to the opinion of the Trade secretary it is
an offensive name or if its publication would be a criminal offence.
4) Connection with the government: Some names can suggest a type of connection with the
government or local authority. The Trade Secretary will assess each particular case.
5) Sensitive names: The Trade Secretary made a list of words or expressions not allowed for names of
companies or business
o Change of name
The change of the name can be: Voluntary change or Compulsory change
1) Voluntary change: The new name must be according to the same requirements already explained
for the registration
2) Compulsory change: If after the 12 months given to the company who was using a “too like” or
similar name, the company did not change it voluntary; the Trade secretary directs a company to
change its name if he believes that this name is confusing or misleading information.
o Companies names and symbols
The increasing use of symbols in a company names, e.g. @, has led Company House to revise its policy.
The incorporation of a symbol could allow registration of a name already registered. Example: “Florist at
City House. Ltd” and “Florist @ City House. Ltd”
The incorporation of the symbol can be challenged that the name is “too like” and the Registrar will
proceed by saying that the name is too similar to that already registered in the Index, enforcing the
change of the name.
o Objection to a company’s registered name.
If a person or company is registered under a name which has given goodwill, meaning a good reputation
to its business and other company adopts the same name, the name can be objected by the objector
(someone who disagrees with or opposes). However, the respondent (the person who replies to the
objection) can say that he has adopted the name legitimately if:
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The name was registered by the respondent before the objector lad started the business in which
the says that has a goodwill
- The name was adopted in good faith and not with the intention of taking advantage of the
goodwill of the objector’s business
- The company of the respondent has incurred in substantial cost using this name, for example,
making big and expensive boards with that name, costs of publicity, etc.
If there is no agreement between the objector and the respondent the Secretary of State will appoint a
person called the Chief Adjudicator who has the power to direct one of the companies to change the
name. If the company does not change it the adjudicator will decide on a new name for the company.
-
o Publication of name
The company’s name must be shown in a visible place outside the premises of the company or at the
office where the company operates. Also the name must be included on business letters, notices, official
publications, bill of exchange, cheques, promissory notes, order for money of goods, receipts and
invoices, e-mails and websites.
Fines can be imposed for failure to comply to this obligation, even the officers or directors of the company
can be exposed to personal liability.
o Business names
If a company carries on business in which is not the corporate name, for example, Boxo Ltd carrying on
business as “Paris Fashions” – then the business name (Paris Fashion), must not suggest a connection with
government or local authority or contain sensitive words without the approval of Secretary of State. A
company which is using a business name has to state its corporate name in business letters, orders for
supplies, invoices, and receipts and written demands for payments.
What is the difference between a company and a business name?
A corporate name is used by an entity that is formed as a corporation. Profit corporation names are
required to contain one of the following endings: "Corporation", "Incorporated", "Limited" or an
abbreviation of one of those words. The name cannot be substantially identical to a name already
registered with the Department.
A trade or business name is a name under which a person transacts business, other than one's legal name
(personal name) or a registered corporate name, general or limited partnership name, limited liability
company name or limited liability partnership name. A trade name is also known as a fictitious name or a
DBA (doing business as).
Example: Shafer’s is clearly identified as a fountain pen manufactured by the Shafer Company and no one
else can produce pens with that name. However, a motorcycle with the name Shafer would not be an
infringement since the product is different
o Abuse of names by internet users
Persons can select any domain name for their Internet address.
Nominet UK is the body responsible for allocating UK domain names. If, by error, the same Internet
domain name is allocated to two or more organizations, the court is prepared to resolve the dispute. The
rule of “first come, first served” will be applied; meaning that the one who comes first is the one with
right to choose the name.
There are some speculations who register domain names in the hope, for example, of offering it for sale
to some companies. The High Court granted injunctions to avoid these situations; stating that if the name
was allocated but it is not in use, it should be given to a company or person who will make use of it.
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Registered office
An actual address must be registered. A major purpose is to keep all the registers, such as register of
members and records, for the purpose of inspection.
Objects
What the company will do.
It is the product that the company will produce.
o Pre-Companies Act 2006
Former companies’ memorandum had to make a list of the things that the company would do. If the
company entered into a transaction which was not include in the list, the transaction was considered ultra
vires (beyond its powers) and void (not valid).
o Objects today
The new legislation says that the objects of the companies are now unrestricted, saying that there is no
need to make a list of the things that the company will do.
It is possible that the company can make a list, written in the articles, of the things that will not do; but if
later the company decides to start doing transactions of some things that were said that will not be done,
the company must inform the Registrar about the modification of the article.
o A company’s capacity
The Act of company cannot question a company about a particular transaction saying that the company
has not the capacity, or the ability to do something. The contracts signed by the directors will bind the
company to the other part of the transaction. In other words, if a small company commits a type of
business that apparently has not the capacity to perform, it is up to the directors to know the capacity of
transaction of the company.
o Power of the directors to bind the company
The directors have power to deal on behalf of the companies. The constitution can limit these powers but
those third parties dealing with the company do not need to enquire about the type of limitations that the
director has for dealing.
o Constitutional limitations of directors and associate directors
The transactions made by directors are valid for the external party dealing with the company; whether
there are internal or constitutional limitations or not, and the company can be liable for those operations.
The directors are liable to account to the company and they will have to explain for any gain made by the
company or the loss in case the transaction was not successful.
o Companies that are charities
Charitable companies are not bound by the directors’ transactions if the external party knew that he was
dealing with a charitable company and the powers of the directors were limited.
o Altering the objects
A company that had restrictive objects can now put them in the articles by special resolution of the
members.
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Limitation of liability
The limitation of the company must be stated in the documents filed during the incorporation process.
The documents state: “The liability of the members is limited”.
We need to recall an unlimited company does not need to file and present accounts to the Registrar.
Capital
The information about capital is contained in the statement of share capital filed on incorporation. The
capital of the company may be increased by allotting shares.
ARTICLES OF ASSOCIATION
An Article is a formal agreement of document.
The articles are now the company’s main constitutional document. It contains all the company rules and
also the allocation of powers between the members and the directors.
The articles must be printed and divided into paragraphs numbered consecutively.
Power of Secretary of State to prescribe model articles
The Secretary can make models of articles that can help the companies for the writing of their own
articles.
The Company Act 1985 gives in Table A, a model to be used by companies as a guide to develop their
articles. However this model was criticized because it was not possible to adapt it for small and medium
sized companies.
Act 2006 provides three main types of articles of association for:
- Private companies limited by shares
- Private companies limited by guarantee
- Public companies
Entrenched provisions in the articles
Entrenched: definition: It is a custom or an idea that is firmly established, so that it could be difficult to
change; for this reason we talk about entrenched provisions
An entrenched clause or entrenchment clause is a provision which makes certain amendments either
more difficult than others or impossible.
o Notice to the Registrar of entrenchment
The Registrar must be notified when a company entrenches a provision.
o Notice to the Registrar of removal of entrenched provisions
The purpose of the entrenched provision rule is to put people searching the register on notice that
register on notice that there are entrenched provision and as to whether they have been removed.
Existing companies: Provision of memorandum transferred to articles
Some companies were created with memorandums, which provisions must be transferred to the
appropriate articles.
Legal effect of the articles
The article with its provisions constitutes an especial kind of contract whose terms bind the company and
its members.
It follows from this that:
1. The members are bound to the company by the provision of articles
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2. The company is bound to the members in respect of their rights as members
3. Each member is bound to the other members
4. Neither the company nor the members are bound to outsiders
Alteration of the articles
The company may change or alter its articles by a special resolution, subject to certain restrictions of
which the following are the most important:
1. The court will not allow an alteration if it is not for the benefit of the members as a whole; for
example, will not allow the change of the article if the company takes a power of expulsion of
members for no particular reason
2. A company cannot justify the breach of contract outside the articles, by showing that this breach
resulted from an alteration of the articles
3. Shareholders’ rights are contained in the articles. These rights can be changed by a special
resolution of the company in general meetings. For the resolution it is necessary the agreement of
the majority. A special resolution is not effective unless holders of the three-quarters of the issued
shares of each class consent in writing.
o Alteration of the articles by court
The articles are a contract and the court has power to rectify (to alter or change) contracts when the
parties have orally agreed on something but then when the contract was written down some of the things
agreed verbally were not included in the written contract; if after realizing the problem one of the parties
does not want to collaborate rectifying what was wrongly written because the mistake is favorable to him,
the court has the power to intervene compelling to make the needed corrections.
SHARES
Share is a unit of ownership that represents an equal proportion of a company's capital. It entitles its
holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the
company's debts and losses.
Two major types of shares are
1) ordinary shares (common stock), which entitle the shareholder to share in the earnings of the
company as and when they occur, and to vote at the company's annual general meetings and
other official meetings, and
2) preference shares (preferred stock) which entitle the shareholder to a fixed periodic income
(interest) but generally do not give him or her voting rights.
FINANCING THE COMPANY
We shall now deal with the raising of fund for the company.
We will discuss:
- Share capital
- Loan capital
Share capital
The capital of a company may be divided into
- Preference shares
- Ordinary shares
Both of them may be issued as redeemable (to be paid) shares by the company at a future date
Preference shares
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These shares will be paid of a fixed dividend, example 10% of the nominal value. These shares have
priority when the company will pay its dividends, meaning that will be paid before any dividend is paid to
the other type of shares. The shares will be paid only if the profits of the company are enough to pay
them.
The shares will be paid at the fixed dividend agreed; which means that if the company makes a lot of
profit, the preference shares will not receive more payment that the percentage established.
Ordinary (or equity) shares
They are behind the preference shares at the moment of payment; the company pays first the preference
shares and then the ordinary shares.
Ordinary shares, therefore, carry more risks. Generally the ordinary shares have most of the voting rights
in general meetings and therefore they can control the company.
The dividends are fluctuating for ordinary shares, because after paying the fixed dividend of the
preference shares, the dividends or the ordinary shares can be high or low depending on the profits of the
company. They are not fixed dividends.
Redeemable shares
Redeemable shares are a class of shares that a company agrees to buy back from their holders under
certain conditions.
Redeemable shares will be paid in the future. They can be preference shares or ordinary shares.
These shares will have two dates for the payment; the holder of the shares knows that his shares cannot
be redeemed (paid) earlier than these dates given for payment. Even the shares would be redeemed later
than the stated dates.
o Purchase of own shares
In the past a company buying its own shares was completely prohibited. But now, buy-back is permitted
but they are subject to restrictive and detailed rules.
The problem with companies buying their own shares is that, if completely unrestricted, there is a danger
that creditors (and potential creditors) may be misled as to the size of the company’s capital.
The shareholder (s) must be willing to buy them.
The company cannot be forced to buy the shares and the shareholders cannot be forced to sell them.
There are important procedures and rules that the company must follow before buying own shares:
1. The shares must be fully paid
2. The company cannot purchase its own shares if as a result of the purchase there would be no
longer members holding non-redeemable shares
3. the shares must be cancelled after purchase
It is not necessary an authorization in the articles allowing the company to purchase the own shares.
o Treasury shares
The Act 2006 allows Public companies to keep shares in what is called treasury shares, after being
purchased back by the company.
Treasury shares can be defined as shares of a company's stock that have been bought back by the
company and not canceled.
In the United Kingdom, they are shown as company assets in the balance sheet.
No more than 10% of the company issued shares can be held as treasury shares.
To make purchase of its own share for treasury the company must have sufficient profitable profits.
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When the treasury shares are sold for a price equal or less than the price the company paid for them, the
income is treated as realized profit, but if the treasury shares are sold more expensive than the price that
the company paid for them, the excess is treated as capital and it is not distributable.
- Treasury shares must not receive dividends
- Treasury shares does not give the company, as holder, any voting rights
- On sale, the treasury shares must be offered first to the existing shareholders. This is called the
Pre-emption right.
Buying shares
Companies can buy shares:
- In the market
- Off market form an individual shareholder
o Market purchase of the company’s own shares
The purchase can be made by the directors but the members must approve the purchase by ordinary
resolution. The minimum price that the directors are allowed to pay is often specified in the resolution,
but the maximum price is usually calculated according to a formula.
A copy of the resolution that approves the purchase must be filed with the Registrar of Companies.
o Off-market purchase of the own shares
These provisions are mainly for private companies.
The procedure is as follows:
1. A special resolution of the members is required before the contract is approved
2. The special resolution is not effective unless the draft contract is made available for inspection by
the members. For the approval it will be necessary the 75% of the votes of the members. The
member who is selling the shares is not allowed to vote.
o Off-market contingent contracts
Contingent contracts are made by the company to buy its own shares on the happening of a future event;
for example, a contract to buy shares of an employee on retirement
o Purchase of own shares: Miscellaneous provisions
When a company has purchased its own shares it must disclose the fact to the Registrar of Companies
within 28 days.
The contract must be kept at eth office for 10 years and can be inspected by members.
o Purchase (or redemption) partly from capital – For private companies only
Some private companies may wish to buy its own shares but the profits are not enough to purchase or
redeem the shares. In that case the company can purchase them partly from capital.
The part that will be paid with capital is called PCP “Permissible Capital Payment” and it represents the
shortage of profit necessary to complete the purchase.
The payment from capital (PCP) has regulations that must be complied as follows:
- There must be a statutory declaration of solvency by the directors
- A report by auditors stating that the PCP has been properly calculated
- The statutory declaration and the auditors report must be available for inspection at the meeting
- Publicity must be given to all the company’s creditors explaining the fact of the special resolution
and the amount of the PCP
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o Transfer of purchased shares
The seller just hands over his shares certificate to the company for cancellation. When shares are to be
held in treasury; the seller transfers them to the company.
Loan Capital
Trading companies have power to borrow and charge their assets as security for a loan.
PLCs (Public Limited Companies), cannot commence business on borrow until they have received a
certificate allowing them to do this from the Registrar of Companies.
o Single debenture and debenture stock
A debenture is an unsecured debt backed or supported only by the integrity of the borrower and not by
assets and documented by an agreement called debenture.
The debenture agreement is the evidence that the lender made a loan to a company.
-
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Single debenture: Is the document by which the company charges in favour of the bank all its
assets and undertakings, thus giving the bank the right to appoint an administrator in case of no
payment.
An administrator may manage the company for a period of time in which he may improve the
financial situation of the company and increase its income.
Stock debenture: When the loan comes from the public, and not from the bank, the lender will
receive a stock certificate instead of a share certificate. The stock certificate can be transferred to
one person to another in a similar way to shares.
o Registration of Charges
The charges that a company issues to secure the debentures must be registered with the Registrar of
Companies. The object of this is to show to those doing business with the company what charges are
affecting the company’s property.
o Failure to register ca charge
Failure to register of the charge with the Registrar within 21 days from the creation of the debenture
means that the charge will be void if the company is wound-up. The lender would become in this case an
unsecured creditor. To avoid this, in practice, the bank gets the signatures in the forms that are necessary
to register the charges in the Registrar of Companies at the moment of the debenture; then the bank will
present the signed forms to the Registrar.
o Releasing the charge
If the company pays to the lender, the Registrar will make a certificate of satisfaction. This certificate is
very useful for the company for the future in case they need to borrow again.
THE ISSUE OF SHARES AND DEBENTURES - Generally
The directors of public and private companies cannot issue shares without the express permission of the
members of the company.
The authority for the allotment of shares is given by the members by ordinary resolution at a general
meeting of the company. It can be given only for a maximum period of five years and then it must be
renewed.
In some private companies this authority given to the directors to allot shares can be given for an
indefinite period or a fixed period longer than five years.
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Pre-emption rights: it is a right of the shareholders when public or private companies wish to offer shares;
the company must give the priority first to the existing members to buy those shares.
A public company can disapply the pre-emption rights by especial resolution of the members and stated
in the articles of the company.
PROCEDURES FOR ISSUING SHARES TO THE PUBLIC
There are two main methods of issuing new shares:
- A right issue (pre-emption)
- A placing: Shares that are not taken up by shareholders using the pre-emption right are placed by
the company’s’ broker (someone who buys and sells shares of companies in the market) to the
broker clients.
REGULATION OF THE SECURITIES MARKET AND OF ADMISSION TO IT
It is now necessary to consider the control on the contents of the listing particulars and the regimen of
control that surrounds the procedure.
European Union law requires that each country member must have an Authority to maintain an official
list (or market) of securities and to monitor the companies who issue shares. In UK the competent
authority is the Financial Service Authority (FSA).
The FSA will monitor companies so that investors have sufficient and reliable information about the
company securities in order to deal with them.
The FSA has developed the FSA full Handbook – Listing, prospectus and disclosure, which the companies
must follow and comply.
Prospectuses
A prospectus is a document that provides details about the business to people who are interested in
invest in it.
The Prospectus Regulations 2005 explains the regulations that affect the prospectus contents. The FSA
supervises the information provided by the companies in its prospectuses before they can be used to
promote the selling of shares to the public. The contents of the prospectuses are related to financial
information about the company.
Compensation for false or misleading particulars contained in the prospectus
A company is liable if the information provided in the prospectus is not accurate and it can mislead an
investor. The remedy given for the investor who suffered loss because of that misinformation is the
right to request money to compensate the loss.
Person responsible
The company and its directors and anyone who expressly takes the responsibility for the contents
of the prospectuses are liable for the misstatements.
Defenses
A person responsible for the misinformation shall not be liable if he can prove:
- That he had a reasonable belief in the truth of the statement
- That the statement was done by an expert consultant and he had a reasonable belief in the
expert’s competence
- If the person who acquired the securities knew of the defects of the prospectus
THE REMEDY OF RESCISSION
The main remedy for loss resulting from a misstatement in a prospectus involves taking the name of the
shareholder from the register of members and returning the money paid to the company by him.
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However the modern trend in business is that the remedy is to offer to the shareholder to keep the
money in the company but he will receive a compensation for the damages and loss.
MEMBERSHIP
Becoming a member
A person may become a member of a company:
1. By subscribing to the memorandum of association. The person is a member from the beginning of
the company
2. By agreeing to become a member after the company was registered.
A person may show this agreement by:
- By purchasing shares from the company
- By taking shares from an existing member; buying the shares or receiving the shares as a gift.
Minors
A minor may be a member unless the company’s articles forbid this clause.
Personal representatives
The personal representatives of a deceased member do not become themselves, unless they ask for and
obtain registration. However, they are allowed to transfer the shares.
Bankrupts
A bankrupt member can be a member of a company. His trustee will be the representative when dealing
with the dividends.
Shareholder’s rights
The main rights given by law to a shareholder are as follows:
1. A right to transfer his shares: This is subject to any restrictions stated in the articles
2. Meetings: A shareholder is entitled to receive notice of meetings and to attend and vote
3. Dividends: A shareholder’s tight to dividends depends on the company having sufficient
distributable profits to pay the dividends
4. Accounts: A shareholder is entitled to a copy of the company’s accounts. The Act 2006 enables
that a copy of the accounts can be sent electronically by e-mail or may appear in the company’s
website.
Shareholder’s duties
He must pay for his shares when called upon to do so. The shareholders are not liable for the company’s
debts beyond the amount of his shares.
Cessation of membership
1. By transfer of his shares to a purchaser or as a gift
2. Rescission of the contract under misleading prospectus, though the more likely and acceptable
remedy today would be to remain as member but receive monetary compensation
3. Redemption or purchase of shares by the company
4. Death or bankruptcy
5. Winding up of the company
MEETINGS, RESOLUTIONS AND ANNUAL RETURN
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Shareholders meetings
There are two kinds of company general meetings
- Annual General meeting
- Extraordinary general meetings
o Annual General Meeting (AGM)
It must be held within six months after the end of the company’s financial year
The notice must say that is the annual general meeting
Private companies are no longer required to hold AGM
o Extraordinary General meeting
All general meetings held by the members, other than the annual general meeting are considered
Extraordinary General meetings. They may be called by the directors at any time.
Shareholders with more than one-tenth of the shares capital have the right to request for an
extraordinary meeting. The request must explain the objects of the meeting and cannot be made by only
one member, even if he holds one-tenth of the shares; this is to ensure that there will be a quorum in the
meeting.
o Convening a meeting in deadlocked companies
The company is deadlocked when there is a disagreement between members who are not willing to
change opinion and decisions.
In the smaller private companies one problem that the company could face is that a majority of
shareholders are unable to exercise control of the company because one or more members will not
attend the meetings. In those cases, the court can call an extraordinary meeting and state that one
member of the company shall constitute a necessary quorum, giving validity to conduct business.
But if the company has only 2 members and each of them has 50% of the shares of the company and the
company is deadlocked, the court cannot call a meeting and say that one member has powers over the
other and give to one of them power to conduct business. Such deadlocked will, unless the shareholders
reach an agreement, generally result in the liquidation of the company.
o Notice of general meetings
When the company will have an AGM, the shareholders must be noticed at least 21 days in advance.
For the other meetings the notice required is 14 days.
o Quorum at general meeting
Quorum is the minimum people who must be present at a meeting in order to allow official decisions to
be made.
In a one member company one qualifying person is enough to constitute the quorum. In other cases, two
qualifying persons are required.
Qualifying persons are individuals who are members of the company or a person who is officially
representing a member in a meeting.
o Voting
The vote system may be by a show of hands, in which obviously each member has one vote.
However each company can define in its articles the voting system, for example, giving to the members
the number of votes according to the number of shares that they have which is the right of a poll of the
shareholders. (A Poll is to get a particular number or percentage of votes in an election)
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o Proxies
To proxy is to arrange for someone else to do something on behalf of another person.
Members of companies have the rights to appoint proxies.
The proxies will be able to attend, speak and vote at a meeting.
o Minutes
A minute is an official written record of the decisions that people make at a formal meeting.
A company must keep minutes of the proceedings as its general and board meetings. Members have the
right to inspect the minutes of the general meeting but not those of director’s meetings.
Resolutions
Generally
A Resolution is a formal proposal that is considered by an organization and then voted on.
There are four main kinds of resolution that are passed at company meetings
- An Ordinary Resolution
- A Special Resolution
- Written Resolution
- Ordinary Resolution after special notice
1) An ordinary resolution
It is a resolution passed by a majority (>50%) of persons present and voting at a General meeting. An
example of the use on an ordinary resolution is the permission given to the directors of public companies
to allot unissued shares.
2) A special resolution
It is the one passed by a 75% majority of the votes.
A special resolution is required, for example, to change the company’s articles. The Registrar of
companies must be informed about the changes made on that special resolution within 15 days.
3) Written resolutions of private companies
The resolution is circulated for approval by members without a meeting. The resolution only needs to be
signed by the majority; 50% or 75% depending if it is an ordinary or a special resolution.
4) Ordinary resolution after special notice
For certain ordinary resolutions to be passed at a meeting, a special notice must be given; for example, a
resolution of removing a director before his period of office is ended; if a member wishes to propose the
removal of the director, when the member stands up at the meeting to propose the removal, the director
will be aware because he was noticed in advance, giving to the director the possibility of his defence
either by an official written statement or giving an oral defence during the meeting.
Member’s resolutions of the AGM
Members with at least one-twentieth of the total voting rights can compel or force the directors to:
- To give to the members who are entitled to receive notice, a notice of the next resolutions that
will be discussed in the next AGM
- To circulate to the members a sort of summary of the proposed resolution that will be discussed in
the next AGM
Requests in electronic form are permitted
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Written resolution of private companies
The majority needed for these resolutions is 75%. These types of resolutions are only for private
companies.
- Member’s powers: Members having 5% of the total voting rights of the membership can request
the directors to circulate a written resolution.
- Other main points: The articles cannot prevent a private company to use the written resolution
procedure
- Auditor right: The company auditor in entitled to receive all such communications relating to the
resolution
- Records: The company is required to keep a record of all written resolutions
Resolutions and the “Duomatic principle” of unanimous consent
Some small companies do not follow all the legal formalities of decision-making within corporate law.
When all the shareholders of a company agree on a matter that should have been stated by a resolution
in a general meeting, the unanimous (common) consent of all shareholders without a written resolution is
enough to be accepted by the law. This is called the Duomatic principle.
Impact of the Schs 4 and 5 to the Act 2006
Notice of meetings, appointment of proxies and filing of resolutions or other documents can be now sent
electronically according to Act 2006
The Annual return
A return is an official form on which a business shows how much is the income.
A company must file an annual return with the Registrar of Companies and the return must be delivered
to the Registrar within 28 days of the make up date by the Secretary of the company
PROTECTION OF MINORITY INTERESTS
There are two major areas of minority protection that are included in Act 2006
- Part 11: The derivative claim against directors
- Part 30: Protection of members against unfair prejudice
Part 11 – The derivative claim against directors
It allows a minority of members to bring a claim on behalf of the company for compensation from
directors who did not perform properly which caused loss to the company.
o What is a derivative claim? For example, a member of a company, being a shareholder, claims for
damages caused by the acts of the directors who were in control of the company. As we can see,
the shareholder is not making the claim for himself, he is in fact claiming on behalf of the company
against the director for damages caused by negligence, default, breach of duty or breach of trust.
If the claim is successful the compensation will go to the company. The derivative claimant (the
shareholder) will recover the costs that he spent in concept of the administrative expenses used
for the claim.
The directors can use the following measures for protection against the claim:
- The claimant must obtain a permission of the court to proceed with the claim
- The court can refuse the permission if in the view of the court the claim does not promote any
benefit for the company
- The court needs to be satisfied that the cause of the action are based from an act of omission,
negligence, default, breach of duty or breach of trust by a director
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Other statutory protection of the minority
The most important is the Right of a minority shareholders to petition the court for relief when the
shareholders believe that their interests are being “unfairly prejudiced” by the way in which the
company’s affairs are being carried on.
o Relief from unfair prejudice
Any member may make the petition to the court that the way the affairs of the company are not
conducted in a proper manner.
- Circumstances leading to “unfair prejudice”
1. Director paying themselves excessive salaries, thus depriving members who are not directors of
any dividends or of adequate dividends
2. Refusal of the board of a private company to accept a representative of a deceased shareholder as
a member. This situation can lead the representative to be forced to sell the shares to the
company at an inadequate price
3. The issue of shares to directors on advantageous terms
4. The refusal by the board to recommend payment of dividends on non-cumulative preference
share by a minority
It is not unfairly prejudicial the refuse of the board to purchase the company’s shares
The removal from the board without good reasons of a member who may be had interest to become
director of the company, would be included as unfair prejudice.
- Relief available
The court has the power to make any order that the court believes that will fit to relieve the unfair
prejudice.
Some of the remedies are:
1. Order to regulate the future conduct of the company’s affairs: the court can order the company to
change its article
2. Order to stop (to restrain) the continuance of the act that the petitioner is complaining of , for
example, the court can order the reduction of the salaries of the directors if those salaries are
excessive and there are few dividends for the shareholders.
3. Order to authorize civil proceedings; The court can give permission to initiate legal proceedings
4. Order to order the purchase of a member’s shares. This is the most frequently used remedy
DIRECTORS and SECRETARY
The management of a company is usually entrusted to a small group of people called directors.
The shareholders have the power to appoint or remove directors.
The company Secretary is an important officer of the company dealing with the day-to-day
administration. Every public company must have at least two directors and every private company at least
one.
Company Secretaries (Act 2006)
Private companies may have or not have a company secretary.
The company is permitted to have a secretary but it is not compulsory to have it. The function of the
secretary would be done either by the director or another person authorized to carry out the function of a
secretary.
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Appointment of directors and secretary
The first director of the company will be appointed during the registration process of the company at the
Registrar. Subsequently, directors are usually appointed by the members of the company in general
meeting by ordinary resolution. The board of directors is normally allowed to fill casual vacancies, e.g.
when a director dies or resigns or his contract is ended before the termination of his term.
The concept of the “Shadow director”
A Shadow director is a person who is not officially appointed as director, in other words, he is not
technically a director, but he is someone who openly participates in the firm’s decisions, giving
instructions and directions to employees and even to directors. Usually he is a significant shareholder of
the company who wishes to escape the disclosure requirements for directors.
For the law, this shadow director is equally liable for the obligations of the firm as they were acting as the
official director.
Remuneration of the directors – generally
The remuneration of the directors must be stated either in his contract of service or in the articles.
The notes to the accounts of the company must disclose the salaries or fees of the directors.
Controlling directors payments
In recent times some companies have found that some directors have been receiving excessive payments
that were not always according to the profitability of the company.
There are now two main methods of controlling directors pay; but this can be applied only to companies
listed on the Stock Exchange market;
The methods are:
- The Combined Code of Best Practice
- The Director’s Remuneration Report Regulation for listed companies
o The Combined Code of Best Practice: This code of practice is the result of separate reports over a
period of years by the Greenbury Committee and the Hampel Committee.
It requires listed companies to set up remuneration committees of independent non-executive
directors to make recommendations to the board in relation to executive director’s remuneration
packages.
The company annual report must state the remuneration policy. The code also states the
reduction of the duration of the contracts of the directors to one year. This is designed to reduce
the amount of money that the director will claim as compensation for dismissal in a company with
not good financial performance.
o The directors’ Remuneration Report Regulation for listed companies:
The companies must publish a report on director’s pay as part of their annual reporting cycle.
This report must be approved by the board of directors. The report must be presented in the AGM
and the shareholders will vote for agreement or disagreement on the terms of the report.
The report must include the following information:
- Details of the individual director’s pay package
- Comments of the board about the director’s remuneration
- Members of the remuneration committee
- Names of consultants used for the writing of the report
- An statement of the company policy on remuneration policy for the future
- A performance graph providing information on the company’s performance
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The vote of the shareholder is only advisory; meaning that their disagreement does not force the
company to change the terms of the directors remuneration; however it is true that a majority of
shareholders expressing their disagreement on the report will give to the company considerable
criticism and pressure for change.
o Statutory requirements on disclosure remuneration
Company Legislation states that:
Companies will be required to show aggregate details of director’s remuneration under four headings:
- Emoluments (e.g. basic salary and annual bonuses)
- Gains made on the exercise of shares options
- Gains made under long term incentive schemes
- Company contributions to money purchase pension schemes
When the aggregate remuneration exceeds £ 200,000 companies will be required to show the figures
attributable to the highest paid director the amount of his retirement benefits.
o Exceptions for unlisted companies
Companies that are not listed on the Stock Exchange must comply with the requirements explained
before but with two important exceptions:
a) Unlisted companies do not have to disclose the amount of gains made when directors exercise
share options
b) Unlisted companies do not have to disclose the net value of any assets that comprise shares which
would otherwise be disclosed in respect of assets received under long term schemes
Enforcement of fair dealing by directors
o Duration of contracts of employment
Employment of directors which are for a period of more that two years and cannot be terminated by the
company notice must be approved by ordinary resolution in general meeting.
Sometimes the removal of a director is difficult because the compensation that the company must pay is
more than the company could afford.
o Substantial property transactions
Any arrangement to transfer or to receive from a director (or connected person) a non-cash asset, e.g.
land, exceeding £ 100,000 requires the approval of the members by ordinary resolution in the general
meeting.
The Act is designed to prevent directors (at least without member’s approval) from buying assets from the
company at lower price than the real value or transferring their own property to the company at more
than market value.
These provisions include also transactions made to connected persons, like director spouse or children
under 18 yrs old.
o Loans, quasi loans and credits taken by directors
Any of these transactions between the company and the directors require, according to Act 2006, the
approval by members by ordinary resolution or written resolution.
1) Loans and Quasi loans: Basically a quasi loans occurs when a director spend company’s money for
personal expenditures. The director pays the company back later.
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Example of quasi loans: The Company pays an airline ticket for a director’s wife who is
accompanying him on a business trip, or when the director uses a company credit card to pay for
personal goods.
2) Credit: Examples: A furniture company sells some furniture to the director and gives him 12
months to complete the payment; or when the director uses the garage of the company to do a
service of his private vehicle and the director will pay later.
o Approval of loans, quasi loans and credits
In the case of private companies the approval of members is necessary for transactions done by directors.
For public companies it is necessary for directors and connected persons.
Member approval is not required in the following circumstances:
- When the transaction aimed to meet expenditures in the company business does not
exceed £ 50,000
- Money advanced to a director’s defence costs in legal proceedings
- Small loans and quasi loans not exceeding £ 10,000 given to directors
- Small credit transactions not exceeding £ 150,000 given to directors
- Credit transactions made in the ordinary course of company’s business
There is no criminal penalty for the breach of the above provisions, however, the loans would be
recoverable by the company if were done in unlawful terms.
o Disclosure in accounts
All transactions involving loans, quasi loans and credits to directors and their connected persons in all
companies must be disclosed in notes to the company’s accounts
o Material interest
A material interest could be, for example, a contract to make an extension in the premises of the
company, and the building firm is run by the spouse of the director, or even his brother; in this situation
the director must disclose to the board of director that connection between the company and the
material interest if the extension is done by the firm of his connected person.
If the director fails to disclose, the auditor must do it.
o Contracts with a sole member/director
The terms of a contract with a sole member/director must wither be set out in a written memorandum or
recorded in the minutes of the board meeting
o Disclosing interest in contracts
Every director who has personal interest in signing a contract or proposed contract must disclose his
interest at the board meeting.
A director who fails to make disclosure as required is liable to a fine. The principles of disclosure are also
applied to shadow directors.
REMOVAL OF DIRECTORS
- Removal under statute
- Removal under the articles
Removal under statute (According to the law)
Every company has power to remove any director before the end of his period. The removal is carried out
by an ordinary resolution of the members in a general meeting. A written resolution cannot be used.
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The director must receive a notice 28 days before the resolution will be presented. The director is entitled
to have a written statement in his defence and he can also make an oral statement at the meeting.
The director has the right to claim money compensation for the dismissal.
Removal under the articles
The company can state in the articles its own policy for the dismissal of directors.
This power is to give more flexibility to the company to exercise provisions of the removal under statute.
The articles can have a clause, for example, allowing a simple majority of the board to remove a director
by written notice in writing.
The articles cannot prevent the director to exercise the right to claim against the company for wrongful
dismissal.
Retirement of a director
The company’s articles generally provide that certain number of directors shall retire annually; this is
called retirement by rotation.
Resignation of a director
The articles usually provide that a director vacates office when he notifies his resignation to the company
Disqualification of a director
The reasons and the grounds for disqualification of directors may be set out in the articles.
In addition the court may disqualify directors (Company Directors Disqualification Act 1986).
The court can disqualify directors following persistent default in filing returns, account and other
documents with the Registrar
Also the court can disqualify a director when the company goes into liquidation and the evidence shows
that the director have negligently struggled with an insolvent company in the hope that things would get
better, but finally the company ended up into insolvent liquidation. This is called wrongful trading and the
maximum period of disqualification is 15 years
A director may also be disqualified by the court if she or he is considered “unfit” to hold the office of
director; the company must be declared insolvent, generally as a result of serious management failures.
POWERS OF DIRECTORS
The Act requires certain powers to be exercised by the members, e.g. alteration of the articles. Apart from
this distribution of powers between the board and the members depends entirely on the articles.
DUTIES OF DIRECTORS
Statutory framework (Act 2006)
The Act sets out the legal duties of the directors
Before the Act 2006, the duties of the directors were mainly outside statute law. These duties were based
on common law principles that became well-established rules.
The Act states “A code of conduct, which sets out how directors are expected to behave but it does not tell
them what to do”.
The seven general statutory duties are:
o Duties owed to the company
- Duty to act within powers
- Duty to promote the success of the company
- Duty to exercise independent judgment
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Duty to exercise reasonable care, skill and diligence
Duty to avoid conflicts of interest
Duty not to accept benefits from third parties
Duty to declare interest in proposed transactions or arrangements
- Duty to act within powers: The director must act in accordance with the company constitution and use
those powers only for the purpose for which they were granted
- Duty to promote the success of the company: To act in good faith and promote the benefits of its
members as a whole. A director must take into account:
- The likely consequences of his decisions for the future of the company
- The interest of the company’s employees
- To promote good relationships with suppliers, customers and others
- The impact of the company in the community and the environment
- The reputation of the company
- The need to act fairly as between members of the company
- Duty to exercise independent judgment: the self judgment of the director must be in accordance with
the agreement made by the company and in a way authorized by the company’s constitution
- Duty to exercise reasonable care, skill and diligence: This duty must be in accordance to the expected
general knowledge for a director and the skills and knowledge that the director has
- Duty to avoid conflict of interest: A director must avoid within reasonable terms, situations that could
create a conflict between his own interest and the interest of the company
- Duty not to accept benefits from third parties: This deals with bribes and personal benefits. There may
be required a board authorization
- Duty to declare interest in proposed transactions: The deal of disclosure of any transaction that the
company could do that would benefit the director directly or indirectly
Shareholder’s claim on behalf of the company
It was already explained the derivative claim on behalf of the company
Corporate indemnification of director
Act 2006 states as follows:
- The legal costs for judgment that is brought by claims from third parts against the directors or the
company can be paid by the company. The company however has not obligation to pay criminal
fines and the legal costs of unsuccessful criminal proceedings
- Companies are allowed to pay a director’s defence costs as they are incurred, even when the claim
is brought by the company
- All indemnities must be disclosed in the director’s annual report and indemnity agreement must
be available for inspection by members
Directors meeting
Unless the articles state it in a different way, any director can call a board meeting
- Quorum: This is a matter for the articles or the necessary quorum for valid transactions may be
fixed by the directors themselves
- Voting: Unless the articles say differently, each director has one vote
- Minutes: A company must keep minutes at the minutes of directors. The members of the company
have no right to inspect those minutes.
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The Secretary
A private company is not required to have a company secretary.
As we said before, a company secretary is an important officer of the company in terms of its day-to-day
administration.
A Public Company must appoint a Secretary. It is an offence not to comply with this requirement.
It is usual that the secretary is appointed by the directors.
The secretary is an employee of the company.
The Secretary enjoys the power to make contracts on behalf of the company even without authority
because the secretary deals with the day-to-day issues; but this authority is limited and the secretary
cannot do the following:
- He cannot, without authority, commence an action in the courts on the company behalf
- He cannot summon or call a general meeting himself
- He cannot register a transfer of shares without the board approval
All of those are powers of the directors
There are some duties that are imposed to the secretary by statute (by law); the most important one is
the duty of submission of the annual return
COMPANY INSOLVENCY AND CORPORATE RESCUE
In the event that a company becomes insolvent, the company’s business and assets and its affairs
generally will be controlled by an insolvency practitioner. Most insolvency practitioners are accountants
working for a firm specialized in insolvency work.
The insolvency practitioner is not the Official Receiver as we will see later; the Official Receiver is a civil
servant who takes that position during the liquidation process until the wind up of the company.
Insolvency procedures
There are three main insolvency procedures as follows:
1. Company voluntary arrangement, which is designed to allow the company to continue the
trade under arrangements to make some payments to the creditors
2. Administration: Which is designed to rescue the company from insolvency
3. Liquidation: In which the company is wound up and taken off from the Registrar of
Companies
The demise of the administrative receiver
(demise: The time when something or someone stops existing)
In the past the banks were allowed to appoint a person whose function was to take responsibility for
some procedures to ensure that the company will pay its debts to the bank.
The Enterprise Act 2002 prevents the holder of a floating charge, like a bank, from appointing an
administrative receiver.
LIQUIDATION
Liquidation is a procedure by which a company is ending its existence and its property is administered for
the benefit of creditors and members. A liquidator takes control of the company, collects the assets, pays
debts and liabilities and distributes any surplus between the members.
The company is then dissolved and is removed from the Registrar of Companies.
There are three types of liquidation (or winding up)
1. A compulsory liquidation
2. A member’s voluntary liquidation
3. A creditor’s voluntary liquidation
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Insolvency Act 1986: It controls the procedures for liquidation of a company
Compulsory liquidation
o The petition
The petition is presented on the grounds that the company cannot pay its debts.
A company is to be regarded in law as unable to pay its debts if:
- The creditor has requested presenting statutory demand in a special form
- The company is unable to pay a debt that the creditor has obtain a court judgment for the payment
- The company’s assets are worth less than its liability
- It is proved that the company is unable to pay its debts and the court agrees on that
o The petitioners
More commonly the petitioner is a creditor, but the company itself can present the petition when the
directors see no hope to improve the financial situation of the company.
The usual ground for presentation of a petition is when the company is unable to pay an statutory
demand.
o When the winding up order is made
The Official Receiver becomes the liquidator on the making of an order for compulsory winding up. The
Official Receiver proceeds as follows:
- Advertise the winding-up in an official journal and local newspaper
- Notify the Registrar of Companies
- Exercise the powers of the directors
- Arrange in the company’s stationary (letters, envelops, etc) stating that the company is in
liquidation process
- Receive from the directors a statement of affairs which gives information regarding the company’s
assets and liabilities, names of the creditors and details of any security that they have.
- Prepare a report for the court stating the financial position of the company and the reason for its
failure
- Call separate meetings with creditors and members of the Company
Voluntary liquidation
A voluntary winding up is commenced by a resolution of the members.
When the company is insolvent, the members must pass an extraordinary resolution stating that the
company cannot pay its liabilities and cannot continue its business. In other cases special resolution is
used. The extraordinary resolution results in a creditor’s voluntary winding up and the special resolution
in a member’s voluntary winding up.
o Member’s voluntary winding up
The members and the directors make a statutory declaration (a statement of oath) that the company is
solvent and will be able to pay all its debts in full within a period of 12 months. If this can be done, the
members appoint an Insolvency Practitioner as the liquidators.
o Creditors voluntary winding up
When the directors cannot or are not prepared to make the statutory declaration, then the liquidation is a
creditor’s voluntary. An insolvency practitioner will be appointed as liquidator by the creditors.
The directors have no power for the management of the company and this power is taken over by the
liquidator.
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Actions against the company
In a compulsory winding up, no action can be brought against the company, unless the court allows it.
In a voluntary liquidation the curt has discretion whether to stop claims or not.
The property of the company
The liquidator takes possession of the properties and uses them distributable among the members.
Certain properties are excluded and not available to the liquidator for realization; for example when the
property is held by the company but it has a retention clause saying that the property is not owned by the
company if the property has not been paid for by the company.
Distribution of assets
The funds realized by the liquidator must be distributed in a given order. However, it should be noted that
secured creditors with a fixed charge over specific properties such as lands or buildings will usually
enforce their security by a sale of property.
If the sales of properties are more than sufficient to pay the secured creditors, the balance will be
distributed by the liquidator to the other creditors.
The liquidator will distribute funds in the following order:
- 1st: To pay the costs of the winding up procedures, including the remuneration of the liquidator
- 2nd: Paying the preferential creditors, which are mainly the employee’s salaries. The debts owed to
the Revenue authority, VAT and National insurance contributions are no longer preferential; now
they have the rank of unsecured creditors for payment.
- 3rd: Money that was lent. E.g. by a bank
o Creditors having a floating charge
For the priority of payment they will do it in the order of its creation, so that those created first are paid
first.
o Unsecured creditors
When the previous categories have been paid in full a distribution may be made to ordinary unsecured
creditors
o Members
If all the above debts have been paid in full, a distribution may be made to members. This is called a
dividend. Obviously, there will not be a distribution to members when the company is insolvent.
o Increasing of the assets
The assets available to the liquidator or administrator can be increased when prior to the liquidation
there have been transactions at lower value than the real value (transactions at undervalue). The
administrator can request the court the repayment to the company
ALTERNATIVES TO LIQUIDATION: Company rescue procedures
The two main alternatives most commonly used in business as alternatives to liquidations and with the
view to company rescue are:
- Placing the company into administration
- Making a Company Voluntary Arrangement (CVA)
ADMINISTRATION
The Enterprise Act 2002 made significant changes in the administration procedure. This was achieved by
inserting an additional Schedule (B1) into the Insolvency Act 1986.
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The nature of administration
An administrator of a company is a person appointed to manage the company’s affairs, business and
property.
The effect of Schedule B1 is as follows:
- An administrator is an officer and can only be appointed if he is qualified to act as an insolvency
practitioner
- An administrator cannot be appointed if the company has already an administrator
- A company cannot be put into administrator if:
- The members have passed a resolution for a voluntary winding up
- A compulsory winding up order has been made by the court
The purpose of administration
The Schedule clarifies the purpose of an administration and puts great emphasis on company rescue. The
prime objective is to rescue the company. When this is not reasonable practicable, the objective becomes
the realisation (the selling) of the company’s property in order to make a distribution to one or more
preferential and secured creditors.
The administrator must think as well of the interest of the unsecured creditors, for example, when selling
properties, he should not think only if the money collected will be enough or sufficient to pay the
preferential and secured creditors; and may be selling the properties at a cheap value without taking into
consideration that if selling the properties at a higher and more fair price the company would also pay the
unsecured creditors.
Appointment of an administrator
Formerly, an administrator could be appointed only by order of the court. The new schedule states that
those holding floating charges and companies or their directors can appoint an administrator without the
intervention of the court.
Appointment by the Court
Appointment of administrator
Appointment Out of the Court
By holders of floating charges
By the company or by its
Directors
o Appointment by the Court
Those holding floating charges, the company or the company directors can apply to the court for the
appointment by the court of an administrator.
Before accepting the petition, the court must assess if the appointment of the administrator is likely to
achieve the purposes of an administration according to its objective.
If the court does not make an administration order it may make any other appropriate order, e.g.: order
for winding up of the company.
o Appointment out of the Court
- By holders of floating charge (banks)
- By the company or by its directors
By holders of a floating charge (usually are the banks): Holders of an enforceable floating charge are able
to appoint an administrator of their own choosing.
The conditions for them to appoint an administrator are:
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-
That the charge is a qualifying charge
The charge is enforceable at the date of the appointment
The company must not have a provisional liquidator in office
There must not be an administrative receiver in office
Method of appointment: The floating charge holder must inform the other holders of a qualifying floating
charge about his intention to appoint an administrator. The proposed administrator must consent by
statement the acceptance of the proposal and his opinion that the purpose of the administration is
reasonable likely to be achieved.
By the company or its directors
A company or its directors will only be able to appoint an administrator if:
- The company has not been already in administration
- The company has not been subject to a moratorium
A moratorium is an official agreement to stop an activity for a short time
- The company is or would be unable to pay its debts
- The company is not holding a winding up petition
- There is not an administrator already in office
The procedure depends then upon whether there is or not a floating charge holder
- When there is not a floating charge holder: The Company sends a notice with the agreement of
the court, only expressing the intention to appoint an administrator. This notice is sent to all
floating charge holders. The moratorium also takes effect at this point.
There are two possibilities depending on the answer of the floating charge holders:
- The floating charge holders agree with the appointment: They can show the agreement by
responding within 5 days that he or she is content with the appointment or if the floating charge
holder does not send a response within 5 days, the agreement is implied. The administrator is then
in office.
- The floating charge holder does not agree with the appointment: Such a holder can appoint an
administrator of his choice. The notice to appoint is filed in court and a statement from the
administrator consenting to the appointment and stating that in his opinion the purpose of the
administration is likely to be achieved must be included in the file of appointment.
The administrator is then in office.
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Effect of appointment of an administrator – Generally
All business stationary (letters, envelops) must state that the company has an administrator; and
his name must also be written alongside the company’s name.
The administrator manages the company’s affair and takes charge of its business and properties
The administrator can apply to have transactions at undervalue and preferences set aside
The directors must submit a statement to the administrator but they remain in office unless the
administrator removes them.
The administrator has 8 weeks in which to make proposals to save the company from liquidation
and then to implement these proposals.
The special case of employment contracts
An administrator will often wish to retain the services of the company’s employees at least for a period of
time.
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The law contains provisions to ensure that the administrator can pay the employees or make them
redundant* at an early date in the administration; so that the employees are not left to work on for a
period of time after the commencement of the administration only to be told that the company cannot
pay them for the work they have done.
This is achieved by giving an administrator a window period of 14 days after the commencement of the
administration to decide what to do about the employment contracts.
If the administrator adopts the contracts of employment and then is unable to pay, the law says that the
amount owing to employees are charged of the assets of the company with preferential payment, even
they must be paid before the administrator’s remuneration is paid.
*Redundant: If someone is made redundant is told that he/she must leave the job because they are not
longer needed.
Ending the administration
The administrator will automatically leave the office after one year from the date his appointment took
effect. This period may be extended by the court. The maximum extended period is up to 6 months.
The administrator can apply to the end of his administration before one year; in most cases this will be
when the administrator thinks that the purpose of his administration has been achieved. When the
objectives of the administrator cannot be achieved the court would order another insolvency proceeding
such as winding up.
Ring-fencing assets for unsecured creditors – all insolvencies
The preferential debts are paid before the holding floating charges.
In the past, such debts as Crown debts (Inland Revenue) were in the category of preferential debts, but
now they have been reduced to the category of unsecured debts.
In that way, the amount of preferential debts is reduced; giving more chances to recover the debts to the
next category of the priority for payments, meaning the floating charge holders, which typically are banks.
The insolvency practitioner (in all corporate insolvencies) will take measures in order to avoid that holders
of floating charges (banks) receive all the benefits of this reduction of the amount allocated to
preferential creditors.
The insolvency practitioner will set up a fund of £ 10,000 for the purpose of make some payment to
unsecured creditors before making any payment to holders of floating charges.
VOLUNTARY ARRANGEMENTS (CVA)
The aim of the Company Voluntary Arrangement (CVA) is to avoid insolvency proceedings by substituting
a satisfactory settlement of the company’s financial difficulties, for example, an acceptance of an
agreement between company and creditors to pay 60% of the total debts.
The directors must write proposals assisted by an insolvency practitioner, called the Nominee.
Creditors will consider the proposals. If the court agrees, the nominee will call a meeting with the
creditors.
If 75% of the creditors accept the proposal the nominee becomes the Supervisor of the arrangement.
The CVA binds all the creditors of the company, even those who did not participate in the meeting.
The supervisor will implement the terms of the agreement.
A company voluntary arrangement with a moratorium option for small companies
A Moratorium is an official agreement to stop an activity for a short time.
The Insolvency Act 2000 makes provisions for a company CVA with a moratorium. The provisions are
restricted to small companies.
Companies involved in financial market such as stock brokers, are excluded.
Also are excluded companies already subject to formal insolvency proceedings.
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The main provisions of the Act are set out below:
1. Nominee statement: Directors who want a moratorium must appoint a nominee, normally an
insolvency practitioner. The directors must provide him all the important information regarding
the company.
2. Documents to be submitted to the court: In order to obtain a moratorium the directors must file
certain documents with the court, mainly the terms of the CVA, the statement of affairs and the
nominee statement.
3. Duration of the moratorium: The moratorium begins when the documents are filed with the court.
The duration is for 28 days but it can be extended up to a maximum of 2 months.
4. Members and creditors conflicting decisions: In this situation the decision of the creditors prevails
or is over the members’ decision; however the members can appeal to the court in order to make
their decision prevail. The final opinion of the court will be taken after assessment of each
particular case
5. Notification of the moratorium: When the moratorium ends, the nominee is required to advertise
the fact, to notify the Registrar of Companies and to give an official notice to the company.
6. Effect of the moratorium on creditors: No petition to wind up the company not any other
insolvency proceedings can be commenced during the moratorium. Existing winding up petitions
cannot proceed.
7. Obtaining credit: the company must disclose to the lender that the company is in moratorium
when they ask for a credit of more than £ 250
8. Disposal and payments: When in moratorium is in force, the company may only dispose of any of
its property or pay a debt that existed at the start of the moratorium if there are reasonable
ground for believing that it will benefit the company and the moratorium committee gives
approval
9. Disposal of charged property: Act 2000 allows the disposal by the company during the moratorium
of charged property under a hire-purchase agreement provided by the holder of the security
10. Moratorium committee: When the moratorium is extended it is possible to set up a moratorium
committee
11. Effect of CVA: When the CVA (Company Voluntary Agreement) is approved, it binds all creditors
including unknown creditors. On the approval of the CVA the nominee becomes the supervisor
12. Offences by officers of the company: the Act states tat if during the 12 months prior to start of the
moratorium any officer of the company committed certain act, e.g. fraud or falsification of
documents, commits an offence.
It is also an offence if the director of the company tries to obtain a moratorium or an extension by
making false statement or fraudulent doing.
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CHAPTER 7
FORMING BUSINESS CONTRACTS
BUSINESS CONTRACTING – Generally
Once the business person has decided the type of business that suits his needs, he can concentrate on
establishing and building up the business. This will involve acquiring premises and equipment, taking on
employees, buying raw materials and stock, marketing the product or service and meeting orders. An
important part of all business is the presence of a contract
We define contract as the making of a formal agreement that work will be done or that something will
happen.
The vast majority of contracts are entered without formalities. The parties may even be unaware of the
legal significance of their actions.
The dominant economic philosophy of the 19th century was Laissez-faire individualism, which is the view
that the state should not intervene in the affairs of business and the individuals should be free to
determine their own destinies.
But later in order to ensure the freedom of contract and equality of bargaining power, the judges
produced and acceptable legal framework for the regulation of the business transactions; therefore it was
necessary for Parliament to intervene and to make changes to improve the balance between employers
and employees, businessmen and consumers, lenders and borrowers. In these areas, the concept of
freedom of contracts has been modified.
NATURE OF CONTRACT
A contract has been defined as a legally binding agreement.
Other way do define it is “A promise or a set of promises which the law will enforce”
However not all promises or agreements can be considered contracts.
We will try to define in this chapter which kind of agreement the law recognize as creating enforceable
rights and duties.
TYPES OF A CONTRACT
- Speciality contracts
- Simple contracts
1) Speciality contracts: These formal contracts are also known as deeds. Formerly these contracts
had to be in writing and signed in front of witness and attested.
Attestation is a statement that the deed has been signed in the presence of a witness. The court of
Appeal has held that the failure to sing in the presence of a witness will not necessarily invalidate a
deed.
2) Simple contracts: Contracts which are not deeds are known as simple contracts. They are informal
contracts and may be made in any way: orally, in writing or they may be implied from conduct
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ESSENTIALS OF A VALID CONTRACT
The elements that make a contract effective are:
- Agreement
- Consideration
- Intention
- Form
- Capacity
- Genuineness of consent
- Legality
A contract which possesses all these requirements is said to be valid.
If one of the parties fails to live up the promise, the party may be sued for a breach of contract
The absence of any of these essential elements may turn the contract into: void, voidable or
unenforceable
1) Void contract: Due to the lack of the essential elements, we can say that there was never a
contract. Any good or money obtained under the agreement must be returned; if there are some
mistakes in the contract, it can also be classified as a void contract
2) Voidable contracts: Contracts made by persons without a proper right of representation of doing
something on behalf of someone else, or contracts made by minors fall into this category
3) Unenforceable contracts: it is a valid contract but it cannot be enforced in the courts if one of the
parties refuses to carry out its terms
We will analyse in details each element of a valid contract
AGREEMENT
An agreement is formed when a party accepts the offer of another, therefore in an agreement we have
two important components:
- The Offer
- The Acceptance
The first requisite of any contract is an agreement. At least two parties are required; one of them, the
offeror, makes an offer which the other party, the offeree, accepts
Offer
An offer is a proposal made on certain terms by the offeror together with the promise to be bound by the
proposal if the offeree accepts the stated terms.
It is important to identify when a true offer has been made because once it is accepted the parties are
bound.
A real offer must be distinguished from what is known as an “Invitation to treat”
o An invitation to treat
This is when a person or business stays in a position that shows that he is ready to receive offers.
With this new concept we need to adjust some concepts that we have about the idea of what is an offer
and what is an invitation to treat.
For example, when we go to a shop which has an “offer” of a product, according with the new concept we
know now that in fact they are not making an offer, what they are doing is an invitation to treat and
inviting you to make an offer for that product.
Examples of invitations to treat:
1. The display of goods with a price ticket attached in a supermarket or in a shop window: This is not
an offer to sell but an invitation for customers to make an offer to buy
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2. Advertisements, catalogues and brochures: It includes adverts in TV, radio, magazines, internet,
etc. Even if the word offer is used in the adverts, it is still an invitation to treat
3. Company prospectuses: When a company wishes to sell shares to the public, it may issued a
prospectus which is another example to an invitation to treat
4. Auctions: At an auction sale, the call for bids by an auctioner is an invitation to treat. The bids are
offers
5. Tenders: Some companies or governments place contracts by inviting interested firms to tender
(to offer) for business. The acceptance of a tender has different legal consequences depending on
the wording or on the way it was written the original invitation to tender
6. Statements of price in negotiations for the sale of land: When the subject matter of a proposed
sale is land; the courts are reluctant to find a definitive offer to sell unless it is very clearly stated.
o Termination of the offer
An offer can end in a number of ways
- By acceptance
- By rejection
- By revocation before acceptance
- If the offer lapses
- Death
- Failure of a condition attached to the offer
.
1) By acceptance: An offer which has been accepted constitutes a contract.
2) By rejection: An offer is rejected if:
The offeree notifies the offeror that he does not wish to accept the offer
The offeree says that he accepts the offer under certain conditions
The offeree makes a counter offer
However, a request made by the offeree to the offeror requesting for more information about the
offer cannot be taken as a rejection of the offer.
3) By revocation before acceptance: An offer may be revoked (withdrawn) at any time before
acceptance but it will only be effective when the offeree is aware or knows about the withdrawn
of the offer; but if someone has started to perform the act requested in the offer, the offer cannot
be revoked.
4) If the offer lapses: The offeror may stipulate that the offer is only open for a limited period of time.
Once the time limit has passed, any acceptance will be invalid
5) Death: If the offeror dies after having made an offer and the offeree is notified of the death, any
acceptance will be invalid
6) Failure of a condition attached to the offer: An offer may be made subject to conditions. Such
conditions may be stated expressly by the offeror or implied by the circumstances. If the condition
is not satisfied the offer is not capable of being accepted.
Acceptance
Once the presence of a valid offer has been established, the next steps in the formation of an agreement
are to find an acceptance of that offer. The acceptance must be made while the offer is still open. It must
be absolute and unqualified.
o Unconditional acceptance
If the offeree tries to change the terms offer, this is a counter offer, therefore it is a rejection of the
original offer.
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One form of conditional acceptance is the use of the phrase “subject to contract”, mainly used in
negotiations involving the sale of land; these words usually mean that the parties do not intend to be
bound at that stage.
The advantage of “subject to contract” agreements is that they allow either party to withdraw from the
agreement at any time and for any reason without facing an action for breach of contract.
o Method of acceptance
An acceptance may take any form. It can be given orally or in writing but silence cannot normally amount
to an acceptance.
Consumer Protection Regulations 2000 outlaw the supply of unsolicited goods and services to consumers,
which is called “Inertia selling”.
Inertia selling is when a trader sends unsolicited goods to a person’s home, stipulating that if the seller
does not receive a reply within a specified period of time, he will assume that his offer to sell the goods
has been accepted and the good must be paid. The Regulation 2000 clearly states that the person is not
obliged to pay for the goods left in his house.
- An offeror may state that the acceptance must be in a particular form; and the wishes of the offeror
should be respected; so if the offeror asks for an acceptance in writing it must be done in that way; in that
case a telephone call or a verbal acceptance will not be valid.
o Communication of acceptance
The general rule is that acceptance must be communicated to the offeror, either by the offeree himself,
or by someone authorised by the offeree. The contract is formed at the time and place the acceptance is
received by the offeror.
Acceptances sent by electronic means are likely to be effective when received by the customer
The Electronic Commerce (EC Directive) Regulations 2002 provide a legal framework for the regulation of
contracts by electronic means.
The regulations apply to online trading and advertising using Internet, email or mobile phones.
Regulations provide the following information:
- The different technical steps to follow to conclude the contract
- Whether the concluded contract will be filed by the service provider and whether it will be
accessible
- The technical means for identifying and correcting input errors before the order is placed
- The languages offered for conclusion of the contract
CONSIDERATION
On the previous pages we have seen how an agreement is formed –the requirements of offer and
acceptance- but the agreement alone does not make a contract.
The element of exchange is known as “Consideration” and is an essential element of every valid simple
contract.
Considerations can take tow forms: executed and executory.
1) Executed considerations: When a promise is made in exchange for an act, when that act is
performed, it is executed consideration. It is when one party promises to do something in return
for the act of another, e.g. reward case.
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2)
Promise
Reward to return a lost cat
Act
A person sees the advert, finds the cat, returns it
to the owner and claims the reward
3) Executory considerations: Is when there is an exchange of promises to perform acts in the future.
Promise
Act
Promise to pay when a new computer is delivered Promise to deliver the computer within six weeks
o
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Rules governing consideration
Consideration must not be in the past
Consideration must move from the promise
Consideration must not be illegal
Consideration must be sufficient although may not be adequate
1) Consideration must not be in the past
If one person performs an act and the other person makes a promise after the act was performed, the
consideration is said to be in the past. Past consideration is regarded as no consideration
Promise
Act
A person finds a cat in the street and returns it to The owner is glad for the return of the cat and
the owner (there was not adverts of reward promise that she will give him some money next
week
offers)
In this case the person, who found the cat, cannot force the owner to give the money that she had
promised because when he gave the cat he did it without expecting payment and so there was no bargain
between the parties.
2) Consideration must move from the promise
If A (the promisor) makes a promise to B (the promise), the promise will only be enforceable if B can show
that he has provided consideration in return for A’s promise.
The promise will not be enforceable if B cannot show the consideration, unless the promise is made in the
form of a deed.
3) Consideration must not be illegal
The courts will not entertain an action where the consideration is contrary to a rule of law or is immoral
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4) Consideration must be sufficient but may be not adequate
Sometimes the price of the consideration may be of a little value or even the value of £ 1 may be taken as
a symbolic payment to prove the transaction. The contract is valid, and it does not fail for lack of
consideration; we can say that the consideration was not adequate but it was sufficient
The court will not help someone who complains of making a bad bargain
The problem is different when a person accepts a smaller sum of money as full payment under a contract
to pay a larger amount. For example, what is the legal position if Derek owes to Graham £ 100 but
Graham says that he will accept £ 90 in full settlement? The long-established common law rule, known as
the rule of Pinel’s case (1602) is that an agreement to accept a lesser sum is not binding unless is
supported by a new consideration.
- There are some exceptions to this rule:
a) If the smaller payment is made at the creditor’s request. The payment by cheque rather than by
cash does not release a debtor from the obligation of paying the full amount.
b) The rule does not apply to a composition agreement when the debtor agrees with all the creditors
to pay part of the total amount. If the debtor pays the agreed amount the creditors cannot sue for
any outstanding sum.
c) Another exception is provided by equity.
Equity is a system of law based on the idea of “fairness and doing right according to conscience”
The rule about part payment would be a good example to apply equity system.
Thus, it seems that if a person promises that he will not insist on his strict legal rights, then the law
will require the promise to be honoured.
Promissory estoppel is a common law doctrine used by courts to enforce promises that have been
made and subsequently relied upon. Most of the time, contract law, dictates the terms of how
promises should be enforced. Promissory estoppel usually comes into play when there is no formal
contract but the parties involved have nevertheless acted as if there was one. Courts use the
doctrine in these circumstances to impose a contract on the agreement, usually in the interest of
fairness.
The following points should be noted about promissory estoppels:
- The rule can only be used as a defence and not as a cause of action
- The rule will only operate if the promise has relied upon the promise, so that it would be
inequitable to allow the promisor to insist on his legal right.
- It is a principle of equity that whoever seeks the help of equity must himself have acted equitable
and fairly
- The rule does not extinguish rights; it only suspends the rights of the promisor; so if the promise
refers t a particular period of time or a state of affairs (e.g. war conditions), the promisor can
revert to the original position at the end of the stated time or when conditions change.
PRIVITY OF CONTRACT
In Common law, the doctrine of privity of contract means that a person who is not a party to a contract
cannot bring an action in contract. Or in other words, a person cannot be bound by, or take advantage of
a contract to which he is not a party.
However, in many situations the third party has right although there were not directly involved in the
contract.
Examples:
- When the person transfers the benefits of a contract to another person, this is called, assignment
of contractual rights
- Agencies: when they make contracts on behalf of a third party
- In land law there are many situations that the doctrine of privity of contract does not apply
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In 1996 the law Commission recommended that the doctrine of privity needed to be more flexible to
allow a person who is not a party to a contract to have rights if the contract expresses clearly a term that
confer rights to this third party.
The Act 1999 – Contracts Rights of Third Parties reforms the doctrine of privity by recognising the rights of
third parties to enforce contracts which have been made for their benefit.
The contract can only be applied if it gives benefits to the third party; but contracts that burden (trouble)
or give obligations to a third party cannot be imposed it the third party was not aware of this contract or if
he did not give his consent.
o Main provisions of the Contracts Act 1999 (Right of Third Parties)
It gives provisions regarding the rights of a third party to enforce a term of a contract.
A third party will have the right to enforce a term of a contract if the third party is expressly identified in
the contract, by name (e.g. Fred Smith), by class (e.g. Fred Smith’s employees) or by description (e.g. Fred
smith’s daughter).
The right of a third party to enforce a contract is subject to the terms and conditions of the contract
For the purposes of the Act: The “promisor” is the party of the contract against whom the contractual
term is enforceable by the third party; the “promise” is the party of the contract by whom the term is
enforceable against the promisor.
So if A makes a contract with B, by which B agrees to confer a benefit to C. B is the promisor, A is the
promisee and C is the third party
Example: If Peter sells a business to Joseph and the contract states that Joseph must pay £50 monthly to
Peter for the rest of his life, and the contract says that if Peter dies, Joseph must continue paying £40 to
Peter’s widow. In this case Joseph is the promisor, Peter is the promisee and Peter’s widow is the third
party.
According to the Act 1999, Joseph is enforceable to pay the monthly payment to Peter’s widow even if
she was not involved in the contract.
o Variation and rescission of the contract
The effect of this section is to restrict attempts by the contracting parties to alter, change or cancel the
contract without the agreement of the third party.
When the third party has a right to enforce a term of a contract, the contracting parties may no, by
agreement, change the contract in such a way that the third party loses his rights. Obviously, for the third
party to be able to enforce this right, he must be aware that there is a contract between two parties when
he is a third party with right to benefits.
o Defences, set offs or counterclaims available for the promisor
This section provides all the means that the promisor has available to prevent a third party to enforce an
action in connection with the contract.
A set-off is a counterclaim with the particular goal of defeating or diminishing the amount the defendant
will have to pay if the plaintiff's suit succeeds.
Some of this defences may be expressly written in the contract; on the other hand, the contract may
include provisions to the effect that the promisor cannot raise any defences, set-offs or counterclaims
that would have been available to the promisor.
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o Enforcement by the promise
This section makes it clear the rights given to third parties under the Act are in addition to any rights that
the promisee has to enforce the contract; this means that in a contract between A and B for the benefit of
C, B can sue on behalf of C
o Exceptions
Third parties have no rights in relation to the following contracts:
- Contracts on a bill of exchange, promissory note or other negotiable instruments
- Contracts in companies constitution between the company and its members
- Contracts of employment
- Contracts for the carriage of goods by sea
INTENTION
For a binding of a contract, the law demands that the parties have the intention to enter into a legal
relationship.
How the law decides if the parties had intention to enter into a legal relationship?
For the purpose of establishing this intention, the agreements are divided into two categories:
- Business / commercial agreements
- Social / domestic agreements
Business / commercial agreements
In the case of a business agreement, it is automatically presumed that the parties intended to make a
legally enforceable contract.
However, when the parties enter into an agreement “subject to contract” they are expressly stating that
they will not be bound unless and until a formal contract is written and signed.
There are situations where it would appear that the parties had entered into a commercial arrangement
but nevertheless a contract is not created. These situations are:
- Collective agreements
- Advertisements
- Public bodies
- Letters of comfort
- Letters of intent
o Collective agreements
The agreements between employers and trade unions regarding payments and employment conditions
are not intended to be legally enforceable unless they are in writing, meaning that what was verbally
agreed, for example, in a meeting must be properly documented in writing and signed.
o Advertisements
Generally speaking, vague promises or guarantees given in the course of promoting a product are not
intended to be taken seriously. E.g.”… the best car of the world…”
o Public bodies
When one party is a public body which is bound to supply a particular service, there is no intention to
enter into by ordinary class mail and it is delayed or lost, you cannot sue the post office for breach of
contract
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o Letter of comfort
Informal letter from a person or organization (e.g. a bank) indicating its willingness to support a customer
with a short term loan, if and when required. It is not a letter of commitment.
It can also be defined as a document supplied by a third party to a creditor indicating a concern to ensure
that the debtor meets his obligations to the creditor. The letter must be carefully written in regard to the
words used as to avoid the creation of any legal obligation.
o Letters of intent
A letter of intent is when one person indicates to another that he is likely to place a contract with him but
the binding will exist under certain circumstances. The best example is when a person is preparing a
tender and he has to plan the cost of the work; he can call another sub-contractor for some specific work,
for instance, a carpenter to do some of the works for the construction; in this example, the persons who is
preparing the tender can arrange with the carpenter “In case I win the tender, I will contract you for the
carpentry work. Normally the letter is carefully worded so as to avoid any legal obligations (…”in case I
win the tender...”).
Social / domestic arrangements
Social arrangements between friends are not seen as contracts because the parties never intended their
agreement to become legally bound, for example, an agreement to meet for lunch or an invitation to a
party.
But if the agreement had a commercial purpose, the court may be prepared to find the necessary
intention of the contract.
Most domestic arrangements within families are not intended to be legally binding, but it does not mean
that there can never be business contracts between members of a family. Many families are running as
partnership.
The promise will bind the family depending on the context where that promise was made.
FORM
If you ask someone what a contract is, you will probably be told that it is a written document. Some
contracts are indeed in writing but the majorities are created much more informally either orally or
implied from conduct.
Generally, the law does not require complex formalities to be observed to form a contract; however there
are some types of contracts which some formalities are necessary to make the contract valid.
The contracts that need to respect some forms are;
- Contracts involving land: Require to be done as a deed. The contracts for the sale of land can only
be made in writing and it must be signed by each party.
- Bills of exchange, cheques and promissory notes must be in writing
- Transfer of shares in a limited company also need the formality of writing
- Contracts of employment require that the employee has to receive a written statement of the
terms and conditions of employment
- A contract of guarantee has to be evidenced in writing. If you borrow money or buy goods on
credit, you may be asked to find someone who will guarantee the debt. This means that if you do
not or cannot repay the money the guarantor will pay the debt for you.
o Formalities and electronic communication
The rapid development of electronic communication technology is changing the way in which business is
conducted.
The Electronic Communication Act 2000 is designed to facilitate the development of electronic commerce
by providing provisions for:
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1. A voluntary registration system
2. Legal recognition of electronic signatures
3. The removal of obstacles to the use of electronic storages instead of paper documents
CAPACITY
It is assumed that everyone is capable of entering into a contract. There are however some group of
people who are in need of the law’s protection either because of their age or because of their inability to
appreciate their own actions.
This group is:
- Minors (under 18 years old)
- Mental patients and drunks
Minors
A minor is free to enter into contracts and enforce his rights against an adult. The adult’s rights will
depend on the way in which the contract is made.
o Valid contracts with minors
There are two types of contracts which will bind a minor:
- Contracts for necessary goods
- Beneficial contracts of service
Necessaries goods are those goods suitable to the condition in life of a minor. Luxury goods are excluded;
it means that if the minor buys good that are classified as necessary goods the minor is bound to the
contract and must pay for them.
Contracts that provide education or involve the learning of a profession are taken as beneficial service for
the minor and the minor is bound to this contract.
If the minor has a business contract he will not be bound by his trading, but the adult dealing with the
minor will be bound to the terms of the contract.
o Voidable contracts with minors
There are three kinds of contract which are voidable when dealing with minors:
- Leases of land
- Partnership
- Purchase of shares
Voidable means that the minor is bound to the contract until he decides to reject it.
Minor’s Contracts Act 1987 (MCA 1987)
This new Act replaces the Infant Relief Act 1874.
The Act establishes that a contract made by a minor becomes automatically enforceable when the minor
reaches 18, without the need to make a new contract.
A loan given to a minor is enforceable to the adult who supported the guarantee for the debt, meaning
the adult guarantor
The Act improves the remedies available to an adult who has contracted with a minor:
- When a minor has cancelled a contract, the court may, if the court thinks that is fair and equitable to do
so, require him to return the property that he has acquired; but if the minor has already consumed or
disposed the good of the transaction, the adult cannot force him to compensate for the already disposed
goods.
These remedies of restitution were defined in the new MCA 1987; however previous to this act, it was
well established that an adult had the right to recover money or property acquired by a minor as a result
of fraud. The remedy was confined to restitution of the property acquired.
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Drunks and mental patients
If a person is suffering from mental disability or drunkenness at the time of making the contract, he will be
able to avoid his liabilities if he can prove that he did not understand what the agreement was about and
the other person was aware of his disability.
The Mental Health Act 1983 provides powers to the court of Protection over the property and affairs of
mental patients.
The Mental capacity Act 2005 establishes a new statutory framework to protect adults who lack mental
capacity and are unable to make their own decisions
GENUINENESS of CONSENT
The most basic requirements of a contract are the presence of an agreement.
The agreement may be invalidated by a number of factors:
o Factors that invalidate an agreement
1- Mistake
2- Misrepresentation
3- Duress (agreement done by force or threat)
4- Undue Influence
MISTAKE
Types of mistakes
a) Common mistake: Both parties make the same mistake. The parties have entered into an
agreement on the assumption that a certain states of affairs exist but subsequently they both
discover that they were wrong.
b) Mutual mistake: When the parties are at cross purposes; for example, John offers to sell his car to
George; the offer is accepted by George thinking that John wants to sell his Toyota, but John is
referring to his other car, which is a Jaguar.
c) Unilateral mistake: Situation where only one of the parties is mistaken and the other party either
knows or is assumed to know that a mistake has been made.
The effect of a mistake under the view of Common law
o Common mistake under common law view
The general rule is that a common mistake does not affect the validity of a contract; however,
there are some kinds of mistake which common law will not consider that the contract is void. A
void contract implies that no rights of ownership can pass and any goods which have changed
hands can be recovered.
A common mistake will invalidate the contract in the following situations:
a) Mistake of law: It is assumed that everyone is presumed to know the law (“Ignorantia juris
non excusat”); however the House of Lords stated in a case in 1998 that the rule precluding
recovery of money paid under a mistake of law could no longer be maintained.
b) Mistakes as to the existence of the subject matter of the contract: When parties contract in
the mistaken belief that a particular thing is in existence, but in fact it has ceased to exist,
the contract is void. These situations are known as cases of res extincta.
c) Mistake as to title: When the parties are mistaken about the ownership of the subject
matter of the contract. This is sometimes referred to as res sua.
o Mutual or unilateral mistakes under Common law view:
A mutual mistake is when the parties are talking at cross-purposes. The court will consider objectively if
there is an agreement or if the misunderstanding is so big that it is impossible to find an agreement at all.
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For the unilateral mistake, the general starting point is that a unilateral mistake does not invalidate a
contract; however, if there is a fundamental mistake as for example, changing the subject matter of the
agreement, the court may consider that the contract is void.
- Mistake as to the terms of the contracts: This is when one party makes an offer to another party and he
is aware that the other party is fundamentally mistaken about the terms
- Mistake about the identity of one of the parties: If one party makes a mistake about the identity of the
person he is contracting with, this may invalidate the contract on the basis of unilateral mistake. A typical
“mistake identity” case is when a crook fraudulently represents as the owner of the goods that belong to
someone else; in these cases the decision of the Court will depend on whether the parties had face-toface dealings or the agreement was reached by written correspondence.
If the agreement has been concluded in writing and the parties never met, then the mistake of identity
will result in the contract being void.
The situation is more complicated when the parties have face-to-face dealings; in this case the owner of
the good could think that he is dealing with someone who is not really the person who he thinks that he is
dealing with; he is assuming an identity but eventually he is making an agreement with another person; in
this situation the contract will be valid until the owner of the good realises the he had made a mistake of
identity. The problem also arises when the owner realised about his mistake too late, because the crook
has already sold or dispose of the goods. The question is: Has the owner any right to claim for the
recovery of the goods if he discovered that the goods are now in possession of a third party? (the person
who bought the goods from the crook). The third party (the buyer) can say that he dealt with a person
(the crook) who was in possession of a valid contract, which it would be true, because the contract is valid
until the owner realises that he made a mistake which as we said it could be too late.
In general terms, the Court will say that the third party (the buyer), does not loose the rights of ownership
of the goods and the owner has no right to claim for the recovery of the goods. However, recently in 2004
the “mistaken identity” cases were reviewed as a result of a particular case (Shogun Finance Ltd v Hudson
– 2004)
The effect of a mistake under the view of equity
At common law, mistakes do not invalidate a contract, excepts only in special situations. It may,
nevertheless, be possible for the court to apply equitable principles to achieve a measure of justice in the
case. A court may grant the following forms of equitable relief:
- Rescission of terms: the contract can put aside the terms of agreement and analyse the context of
the situation for a fairer solution of the problem
- Rectification: If a mistake is made in reducing an oral agreement into writing, the court may rectify
the document so it can express the real intention of the parties
- Specific performance: A court may refuse to grant an order of specific performance against a party
who made a mistake, if it would be unfair to enforce the contract against him.
Documents mistakenly signed
There are a group of cases where typically a person is induced by a false statement to sign a document
which if fundamentally different from what he thought he was signing.
As general rule, a person who signs a document is assumed to have read, understood and agreed to its
contents. However the contract can be void if:
- The contract must have been induced by fraud
- The document signed is fundamentally different from the document thought to be signed
- The signer must not have acted negligently
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MISREPRESENTATION
The formation of a contract is often preceded by a series of negotiations between the parties. Some of
the statements made during the negotiation may later turn out to be false.
A Misrepresentation is a false statement made by one party which induces the other to enter into a
contract.
The silence cannot be taken as a misrepresentation, but there are certain situations where a failure to
speak will amount to an actionable misrepresentation:
- In a good faith relationship between partners
- Contracts of utmost good faith. E.g. proposal for insurance cover
- When a half truth is covered
- When there has been a change in circumstances between the time of negotiations and the
conclusion of the contract
The misrepresentation must involve a statement of fact, opinion or intention.
An opinion will not be taken as misrepresentation because an opinion is a statement of belief which is not
capable of proof; but if this opinion is coming from a person who is in a position of expertise in the
subject; his opinion could be an actionable misrepresentation.
Types of misrepresentation and their effects
- Fraudulent misrepresentation
- Negligent misrepresentation
- Innocent misrepresentation
Fraudulent misrepresentation: A person will be liable for fraud if he makes a statement which he knows to
be false or he has no belief in its truth or he is reckless, careless whether the statement it is true or false
Negligent misrepresentation: When the person making the false statement has no reasonable grounds for
believing the statement to be true
Innocent misrepresentation: An innocent misrepresentation is when a person made a false statement
thinking that what he was saying was true
Rescission
Rescission is to make a contract no more valid
Rescission aims to restore the parties to the position where they were before the contract. Money or
goods which have changed hands must be returned.
DURESS and UNDUE INFLUENCE
The general rule of law is that a contract will be valid only if the parties entered into it freely and
voluntary.
When a party to a contract is subject to violence or threats of violence, the contract may be avoided on
the grounds of duress.
The court recognize also economic duress as a way to make a contract voidable
Economic duress: Wwrongful or unlawful conduct that creates fear of economic hardship which prevents
the exercise of freedom while engaging in a business transaction
- When one of the parties occupies a position of dominance and influence over the other, there is a
relationship under pressure from one party over the other. The contract will be void unless the dominant
person can show that the other party acted independently and without pressure.
We have finished now with the explanation of the factors that invalidate an agreement (mistake,
misrepresentation, duress and undue influence); under the lack of genuineness of consent.
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Now we will continue with the next of the essential of the valid contract. We have already discussed
about Agreement, Consideration, Intention, Form, Capacity and Genuineness of consent.
The last of the essentials that we will explain is Legality
LEGALITY
When the contract involves some kind of wrongdoing, it will be illegal.
If, however, the conduct is neither immoral nor blameworthy, but simply undesirable, the contract will be
void.
Contract illegal at common law
- Contracts to commit crimes or civil wrongs
- Contracts involving sexual immorality
- Contracts tending to promote corruption in public life (bribes to officials, public servants or even in
the private sector)
- Contracts trading with an enemy in wartime
- Contracts directed against the welfare of friendly foreign state
- Contracts prejudicial to the administration of justice
o Consequences of illegality
A contract which is illegal from the beginning will be void and unenforceable.
Some contracts are innocent at the beginning but become illegal because of the intentions of one of the
parties. The innocent party will protect his rights if he repudiates the contract as soon as he is aware of
the illegality.
Contracts void at Common law
There are three types of contract in this category:
1. Contracts that remove the jurisdiction of the Court: A contract which has a clause that prevents
the intervention of the Court in case of dispute is a void contract.
2. Contracts prejudicial to the status of marriage: This includes a contract that restrains or controls a
person from marrying at all or except to one person. A contract which provides for a possible
future separation of the spouses will be void, but it is possible to make a contract between the two
parties to facilitate things in case of an immediate separation.
3. Contracts in restrain of trade: In general terms we can say that a person is free and has liberty to
carry on his business, trade or profession; and any contract that restrains this right is considered
void.
However, there are certain situations that this right of freedom of trading is limited and the law
accepts these restrains.
The four main types of restrains for freedom of trading are:
a) A term a contract of employment: Which restricts an employee’s freedom of conduct
either during the period of employment or after the employment has terminated. There
are many examples that can be included in this section, some of them are: employees that
signed a full time contract with a clause that prevents the employee to perform private
business; a contract with an employee who knows certain secret processes for the
manufacture of a product; an employer who wants to protect his customers connections,
etc.
The court will accept the restrictions which are reasonable in the circumstances; for
instance, if the employee knows a secret for the process of a product, it would be
reasonable that the employer restrains this employee to make the same product in case of
resignation of his job; but the court will not see as reasonable restriction the employer to
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prevent an employee from making use of his knowledge and skill which he has acquired in
the course of his employment; e.g. en employee who worked in a garage repairing cars,
after a couple of years he wants to open his own garage, in this case the employer could
not prevent him to do so.
In case the restrains have reasonable grounds, the next step is to define the area of
restrains and the restrain of the time of operation; this restriction should not be excessive;
for example, the restriction will be for a radius of 20 km, or in relation to the time the
contract can state a restriction during 1 year; the two factors are complementary: The
wider the area of the restraint the shorter the duration, and vice versa.
If a restrain is accepted by the court, it can be enforced by an injunction; however, if a
court finds that a restraint is illegal will ay that the contract is void and the clause is
unenforceable.
b) A “solus” agreement by which trader agrees to restrict his orders from only one supplier;
there are good examples in the petrol industry where a garage makes a deal with one
petrol company (e.g. Esso) to sell only this fuel.
c) A contract for the sell of a business by which the seller agrees not to compete with the
buyer. We have seen examples of these restraints when we studied the cases of the sale of
goodwill.
d) Contracts between traders to regulate prices; this part of the law is largely covered by
legislation that we will study later.
Contracts illegal by statute
Some statutes expressly prohibit a certain type of contracts; for example, Competition Act 1998 says
that agreements by two or more persons to fix the price at which goods may be resold are unlawful.
Contracts void by statute
a) Gambling contracts: Gambling Act 2005 provides all statutory provisions preventing
enforcements and provides that gambling contracts are as enforceable as other contracts. The
Gambling Commission has the power to void a bet in specified circumstances.
b) Anti-competitive agreements: Competition Act 1998 (CA 1998) and Enterprises Act 2002 (EA
2002) deal and provide control of anticompetitive agreements
COMPETITION POLICY
Competition is an essential requirement of a free market economy; it provides consumers a choice of
goods and services at the best possible price. However, unregulated competition in a free market leads
inevitably to monopoly and other undesirable practices. Another problem which may arise is when
companies within a particular industry form a Cartel to fix minimum prices for their products or restrict
production, denying consumers the benefits of a competitive market.
A cartel is a group of companies who agree to sell something at the same price so that they do not
compete with one another; thus it is necessary to regulate the competitive process in order to maintain a
healthy free market which serves the interest of consumers.
The Monopolies and Trade Practice Act 1948 was the first competition law in the UK developed in
response to changing needs and circumstances.
By 1997 the law had become a complex mixture of UK and European Community provisions
The competition Act 1998 was a reform in the UK competition law of measures to enhance the UK’s
enterprise capability. They include modernising the insolvency laws, creating the Office of Fair Trading
(OFT) as a statutory authority and strengthening consumer protection.
We will present an overview of the three main legal framework used to regulate competition:
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-
European Community competition law
UK Competition Act 1998 (CA 1998)
UK Enterprise Act 2002 (EA 2002)
European Community Competition law
Under Arts 81 and 82 of the Treaty of Rome, all agreements between business which operate to prevent
or restrict competition in the European Community (EC) are void.
- Art 81: It bans practices which distort competition between members of the EC. These include:
Price fixing, restriction in production and market sharing.
- Art 81: Prohibits the abuse of monopolistic position by an organization within the EC. Practices
which might be considered abuses include imposing unfair buying or selling prices.
o European Community Merger Control Regulations
Merger is when two companies combine to form a bigger company.
Most of the mergers within a country are regulated by country’s domestic law; however in certain
circumstances when the merger makes a company very big with an aggregate turnover that exceeds 5
billion euros; this merger will fall under the regulation of the European Community.
-
UK Competition law
Competition Act 1998
The Enterprise Act 2002
o Competition Act 1998
The CA 1998 has two prohibitions that are based on the prohibitions stated in Arts 81 / 82 of the
European Community law.
Chapter 1 prohibition: It is based in art 81. According to this act it is prohibited to:
- Agreeing to fix purchase or selling prices
- Agreeing to limit or control production, markets, technical development or investment
- Agreeing to share markets or supply sources
- Agreeing to place some parties at a competitive disadvantage
- Agreeing to make contract subject to unrelated conditions
Fro an agreement to be prohibited, it must have an “appreciable effect” on competition; meaning that if
the agreements do not have a remarkable effect on competition will be allowed.
There are other exemptions for these prohibitions:
1) Individual exemptions: The parties to an individual agreement may apply to the Office of Fair
Trading (OFT) for exemption if they can show that the aim of the agreement does not affect
competition.
2) Block exemptions: These exemptions meet the same criteria as for individual exemptions
3) Parallel exemption: when the agreement has an effect on trade between members states of the
European union
Chapter 2 prohibition: It is based on Art 82 of the EC law.
It prohibits the abuse by an undertaking of a dominant position.
The Act makes a list of the conduct that may be seen as abusive:
- Imposing unfair purchase or selling prices
- Limiting production, markets or technical development that affect consumers
- Applying trading conditions that place other parties in competitive disadvantages
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The Act provides some exclusions or exemptions for Chapter 1 prohibitions; however there are no
exemptions for Chapter 2 prohibitions.
Enforcement
The responsibility for enforcing the new legislation rest primarily on the Office of Fair Trading (OFT)
The OFT has the power to grant exemptions, investigate, make decisions enforceable by a court order and
publish advice and information.
Failure to cooperate with an investigation carried by OFT may lead to criminal offence, punishable by a
fine or imprisonment.
The OFT may exercise the following powers during an investigation:
- Make copies of any relevant document
- Enter into premises without a warrant in order to obtain documentation useful for the investigation
Consequences of breach
The OFT has the power to impose civil fines of up to 10% of undertaking’s turnover for infringement of
either Chapter 1 or Chapter 2 prohibitions.
Competition Commission (CC)
The competition Act 1998 established the Competition Commission (CC) which carried out two functions:
- It investigates specific markets or the conduct of companies or mergers and makes a report with
recommendations for action
- It hears appeals against decisions made by OFT in enforcing prohibitions. This power of the CC
stated in Act 1998 has been given to the Competition Appeal Tribunal which is established in the
Enterprise Act 2002
o The Enterprise Act 2002 (EA 2002)
The EA 2002 made a number of significant changes to UK competition law
Some of the important subjects established in EA 2002 are:
- Definition of functions of the Office of Fair Trading (OFT)
- Creation of the Competition Appeal Tribunal
- Reform of the merger control framework
- Establishment of a new system of market investigation
- Criminalisation of Cartels
- Introduction of a procedure that allows certain consumer bodies to make super-complaints to the
OFT
- Introduction of amendments of the company Disqualification Act 1986
- Introduction of some changes to the Competition Act 1998
Office of Fair Trading: the EA 2002 established that the OFT is a corporate body composed of a Chairman,
Chief Executive and other four board members. The studies of market which are not operating well for
consumer are carried out by the Market and Policy Initiatives Division (MPI)
Competition Appeal Tribunal: It replaces the power of the Competition Commission to hear appeals
against decisions made by the OFT
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Regulation of Mergers: The main provisions of the Act 2002 in regarding mergers are:
a) Decisions on mergers are now taken by the OFT and Competition Commission rather than by
the Secretary of State for Business, Innovation and Skills
b) Mergers will be prohibited if they would result in a substantial lessening of competition in the
market
c) The OFT may investigate mergers which meet either the “turnover” test (company with a
turnover of at least £ 7 million) or the “share of supply” test (merged companies supplying at
least 25% of goods or service of the market)
d) OFT can investigate distribution of powers within a company (de facto control and de jure
control)
e) The OFT must refer a merger to the CC if it believes that the merger may substantially lessen
competition
f) The CC will conduct a full investigation of cases referred by the OFT. If merger caused lessening
of competition, the CC can stop the merger or impose remedies.
Criminalisation of Cartels: As we have seen, a Cartel is a group of companies who agree to sell something
at the same price so that they do not have to compete with one another.
EA 2002 states that a person will be guilty of an offence if he dishonestly agrees with another in the
following activities:
- Price fixing
- Limitation of supply production
- Market sharing
- Bid – rigging
The offence is triable in the magistrate’s court or by the Crown Court; with a maximum sentence of six
months imprisonment (for the magistrate’s court) or five years imprisonment (for the Crown Court)
Super complaints: The EA 2002 introduce a new procedure to allow certain designated consumer bodies
to make super-complaints to the OFT when a market of goods or services in the UK is or appears to be
significantly harming the interest of consumers.
Disqualification of directors: The EA 2002 allows the OFT to apply to the High Court in order to disqualify
directors of companies which have committed breaches of the following competition law provision:
- Chapter 1 of CA 1998
- Art 81 of EC treaty
- Chapter 2 of CA 1998
- Art 82 of EC treaty
The maximum period of disqualification is 15 years
Changes to the Competition Act 1998
- The exclusion of designated professional rules from chapter 1 prohibition is now repealed
- When the OFT obtains a warrant to enter premises for an investigation, the warrant may authorize
the OFT officer but also a person who can assist the OFT officer in technical or particular issues, for
example, a person with knowledge in computer programs to be able to have access to all related
information stored in the company’s computers
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CHAPTER 8
THE TERMS OF BUSINESS CONTRACTS
A contract comprises a set of promises which the law will enforce.
The obligation undertaken by the parties are known as the terms of the contract.
The terms of a contract are essentially a matter of express agreement between the parties.
CERTAINTY OF TERMS
The terms may be so vague and not well defined that in reality there is no contract in existence.
The presence of a vague term will not always cause that the contract is not valid. There are some ways to
make these vague terms become clearer.
PUFFS, REPRESENTATION AND TERMS
The first step in determining the terms of a contract is to establish what the parties said or wrote.
Not all statements made during the course of negotiation will automatically be incorporated in the
contract.
There are statements prior the contract is agreed (Pre-contractual statements: Trader’s puffs and
Representation) and statement of the contract (Contractual terms).
o Trader’s Puff: Usually they are advertising exaggeration of the seller, e.g. “…this is a perfect car at
an incredible value…”; we are not expected to take such statement seriously.
o Representation: A representation is a statement of fact made by one party which induces the
other to enter into a contract. When this statement made by one party is false, we say that it is a
misrepresentation.
Misrepresentation
Remedies:
Fraudulent
Negligent
Damages for the tort
of deceit
Damages either under s2
Misrepresentation Act 1967
or for the tort of negligence
AND
Rescission of the contract
AND
Innocent
Rescission of the contract
OR
Rescission of the contract
At the discretion of the court, damages
Under s2 Misrepresentation Act 1967
o Term: The terms of the contract define the obligations of the parties. Breach of the terms of the
contract entitles the injured party to claim damages.
o Advertising: Misleading Marketing Regulations 2008 (BPRs), contains business protections in
respect to misleading advertising.
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TYPES OF CONTRACTUAL TERMS
Traditionally, terms have been created into two categories:
- Conditions
- Warranties
1) Conditions: A condition is a major term which is vital to the main purpose of the contract. A breach
of condition will entitle the injured party to repudiate the contract and claim damages.
2) Warranties: A warranty is a less important term: it does not go to the root of the contract. A
breach of warranty will only give the injured party the right to claim damages but he cannot
repudiate the contract.
In recent years the court have recognized that it may be impossible to classify a term in advance as either
a condition or a warranty; sometimes the only way to make the difference between both terms is by
assessing the consequences of a breach. If a breach of the terms results in severe loss and damage, the
injured party will be entitled to repudiate the contract; when the breach involves only minor loss, the
injured party’s remedies will be restricted to damages.
EXPRESS AND IMPLIED TERMS
Another way in which the contents of a contract can be classified is according to whether the terms are
express or implied.
Express terms
Express terms are the details of the contract which have been specifically agreed between the parties.
The express terms can be written or verbal terms.
o Types of express terms
The most common types of express terms are:
- Exemption clauses
- Liquidated damages clauses
- Price variation clauses
1. Exemption clauses: This term is used to describe an express term which seeks to exclude or limit
the responsibilities of one of the parties.
2. Liquidated damages clause: Term in a contract which states the amount of damages that will be
payable in the event of a breach of contract.
3. Price variation clause: It is a term inserted in a contract which allows a variation in the contract
price under certain circumstances, e.g. in a period of inflation.
Implied terms
In general, the contents of a contract are determined by agreement between the parties; however in
certain circumstances some additional terms may be implied into the agreement.
The additional terms may be implied:
- by Custom
- by The Common law
- by Statute
1. By custom: The parties assume that their contracts will be subject of the customs of a particular
locality or trade which although they are not specifically mentioned in the contract; the parties
assume that it will be according to that customs.
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2. By Common law: Sometimes the parties have failed to express one intention clearly stated in the
contract. The court will supply, in this case, a term in the interest of “business efficacy” so that the
contract makes commercial common sense. By implying a term into a contract, the court is
imposing reasonable obligations.
3. By statute: A term may be implied into a contract by Act of Parliament.
Some terms are implied into a contract for the Sale of good under the Sale of Goods Act 1979.
- Section 12 (title): The seller will transfer good title of the goods to the buyer
- Section 13 (description0: when there is a sale of goods by description, there is an implied condition
that the goods will correspond with the description
- Section 14 (quality and suitability): There is an implied condition that the goods are of satisfactory
quality. There is also an implied condition that the goods will fit for the purpose for which the
goods are acquired.
- Section 15 (sample): In sales by sample, there is an implied condition that the goods purchased will
correspond with the agreed sample.
There are different types of agreements depending on the type of goods supplied and for each
transaction we have a special Act for its regulation:
- Sales of Goods: Sale of Goods Act 1979
- Hire Purchase: Supply of Goods (Implied Terms) Act 1973
- Barter, work and materials: Supply of Goods and Services Act 1982
- Hire: Supply of Goods and Services Act 1982
- Redemption of Trading Stamps: Trading Stamps Act 1964
STANDARD FORM CONTRACTS
One way of avoiding conflicts in a contract is to ensure that all terms are contained in a written contract.
The standard form contract is a pre-printed document that contains standard terms of a business
contract. The terms are not usually open to negotiation: the customer must either accept them or not.
o Advantages for business of standard form contracts
- The terms are written and quite clear about what they have agreed
- Useful when a service is offered to a large number of people, for example, train services, where it
could be impossible to negotiate individually with each passenger for a journey
- Once the organisation has adapted a standard form for its business, the formation of a contract
becomes a routine matter
- A standard form can be used for business persons as a way to minimize their potential risks;
including, for example, limitation or exclusion clauses.
o Drawbacks (disadvantages) of standard form
The disadvantages are mainly for customers:
- Standard terms are often expressed in a language which a customer may find himself bound by a
contract even though he did not properly understand the terms
- When the customer needs to buy a product in a non-competitive market; the consumer find
himself in a weak bargaining position, victims of a very one-sided contracts made by the seller
through a standard form contract
EXEMPTION CLAUSES
They are express terms which to exclude or limit the liability that might belong to one party in the event
of a breach of contract.
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These clauses are fair when they are the result of free negotiations between equals, but very often the
exemption clauses are imposed by the stronger party.
The parliament intervened to control the use of unfair exemption clauses that commonly affected
consumers.
Before intervention of the Parliament by the Unfair Contract Terms Act 1977 and the Unfair Terms in
Consumer Contracts Regulations 1999, the court attempted to deal with the problem, but it was not easy
task, however it is still necessary to examine the attitude of the court to these clauses.
Judicial control
The judges analyzed the validity of an exemption clause by two ways:
- Incorporation
- Interpretation
o Incorporation
The person wishing to use an exclusion clause to exclude or reduce his liability must show that the clause
was part of the contract.
In connection with that we must see the following rules:
- In signed contracts, the signer is presumed to have read and understood the significance of all the
terms contained in the document. This general rule will not apply when the signer can plead Non
est factum or if the other party has misrepresented the terms.
- In a ticket or notice, the exemption clause will be part of the contract if it is regarded as a
reasonable clause and if the notice of exemption clause was given before the contract was made.
Attempts to give notice after the contract was agreed will not be considered.
- The person who includes the exemption clause must show that a proper notice of the clause was
given to the other party; the more unreasonable a clause is the greater the notice which must be
given of it. Some clauses would need to be printed in red ink with a “red hand” pointing to it
before the notice could be held to be sufficient.
- An exclusion clause may be binding even though it has not been included in the contract in
question, if a previous course of dealings between the parties on the basis of such terms can be
established.
- According to the doctrine of privity of contract of Common law, a person who is not a party to a
contract can neither benefit from the contract nor be made liable under it. However this common
law position is now subject to the provisions of the Contract Act 1999 (Rights of Third Parties). The
Act allows contracting parties to confer third party rights in relation exclusion clauses in some
contracts.
o Interpretation
When a clause is properly incorporated into a contract, the courts will examine the words use to see if the
clause covers the loss which has actually occurred.
The court will follow some rules for interpretation:
- Strict Interpretation: An exemption clause will be effective only if it expressly covers the kind of
liability which has in fact arisen.
- Contra proferentem: Very clear words must be used before a party will be held exempt from
liability in negligence.
- Repugnancy: Under this rule, a court can reject an exemption clause when it is inconsistent with
the main purpose of the contract.
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The doctrine of fundamental breach
According to this doctrine, no exemption clause could protect a party from liability for a serious breach of
contract with serious consequences.
The House of Lords rejected this doctrine when stated in a case (Photo Production v Securicor Transport
ltd – 1980) that although in that case the breach of contract produced serious consequences the House of
Lords accepted the exemption clause as a protection of the defendants.
Statutory Control (Act of Parliament)
The involvement of Parliament to control the exemption clauses was made in specific types of contract.
E.g. Transport Act 1962; Occupiers Liability Act 1957; Carriage of Goods by Sea Act 1971, and the
Defective Premises Act 1972.
Parliament interest in regulation of exemption clauses culminated in the enactment of the Unfair Contract
Terms Act 1977 which is now supplemented by the Unfair Terms in Consumer Contracts Regulations 1999.
UNFAIR CONTRACT TERMS – Act 1977
- The Act affects the law of tort as well as contract law because it covers non-contractual notices
and signs.
- It does not deal with all unfair terms in a contract, it deals only with unfair exemption clauses
- Most of the provisions of the Act apply only to “business liability”, i.e. liability for things done in
the course of business or from the occupation of premises used for business purposes
- The Act does not apply to international supply contracts
- The Act does not apply to contracts of insurance and contracts in relation to land
- The Act provides the greatest protection to consumers
A person is dealing as a consumer if:
a) He does not make the contract
b) The other party makes the contract in the course of business
Consumer and non-consumer transactions under the Unfair Contract Terms Act 1977
The parties
Business person / Private person
Business person / Business person
Private person / Private person
Types of transaction
Consumer transaction
Non Consumer transaction
Non Consumer transaction
Exemption clauses are regulated by the Act in two ways:
- Rendered void and completely ineffective
or
- Subject to “reasonableness test”
The court will decide if an exemption clause has reasonable grounds.
These are some tips which can help the judges to take a decision:
a) Reasonableness must be judged according to the circumstances at the time when the contract was
made
b) The person who includes the exemption clause is the one who must prove the reasonableness of
the clause
c) When it is a contract for supply of goods the court will take into consideration the following
criteria:
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i.
ii.
iii.
The bargaining strengths of the parties and the availability of alternative suppliers
The choices of the customer, e.g. an option to a contract with different prices; a cheap
price with the exemption clause or higher price without the exemption clause
If the good were manufactured to the special order of the customer
Exemption of liability for negligence (Section 2)
The section 2 of the Unfair Contract Terms Act 1977 states that no one acting in the course of a business
can exclude or restrict his or her liability in negligence for death or personal injury by including an
exemption clause or by a way of notice.
Exemption of liability for breach of contracts (Section 3)
The business person dealing with consumers cannot exclude his liability for: - Breach of contract, - Nonperformance, or - Different performance of the contract; unless the exemption clause satisfies the
requirement of reasonableness.
Unreasonableness indemnity clause (Section 4)
Under section 4, Indemnity clauses in contracts when one of the parties deals as a consumer are
unenforceable unless they satisfy the requirements of reasonableness
Guarantees of consumer goods (Section 5)
A manufacturer cannot exclude his liability for loss arising from defects in goods that have been supplied
to a customer.
Exemption of implied terms in contracts of sale and hire-purchase (Section 6)
In the past the parties had the freedom to exclude implied terms of the contracts; this freedom was often
used by sellers to deprive consumers of their rights.
The Supply of Goods (Implied Terms) Act 1973 and the Sale of Goods Act 1979 made changes stating that
the implied obligations as to title, description, quality and suitability and sample cannot be excluded or
restricted by any contract term against a person dealing as a consumer. When the person is not dealing as
a consumer, the exemption clause is subject to the reasonableness test.
Exemption of implied term in other contracts for the supply of goods (Section 7)
Supply of Goods and Services Act 1982: Terms as to title, description, satisfactory quality, fitness for
purpose and sample are now included in contract for the supply of goods by way of hire, exchange or
work and material contracts.
Some of the obligations cannot be excluded whereas other obligations are subject to the reasonableness
test.
Exemption of liability for misrepresentation (Section 8)
Any clause which excludes or restricts liability for misrepresentation is ineffective unless it satisfies the
requirement of reasonableness
UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999
It supplements the Unfair Contract Term Act 1977.
There are some differences between 1977 and 1999 Acts.
Act 1999 defines consumer as a natural person who is acting for purposes outside his trade, business or
profession.
The 1999 Regulations do not cover terms in non-consumer contracts such as:
Employment agreement
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Agreement dealing with succession rights
Family law rights
The incorporation or organisations of companies or partnership
All of them have their own regulatory laws
Terms in consumer contracts, which have not been individually negotiated will be regarded as unfair if
they cause a significant imbalance in the parties’ rights and obligations under the contract, which will
affect negatively the consumer.
List of terms which may be regarded as unfair:
- Excluding or limiting the legal liability of the seller for the death or personal injury to a consumer arising
from an act or omission of the seller. E.g. “Products are used at consumer’s own risk”
- Terms that allow the seller to keep sums paid by the consumer in case the consumer decides to cancel;
in that case if the consumer decided to cancel he should receive part of the money given and if the seller
was the one who cancelled the transaction, the customer should receive the full amount left, e.g.: “No
refunds or deposit if orders are cancelled” is regarded as unfair term
- Enabling the seller to change unilaterally the terms of a contract without a valid reason; e.g. “Products
supplied may vary in specification form those ordered’
- Providing that the price of goods can be changed without giving the consumer the right to cancel if the
price is too high; e.g. The price of goods may be increased when there is an increase in costs prior to
delivery”
- Restricting the consumer’s right to take legal action, for example by requiring disputes to be resolved by
arbitration; e.g. “All disputes concerning this agreement will be resolved by arbitration”.
Any written term of a contract of a consumer must be expressed “in plain intelligible language”. When
there is doubt about the meaning of a term, the interpretation which is more favourable to the consumer
must prevail.
Remedies for unfair terms
Unfair terms are deemed voidable if they are against the consumer; although the contract can
continue in existence but without the unfair term.
The Office of Fair Trading (OFT) can prevent the continued use of the unfair term by any party in
future contracts
REFORM
There is a statutory regulation review of the 1977 and 1999 Acts.
The reforms are proposed in the Final Report and Draft Bill 2005.
Main proposals:
- Only one legislation for the whole UK
- Only natural persons should be considered consumers
- Additional powers to OFT
Meanwhile the European commission is undertaking a review of eight key directives that comprises the
“Consumers Acquis”
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CHAPTER 9
ENDING BUSINESS CONTRACTS
The termination of a contract is often referred to as the discharge of a contract, as it explains the ways
the parties can be discharge from their contractual obligations
DISCHARGE OF CONTRACTS
The contract may come to an end and the parties discharged fro their obligations in four ways:
By: - Performance
- Agreement
- Frustration
- Breach
Performance
The general rule says that the parties must carry out precisely what they agreed under their contract. If
one of the parties does something less than or different from that he agreed to do, he is not discharged
fro the contract.
A strict application of this rule about precise performance would frequently lead to injustice; therefore,
certain exceptions to the rule have been developed.
1. Doctrine of substantial performance: If the court decides that the claimant has substantially
carried out the terms of the contract, even if the performance is not completed, the claimant may
recover for the work he has done.
Example: The agreement to install a central heating system, if the work was carried out defectively
it does not mean that the work should not be paid; the other party can counter-claim for defects
in performance.
2. Acceptance of partial performance: If one of the parties carries out partially his side of the
contract, but the other party, exercising a genuine choice accepts the benefit of partial
performance, the court will infer a promise to pay for the benefit received.
3. Performance prevented by the promise: A person who is prevented from carrying out his side of
the bargain by the other party can bring an action to recover for the work he has done.
4. Divisible contracts: Some contracts may be divisible. E.g. the obligations can be split up into stages
or parts. Payment can be claimed for each completed stage. A contract to build a house usually
provides for payment to be made in three stages.
Agreement
The parties may have agreed in their original contract that it should end automatically with the happening
of some event or after a fixed period of time.
Frustration
An agreement that is impossible to be carried out from the beginning will be void for mistake; but it is
important to define the legal position when it is possible to carry out the contract at the beginning but
then a change of circumstances makes impossible to carry out the agreement.
In the past the law was very strict, and a person was not excused simply because outside events had
made performance impossible.
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The court recognizes an exception to that rule under the doctrine of frustration: “If further performance
of the contract is prevented because of events beyond the control of the parties; the contract is
terminated and the parties discharged from their obligations”.
The doctrine of frustration will apply in these circumstances:
a) Physical impossibility: This is when something or someone necessary to carry out the contract
ceases to be available
b) Supervening illegality: A subsequent change in the law may make a contract, which was legal at
the moment of agreement become illegal.
c) Foundation of the contract destroyed: The parties may have made the agreement on the basis
of some forthcoming event. We can apply the doctrine of frustration if the event fails to take
place and as a result, the main purpose of the contract cannot be achieved.
For the application of the doctrine of frustration is required a multifactorial approach; the factors to be
considered include: the terms of the contract, the parties’ knowledge, expectations, assumptions, risks,
the nature of the supervening event and the party’s calculations, etc.
All of them will give the judges enough elements to evaluate each individual case, because, as Rix LJ said,
“The doctrine of frustration is the doctrine of justice”.
o The consequences of frustration
At common law, a frustration event has the effect of bringing the contract to an immediate end. The rule
was that money payable before frustration remained payable and money paid before frustration could
not be recovered.
These harsh consequences were modified by the Law Reform (Frustrated Contracts) Act 1943.
The new Act states two changes:
- Money payable before frustration ceases to be payable and money paid before frustration can be
recovered.
- A party who has carried out act of past performance can recover compensation for any valuable
benefit (other than money) conferred on the other party
Breach
A breach of contract may occur in a number of ways.
It may be anticipatory breach or an actual breach.
o Anticipatory breach
This is when a party states that he is unable to perform his contractual obligations and refuses to carry
out his side of the contract.
The other party will have two options: he can sue the failing party immediately or he can wait until the
time of performance arrive and sue after that date.
The time of performance is the date when the contract had to be completed performed.
o Actual breach
One party may fail to carry out one or more of his obligations.
The terms of the contract may be divided into those terms which are important (conditions) and the less
important terms (warranties).
The injured party has a choice: he may wish to be discharged from the contract or he may prefer to carry
on with the contract and claim damages for the breach.
REMEDIES AVAILABLE WHEN THE CONTRACT HAS BEEN BROKEN
Common law gives the right to recover damages (financial compensation).
Other remedies, like: - Specific performance and – Injunction, are alternatives granted at the discretion of
the court that were developed by Equity as another form to ensure that justice is done.
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Damages
Damages attempt to measure in financial terms the extent of harm a plaintiff has suffered because of a
defendant's actions. As a result, damages are generally regarded as remedial rather than preventive or
punitive.
- Liquidated damages: When the parties agree in advance the damages that will be payable in the
event of a breach of contract
- Unliquidated damages: When there is no prior agreement on the amount to be paid in the event
of a breach of contract
o Liquidated damages
When the parties have made a genuine attempt to estimate the likely loss, the court will accept the
agreed amount for payment of damages.
It is important to distinguish between liquidated damages and penalty clauses.
Liquidated damages and penalty share a common feature that both are payable on the occurrence of a
breach of contract. The parties to a contract may provide in advance the amount of compensation
payable in the case of failure to perform the contract. The sum so fixed may be either liquidated damages
or penalty
However, the main difference then is:
Liquidated Damages
Penalty
Where the amount is fixed and genuine pre- If the amount is fixed and is without any regard to probable loss,
estimate of the loss in cases of breach, it is but is intended to frighten the party and to prevent him from
liquidated damages.
committing breach it is a penalty and is not allowed.
o Unliquidated damages
The aim of Unliquidated damages is to put the injured party in the position he would have been in if the
contract had been carried out properly. Damages are designed to compensate for loss. If no loss has been
suffered, the court only will award nominal damages, which is a small sum of money to mark the fact that
there had been a breach of contract.
For the awarding of damages the court will consider the following:
- The damage can include sums for financial loss, damage to property, personal injury and distress,
disappointment and upset to claimant
- The injured party cannot necessarily recover damages for every kind of loss which he has suffered:
There are damages that will be close related to the breach of the contract but other damages will
not have a close link to the breach; when the relation between the damage and the breach of
contract is not close we say that the damage is remote from the original breach, and this damages
are not recoverable.
- Provided that the loss is not too remote, the next matter to consider is how much is payable by
way of damages.
- Once a breach of contract has occurred, the innocent party is under a duty to mitigate (minimise)
his loss. He cannot stand back and allow the loss to get worse. The claimant will not be able to
recover for that part of the loss which has resulted from his failure to mitigate.
Debt recovery
When one party performs his part of the contract, e.g. by delivering goods, and the other party refuses to
pay, the claim is for payment of the debt rather than an action for damages.
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The Late Payment of Commercial Debts (interest) Act 1998 introduced a statutory right for business to
claim on the late payment for commercial debts.
Business are encouraged to agree their own contractual terms providing for contractual interest to be
payable if bills are paid late. However, the Act prevents abuse of contractual interest, by requiring any
contractual remedy to be “substantial”. A remedy for late payment will be “substantial” if it is enough to
compensate the supplier for the cost of late payment and the sum to be paid is reasonable and fair in all
circumstances.
Equitable remedies
The remedy for breach of contract at Common law is an award of damages, but when the damages are
neither adequate not appropriate, Equity developed other forms of remedies to ensure that justice is
done:
These remedies are:
- Specific performance
- Injunction
o Specific performance
It is an order of the court requiring the party in breach of contract to carry out his obligations. Failure to
comply this order puts the defendant in a position prone to receive penalties. Specific performance is an
equitable rather than legal remedy.
Like all equitable remedies, the grant of specific performance is discretionary (based on someone’s
judgment of a particular situation rather than on a set of rules).
Specific performance will not be applied in the following circumstances:
- When damages are an adequate remedy
- When there is no mutuality between the parties, for example, an adult cannot obtain an order of
specific performance against a minor, so a minor will not be awarded specific performance either.
- When need of close supervision: An order will not be made unless the court can adequately
supervise its enforcement. It is for this reason that specific performance will not be awarded to
enforce building contracts, because the court cannot supervise on the day-to-day basis. Similar
principles apply to employment contracts.
- At the court discretion: The court may refuse specific performance when it is felt that it would not
be just and equitable to grant it.
o Injunction
This is an order of the court requiring the party at fault not to break the contract. It main use is to enforce
the negative promises that can be found in employment contracts. The employee may agree, for example
not to work in similar capacity for a rival employer during the period of his contract.
Claims for restitution: Quasi-contract
The law of restitution may provide a claimant with a remedy in situations where the defendant has
obtained an unfair benefit. The requirement to repay money does not arise because of a breach of a legal
duty, such as a breach of contract or tort, but because the defendant has been unfairly enriched.
An action for restitution may arise in the following circumstances:
- Claim on a quantum meruit
- Total failure of consideration
- Money paid under a mistake
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o Claims on a quantum meruit
Instead of claiming a precise sum of money, the claimant may be able to sue on a quantum meruit for
payment for work he has actually done.
o Total failure of consideration
If the claimant has paid money to the defendant in respect of a valid contract and the defendant
completely fails to honour his part of the bargain, the claimant has a choice of remedy. In these cases the
claimant has two options:
a) He can bring a claim for breach of contract and claim damages for breach
b) He can terminate the contract and sue in quasi-contract to recover the money he has paid over
on the basis that there has been a total failure of consideration
o Money paid under mistake
A claimant may recover money which has been paid over under a mistake of fact. A mistake of fact would
include, for example, errors in a restaurant bill because the waiter had made a mistake when adding up all
the items, or, at the supermarket check out when a cashier inadvertently scans an item twice.
LIMITATION OF ACTIONS
The right to sue does not last indefinitely. The parties may include a provision in their contracts which
limits the time within which a claim must be made.
When no limit is agreed between the parties, the Limitation Act 1980 will apply.
The Act imposes statutory the time limits within an action for breach of contracts must be brought:
- An action on a simple contract must be brought within 6 years
- An action on a contract made in a form of a deed, must be brought within 12 years
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CHAPTER 10
LAW OF AGENCY
CONTRACTS of AGENCY
Over the years, “particular classes of intermediary” have become indispensable to business.
In essence, agency is a consensual and fiduciary relationship between a principal and an agent.
The relationship has been created when one person, (a principal), grants authority to another person, (the
agent) to act on his or her behalf.
Examples:
- An employee who makes contracts on behalf of the company
- Directors are agents of the company
- Travel agencies, estates agents, auctioner, insurance brokers, etc.
Through the creation of an agency, the principal grants authority to the agent to enter, modify or
terminate a contract with third parties on the principal’s behalf.
There are therefore two main issues that need to be considered in every agency:
a) The granting of authority
b) The scope of authority as either factor could affect the enforceability of the underlying contract
with the third party
TYPES OF AGENT
An agent may fall into one or more of the following categories:
- A general agent
- A special agent
- A mercantile agent
- A del credere agent
1. General agent: He has the power to act for his principal in relation to particular kinds of transactions, e.g.
an estate agent
2. Special agent: Is limited to acting for the principal in respect of one specific transaction
3. A Mercantile agent or Factor: Factor was defined as “an agent, but an agent of particular kind. He is an
agent entrusted with the possession of goods for the purpose of sale”.
Factors Act 1889 defines factor as “Mercantile agent having in the customary course of business as such
agent authority either to sell goods or to consign goods for the purpose of sale, or to buy goods or to raise
money on the security of goods’.
4. A del credere agent: Is an agent who, in return for extra commission, guarantees that if the third party he
has introduced fails to pay for goods received, the agent will indemnify the principal.
ACTUAL EXPRESS, ACTUAL IMPLIED AND APPARENT (ostensible) AUTHORITY
We have three main parties in contracts of agency:
- The principal
- The agent
- The third party
An agent is granted authority by the principal to enter into contracts on his behalf.
The existence and the scope of the authority of the agent is in most cases expressly defined, but it is also
possible that this authority is “implied when it is inferred from the conducts of the parties and the
circumstances of the case”.
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Sometimes an agent will act without authority or may exceed his actual or implied authority. The principal
will be bound by the agent’s action if he chooses to ratify the contract or if the agency arises through
necessity. However, the principal will also be bound by the agent’s action if the agent is acting within the
scope of his apparent (ostensible) authority.
The concept of apparent or ostensible authority is put as “the authority of a agent as it appears to
others”; whereas the agent may not actually have the authority, or when ostensible authority exceeds
actual authority.
- An actual authority is a legal relationship between principal and agent created by a consensual
agreement to which they alone are parties.
RIGHTS OF THE THIRD PARTIES
The existence and the scope of authority determine if the third party has the right to sue the principal.
The rights of the third party depend largely on whether the third party is aware that he is dealing with an
agent. If the agent discloses that he is an agent, he will be out of the picture and the third party can only
sue and be sued by the principal. If the agent does not reveal that he is an agent, either the agent or the
principal can sue on the contract.
FORMATION OF AGENCY
An agency is usually created by agreement between the principal and the agent, but in some situations an
agency can be created without such an agreement.
Ways in which an agency can be formed
- Express appointment
- By implication
- By ratification
- By necessity
- By estoppel
1. Express appointment
This is the main way in which an agency is created. A principal will expressly appoint an agent either to
carry out a particular job or to undertake a range of transactions.
2. By implication
Implication is when something that you suggest is true, although you do not say it directly.
This form of agency usually arises where there is a pre-existing agency relationship and it is assumed by a
third party that the principal has given the agent the authority to act as an agent in matters not covered
by express appointment.
Sometimes there is an overlap between implied authority and apparent authority.
The distinction between implied authority and apparent authority may well depend on the circumstances
of the case as to what could be regarded as “day-to-day” operation of the businesses.
3. By ratification
This is when an agent engaged in a contract without the authority and without the knowledge of the
principal; but when the principal becomes aware of the transaction, rather than deny the contract, he
ratifies it.
Ratification will only be effective if:
- The agent must have disclosed that he was acting for a principal
- The principal must ratify the whole contract
- Ratification must take place within a reasonable period of time
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Ratification will not be effective when unfair prejudice would be caused to the third party.
4. By necessity
This type of agency arises when a person takes urgent action on behalf of another in the event of
emergency.
The person who acts as an agent of necessity must show that he acted in the best interest of the principal,
his actions were reasonably necessary in the circumstances and that it was impossible to contact the
principal to obtain instructions.
5. By estoppel
This arises when a principal represent and embody that a person is acting as his agent. The principal will
be prevented (estopped) for later denying that the person had authority to act as his agent. Apparent
(ostensible) authority is often seen as a form of estoppel.
An agent who had no actual authority may bind a company into a contract with a third party if fulfil the
four following conditions:
1) The representation that the agent had authority to enter into a contract on behalf of the company
was made to the third party (the contractor)
2) The representation was made by a person or persons who had “actual” authority
3) The third party (the contractor) was induced by such representation to enter into the contract
4) The articles of association of the company do not prevent to delegate authority to enter into a
contract of that kind to the agent.
Commercial Agents (Council directive) Regulations 1993
The purpose of the regulations is to harmonize European legislation governing contracts between agents
and their principals and in general to strengthen the position of agents.
The regulations lay down the minimum requirements of a contract between an agent and principal, for
example, minimum notice period, when commission is due and the right to claim compensation on the
termination of the contract.
DUTIES AND RIGHTS OF THE AGENT
Duties of the agent
1) To carry out the wishes of the principal in accordance with the agency agreement: As the essence
of an agency is a contract, the agent must perform his side of the contractual obligation as agreed
under the contract.
The agent must look after the interest of his principal and act dutifully and in good faith.
A commercial agent must make proper efforts to negotiate and conclude the transactions he is
instructed to take care of.
2) To exercise reasonable care and skills, even if the agent does not receive payment or monetary
compensation for his service (gratuitous agent)
3) To carry out his duties personally unless there is express or implied authority for him to delegate
his duties.
The general rule is that an agent has no authority to appoint a sub-agent except with the express
or implied authority of the principal.
An agent is an agent under fiduciary duties to the principal. Fiduciary is someone who has
undertaken to act for or on behalf of another in a particular matter in a relationship of trust and
confidence. A fiduciary must act always in good faith.
4) To account for all money and property received on behalf of the principal and to keep proper
accounts
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5) To avoid conflict of interest
6) Not to take bribes or make a secret profit
Rights of the agents
1) To be paid the agreed amount or, if no fee is agreed, a reasonable amount.
The agent will be entitled to remuneration for the work that he has performed on behalf of the
principal
2) To be indemnified for any expenses incurred in performing his duties
This will usually be dealt with under the contract. However, there could be charges or expenses
that arise outside the agreement
3) To exercise a lien over the principal’s goods and to stop them in transit when payment is
outstanding
A lien is a form of Security interest granted over an item of property to secure the payment of a
debt or performance of some other obligation.
The lien of an agent only permits the agent to retain possession of goods until the principal has
paid the debts.
TERMINATION OF AGENCY
The agency may come to an end by:
- Termination by the parties
- Termination by operation of the law
Termination by action of the parties: The principal and agent may terminate their relationship by mutual
agreement or the agency contract may allow either party to terminate be giving notice.
Termination by operation of the law: The relationship will come to an end automatically with the death
or insanity of either party or by the bankruptcy of the principal. The agency can also come to an end
because of frustration or illegality.
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CHAPTER 11
CONTRACTS FOR THE SUPPLY OF GOODS AND SERVICES
In this chapter we will look at specific types of contracts in use in the business world.
It is important to distinguish between different kinds of transactions for the supply of goods and services
because different statutory provisions will apply.
Parliament has intervened to provide a statutory framework for such transactions.
CONTRACTS FOR THE SUPPLY OF GOODS
Sale of goods
A contract for the sale of goods is probably the most common form of transaction in the business world.
Whenever you buy goods, whether from a supermarket, doorstep salesman, by mail or using internet, you
have entered into a contract for the sale of goods. The right and duties of the parties to this type of
contract are set out in the Sale of Goods Act 1979.
The essence of the transaction is the transfer of property in goods from the seller to the buyer. Property
in this context means ownership of goods. Goods include all tangible items of personal property such as
food, clothes and furniture. Land and money are excluded from the definition.
Exchange or Barter
Barter is to exchange goods or services for other goods or services instead of money.
The absence of money from the consideration means that the Sale of Goods Act does not apply to this
contract; but now the Supply of Goods and Services Act 1982 imposes certain statutory duties on the
supplier of goods under a contract of exchange.
Work and material
Another way in which you can acquire goods is in consequence of a contract whose main purpose is the
provision of services. If you take your car to be serviced by a garage, the main substance of the contract is
the skill and labour of the mechanic in checking the car.
Legislation governing contracts for the sale and supply of goods and services
Type of contract Sale of goods
Main Act
Supply of Goods and Services
Sale of Goods Act 1979 Supply of Goods and
Services Act 1982
SALE OF GOODS ACT 1979
This Act provides a framework for the relationship between the buyer and the seller and covers such
matters as the rights and duties or the parties and their remedies in the event of a breach.
It is important to mention that the Act, in general, does not prevent the parties from making their won
agreement.
The rules contained in the Act only apply when the parties have failed to make express arrangements as
to their obligations.
We will now look at some of the more important provisions of the Act.
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Definition
A contract of Sale of Goods is defines as a “Contract by which the seller transfers or agrees to transfer the
property in goods to the buyer for a money consideration called the price”.
Formation
It is not necessary to observe complex formalities to create a contract for the sale of goods; it may be in
writing or by word of mouth or implied from the conduct of the parties.
The implied terms
The parties are generally free to agree between themselves the details of their contract. However, the Act
also automatically includes a number of conditions and warranties in every contract for the Sale of Goods.
These are the implied terms of the Sale of Goods Act 1979:
- Title
- Description
- Quality and suitability
- Sample
Title
There is an implied condition on the part of the seller that in the case of a sale he has right to sell the
goods, and in the case of an agreement to sell he will have the right to sell when the property is to pass. If
the seller cannot pass good title (rights of ownership) to the buyer, he will be liable for breach of a
condition.
These are the warranties into sale of goods contract:
- That the goods are free from any charges not made known to the buyer before the contract
- That the buyer will enjoy quiet possession of the goods
Description
When there is a contract for the sale of goods by description, there is an implied condition that the goods
will correspond with the description. If the buyer does not see the goods before he buys them (e.g. from a
mail order catalogue or through the Internet), there has clearly been a sale by description.
Quality and suitability (Section 14)
Section 14 implies two conditions into every sale by a trader: - That the goods are of satisfactory quality
and – That the goods are fit for a particular purpose.
Is a requirement of section 14 that the sale must be “in the course of a business”; which means that the
implied terms of quality and fitness cannot apply to sales by a private individuals. So, if you buy something
privately and it is defective or unsuitable you cannot complain under s14.
o Satisfactory quality
When a seller sells goods in the course of a business there is an implied condition that the goods supplied
are of satisfactory quality.
Goods are of satisfactory quality if “they meet the standard that a reasonable person would regard as
satisfactory, taking into account any description of the goods, the price (if relevant) and all other
circumstances”.
Quality of goods includes:
- Fitness for all purposes for which goods of the kind in question are commonly supplied
- Appearance and finish
- Freedom from minor defects
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- Safety
- Durability
“Relevant circumstances”, include any public statements about the specific characteristics of the goods
made by the seller particularly in advertising or labelling but only when the buyer deals as a consumer.
A person is a consumer if he is a natural person acting for purposes outside his trade, business or
profession.
The buyer can lose his right to complain in two situations:
- When a seller specifically points out that the goods are faulty or defective
- When he decides to check the goods, but fails to spot an obvious defect
o Fitness for a particular purpose
Section 14 provides that when the seller sells goods in the course of business and the buyer, makes
known to the seller any particular purpose for which the goods are being bought, there is an implied term
Sample (Section15)
In a contract of sale by sample there is an implied condition:
- That the bulk will correspond with the sample
- That the buyer will be able to compare the sample and the bulk
- That the goods will not have defects that were not seen in the sample
TRANSFER OF PROPERTY IN THE GOODS
The essence of a contract for the sale of goods is the transfer of property (ownership) in goods from the
seller to the buyer.
It is important to ascertain exactly when the property in goods passes from the seller to the buyer for the
following reasons:
1. If the goods are accidentally destroyed, it is necessary to know who bears the loss
2. I either the seller or the buyer becomes bankrupt, or in the case of a company, goes into
liquidation; it is necessary to discover who owns the goods
3. The remedy of an unpaid seller against a buyer will depend on whether ownership has been
transferred
The rules relating to the transfer of ownership depend on whether the goods are: - Specific goods or –
Unascertained goods.
Specific goods are goods identified and agreed on at the time a contract of sale is made, e.g., purchasing
at a supermarket, buying clothes in a shop, etc.
Unascertained goods are those goods which are not identified and agreed on when the contract is made.
An order of 200 kg of oranges to be delivered in 3 days’ time involves unascertained goods, because it is
impossible to identify which specific oranges will make up the order.
Specific goods
Normally the contract between parties will define when the property of the goods passes from one party
to the other.
If parties do not indicate when the property passes, section 18 of the Sale of Goods Act 1979 sets out
various rules:
- Rule 1: When there is an unconditional contract, the property in the goods passes to the buyer
when the contract is made regardless the time of payment or the time of delivery. This means that
a buyer can become the owner of goods even though he has not paid for them yet and they are
still in the seller’s possession.
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-
Rule 2: When there is a contract that says that something has to be done to put the goods in a
deliverable state, the property does not pass until the thing is done.
Rule 3: When the specific goods includes definition as weigh, measure or other definition of the
goods, the property does not pass until the act or thing is done. If, for example, you agree to buy a
particular bag of potatoes at a price of 80 p per Kg, you will not become the owner of the potatoes
until the seller has weighed the bag and inform you of the price payable.
Unascertained goods
In a sale of unascertained goods, the property passes to the buyer when the goods have been ascertained
or established. If the parties fail to mention in the contract when the ownership passes fro one party to
the other, Section 18, rule 5 will apply.
Rule 5: When there is a contract for the sale of unascertained or future goods by description, the property
of the goods passes to the buyer when he assents that the goods are according to the description. The
assent may be express or implied.
Goods are unconditionally appropriated to the contract when they are separated form the bulk and
earmarked for the particular buyer.
Delivery to carrier will amount to an “appropriation” if the buyer’s goods can be clearly identified.
Reserving a right of disposal
The main seller’s concern is to ensure that he receives payment in full for the goods that he sells.
A retailer (a person or company that sells goods directly to the public), has not this problem, he sells the
goods and he receives payment; but in the business world, however, sellers are expected to do business
on credit terms.
If ownership of the goods passes to the buyer before he pays and then the buyer becomes bankrupt or in
case of company, goes into liquidation, the seller will be treated as an ordinary creditor, As such, the
seller is unlike to recover the money owed.
In order to avoid this risk, the seller can state that the property in the goods shall not pass to the buyer
until the contract price has been paid.
This position can become complicated if:
- The buyer has resold the goods
- The buyer has mixed them with other goods during a manufacturing process and then sold the
manufactured product.
Transfer of Risk
The general rule is that risk of accidental loss or destruction passes with ownership.
Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to
the buyer, the goods are at the buyer’s risk whether delivery has been made or not.
SALE BY A PERSON WHO IS NOT THE OWNER
As a general rule, a buyer cannot acquire ownership from someone who himself has neither ownership
not the owner’s authority to sell. This rule is known as the nemo dat rule (no one can give what he has
not got).
o Exceptions to the nemo dat rule
a) Estoppel
If the true owner by his conduct allows the innocent buyer to believe that the seller has the right to sell
the goods, ownership of the goods will pass to the buyer because the true owner will be prevented
(estopped) from denying that the seller has the right to sell.
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a) Agency
An agent who sells his principal’s goods passes a good title to the buyer because he is selling the goods
with the authority of the owner.
b) Sale under common law or statutory power
Certain persons have the power under common law or statute to sell goods that belong to another. A
pawnbroker, for example, has the right to sell goods which have been pledged with him, when the loan
has not been repaid. The purchaser will acquire a good title to the goods.
c) Sale by a person with a voidable title
A person may obtain possession of goods under a contract which is void (e.g. for mistake). A void contract
is, in fact, no contract at all. A purchaser in these circumstances does not acquire title to the goods and,
therefore, cannot pass good title to anyone else.
A person may also acquire goods under a contract which is voidable (e.g. for misrepresentation). In this
case, the contract is valid unless and until it is avoided.
d) Sale by a seller in possession of the goods
When a seller sells goods but remain in possession of them, any resale to a second buyer who actually
takes physical delivery of the goods, the title will pass to the second buyer. The disappointed first buyer
may sue the seller for non-delivery of the goods.
Sales of motor vehicles on hire-purchase (Hire Purchase Act 1964, Part III)
If a vehicle which is subject to a hire purchase (HP) agreement is sold by the hirer to a private person who
buys in good faith and without notice of the HP agreement, the buyer acquires a good title to the vehicle,
even against the owner.
Motor dealers and finance companies cannot claim the benefit of this provision; so they will not acquire
good title to a vehicle which is already subject to an HP agreement.
Reform of the law relating to transfer of title contained in sections 21-26 of the Sale of Goods
Act 1979
In 1989 Prof L. diamond considered that purchaser were inadequately protected by the law.
In 1994, the government initiated consultations for reform and the following are the proposals for reform:
- Simplification of the law and increased protection for innocent purchasers
- Abolition of the rule of market overt
The rule of Market Overt
Marché ouvert (Law French for "open market") or market overt was an English legal concept originating
in mediaeval times governing subsequent ownership of stolen goods.
It provided that if a purchaser bought goods according to the usages of the market in good faith and
without notice of any defect in the title of the seller, he acquired good title.
In general, the sale of stolen goods does not convey effective title. However, under 'marché ouvert', if
goods were openly sold in designated markets between sunrise and sunset, provenance could not be
questioned and effective title of ownership was obtained. The law originated centuries ago when people
did not travel; if the victim of a theft did not bother to look in his local market on market day—the only
place where the goods were likely to be—he was not being suitably diligent.
'Marché ouvert' was abolished in 1995 by the Sale of Goods (Amendment) Act 1994. From that date, the
purchaser of goods in market overt obtains no better title to them than the seller had.
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PERFORMANCE OF THE CONTRACT
It is the duty of the seller to deliver the goods and the buyer’s duty to accept and pay for them. The
parties are free to make their own arrangement about the time and place of delivery and payment. The
Act sets out the obligations of the seller and buyer when they have not dealt with there matters
specifically in their agreement.
We will discuss about three important components of the Selling of goods:
- Delivery
- Acceptance
- Payment
Delivery (section 29)
Delivery in the context of the Act means the voluntary transfer of possession from one person to another.
The delivery may consist of:
- Physically handing over the goods
- Handing over the means of control of the goods, e.g. the keys of the premises where they are
stored
- Transferring documents of title
- When the goods are in the possession of a third party, an acknowledgement by the third party
that he is holding the goods on behalf of the buyer.
o Place of delivery:
In the absence of any agreement to the contrary, the place of delivery is the seller’s place of business; it is
up to the buyer to come and collect the goods.
o Delivery to a carrier:
If the seller agrees to send the goods and engages a carrier for this purpose, the delivery to the carrier is
deemed to be delivery to the carrier; but when the buyer deals as a consumer, if the seller is authorised
or required to send the goods to the buyer, delivery of goods to a carrier is not delivery to the buyer.
Business transaction
Consumer transaction
Seller
Seller
Delivery done
Carrier
Carrier
Delivery done
Buyer
Buyer
o Time of delivery:
The parties may have fixed a delivery date. Failure to make delivery by that date is a breach of condition.
When the seller agrees to send the goods and no time for sending them has been agreed, he must
despatch them within a reasonable time. What is reasonable is a question of fact and it depends on many
factors for instance the type of goods to be delivered, the distance to be covered, the costs of the
transport, etc.
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o Delivery of the wrong quantity
If the seller delivers a smaller quantity than ordered, the buyer may reject the consignment, but, if he
decides to accept the goods, he must pay for them at the contract rate. If the seller sends a larger
quantity than agreed the buyer has the following choices:
- He may accept the goods he ordered and reject the rest
- He may reject the complete lot
- He may accept the whole consignment, paying for the extra goods at the contract rate
The sale of Goods Act 1979 now provides that a commercial buyer may not reject goods for delivery of
the wrong quantity when the seller can show that the excess or shortfall is so slight that it would be
unreasonable for the buyer to reject the goods.
o Delivery by instalments
Unless otherwise agreed, the buyer is not bound to accept delivery by instalments. The parties may, of
course, agree that the goods are to be delivered in stated instalments.
If there is a breach of contract with one or more instalments it is important to define if the buyer has the
right to repudiate the contract; this right depends on whether the contract is indivisible or severable.
- Indivisible contracts: In the past if the buyer accepted some of the goods he was deemed to have
accepted all of them and had no right to reject part of the goods. But now, the Sale of Goods Act
1979 provides that where a buyer has accepted some of the goods, he will not lose his right to
reject the goods because of his acceptance when there is a breach in respect of some or all of the
goods.
- Severable contracts: Whether a breach in relation to one or more instalments will entitle the
injured party to repudiate the whole contract depends “on the terms of the contract and the
circumstances of the case”. If the contract does not specify on the matter, the court apply two
main tests:
a) The size of the breach in relation to the whole contract
b) The likelihood that the breach will be repeated
Acceptance (section 35)
The buyer is bound to accept the goods which the seller delivers in accordance with the contract. If the
goods do not meet the requirements of the contract, the buyer will have a claim against the seller.
What acceptance means?
Sale of Goods Act 1979 defines that there are three ways in which a buyer could accept the goods:
1) Expressly telling the seller that he accepts the goods
2) Doing something to the goods that is inconsistent with the seller’s ownership
3) Retaining the goods for a reasonable time without telling the seller that he had rejected
them
However these three rules of acceptance could lead to a number of problems relating to the meaning of
acceptance, therefore the Sale and Supply of Goods Act 1994 acknowledged the three ways of accepting
the goods but adds the following qualifications:
4) A consumer cannot lose his right to reject the goods by agreement unless he has had a
reasonable opportunity to examine them
5) A material factor in deciding whether goods have been accepted after the lapse of
reasonable time is whether the buyer has been given a reasonable opportunity to examine
the goods
6) A buyer is not deemed to have accepted the goods when the goods have been sold or
given to a third party
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7) When a buyer accepts goods which are part of a larger commercial unit, he is deemed to
have accepted all the goods which make up the commercial unit, e.g., if you buy a pair of
shoes and accept one shoe, you will be deemed to have accepted the pair
Payment
The price will normally be fixed by the contract.
The parties may make their own agreement as to the time of payment. In the absence of such express
agreement, payment is due when the goods are delivered.
REMEDIES
Seller Remedies
Two sets of remedies are open to the seller:
- Personal remedies against the buyer himself
- Real remedies against the goods
o Personal remedies
The seller can sue the buyer for the contract price or for damages for non-acceptance.
- Action for the price: The seller can bring an action in two situations: When the property in
goods has passed to the buyer or when the buyer has failed to pay by a specified date.
- Damages for non-acceptance: If the property in the goods has not passed and the buyer will
not accept the goods, the seller can sue for non-acceptance.
o Real remedies
The unpaid seller has three possible remedies in respect of the goods, even though the property in the
goods has passed to the buyer. The three possible remedies are:
- Lien
- Stoppage in transit
- Right of resale
a) Lien: Is the right to retain the lawful possession of goods (but not to resell them) until the
contract price has been paid.
b) Stoppage in transit: This is the right of the seller to stop goods in transit to the buyer, regain
possession of them and retain them until payment has been received.
c) Right of resale: The seller is allowed to resell the goods in the following circumstances:
i. When the goods are of a perishable nature
ii. When the seller gives notice to the buyer of his intention to resell and the buyer does
not pay within a reasonable time
iii. When the seller expressly reserves the right of resale in the event of the buyer
defaulting
Buyer’s remedies
Various remedies are available to the buyer when the seller is in breach of contract:
- Rejection of the goods
- An action for damages
- Specific performance
- Additional rights of buyers in consumer cases: 1) repair or replacement, 2) reduction or
the purchase price or rescission of the contract
- Auction sales
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o Rejection of the goods
If the goods do not correspond with the implied terms in sections 12-15 (description, quality, fitness for a
particular purpose or correspondent to the sample), the buyer is entitled to reject them. The right to
reject is lost as soon as the goods have been accepted under the rules set out in section 35.
However, not all breaches of the implied terms in ss 13-15 will be so serious as to justify the buyer’s right
to reject.
o An action for damages
1- Non delivery: The buyer can sue for non-delivery when the seller wrongfully neglects or
refuses to deliver the goods. If the buyer has paid in advance and the goods are not
delivered, he can recover the amount paid.
2- Breach of warranty: the buyer can sue for damages in the following circumstances:
- When the seller is in breach of a warranty
- When the seller is in breach of a condition, but the buyer has chosen to carry on with
the contract and claim damages instead
- When the seller is in breach of a condition, but the buyer has lost the right to reject the
goods (because he has accepted them)
o Specific performance
The buyer may sue for specific performance, but only in cases where the goods are specific or ascertained
and where monetary damages would not be an adequate remedy. A court is unlikely to make such an
order if similar goods are available elsewhere.
o Additional rights of buyers in consumer cases
The Sale and Supply of Goods to Consumer Regulations 2002 introduce a range of additional rights for
consumer buyers. A consumer is a natural person who is acting for purposes outside of his or her trade,
business or profession.
The additional rights are as follows:
- Repair or replacement: The buyer has the right to require the seller to repair or replace the goods,
within a reasonable time and without causing significant inconvenience to the buyer.
- Reduction of the purchase price or rescission of the contract: If repair or replacement is not
practicable remedies or the seller has not fulfilled the requirement to repair or replace within a
reasonable time and without significant inconvenience, the buyer is entitled to a partial or full
reduction of the purchase price or to rescind the contract.
o Auction sales
The Sale and Supply of Goods to Consumer Regulations 2002 also make some important changes to the
rights of consumers who buy goods through auctions, including Internet auctions.
Effect of the Sale and Supply of Goods to Consumers Regulations
SUPPLY OF GOODS AND SERVICES – Act 1982
The provisions of the Sale of Goods Act 1979, including the protection afforded to the buyer by the
implied terms contained in ss 12-15, apply only to contracts where goods are sold for a money
consideration. The sale of goods legislation did not cover other methods of obtaining goods (e.g. by hire
purchase (HP), hire, barter or contracts for work and materials. In 1979 the Law Commission
recommended that the protection of statutory implied terms should be extended to all contracts for the
supply of goods. This was achieved by the Supply of Goods and Service Act 1982.
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The Supply of Goods and Services Act 1982 is divided into two main parts: Part I deals with implied terms
in contracts for the supply of goods, while Part II covers implied terms in contracts for services
IMPLIED TERMS IN CONTRACTS FOR THE SUPPLY OF GOODS (Part I)
The provisions of Part I consist of two sets of implied terms. The first set applies to contracts for the
transfer of property in goods, the second set to contract for hire.
Contracts for the transfer of property in goods
The first set of terms, detailed in sections 2-5, are implied into contract for work and materials and barter
under which a person acquires ownership of goods. The terms, match with the section 12-15 of the Sale
of Good Act 1979.
Section 2: Transfer of property
Section 3; Description
Section 4; Satisfactory quality and reasonably fit for the purpose
Section 5: Sample
Contracts for the hire of goods
The second set of implied terms in Part I can be found in sections 7-10. They apply to contracts under
which “one person bails or agrees to bail goods to another by way of hire”.
The terms implied match, as far as possible, the implied terms in contracts for the sale of goods.
Section 7: The bailee will enjoy quiet possession of the goods during the period of hire
Section 8: Description
Section 9: Satisfactory quality and reasonably fit for the purpose
Section 10: Sample
Additional rights and remedies of consumer under the Sale and Supply of Goods to Consumer
Regulations 2002
The Sale and Supply of Goods to Consumer Regulations 2002 make amendments to the Supply of Goods
and Services Act 1982 to ensure that the additional rights and remedies made available to consumers
under the Sale of Goods Act 1979 are also extended to consumers who obtain goods other than by way of
a contract for the sale of goods, e.g. by hire, HP, or exchange.
IMPLIED TERMS IN CONTRACTS FOR THE SUPPLY OF SERVICES (Part II)
A contract for the supply of services is one “under which a person (the supplier) agrees to carry out a
service”. This covers agreements where the supplier simply provides a service and nothing more, such a
dry-cleaning or hairdressing. It also includes contract where the provision of a service also involves the
transfer of goods (e.g. installing central heating or repairing a car). The Act does not apply to contracts of
service (employment) or apprenticeship.
The terms implied into a contract for services by this part of the Act are as follows:
- Care and skill
- Time of performance
- Consideration
Care and skill (section 13)
When the supplier is acting in the course of business there is an implied term that the supplier will carry
out the service with reasonable care and skill.
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Time for performance (section 14)
When the supplier is acting in the course of business and the time for performance cannot be determined
from the contract there is an implied term that the supplier will carry out the service within a reasonable
time. What is reasonable time is a matter of fact.
Consideration (section 15)
When the consideration cannot be determined from the contract or by a course of dealing between the
parties, there is an implied term that the customer will pay a reasonable charge for the service.
MANUFACTURER’S LIABILITY IN CONTRACT
Generally
We will now turn out attention on the person who produces the goods. What exactly are the
responsibilities of a manufacturer who puts defective products into circulation?
The law of contract provides the main way for restore in respect of faulty goods. However a contractual
solution to the problem of defective goods has its limitations:
1. Only the purchaser could take action in contract in respect of a defective product. However, under
Contracts Act 1999 (Right of Third Parties), a third party may have the right to enforce a term in
the contract.
2. The common law doctrine of privity also means that the consumer’s right in contract are restricted
to an action against the person who sold or supplied him with the goods.
3. The retailer is required to bear the brunt of claims for compensation from affected customers,
even though he may be completely blameless.
Chain of responsibility in contract for a defective product
MANUFACTURER
MANUFACTURER
Sells to
Sues in contract
WHOLESALER
WHOLESALER
Sells to
Sues in contract
RETAILER
Sells to
RETAILER
If the goods
contain a
Manufacturing fault
CONSUMER
Sues in contract
CONSUMER
There is a case for a consumer, irrespective of whether he purchased the defective item, being able to
take direct action against the manufacturer, but there are limited circumstances in which the
manufacturer can be sued. These are:
1. Under a collateral contract between the manufacturer and the consumer
2. In tort
3. Under Part I of the Consumer Protection Act 1987
4. Under the Sale and Supply of Goods to Consumer Regulations 2002
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Collateral contract
When the manufacturer develops a marketing strategy for promotion of his product encouraging
potential customers to buy them, for example, by advertising, promotions, “warranties”, etc.; such
activities may result in the manufacturer being directly liable in contract to the consumer, even though
the consumer buys the goods from the retailer.
This second contract consumer-manufacturer is known as collateral contract: it is, in effect, an implied
contract between the manufacturer and the consumer. A collateral contract may arise in two situations:
- From advertising and sales talk
- Under a manufacturer’s guarantee or warranty
o Advertising and sales talk
The principle applies when the manufacturer’s salesperson calls on the consumer and makes promises
about the performance of a product.
o Manufacturer’s guarantee and warranties
Sometimes the manufacturer’s confidence in his product is expressed formally in the shape of a written
guarantee or warranty which accompanies the goods.
The Sale and Supply of Goods to Consumer Regulations 2002 states that: When goods are sold or supplied
to a consumer and a consumer guarantee is offered, then the guarantee will be legally binding as a
contractual obligation.
The guarantee must:
- be in writing
- set out in comprehensible language
- be made available within a reasonable time in writing or some other durable and accessible
medium
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CHAPTER 12
BUSINESS AND THE LAW OF TORT
In this chapter we will consider how the activities of business organisations may give rise to liability in
tort.
TORTIOUS LIABILITY
A tort is a civil wrong.
A tort is the body of the law which allows an injured person to obtain compensation from the person who
caused the injury.
The law of tort seeks to provide a legal remedy for the victims of certain forms of harmful conduct.
Examples of the kinds of the kinds of harmful conduct which the law provides protection against include:
- interference with a person’s ownership or possession of land or personal property, e.g. the torts of
trespass to land and trespass to goods
- injury to business or personal reputations, e.g. tort of defamation
- interference with a person’s use and enjoyment of land, e.g. tort of nuisance
- damage to land, e.g. tort of negligence,
- personal injury and death, e.g. torts of negligence and trespass to the person
- damage to commercial interest, e.g. torts of deceit, passing-off, inducement of breach of contract,
conspiracy
Each tort is governed by its own special rules. We will discuss in this chapter the general principles of tort.
Basis of tortuous liability
Liability in tort is essentially “fault-based”. This means that a claimant must prove that the defendant
acted intentionally or negligently and was, therefore, blameworthy.
There are two situations where tortuous liability may be imposed despite the defendants not being at
fault:
a) Torts of strict liability: these are torts where the claimant can recover compensation for loss or
damage without having to prove fault or intention on the part of the defendant
b) Vicarious liability: In certain situations one person may be held liable for the torts of another.
This type of liability is known as vicarious liability. An employer, for example, is vicariously
liable for the torts of his employees committed during the course of their employment.
Proof of damage
The law of tort is concerned with providing a remedy for certain forms of wrongful conduct. In most torts,
the claimant must prove that he has suffered some damage, e.g. personal injury of damage to his
property. However, the fact that the claimant has suffered damage is not sufficient on its own to establish
liability. The claimant must also prove that the damage was caused by the defendant’s infringement of a
right vested in the claimant which is recognised by the law.
Causation
Liability in tort is dependant on making a connection between the defendant’s wrongful conduct and the
damage suffered by the claimant. If the damage was caused by some other factor, the defendant will
escape liability, but when the damage is too remote a consequence of the defendant’s action the claimant
cannot necessarily recover his loss.
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SPECIFIC TORTS RELEVANT TO BUSINESS
Negligence
The tort of negligence is concerned with certain kinds of careless conduct which cause damage or loss to
others.
In order to establish negligence a claimant must prove that:
a) The defendant owed him a legal duty of care
b) The defendant was in breach of this duty of care
c) The claimant suffered injury or loss as a result of the breach
All the three elements are essential to a successful negligence claim.
o Duty of care
It is important to know in which circumstances one person will owe a duty of care to another.
For a duty of care to exist involve two main elements:
- Reasonable foresight
- Proximity
A duty of care would be imposed if the damage was reasonably foreseeable and the relationship between
the parties was sufficiently close (proximity).
o Breach of duty of care
After establishing the existence of a duty of care, the claimant must show that this duty has been broken
by the defendant.
The court will consider a range of factors including:
- the likelihood that damages or injury will be incurred
- the seriousness of any damage or injury
- the cost and ease of taking precautions
- the social need for the activity
In a number of recent cases the courts have demonstrated their reluctance to award compensation for
accidents when people should have taken responsibility for their actions the same approach is taken by
the court to award compensation when people are injured participating voluntary in hazardous activities.
Res ipsa loquitur
It is normally the responsibility of the claimant to show that the defendant did not act reasonably, i.e. the
burden of proof lies with the claimant. If the claimant is unable to present appropriate evidence, his case
will fail. However, there are some situations where the only or most likely explanation of an accident is
that the defendant was negligent. If this is the case, the claimant may claim Res ipsa loquitur –the facts
speak for themselves-.
o Damage
The claimant must show he has suffered some damage, that is has been caused by the defendant’s breach
of duty. The kinds of damage which will give rise to an action in negligence are: death, personal injury,
nervous shock, damage to property, and, in limited circumstances financial loss.
We will now examine in more detail the potential business liability by considering the extent of liability in
tort for defective goods and services.
DEFECTIVE GOODS
There are three circumstances when the person responsible for putting defective goods into circulation
will incur liability for his products. These are:
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1. In the tort of negligence
2. Strict liability under Part I of the Consumer Protection Act 1987; and
3. For breach of statutory duty under Part II of the Consumer Protection Act 1987
Negligence
A manufacturer may be liable to a consumer for loss and damage caused by his defective product under
the tort of negligence
A consumer must establish first of all that the manufacturer owed his a duty of care. This means that the
consumer must be able to prove that the manufacturer failed to act reasonably in all the circumstances.
In order to determine that, the court will consider a number of factors: the likelihood and seriousness of
injury or harm, the cost and ease of instituting precautions to eliminate or reduce the risk and the social
need for the product.
Liability in negligence is fault-based and the burden of proving that the manufacturer was at fault is upon
the consumer. This can be very difficult task as usually the consumer has no means of knowing exactly
what went wrong in the manufacturing process.
Finally, the consumer must be able to prove that he has suffered loss or damage as a result of the
manufacturer’s breach of duty. If the damage is caused by some other factor, the manufacturer will not
by liable.
A manufacturer is liable only for loss and damage which is reasonably foreseeable.
The manufacturer also has the possibility to prove and defeat the claimant by showing that the accident
was caused wholly or partly by the consumer’s own negligence.
Part I of the Consumer Protection Act 1987 (CPA 1987)
The term “product liability” was used to describe a system of strict liability for manufacturers in respect of
injury or loss caused by their defective products.
o Liability under Part I of the CPA 1987
The Act introduces a regimen of strict liability for personal injury and damage to property caused by
defective products. It is no longer necessary for a claimant to prove negligence. Nevertheless, to establish
under the CPA 1987 the claimant must prove that;
a) He has suffered damage
b) The product was defective
c) The damage was caused by the defective product
Those who are liable for injury or damage arising from a defective product are;
- The producer of the product
- Own-branders, who are those that market goods under their own label, even though the goods
were manufactured by someone else
- The importers of the goods
- When the producer cannot be identified within a reasonable time, the liability lays in any person
who supplied the product, e.g. retailers or wholesalers who cannot identify the manufacturer of
the product
o Defect
There is a defect in a product if the safety of the product is not such as people are generally entitled to
expect. The factors to be taken into account are:
- the manner and purposes for which the product has been marketed
- the use of any mark, instruction or warning
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-
what might reasonably be expected to be done with the product
the time when the product was supplied by the producer to another
o Damage
The damage for which compensation is recoverable under the CPA 1987 is defined as death, personal
injury or damage to any property (including land). The right of recovery in respect of property damage is
restricted
o Defences
The following defences are available to an action under the CPA 1987:
1. The defect is attributable to compliance with UK legislation or EC obligation
2. The defendant did not at any time supply the product to another
3. The product was not supplied in the course of business. E.g. home-made product given as a
gift
4. The defect did not exist in the product at the relevant time
o Limitation of actions
Actions in respect of personal injury and loss or damage to property must be brought within three years
from the date of the cause of action. The three-year limit may be extended in the case of legal disability,
fraud, concealment or mistake. All claims are subject to a maximum limitation period of ten year from the
date of supply.
Breach of statutory duty
The General Product Safety Regulations 2005 gives the legal framework of protection for the public from
the hazards of unsafe goods.
1. It is an offence of supplying consumer goods which fail to comply with the general safety
requirements
2. The Secretary of State make safety regulations in respect of safety of specific goods
3. The Secretary of State has the power of prohibition notices and warning notices for unsafe
products
4. The consumer has civil remedies when he suffered loss or damage as result of the unsafe
goods
DEFECTIVE SERVICES
Generally
The law of negligence has an important application to the provision of services. It opens up a remedy to
those who are strangers to the contract for services but nevertheless have suffered a loss as a result of
the contractor’s negligence. Liability for physical injury or damage caused by a negligent act is well
established. But what is the position of a person whose job involves giving professional advice?
Professional negligence
Before 1963 the liability of a professional who made a careless statement which caused financial loss was
limited in cases of fraud or in cases where there was a contractual relationship between the parties.
The new judicial approach to negligent statements was announced in a case involving banker’s references
in 1963. The House of Lords agreed that there could be liability for negligent misstatement causing
financial loss, even in the absence of a contractual or fiduciary relationship. However in order to avoid
problems for the future their Lordships made it clear that a duty of care in respect of a negligent
statement would only be owed to persons who the maker of the statement knows will rely on it.
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We will now examine how the rule has been developed in relation to three particular professional groups:
- Lawyers, - Accountants, and - Valuers and Surveyors
o Lawyers
In the past the liability of the legal adviser depended on the type of work he has engaged on; for example,
the barrister owed no duty of care to clients for whom he acted as advocate.
This immunity (definition: a situation in which someone is not affected by something such as a law because they have a
special job or position), has now been removed in respect of both civil and criminal proceedings.
o Accountants and auditors
The extent of an accountant’s liability includes: clients, third parties of whom they had knowledge and
even the scope was expanded and broadened to persons of whom the accountants had no prior
knowledge.
The law relating to the duty of care owed by professionals, such as accountants and auditors, is still being
developed.
o Valuers and surveyors
There is evidence to suggest that the frequency of negligence claims brought by mortgage lenders against
property Valuers is related to the state of the property market. Put simply, the most common scenario for
litigation of this kind is a loan transaction based on a valuation of property carried out when values are
buoyant, followed by a severe fall in the property market generally and in the value of the mortgaged
property in particular.
OTHER TORTS RELEVANT TO BUSINESS
- Trespass
- Conversion
- Nuisance
- Defamation
- Economic torts: a) Inducement of breach of contract, b) Conspiracy, c) Deceit, d) Passing-off
Trespass
The definition of trespass according to the law defines trespass as:
a) An unlawful act causing injury to the person, property, or rights of another, committed with force or
violence, actual or implied.
b) A wrongful entry upon the lands of another.
c) The action to recover damages for such an injury.
Trespass takes three forms:
- Trespass to the person: This includes Battery, Assault and False imprisonment
Battery is a direct and intentional application of force against the person
Assault involves putting a person in fear of a battery
False imprisonment consists of unlawfully restraining a person from going wherever he or she wants.
- Trespass to land: Can be defined as unlawful interference with the possession of someone’s land
- Trespass to goods: Is the wrongful interference with a person’s possession of goods. This tort may
be committed by destroying another’s goods, stealing or simply moving them from one place to
another.
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Conversion
The tort of conversion involves doing some act in relation to another’s goods which in inconsistent with
the other’s right to the goods. Conversion is one aspect of the tort of trespass to goods.
Nuisance
There are two kinds of nuisance: Public and Private.
Public nuisance (an act or omission which causes discomfort or inconvenience to a class of Her Majesty’s
subjects) is essentially a crime. However, individuals who have been particularly affected by the nuisance
may bring an action in tort. Polluting a river could amount to a public nuisance.
Private nuisance consist of unreasonable interference with a person’s use or enjoyment of land. The
following requirements must be present to establish liability for a private nuisance:
- an indirect interference with the use or enjoyment of land, e.g. by smoke, smells, noise;
- either physical damage to land or interference with the land causing loss of enjoyment or
discomfort with the land causing loss of enjoyment or discomfort; and
- interference which is unreasonable
In order to determine the question of unreasonableness, the court will consider the following factors:
- The character of the locality in which the interference occurs
- The duration of the interference
- Malice on the part of the defendant
A successful claimant is entitled to compensation for damage caused by the nuisance
Defamation
Defamation is the publication of a false statement which damages a person’s reputation.
It takes two forms: Libel and Slander
- Libel: is defamation in a permanent form, such as writing, pictures, a film or a play
- Slander is defamation in a transitory form, for example, speech or gestures.
Slander is actionable per se if:
- an imputation states that a claimant is guilty of a criminal offence for which he could be sent to
prison
- an imputation of unchastity made against any woman or girl
- an imputation that the claimant has an contagious disease so that people would avoid him or her
- any words that suggest that the claimant is unfit to carry on his trade, business or profession
In order to establish a case in defamation, the claimant must establish the following requirements:
- it must be false
- the statement must lower the claimant’s reputation
Defences to an action in defamation
The defendant may use the following defences in order to protect himself against an accusation of
defamation:
- Justification or truth: A person cannot complain a truth statement
- Fair comment on a matter of public interest: Those who place themselves in the public eye must
expect honest criticism of what they do
- Privilege: Statements made for example in a court, are privileged and the person whose reputation
has been injured has not right to claim.
- Unintentional defamation under the Defamation Act 1996: The publisher of an innocent
defamation may escape liability by making an offer of amends
- Consent to publication: If the claimant consented to the publication of the defamatory material
A successful claimant may be awarded damages or granted an injunction
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Economic torts
The term “economic torts” is often used to describe a number of torts which seek to protect business
interests.
o Inducement of breach of contract
This tort consists of one person (A) inducing another person (B) to break a contract with a third person
(C). C can sue B for breach of contract, but C can also sue A in tort.
o Conspiracy
This tort consists of an agreement between two or more persons to do an act which is intended to injure
another person and does result in damage.
The conspiracy can be made using lawful or unlawful means.
o Deceit
This tort, which is also known as fraud, consist of knowingly or recklessly making a false statement to
another person who act on it to his detriment
o Passing-off
The law of passing off prevents one person from misrepresenting his or her goods or services as being the
goods and services of the claimant.
This tort protects a trader whose competitors pass off their goods as the trader’s. Examples of passing-off
include using another’s trader name and imitating another’s goods.
DEFENCES AVAILABLE TO A DEFENDANT FACING AN ACTION IN TORT
These general defences are;
- Consent
- Contributory negligence
- Statutory or common law justification
- Necessity
- Illegality
Consent
It is an active acceptance or silent compliance by a person legally capable of. It may be evidenced by
words or acts or by silence when silence implies agreement.
Consent may arise from an express agreement to run the risk of injury or may be implied from the
claimant’s conduct. An example of express agreement is when a patient signs a consent form before an
operation.
Implied consent is often referred to as volenti non fit injuria (no harm is done to one who is willing), for
example, participant of boxing match do not complain of personal trespass.
The defendant must prove that the claimant had full knowledge of the risk and freely consent to running
the risk.
Contributory negligence
Contributory negligence in common-law jurisdictions is defense to a claim based on an action in tort.
It applies to cases where a claimant has, through his own negligence, contributed to the harm he or she
suffered. For example, a pedestrian crosses a road negligently and is hit by a driver who was driving
negligently. The pedestrian has contributed to the accident.
For example, if the court assesses the claimant’s loss as £100,000, but finds that he was 25% to blame for
what happened, his damages will be reduced by 25 per cent and he will receive £75,000 damages.
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Statutory or common law justification
A person may have a good defence to an action in tort if he can show that his acts are covered by
statutory authority. Examples: Under a justified and provided authority the police can arrest, entry and
search during an investigation procedure; another example is self-defence used as defence to the tort of
trespass to the person.
Necessity
If a person commits a tort buy only in order to prevent a greater harm from occurring, he may be able to
use the defence of necessity. The defendant must prove that there was a threat of danger to person or
property and that his action was a reasonable response to the circumstances.
Illegality
It is a general principle of law that a person will not be able to maintain a cause of action if he has to rely
on conduct which is illegal or contrary to public policy.
REMEDIES AVAILABLE IN RESPECT OF TORTIOUS CONDUCT
The available remedies are;
- Damages
- Injunction
Damages consist of a payment of money by the defendant to the claimant.
There are Nominal damages, when the claimant cannot show that he has suffered any loss, and
Exemplary damages, which are designed to punish the defendant.
An Injunction is a discretionary order of the court requiring the person t cease or to stop committing a
tort. There are different kinds of injunctions: Interim injunction, Quia timet injunction, Prohibitory
injunction and Mandatory injunction.
TIME LIMITS FOR AN ACTION TO BE BROUGHT
The right to bring legal action does not last indefinitely.
- An action in tort must normally be brought within six years of the date when the cause of action
accrued. The period may be extended by three years in special circumstances.
- An action in negligence, nuisance or breach of statutory duty for damages for personal injuries
must be brought within three years.
This time may be extended as follows:
- When fraud, concealment or mistake is alleged
- If the claimant is under a disability, such as minority or mental incapacity.
The time limit for an act of defamation and malicious falsehood has been reduced to one year.
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CHAPTER 13
CREDIT
Credit consists of either buying something and being given time to pay for it or borrowing money and
paying a back later. The person giving the credit (the creditor) is providing service, which the borrower
(the debtor) is usually required to pay for, the price being a certain rate of interest.
Credit has several clear advantages. Most people lack the self-discipline to save up for expensive items.
Credit allows them to enjoy the benefit of goods and services sooner than they otherwise would.
Since the creditors face the risk that they may not be repaid, they channel their energies into finding
effective ways to securing their financial interests.
The Consumer Credit Act 1974 came into force in 1985 – 11 years after the Act was passed by Parliament.
In 2003 the Department of Trade and Industry published a White Paper –Fair, Clear and Competitive- The
Consumer Credit Market in the 21st Century- setting out proposals for reforming the legal framework
governing the consumer credit industry.
The Consumer Credit Act 2006 was implemented in 2008.
In 2008 the EU adopted a new Consumer Credit Directive. The Directive has been implemented in the UK
by six sets of regulations.
This chapter will examine the various types of credit available and how they are regulated by the law,
particularly the Consumer Credit Act 1974.
TYPES OF CREDIT
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Hire-Purchase (HP)
Conditional Sale
Credit sale
Bank loans
Credit cards
Shop budget account
Trading checks and vouchers
Credit unions
Insurance policy loan
Finance company personal loan
Moneylenders
Pawnbroking
Mortgage
Hire
Hire-purchase
The customer pays regular amounts for the hire of goods, only becoming the owner if he exercises an
option to buy. The advantages of this form of credit to traders were twofold: if the hirer failed to pay an
instalment the owner could repossess the goods and if the goods fell into the hands of an innocent third
party, the owner could recover them.
The owner may be the supplier of the goods but today it is more likely to be a specialist finance company
introduced by the supplier.
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4
FINANCE
COMPANY
1
2
5
3
CUSTOMER
SUPPLIER
1- Pass of the ownership of the goods from the supplier to the Finance Company
2- Contract for the sale of goods between the supplier and the finance company covered by the Sale of Goods Act 1979
3- Agency: If the HP agreement is regulated agreement under the Consumer Credit Act 1974, the dealer is regarded as an
agent on the finance company. The finance company is equally responsible with the supplier for any
misrepresentation or breach of contract.
4- HP contact between the finance company and the customer. The agreement will be regulated by the Consumer Credit
Act 1974, if the debtor is an individual, a sole trader or a partner in a partnership of two or three partners. If the Act
does not cover the agreement, the common law applies.
5- Hire installment
Conditional sale
Like HP, Conditional sale gives the customer immediate possession of the goods, payment is by regular
installments and ownership only passes to the buyer when all the payments have been made.
The difference with HP is that under conditional sale agreement the customer is under an obligation to
buy the goods.
Credit sale
The ownership and possession pass immediately to the buyer, but he is given time to pay. Since the
purchaser becomes the owner of the goods he can resell them before the end of the agreement.
Bank loans
There are various ways of borrowing from a bank:
1- Overdraft: It may arise in one of two ways: a) When the customer makes an arrangement with the
bank to allow him to overdraw his current account up to an agreed amount or b) When the
customer simply writes cheques for an amount greater than in his account.
2- Ordinary loan: This type of loan is extended to bank customers and for a particular purpose –to
buy a car, for example- A specific amount of money is borrowed for an agreed period of time.
3- Personal loan: The bank provides loan to everyone, customers and non-customers for a particular
purpose. It is a more expensive way of borrowing than an overdraft or ordinary loan.
4- Budget account: A budget account is used to help spread the payment of bills over the year. it is a
bank account for paying household bills (electricity, water, council taxes, etc), being credited with
regular or equal monthly payments from the customer's current account
Credit cards
A credit card allows the holder to pay for goods and services or to obtain cash from an ATM (Automatic
Teller Machine) in advance by producing a plastic personalized card.
There are three main kinds of credit card;
1- Bank credit cards (e.g. MasterCard, Visa): The user can buy goods or services or obtain cash
wherever the card is accepted. The credit card company charges a percentages of the purchase to
the seller and the customer is charged usually an annual fee for the use of the credit card.
2- Charge cards (e.g. American Express, Diner’s Club): These cards work in a very similar way as bank
credit cards. The main differences are:
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a. the card holder pays an initial joining fee plus an annual membership fee
b. there is no pre-set credit limit
c. the companies insist that the account is paid in full each month
3- Retailer’s credit card (e.g. M&S store credit card): Many chain stores, supermarkets and garages
issue their own credit cards.
When a card-holder uses his card to acquire goods and services, this operates as an unconditional
discharge of his obligation to the supplier. An unpaid supplier can, therefore, take action only against the
card issuer to recover what he is owed.
Shop budget account
This form is operated by many large stores. It is an account with a shop that allows you to pay for
something with regular small payments usually monthly. The customer is allowed a spending limit of, for
example, 12 times the £15 pounds agreed. This allows the customer to spend up to £180 but never more
than this.
Trading cheques and vouchers
The check trader issues a check or voucher for a specified amount to his customer. The checks can be
spent in any shop which has already agreed to accept them. The shop receives payment from the check
trader, less a discount.
Credit unions
They are formed by people with something in common; they may belong to the same club or work
together. They agree to make a regular savings to form a pool of money. If any of the members need
money unexpectedly, they can borrow from the pool. They are governed by Credit Union Act 1979.
Insurance policy loan
Loan obtained by an insurance company
Finance company personal loan
Big stores, car dealers, gas and electricity companies often arrange these loans to finance large purchases.
Moneylenders
They are often used by people who cannot get a credit from other sources. The lender lends the money
without security and in compensation he charges in very high interest rates.
Pawnbroking
A pawnbroker will advance money for a short period of time, and in return will take possession of goods,
for example, jewellery, as security. If the loan and interest are repaid, the goods are returned to the
borrower; otherwise the pawnbroker may sell the goods.
Mortgage
The mortgage is the interest taken by the lender in the property which act as security for the loan
• Hire
Under a hire agreement the owner of goods allows someone else (the hirer) to make use of them in
return for regular rental payments. The hirer obtains possession of the goods but ownership never passes
to him and at the end of the agreement the goods must be returned to the owner.
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Business takes advantages of hire as a method of obtaining the use of equipment, including the advantage
of the opportunities created by the rapidly changing new technology.
CONSUMER CREDIT ACT 1974
• Background of the Act
The Consumer Credit Act 1974 replaces most of earlier credit legislation. The Act has been reviewed by
the Consumer Credit Act 2006.
• Terminology
The Act introduced a new set of terms, the most important of which are explained below
1. Debtor-Creditor-Supplier agreements (DCSA) and Debtor-Creditor agreement (DCA): A DCSA arises
when there is a connection between the creditor and the transaction for which the finance is
being provided. The creditor and supplier of the goods or services for which the credit is being
made available may be the same person. When they are different people, it will be a DCSA if there
is an arrangement between the supplier and creditor. Examples include HP, credit cards and
trading checks.
If there is no connection between the creditor and any supplier, it will be a DCA. Example; an
overdraft from a bank to be spent as the customer wishes
2. Restricted-use credit agreement and unrestricted-use credit agreement-use credit agreement: If
the debtor as he or she pleases, e.g. overdraft, it will be an unrestricted-use credit agreement.
3. Fixed-sum credit and running-account credit: It is when the debtor can receive cash, goods or
services from time to time to an amount which does not exceed his credit limit
4. Credit tokens: The definition of a credit token covers credit cards, trading checks and voucher.
5. APR (Annual Percentage Rate of charge): This is intended to allow the consumer to make a fair
comparison between different credit deals. The APR includes all the costs known to the creditor
and which are required to be paid by or on behalf of the borrower. The costs included in the APR
are interest, commissions, takes and any other kind of fees.
AGREEMENTS COVERED BY THE ACT 1974
Most of the Act only applies to “regulated agreement”. Some agreements are “partially regulated” while
other agreements are said to be “exempt”.
• Regulated agreements
Two types of credit agreement are regulated and controlled by the Act 1974: Consumer credit
agreements and Consumer hire agreements.
1) Regulated consumer credit agreement: This is a consumer credit agreement between an individual
(the debtor) and any other person (the creditor) by which the creditor provides the debtor with
credit of any amount. Individuals include sole traders and partnership of two or three partners.
The transactions included in regulated consumer credit are, HP, conditional sale, credit sale, loans,
overdrafts, credit cards, shop budget accounts and trading checks.
2) Regulated consumer hire agreement: This is an agreement under which goods are hired, leased,
rented or bailed to an individual, which is capable of lasting for more than 3 months.
• Partially regulated agreements
1) Small agreement: It is either a regulated consumer credit agreement (other than an HP or
conditional sale agreement) when the credit or the hire does not exceed £50 or a regulated
consumer hire agreement which does not require the hirer t pay more than £50 in rentals.
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2) Non-commercial agreement: This is a consumer credit agreement or hire agreement which is not
made in the course of business carried on by the creditor
• Exempt agreements
1) Exempt consumer credit agreements: The exemptions are as follows:
a. Agreements secured on land
b. Low-cost credit, e.g. on very low APR
c. Finance of foreign trade: Credits in connection with the export of goods and services
d. Normal trade credit: When the credit requires to be paid in only one instalment, and when
the DCSA the number of payment does not exceed four
e. Land transaction lending
f. Certain insurance policy loans
g. Credit Union agreements
2) Exempt consumer hire agreements: The only exemptions are for the hire of meters equipment for
electricity, gas and water
3) New categories introduced by the Act 2006 (as amended):
a. High net worth individuals: “High net worth” means that the individual has a net income in
excess of £150,000
b. Business agreements: When the creditor provides credit exceeding £25,000 and it is
predominantly for business purposes
LICENSING OF CREDIT AND HIRE BUSINESSES
The Act set up a comprehensive licensing system to control the activities of those in the credit and hire
business. The following categories of business require a consumer credit license:
1- consumer credit business, e.g. banks, moneylenders, finance companies
2- consumer hire business, e.g. TV and car rental companies
3- credit brokerage, e.g. car dealers, estate agents
4- debt adjusting
5- non-commercial debt adjusting
6- debt counselling
7- non-commercial debt adjusting
8- debt collecting
9- debt administration
10- provision of credit information service
11- credit reference agencies
The Act also applies to brokers
The function of the Office of Fair Trading (OFT) in licensing of credit and hire business
The OFT is charged with determining the fitness of applicants to hold a license
Matters which the OFT should take into account include whether the applicant or an associate:
i. has committed an offence involving fraud, dishonesty or violence
ii. has contravened provisions or relevant legislation, e.g. the 1974 Act
iii. has practiced discrimination
iv. has engaged in business practices which appear to the OFT to be deceitful, unfair or improper,
which may include irresponsible lending
The OFT must publish guidance on the way it determines the fitness of a person to hold a licence
Anyone who carries on any of the activities listed above without a licence commits a criminal offence
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The OFT can enter the licensee’s premises on reasonable notice to observe how the business is being
carried on or to inspect relevant documents.
SEEKING BUSINESS
The Act controls three ways of attracting business: Advertising, Giving quotations and Canvassing
Advertising (sections 43-47)
The Act makes regulations about the form and content of advertisements to ensure that they express a
fair and reasonably comprehensive indication of the credit offered and their true cost.
The regulations apply to all forms of advertising including TV, radio, on the Internet and by telephone. If
the advertisement includes an interest rate or any amount relating to the cost of the credit, the
advertisement must include a representative example.
Quotations (section 52)
A Quotation is the price that someone says that they will charge for doing a job selling goods.
The Consumer Credit Regulations 1999 require the inclusion of certain prescribed information when a
quotation is provided by the trader. Quotations must include a statement, if applicable, that security is or
may be required and the warning: “Your home is at risk if you do not keep up repayments on a mortgage
or other loan secured on it”.
Canvassing (sections 48-51)
This forbids the practice of stopping people in the street or calling uninvited at their houses to persuade
them to take a loan. It is also an offence to send any document to a minor inviting him to borrow money.
o Creditworthiness checks
The EU Directive Regulations introduces a new provision requiring creditors to assess a borrower’s
financial solvency before entering into a credit agreement.
The OFT has developed a guide in Irresponsible Lending which provides advices and recommendations to
the creditors on how to assess the creditworthiness of the borrowers.
o Adequate explanations
The 2008 EU Directive introduces a new section 55 which applies to all regulated consumer credit
agreements except:
• agreements secured on land
• agreement for credit in excess of £60,000
• non-business overdraft repayable within three months or on demand
• business overdrafts
A creditor is required to:
• provide borrowers with an adequate explanation of certain matters
• advise the borrower to consider pre-contractual information
• give the borrower the opportunity to ask questions about the agreement
• advise the debtor how to ask for further information
The matters which must be explained to the borrower are:
a) The features of the agreement
b) how much the borrower will have to pay periodically
c) the features of the agreement which the borrower is unlikely to foresee
d) the consequences from a failure to make payments
e) the rights to withdraw from the agreement
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o Pre-contractual information and agreements (the Disclosure Regulation)
The regulations require certain information to be provided to the borrower before the agreement is
entered into. In most cases the information must be provided in a standard format, known as the Precontract Credit Information (PCI) form.
SIGNING CREDIT AGREEMENTS (the Agreements Regulations)
The agreement must contain the information specified in the Regulations in a clear and concise manner.
There are terms that if they are not included in the agreement the creditor cannot enforce the agreement
without the court order; these are called the “prescribed terms”.
The prescribed terms are:
• the amount of credit or credit limit
• the rate of interest
• the timing of repayments
The agreement must be signed by the borrower.
o Copies of the agreement
The creditor must give a copy of the executed agreement to the borrower once the agreement has been
made.
Failure to comply with the formalities of the agreement can lead that the enforcement against the debtor
can only be executed by order of a court.
CANCELLETION
There is a new right to withdraw from a credit agreement which applies to all consumer credit
agreements except for the following agreements: - for credits exceeding £60,000, - secured on land, -to
finance purchase of land, -for bridging loans in connection with the purchase of land.
Borrowers have a right to withdraw from a credit agreement within 14 days from the agreement was
made. The right to withdraw only applies to the credit agreement and does not give any right to return
goods or cancel services which have been purchased using the credit. The borrower must still pay for the
goods or services. The borrower must repay the credit plus any added interest within 30 days.
Post-contract information
This is the required information to be provided after the contact has been signed. These include periodic
statements, notices of changes in the agreement, default, enforcement and termination notices and
information provided on request.
The 2006 Act introduces the right the debtors must receive an annual statement of their position.
The EU Directive also introduces a new requirement that obliges creditors to inform borrowers in writing
prior to any changes in the rate of interest.
CREDIT REFERENCE AGENCIES
These organizations collect information about people’s creditworthiness. It is a normal practice for traders
in the credit business to use the services of such an agency to evaluate the suitability of applicants for
credit.
The borrower has the right to know the name and address of any agency used for the investigation of his
financial situation.
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CREDIT INTERMEDIARIES
The EU Directive requires that credit intermediaries must disclose the extent to which they are acting.
LIABILITY OF THE SUPPLIER AND CREDITOR
A supplier of goods and services will be liable for any false statement he makes which persuade a
customer to enter into an agreement and the supplier may be sued by the customer for breach of
contract.
But if credit is involved, the situation may be complicated by the fact that the creditor and supplier are
not the same person. For example, a credit card may have been used to buy goods.
The creditor grantor and the supplier are equally liable for breach of contract.
Section 56: In the case of regulated agreements, the dealer is deemed to be acting as the creditor’s agent.
The creditor is, therefore, responsible for the negotiations conducted on his behalf by the supplier
including, for example, any misrepresentations.
Section 75: This makes the creditor equally responsible with the supplier for any misrepresentation or
breach of contract. However, the section only applies if the agreement meets the following conditions:
- it is a regulated credit agreement
- the cash price of the item is between £100 and £30,000
- the credit is granted under an agreement between the creditor and supplier
Equal liability does not apply to non-commercial agreements or when the customer has arranged his own
credit, such as a bank overdraft or a cash advance from a credit card company.
The EU Directive introduces a new section 75A which it will apply when the price is more than £30,000,
the amount does not exceed £60,000, the goods or services are purchased under a ‘linked credit
agreement” and when there has been a breach of contract, and the borrower is unable to pay.
Section 75A applies only when the credit is for purchase specific goods and services, rather than for
general purposes.
Under section 75 the borrower can choose to pursue the creditor rather than the supplier.
The new section 75A requires the borrower to pursue the supplier first. The borrower will only be able to
take action against the creditor if:
- the supplier cannot be traced
- the borrower has contracted the supplier but has not received a response
- the supplier is insolvent
- the borrower has taken action against the supplier but has not obtained satisfaction.
o The scope of the equal liability provisions
The credit card companies and the Director General of Fair Trading have been discussing the
responsibilities of the companies in relation to transactions paid by credit card.
Areas of discussion
Since section 75 came into effect in 1977 there was need to clarify what happened to card holders who
obtain their cards before 1977.
The credit card companies requested that before taking action to them the customer should take action
first against the supplier; the OFT rejected this proposal but agreed that that liability is limited only to the
amount of the transaction excluding any damages suffered by the card-holder.
It has been argued that the equal liability provision do not apply to overseas transaction by UK card
holders, However in two cases in 1997 and 2008, the Court of Appeal and the House of Lords confirmed
that purchases made abroad using a credit card have the same protection as those made in the UK.
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Loss or misuse of credit tokens
Section 66 and 84 set out the extent of a debtor’s liability if his token (i.e. credit card) is misused.
The card holder should give notice as soon as possible to the creditor (card-issuer) that the credit token
has been lost, stolen or liable to misuse because he will not be liable for any loss arising after notice has
been received by the creditor.
The Consumer Protection (Distance Selling) Regulations 2000 introduce increased protection for
consumers who use credit cards in connection with “distance selling” contracts, such as purchases made
via the Internet or by mail order.
Extortionate terms (Act 1974 sections 137-140)
A credit bargain is extortionate if it requires the debtor or his relatives to make payments which are
grossly exorbitant (amount of money which is much more than is reasonable) or which otherwise breach
the ordinary principles of fair dealing.
The sections contain powers for the courts to analyze extortionate credit bargains so as to do justice
between the parties. The provisions apply to all credits
o General factors that the Court will take into account to be regarded as an extortionate:
a) existing interest rates
b) the age, experience, business capacity
c) the degree of financial pressure put on the debtor and the nature of that pressure
d) the degree of risk accepted by the creditor
e) the creditor’s relationship with the debtor
f) whether the cash price quoted for the goods was true or “colourable”, i.e. inflated to make the
credit charges appear more reasonable
If the court finds that the credit bargain is extortionate, it may:
i. direct a state of account between the two parties to establish the real amount paid and to be paid
by the debtor
ii. set aside any obligations under the agreement
iii. require the creditor to repay all or part of any sum paid under the agreement
iv. direct the return of any property provided as security
v. change the terms of the agreement
o Reform of the extortionate credit provisions
The 2003 White Paper (Fair, Clear and Competitive – The Consumer Credit Market in the 21st Century)
proposed replacing the existing extortionate credit provisions with a much wider “unfairness” test, which
would be able to take into account all aspects of the transaction.
The Act 2006
The Act cancels the sections 137-140 of the Act 1974 and replaces them with new provisions in sections
140A and 140B.
The Court has power to declare a relationship between debtor and creditor as unfair after evaluate the
terms of the agreement, the way the creditor exercises his rights and any other thing done (or not done)
by or on behalf of the creditor.
The new “unfair relationship” rules apply to new agreements with effect from 6 April 2007.
TERMINATION AND DEFAULT
Both debtor and creditor may have reasons to terminate the credit agreement.
The debtor may have received money and would like to pay off his debt
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The creditor would want to take action against people who have not fulfil the obligations of the
agreement
• Early settlement
The debtor under a regulated consumer credit agreement is entitled to pay off what he owes at any time
on giving notice to the creditor of his intention to do this. This may entitle him to reimbursement of
interest
“The Rule of 78” is a formula used to calculate the costs that the borrower had to pay if he pays earlier;
the government stated its intention to abolish the Rule of 78 and to introduce a new method to calculate
maximum early settlement charges.
The EU Directive Regulations gives borrowers the right to make partial early repayment of a credit
agreement.
• Termination
1. by the debtor: The debtor under a regulated HP or conditional sale agreement may give notice to
terminate the agreement at any time before the final instalment is due. The debtor must return
the goods and pay off any arrears. In addition, he or she must pay the smaller of the following:
a. a minimum amount specified in the agreement
b. half of the total purchase price
c. an amount ordered by the court to compensate the creditor for his loss
If the debtor has failed to take reasonable care of the goods, he or she must pay damages to the
creditor.
2. by the creditor: Usually the creditor will wish to terminate the agreement because the debtor has
broken the agreement in some way. However, it should be noted that some agreements allow the
creditor to terminate when there has been no default by the debtor, but the creditor can
terminate the contract for example the debtor becomes unemployed or is convicted of a crime of
dishonesty.
Default
Default: To fail to pay money that you owe.
If the debtor has committed a breach of the agreement, the creditor must serve a “default notice” before
taking any of the following actions:
- to terminate the agreement
- to demand earlier payment
- to recover the possession of any goods or land
- to regard rights conferred on the debtor by agreement as terminated, restricted or deferred
- to enforce any security
The time allowed for the debtor to remedy the breach must be at least seven days from the default notice
o Time orders
A debtor may apply to the court for a time order where he has been served with either a default or nondefault notice or in the course of an action by the creditor to enforce a regulated agreement.
The debtor must indicate that he wants to make a proposal in relation to making payments under the
agreement and provide details of his proposal.
o Information sheets
The OFT must provide information sheets designed to help the debtor and contain, for example,
information about debt management options and contact details for providers of advice.
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o Repossession of the goods
In the past many HP agreements even gave creditors the right to enter the hirer’s home for the purpose
to recover the unpaid goods.
Now, debtors under HP and conditional sale agreements enjoy protection against the so-called “snatch
back”:
- A creditor must obtain a court order before he enters any promises to repossess goods
- If the debtor has paid at least one-third of the total price and he has not terminated the agreement, the
goods are protected unless he obtains a court order.
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CHAPTER 14
CONSUMER PROTECTION
We will consider in this chapter the nature and scope of the law of consumer protection, the role of the
criminal law in protecting consumers, the rights of consumer and the role of various organisations which
protect and represent consumers.
WHO IS A CONSUMER?
A consumer transaction generally has three essential elements: a) an individual who purchase or uses
goods and services for his own private purposes, b)a supplier who is acting in a business capacity, c)goods
or services which must be intended for private use or consumption.
Despite this consensus the court have difficulties in deciding who is worthy of protection.
i. Individual purchaser or user acting in a private capacity: The definition of “individual” is so broad
that it includes borrowing by sole traders, small partnerships and even companies
ii. Supplier acting in the course of a business: The requirement that the supplier must be acting in a
business capacity has not always been consistently applied. The courts will approach the question
of whether a trader is acting for business purposes indicate that the courts are likely to take a
restrictive approach.
iii. Goods and services intended for private use of consumption: There are problems with such an
approach: Is a person dealing as a consumer if the goods are used for both business and private
purposes? What is the position in relation to goods which are ordinarily supplied for business
purposes but then put to private use, or vice versa?
If the consumer is an individual it is no longer necessary to show that the goods are of a type
ordinarily supplied for private use or consumption.
In recent years, there has been growing recognition of the need to protect non-contractual consumers.
WHY DO CONSUMERS NEED PROTECTION?
The earliest forms of consumer protection were designed to discourage fraudulent trading practices and
to protect the consumer from danger.
There have been enormous changes in the last century, including the complexity of technology in modern
goods, the large-scale retail business, e.g. supermarkets and shopping complexes, advertising and
marketing techniques, new ways of purchasing (internet), etc. the overall effects of these changes has
been to increase the power of suppliers at the expense of consumers.
The aim of most modern consumer protection law is to equalize the balance of power.
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CONSUMER PROTECTION INSTITUTIONS
A large number of organisations have a role in protecting consumers:
European Institutions:
-
European Consumer Consultative Group (ECCG)
Central Government Institutions:
-
Department for Business, Innovation and Skills (BIS)
The Home Office
The Department of Health
The Department for Environment, food and Rural Affairs (DEFRA)
The Department for Culture, Media and Sports
The Office of Fair Trading (OFT)
Food Standards Agency (FSA)
Local Government authorities
-
Local consumer protection departments
Government-sponsored bodies
-
Consumer Protection Advisory Committee (CPAC)
Consumer Focus (formerly the National Council)
Regulators of Public services and privatised industries
-
Office of Communications
Chairman of Gas and Electricity Markets Authority
Director General of Water Services
Rail Regulator
Civil Aviation Authority
Voluntary organisations
-
Consumer Association
Citizen’s Advice Bureaus (CABx)
National Consumer Federation (NCF)
British Standard Institute (BSI)
Other organisations
-
Trade associations
Advertising Standard Authority (ASA)
Professional bodies
Ombudsmen
European Institutions
The UK is member of the European Union since 1973.
The EU is a new source of law. The EU creates Directives that each country will make use of them to
create a new legislation to satisfy the EU Directives.
European Community Directives on consumer protection already adopted by UK through different
regulations include:
- Directive on Liability of Defective Products
- Directive on Misleading Advertisements
- Directive of Doorstep Selling
- Directive on Package Travel, Package Holidays and Package Tours
- Directive on General Product Safety
- Directive on Unfair Terms in Consumer Contracts
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-
Directive on Timeshare
Directive on Distance Selling
Directive on Injunctions for the Protection of Consumer Interests
Directive on Sale of Consumer Goods and Associated Guarantees
Directive on Unfair Commercial Practices (UCP)
Objectives of the European Commission Consumer Strategy Policy 2007-2013:
i. To empower EU citizen who need “real choices, accurate information, market transparency
and the confidence that comes from effective protection and solid rights”
ii. To increase EU consumer’s welfare in terms of price, choice, quality, diversity, affordability
and safety
iii. To protect consumer from serious risks and threats that they cannot tackle as individuals
Central government institutions
o Department for Business, Innovation and Skills: The BIS is responsible for developing policy and
promoting legislation in the fields of trading standards, fair trading, weights and measures, shops
legislation, consumer credit and consumer safety. It also has functions in relation to competition
policy and has responsibility for a number of agencies, e.g. OFT, Competition Commission, some of
the Regulators of Public services, etc.
o The Home Office: The Home Office is responsible for supervision of the control of explosives,
firearms, dangerous drugs and poisons.
o The Department of Health: The Department of Health offers medical advice on contamination of
consumer goods and is involved in the control of drugs
o The Department for Environment, food and Rural Affairs (DEFRA): One of DEFRA’s objectives is “to
promote a sustainable competitive and safe food supply chain which meets consumer’s
requirements”
o The Department for Culture, Media and Sports: This department has taken over responsibility
from the Home Office for liquor licensing
o The Office of Fair Trading (OFT): The Enterprise Act 2002 sets out the general functions of the OFT
in relation to consumer protection as:
a) Obtaining and reviewing information relating to its functions in respect of competitions and
consumer matters
b) Promoting to the public the benefits that competition may have for consumer and the
economy in general
c) Promoting good consumer practice
o Food Standards Agency (FSA): The main objective of the Agency is to protect public health in
relation to food, and also to protect the wider food standards interests of consumers, such as
labelling.
Local government
Local authorities have two main roles in respect of consumer protection: enforcement of regulatory
statutes and the provision of consumer advice and information.
1- Enforcement: Local government has the day-to-day responsibility for enforcing many of the
statutory consumer protection measures. Most local authorities have consumer protection
departments.
2- Consumer advice: Many local authorities have set up consumer advice centre to provide preshopping advice and to give on complaints.
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Government-sponsored bodies
o Consumer Protection Advisory Committee (CPAC)
- The Consumer Transactions (Restrictions on Statements) Order prohibits the display of notices which
indicate that no remedy will be given to a customer with a complaint about the supply of goods.
Any statement which would cause a reasonable person to conclude that he would not be able to pursue a
justified claim against a retailer would be prohibited and therefore illegal. Examples of statements which
the courts have deemed illegal are as follows: 'No Cash Refunds', 'No Sale Goods Exchanged or Money Refunded', 'Sold
as Seen and Inspected', 'Please Examine Your Goods with Care Because our Liability Ends Once they Leave the Premises', 'No
Refunds or Exchanges Without a Receipt'
- The Business Advertisement Disclosure Order 1977 requires all advertisements by people who seek to
sell goods in the course of business to make the fact clear.
The Committee was formally abolished by the Enterprise Act 2002.
o Consumer Focus (formerly the National Consumer Council)
The Consumer Focus was established in October 2008. It is sponsored by the government. In October
2010 the Government indicated its intention to abolish Consumer Focus and transfer its functions to
Citizen Advise.
Regulators of Public and privatised industries
Large private suppliers of public services such as gas, electricity, water, transport and communication
have the monopoly of these services. It is necessary to regulate their operations in order to avoid abuse
to customers. Regulators bodies were created for that purpose.
The duties of the regulators may include promoting competition and protecting the consumer in relation
to pricing and terms of supply.
In 1991 the government launched its Citizens Charter initiative for public services.
The regulators bodies in UK are: Office of Communications, Chairman of Gas and Electricity Markets
Authority, Director General of Water Services, Rail Regulator, and Civil Aviation Authority
Voluntary organisations
o Consumer’s Association
The five aims of the Consumer’s associations are:
1. to encourage people to spend their money wisely
2. to reduce the inequality between the shopper and the manufacturer
3. to improve the quality of British goods, creating more discriminating purchasers
4. to tackle the growing complaints about unsatisfactory goods
5. to combat the power of advertising by providing information so the consumer can choose goods
on more rational grounds
Consumer associations also influence consumer protection be lobbying Parliament.
o Citizen’s Advice Bureaux (CABx)
They deal with a wide range of problems: employment rights, social security, land-lord and tenant
disputes, etc.
o National Consumer Federation (NCF)
It encourages and coordinates the activities of the local consumer groups
o British Standards Institute (BSI)
A “British Standard” is a document which stipulates the specifications, requirements for testing or
measurements with which a product must comply in order to be suited for its purpose.
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Other organisations
o Trade associations
They supplement laws by codes of practice drawn up by trade associations
o Advertising Standard Authority (ASA)
It was established in 1962 to provide independent supervision of the advertising industry. The main
instrument of control is the British Code of Advertising Practice (BCAP).
o Professional bodies
The Law Society, for example, operates a compensation fund for victims of dishonest solicitors
o Ombudsmen
The financial sector has appointed a number of “ombudsmen” to deal with complaints, e.g. insurance,
building societies, pensions, banking.
DIFFERENT APPROACHES TO CONSUMER PROTECTION
The four main approaches are:
- providing civil remedies
- imposing criminal liability
- administrative controls
- business self-regulations
Providing civil remedies
An individual consumer may be able to bring a civil action against a trader for a breach of contract or for
liability in tort, e.g. negligence.
Imposing criminal liability
Offences against the community as a whole, responsibility for enforcement is entrusted to public officials
who bring proceedings against offender traders at public expenses.
In this chapter we shall concentrate on some of the more significant provisions of the criminal law that
affect the supplier of goods and services:
Unfair Commercial practices
Safety of consumer goods
Safety and quality of food
UNFAIR COMMERCIAL PRACTICES
The Unfair Commercial Practices (UCP) of the European community was designed to harmonise the unfair
trading laws of member states of the EU.
The Consumer Protection Regulation 2008 (CPR) consists of three main elements:
a) A general prohibition of unfair commercial practices
b) Prohibition of misleading and aggressive practices, and
c) Banned practices
Definitions introduced by CPRs
- Average consumer: The CPR recognize three types of average consumer: a) well informed and observant
consumers, b) the “average member” of a targeted group of consumers, c) vulnerable group of consumers
- Commercial practices: “ any act, omission, course of conduct, representation or commercial
communication (including advertising and marketing) by a trader, which is directly connected with the
promotion, sale or supply of a product to or from consumers, whether occurring before, during or after a
commercial transaction (if any) in relation to a product.
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- Materially distorting the economic behaviour of the average consumer: Impair the consumer ability t
make an informed decision.
- Products: Word with a wide meaning that includes goods, services, property, rights and obligations
- Professional diligence: the standard of special skill and care which the trader is expected to exercise,
acting with honest market and good faith.
- Transactional decision: Is any decision taken by a consumer whether it is to act or desist from acting
Scope of the Consumer Protection Regulations 2008 (CPRs)
In general terms the CPRs apply to “business to consumer” transactions and “business to business”
transactions with the potential to affect consumers.
The CPRs also apply to practices which occur before, during and after the transaction. This includes
advertising and marketing, and after-sales service and debt collection.
The general prohibition (reg 3)
The general prohibition against unfair commercial practice is set out in regulation 3
A commercial practice is unfair if it breaks the requirements of professional diligence
A commercial practice is also unfair if it is:
i.
ii.
iii.
iv.
a misleading action
a misleading omission
an aggressive commercial practice
unfair practices listed in Sch 1
Misleading and aggressive practices (reg 5-7)
The CPRs prohibit misleading actions and omissions
o
Misleading action (reg 5)
A commercial practice is a misleading action if:
a) Gives false information to, or deceiving, consumers: When it contains false information and in
untruthful in relation to certain specified matters, which are the main factors which a consumer is
likely to take into account in making decisions about a product.
b) Creates confusion and failing to honour commitments made in a code of practice: If it concerns any
marketing of a product, trademarks, trade names or other distinguishing marks of a competitor
o
Misleading omissions (reg 6)
When the practice omits or hides material information or provides it in an unclear, unintelligible,
ambiguous or untimely manner and as a result it causes or is likely to cause the average consumer to take
a different transactional decision. Material information is the information the consumer needs to have in
order to make an informed decision and includes any information required by EC law.
o
Aggressive commercial practice (reg 7)
A commercial practice is aggressive if it significantly impairs or is likely to impair the freedom of the
consumer of having a choice or conduct through the use of harassment, coercion or undue influence and
it causes to take different transaction decisions.
Harassment, coercion or undue influence in a commercial practice:
a) the use of threatening or abusive language or behaviour
b) impairing the consumer’s judgement
c) creating barriers by the trader when the consumer wishes to exercise the rights under the contract
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Banned practices
Schedule 1 of the CPRs contains a list of 31 commercial practices which are regarded as unfair.
Some examples of those practices are:
•
•
•
•
•
•
•
•
claiming to be a adherent to a code of conduct when the trader is not
displaying a trust mark, quality mark or equivalent without having obtained the necessary authorisation
claiming the approval of the product by a public or private body when they have not
Bait advertising is an unethical advertising technique that involves attracting the customer in with a
promise of a sale or an inexpensive item they may be interested in, and once capturing their attention, the
online advertiser changes the scheme by making the product unavailable and then directing the consumer
to a like product that is more expensive.
making an invitation to purchase products at specified price and then: refusing to show the advertise item
to a customer or showing a defective sample of the offered product with the intention to discourage the
customer to buy this product and taking advantage to sell another product more expensive.
Falsely stating that the product will be available only for limited period of time
Claiming that the trader is about to cease trading or move premises when he is not
Falsely claiming that the product is able to cure illnesses, dysfunction or malformations
Offences
It is a criminal offence if a trader engages in a commercial practice which contravenes the requirement of
professional diligence and the practice distorts the economic behaviour of the average consumer.
The penalties on conviction are, in the magistrate’s court, a fine up to the maximum of £5,000, and, in the
Crown Court, an unlimited fine or two years imprisonment.
Defences
Defence of due diligence: The accused must prove that the commission of the offence was due to a
mistake, reliance on information given by another person, the act or default of another, an accident, or
another cause beyond his reasonable control.
Defence on the publication of advertisements: The accused must show that he received the
advertisement in the ordinary course of business and that he did not know and had no reason to suspect
that its publication would amount to an offence.
Enforcement
The OFT has the power to investigate whether a breach of the regulations has occurred. OFT can enter
premises, copy documents and seize and detain goods.
PRODUCT SAFETY
The legal framework for dealing with the problem of unsafe general products is contained in:
General Product Safety Regulations 2005
Part II of the Consumer Protection Act 1987
The General Product Safety Regulations (GPS) 2005
The 2005 GPS Regulations implement the provisions of a 2001 EC Directives on GPS.
o
Scope of the regulations
The regulations apply to products intended to be used for consumer use which have been supplied in the
course of a commercial activity. The regulations apply whether the products are new, used or
reconditioned.
o
General safety requirement
Regulation 5 provides that a producer may not place a product on the market unless it is a safe product.
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o
Safe product
It is a safe product when there is no risk or the risk has been reduced to a minimum. Any risk must be
compatible with the product’s use.
Products which comply with UK legal requirements concerning health and safety are presumed to be safe
products.
o
Producer
A producer is defined as:
a. a manufacturer established in the EC
b. where the manufacturer is not established in the EC, his representative or the importer of the product
c. other professional in the supply chain, but only to the extent that their activities night affect the safety
of the product
o
Information requirements
A producer is required to provide consumers with information for the consumer to take precautions
o
Duty of distributors
A distributor must act with due care to help producers comply with the general safety requirements. In
particular, a distributor will commit an offence if he supplies dangerous products.
o
Defence of due diligence
The accused person must show that he took all reasonable steps and exercised all due diligence to avoid
committing the offence.
o
By-pass provision
It enables the prosecution of the person, in the course of a commercial activity of his, whose act or
default causes another to commit an offence
o
Enforcement, notices and penalties
- Enforcement authorities include: a) Local trading standards authorities, b) Environmental Health
Officers, c) The Vehicle Operator Service Agency and d) The Medicines and Healthcare Products
Regulatory Agency.
- Notices: Enforcement authorities may issue a range of notices
a.
b.
c.
d.
e.
Suspension notice
Requirement to mark products with a warning
Requirement to warn those who have already bought the product
Withdrawal notice
Recall notice
Part II of the Consumer Protection Act 1987 (CPA 1987)
Section 10 of the act contains a general statutory offence of suppliers which fail to comply with the
general safety requirements. This section 10 was repealed by the GPS Regulations 2005.
The GPS regulations repealed only the section 10 but the other provisions of the Consumer Protection Act
1987 will continue to apply.
o
Safety regulations
Section 11 gives powers the Secretary of State to make safety regulations for other purposes, such as
ensuring that appropriate information is provided with goods or that goods which are unsafe in the hands
of certain people are not made available to these persons.
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o
Notices
Unsafe goods can be dealt with by means of various notices.
The Secretary of State can issue two kinds of notices:
•
•
Prohibition notice requiring a trader to cease supplying unsafe goods
Notice to warn, requiring a manufacturer or distributor to warn the public about the dangers of a
product in circulation
Local authorities may issue a:
•
o
Suspension notice which requires a trader to cease supplying goods suspected of breaching any
safety provisions for a period of six months.
Enforcement and penalties
In addition to the suspension notice they may apply for a court order for the removal of any goods which
contravene any safety provision.
SAFETY AND QUALITY OF FOOD
Modern food law is contained in the Food Safety Act 1990 (FSA 1990).
The scope of the FSA 1990 is not confined to food safety; it also covers matters such as composition,
labelling and advertising.
Food Safety Act 1990
Food means “any substance or product, whether processed partially processed or unprocessed, intended
to be or reasonably expected to be ingested by humans”. It includes drink, chewing gum and any
substances (including water) intentionally incorporated into food during its manufacture preparation or
treatment.
The main offences under the Food Safety Act
o Rendering food injurious to health: To be guilty on an offence under this section, the defendant
must have done some positive act, which has resulted in the good becoming injurious to health.
o Selling good not of the nature, substance or quality demanded:
An offence as “Nature” concerned is committed if the customer does not get what he asked
for, e.g. when the customer asks for butter but is supplied with margarine.
With respect to “substance”, an offence will be committed if the good contains unwanted
additives or when the food fails to comply with a statutory standard
As “Quality” is concerned, an offence will be committed if the food fails to comply with the
standard of quality demanded.
o Falsely describing or presenting food: This section creates an offence of giving any food sold or
displaying with any food exposed for sale in possession for the purposes of sale, a label whether
or not attached on the wrapper or container which falsely describes the food is likely as to the
nature, substance or quality of the food.
Defences
When a person is accused of an offence under the FSA 1990, he can apply the following defence:
- When the defendant alleges having taking all reasonable precautions and he has exercised
due diligence to avoid the commission of an offence.
By-pass provisions
When the commission by any person of the relevant offence is due to the act or default of some other
person, that other person shall be guilty of the offence.
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Enforcement and penalties
Enforcement authorities have powers to apply orders to deal with offenders:
- Prohibition order
- Emergency prohibition order
- Emergency control order
The penalties for contravening the FSA 1990 are a prison sentence not exceeding two years and/or an
unlimited fine in respect of a Crown Court conviction.
Regulation EC 178/2002
a) to ensure that the labelling, advertising and presentation of food does not mislead consumers
b) to keep record of suppliers and business they supply to and to make the records available to
competent authorities
c) to recall or withdraw food from the market if it is not compliance with food safety requirements
OTHER CRIMINAL LIABILITY FOR THE SUPPLY OF GOODS AND SERVICES
In addition to the already examined provisions, the criminal control also includes:
- Weights and Measures Act 1985
- Consumer Credit Act 1974 (as amended)
- Property Misdescriptions Act 1991
ADMINISTRATIVE CONTROLS
Administrative bodies have power to deal with unfair trade practices.
The advantages of administrative controls compared to legal controls are as follows:
1. Administrative controls allows action to be taken on behalf of all consumers
2. Administrative agency may be able to act more quickly than Parliament to deal with new forms
of unfair trading
3. Administrative agencies may achieve the desire effect by persuasion rather than threat of legal
action
4. Removal of licensing may be a good form of control the dishonest traders
Administrative controls under the Enterprise Act 2002 (EA 2002)
1) Super-complaints: The EA introduces a new procedure to allow certain designated consumer
bodies to make super-complaints to the OFT and other specified regulators when “any feature of a
market in the UK for goods or services is significantly harming the interests of consumer”
The actions of the OFT include:
- bringing enforcement action under either competition or consumer regulation powers
- launching a market study
- making a market investigation reference to the Competition Commission (CC)
- making recommendations for changes in legislation
2) Enforcement orders (Part 8 of EA 2002): Enforcement orders can be obtained for two types of
infringement:
- Community infringements
- Domestic infringements
The OFT has responsibility for leading enforcement activity and coordinating action by enforcers,
to ensure that only the most appropriate body takes action.
When proceedings are brought against a trader the court may:
- Accept an undertaking from the trader
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-
Make an enforcement order, requiring the trader to stop and not continue the infringing
conduct
OFT has the power to require information, including documents, from traders by issuing a written
notice.
Licensing of traders under the Consumer Credit Act 1974
OFT has the power to refuse a licence or withdraw a licence to undesirable traders.
BUSINESS SELF-REGULATION
The OFT is under a statutory duty to encourage relevant trade association to prepare and disseminate to
their members codes of practice for guidance in safeguarding and promoting the interest of consumers.
The aim of such codes is to enable a particular industry to try to regulate the practice of its members.
Advantages of voluntary codes of practice:
- codes can deal with matters which it would be difficult to deal with by means of legislation
- codes may be able to go further than existing law or improve upon legal remedies
- changing a code of practice is quicker than changing legislation
- codes encourage the members of particular industry to put their house in order
- complaint are dealt in a more informal way, e.g. conciliation
- most codes provide for arbitration in the event of a dispute
Disadvantages of self-regulation:
- not all traders are members of the trade association and subject of their rules and codes
- members of the public are not aware of these codes
- the sanctions to the member who fails to comply the codes are usually very weak
- the codes may be more adequate to members of the industry than the interest of consumers
ENFORCING CONSUMER RIGHTS
There are currently three main ways in which a consumer may obtain remedy:
- Compensation order
- Conciliation or arbitration under a code of practice
- Arbitration under the county court small claim procedure
Compensation orders
The court may make a compensation order requiring the trader to pay compensation for “any personal
injury, loss or damage” resulting from the offence under the Powers of Criminal Court Act 2000.
Compensation orders benefit consumer in the following situations:
- When the amount loss is very small and does not justify bringing a civil action
- when consumer has no remedy un civil law
Conciliation or arbitration under a code of practice
The aim of conciliation is to get the parties to resolve their differences in an informal way. If conciliation
does not result in agreement, the consumer is still free to take the matter to arbitration or to the courts.
A term in a contract which constitutes an arbitration agreement is unfair if it relates to a claim for a
financial remedy, which involves money, which does not exceed an amount specified by an order made
under Act.
The small claims track
Since 1973 the county court has operated a special scheme for “small claims”. If a claim for £5,000 or less
is defended the case will be allocated to the small claims track. The judge can adopt any procedure he
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considers fair. The procedure for bringing a claim is relatively straightforward so that it should not be
necessary to have legal assistance.
Consumers are generally unaware of the small claims system; moreover, this method has been more
often used by business to recover money owed by consumer than the consumer seeking for protection of
their rights.
CONSUMER PROTECTION CASE STUDY – PACKAGE HOLIDAYS
Package holidays have experienced an enormous growth in the past 30 years; however there is a high
level of dissatisfaction with package holidays.
The problem with package holidays
1. A package holiday involves a complex set of legal relationship between the travel agent, tour
operator, hotelier, carrier and local supplier of services. The consumer sometimes does not know
who is responsible if something wrong happens
2. The holiday is often arranged by one person on behalf of a group
3. Descriptions in a brochure or advertisements may not correspond with the service the customer
receives
4. Events beyond the control of the tour operator (fight delays, bad weather, workers strikes, etc)
may disturb the program of a package holiday
5. Restriction of consumer’s rights through the use of standard terms and conditions
Legal controls over package holidays
- Civil law remedies
- Criminal penalties
- Administrative controls
- Business self-regulation
o Civil law remedies
Individual holidaymakers could bring actions in contract or tort against the tour operator if the holiday
failed to be according to the expectations, for example, untrue statements about the program of the
holiday
o Criminal penalties
Travel agents and tour operators are vulnerable to prosecution under the Consumer Protection for Unfair
Trading Regulations 2008 for false and misleading statements.
o Administrative controls
Administrative controls have located arrangements to protect holidaymakers in the event of the tour
operator becomes insolvent. An Air Travel Reserve Fund was set up as an additional precaution.
o Business self-regulation
The Association of British Travel Agents (ABTA) represents the interest of both travel agents and tour
operators. ABTA members are bound by the code of practice.
The European Community Directive of Package Travel was given effect in the UK by the Package Travel,
Package Holidays and Package Tours Regulations 1992.
The Package Travel, Package Holidays and Package Tours Regulations 1992
The main provisions of the regulations in relation to consumer protection are as follows:
1. Package: The definition of ‘package’ requires the existence of the following elements:
Pre-arranged combination of at least two or more of these:
i. transport
ii. accommodation
iii. other tourist services
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iv. combination sold at an inclusive price
v. service covers for period of 24 hours or includes overnight accommodation
2. The parties:
i. Organiser is the tour operator
ii. Retailer is the travel agent
iii. Consumer is the person who makes the contract for the package
3. Misleading information: A consumer is entitled to be compensated by the organiser or retailer for
any loss arising from misleading information about the package
4. Provision of information: The regulations set out what information must be given to consumers in
brochures and before the package starts:
i. Brochures: They must contain certain specified information, e.g. the destination, the means
of transport, the type of accommodation, its location, main features and category, inclusive
meals and itinerary.
Particular in the brochure have the status of implied warranties, unless the parties agree
otherwise.
ii. Before package starts: Organiser and retailers must provide information about matters
such as passport and visa requirements, health formalities and arrangements for security of
money paid and arrangements for repatriation
5. Content of the contract: The organiser or retailer must supply a written copy of the terms of
contract to the consumer before the contract is made
6. Transfer of bookings: The consumer has the right to transfer the package to a third party if he
gives reasonable notice, however he must pay the extra costs that it may involve.
7. Surcharges: Price variation clauses are not allowed but it can be accepted in case of variations due
to changes in the cost of transportation, or dues, taxes or fees for services, such as landing taxes or
exchange rates. A price increase cannot be made within 30 days of departure.
8. Alteration of the terms: The organiser must inform the consumer in case of a significant alteration
of the terms of the contract, e.g. price, so the consumer can decide whether to cancel or accept
the change.
9. Significant proportion of services not provided: When after a departure a significant proportion of
the services contracted for are not provided, the organiser must make suitable alternative
arrangements for the consumer to continue the package, at no extra cost.
10. Liability for proper performance of the contract: The organiser and retailer will not be liable for the
proper performance of the contract if they can prove that the failure was attributable to:
i. the consumer himself; e.g. the consumer fails to be on time at the airport and missed the
flight
ii. third party unconnected with the services contracted for; or
iii. to unusual or unforeseeable circumstances beyond the control of the organizer or retailer
(known as force majeure)
11. Protection against insolvency: The organiser and retailer must provide evidence of security for the
refund of money paid over and for the repatriation of a consumer in the event of insolvency
12. Offences and enforcement: It is a defence for a defendant to show that he took all reasonable
steps and exercised due diligence to avoid committing a crime.
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CHAPTER 15
BUSINESS PROPERTY
GENERALLY
English law divides property into real and personal property. The distinction between them is mainly that
real property cannot be moved but personal property can. However some things which can be moved are
regarded as real property (called fixtures), while others that can be moved do not become part of the real
property to which they are attached (called fittings).
FIXTURE AND FITTINGS
Fixtures become part of the land itself; fittings do not.
If a piece of personal property is securely attached to the ground it is probably a fixture, but if the piece of
personal property was put on the land so that could be better enjoyed for itself, it is not a fixture.
However, if it was put on the land so that the land can be better enjoyed, then it is a fixture.
The importance of the concept of fixtures and fittings is that if you but a building (e.g. a house), the
transfer will include the fixtures to the buyer and they cannot be removed by the seller; on the other
hand, fittings can be removed by the seller.
Items which are considered fixtures:
- fitted carpets
- light fittings attached to the property
- curtains, blinds and pelmets specifically designed for the particular window
- towel rails, soap fittings, tap fittings and shower heads
- white goods fitted into standard-size holes and piped or wired in and aligned with and next to
each other so as to be part of the overall fitted kitchen.
In order to avoid misunderstanding, the Law Society’s National Protocol “Transaction” for the sale of
residential property requires a seller to complete fixtures from detailing those fixtures that are included in
the sale and those which are excluded.
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THE LEASE
A lease of land, e.g. rent of an office or house, is obviously an interest in land (or realty) but for historical
reasons it is regarded as personal property and not a real property.
PURE PERSONALTY (personal property) AND CHATTELS REAL
The word personalty is another name for Personal property. The word chattel is also used to describe
personal property.
Leasehold is when a building or house is allowed to be used in return for payment
Although leaseholds are regarded as personalty, they are over land and result in a person having use of
land, and so they are referred to as chattels real to distinguish them from pure personalty, such as for
instance, a watch, a mobile phone or computer.
PURE PERSONALTY – CHOSES IN POSSESION AND CHOSES IN ACTION
-Choses (things) in possession: Are things such as jewellery or furniture which are tangible objects and
have not only a money value but they can also be enjoyed by the person who owns them in a physical
way through the senses.
-Choses (things) in action: Are things which cannot be enjoyed by the person who owns them in a physical
way, but which nevertheless are worth money, examples are patents, copyrights, trademarks, shares,
cheques and the goodwill of a business.
EASEMENTS AND PROFITS
An Easement is a right either to do something, or to use something, over another person’s land.
Types of easements
- right of way
- right of light
- right of support
Right of way: An easement is a right given to another person or entity to trespass upon land that person
or entity does not own. Easements are used for roads, for example or given to utility companies for the
right to bury cables or access utility lines. Landlocked home owners sometimes pay for an easement to
cross the land of another.
The right to light: Generally speaking, a property owner cannot build a structure which would block their
neighbour's incoming flow of natural sunlight.
Once established, then people can use the easement to protect their rights.
Right to support from other buildings: when a house or business premises are attaché to other property,
as which a semi-detached house, one property needs the support of the other.
Criteria for an easement
Rules for establishing a new easement:
1. There must be a dominant tenement and a servient tenement – i.e. the right is enjoyed over
servient tenement for the benefit of the dominant tenement. The two pieces of land must exist
and be identified before an easement can be granted
2. The two tenements must be owned by different people – this is because an easement is a right
exercised over another’s land and cannot exist over one’s own land
3. The easement must accommodate the dominant tenement
4. The Easement must lie in grant – i.e. must be capable of being granted by Deed.
Legal or equitable:An easement can be legal or equitable. This is an important point. If the easement is legal, it can
be overriding under the Law of Property Act 1925 s70(1)(a) ("LPA") and therefore binding on a
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purchaser of the property. If the land is unregistered then a notice must be put on the charges
register in order for the easement to be binding on the purchaser.
In short, when a person has an easement, the person will want know that the easement will
endure.
The Acquisition of Easements
Easement can be acquired by express grant/reservation, implied grant/reservation, prescription (long use)
or by statute.
It is important to note that as easement is a private right (a public right of way is a different matter with
which we shall not deal), enjoyed by owners or occupiers of land over neighbouring land.
Profits
Sometimes the right which exists over someone else’s land is to take something from the land. It may, for
example, be a right to fish or cut wood
SECURITIES
A person may raise a loan on the security of his property, whether real (say, his house) or personal (say,
his shareholding in a company), and the lender has certain rights over the property so used as a security if
the loan is not repaid.
LICENCE
A special permission to do something on, or with, somebody else’s property which, were it not for the
license, could be legally prevented or give rise to legal action in tort or trespass
Legislation has encouraged property owners to attempt to create licences rather than leases.
A licence can be ended on reasonable notice.
A licence will exist if the tenant does not have exclusive possession of the premises
Commercial uses of the licence
A main reason in business for the use of a licence rather than a tenancy is for short-term trading, for
example, during the Christmas period or during the summer holiday period, either for retailing or storage
purposes. The licence is also useful when a tenant want to occupy premises for a short period of time
before or after the beginning or the end of the lease respectively. In these cases the landlord will want to
maintain the income but does not want the tenant to acquire security of occupancy under the Landlord
and Tenant Act 1954.
ACCESS TO LAND
Access to Neighbouring Land Act 1992
The Act deals with a situation in which a person who owns a building which is badly in need of repair
cannot carry out necessary work on that building without entering on to his neighbour’s property, and he
cannot do this without committing a trespass because the neighbour will not consent to access. Under the
Act the owner of the building can apply to the court for what is called an ‘access order”, under which he
may enter the neighbouring property and carry out the necessary work on his own property.
If you need to be granted right of access, proceedings must be commenced in the County Court. The court
will grant an access order if it is satisfied that the preservation works are:
Reasonably necessary for the preservation of the relevant land; and
That they cannot be carried out, or would be very difficult to carry out, without entry onto the
adjoining land.
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Countryside and Rights of Way Act 2000
This Act also provides access to land by non-owners.
The main provisions are as follows:
- a right of access on foot for open air recreation to mountain, moor, heath, down and
registered common land (or open country)
- open map land will be shown on maps that will be available to the public
- exceptions: cultivated land, land covered by buildings, parks and gardens, mineral workings,
railway land and golf courses, aerodromes, race courses and development land
- landowners must not place misleading signs giving false information with the aim to confuse
walkers to use their right of access
- open country access may be closed for up to 28 days each year, but not during weekends or
holidays
o Limitation of access rights
No vehicles can be used (including bicycles), no craft can be sailed on waters and no organized games
played. Camping is also prohibited. If these activities are undertaken the persons concerned become
trespassers. The owner of the land is under a duty only to warn of dangers known to him.
RESTRICTIVE COVENANTS
A Covenant is a written and legally enforceable agreement or promise that is often a part of a contract or
deed, especially one to maintain the status quo of something or to do or not do something during the
term of the covenant.
The Restrictive covenants control the way in which a person uses his land.
There is public control of the use of land through Town and Country Planning Acts and there are also
building regulations to cover the way in which building are constructed and private control by means of
restrictive covenants.
A restrictive covenant is a clause in a deed or lease to real property that limits what the owner of the land
or lease can do with the property. Restrictive covenants allow surrounding property owners, who have
similar covenants in their deeds, to enforce the terms of the covenants in a court of law. They are
intended to enhance property values by controlling development.
Land developers typically use restrictive covenants when they subdivide property for residential
developments. A land developer, after platting the subdivision into lots, blocks, and streets, will impose
certain limitations on the use of the lots in the development.
LEGAL ESTATES IN LAND
The word “estate” is used because in theory at least the Queen owns all our land and we can only hold an
estate, as it is called, from her; in other words, part of what she owns. However, the Queen has now no
right to take back these estates from their owners.
There are three legal estates in land:
- Freehold
- Leasehold
- Commonhold
The freehold – (The fee simple absolute in possession)
The fee simple absolute in possession (or freehold) last indefinitely and the word “fee” means that the
land can be inherited; “simple” means that it can be passed on to anyone; absolute means that it must
not be what is called a modified fee.
If freehold land is sold or left by will to another person, the freehold will belong to the new person and he
can pass it on to another.
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The leasehold
A lease is an estate which lasts for a fixed time. it is usually given by a freehold owner to a tenant. it will
normally be for a fixed period, e.g. 21 years.
A lease for a fixed term comes to an end when the term finishes.
The commonhold
A commonhold is defined as a freehold with special characteristics – mainly that it is not necessary for the
property to have foundations in the land, which is a requirement for the ordinary freehold. This is why it is
often referred to colloquially as a “flying freehold”.
The owner of commonhold units such as commonhold flats will be members automatically of the
commonhold association that will own the common parts such as lifts, entrance halls, stairs, refuse areas,
gardens and driveways. The use and maintenance of the units will be governed by the commonhold
community statement (CCS): the CCS is the constitution of the commonhold land and must be registered
at Her Majesty Land Registry.
Most commonholds will be a block of flats but they could be shop units in a shopping mall.
Three major points about commonhold from a commercial aspect are:
a) to convert a leasehold to commonhold it will be necessary to obtain the consent of all the existing
leaseholders.
b) in the case of a residential commonhold, there will be a restriction on the commonholder letting
the premises
c) it is anticipated that commonhold residential developments will become, in time, more desirable
than leasehold properties
o Advantages of commonhold over leasehold
The commonhold legislation is concerned to overcome certain weaknesses in leasehold arrangements.
- A lease is granted for a fixed term whereas commonhold is permanent
- Leasehold have no standard management structure as the commonhold has the structures offered
can vary greatly in their quality
- In commonhold there is only one document, like the CCS (commonhold community statement),
which sets out the obligations and terms of ownership for all units; in leasehold there are various
leases increasing the risk of mistake with the documentation.
- Premature termination of a leasehold can cause problems in terms of dividend benefits; in
commonhold the agreement sets out the terms of termination
- A freehold is a perpetual state
- A lease is subject t penalty if there is a breach of covenant.
The main business application is that a freehold title in commonhold land is a better security than a lease
in terms of lending and borrowing.
o Setting up a commonhold
A commonhold may be established in two ways:
- It can be registered at the Land Registry with unit-holders where the identity of the unit-holders is
known.
- A person developing by building afresh or converting an empty building with the intention of selling off
the units will register a commonhold without unit-holders. The developer retains ownership after
registration for an interim period until the first unit is sold.
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o The nature of the property
Agricultural land cannot be registered as commonhold but an existing freehold or leasehold can be
converted. An existing freehold can be divided into parcels or plots and held under commonhold.
o Termination of commonhold
A commonhold arrangement is brought to an end by winding-up the commonhold association. The court
may make what is called a “succession order” under which a new commonhold association is substituted.
If no succession order is made, the commonhold arrangement ceases to exist and the properties will be
dealt with in accordance with the directions of the liquidator.
o Joint owners
A commonhold unit can be held by joint owners
THE RIGHTS AND DUTIES OF AN OCCUPIER OF LAND
The main right of a occupier of land is to seek an injunction against persons who trespass on his land or
alternatively, sue the trespasser for damages.
Duties to those who are not on the premises
1. Liability to persons on the highway: The occupier has a duty not to injure persons on the highway
by allowing a harmful situation to develop on his land; for example, when a factory releases smoke
or steam that goes across a road next to it and made it difficult to see.
2. Liability to persons on adjacent premises: An occupier has a duty not to injure persons on adjoining
premises by allowing harmful situation to develop on the land.
Duties to persons on the premises
An occupier of premises must take reasonable care to see that a visitor to his premises will be
reasonably safe. There is no duty to warn people of obvious dangers or to protect them from their
own foolish acts.
o Visitors – generally: These are individuals who enter the premises with the express permission of
the occupier, e.g. a plumber enters a house to repair a pipe.
Persons who enter premises to read, for example, a gas or electricity meter, or a policeman with a
search warrant, they have an implied permission.
o Children: Persons who occupy premises must take into account the fact that children may be less
careful than adults and therefore the duty of care owed to children is higher (even if the child
involved is a trespasser)
o Visitors who are experts: Persons who enter premises as part of their job, e.g. plumbers and
electricians, ought to have a better appreciation of the risks which may arise while they are doing
their work.
o Warning: If the occupier gives a warning of the danger, it will free him from liability, but only if the
warning makes the visitor safe.
o Exclusion of liability: An occupier may restrict of exclude his duty by agreement or otherwise.
There can be no exclusion of liability for death or personal injury on business premises.
o Faulty work of outside contractors: The 1957 Act allows an occupier to escape liability if the
damage results from the faulty work of an outside contractor (called also an independent
contractor) whose expertise is necessary to get the job done, provided the occupier behaved
reasonably in the selection of the contractor.
o Trespassers: The Occupiers Liability Act 1984 deals with the duty of an occupier to persons other
than his visitors and this includes trespassers and persons entering land without the consent of the
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owner, but in the exercise of a private right of way or public access. In these cases the occupier
owes a duty, if he is aware of the danger which exists, or has reasonable grounds to believe that it
exists.
INTELECTUAL PROPERTY AND ITS PROTECTION
Generally
Intellectual property is a term used to refer to a product or a process which is marketable and profitable
because it is unique.
The uniqueness is protected by:
- Patent law: Which gives protection to technological inventions
- Registered designs: Protects articles which are mass produced but distinguished from others by a
registered design which appears upon them.
- Copyright law: Protects, for example, rights in literary, artistic and musical works
- Trade mark and service marks: Protects the use of a particular mark if it is used in trade
PATENTS
o Application
An application for a patent can be made by the inventor of a new process or device and the grant of a
patent will be made to the inventor or to the person who bought the invention or idea before it was
patented.
o What can be patented?
It should not be assumed that every bright idea can be the subject of a patent. When application is made
for a patent certain essential criteria must be met. it must be shown that the applicant has an invention;
the invention must not be excluded; it must be new and not something that would be obvious to lots of
people.
o Exclusions
Certain items cannot be protected by a patent. Among these are discoveries, so that if you had been the
first person to develop the theory of gravity, you could not have patented the principle of gravity.
Computer programs (software) are generally protected by copyright, but exceptionally, if a program was
invented which enabled the computer to work faster, patent protection would be available for the
programmed computer and the method of operating it.
o Registration
Application for a patent is made to the Patent Office which is part of the Department for Innovation,
Universities & Skill and it deals with the granting of patents, registered trademarks and registered designs.
A patent last for 20 years but must in effect be renewed annually by payment of a fee to the Patent
Office. A patent cannot be extended beyond 20 years.
o Using patents
A patent does not necessarily give the patent holder a right to use his invention. The holder has the right
to control his invention, in the sense of having a total monopoly in the market or allowing other to market
the invention subject to conditions imposed by the patent holder, e.g. to receive a monetary
compensation.
o Infringement
A UK patient will, in general be infringed by making, using or selling something in the UK which is subject
to the patent without the owner’s consent.
Infringement of a patent is a matter for the civil rather than the criminal law and actions for an injunction,
damages, or an account of profits, are brought in the Patents Court.
The Patent Act 2004 among other things enables the Patent Office to settle disputes over patent rights
without the parties having to resort to litigation in the Patents Courts.
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o Employee’s inventions
An invention of an employee belongs to the employer if the employee arrives at it during his normal
employment or during a specific job outside his normal duties.
Inventions made during the employee’s spare time belong to the employee.
When the invention turns out to be of outstanding benefit to the employer the employee may be
awarded compensation to ensure that the employee gets a fair share of the benefit.
DESIGNS
Designs: The UK regime
What is meant by a design?
A design refers only to the features of shape, pattern or ornament applied to an article by an industrial
process which appeals to, and is judged solely by, looking at the article, e.g. the shape of a Coca-Cola
bottle.
o Registration
Design may be registered at the Patent Office (Designs Registry) under the Registered Designs Act 1949,
amended by the 1988 Act.
Registration gives the owner of the design protection for five years on this can be extended for four
further fees every five years, making 25 years in all.
o Infringement
The remedies for infringement are to sue the person responsible for damages and/or injunction, or an
account of profits made from the wrongful use of the design.
Unregistered design right
The Copyright, Designs and Patents Act 1988 abolishes copyright protection for drawings but gives instead
a new design right which is automatically acquired and does not require registration. It last for 10 years
from the date of first marketed or 15 years after it was first designed
o Infringement
The owner’s remedies for infringement are to apply to the court for damages, an injunction and for
delivery-up of infringing materials.
Designs: The European Community regime
European Community Registered Designs
The Regulations provide for a registrable design the right that applies across all EU states.
Application is made to the Office for Harmonisation of the Internal Market in Alicante (Spain). After
registration the design is published in the Community Designs Bulletin. However, applicants can ask for
the publication to be deferred for 30 months when it is felt that publication might otherwise adversely
affect the commercial success of the article.
The Office for Harmonisation of the Internal Market in its webpage (www.oami.europa.eu) defines the
following:
In law, a design is the outward appearance of a product or part of it, resulting from the lines,
contours, colours, shape, texture, materials and/or its ornamentation.
Why protect your designs? The design or shape of a product can be synonymous with the branding
and image of a company and can become an asset with increasing monetary value. If you do not
apply for protection others may benefit from your investments.
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Unregistered European Community Design Right:
The EU right last for only three years from when the design was first made available to the public in EU.
The EU right differs from the UK right since the latter lasts for 10 years and does not protect surface
ornamentation.
COPYRIGHT
The types of work eligible for copyright protection include a literary, dramatic, artistic or musical work,
the typographical arrangement of a published edition, a sound recording, a film, or a broadcast.
The Copyright, Designs and Patents Act 1988 does not require the owner of a copyright to register it or to
follow any formalities in respect of it. The protection is given by the Act to every original literary,
dramatic, musical and artistic work which was previously unpublished.
o Ownership and duration
The author of the work is the owner of the copyright. However, it may be given by a contract to the
publisher of the work, for example, a journalist writes an article but the copyright belongs to the
newspaper company.
Duration of Copyright and Rights in Performance Regulations 1995 passed in order to harmonise UK law
with that of the EU. The duration of the rights is during the time the author is alive plus 70 years after his
death.
o Infringement
The person infringing the copyright will usually have copied from the work and an action can be brought
for an injunction and/or damages or for an account of profits made from the wrongful use of the
copyright work.
- Press-cuttings: Is an extract or a passage selected from a larger work which is cut from a newspaper or
magazine. The Newspaper Licensing Agency (LNA) is a company formed to protect the intellectual
property rights of national and provincial newspaper relating to pre-cuttings.
o Exceptions
There are no statutory defences to copyright infringement. However, there are common law defences,
the principal being known as “non-derogation from grant”.
The doctrine of non-derogation from grants is a principle of the law of England and Wales. As the House
of Lords explained in British Leyland Motor Corp. v. Armstrong Patents Co., it states that a seller of realty
or goods is not permitted to take any action (such as bringing an infringement action) that will lessen the
value to the buyer of the thing sold.
Moral Rights
Moral rights in United Kingdom law are parts of copyright law that protect the personal interests of the
author of a copyrighted work, as well as the economic interests protected by other elements of copyright.
Under the 1988 Act authors are given certain moral rights in their work which exist quite independently of
copyright. The provide protection alongside a copyright and would be especially useful and necessary to
an author who had sold the copyright to someone else.
- Right to Paternity
- Right of Integrity
- Right against false attribution
- Right of privacy
The Right of Paternity (right to be identified)
This is the right of the author to be identified as the creator of a literary, dramatic, musical or artistic work
It includes also the right of the author if any adaptation is made, for example, a song that is modified the
original version. The right of paternity must be specifically claimed by the author.
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The exceptions to the right of paternity include the extract of works for the purpose of reporting current
events, incidental inclusion in a broadcast or cable television programme and extract and extracts for use
in examination papers. If the author consents to the publication of the work, such as encyclopaedias, or
dictionaries, he or she gives up the right to be mentioned in the work.
The right of integrity (right to object to derogative treatment)
Under this right the author may object to changes in his work by way of additions, deletions, alteration or
adaptations to amount to a distortion or interference with the work’s internal structure.
Right to claim against false attribution
The right to object to false attribution allows individuals to avoid being named on works they are not the
author of, and applies to literary, dramatic, musical or artistic works, as well as films.
It lasts for 20 years after the death of the person falsely attributed with authorship.
Right of private or domestic commissions (right of privacy)
Where an individual has a photograph or film commissioned for private use, and this is original enough to
be copyrighted, they hold a monopoly on broadcasting it, showing it publicly and issuing copies to the
public.
o Infringement
An author whose moral rights have been infringed is entitled to an injunction and damages. These moral
rights continue for the same length of time as copyright, the life of the author plus 70 years after his
death. A good example of enforcement of moral rights after the death of the author is when a son or
daughter made the beneficiary of an author (the parent) moral right after the death of the parent.
The Copyright and Trade Marks Act 2002 gives the police the power to obtain warrant to search property
from any business that they believe is using unlicensed software.
Semiconductors product topographies
This is a new form of intellectual property protection. It protects integrated circuit layout designs found in
computers, and in home equipment such as hi-fi, compact disc players, and food processors.
European Community directive in relation to semiconductors products:
Semiconductor technology is essential for the European Community's industrial development. The
development of such topographies requires the investment of considerable human, technical and
financial resources, while topographies of such products can be copied at a fraction of the cost needed
to develop them independently.
This Directive therefore aims to provide a clear legal framework for the protection of topographies of
semiconductor products and to remove the differences between the national laws in force in this field.
Computer software
The 1988 Act protects computer software in the same way as that of literary copyright.
The Copyright and Related Rights Regulations 2003
They make changes in the law by adding new provisions to the Copyright, Design and Patents Act 1988.
The main changes are:
- Performers now have the right to consent or prohibit a recording of their performance being made
available to the public by electronic transmission, including the Internet. These new rights are
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designed to assist the music and film industries, in particular, in the fight against widespread and
unauthorised downloading of their works on the Internet.
Copying for commercial research: The change abolishes of the fair dealing exception for
commercial research
Criticism, review and news reporting: The new regulations continue to allow fair dealing with
acknowledgment provided that the work has been made available to the public. Making available
to the public includes Internet publication.
Library copying: Copying works in libraries will be permitted only if required for non-commercial
purposes or private study
Anti-copying protection on CDs: Injunctions can be obtained against an Internet service provider if
he has actual knowledge that another person is using the service to infringe copyright.
TRADE MARKS
Trademarks serve to identify a particular business as the source of goods or services.
Types of trade marks
There are two types of trademarks:
- Unregistered or common law trade marks
- Registered trade marks
Common law trade mark: is any mark which has been so widely used with certain class of goods that it
can be shown that the public recognised good with such a mark as coming from the owner of the mark.
The remedy to restrict improper use is a passing-off action. In this category would come “Persil” and
“Polaroid”, which are household names in regard to the products concerned.
Registered trademark
o Trade Mark Act 1994.
The aim of the Act was the implementation of the EC Trade Mark Directive which harmonised the law of
trade mark throughout the EC.
Trade mark is any sign capable of being represented graphically which is capable of distinguishing goods
or services of one undertaking from those of others. It can include words (including personal names),
designs, letters, numerals or the shape of goods or their packaging. It is also expected to include sounds,
smells and colours.
Personal names are allowed to be registered as trademarks, but they must comply with section 3 of the
Act, which allows the refusal or registration where the so-called mark is not distinctive. It could therefore
be impossible, in the UK at least, to copyright as a trade mark the name “Diana”, though “Diana Queen of
Hearts” should be acceptable as should be “Diana Princess of Wales”.
o Registration: The mark must be distinctive
A mark that is not distinctive can be excluded from registration under the Trade Marks Act 1994.
Procedure for registration: Any person who claims to be the proprietor of a registrable trade mark and
wishes to register it must apply to the Registrar of Trade Marks giving a statement of the goods or
services and a representation of the mark. The Registrar may accept the mark absolutely or approve
registration subject to conditions or refuse to register the mark. When registration is acceptable, the
Registrar must advertise the application in the Trade Mark Journal. The mark will be registered and will be
valid for 10 years, renewable every 10 years.
o Enforcement
The effect of a registered trade mark is to give rights of exclusive use to the owner. The general remedy is
an injunction to prevent wrongful use. The Act contains a criminal offence with a maximum penalty of
unlimited fine and/or imprisonment for up to 10 years.
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o The European Community Trade Mark
The Community Trade Mark (CTM) is a single trade mark right which extends throughout the EU. The
system is available to any country which is a member of the EU. Applications are filed at any National
Trade Marks Registry such as the UK Registry in London or directly at the CTM office in Alicante, Spain.
The CTM office is known as the Office for Harmonisation in the Internal Market.
Advantages and disadvantages of the CTM system: A main advantage is that a single application allows a
trade mark to be registered throughout the EU at less cost and administrative effort than individual
applications to each country, making enforcement easier.
However, since CTM gives rights to so many countries it is likely that large numbers of conflicts will arise.
Trade mark and comparative advertising
Comparative advertising is an advertisement in which a particular product, or service, specifically
mentions a competitor by name for the express purpose of showing why the competitor is inferior to the
product naming it. Comparative advertising is an advertisement in which a particular product, or service,
specifically mentions a competitor by name for the express purpose of showing why the competitor is
inferior to the product naming it.
In the UK the use of competitors’ trademarks was no longer restricted for businesses competing within an
industry, provided that compliance of the conditions set out in the legislation were performed. This meant
that businesses are able to use the trademarks of other companies and trade names to distinguish the
relative merits of their own products and services over those of their competitors
Internet domain names
The Trade Mark Registry has issued guidelines on the treatment of Internet domain names. If it has a
distinctive element, it will be considered for acceptance as a trade mark in the electronic information
services class or in the software class.
INJURIOUS FALSEHOOD
A person is liable for injurious (or malicious) falsehood if he makes a statement about the goods of
another which is malicious and is intended to cause and does cause damage to the business of the other
person. Injurious falsehood is an aspect of defamation.
PASSING-OFF
Any person company or other organisation which carries on or proposes to carry on business under a
name calculated to deceive the public by confusion with the name of an existing concern, commits the
civil wrong of passing-off and will be restrained by injunction from doing so. Other examples of passing off
are the use of similar wrappings identification marks and description.
CONFIDENTIALITY: Employment
Breaches of duty of faithful service will sometimes be prevented by the court, so that a person who
retains secret processes in his memory can be restrained from using them to his employer’s disadvantage
without any contract in restraint of trade. The same applies to prevent an employee to copy names and
addresses of customers fur use after leaving his employment.
It is important and recommended for the employer to state clearly in the contract what is intended to
protect in order to differentiate with the knowledge that the employee has acquired and learned as part
of doing the job.
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DATA PROTECTION
Information is one of the most important resources that the business makes use of.
Information is collected and store on computer and processed automatically, although it can also be
processed manually in the form of paper.
The Data Protection Act 1998 provides provisions regarding the collection and processing of all forms of
information about people. The 1998 Act replaces the Data Protection Act 1984, which had been
introduced to adapt the 1960 legislation to the increasing use of computers and also to follow the 1981
European Community Data Protection Directive “for the protection of individuals with regard to
automatic processing of personal data”.
The Data Protection Act 1998 (DPA)
The Data Protection Act 1998 establishes a legal framework to regulate the storage and processing of
personal information.
The DPA gives rights to individuals, including the right to obtain details of information held about them
and a right to obtain compensation for damage suffered as the result of any contravention of the
requirements of DPA 1998 by a data controller.
The DPA gives rights to individuals, including the right to obtain details of information held about them
and a right to obtain compensation for damage suffered as the result of any contravention of the
requirements of the DPA 1998 by a data controller.
o Terminology used in the DPA 1998
Data: This term refers to:
- information which can be processed automatically, i.e. by computer, or
- information which is recorded as part of a relevant filing system, or
- information which does not fall within the two points above but which forms part of an “accessible
record”, e.g. health records, social services, housing, etc
Personal data: These are items of information about a living individual who can be identified. It includes
factual information about the person, expressions of opinion about him and any indication of the
intentions of the data controller in respect to that individual.
Data controller: This is a person who determines the purposes for which and the manner in which any
personal data is processed.
Data processor: Person who processes personal data on behalf of the data controller
Data subject: Is the person who is the subject of personal data.
Processing: Process of obtaining, recording or holding the information or data or carrying out operations
including: a) organisation, adaptation or alteration of the data; b) consultation or use of the data;
disclosure of the data; c) grouping, erasure or destruction of the data.
The data protection principles
1. Personal data shall be processed fairly and lawfully, and, in particular, shall not be processed
unless:
One of these conditions is met:
i. The data subject has given consent
ii. the data is necessary in relation to the contract
iii. the data is necessary to comply with a legal obligation
iv. the data is necessary to protect the data subject (i.e. matters of life, health, death)
v. the data is necessary for the administration of justice
vi. the data is necessary for the legitimate interest of the data controller
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In the case of sensitive personal data, at least one of these conditions is also met:
i. the data subject has given explicit consent
ii. data is needed for fulfilling of legal obligations in relation to employment
iii. data is necessary to protect vital interests of the data subject
iv. the processing of data is carried out by non-profit-organisation which exist for political,
philosophical, religious and trade union purposes, subject t certain requirements;
v. the data has already been made public by the data subject
vi. data is necessary for legal proceedings
vii. data is necessary for medical purposes
viii. the processing relates to racial or ethnic origins and the processing is necessary for equal
opportunities monitoring
2. Personal data shall be obtained only for lawful purposes and shall not be processed in any manner
incompatible with those purposes
3. Personal data shall be adequate, relevant and not excessive in relation to the purpose for which
they are processed
4. Personal data shall be accurate and, when necessary, kept up to date
5. Personal data processed for any purpose shall not be kept for longer than the necessary
6. Personal data shall be processed in accordance with the rights of data under the DPA
7. Appropriate measures shall be taken against unauthorised or unlawful processing of personal data
and against accidental loss of destruction
8. In case the data is transferred to a country outside the EU, that country must ensure an adequate
level of protection for the rights and freedoms of data subjects in relation to the personal data
Notification
The DPA introduces a new simpler notification system.
The data controller must provide the Information Commissioner the following information: Name and
address of the data controller, name of data controller representative, description of personal data that
will be processed, purpose of the processing of personal data, receiver of the data, security measures to
protect the data, countries where the data may be transferred.
The period of notification last for 1 year and notification the applicant must pay a fee.
It is an offence to process personal data without notification.
Information Commissioner
The Commissioner is under a duty to make an assessment of whether processing of personal data is being
carried out in compliance with the DPA, if so requested.
The Commissioner has the power to issue the following notices:
- Enforcement notice: requires the data controller to observe data protection principles
- Information notice: requires the data controller to provide information about DPA compliance
- Special Information notice: About the purpose of processing of the personal data
The Commissioner can apply to a judge for a warrant to enter and search premises when there is
suspicion that the data protection principles are being contravened.
Rights of data subject (the person subject of personal data)
The DPA 1998 gives the following rights:
1. Access to personal data: A data subject is entitled to be informed of whether a data controller
holds any data about him and to be supplied with a copy of such data.
2. Right to prevent processing likely to cause damage or distress
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3. The right to prevent processing for direct marketing
4. Rights in relation to automatic decision-making: To ensure that no decision which significantly
affects him is based solely on the processing of his personal data by automatic means
5. Right to compensation for damage and distress caused by a breach of the DPA 1998
6. The right of rectification, blocking, erasure and destruction when data is inaccurate or contains
expressions of opinion based on inaccurate data
7. The right to request the Information Commissioner to assess whether the personal data is
processed in compliance with the DPA 1998
Exemptions
The nature and extent of exemptions is a complex matter and the guidance produced by the
Information Commissioner should be consulted.
Primary exemptions are more likely to be claimed and include data related to: Safeguarding national
security; prevention and detection of crime; taxation matters; health, education and social work;
regulatory activity of certain bodies; special purposes covering journalism, artistic and literary
purposes; historical or statistical research.
There are also “miscellaneous” exemptions with a wider ranging in scope.
Offences under the DPA 1998
The DPA 1998 creates a number of criminal offences. These include processing personal data without
complying with the notification requirements, unlawfully obtaining or disclosing personal data without
the consent of the data controller and unlawfully selling personal data.
The Act provides the Secretary of State the power to increase the maximum penalties for an offence
The Act also gives the information Commissioner new powers to impose monetary penalties up to
£500,000 on data controllers for serious breaches of the DPA.
COMPUTER MISUSE
The Computer Misuse Act 1990 creates three criminal offences to deal with the misuse of computers.
The offences are as follows:
1. Unauthorised access to computer material: This basic offence is designed to criminalise the
activities of: - Outside “hackers” who obtain access to computers using the public
telecommunication system and – Insiders who knowingly exceed the limits of their authority.
2. Unauthorised access with intent to commit or facilitate commission of further offences: These
serious crimes would include theft and blackmail. This offence would cover a “hacker” who
obtains unauthorised access to a computer in order to hijack funds in the course of an
electronic funds transfer. This offence has a maximum penalty of five years imprisonment.
3. Unauthorised modification of computer material: This offence is designed to cover
interference with computer programs and data such as the deletion or alteration of material or
the introduction of computer viruses
The Act also makes provision for extradition (to send someone who is wanted for a crime back to the
country where the crime was committed, so they can be judged in a law court there) for these offences.
FREEDOM OF INFORMATION
The Freedom of Information Act 2000 requires every public authority to put in place a publication scheme
to be approved by the Information Commissioner which identifies the information available from the
authority and how it can be obtained. Public authorities include central and local government, police and
prosecution services, the health service and education organisations, e.g. colleges and universities.
The Information Commissioner may issue decision notices, information notices or enforcement notices.
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CHAPTER 16
EMPLOYING LABOUR
EMPLOYING LABOUR
In this chapter we are concerned with employment law. This is based upon and deals with the relationship
of employer and employee.
Employer and employees
If A is an employee, he or she will have been selected by B, (the employer); A will usually work full-time or
part time for B under a degree of supervision for a wage or salary.
Also, if A is an employee, B will deduct income tax from A’s pay under PAYE (pay as your earn) agreement.
B will also make social security contributions for A and will often provide a pension scheme which A can
join.
The control test
In times past, an employer was liable to pay damages to those injured by his employee if those injuries
took place during the course of the employee’s work. This is called an employer’s vicarious liability.
A person was not vicarious liable for injury caused to others by a self-employed (or independent)
contractor who was doing work for him. Obviously, then it was necessary to find a test to decide whether
A was, or not, an employee of B. The earliest test was called “the control test”.
Nowadays it is not normally necessary to use this test because we have much more evidence of the
relationship. However, sometimes it is necessary to decide whether A, who is employed by B, has been
temporary transferred to another person, C, so that C (the temporary employer) is liable vicariously for
the injuries caused to a person.
o Shareholders and directors
The shareholders and directors of companies may be regarded as employees when there is a written
contract of employment.
The organization test
A test called the “organization or integration” test was developed because the control test was not really
suitable for employees who were highly skilled.
In those cases the employer could convince the court in his defence that he did not have the necessary
control of the skilled person.
INDEPENDENT CONTRACTORS – SELF EMPLOYEMENT
This includes what is called a contract of services.
Particular cases examined
There is no big difficulty in determine if a person is employed or self-employed. For example, factory
employees, office secretarial staff and agricultural workers are clearly employees, Garage proprietors,
house-builders and dry cleaners are contractors.
Contract of service or contract for services? – Why distinguish?
First of all, because of the existence of vicarious liability of an employer we need to define if the it is a
contract of service or a contract for services. Second, the rights and remedies provided by employment
legislation are available to an employee, but not all of them are available to the self-employed.
The terms:
- “contract of service” relates to a person in employment (as in the case of a domestic servant who
is described as being “in service”)
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“contract for services” relates to a person who is self-employed and who provides services to
clients.
The term “contract of service” is, however, referred to in the employment and tax legislation. A person
who works under a contract of service is:
- an “employee” for payroll purposes, and
- an “employee” for employment rights purposes, and
- a “worker” for other employment rights purposes.
In contrast, a person who works under a contract for services, i.e. a self-employed person, is neither an
employee nor a worker. There is no requirement for an employer to put such a person on the payroll;
rather payment may be made on invoice. There is no entitlement to any of the employment rights
available to employees and workers.
How, then, are these two terms to be distinguished? Traditionally, there are two key tests to identify an
employee, i.e. a person who works under a “contract of service”. These are:
“mutuality of obligation”, i.e. both parties to the contract have obligations to each other,
the employee to perform work as directed, the employer to pay for the work performed
the “degree of control” exercised by the employer over the work performed by the
employee.
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Rights of non-employees
Certain statutory rights are given to persons who are not employees. These are some examples:
- Rights in respect of racial and sex discrimination are enjoyed by job applicants
- Trade union membership they have rights not to be refused to a job because of his participation in
an organization that advocates for the worker’s rights
- Rights of contract workers: A contract worker is one who is employed by a third party, such as an
agency. A claim against employers could be mad, for example, by a temporary secretary who is
turned away or treated in hostile manner on grounds of colour or disability or who is victim of
sexual harassment.
THE CONTRACT OF EMPLOYEMENT
Generally
The ordinary principles of the law of contract apply. So, in a contract of employment there must be an
offer and an acceptance, which is in effect the agreement. There must also be an intention to create legal
relations, consideration, and capacity, together with proper consent by the parties, that is, no mistake,
misrepresentation, duress or undue influence. In addition the contract must not be illegal.
Fraud and illegality
The general rule is that the courts and employment tribunals will not do anything to enforce either party’s
right under a contract which is illegal.
A party to a contract may also be unable to enforce the contract if it has been entered into as a result of
the party’s fraud.
Written particulars
A particulars is information and details about someone or something.
A contract of employment does not require any written formalities and can be made orally. However,
certain written particulars of it are required to be given to the employee by the Employment Rights Act
1996. Some employers do try to avoid the application of expensive employment rights by using “zero
hours” arrangements. A zero-hour contract (or zero-hours contract) is a recent type of contract under
which an employer does not guarantee the employee a fixed number of hours per week. Rather, the
employee is expected to be on-call and receive compensation only for hours worked
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These particulars must be given to all employees within two months of starting work.
o Contents – generally
The statement must contain the following information:
1. The names of the employer and the employee
2. The date when the employment began: This is important if it becomes necessary to decide what
period of notice is to be given. In addition, the length of the employment affects the period
necessary to make certain claims. Unfair dismissal requires one year of continuous service.
3. Whether the employment counts as a period of continuous employment with a previous
employment and the date of commencement of the previous employment where this is so: This is
important because of the rights of an employee to complain of unfair dismissal or to claim a
redundancy payment.
Situations of continuous employment despite a change of employer are:
a) A transfer between associated employers
b) A sale of the business in which the employee was employed to another person
c) A change in the partners when a person is employed by a partnership
d) A succession of contracts between the same parties is regarded as continuous
o Contents – terms of employment
The written particulars must set out the following terms of the employment:
1. The scale and method of payment
2. The frequency of payments (monthly, weekly)
3. Number of working hours
4. Holiday entitlement
5. Sick pay and injury arrangements
6. Pension scheme
7. Length of notice to be given or received by the employee
8. The job title
9. Other extra information:
a. Duration of temporary contracts
b. Work location
c. Collective agreements affecting the job
d. Especial arrangements when the work is outside of UK for more than 1 month
e. Disciplinary procedures (number of warnings before suspension) and Grievance procedures
o Changes in the particulars
Changes must be given to the employee in writing as soon as possible and in any case not later than one
month after the change.
o Terms of employment – collective agreements
If the terms of the employment are changed by a collective agreement with a trade union the terms of
the job can be changed without the employee’s consent
o Failure to comply with the obligation to give written particulars
Employment Rights Act 1996 provides that if an employer fails to give written particulars in the time scale
required or fails to notify changes in the terms of the contract the employee can go to an employment
tribunal. If a statement is given but the employee thinks it is not complete, then either the employee or
the employer can go to a tribunal to decide which of them is right.
Written particulars are a right of the employee and therefore they must be given whether the employee
asks for them or not.
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Under the Employment Act 2002 money compensation can be awarded where there is a claim, e.g. unfair
dismissal and the written particulars are incomplete, inaccurate or non-existent.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006)
o A relevant transfer
A business transfer which will be affected by the regulations is a transfer of an undertaking or business to
another person when there is a transfer of an economic entity which retains its identity.
Employees will be protected in a situation of service is subcontracted or passed from one contractor to
another or is brought back in-house.
Comment:
- TUPE 2006 does not apply when there is no identifiable group of employees
- TUPE could apply and lead to the transfer of employees even though the transferee intends to
carry out the service in a different way, e.g. by computerisation. If the transferred staffs do not
have the necessary skills, the transferee may choose to retrain them or make them redundant.
- TUPE 2006 does not specifically exclude professional business services.
o Effect of a relevant transfer on contracts of employment
- The transfer of employees: Employees, who are employed by the former operator of the business,
will be transferred to the new operator of the business.
- Variation of contracts of employment: TUPE 2006 allows employees to agree to variations in their
terms of employment. However this is only when the variation is not connected with the transfer.
The variations cannot be effectively made merely to make the business being transferred more
attractive to the buyer, and that the consent of the workers must be freely given even when there
are economic, technical or organisational reasons.
o Workers abroad
TUPE 1981 excluded workers abroad from its provisions
o Giving information to the new employer
The transferor must give information to the new operator in written or readily accessible form in
regard to the identities of those employees form in regard to the identities of those employees who
are transferring and their employment rights and liabilities.
Specifically the information to be supplied is:
- the identities and ages of all employees
- the statement of terms and conditions of employees
- details of any disciplinary proceedings against the employees
- details of any collective agreement
When this information is not supplied, the transferee will be able to bring a tribunal claim against the
transferor.
o Duty to inform and consult representatives
The employees can ask their representatives about the consequences of the transfer; therefore the
employer must inform those representatives of:
- the fact that a transfer is to take place
- the legal, economic and social implications of it for employees affected
- the measures he or she will take in relation to any affected employee
When an independent trade union is recognised by the employer, “appropriate representatives” are
representatives of the union.
o Failure to inform and consult
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Failure to inform and consult properly can lead to a claim against the transferor and transferee of the
business
o Insolvent employers
Transfer of debts. Some of the transferor’s debts will not be transferred to the transferee; those debts
include: redundancy payment, arrears to pay, compensation of unfair dismissal, etc. In practice, these
debts will often be met by the National Insurance Fund.
Variation of employment contracts: TUPE 2006 provides provisions to change the terms and conditions of
employment when the transferor is insolvent. The changes must be agreed by the transferor or transferee
with the employee representative.
o Pensions
The regulations provide that when an employee had access to an occupational pension scheme with
employer contributions they will be entitled to the benefit of a new pension scheme post-transfer.
Health and safety
The Health and Safety at Work Act 1974 states that an employer must prepare and revise, when
necessary, a statement of his policy in regard to the health and safety at work of his employees, and
arrangements for carrying out the policy.
Exemption from the written particulars requirements
These exemptions include:
- Employees with fully written contracts containing all the necessary terms
- When the employee is employed for a specific job, e.g. to clear a backlog of office work, which is
not expected to last more than one month.
Employment particulars: changes effected by the Employment Act 2002
The following sections of the 2002 Act make amendments to relevant sections of the Employment Rights
Act 1996.
- All stages of the disciplinary and dismissal procedures must be set out in the written statement,
including those employers with less than 20 employees.
- Section 37 allows particulars included in a contract of employment or letter of engagement to
form all or part of the written particulars
- Section 38 provides for tribunals t award monetary compensation to an employee when it appears
that the particular received are incomplete or inaccurate, for example, in case of unfair dismissal.
THE CONTRACT OF EMPLOYEMENT: SPECIAL SITUATIONS
Part-timers and those on fixed-term contracts
The full range of employment rights are available to part-time workers not employed on “zero-hours”
arrangements.
o Part-timers: main effects of the regulations
1. Pay: Part-time employees should receive the same hourly rate of pay as a comparable fulltime worker.
2. Overtime: Right to receive the same hourly rate for overtime once they have worked more
than full-time hours.
3. Contractual sick pay and maternity pay: Same benefits as full-time workers
4. Occupational pensions and other benefits: Employers should not make any discrimination
in terms of access to pension schemes
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5. Redundancy: Part-time workers must not be treated less favourable in regard to selection
for redundancy
o Fixed-term workers: main effects of the regulations
The Fixed-term Employees Regulations 2002 apply. The main points are set out below:
1. Definition: A fixed-term contract will generally be a contract of employment that terminates at the
end of a specified term, fixed in advance or automatically on completion of a particular task.
2. Comparators: When both individuals must be employed by the same employer and be engaged in
the same or similar work having similar level or qualifications and skills
3. Less favourable treatment: It is regarded to levels of pay, pension and other benefits such as
bonuses.
4. Written statements: A fixed-term employee who feels that he has been treated less favourably has
a right to ask the employer for a written statement of reason.
5. A tribunal claim: A fixed-term employee who feels that he has been treated less favourably may
present a claim to an employment tribunal after having exhausted all internal procedures
6. Vacancies for permanent employment: The fixed-term employee must be informed about
availability of permanent vacancies
7. Transfer to permanent employment: When an employee is on a fixed-term contract that has been
renewed on a new fixed-term contract, and when the employee has been employed for at least
four years, the renewal of the contract will take effect as a permanent contract.
8. Dismissal and detriment: Dismissal when the regulations have been infringed is automatically
unfair
9. Remedies: A tribunal may order compensation or recommend that reasonable action be taken to
remove or reduce the less favourable treatment.
RIGHTS AND DUTIES OF THE PARTIES TO THE CONTRACT
The duties of an employer and an employee come from common law and Act of Parliament.
One of the major duties of an employer is to comply with the Working Time Regulations.
DUTIES OF AN EMPLOYER
- To provide remuneration
- To give holidays and holiday pay
- To provide sick pay
- To provide pay during suspension
- To make payments during lay-off - guarantee payment
- To pay during statutory time off
1) To provide remuneration
In business organisations the duty to the employer to pay his employees and the rate or amount or pay
are decided as follows;
- By the contract of employment; or
- By the terms of what is called a collective agreement made between a trade union and the
employer
National minimum wages (NMW)
The Act and connected regulations provide workers with a floor below which their wages will not
fall, regardless of the size of the employer’s business
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a) Entitlement: Those entitled must be workers who work in the UK under a contract of employment.
The self employed and voluntary workers are excluded. Those under 16 years of age are also
excluded.
b) Owner-managed business: A person who works as a director of his company but takes no salary
(or very little), relying on dividends as income, falls foul of the Act and must receive the minimum
wage or adjust the hours worked to comply.
c) Level: The national Minimum Wage rates (October 2010);
Workers aged 22 and over: £6 per hour
Workers aged 18-21: £5 per hour
Workers aged 16-17: £3.6 per hour
Apprentices <19 yrs old or in the first year of apprenticeship: £ 2.5per hour
d) Increase in level: This will depend upon the advice of the Low Pay Commission and the economic
situation and is not automatic
e) What counts as remuneration?: The regulation deal with a number of instances of what does and
does not count towards discharging an employer’s obligation to pay the NMW. Examples of things
which do not count are: advances of wages, pensions, redundancy payments and benefits.
Living accommodation at a fairly low limit is excluded. Sick payment, holiday pay, maternity pay
and guarantee payment, service charges, tips are not included.
Allowable deductions: a checklist
- Penalties imposed upon an employee for misconduct previously agreed in the contract
- Deduction to repay loans, wages advances or purchase of share
- Deduction to repay any accidental overpayment of wages
- Deductions of payments made by the employer for goods or services freely purchased
- Deductions for accommodation
The employer is not allowed to deduct cost of items related to the worker’s employment, e.g. the
uniform.
Enforcement
The Secretary of State appoints enforcement officers and HMRC (Her Majesty Revenue & Custom) is
responsible for enforcement by checking employer’s records to ensure compliance.
- Information supplied by worker and employer: The enforcement officer is allowed to disclose
information obtained from the employer to the worker when it relates t his case and similarly to
disclose information obtained from the worker to the employer.
- Withdrawal and replacement of enforcement and penalty notices: Enforcement officers may
withdraw and replace enforcement notices
- Penalties: Organisations that refuse to pay the NMW face fines of twice the NMW, a day for each
employee. Workers have the right to recover the difference between what they have been paid
and the NMW.
HMRC officers have power to issue enforcement notices if they find underpayment.
National Minimum Wage (Enforcement notices) Act 2003 ensures that HMRC can issue
enforcement notices to require the payment of the NMW to former employees as well as current
employees
- Action by employees: A worker who is dismissed for asking for the NMW can claim unfair dismissal
- Records: An employer has to keep records “sufficient to establish that he is remunerating the
worker at a rate at least equal to the national minimum wage.
- Access to tax records: Employment Relations Act 1999 allows information obtained by a tax
inspector to be supplied
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-
-
Corporate offences: When a relevant offence is committed by a company, its directors and other
officers are jointly responsible with the company when they have consented to or connived at the
offence or been neglectful in regard to it.
Contracting out: It is void any agreement that prevents a worker to make complaint regarding the
application of the Act’s provisions
Victimisation and unfair dismissal: workers have the right not to be subject to any detriment, e.g.
failure to promotions, because they have asserted right under the 1998 Act.
Employees who are dismissed or selected for redundancy for similarly asserting rights will be
regarded as unfairly dismissed.
Capability and the minimum wage: In a judicial case a textile company was entitled to dismiss a
worker who had not performed sufficient productivity to match his minimum wage.
Impact of NMW on employment awards
The Employment Appeal Tribunal (EAT) has ruled that an employment tribunal has a duty to consider and
apply the NMW when determining a week’s pay under the Employment Rights Act 1996 and calculating
the net rate of pay for the loss of earnings element of the compensatory award under the same Act.
Low Pay Commission
The Commission has the role of monitoring and evaluating the impact of the NMW. The Commission also
considers whether there is a case for increasing the NMW and includes earnings growth in its assessment
as well as inflation and the effect on employment.
2) To give holidays and holiday pay
The rights and duties of the parties here depend upon what the contract of employment says or what the
terms of a collective agreement with a trade union are. However, whatever these agreements state the
worker has right to paid holidays although the contract agreement can arrange the way of taking them.
3) To give holidays and holiday pay
The rights and duties of the parties here depend upon what the contract of employment says or what the
terms of a collective agreement with a trade union are. However, whatever these agreements state the
worker has right to paid holidays although the contract agreement can arrange the way of taking them.
4) To provide sick pay
Entitlement to sick pay must be dealt with by the written particulars. An employer has no general duty to
provide sick pay from his own funds. There is no implied term in the contract of service that an employee
is entitled to sick pay.
Employers were required to provide what is called Statutory Sick Pay (SSP) on behalf of the government.
The social Security Administration Act 1992 deals with the administration of statutory sick pay and
statutory maternity pay.
When an employee falls sick he or she gets a weekly amount form the employer and not from the
Department of Social Security.
The government introduced new regulations under which all employers recover SSP under the
“percentage threshold scheme”. Under this scheme the employer takes the figure of NIC (National
Insurance Contribution) due in any tax month. If there is more than 13% of the NIC figure, the employer
recovers the excess.
Exceptions
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The person claiming for SSP must be an employee and in all cases the claimant must have earned the
qualifying level (currently £97 a week).
SSP is paid by an employer fur up to 28 weeks of incapacity for work during a three year period. The first
three days of sickness are waiting days and no SSP payable. However, as regards the second and
subsequent periods of sickness, if the employee has not been back at work following the first period of
sickness for eight weeks or more the periods are linked and there are no waiting days, SSP beginning on
the first day of sickness in the second or subsequent period.
Enforcement
If an employee is dissatisfied with an employer’s decision in regard to entitlement to SSP or the employer
has failed to make a decision, the employee can write to HMRC asking for a decision on entitlement.
5) To provide pay during suspension
On medical grounds: Under the ERA (Employment Rights Act) 1996 an employee who is suspended from
work not because he is ill but because he might become ill if he continues at work, since he is currently
engaged on an industrial process which involves a potential hazard to his health, is entitled to be paid his
normal wages while he is suspended for up to 26 weeks. This could occur, for example, where there was a
leak of radioactivity at the workplace.
On disciplinary grounds: There is no implied term to suspend an employee for disciplinary reasons without
pay unless there is an express term of the contract which is agreed by the employee and be written in the
particulars of the job.
There is no implied contractual term allowing an employer to suspend or fine a worker for poor quality
work, unless an express term is included in the contract.
On maternity grounds: The ERA 1996 provides for suspension on maternity grounds. The ERA applies
suspension on the ground of pregnancy, recent childbirth or breastfeeding while the health hazard
continues. The employee may complain to a tribunal if she is not offered available and suitable alternative
work
Employment Act 2008
The key proposal of the Employment Act intended to:
- Improve the effectiveness of employment law to the benefit of employer, trade unions, individuals
and the public sector
- Bring together both elements of the government’s employment relations strategy; increasing
protection fro vulnerable workers and lightening the load for law-abiding business.
- Promote compliance and help to ensure a level playing field for law-abiding business
It also seeks to clarify and strengthen the enforcement framework for the National Minimum Wage and
employment agency standards which cover voluntary workers who receive no monetary payment or
benefit in kind.
Family-friendly provisions
These provisions include:
- Antenatal care
- Maternity leave and pay
- Paternity leave
- Maternity allowance
- Pregnancy dismissals
- Adoption leave
- Unpaid parental leave
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-
Time off for dependants
Flexible working
o Antenatal care
A pregnant employee who has, on the advice of her doctor, midwife or health visitor, made an
appointment to get antenatal care must have time off to keep it and she must also be paid.
o Maternity leave and pay
Compulsory maternity leave
The employer of a woman is prohibited fro allowing her to return to work during the two weeks from the
day the child is born. An employer who contravenes this requirement commits a criminal offence.
Statutory Maternity Pay administration
Employers can recover 92% of the amount paid out by way of Statutory Maternity Pay (SMP) and small
employers can recover 100%
o Paternity leave
Male and female employees have a right t be away from work on paid paternity leave.
The right is available to employees who:
- have continuous service with the employer of 26 weeks
- have responsibility for bringing up the child
- are either the biological father of the child or are married to or are the partner of the child’s
mother
Leave is for two weeks and the statutory paternity pay is at the weekly rate of the lesser of £125 or 90% of
normal earnings.
Employers can recover 92% of the NI (National Insurance) payments.
Employees can take paternity leave in addition to unpaid parental leave of 13 weeks.
o Maternity allowance
Those who do not qualify for statutory maternity pay may be able to get maternity allowance. The
provisions are as follows:
- Amount of benefit: A successful claimant will receive weekly rate of the lesser of £125 or 90% of
average earnings.
- Payment period: Maternity allowance is paid for up to 39 weeks
- Service requirement: to qualify for maternity allowance the claimant’s average weekly earning
must be at least equal to the maternity allowance threshold which is £30 a week
o Pregnancy dismissals
Employment Right Act 1996 states that it is automatically unfair to dismiss a woman for a reason related
to her pregnancy, maternity or maternity leave.
o Adoption leave
Only married couples or one person in an unmarried relationship can adopt. A married couple who adopt
can choose which of them takes adoption leave and which takes paternity leave. The partner of a person
who adopts can take only paternity leave.
o Unpaid parental leave
Parental leave allows workers to take pre-arranged time off to care for their children. Time off for
dependant covers unforeseen emergencies involving someone dependent on the employee, such as
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illness or injury, breakdown of care arrangements or an incident at school. The maximum allowable
period of parental leave in the UK following is three months.
The law establishes the right for parents to take up time off without losing employment rights.
Government guidelines encourage employers to negotiate their own parental leave arrangements. Where
this is not possible, a Fall Back scheme has been included in the regulations
The fallback scheme
Under the Fallback scheme:
- Parental leave must be taken in blocks of one week except for children entitled to Disability Living
Allowance, where leave can be taken in periods of less than a week.
- No more than four weeks’ parental leave can be taken in any one year by each parent, for each child.
- Age of the child: Parental leave only applies up to the child’s fifth birthday under the regulations, but
the need for childcare does not stop when a child starts school.
- Evidence: The employer is entitled to require evidence of the employee’s legal responsibility for the
child as well as evidence of the child’s age
- Notice: The parent must give 21 days’ notice before taking parental leave, or, where that is not
reasonably practicable, as soon as is reasonably practicable
- An employer can postpone your parental leave for up to six months if they consider that your absence
would unduly disrupt the business. Leave requested for the period immediately after the birth of a
child, or their placement in adoption, cannot be postponed.
- Right to return to the same job: Parental leave regulations state that an employee is guaranteed the
right to return to the same job only if the leave is for four weeks or less. Employees taking longer leave
are entitled to return to the same job, but if that is not reasonably practicable, to a similar job which
has the same or better status and terms and conditions.
- Contact with the employer: The law does not require employers to maintain contact with employees
who are on parental leave
- Records: The regulation do not require the keeping of records but it will be impossible for employers
to avoid keeping them for accounting purposes to show that leave has been unpaid and that the rights
are not being abused
Difference between maternity leave and parental leave
Maternity Leave is leave that is given to mothers. Parental Leave includes Maternity, Paternity as well as
adoption leave that may be utilised by any parent. Maternity leave for the mother is a generally accepted
norm although the duration for this varies from 8 weeks to 52 weeks depending on the country and the
local laws. This is generally paid leave and in case it needs to be extended can be done as unpaid leave.
The parental leave for the father is only available in a few countries. Mostly the paid leave is only for a
few days.
The maternity leave is essentially for the natural mother of the baby and starts either immediately before
or after the birth of the baby. This is generally allowed in a single stretch. The parental leave however, can
even be granted to Father, Mother or even to the grandparents in some countries and these benefits may
even extend to adoption or adopted children. This need not be taken immediately after the birth and can
also be utilized for family events relating to the immediate family.
The maternity leave is generally incorporated in the national law for the workers due to the medical
requirements of the mother immediately after pregnancy whereas the Parental leave is generally allowed
on compassionate grounds. Mostly parental leave is granted by the bigger corporations as a way to attract
good workers and keep down the attrition rates
Summary
1. Maternity leave granted to Mothers while Parental leave can be for Fathers also.
2. Maternity leave is generally paid leave for the entire duration however the Parental leave can be
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combination of paid and unpaid leave.
3. Maternity leave essentially for Natural Mothers while Parental can be for Fathers and also
Grandparents and can even extend to adopted children.
4. Maternity leave starts immediately after the birth whereas the parental leave may be for family events.
5. Maternity Leave is generally ensured by the law however Parental Leave is still not covered by law in
most countries.
6. Maternity leave is generally accepted by the industry while there still are critics for the Parental Leave.
o Time off for dependants
In many cases you have the right to take time off work to deal with an emergency involving someone who
depends on you (sometimes called compassionate leave). You cannot be penalised by your employer for
taking the time off, providing your reasons for taking it are genuine.
ERA 1996 applies. It entitles every employee to take a reasonable amount of time off work “to take action
that is necessary”:
- to help when a dependant gives birth, falls ill or is assaulted
- to make longer term arrangement for the care of a sick or injured dependant
- as a result of dependant’s deaths
- to cope when the arrangement for caring for a dependant break down
- to deal with an unexpected incident that involves a dependant child during school activities
- Dependants: this could be your husband, wife, partner, child, parent, or anyone living in your household
as a member of the family
- Amount of time off: There is no limit. In every case the right is limited to the amount of time that is
reasonable in the circumstances. There's no limit to the number of times you can take time off for
dependants, provided it's for real emergencies. If your employer feels that you are taking more time off
than they can cope with, they should warn you of this.
- Being paid for your time off: Your employer doesn't have to pay you for time off for dependants but they
may choose to do so. You can check your contract of employment to see if there's a policy about this.
- Notification: The right only applies if the employee as soon as is reasonably practicable tells the
employer why he or she is absent.
- Enforcing the right: The ERA 1996 gives rights to employees to complain to an employment tribunal
when the employer has unreasonably refused to allow time off
- Victimisation and dismissal: If you are dismissed, made redundant or penalised because of the right, or if
you are refused reasonable time off, you can complain to an Employment Tribunal. If your complaint is
successful they may make an order for you to receive compensation, be re-employed or re-instated.
o Flexible working
Employers are under a duty to consider applications for flexible working from employees who are parents
of children under age six or disabled children under 17. Changes in hours and times of work may be
applied for.
Qualifying conditions for employees are:
- Continuous employment with the employer for more than 26 weeks. The purpose had to be to
care for a child, but since 2007 was extended to the spouse or to a civil partner
- The employee must apply well in advance and the request must be in writing
Under specific grounds the employer may refuse the application made by the employee
What is flexible working?
Government’s guidance gives the following examples: annualised hours, compressed hours, term-time
working, flexitime, working from home, job sharing, self-rostering, shift working and spread over a period
of time hours (staggered hours)
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Employment Relation Act 2004: additional flexible working rights: The dismissal of an employee for
exercising flexible working rights will be automatically unfair; also redundancy will be unfair if the reason
for selecting the employee for redundancy was that he or she was exercising flexible working rights.
Flexible working and discrimination
Employers should ensure that, in refusing a request for flexible hours they are not discrimination on
grounds of sex, race, disability, sexual orientation, religion or belief or age either directly or indirectly.
6) To make payments during lay-off - guarantee payment
Lay-off: To avoid difficulty the right of the employer to lay off employees without pay because of lack of
work should be made an express term of the contract of employment. However the contract cannot have
clauses which are worse for the employee than the basic statutory rights which provide for guarantee
payments.
Guarantee payments: The ERA 1996 provides that employees with more than four weeks of service are
entitled to a guarantee payment up to a maximum sum, which is currently £21 per day, if they are not
provided with work on a normal working day, e.g. because of a power cut
7) To pay during statutory time off
The ERA 1996 gives employees certain rights to time off work. In two cases the employee is also entitled
to be paid during the time off:
- Time off with pay for carrying out trade union duties
- Redundant employees
- Time off with pay for carrying out union duties: Officials, e.g. branch officers and shop stewards, of a
recognised and independent trade union must be given paid time off in order to carry out their duties as
union officials. Paid time off must also be given to union officials to take training in aspects of industrial
relations which are relevant to maters for which the union is recognised by the employer.
- Redundant employees: An employee who has been employed for at least two years and received a
dismissal notice because of redundancy has a right to reasonable time off during working hours so that he
can look for another job or make arrangements for training for future employment.
While absent, the employee is entitled to be paid.
-Other cases: There are other circumstances in which employees are entitled to paid time off. Some of
them are set out below:
- Pregnant employees who require time off for antenatal care
- Employee/pension fund trustees are allowed paid time off so they can perform their duties
- Elected worker representatives who are consulted by the employer in a redundancy situation
- Elected worker safety representatives
- Workers aged 16 to 18 requiring paid time for study or training purposes
In all cases the right is to “reasonable” time off in all the circumstances of the case.
Itemised pay statements
Under ERA 1996 the employee must be provided an itemised pay statement at the time of or before
receiving pay, showing gross pay and take-home pay and the variable deductions, e.g. income tax.
If the employer does not comply with the pay statement requirements, the employee can complain to a
tribunal which will make a declaration of the law that a statement should have been given. The tribunal
may also order the employer to give back to the employee any deductions which were made from the
employee’s pay and which were not notified to him.
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Method of payment and deductions fro pay
Under the Era 1996 employees no longer have a right to be paid in cash. An employer can if he wishes pay
the employee, for example, by cheque or by crediting the employee’s bank account by credit transfer.
Deductions from pay are unlawful unless they are:
- authorised by Act of Parliament, such as income tax and national insurance deductions, or
- Contained in a written contract of employment or under worker’s consent. Deductions fro the
wages or workers in the retail trade, e.g. petrol station cashier for stock and cash shortages are
limited to 10% of the gross wages and deductions may be made only within the period of 12
months from the date when the employer knew of the shortage.
Employer’s duty to provide work
There is, in general, no duty for an employee to provide work. If the employer still pays the agreed salary,
the employee cannot regard the employer as in breach of contract.
There are some exceptions at common law; for example, a salesperson that is paid by commission must
be allowed to work in order to earn that commission; actors and actresses they need to keep a public
image which requires occasional public performances.
The same exceptions could be applied to all skilled workers who may need work to preserve and enhance
their skills.
Employee’s property
An employer has no duty to protect the properties that belong to his employee.
Employee’s indemnity
An employer is bound to indemnity any expenses, losses and liabilities incurred by an employee while
carrying on his duties.
Trade union matters
o Recognition
Employers will have to recognize trade unions where a majority of those workers voting in a ballot and at
least 40% of those eligible to vote are in favour of recognition. Organisations employing fewer than 21
workers will be exempt. The Employment Regulations Act 1999 gives protection against dismissal for
those who participate in a campaign which includes provision of information to workers about ballots.
The recognition of the trade union gives the right to negotiate on matters relating to pay, hours of work
and holidays decisions regarding redundancies, transfer of business and they can accompany an employee
during a disciplinary hearing.
The Trade Union and Labour Relations Act 1992 gives employees the right to belong or not to a trade
union.
o Employment protection
Under the Trade Union and Labour Relations Act 1992 employers have a duty not to take action against
employees, including dismissal and selection for redundancy, just because they are members of a trade
union.
If action is taken against employees, they may complain to a tribunal which can award compensation and
if the employee has been dismissed, the unfair dismissal remedies apply.
The Act also gives job seekers a right not to be refused employment or the services of an employment
agency on the grounds that they are or are not trade union members.
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Time off work without pay
Under ERA 1996 employees have a right to time off work in certain circumstances. Sometimes they are
also entitled to pay, as in the case of trade union official and of redundant employees who are looking for
work or wanting to arrange training for another job. However, there are other cases in which employees
are entitled to time off but the employer is not under a duty to pay salary for it. These are as follows:
- Trade union activities
- Public duties
- Family emergency
a) Trade union activities: An employee who is a member of a recognised trade union is entitled to
reasonable time off for trade union activities but the employer is not entitled to pay unless he is a
trade union official and the time off is taken under provisions.
Paid time off for union officials for trade union duties has already been considered.
b) Public duties: Employers also have a duty to allow employees who hold certain public positions to
have reasonable time off to carry out these duties. The Act covers such offices as magistrate,
member of a local authority, member of an employment tribunal, and member of certain health
and education authorities.
c) Family emergencies: Already discussed under Family-friendly provisions.
Testimonials and references
There is no law which requires an employer to give reference or testimonial to an employee or to answer
questions or enquires which a prospective employer may ask him. An exception occurs then a reference is
required by a regulatory body, such as the Financial Services Authority. However if an employer does give
a reference or testimonial which is false, he commits a criminal offence and he may be liable to pay
damages to affected persons as follows:
1. To a subsequent employer, who suffers loss because of a false statement known to the former
employer to be untrue, or made negligently without reasonable grounds for believing the
statement to be true. An employer who gives another employer a reference concerning an
employee owes a duty of care in negligence to the recipient employer.
The rehabilitation of Offenders Act 1974 is also relevant here: When a person convicted of crime
has been successfully living it down and has avoided further crime, his efforts at rehabilitation
should not be prejudiced by the unwarranted disclosure of the earlier conviction. The Act also
removes the need to disclose convictions resulting in a fine recorded for more than five years.
If an employer does refer to a spent conviction in his testimonial or reference, the employee is
entitled to sue him for libel in the case of a written reference or slander when the testimonial or
reference is spoken. The defence of the employer in this case would be that he acted without
malice and that the conviction was true.
2. To the former employee, for libel and slander if things have been stated in a testimonial or
reference which damages the employee’s reputation when what is stated is false. However the
employee will need to prove that what the employer made the statement out of malice and he
knew that what he said or wrote was untrue.
What constitutes a satisfactory reference? If the potential employer does not think that the reference is
satisfactory, it is not. The test is a subjective test but presumably the employer must be reasonable and
not regard as a perfectly good reference as unsatisfactory in order to get out of the contract made subject
to the reference condition.
Defacing reference: Finally, employees who maliciously disfigure his own reference or testimonial commit
a criminal offence.
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References and discrimination: Acts related to sex, race, religion and beliefs, sexual orientation, age and
disability prohibit discrimination after the end of an employment relationship if the act is closely related
to the relationship, e.g. unreasonable refusal to give a reference. These can be seen in the Equality Act
2010 section 108.
Non contractual duties of the employer
The employer has other duties in regard to the health, safety and welfare of his employees that we will
consider later in this chapter.
It is important to know legislation concerning the monitoring of workplace communications.
o Employee surveillance
The Telecommunications Regulations 2000 provide employers with lawful consent access to their
employee’s use of email and other communications in order to establish whether the use is related to
business. The employer is also allowed to record all communications without obtaining the consent of the
employee for the following purposes: a) to establish the existence of facts relevant to the business, b)to
ascertain compliance to the procedures, c)to demonstrate the standards that ought to be achieved by
persons using the telecoms system, d) to prevent or detect crime, e) to investigate unauthorised use of
the system, f) to ensure the effective operation of the system.
Business that wishes to rely on these exceptions must inform the employees that their communications
might be intercepted.
o Involvement of the Information Commissioner
The Information Commissioner has issued a Practice Code on employee monitoring to ensure that
monitoring of employee’s communications takes place only in accordance with needs. Monitoring must
be justified by ensuring that the benefits to the organisation outweigh any detriment to the employees
concerned.
o Human Rights
Art 8 of the Convention of Human Rights gives a right of privacy that covers correspondence and the
workplace.
DUTIES OF AN EMPLOYEE
- To use reasonable skill and care in the work
- To carry out lawful and reasonable instructions
- To give faithful service (or the duty of fidelity)
- Not to disclose trade secrets or confidential information
To use reasonable skill and care in the work
If an employee says to have particular skills but then shows himself to be incompetent he may be
dismissed without notice.
Unskilled employees are required to take reasonable care in carrying out the job, but they may be
dismissed only if there is a serious breach of this implied term of the contract.
To carry out lawful and reasonable instructions
However the employee is not required to carry out illegal acts.
The duty go give faithful services (or the duty of fidelity)
This is an implied term of a contract of employment
Certain activities of employees are regarded by the law as breaches of the duty to give faithful service, for
instance, an employee who while employed takes the names and addresses of the customers for use
them when he leaves the job. However, fidelity does not apply once the contract of employment has
come to an end.
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A former employee can be prevented by the court from using his former employer’s trade secrets or
confidential information without a clause in the contract about restrain of trade.
It is very important for employers to put express terms into their contracts of employment to control the
use and disclosure of confidential information after the employment contract ends. The courts seem to
prefer the contractual terms approach to the rather vague concept of the implied term.
Confidential information
It is an implied term of a contract of service that the employee must not disclose trade secrets or
confidential information. However, the use of knowledge that the employee acquired during his job
cannot be prevented from being used, for example, a worker who spent long time working in a garage
repairing cars cannot be prevented to open his own garage and use the knowledge that he acquired
during his job.
Regarding confidentiality there are some important points that are worthy to be mentioned:
a) Setting up competing business: If an employee resigns his job without giving a proper notice in
order to set up a competing business or work for a competitor, the employer may be able to
prevent the employee from acting in that way thorough an injunction order. This action is most
useful where the employee has a contract requiring a long period of notice.
Sometimes we wonder wow the employer will act knowing that the employee is planning to leave
to be or become part of his competition; in that case the term “garden leave” arises, meaning that
the employer does not want to fire the worker but at the same time does not want to continue
giving responsibilities in his business, we say that the worker is giving the duty to “take care of the
garden” of the premises, as a way to represent that he must come to work but not tasks will be
given to him.
b) Confidentiality in reverse: Confidentiality works in both ways. The employer may also be
prevented to use confidential information regarding his employees. This issue was seen when we
discussed data protection in chapter 15.
c) Whistleblowing: If you believe there is malpractice or wrongdoing happening in a workplace then
you can ‘blow the whistle’ on the behaviour and you could be protected from losing your job
and/or being victimised by your employer.
Whistleblowers are protected for public interest, to encourage people to speak out if they find
malpractice in an organisation or workplace.
Malpractice could be improper, illegal or negligent behaviour by anyone in the workplace.
Protection for blowing the whistle: You are protected as a whistleblower if you:
are a 'worker'
believe that malpractice in the workplace is happening, has happened in the past or will
happen in the future
are revealing information of the right type (a 'qualifying disclosure')
reveal it to the right person, and in the right way (making it a 'protected disclosure')
The employment contract and shop workers
The Sunday Trading Act 1994 repealed previous restrictions on Sunday trading. Recognising the impact of
this on shop workers, the Act provides new rights. These rights, which are now contained in the ERA 1996,
are:
not to be dismissed or made redundant for refusing to work on Sunday; and
not to suffer a detriment for the same reason
These rights extend to all shop workers if they are asked to work on Sunday. The rights are not available
to Sunday-only workers.
The ERA 1996 defines a shop worker as an employee who is required or may be required by contract to
work in or about a shop on a day when the shop is open to serve customers.
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A shop is defined as including any premises where any retail trade or business is carried on. This does not
include the sale of meals, refreshment, or intoxicating liquor for consumption on the premises.
If the workers had been contracted before the Sunday Trading Act 1994 came into force, they are able to
give up their right to refuse to work on Sundays but only if:
they expressly state that they do not object to work on Sunday
they enter into an express agreement with the employer to work Sundays or on a particular
Sunday
Workers who are employed after commencement of the Act under contracts which require them to work
on Sundays (Opted-out workers) they have the right to choose not to work on Sunday but they must give
the employer a signed written notice stating that they object to Sunday work. They then have to serve
three-month notice period. During this time they are still obliged to do Sunday work. After the period of
three months has expired the worker has a right not to do Sunday work. The ERA 1996 provides that
dismissal or redundancy or protected opted-out workers will be regarded as unfair dismissal if the cause
of the dismissal was the refusal to work on Sundays.
o Employer’s explanatory statement
The ERA 1996 provides that employers are required to give every shop worker who enters into a
contractual agreement to work on Sundays.
ERA also provides that:
employers are not obliged to compensate the employee for loss of Sunday work, either in terms of
extra hours or remuneration
the agreement between a shop worker and his employer cannot exclude provisions of the ERA
the dismissal of an employee for asserting a statutory right contained in the ERA is regarded as
unfair
Vicarious liability: transfer of control
What we will explain is a description of the general law relating to vicarious liability.
o Vicarious liability
Because of this principle of the law an employer is liable for damage caused to another person by his
employee, while the employee was carrying out his work. The employer is liable even though he is not
responsible, which seems at first sight to be unfair to the employer, is based upon law and policy.
So far as the law is concerned, employer and employee are regarded as associated parties in the business
and the employee becomes an extra hand if the amount of work increases and the owner cannot do it all
with his own hands, so he is responsible of any damage suffered by those hands which have been
employed.
The point of policy is to provide the injured person with a defendant who is likely to be able to pay any
damages which the court may award. The employer will normally insure his employees against the risk of
liability and of course the cost of that insurance will be transferred to the price of the goods or services
sold by the employer. Thus, in the end, the injured person is compensated by those members of the
public who buy the goods or services.
Insurance against employer liability for injuries or disease suffered by the employee is compulsory in UK
o The course of employment
It is very important to define if the injury was suffered in the course of employment when the case is
brought against the employer. The decision is sometimes a difficult one.
The following analysis gives some idea of the way in which the courts have dealt with this important
aspects of employer’s liability.
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1. Acts outside the contractual duties: If the employee is engaged on a private matter personal to him, the
employer will not by liable for injuries caused by the employee during this time.
2. Unauthorised ways of performing the contractual duties: The employer may be liable in spite of the fact
that the employee was acting improperly in the act was, even so, part of his contractual duties.
3. Acts which the employer has forbidden the employee to do: Just because an employer has told his
employee not to do a particular act does not always excuse the employer from vicarious liability if the
employee causes damage when doing the forbidden act.
4. Employee’s fraudulent acts: Gradually the courts make the employers liable for fraudulent act
committed by their employees; even in cases where the fraud was carried out by the employee entirely.
5. Employee’s criminal acts: An employer may even be vicariously liable for a criminal act by his employee
executed in the course of employment
6. Corporation and the ultra vires rule: When the employer is a corporation there are further difficulties as
regards the corporation’s vicarious liability.
It is necessary to distinguish between those acts of employees which are within the company’s powers
(intra vires) and outside its powers (ultra vires).
a. Intra vires activities: if an employee of a corporation injures someone by negligence while acting in
the course of his employment in an intra vires activity, then the corporation is liable.
b. Ultra vires activities: A corporation will not be liable if one of its employees gets involved in an act
which is ultra vires the corporation unless he has express authority from management to do the act.
o Employer’s defences
There are three main defences which an employer may have if he is sued under the rule of vicarious
liability. These defences are set out below:
1. An exclusion clause in a contract or notice: An employer cannot exclude or reduce his liability for
death or injury cause by his own negligence or that of his employees. As regards other types of
damage, an exemption clause in a contract or notice will apply to exclude or reduce the liability, but
only if the court thinks that it is reasonable that this should happen.
2. Voluntary assumption of the risk: This defence is also referred to as volenti non fit injuria (to one who
is willing no harm is done). This defence is most often tried in employment cases when employees
sue their employers for injuries received at work.
3. Contributory negligence: Sometimes when an injury occurs, the person injured and the person
causing the injury have both been negligent. In such a situation liability can be divided between the
person injured and the person causing the injury.
Employer’s liability for injuries to his employees
Under the Employer’s Liability (Compulsory Insurance) Act 1969, an employer must insure himself in
respect of liability for injuries caused to his employee when these arise from a negligent act.
o Safe plant, appliance and premises
An employer has a duty to provide and maintain suitable plant, appliances and premises.
The Employer’s Liability (Defective Equipment) Act 1969 puts liability on an employer who provides
defective equipment to an employee which causes that employee injury. However, this does not affect
the employer’s right to claim that the injury was cause by the contributory negligence of the employee.
The employee can also sue the manufacturer of the defaulting equipment.
o Safe system of work
An employer is required to set up a safe way of working. It is also the duty of an employer to enforce the
safe system once having set it up.
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o Problems of causation
Causation is the "causal relationship between conduct and result". That is to say that causation provides a
means of connecting conduct with a resulting effect, typically an injury. In criminal law, it is defined as the
actus reus (an action) from which the specific injury or other effect arose and is combined with mens rea
(a state of mind) to comprise the elements of guilt
One of the mayor developments in the liability of employers for injury to their employees came in the
case of Fairchild v Glenhaven Funeral Services Ltd [2002]: Mr Fairchild had worked for a number of
different employers, as a subcontractor for Leeds City Council, all of whom had negligently exposed him
to asbestos. Mr Fairchild contracted pleural mesothelioma. He died, and his wife was suing the employers
on his behalf for negligence. A number of other claimants were in similar situations, and joined in on the
appeal. The problem was, a single asbestos fibre, inhaled at any time, can trigger mesothelioma. The risk
of contracting an asbestos related disease increases depending on the amount of exposure to it. However,
because of long latency periods (it takes 25 to 50 years before symptoms of disease become evident) it is
impossible to know when the crucial moment was. It was impossible therefore for Mr Fairchild to point to
any single employer and say "it was him". Moreover, because the traditional test of causation is to show
that "on the balance of probabilities" X has caused Y harm, it was impossible to say that any single
employer was the cause at all. While it was possible to say "it was one of them" it was impossible to say
which. Under the normal causation test, none of them would be found, on the balance of probabilities to
have caused the harm.
o Employer’s defences
Contributory negligence: It applies to cases where a claimant has, through his own negligence,
contributed to the harm he or she suffered. It is available as a defence to an employer in a claim
brought against him by an employee who says he has been injured because of his employer’s
negligence.
2. Assumption of risk by the employee: This is unlikely to provide the employer with a successful
defence these days since it is known the law that just because an employee knows of the risk he
cannot for that reason be regarded as having consented to it.
1.
o Fatal accidents
If, as a result of the employer’s negligence, an employee is killed in the course of his employment the
personal representative of the deceased have a claim on behalf of the estate under the Law Reform Act
1934. In addition, under the Fatal Accidents Act 1976 certain dependant relatives, e.g. husband or wife an
children, are entitled to claim in a personal capacity if they were dependent on the deceased for their
living expenses.
HEALTH AND SAFETY AT WORK
Health and safety regulations
The general principles of health and safety and enforcement procedures and offences are contained in
the Health and Safety at Work Act 1974.
o Management of Health and Safety at Work Regulation 1999
They set out the general duties of employers in regard to the management of health and safety as follows:
a. Every employer is required to assess the risks to the health and safety of his employees
b. Employers must make arrangements to implement health and safety measures to deal with the risks
c. Competent safety advisers must be appointed to deal with the implementation of safety measures
d. Procedures must be put in place to deal with health and safety emergencies
e. Employees must be informed about arrangements for health and safety and receive adequate training
f. There must be cooperation with other employers sharing the same workplace
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The regulations also place duties on employees to follow health and safety instructions and report danger,
and employers must consult employee’s safety representatives and provide facilities for them.
o Young people and new and expectant mothers
A new and expectant mother is defined as an employee who is pregnant or who has given birth within the
previous six months or who is breastfeeding.
A young person means any person who has not attained the age of 18.
- Young persons
The main regulations do not apply fully to young persons who are involved in occasional or short-term
work on domestic service where the work is not harmful, dangerous or damaging to young people.
The parents of the child that is intended to be employed must receive certain information from the
employer regarding the risks to health and safety.
During the assessment process we need to consider additional elements in regarding to young persons,
e.g., inexperience and immaturity.
- New and expectant mothers
For these women when they are performing night work the employer is required that night work should
not be undertaken for a specified period.
A regulation requires employers to pay particular attention in any risk assessment to the health and safety
of new and expectant mothers.
When it is not possible to take steps to avoid any risk, the woman should be suspended from work.
The Management of Health and Safety at Work and Fire Precautions Regulations 2003, allow employees
to bring civil claims for breach of the regulations against their employers.
o Workplace (Health, Safety and Welfare) Regulations 1992
The regulations apply to all places of work, subject to some exceptions such as construction sites and
fishing boats. There are general requirements in four main areas:
1. The working environment: These include provisions relating to temperature to maintain
reasonable temperature in rooms where employees work. As regard ventilation, the rooms must
be adequately ventilated and supplied with fresh or artificial purified air. In addition, rooms in
which people work must not be overcrowded.
2. Safety: Floor, passages and stairs must be of sound construction, properly maintained and kept
free from obstruction and slippery substances.
3. Facilities: Suitable, and sufficient toilets must be provided
4. Housekeeping: All premises, furniture, furnishing and fittings must be kept clean and properly
maintained and suitable drainage of the premises must be provided.
o
Health and Safety (Display Screen Equipment) Regulations 1992
These regulations cover a new area of activity. The risks involved with work on display screens are not
high but can lead to muscular problems, eye fatigue and mental stress. The regulations apply when there
are employees who habitually display screen equipment as a significant part of daily work.
o Provision and Use of Work Equipment Regulations 1998
The regulations place general duties on employers and list minimum requirements for work equipment to
deal with selected hazards, regardless of the type of industry.
o Manual Handling Operations Regulations 1992
These apply to any manual handling operations which may cause injury at work. They cover lifting of
loads, lowering, pushing, pulling, carrying or moving them.
o Personal Protective Equipment at Work (PPE) Regulations 1992:
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They include protective clothing such as eye, foot and head protection, safety harnesses, life jackets and
high-visibility clothing.
Director’s report
The annual reports of company directors must contain information regarding arrangements in force
during the year relating to the health, safety and welfare of employees.
Duties of employers and the self-employed to persons who are not their employees – generally
It is the duty of every employer to carry on his business in such a way not to expose to risks to health or
safety persons who are not his employers but who might be affected by the conduct of the business.
A wide variety of people is covered, including customers in a shop, people passing next to the premises,
etc. It is an offence to run a business negligently or to create a nuisance.
Duties of employers and the self-employed to non-employees- premises
Certain duties are imposed upon employers and the self employed in regard to people who are not
employees but who come on to their business (not domestic) premises. The duty is to make sure that the
premises are safe and without risk to health. The duties also apply to landlord letting business premises.
People covered include, window cleaners and painters, the employees of contractors maintaining lifts or
installing central heating.
Duties in regard to harmful emissions in the atmosphere
The Trade and Industry Secretary have power to control the emission into the atmosphere form premises
of noxious or offensive substances. The provisions of the Health and Safety at Work Act 1974 are
concerned only with air pollution. The main regulations are under the Control of Substances Hazardous to
Health Regulations 2002.
General duties of those who make import or supply articles, or who install equipment
This part of the 1974 Act creates the following duties.
1. To ensure that the article (e.g. machine) is designed and constructed as to be safe and without risks
to health when properly used.
2. To take steps to make sure that when the article or substance is put to that use it will be safe and
without risk to health
As regards the installation and erection of equipment, the 1974 Act provides that it is the duty of any
person who erects or installs any article for use at work in any premises to make sure that nothing about
the way in which it is erected or installed is unsafe or at risk to health when properly used.
Research, examination and testing
This part of the 1974 Act makes it the duty of any person who undertakes the design or manufacture of an
article to eliminate or minimize any risks to health or safety to which the design, article or substance may
give rise.
Duties of employees at work
1. To take reasonable care for the health and safety of himself and of other persons at work
2. To cooperate with the employer on the accomplishment of safety measures
No person shall intentionally or recklessly interfere with or misuse anything provided in the interest of
health, safety or welfare, e.g. remove a safety guard from a machine. To do so is an offence for which the
employee can be prosecuted.
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These are useful sections which could enable an employer to enforce his safety policies. Some workers
are reluctant to use safety equipment.
It is important to remember that an employee’s consent to a dangerous practice, or his willing
participation in it, is no defence for an employer who is prosecuted under the Act.
Duty not to charge employee for things done or provided by the employer by law
No employer shall levy or charge any employee any charge in respect of anything done or provided by the
employer as a result of the provisions of the Act of Parliament. For example, personal protective clothing
which the employer is required to provide by law, or ear protectors in workplaces where there is a noise
hazard, the employer must supply but he cannot charge them employee for their costs.
The statutory duties and civil liability
As we have already noted, civil liability has been extended to cover breaches of health and safety
legislation.
When the employer has infringed the Act and this has caused injury to the employee, the Act is a relevant
part of establishing the employee’s case for damages at civil law.
Offences and civil claims for accidents at work are more likely to arise in a factory than in an office.
However the following are examples of accidents which can occur and medical conditions which can arise
in an office environment:
- Defective electrical system or equipment, - defect in the premises, e.g. dangerous staircase, - ill-designed
chairs supplied to employees, - eye damage caused by exposure to VDU screens.
Civil claims – strict liability
Some areas of health and safety legislation have always allowed civil actions and in some cases liability is
strict, which means that an employer can be liable even in the absence of negligence on his or her part.
Smoking in the workplace – generally
It is also arguable that at common law an employer is at fault in requiring employees to work in an
atmosphere containing heavy concentrations of cigarette or cigar smoke, although it may be possible to
call medical evidence to challenge the existence or degree of the risk involved in “passive smoking”.
HSE (Health and Safety Executive) is not responsible for enforcing the legislation. It works with local
authority officers both in raising employer’s awareness of their responsibilities and in encouraging
employers and employees to comply with the new legislation.
- Legislative duties for smoking in the workplace: Relevant legislation includes the following:
The Health and Safety at Work etc Act 1974
Management of Health and Safety at Work Regulations 1999
Workplace (Health, Safety and Welfare) Regulations 1992
Employment Rights Act 1996
- A workplace smoking ban:
The government has issued the Smoke-free Regulations 2006. These ban smoking in enclosed public
places, including most work places.
As regards penalties, employees caught smoking in regulated areas after the regulations are in force will
face a fixed penalty of £50.
Drink and drugs in the workplace
Employers must take reasonable steps to ensure that their workers are not under the influence of dink
and drugs when it would create a risk to the health and safety of others.
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Abusive fellow workers – a health and safety risk
It is automatically unfair to dismiss and employee who has left his work because circumstances of danger
of a serious nature appear imminent, which one normally associates with a health and safety risk. In
Harvest Press Ltd v McCafrey it was ruled that the dismissal of an employee who left his work in the
middle of a shift because of the abusive behaviour of a fellow worker was automatically unfair.
The Health and Safety Commission and the Health and Safety Executive
o Corporate killing
In the English law of homicide, manslaughter is a less serious offence than murder, the differential being
between levels of fault based on the mens rea (Latin for "guilty mind").
- Voluntary manslaughter occurs when the defendant kills with malice aforethought (an intention to kill or
cause grievous bodily harm), but one of those partial defences which reduce murder to manslaughter
applies (these consist of mitigating circumstances which reduce the defendant's culpability).
- Involuntary manslaughter arises where the accused did not intend to cause death or serious injury but
caused the death of another through recklessness or criminal negligence.
It is difficult to prosecute companies for manslaughter
o Corporate Manslaughter and Corporate Homicide Act 2007
- What is the Corporate Manslaughter Act? The Corporate Manslaughter and Corporate Homicide Act
2007 create a means of accountability for deaths caused by very serious management failings.
Prior to the act coming into force, it was possible for a corporate entity, such as a company, to be
prosecuted for a wide range of criminal offences, including the common law offence of gross negligence
manslaughter.
However, in order for the company to be guilty of the offence, it was also necessary for a senior individual
who could be said to embody the company (also known as a 'controlling mind') to be guilty of the offence.
The new law is wider, meaning a company can be convicted if it can be proven that there was a gross
breach of duty of care by "senior management," instead of just one individual.
The offence is concerned with corporate liability and does not apply to directors or other individuals who
have a senior role in the company or organisation.
However, existing health and safety offences and gross negligence manslaughter continue to apply to
individuals. Prosecutions against individuals will continue to be taken where there is sufficient evidence
and it is in the public interest to do so.
Penalties will include unlimited fines, remedial orders and publicity orders.
The legislation does not apply to Armed Forces Operations, including peacekeeping and counter-terror
work, nor to essential hazardous training related to police operations.
The Working Time Regulations (WTR)
The general terms of the regulations regarding hours of work and entitlement to paid holidays are set
below:
- A maximum 48 hour working week, averaged over 17 weeks
- At least 5-6 weeks annual holiday entitlement
- A daily rest period of at least 11 consecutive hours in 24 hours
- A weekly rest period of at least 1 day per week
- In work a rest break of at least 20 minutes for those working more than six hours a day
- The normal hours of night workers should not exceed eight hours for each 24 hours
It should be noted that although employers must ensure that their workers can take leave, they are not
forced to see that they actually do.
o Who is a worker?
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Generally speaking, a worker is a person employed under a contract of service, but agency workers,
trainees and some domestic employees are also included.
Those who are genuinely self-employed are not covered.
o What is a working time?
It is defined when a worker is working at his employer’s disposal and carrying out his duty or activities.
Training time is included. Time when a worker is on call but is otherwise free to pursue his own activities
or is sleeping would not be working time. On-call time when the worker is restricted to the workplace is
working time.
The regulations allow workers and employers to make agreements on the definition of working time.
o The 48-hour week
Calculating the working time:
An employer cannot make the employee work longer than an average of 48 hours a week. If the employee
works longer, he should discuss with his manager about either reducing your hours or signing an opt-out
agreement.
The basic calculation: To know how long you are working, you need to calculate the number of hours you
work each week (including overtime) and then average these hours over a set period.
Your average working hours are calculated over a ‘reference period’, which is normally a 17-week period.
You can work more than 48 hours in one week, as long as the average over 17 weeks is less than 48 hours
per week.
Changing the average working time reference period
With a workforce or collective agreement you can agree with your employer to calculate the average
weekly working time over a different period, anything up to 52 weeks. These are agreements that have
been reached between an employer and a trade union. Your contract of employment will probably set out
which collective agreements cover you.
Some careers automatically have a different reference period:
• doctors in training have a 26 week reference period
• the offshore sector has a 52 week reference period
Example on how to calculate your average weekly working time (www.direct.gov.uk)
To calculate your average weekly working time you should add up the number of hours you worked in the reference
period. Then divide that figure by the number of weeks in the reference period (normally 17 weeks).
You have a standard working week of 40 hours (eight hours a day). You also do 12 hours overtime a week for the first ten
weeks of your 17-week reference period.
- Step 1: multiple your standard working hours by the number of weeks in the pay reference period
(17 weeks x 40 hours = 680 hours)
- Step 2: add on your overtime (12 hours x 10 weeks = 120 hours overtime + 680 hours = 800 hours)
- Step 3: the total hours should be divided by the number of weeks in the pay reference period
(800 hours ÷ 17 weeks = 47.1 hours)
So you would have worked an average of 47.1 hours per week, which is within the working time limits.
The law does not say that employees cannot work for more than 48 hours per week. This gives certain
amount of flexibility for business to cope in case of increase demand of work
o Paid annual leave
In the absence of any agreement, the employer can require a worker to take all or any of the leave at
specified times, subject to giving the worker notice of at least twice the period of the leave to be taken.
The basics of holiday rights (www.direct.gov.uk)
There is a minimum right to paid holiday, but your employer may offer more than this. The main things you should know about
holiday rights are that:
you are entitled to a minimum of 5.6 weeks paid annual leave - 28 days for someone working five days a week (capped at
a statutory maximum of 28 days for all working patterns)
part-time workers are entitled to the same level of holiday pro rata (so 5.6 times your usual working week, eg 22.4 days
for someone working four days a week)
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you start building up holiday as soon as you start work
your employer can control when you take your holiday
you get paid your normal pay for your holiday
when you finish a job, you get paid for any holiday you have not taken
bank and public holidays can be included in your minimum entitlement
you continue to be entitled to your holiday leave throughout your ordinary and additional maternity leave and paternity
and adoption leave
o Rolled-up holiday pay
Rolled up holiday pay is a system whereby an employer adds an additional amount to a worker's hourly
rate that is deemed to be for holiday pay. The worker is paid for their holidays on an ongoing basis
throughout the year and does not receive payment when on holiday. The holiday pay has been "rolled up"
and the worker has already received it.
The practice of paying rolled up holiday pay is unlawful under the Working Time Regulations 1998 (as
amended). If a Company is currently paying rolled up holiday pay, they should now renegotiate the
contracts of all employees who are receiving such payments to ensure that holiday pay is made at the
time when the holidays are taken.
If a Company has operated a system of rolled up holiday pay in the past, they may offset payments that
they have already made against payments due for past holiday periods, provided they can show that the
payments were made in a transparent and comprehensible way and were additional to basic hourly rates.
However, the rolled up holiday pay system must be discontinued in the future and employees must
actually take the statutory minimum paid holiday away from the workplace (currently 5.6 weeks for a full
time employee).
o Length of night work
Night work is presumed to be work between 11 pm and 6 am, unless otherwise defined by agreement
o Excluded sectors
The regulations, other than those parts which apply to young workers, do not currently apply to workers
who are employed in the following sectors:
Air transport, rail, road transport, sea transport, inland waterway and lake transport, sea fishing, other
work at sea, e.g. offshore work in the oil and gas industry
o Road transport (Working Time) Regulations 2005
The regulations give working time protection for all mobile workers such as goods vehicles over 3.5
tonnes, coaches and inter-urban bus services. They do not apply to self-employed drivers.
o Derogations
Employees whose working time is not measured were exempt from the provisions relating to the 48-hour
week, rest periods and rest breaks, these provisions were removed because it appears that some
organisations had used the derogations to put pressure to junior workers to work in some cases limitless
unpaid overtime.
o Collective and workforce agreements
Employers can modify or exclude the rules relating to night work, daily and weekly rest periods and rest
breaks and extend the reference period in relation to the 48 hour week (but not to modify the 48-hour
week itself); by a collective agreements between the trade union and the employer.
Individuals may also choose to agree with their employer to work in excess of the 48 hour weekly time.
These agreements can only last for a maximum of 5 years.
o Records: weekly working time
An employer must keep adequate records to show that he has complied with the weekly working time
limit. The records must be kept for two years. Pay records may show the worker’s working hours.
o Compensatory rest
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Collective or workforce agreements gives flexibility in the way the worker’s rights are delivered, but they
do not allow those rights to be totally avoided.
o Health and safety assessments
An employer must offer a free health assessment to any worker who is to become a night worker.
Employers must also give night workers the opportunity to have further assessments at regular intervals.
o Young (or adolescent workers)
The WTR also applied to persons over the minimum school-leaving age but under 18 yrs old. The
regulations stated the following but they were modified by the EU Young Workers Directive (see below)
- weekly working hours: adult and young workers are treated the same
- night work limit: adult and young workers are treated the same
- health assessment for night workers: the health assessment for adolescents will include issues like
physique, maturity and takes into account the competence to undertake the assigned night work
- daily rest: for young workers this is 12 hours consecutive rest between each working day
- weekly rest: for young workers the general requirement is two days off per week
- in work rest breaks: for young workers the minimum is 30 minutes
- paid annual leave: adults and young workers are treated the same
o Young workers Directive
All the previous regulations were modified following EC Directives (Young Workers Directive), therefore
the previously listed regulations of the WTR were modified and currently the provisions for young workers
are:
- They are not allowed to work more than 40 hours per week.
- Working time is limited to 8 hours per day
- Night working is prohibited between 10 pm and 6 am or 11 pm and 7 am. There are some
exceptions, such as hospitals and hotel catering work (but not restaurants or bars)
o Other young workers rules
The Children (Protection at Work) Regulations 2000, limits the number of hours a child of school age can
work; being the maximum to 12 hours per week.
o Enforcement and remedies
The weekly working time limit, the night work limit and health assessment for night workers are enforced
by the Health and Safety Executive or local authority environmental health officers.
DISCRIMINATION AND THE EQUALITY ACT 2010
Those involved
The areas of discrimination covered by UK discrimination law are set out below:
- Sex discrimination and marital discrimination, which is discrimination mostly against women, though men
are covered by the law, and discrimination against a person because the person is married.
- Race discrimination, which is discrimination on the grounds of race, colour, nationality or ethnic origin
- Sexual orientation, which is discrimination on the grounds that a person is gay, heterosexual or bisexual
- Religion or belief, which is discrimination on grounds involving religion, belief or philosophical belief.
- Transsexuality, discrimination against persons who have gender dysphoria and wish to live in their
adopted sex
Equality Act 2010
The Act is intended to reduce nine major pieces of legislation and around 100 statutory instruments into a
single Act, making the law more accessible and easier to understand, so that everyone can be clear on
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their rights and responsibilities and promote fairness and equality of opportunity; tackle disadvantage and
discrimination. In other words, the purpose of the Act is to introduce a single legal framework providing
clearer law.
The current laws are mainly contained in the following legislation:
- The Equal Pay Act 1970, -The Sex Discrimination Act 1975, -The Race Relations Act 1976, -The Disability
Discrimination Act 1995, -The Employment Equality (Religion or Belief) Regulations 2003, -The
Employment Equality (Sexual Orientation) Regulation 2003, -The Employment Equality (Age) Regulations
2006, -The Equality Act 2006, part 2, -The Equality Act (Sexual Orientation) Regulations 2007.
The Equality Act 2006 brings together and reinstates the enactments listed above but not all the sections
would appear precisely as in the original Acts. The intention is to harmonise existing provisions to give a
single approach when appropriate.
o Types of discrimination
There are two forms of discrimination, as follows:
a. Direct Discrimination: When an employer or treats a person less favourably than another because
of a protected characteristic, or, when an employer refuses, on discriminatory grounds to grant a
suitability qualified person an interview for a job.
b. Indirect Discrimination: When an employer has applied requirements or conditions to a job but the
ability of some persons to comply because of sex, disability, marital status or race is considerably
smaller and cannot be justified.
o Equal pay
The Equal Pay Act 1970 (EPA 1970) implied a term called an equality clause into contracts of service. This
clause means that a man or a woman must be given contractual terms not less favourable than those
given to an employee of the opposite sex when they are employed.
The relevant provisions can now be found in Part 5 of the Equality Act 2010 and section 66 of the Act is
designed to replicate the effect of definitions contained in the EPA 1970.
Some illustrative cases under the Equal Pay Act
1. If a woman is engaged in the same work as a man and both work for the same employer: The
woman is entitled to the same rate of pay and other terms of employment
2. If the job which the woman does has been given the same value as a man’s job under a job
evaluation scheme: The woman is entitled to the same rate of pay and other terms of employment
as a man. On the other hand, an employer could receive claims for equal pay if the jobs or the
woman and male have been given different ratings under a job evaluation scheme.
3. Equal value: If the job which a woman does in terms of demands upon her is of equal value to that
of a man in the same employment, then the woman is entitled to the same pay and other
contractual terms.
o Associated employers
Comparison of contracts of service for equality purposes is usually made with people who work at the
same place. However, comparison can be made with people who work at different places so long as the
employer is the same or is an associated employer. As regard of associated employer, this would be the
case with a group of companies
o Reference to an employment tribunal
The Act sets out the types of claims under the Act the employment tribunal have jurisdiction to hear. The
claimant has a contractual entitlement to a higher rate of pay or other contract term enjoyed by the
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comparator. The tribunal can also award compensation in respect of the disparity to date or make an
appropriate recommendation.
The Employment Tribunals (constitution and Rules of Procedure) (Amendment) Regulations 2004
It gives employment tribunals powers to insist on the early exchange of relevant information, facilitate
the finding process and penalise parties who do not comply with tribunal directions.
Of particular importance are powers under which employers can be ordered to grant access to their
premises to an expert when one has been appointed by the tribunal or the claimant.
o Time limits for claims
The claims must be brought to the tribunals within three months of the alleged conduct taking place. The
tribunals, however, have the discretion to grant permission for a claim to be brought after the set time
limits when is “just and equitable”.
Examples of just and equitable extensions:
- When the claimant has worked under a series of fixed term contracts forming a stable
employment relationship
- When the employer has deliberately covered the possibility of a claim. Here time runs from when
the claimant discovered the facts
- When the claimant was under a disability in terms of bringing the claim
- When the claimant was a minor; in this case times runs from when the minor reaches 18
Discrimination in recruitment and selection of employees
o Recruitment and offers of employment
It is unlawful to discriminate men and women on the following grounds:
- in the arrangements made for the purpose of deciding who should be offered the job, or
- in terms on which the job is offered; or
- by refusing or deliberately omitting to offer the job
The Equality Act 2010 introduced a new provision, in which an employer must not ask about an
applicant’s health or disability until the applicant has been offered a job. The question can only be asked
to find out, for instance, the suitability for the work or that the information can be used to provide
reasonable adjustments to enable the applicant to participate in the interview/recruitment process.
The terms also prevent discrimination in regards to promotions, transfer, trainings, benefits or services.
Thus, it is unlawful to discriminate in regards to loans, mortgages by banks and building societies.
Discrimination by employment agencies is also covered by the Equality Act 2010
o Exceptions
An employer may confine a job to a man or to a woman when the gender is a condition which can be
included in what is called a ‘Genuine occupational qualification” (GOQ).
In UK employment discrimination law, a Genuine Occupational Qualification (or GOQ) exists when the
nature of a particular job causes the sex or gender of an applicant to become a reasonable cause for
choosing one applicant over another. GOQs are a special case exception to the Employment (Sex
Discrimination) Act 2000, defined in Section 9 of this act.
There are eight possible types of reason for claiming a GOQ in advertising a particular job:
a. Physiology or authenticity (for example, in choosing actors to play a role),
b. Privacy and decency of people the employee would be dealing with (for example, staff in a care
home),
c. Private household's integrity (for example, professional carers for an individual, but not normally
nannies),
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d. Single-sex accommodation, when it is unreasonable to expect the employer to provide additional
accommodation,
e. Single-sex establishments, for example special prisons and refuges,
f. Personal welfare and counselling, when sex is directly relevant to the welfare or counselling
provided,
g. Jobs in foreign countries with specifically relevant laws or customs,
h. When a pair of jobs are advertised specifically for a married couple.
In each of these, reasons must be specific and absolute, not based on stereotypes or generalised
assumptions.
o Positive discrimination and positive action
-Positive discrimination
The Government Equalities Office (GEO) sets out the following explanation of positive discrimination:
“Positive discrimination is recruiting or promoting a person solely because they have a relevant
protected characteristic. Setting quotas to recruit or promote a particular number or proportion of
people with protected characteristics is also positive discrimination. Positive discrimination is
unlawful in Great Britain”. However, it is important to note that it is not unlawful for an employer to
treat a disabled person more favourably in comparison to a non-disabled person.
-Positive action
In both EC and domestic law, it is accepted that in order to achieve full equality in practice,
disadvantaged groups may actually require different treatment and equal treatment may perpetuate
any disadvantage, because not all groups start off from the same position. This is a purely permissive
provision which allows measures to be taken to overcome or minimize any disadvantage or to
encourage participation in an activity where participation is disproportionately low. As this provision
is an exception to the equal treatment principle, by definition, any measures taken in favour of a
disadvantaged group will discriminate against advantaged groups.
Section 158 permits a general exception to allow for “positive action” by allowing a person to take “any
action”, as long as it is a “proportionate means”, to achieve the aims of enabling or encouraging persons
who share the protected characteristic to overcome or minimise that disadvantage, meeting those needs,
or enabling or encouraging persons who share the protected characteristic to participate in that activity.
The protected characteristics are defined in the Act as:
age;
disability;
gender reassignment;
marriage and civil partnership;
pregnancy and maternity;
race;
religion or belief;
sex; and,
sexual orientation.
Discrimination once in employment
It is unlawful to discriminate as regards opportunities for promotion, training or transfer to other
positions or by selection for redundancy or dismissal, if the decision is based in any of the protected
characteristics. In the case of disability discrimination the employer is required, where possible, to make
reasonable adjustments to overcome individuals difficulties with the job.
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Victimisation
Victimisation occurs when where an employee is singled out for using their workplace complaints
procedures or exercising their legal rights.
Example: bringing a complaint of discrimination or giving evidence or information on behalf of another
employee who has brought proceedings for discrimination.
An employee will not be protected if they have maliciously made or supported a complaint that is false.
Damages can be awarded when victimisation has occurred.
Harassment
Harassment also occurs when, on the grounds of race, disability, sex, sexual orientation, belief or religion,
an employer - or their agent such as another employee or a manager - engages in unwanted conduct
which has the purpose or effect of violating an individual's dignity or creating an interrogating, degrading,
hostile offensive or humiliating environment for the employee in question. This is wide spectrum, and
covers all types of harassment.
Such actions can be:
• Physical conduct;
• Verbal conduct; and
• Non-verbal conduct.
In addition, while the conduct must be unwanted by the recipient, it does not necessarily have to be that
the harasser has a motive or an intention to harass. So it is still harassment even if the harasser does not
know there is harm caused by their actions.
o Sexual harassment
Equality Act 2010 provisions defines sexual harassment as:
- Unwanted conduct related to the sex of a person occurs with the purpose or effect of violation the
dignity of that person and;
- any form of unwanted, non-verbal or physical conduct of a sexual nature occurs with the purpose or
effect of violating the dignity of a person, in particular, when creating an intimidatory, hostile, degrading,
humiliating or offensive environment.
Often, sexual harassment incidents fall into the category of the "merely annoying." In other situations
harassment may lead to temporary or prolonged stress and/or depression depending on the recipient's
psychological abilities to cope and the type of harassment, and the social support or lack of it for the
recipient.
o An ACAS (Advisory, Conciliation and Arbitration Service)code of practice
ACAS (Advisory, Conciliation and Arbitration Service) aims to improve organisations and working life
through better employment relations.
ACAS helps with employment relations by supplying up-to-date information, independent advice and high
quality training, and working with employers and employees to solve problems and improve performance.
Sexual orientation: The following matters arise:
a. In recruitment: Employers should avoid unnecessary job criteria that could prevent persons applying
because of their sexual orientation. During the interviewing process the employer should avoid
questions regarding marital status and children.
b. Vetting: Vetting is a process of examination and evaluation, generally referring to performing a
background check on someone before offering them employment, conferring an award, etc. A
prospective person or project may be vetted before making a hiring decision. It is not unlawful if the
employer makes a vetting process through the Criminal Records Bureau, when the work is of special
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nature, e.g. working with children. According to Rehabilitation of Offenders Act 1974, sexual offences
should be disclosed.
c. Genuine occupational requirement: It may be lawful to treat a gay person differently as when the
work is for example in a country where homosexuality is illegal
d. Fitting in: employers should not engage in stereotyping and make assumptions as to whether a person
would fit into the organisation
e. Harassment: Taunting or mocking by workers about the actual or perceived sexual orientation of a
fellow worker is illegal. Staff should be informed that the organisation will not allow such behaviour.
Religion and belief: The following matters arise:
a. In recruitment: Advice should be given to applicants as to the requirements of the job so that they can
be aware of possible conflict with their religion or belief. E.g. late Friday night working could be a
conflict for Muslims.
When interviewing, employers should avoid questions relating to an applicant’s religion or belief
b. Genuine Occupational Requirement: For example, if the employer can show that a particular religion
or belief is a requirement for teaching in a particular school, then a GOR may be applied.
c. Dress requirements: Flexibility is important when staff can dress according to their religion or beliefs
and still meet the requirements of the organisation
d. Holiday leave: It should be allowed when certain workers may wish to take accrued annual leave at
specific times to celebrate festival, spiritual observance or bereavement. E.g. Ramadan, Christmas
e. Dietary requirements: Employers may be sensitive to any special dietary requirements of staff with
special religion or belief
f. Prayer, meditation and rest periods: Permitted rest periods under working hours for praying should be
given but it must not disturb or cause problems to other workers
g. Changing facilities: Employers should provide private changing areas
h. Staff discussion: There is no harm in sensible discussion about religion and belief but offensive
behaviour should be prevented.
DISABILITY DISCRIMINATION
What is disability?
Equality Act 2010 defines Disabled person: “as a person who has a physical or mental impairment which
has a substantial and long-term adverse effect on his or her ability to carry out normal day-to-day
activities”
A variety of conditions can be brought under the general definition of physical and mental impairment
Some conditions as Chronic Fatigue syndrome or depression were considered as disabilities.
It is clear from the above decisions that employers should be especially cautious before they dismiss
employees on the grounds of ill-health since the condition may be regarded as disability.
The employer together with a medical advisor should discuss with the employee to see whether any
adjustment, such as transfer, training, making modifications in the equipment may improve the condition.
o The definition of ‘disability’ under the Equality Act 2010
In the Act, a person has a disability if:
they have a physical or mental impairment
the impairment has a substantial and long-term adverse effect on their ability to perform
normal day-to-day activities
For the purposes of the Act, these words have the following meanings:
'Substantial' means more than minor or trivial
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'long-term' means that the effect of the impairment has lasted or is likely to last for at least twelve
months (there are special rules covering recurring or fluctuating conditions)
'Normal day-to-day activities' include everyday things like eating, washing, walking and going shopping
People who have had a disability in the past that meets this definition are also protected by the Act.
o Progressive conditions considered to be a disability
There are additional provisions relating to people with progressive conditions. People with HIV, cancer or
multiple sclerosis are protected by the Act from the point of diagnosis. People with some visual
impairments are automatically deemed to be disabled.
o Conditions that are specifically excluded
Some conditions are specifically excluded from being covered by the disability definition, such as a
tendency to set fires or addictions to non–prescribed substances.
o Employer’s defence
The Act allows employer’s discrimination if, but only if, the reason is both material to the circumstances of
the case and substantial. Thus, less favourable treatment may be justified if the employer believes on
reasonable grounds that the nature of the disability substantially affects the disabled person’s ability to
perform the required task. The burden of proof will be on the employer.
o Duty to make adjustments
Reasonable adjustments in the workplace (from www.direct.gov.uk)
Under the Equality Act 2010 an employer has a duty to make reasonable changes for disabled applicants
and employees. These are known as 'reasonable adjustments'. Adjustments should be made to avoid you
being put at a disadvantage compared to non-disabled people.
The need to make reasonable adjustments can apply to the working arrangements or any physical aspects
of the workplace. For example, adjusting your working hours or providing you with an adapted piece of
equipment to help you to do the job. Physical adjustments might include replacing steps with a ramp.
Also, if it is reasonable, the employer needs to provide an extra aid to ensure the disabled worker is not
disadvantaged. This might mean providing special or adapted equipment to do the job.
o Constructive dismissal (from www.direct.gov.uk)
Constructive dismissal is when an employee is forced to quit their job against their will because of their
employer's conduct.
If you resign from your job because of your employer’s behaviour, it may be considered to be constructive
dismissal. You would need to show that:
1. Your employer has committed a serious breach of contract
2. You felt forced to leave because of that breach
3. You have not done anything to suggest that you have accepted their breach or a change in
employment conditions
Examples include:
• a serious breach of your contract (e.g. not paying you or suddenly demoting you for no reason)
• forcing you to accept unreasonable changes to your conditions of employment without your
agreement (e.g. suddenly telling you to work in another town, or making you work night shifts
when your contract is only for day work)
• bullying, harassment or violence against you by work colleagues
• making you work in dangerous conditions
Your employer's breach of contract may be one serious incident or the last in a series of less important
incidents that are serious when taken together.
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What to do if your employer's behaviour makes you want to quit
Speak to your manager
Leaving your job should be the last resort. First, speak to your manager and see if you can resolve the
problem that way. If the problem is with your manager, you could talk to:
• their manager
• your company's HR (human resources) department
• an employee representative (e.g. a trade union official), if you have one
• ACAS (the Advisory, Conciliation and Arbitration Service) or another employment advice service
o Enforcement
Complaints are to be presented to an employment tribunal. The claim must be brought within tree
months and the tribunal may take any of the following steps as it considers just and equitable:
- make a declaration of the rights of the claimant
- order monetary compensation with no limit
- recommend steps to be taken by the employer to reduce the adverse effects
The services of ACAS can also be invoked with a view to settlements without a tribunal hearing
Employers should note that the number of cases involving disability discrimination is increasing.
The Equality and Human Rights Commission has issued guidance for employers on how to avoid
discrimination, covering a whole range of situations. (www.equalityhumanrights.com)
TERMINATION OF THE CONTRACT OF EMPLOYMENT
o Unfair dismissal
Before a person can ask an employment tribunal to consider a claim that another has unfairly dismissed
him it is essential to establish that the relationship of employer and employee exist between them.
An employee is a person who works under a contract of service or apprenticeship; the contract can be
written, oral, express or implied.
Unfair dismissal is the term used in UK labour law to describe an employer's action when terminating an
employee's employment contrary to the requirements of the Employment Rights Act 1996. It is
automatically unfair for an employer to dismiss an employee, regardless of length of service, for a reason
related to discrimination protected by the Equality Act 2010, becoming pregnant, or having previously
asserted certain specified employment rights. Otherwise, an employee must have worked for a year to
have the right against unfair dismissal.
This means an employer only terminates an employee's job lawfully if the employer follows a fair
procedure, acts reasonably and has a fair reason.
Fair reasons for dismissal are,
• A reason related to the employee's conduct
• A reason related to the employee's capability or qualifications for the job
• Because the employee's job was redundant
• Because a statutory duty or restriction prohibited the employment being continued
• Some other substantial reason of a kind which justifies the dismissal.
o Meaning of Dismissal
An employee cannot claim unfair dismissal unless there has fist been a dismissal recognized by law.
o Actual dismissal
It is not a problem for an employee to recognize the words of an actual dismissal, whether given orally or
written.
o Constructive dismissal
This occurs when it is the employee who leaves the job but is compelled to do so by the conduct of the
employer. For example, sexual harassment experienced by an employee
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o Fixed-term contracts
Fixed-term contracts normally end automatically when they reach their agreed end point, so there is no
need for your employer to give you notice. However, your employer must still act fairly and follow any
dismissal procedure if necessary. If they do not, you can make a claim of unfair dismissal.
Ending a fixed-term contract
If you are on a fixed-term contract, generally no notice of the contract reaching its end date will need to
be given by the employer. However, failing to renew a fixed-term contract is considered to be a dismissal.
You have the right:
- not to be unfairly dismissed (after one year’s service)
- to a written statement of reasons for the dismissal (after one year’s service)
- to statutory redundancy payments (after two years' service)
- to a minimum notice period of your contract ending before the agreed end date, task or event
The minimum notice period you are entitled to is:
- after one month’s continuous service, but less than two years: one week’s notice
- after two years continuous employment: two weeks’ notice if you have been continuously
employed for two years
o Grounds for dismissal
ERA 1996 requires the employer to give in writing reasonable reasons for dismissal to the employee.
It is up to the employment tribunal to decide whether the dismissal was fair or unfair.
A tribunal should conclude that a dismissal is fair if an employer makes reasonable responses.
Reasons justifying dismissals
- Lack of capability or qualifications: unsuitability
- Misconduct
- Redundancy
- Some other substantial reasons
- Lack of capability or qualifications: unsuitability:
This would usually arise at the beginning of employment when it becomes clear at an early stage that the
employee cannot do the job in terms of lack of skill or mental or physical health. Claims for unfair
dismissal will not often arise since the dismissal usually occurs before the employee completed the
necessary one year’s service t be entitled to claim. It is important to remember that the longer a person is
in employment, the more difficult it is to establish lack of capability.
- Misconduct
This is a difficult matter to deal with and much depends upon the circumstances of the case. However,
incompetence and neglect are relevant, as are disobedience and misconduct, e.g. assaulting fellow
employees. Immorality and habitual drunkenness are also included when the employer believes on
reasonable grounds that it makes the employee unsuitable for the position held.
Crime inside employment (e.g. theft) will normally justify a dismissal on the ground of misconduct
Crime outside employment raises more difficult issues and generally the employer will have to show
damage to his organisation, examples would include an employee involved in football violence is not the
same than an accountant convicted for dishonesty.
An employee’s use of drugs or alcohol outside the workplace is unlikely to amount to a fair reason for a
fair dismissal.
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- Redundancy
Genuine redundancy is a defence. When a person is redundant, his employer cannot be expected to
continue the employment, although there are safeguards in the matter of unfair selection for redundancy.
Examples are selection because of pregnancy or trade union membership or activities or for asserting
statutory rights or on health and safety matters
- Some other substantial reasons
An employer may on a wide variety of grounds which are not specified by legislation satisfy an
employment tribunal that a dismissal was fair and reasonable.
Crime and suspicion of crime may be included under this heading
The matter of fair or unfair dismissal depends also upon the terms of the contract. if the difficulty is that a
particular employee is refusing to do work which involves him, for instance, spending nights away from
home, then his dismissal is likely to be regarded as fair if there is an express term in his contract requiring
this. Employees who are in breach of contract are likely to be regarded as fairly dismissed.
Dismissal which are union-related
An employee will be regarded as automatically unfairly dismissed if the principal reason for the dismissal
was one of the following
- that he was a member of a trade union which was independent of the employer;
- that he had taken part in the activities of such a union at an appropriate time,
- that he was not a member of any trade union
- that he was selected for redundancy on any of the three above “trade union” grounds
Statutory restriction placed on employer or employee
If, for example, the employer’s business was found to be dangerous and was closed down under Act of
Parliament or ministerial order, the employees would not be unfairly dismissed. Furthermore, if a lorry
driver is banned to drive for 12 hours and he does so, he could be dismissed fairly.
o Grievance and disciplinary procedures
The Employment Act 2002 provides statutory dismissal, disciplinary procedures and grievance procedures.
Where conduct is the main reason the employer must show, on a balance of probabilities, that at the time
of the dismissal he believed the employee was guilty of misconduct and that in all the circumstances of
the case it was reasonable for him to dismiss.
During the disciplinary hearings and the appeal process, the employer must have been fair to the
employee; in particular, the employee must have been heard and allowed to put his case properly.
An employee has a right to be accompanied at the hearing by a trade union representative.
o Employee’s contributory fault
This can reduce the compensation payable to the employee by such percentage as the tribunal thinks fit.
Suppose an employee is often late for work and one morning his employer, who can stand it no more,
sacks him. The dismissal is likely to be unfair in view of the lack of warning but a tribunal would probably
reduce the worker’s compensation to take account of the facts.
Unacceptable reasons for dismissal
These are as follows:
- Dismissal in connection with trade unions
- Unfair selection for redundancy
- Industrial action
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- Dismissal in connection with pregnancy and childbirth and parental and adoption and paternity
leave
- Pressure on employer to dismiss unfairly
- Transfer of business
- Health and safety dismissal and detriments
- Dismissal for asserting statutory right
- Dismissal for performing the duties of a member-trustee of an occupational pension scheme
- Dismissal for performing the duties of an employee representative in redundancy consultation or
putting up for election to be one
o Automatically unfair dismissals
Unfair dismissal do not require any particular period of service with the employer.
The reasons which make a dismissal automatically unfair can briefly be listed as follows:
- trade union membership or activities
- not belonging to a trade union
- pregnancy and dismissal in connection with parental and adoption and paternity leave
- selection for redundancy on any of the above grounds
- the transfer of the undertaking or a reason connected with it
- claiming a statutory employment right under the ERA 1996
- in health and safety cases involving union safety representatives
- performing the duties of a member nominated trustee under the Pensions Act 1995
- being an employee representative in redundancy consultation
- refusing to do shopping or betting work on a Sunday
- exercising rights under the Working Time Regulations
- claiming rights to time off for study and training under the ERA 1996
- asserting rights to time off for study and training the ERA 1996
- dismissal of employees because they exercised the right to be accompanied at a disciplinary hearing
- whistleblowing – protection of whistleblowers is provided by the Public Interest Disclosure Act 1998
o Unfair dismissal and frustration of contract
A contract of service is frustrated by incapacity, e.g. sickness, if that incapacity makes the contract
substantially impossible of performance at a particularly vital time, or by a term of imprisonment. if a
contract has been so frustrated, then a complaint of unfair dismissal is not available because the contract
has been discharged on other grounds, i.e. by frustration. Thus termination of a contract of service by
frustration prevents a claim for unfair dismissal.
o Remedies for unfair dismissal
These are as follows:
- Conciliation
- ACAS arbitration and compromise agreements
- Other remedies:
- seek reinstatement or re-engagement; or
- claim compensation
o Conciliation
An employment tribunal will not hear a complaint until a conciliation officer has had a chance to see
whether his intervention can help to the resolution of the conflict
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o ACAS arbitration and compromise agreements
Employment Rights Act 1998 gives the following provisions:
The Act allows parties to opt for their dispute to be resolved by independent binding arbitrations and
gives ACAS powers to pay for and provide an arbitration service for claims of unfair dismissal and unlawful
discrimination. Currently, the parties to an individual employment rights dispute may conclude that
dispute by reaching, for example, a financial settlement.
The Act also allows ACAS-appointed conciliation officers to conciliate in claims relating to statutory
redundancy payments.
o Other remedies
An employee who has been dismissed may:
- seek reinstatement: putting back the employee in the same terms and position as before
- re-engagement: putting back the employee but under different terms
- claim compensation
o Calculation of compensation
The basic award is based on gross pay, but the compensatory pay is based on net pay.
The compensation for unfair dismissal is in four parts, as follows
- The basic award
- Compensatory award
- Additional award
- Time limits
1) The basic award (maximum £9,900 for those with 20 years’ service or more). This award is computed as
a redundancy payment. Contributory fault of the employee is taken into account.
• Example of basic award
Employee: 35 yrs-old; Time of employment: 10 yrs; earning: £400 per week (take home £350)
Unfairly dismissed but he has history of lateness for work and his contributory fault is assessed at 25%
The employee is in the category that gives him a basic award of 1 week’s pay for every year of service up to a maximum of £330
per week.
10 x £330
£3,300
Less: 25%
£ 825
£2,475 = basic award
If the dismissal was considered automatically unfair, for example, for trade union membership, the minimum award would be
£4,400. This may be reduced for contributory fault.
2) Compensatory award (maximum £63,000). This consist of:
- estimated loss of wages, net of tax and other deductions to the date of the hearing less any money
earned between the date of dismissal and the hearing
- estimated further losses
- loss of any benefits such as pension rights and expenses
- loss of statutory rights. It is rare to get an award under this heading but it can be given for loss of
minimum notice entitlement. For 10 years employment is entitled to 10 weeks notice.
• Example of compensatory award
Employee: 35 yrs-old; Time of employment: 10 yrs; earning: £400 per week (take home £350)
Unfairly dismissed but he has history of lateness for work and his contributory fault is assessed at 25%
The employee is in the category that gives him a basic award of 1 week’s pay for every year of service up to a maximum of £330
per week.
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1.
The loss up to the hearing
10 x £350
Loss up to time of getting new job 2 x £350
£3,500
£ 700
i. £4,200
£1,500
£3,150
Less 25% (for contributory fault)
2.
Loss of statutory rights: a nominal figure of
Less 25% (for contributory fault)
£ 100
£ 25
£ 75
£3,150
£ 75
£3,225 = Compensatory award
The employee’s total award is therefore:
Basic
Compensatory
£2,475
£3,225
£5,700
These calculations on higher salaries may very well reach the maximum of £63,000, but this will be likely
only in cases of higher-ranking executives
3) Additional award: This is available in addition to the above when an employer fails to comply with
an order for reinstatement or re-engagement unless it was not practicable for him to do so. The
minimum amount is £8,580 and the maximum is £17,160.
4) Time limits: A claim for compensation against an employer for unfair dismissal must reach the
tribunal within three months of the date of termination of employment.
A tribunal can hear a claim after three months if the employee can prove that it was not
reasonably practicable for him to claim within three months or if he did so as soon as he could in
the circumstances.
o Unfair dismissal: damages for injury to feelings
Employment tribunals do not have power to award compensation for injury to feelings, or other noneconomic "loss", in unfair dismissal cases.
DISCRIMINATORY DISMISSAL
In addition to legislation relating to unfair dismissal, discrimination legislations deals with complaints to
employment tribunals for dismissal on the grounds of discrimination.
ERA 1996 prevents double compensation being paid, once under discrimination legislation, and once
under the general unfair dismissal provisions of the ERA.
REDUNDANCY
The ERA 1996 gives an employee a right to compensation by way of a redundancy payment if he is
dismissed because of a redundancy.
o Meaning of redundancy
Redundancy is a form of dismissal from your job, caused by your employer needing to reduce the
workforce. Reasons could include:
- new technology or a new system has made your job unnecessary
- the job you were hired for no longer exists
- the need to cut costs means staff numbers must be reduced
- the business is closing down or moving
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Redundancy is presumed to occur when the services of employees are dispensed with because the
employer ceases to carrying on business where the employee was employed, or does not require so many
employees to do work of a certain kind.
o Bumped or transferred redundancies
On some occasions when redundancies are impending, management may see some advantage in
proposing that a potentially redundant employee should move into another job and displace the present
holder of that post, who will then be dismissed. Provided that the dismissal is attributable to the
diminishing requirements of the employer for employees to carry out work of a particular kind, the
employee “bumped” out in favour of the employee whose job is disappearing will nevertheless be
dismissed for redundancy. As employers prepare to shed staff this year, therefore, many may consider
“bumping” — a transferred redundancy.
o Eligibility
In general terms, all those employed under a contract of service as employees are entitled to redundancy
pay, including a person employed by his or her spouse. Furthermore, a volunteer for redundancy is not
excluded from claiming. Certain persons are excluded by statute or circumstances. The main categories
are listed below;
1. A domestic servant in a private household who is a close relative of the employer
2. An employee who has not completed at least two years of continuous service
3. An employee who is dismissed for misconduct will lose the right to a redundancy payment
4. An employee who accepts an offer of suitable alternative employment with his employer is not
entitled to a redundancy payment. An employee who unreasonably refuses an offer of alternative
employment is not entitled to a redundancy payment, as illustrated in the following case.
As regards time limits, the employee must make a written claim to the employer or to an employment
tribunal within six months from the end of the employment. If the employee does not do this, an
employment tribunal may extend the time for a further six months, making 12 months in all, but not
longer.
o Amount of redundancy payment
It is necessary to ascertain the amount of a week’s pay. This amount is whichever is the smaller of the
following amounts:
- the employee’s weekly wage, or
- the sum of (current) £330
The redundancy payment then consists of the total of the following amounts:
- half a week’s pay for each complete year during the relevant period for which the employee was
aged 21 and under
- one week’s pay for each complete year during the relevant period for which the employee was
aged between 22 and 40
- one and a half week’s pay for each complete year during the relevant period for which the
employee was aged 41 or more
•
Example of redundancy payment
A man of 52 who is made redundant having been continuously employed for 18 years and earning £280 per week as gross
salary at the time of his redundancy would be entitled to a redundancy payment as follows:
34 to 41 years = 7 years at one week’s pay
41 to 52 years= 11 years at one and a half pay
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=7 weeks
=16½ weeks
23½ weeks
It follows, therefore, that the redundancy payment would be=
23½weeks x £330= £7,755
Statutory redundancy pay (from www.direct.gov.uk)
The calculation for your statutory redundancy pay is based on:
•
how long you have been continuously employed
•
your age
•
your weekly pay, up to a certain limit (£430 current maximum)
You will get:
•
0.5 week’s pay for each full year of service where your age was under 22
•
1 week’s pay for each full year of service where your age was 22 or above, but under 41
•
1.5 week’s pay for each full year of service where your age was 41 or above
The maximum number of years that can be taken into account is 20 years. You can't be given statutory redundancy pay for more than
20 years' employment.
For example: If you are 45, your weekly pay is £430 per week and you have completed 15 years’ full service, you will receive £7,310
statutory redundancy pay.
Step one: 1.5 weeks x 4 years full service when you were 41 or above = 6 weeks
Step two: 1 week x 11 years service when you were under 41 = 11 weeks
Step three: 6 weeks + 11 weeks = 17 weeks x £430 (max weekly wage) = £7,310 statutory redundancy pay
The online calculator can help work out how much statutory redundancy pay you might be entitled to.
o Procedure for handling redundancy
There are different formulas used to decide the selection of the employees that will be considered
redundant, for example, the last employee is in, the last one will be out. Selection procedures may also be
based on poor work performance or attendance record and there is no requirement on the employer to
find out reasons for this. If there is no agreed procedure, the employer must decide after considering the
pros and cons in each case. A dismissal may be unfair if some reasonable system selection is not followed.
Every attempt should be made to relocate a redundant worker, for example, searching for alternatives in
other companies within the group. Failure to do so could result in unfair dismissal.
Methods of selection
If a method for deciding redundancies has been agreed with a trade union, your employer should follow
it. Otherwise, there are some common approaches your employer could use and combine when selecting
employees for redundancy.
In some cases there may be no need for your employer to follow a selection process because the group of
employees to be made redundant will be clear. For example, if your employer is closing down a particular
operation in a company and will have to make all the employees working there redundant.
- Selection pools
One method your employer could use is to consider which group or section of the workforce the
redundancies will be selected from. This is called the ‘selection pool’.
After identifying the selection pool, the employer should apply selection criteria to it, to narrow down the
employees. Your employer should, as far as possible, use objective selection criteria that can be applied
equally and fairly across the workforce. Examples of selection criteria could be:
- disciplinary records
- experience
- capability
- relevant skills and competence
Your employer cannot select people for redundancy based on the following grounds: gender, marital
status, sexual orientation, race, disability, religion or belief, age, trade union membership, health and
safety activities, working pattern (e.g. part-time or fixed-term employees)
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If your employer does select you for redundancy based on one of these grounds, then your redundancy
becomes an automatic unfair dismissal.
- Last in first out
Your employer can look at all employees’ length of service with the company, and select those with the
shortest service (the last ones to join). This can sometimes be indirect discrimination on the grounds of
age if it affects one age group more than another, unless your employer can objectively justify it.
o Consultation over collective redundancies
The employer has the obligation to consult when it is proposed to dismiss as redundant 20 or more
employees at one establishment within a period of 90 days
The employer must consult all those who are appropriate representatives (elected representatives or
member of the trade union)
The employer has the obligation to notify BIS (Department of Business, Innovations & Skills) of proposed
redundancies at least 90 days before any notice dismissal has been issued in the case of 100 or more
redundancies or at least 30 days before in the case of 20 or more redundancies.
The BIS has issued new regulations on notifying collective redundancies
The BIS has published a new guidance document on redundancy consultation and notification.
o The role of ACAS (Advisory Conciliation and Arbitrations Service)
ACAS has now taken on redundancy pay entitlement as an issue on which it has a duty to conciliate if a
person puts in an application to an employment tribunal concerning entitlement to redundancy pay.
o Collective agreements on redundancy
The Secretary of State may, on the application of the employer and the unions involved, make an order
modifying the requirements of redundancy pay legislation if he is satisfied that there is a collective
agreement which makes satisfactory alternative arrangements for dealing with redundancy.
OTHER METHODS OF TERMINATION OF THE CONTRACT OF SERVICE
Having considered the termination of the contract by unfair or discrimination dismissal or redundancy, we
must now turn to other ways in which the contract of service may be brought to an end.
These are set out below:
- By notice
- By agreement
- By passage of time
- By frustration
- Ordinary partnership dissolution, Company liquidation or Sole trader bankruptcy
o By notice
A contract of service can be brought to an end by either party giving notice to the other.
The most important practical aspect is the length of notice to be given by the parties, in particular the
employer. The ERA 1996 contains statutory provisions in regard to minimum period of notice.
1 week notice for 1 month to 2 years of employment
After 2 years the minimum notice is increased to 2 weeks, and for each year of service after that is
increased by one week up to a maximum of 12 weeks’ notice after 12 years of service
- Notice that the employee must give to the employer: If the employee has worked for one month or
more, the legal minimum amount of notice that he must give is one week.
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Breach of the provisions relating to minimum periods of notice do not involve an employer in any penalty,
but the rights conferred by ERA 1996, will be taken into account in assessing the employer’s liability for
breach of contract.
A notice is not required in case of dismissal for misconduct (e.g. dishonesty, disobedience, neglect and
drunkenness).
In these days when there is a great need for skilled personnel, it is tempting for employees to break their
contracts by leaving at short notice to go to other jobs.
o By agreement
As in any other contract, the parties to a contract of employment may end the contract by agreement.
In case of promotion of an employee, the old contract is discharged and the new one takes over.
A genuine mutual agreement (usually achieved through a negotiated severance arrangement) is not a
dismissal. However, if it can be claimed that the intention of the employer, whatever the circumstance,
was to dismiss the employee and the employee was forced to obtain the best deal he could under that
threat, then it can be legally challenged as though it were a dismissal.
o By passage of time
In the case of a fixed-term contract, for example, for three years, the contract will terminate at the end of
the three years, though there may be provisions for notice within that period
o By frustration
Frustration occurs if an event occurs, not reasonably foreseeable when the contract was made and not
under the direct control of either party, which renders impossible further performance of the contract in
the way envisaged by the parties to it.
A contract of service can be discharged by frustration which could be incapacity such as illness. However,
other events can bring about the discharge of a contract of service by frustration, e.g. a term of
imprisonment.
Furthermore, death of either employer or employee will discharge the contract by frustration from the
date of the death, so that, for example, the personal representatives of the employer are not required to
continue with the contract.
The death of a human employer is usually regarded as a “dismissal” for redundancy purposes and the
employee may make a claim against the deceased employer’s estate or possessions
o Ordinary partnership dissolution
A person who is dismissed by an ordinary partnership which is dissolved is regarded as dismissed on
dissolution of the firm. Under ERA 1996 this is regarded as having occurred because of redundancy
Of course, if a firm or sole trader sells the business the employees are transferred to the new employer
automatically under TUPE Regulations 2006.
o Limited liability partnerships: administration and liquidation
Such a partnership is a separate legal person from its members and the insolvency structures applying to
it in terms of the appointment of an administrator and of a liquidator are similar to the company’s legal
rules.
o Company liquidation
- Appointment of an administrator – Company rehabilitation
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The object of administration orders is primarily to allow a company to be put on a profitable basis if
possible. On the appointment of an administrator, the company’s executive and other directors are not
dismissed but their powers of management are exercisable only if the administrator consents.
Since the administrator is made an agent of the company by the court employees are not automatically
dismissed.
If an administrator dismisses an employee, that employee can make a claim for a redundancy payment.
There are two possibilities for company liquidation
- A compulsory winding-up
- A voluntary winding-up
1. A compulsory winding-up: Here the court orders the winding up of the company, usually on the
petition of a creditor because it cannot pay his debt. The effects of the order will be as follows:
- When the company’s business ceases, the winding-up order will operate as a wrongful dismissal
of employees
- When the liquidator continues the business he may be regarded as an agent of the company so
that the employment continues. Alternatively the court may regard the appointment of the
liquidator.
2. A voluntary winding-up: This commences on the resolution of the members and if the company’s
business ceases there is a dismissal of employees. If the company’s business continues, the
position would appear to be as set out above.
o Bankruptcy (of a Sole trader)
The bankruptcy of an employer, such as a sole trader, or indeed of the employee, does not automatically
discharge the contract of service, though it will happen if there is an express term in the agreement.
Wrongful and summary dismissal at common law
The claim at common law for wrongful dismissal is based on general principle of the law of contract of
service by the employer.
The common law action has, of course, been largely replaced by the provisions of the Acts relating to
unfair dismissal. Nowadays, a common law claim is only likely to be brought by an employee who has a
fixed-term contract at a high salary because if wrongful dismissed, he can find more profitable in terms of
compensation for damages.
o Wrongful dismissal and unfair dismissal: Effects of damages limit
Wrongful dismissal is the name given to a breach of an employment contract by an employer which is
connected with the actual dismissal or the constructive dismissal of an employee (for example failure to
give an employee the length of notice to which he is entitled under his contract).
Unfair dismissal can, and frequently does, occur without there being any breach of contract/wrongful
dismissal. It is a relatively new concept.
Frequently "unfair dismissal" will also be "wrongful dismissal" (and vice versa) but not always.
Wrongful dismissal cases were traditionally dealt with by the courts. However since 1994 Employment
Tribunals have had jurisdiction to deal with all wrongful dismissal cases but are not allowed to award
more than £25,000. This contrasts with unfair dismissal cases where tribunals can award much greater
amounts and discrimination cases where there is no limit on what an employment tribunal can award.
o The wrongful dismissal claim
Some of the main reasons for preferring a wrongful dismissal claim are as follows:
a. An employee who is dismissed may not have completed the one year’s service required for an
unfair dismissal claim.
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b. The time limit -e.g. three months- for bringing claims of unfair dismissal may have expired. The
period for wrongful dismissal, which is a common law claim in the country court or High Court, is
six years from dismissal.
c. Awards for unfair dismissal may be reduced substantially by a sum representing the fault of the
employees –e.g. late arrival at work. Damages for wrongful dismissal are not subject to a
deduction for contributory fault.
d. The damages for wrongful dismissal in the case, for example, of highly paid person could still well
exceed the maximum amount of compensation available for unfair dismissal (currently £63,000).
o When does wrongful dismissal occur?
a. When the contract is of indefinite duration but terminable by notice, the termination of the
contract without notice or with shorter notice than that to which the employee is entitled
b. in the case of fixed-term contract, termination before the fixed term expires
c. in the contract to carry out a specific task, termination before the task is completed
d. when the employee is dismissed on disciplinary grounds but the employer does not follow the
right procedure
e. selection for redundancy in breach of a procedure set out in the contract
RIGHTS AND REMEDIES ON DISMISSAL
These are as follows:
Written statement or reasons for dismissal
At common law an employer is not required to give his employee any reasons for dismissal. However, the
ERA 1996 provides that when an employee is dismissed or by failure to renew contract for a fixed term,
he must be provided by his employer on request, within 14 days of that request, with a written statement
giving particulars of the reasons for his dismissal. If an employer refuses to give a written statement the
employee may complain to an employment tribunal.
Employers insolvency
If the employer is bankrupt or insolvent, or when the employer is a company in liquidation, the unpaid
wages of an employee have priority as to payment but only to a maximum of £800 and limited to services
provided during the period of four months before the commencement of the insolvency.
Under ERA 1996 an employee may, in the case of his employer’s insolvency, make a claim on the National
Insurance Fund rather than relying on the preferential payments procedure.
The limits of the employee’s claim on the National Insurance Fund are as follows:
- arrears of pay for a period not exceeding eight weeks with a maximum of £290 per week
- holiday pay with a limit of six weeks and a financial limit of £290 per week
- payments instead of notice at a rate not exceeding £290 per week
- payments outstanding in regard to an award by an employment tribunal for compensation for
unfair dismissal
- reimbursement of any fee or premium paid by an apprentice or articled clerk
Damages for wrongful dismissal
An award of damages is the most usual remedy for wrongful dismissal. The period by reference to which
damages will be calculated is either:
- in the case of a contract of indefinite duration, the period between the date of wrongful dismissal and
the earliest date on which the employer could lawfully have terminated the contract.
- if the employee was employed under a fixed-term contract, the damages period will in general be the
unexpired remainder of the fixed term.
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o Heads of damage
No damages can be recovered for the manner of dismissal –e.g. for hurt feelings- nor for the fact that the
dismissal may make it more difficult to get another job.
o Mitigation of loss
The ex-employee must take reasonable steps to find other suitable employment or become selfemployed. The court will take into account the nature of any reference given to the employee and the
difficulty a dismissed employee hay have in finding other suitable work.
The equitable remedy of specific performance and injunction
A decree of specific performance is an order of the court and constitutes an express instruction to a party
to a contract to perform the actual obligations which he undertook under its terms.
An injunction is an order of the court whereby an individual is required to cease from the further doing of
the act complained of. An injunction may be used to prevent many wrongful acts, e.g. the torts of trespass
and nuisance, but in the context of contract the remedy has been granted to enforce a negative
stipulation in a contract in a situation where it would be unjust to confine the claimant to damages.
Employee’s breach of contract
An employer may sue his employees for damages for breach of the contract of service by the employee.
Such claims are potentially available, for example, for damage to the employer’s property, as where the
machinery is damage by negligent operation.
Action by employers against their employees are, or course, not uncommon in the area of contract in
restraint of trade and for breach of the duty of confidentiality.
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