BUSINESS LAW
INTRODUCTION TO LAW
GENERAL CONCEPTS
Definition Of Law:
Although there is no exact definition for the word "law", it may be
defined as a code of conduct which controls the activities of people in a
given community,
a- towards each other in their private and business lives
b- in their relationship with the state.
Law 's set and enforced by a sovereign political authority. In our
modern societies the sovereign political authority is usually organised in
the form of "state".
There have been many kinds of sovereign bodies in the past ranging
from Chiefs of Tribes, Medieval Kings, Princes and the late form of
sovereign bodies is Democracy . In TRNC the sovereign body is the
Assembly of the Republic. And in Turkey , The Grand National
Assembly, in UK Queen in parliament in US Congress etc.
However, this definition does not cover that part of law which is
unwritten and customary. It is said that no nation can survive only
without other rules of social conduct which hold its members together
and become binding on them by habitual practice. There are also rules
of Morality , Ethics, Customs and Religion.
Law, which is recognised and enforced by the courts must be
distinguished from the above rules of human behaviour or social
conduct. The sanction for a breach of any of these rules is the
conscience of the person concerned. In other words, Law is enforced by
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the external power of the courts, whereas rules of morality, religion or
ethics are not.
LAW AND CUSTOMS:
There are other rules of social conduct which are called customs.
There may be recognised by the courts if they are referred to by any
statute or law. For example , in Cyprus, the Sale of Good's Law allows
the Courts in deciding the "merchantable quality" of goods sold, to take
into account existing customs among merchants dealing in goods of the
same kind.
Many times rules of Law and morality may be the same but not
always. For example in many countries in Europe now, homosexual
behaviour in private between consenting adults is not illegal although
many people would regard it against religion or moral rules.
On the other hand there may be nothing immoral for a person to
smoke marijuana in some countries but under the rules of Law it is a
very serious crime (offence) punishable by a term of imprisonment in
almost all countries of the world.
Therefore, a more precise definition of Law today would be the
following: " Law is a body of rules for human conduct within a
community which by common consent of that community shall be
enforced by external power."
The essential elements required for the existence of Law are the
following:
a-There must be a community,
b- There must be a body of rules for human conduct or behaviour within
that community
c- There must be common consent of the community that these rules
shall be enforced by external force.
Common consent of a community which some jurist may refer as the
" common will" of the community defined as follows.
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The express consent of an overwhelming majority of its members
that those who dissent are of no importance as compared with the
community viewed as an entity in contrast to the will of its single
members.
Main Characteristic of Law
a- The most important distinction of law from the rules of social
conduct is the fact that the law has to be enforced by external power. i.e.
courts, police force etc.
b- Law is of general application and permanent in nature. Its rules
prescribe directives commanding what is right and prohibiting what is
wrong. i.e. "you should pay taxes" (commanding) or " you shouldn't kill
or steal" ( prohibitive).
c- Rules of Law whether they are commanding or prohibitive are
aimed at justice and prevention of arbitrary use of power both by
individuals as well as officials of a State.
This means the law restricts the will of individual as well as the
society. Because it is impossible to talk about freedom and liberty of
individual in a society where there is no respect for law. By doing this,
the law protects both individual as well as the society or state.
Although this may appear to be in contradiction, it shouldn't be
forgotten that overall interest of individuals as well as state lies in
keeping the balance between absolute liberty of the individual and
absolute power of the state which is called sovereignty.
As neither the individual, nor the /state can exist or survive without
each other, the role of the law is to act as moderator of the age old
conflict between the liberty of individual and the authority of State.
Inevitability and Importance of Law
Law is an important, necessary and inevitable part of social life. In
every society, regardless its level of development its culture its political
and economic regime there always is a system of law . This fact is
expressed in the Latin dictum ubi societas ibi ius which means that
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wherever here is society here is law. Also relations among societies
organised as state as well as the structure and activities of international
organisations involve legal aspects and problems.
From cradle to grave every person inevitably come into contact with
law and is affected by it almost constantly. When a baby is born he or
she has to be registered in the Registries of Birth, Death and Marriage
(in Turkey), when a person dies a death certificate has to be obtained
before his or her burial because these formalities are required by law.
In applying for a job or to a school in paying taxes in voting in
marrying in travelling in driving in buying and selling even in walking
in the streets people are subject to law. In times of social unrest within
or between societies such as wars and revolutions or natural disasters
such as earthquakes or floods the existing legal system may be seriously
damaged or broken down. Yet, sooner or later it will either be reestablished or replaced by a new legal order or fail and then be
eliminated or punished in the name of the legal system against which
they had fought.
On the other hand a legal system may not or can not be fully
enforced there may be arbitrariness in its applications . Some people
may find ways to avoid it or it may be demonstrated that it is a reflection
of the socio-economic infrastructure yet it does make itself felt one way
or another. Some may wish or hope or predict that legal order at least as
a means of coercion should or will disintegrate . It seems, nevertheless,
that it will be here to stay for generations to come.
The Necessity For Law
" Bank Clerk Shot"
" Armed Gang Steal Wage Roll"
" Terrorists Bomb Hotel"
" Soccer Fans Run Wild"
" Hi-jakers Kill Hostages"
Headlines such as these are commonplace and their like can be seen
in newspapers most days of the week. If there was no system of law the
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persons responsible for the above events would be under no fear of
punishment or sanction by the State or community in general. Murder is
considered by modern society to be a terrible offence. therefore. it is
essential that there is an established procedure for providing that murder
is a crime and that murderers will be punished. It is essential in a
civilised community that there is a clearly defined criminal law which
may be enforced and a system of law for determining commercial and
Private disputes and providing a means of compensation for injured
parties.
If community did not have system of law which was capable of
being enforced he strongest person or group of persons could dominate
with arbitrary and unfair rules or there could be anarchy with no form of
establishment and individuals following the dictates of their own
conscience. If a community is to develop as a fair and free society law
must be present to ensure that and individual's right and freedoms are
protected. As a community develops its industry and business , its law
must similarly develop and create a system which will ensure that
transaction may take place with reasonable certainty, that disputes will
be settled and that breaches of law will be enforced or compensated. It ›s
not a coincidence tat as business in the world has developed over the last
100 years, so has mercantile and company law and the law dealing with
insurance revenue and taxation consumer protection industrial relations
and similar matters.
Law is not only needed to ensure that offenders will be punished it
creates a code of conduct which a community wishes to follow. The
Factories Acts created laws to protect workers from injury by placing a
duty on an employer to provide a safe place of work. Drivers of motor
vehicles are required to be insured, so that a third party injured in an
accident will be compensated for any loss suffered. Shopkeepers have to
refund the cost of goods which customers return because they are not of
merchantable quality.
A community has its own values and its law should reflect these
values. Laws are not made to be broken but to be followed.
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All breaches of civil or criminal law are not necessarily deliberate.
The examples mentioned above could result in a breach of law which
was not intentional; an employer may have created a dangerous place of
work by accident a motor car accident could have been caused by the
negligence of the driver, and a shopkeeper may not have known that the
goods were unsatisfactory. Yet all there may have committed an offence
or a breach of law. There have been breaches of law because the
community created the laws and requires individuals to behave or
conduct themselves accordingly for the benefit of the community as a
whole.
The Main Legal Systems:
If we leave aside the great systems of Hindu and Islamic law, the
modern world may be divided into two main both groups of legal
systems, the common law countries which comprise the Englishspeaking world and territories which have formed part of the British
Empire and Commonwealth and the civilian countries which include
continental Europe and many other even Oriental-states which have,
with westernization, adopted accidental codes of law, like Japan and
Turkey. To a greater or lesser degree, civilian systems stem from Roman
Law, or rather revived Roman Law. Some jurists add to legal systems
mentioned above the one of the socialist countries which greatly
affected the former Eastern European countries. The socialist law also
accelerated the development of International Law in many aspects. The
main characteristics of some of these legal systems are briefly explained
below.
I- Roman Law
Roman Law was the legal system developed and applied in the
ancient Rome and the Roman Empire. As we noted above it is called
civil law. One reason for this is the fact that the main tenets of the
Roman Civil law are complied by Emperor Justinian and his successors
in a series of treaties collectively called the Corpus Juris Civilis. i.e. the
basic principles and rules of the Roman civil law. Off course Roman
law did not consist only of civil or private law i.e. the legal rules
regulating rights, obligations and relations of private persons and
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procedures of litigation concerning civil law cases. Along the civil law
there also was a public law pertaining the organisation and functions of
the Roman State. Thus, one of the basic characteristics of the Roman
law is the division between ius privatum (private law) and ius publicum
(public law) . But the part of the Roman law later affected the legal
systems of many countries has mainly been its private or civil section.
Corpus Juris Civilis was coplied in the Sixth Century AD During the
next five centuries the Roman law had been neglected and had no
impact outside of Byzantium “its second life began with the use and
study of Justinian’s work in the Italian Universities of the eleventh
century AD which spread thereafter throughout Europe influencing the
development of judicial terminology and though and of the municipal
(national) legal systems of Europe down to the period of codification,
with the French Code Napoleon
( The French Civil Code prepared
with the directive of the Emperor Napoleon Bonapart) of AD 1804.”
Today, the legal systems of many countries are based on the Roman
law tradition. All Europe with the exception of England, all of central
and South America, Philippines, Japan and Turkey may cited here.
The basic characteristics of the Roman law system may be
summarised as follows:
 As we mentioned above in this system the law is divided as public
and private law.
 The legal rules are essentially in the form of written laws, codes and
regulations. This means customs and the court decisions play a
limited role as parts or sources of law.
 Many of the basic legal principles, institutions and concepts have
their origin in the Roman law and frequently expressed in Latin. Here
are some examples:
 Pater is est quem nuptiae demondstrandt (the father of a child is the
husband)
 Pacta sunt serverda ( Parties to an agreement must observe its
clauses)
2-Common Law
As Roman law developed originally in the ancient Rome, the
common law came into being in the medieval England. It is the product
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of the actions of courts. This means that in the case of common law the
main source of the legal rules in force had been the decisions of the
courts and not the written laws. To explain its nature we may give the
following account for common law.
As we have noted earlier, historically legal rules developed mostly in
the form of customs. Customs are unwritten rules of social conduct
which come into being out of practice in various areas of communal life.
Those customs which persist over long periods of time eventually
become unwritten legal rules and thus observed in social activities and
relations they regulate. Most of the customs have been replaced in the
course of history by written legal rules in the form of laws, codes,
regulations etc. But even today in various areas of national and
international life there are customs which are legally recognised and
enforced. Customs having the nature of legal rules are called customary
law. As in other societies in the Anglo-Saxon England before the
Norman Conquest (1066 A.D.) many of the social relations had been
subject to customs which were administered mostly by the local courts.
After the Norman rule was established most of these customs continued
to be observed by local courts but they eventually lost their importance
and a centralised judicial system supplanted them. The English common
law had been developed originally by the decisions of the judges in
these centralised courts. That is why sometimes it is also called as
"judge-made law".
These courts in deciding the cases which were
brought before them based their rulings on the local and general
customs, on precedents i.e. previous decisions of the same or other
courts for similar cases and on the opinions and interpretations of the
judges. Thus, the decisions of the courts became applicable in all similar
cases. For cases which could not be resolved on the basis of existing
customs or by referring to precedents (i.e. previous court decisions), the
courts found solutions of their own.
Consequently the English law
developed as the established decisions of the courts which became legal
rules to be applied uniformly in the whole country. Since these rules
came into being by the rulings of the courts for the cases taken by them
they are also called as "case law".
"A different usage of the term
common law comes into play when we distinguish among the legal
systems of the various nations. Among the Western countries we
distinguish between the common law nations and the civil law nations.
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In this context the common law nations are understood to be countries
deriving their legal systems from the English model, though in such
countries today considerable portion of the law is, of course, embodied
in statutes. the civil law countries, on the other hand are those deriving
their legal traditions, concepts, and vocabularies from ancient Rome.
Such countries, it happens, are today characterised by comprehensive
codification’s, legislatively imposed, from which in theory at least the
courts derive all the rules by which cases are decided. A civil law
country (sometimes called a country of the modern Roman law) does
not, generally recognise judicial decisions as being of themselves an
original source of legal rules. Roughly speaking among the western
nations the common law countries are the English speaking nations,
while the countries of the civil law are those where the prevailing
language is not English, but is usually one of the modern derivatives of
Latin. Naturally, as with all such distinctions, there are anomalies; for
example, a small pocket of civil law maintains itself with moderate
success today in Louisiana (USA)" .
In sum common law had originally been developed by the decisions
of the courts or judges. Although in modern times written laws play an
important part in all common law countries (England, USA, Australia,
New Zealand etc.) the court decisions is still one of the basic sources of
law as legal rules or precedents. It is for this reason common law may at
times is called as "judge-made law" "caselaw" or "unwritten law".
Originally the courts and judges in England based their decisions on
customs (customary law) and eventually on the previous decisions of
their own or of other courts. Even today in common law countries the
study of the court decisions play an important part in the education in
law schools and in legal practice. An interesting feature of the common
law tradition is the use of Latin terms even more widely than in the
Roman law system.
3-Islamic Law
The main characteristics of the Islamic law is, of course its religious
nature, Islam is a comprehensive or totalitarian doctrine. It therefore
aims at regulating all aspects of personal and social life on the basis of
its religious precepts. These rules are strictly legal i.e. must be obeyed in
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the Moslem communities or in countries where Islam is the official
order of the state, and called "sharia", the Islamic law.
In today's world only a few Moslem countries (Iran, Saudi Arabia)
are strictly adhered to Sharia. On the grounds of practical necessities and
political preferences most of the Moslem states and societies have laws
which are contrary or outside the rules and principles of Islamic law.
The basic source of the Islamic law is Koran. Though Koran
contains a number of precepts pertaining to the conduct to be adhered in
the social life these rules are certainly not sufficient to coverall aspects
of the social life and relations. This gave rise to a second source of
law; the deeds and pronouncements of the Prophet, called "sunna".
The deeds of the Prophet comprise not only his acts but also his
remaining silent in the face of the acts or opinions of others for such
silences are regarded as implicit approval (5). Yet another source is the
"ijma" which is the agreement of the qualified legal scholars of Islam
namely the "mejtahid" c~ issues not regulated by the Koran or sunna.
mejtahid were required first to seek the solutions of legal problems in
the Koran and in the sunna and if such a solution was lacking in these
sources they then had to ascertain it by the method of analogy called"gýyas". Solutions found by the mejtahids are called "ijtihat". But
around the tenth century "the door of ijtihat" was closed, that is the
legal scholars were not permitted anymore to develop the Islamic law
through ijtihat.
As mentioned earlier Islamic law in its traditional form was not
found to be completely appropriate for the needs of modern life in many
Moslem countries. For example "usury" (riba, interest on a loan) was
simply forbidden by the Koran. The criminal law part of the sharia "had
fixed penalties called "hadd" for certain offences such as the amputation
of the hand for theft and stoning to death for adultery. Outside the six
specific hadd offences (winedrinking, fornication, theft, slander,
highway robbery, and apostasy i.e. repudiating Islam and embracing
another religion) Sharia law allows the judge almost unfettered
discretion in the determination of offences and punishment thereof. "(
Polygamy and divorce of the wives by simply declaring it by the
husbands (talag) are permitted. All these rules are evidently far from
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being acceptable in terms of the modern ideas and ideals of justice. For
example the principle "nullum crimen nulla poena sine lege" (there can
be no crime and no punishment unless they are clearly shown in the
laws) is now one of the most .basic creeds of the universal human rights.
As a result many Moslems countries have at least partially secularised
their legal systems or somewhat attenuated the rigid rules of the Islamic
law. Here are some examples: "The Egyptian Code of Procedure for
Sharia Courts, 1931,
enacted that no disputed claim of marriage was
to be entertained where
the bride was less than sixteen or the
bridegroom less than eighteen years of age at the time of the contract" ;
a measure taken in order to deal with the problem of child marriage.
SOURCES OF LAW
The expression `sources of law' can mean several different things. It
can refer to the historical origins from which the law has come, such as
common law and equity which were discussed in the last unit. Secondly,
it can also refer to the body of rules which a judge will draw upon in
deciding a case, and where these rules arc to be found. In this second
sense there are two main sources of English law today: legislation and
precedent.
A. Legislation
The nature and effect of legislation
Legislation is the body of rules which have been formally enacted
or made. Many bodies in England have power to lay down rules for
Iimited purposes, for example social clubs, but fundamentally the only
way in which rules can be enacted so as to apply generally is by Act of
Parliament. For various reasons, some of Parliament’s legislative
functions are delegated to subordinate bodies which, within a limited
field, are allowed to enact rules. Local authorities, for instance, are
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allowed to enact by-laws. But local authorities can only do this because
an Act of Parliament has given them the power to do so.
In constitutional theory, Parliament is said to have legislative
sovereignty and, provided that the proper procedure is followed, the
statute passed must be obeyed and applied by the courts. The judges
have had no power to hold an Act invalid or to ignore it, however
unreasonable or `unconstitutional' they might consider it to be.
In this respect England differs from many countries which
have written constitutions. In the United States, for instance, the
Supreme Court has power to declare legislation passed by Congress to
be invalid if it is, in the opinion of the Court, inconsistent with the
written constitution. The conventional attitude of the courts in this
country, on the other hand, has best been expressed in words attributed
to Hon., CJ, in a report of City of London v. Wood in 1702: `An Act of
Parliament can do no wrong, though it may do several things that look
pretty.
This conventional view has been challenged more recently, but only
to a limited and uncertain extent as yet.
In R. v. Secretary of State for Transport, ex parte Factortame Ltd.
(1991), Spanish fishermen were claimed to be catching part of the UK
`quota' of European fishing stocks by forming British companies and
having their boats registered in the United Kingdom. The Merchant
Shipping Act 1988 and regulations made under it tried to prevent this.
The European Court held that part of this UK legislation was contrary to
European Community law, and to that extent should be held invalid b
the courts here.
Although the courts cannot generally question the validity of an Act
of Parliament, they do always have the task of applying it to specific
problems. The Government, by Act of Parliament, states what the law is
to be but, having done so, it must then abide by the words which it has
used. What those words mean is a matter for the courts to decide. If the
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Government disapproves of the interpretation it must pass another Act in
an attempt to state its intentions more clearly. The courts have, in fact,
evolved rules of interpretation which the will use to discover the `true'
meaning of the words of a statute. Parliament helped the courts to some
extent by passing the Interpretation Act 1889, which is now repealed
and replaced by the Interpretation Act 1978 (see page 18).
The legislative process
The process by which an Act is passed is a long one. The first and most
important step in most cases is for the Government to decide that it
wishes the legislation to be passed. Once this decision has been taken,
and so long as public opinion does not cause the Government to change
its mind, the legislation will pass through Parliament and become law,
because of the Government's effective command of a majority in the
House of Commons. On some issues the Government will first seek the
response of interested parties to its legislative proposals by the
publication of a consultative Green Paper. After considering the
response, advance notice of the more definite proposals upon which the
legislation will be based is given in a White Paper.
A formal requirement is that the bill must be approved by both
Houses of Parliament, with ample opportunity for debate both in the
Commons and in the Lords. In spite of Government control of the
Commons, Parliament is not a mere rubber stamp, because it gives
opportunities for members to criticise, publicise, explain and amend the
detailed provisions of the bill, and few bills emerge without at least
some amendment. Finally, a bill must receive the Royal Assent, which
today is never refused. It thereupon becomes an Act of Parliament and,
unless otherwise provided, takes effect from the day of Assent. Many
Acts now contain a section delaying commencement and providing for
the Act to be brought into effect, if necessary part by part, by delegated
legislation. Those affected by the Act are thereby given time to adapt to
the change in the law.
The legislative sources of European Community law are described
later in this unit.
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Amendment and repeal
A statute once enacted, remains in force permanently unless and until
it is repealed, and it can only be repealed by another statute. The
Distress Act of 1878 still appears in the current edition of Halsbury's
Statutes of England for instance. Similarly, a statute can only be
amended by another Act of Parliament unless, as rarely happens, an Act
delegates to a Minister or some other body the power to make minor
changes. Most Acts today, in fact, do have to repeal or amend some
earlier statutory provisions, and they will usually contain a schedule
specifying what earlier provisions have been affected.
Conversely, Parliament can never take away its own power to amend
or repeal earlier legislation. Nor can it abandon its own freedom to
legislate in future as it thinks fit. The European Communities Act 1972
does at present limit the power of Parliament to legislate in a manner
inconsistent with the European Treaties. As we have seen, this was
confirmed (in effect) in the Factortame case recently. Nevertheless, the
European Communities Act could always be repealed by a future
Parliament, although this would mean withdrawal of the United
Kingdom from the European Communities.
Consolidating and codifying Acts
Governments have always tended to introduce legislation as and
when some specific need arises, and several closely connected Acts on a
particular topic may' well exist side by side. In such circumstances the
Government will often do some tidying up. A consolidating Act will be
passed which will repeal all of the piecemeal provisions, and re-enact
them in one logically arranged Act. This is periodically done, for
instance, with tax legislation. Other examples include Acts dealing with
road traffic, social security, safety at work, and companies.
Sometimes a Government may decide not only to consolidate all of
the legislation, but also to replace some of the case law on the subject by
a new Act. Such an Act is called a codifying one. It reduces most of the
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law on the subject into a single code. There are good examples in
commercial law, particularly the Bills of Exchange Act 1882 and the
Sale of Goods Act 1893. (The Sale of Goods Act 1893 was subsequently
amended by several other Acts, and this legislation is now consolidated
in the Sale of Goods Act 1979.)
B-Delegated legislation
Forms of delegated legislation
The task of making the detailed rules needed to translate this new
development into practice was beyond the capacity of any one
legislative body. What the Government has often done, therefore, is to
pass an `enabling' Act setting up the main framework of the reform on
which it has decided, and then empowering some subordinate body-often a Minister-to enact the detailed rules necessary to complete the
scheme. Thus the Factories Act 1961 provides for sufficient and suitable
lighting in factories but leaves to the Minister responsible the work of
laying down specific standards of lighting that shall be deemed
sufficient and suitable for different types of work. Rules enacted under
such powers are called `delegated legislation'. The following are the
principal forms that this may take:
1. Orders in Council are enacted under powers delegated to the
Privy Council. Most senior members of the Government are
also Privy Councillors, and effectively determine what shall
be enacted.
2. Ministerial regulations are made by individual Ministers
within some limited sphere relating to their departmental
responsibilities, for example, traffic regulations.
Most orders and rules of both of these kinds are published
through HM Stationery Office under the description of statutory
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instruments. 3. Local authorities are given powers by many Acts
of Parliament to make by-laws
which will have the force of law within the geographical area
of the authority. 4. Other statutory authorities such as
nationalised industry boards and harbour commissions are often
given power to make by-laws within the scope of their functions.
5. Certain professional bodies are given power by Parliament to
make rules governing the conduct of their members. The Law
Society, for example, has this power under the Solicitors' Acts.
Advantages of delegation of powers
1. Parliamentary time is saved on relatively trivial matters.
2. Greater flexibility is assured by the ability to enact and change
the rules quickly without lengthy Parliamentary proceedings.
3. In national emergencies it may sometimes be necessary for the
Government to act at short notice.
4. Many regulations cover technical subjects which few
Members of Parliament are competent to discuss adequately.
5. Local and specialist knowledge may be drawn upon when
local authority bylaws are passed.
Criticisms of the growth of delegated legislation
In the first half of this century there were widespread criticisms of
the growth of delegated legislative powers. It was felt to be an erosion of
the constitutional role of Parliament to allow such wide powers to be
given to other bodies, particularly to individual Ministries. Moreover, it
was pointed out, delegated legislation need not ever be debated or even
mentioned in Parliament, and might therefore become law without
people really being aware of the fact. There are usually over 2000
different statutory instruments alone coming into force each year, and
some of these can make substantial changes in the law.
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It is generally felt today that these criticisms were exaggerated, and
to some extent simply an expression of resentment at the sheer volume
of legislation needed in a modern industrialised country. Certainly some
safeguards do exist against abuse of delegated powers; how adequate
these safeguards are is a matter which is still sometimes discussed.
Control of delegated legislation
1-Parliamentary control
(a) Parliament, having given the power to legislate, can
obviously take the power away at a future date.
(b) Ministers are usually answerable to Parliament for the
content of regulations made by their departments.
(c) The enabling Act will sometimes require that an
instrument be laid before Parliament thereby permitting
limited Parliamentary debate.
(d) Committees of Members of Parliament examine and
report on statutory instruments, EEC regulations and
other delegated legislation.
2- Judicial control
(a) Ultra vires. There is a vitally important distinction
between the attitude of the courts to an Act of Parliament
and their attitude to delegated legislation. The courts can
never challenge the validity or reasonableness of a statute
except possibly if it contravenes European Community
law. The courts can, and do, sometimes challenge the
validity of delegated legislation. The delegate body has
power to legislate only in so far as Parliament has given it
this power, and the courts keep it firmly within this limit.
If it exceeds its powers in any way, the rules are ultra
vires (outside its powers) and therefore void.
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(b) Unreasonableness. The courts will sometimes take the
view that Parliament has given the power only on the
understanding that it be exercised reasonably. Some local
authority by-laws have been held void, because the court
felt that they were unreasonable.
(c) European Community law. As we have seen, it has been
held in the Factortame case that the courts can and must
hold UK legislation invalid in so far as it contravenes
European Community law. This can apply to Acts of
Parliament as well as to delegated legislation.
B- Judicial precedent
The nature of precedent
The idea of binding judicial precedent is a special feature of common
law jurisdictions, that is to say, systems of law based on that of England.
The doctrine is based on the general principle that once a court has
stated the legal position in a given situation, then the same decision will
be reached in any future case where the material facts are the same.
Whether a court is bound to follow a previous decision depends to a
very large extent on which court gave the previous decision. Generally,
if the decision was of a superior court then the lower court must follow
it, but a superior court is not bound by the previous decisions of an
inferior one. The following table outlines the main rules:
1. Decisions of the House of Lords bind all other courts for the
future, and until 1966 were even binding on the House of Lords
itself in subsequent cases. In that year, however, the Lord
Chancellor issued a statement on behalf of the House that it
would no longer regard itself as rigidly bound if this would
cause injustice by reason of changing social circumstances.
2. The Court of Appeal is bound by previous decisions of the
Lords and, in most circumstances, by its own previous
18
decisions. Its decisions are binding on all lower courts but not
upon the House of Lords.
3. A High Court judge is bound by decisions of the House of
Lords and the Court of Appeal but not by other High Court
decisions.
4. A County Court judge is bound by decisions of all higher
courts. The decisions of the County Courts themselves are not
binding in any future case, and they are not normally reported
at all.
This does not mean that decisions of lower courts will be disregarded
by higher courts. These decisions may not be binding precedents, but
they will have persuasive value. They may be long standing, recognised
by people as the law, and acted upon accordingly. Similarly, decisions
of the House of Lords in appeals from Scotland or Northern Ireland, and
decisions of the Judicial Committee of the Privy Council in appeals
from some Commonwealth countries, while not binding in English
courts, have strong persuasive influence. Note, for instance, the Wagnn
Mound case in 1961. An English court may even turn for guidance the
decision in the United States or the Commonwealth, where the legal
systems have the same basis as our own.
On matters of European Community law (of increasing importance),
a court in this country can and sometimes must refer the issue to the
European Court of Justice (see later). Although the European Court
ruling is binding on the court here in this particular case, the European
Court does not itself have a doctrine of binding precedent. Nevertheless,
its decisions are reported, and a mass of highly persuasive European
case law is developing. When seen in operation, the doctrine of
precedent works in quite a complex manner. When he gives his decision
in a case the judge does, in effect, three things.
1. He gives his actual decision between the parties: `I find for the
plaintiff', or `the appeal must fail'. This is obviously the part
which is of most interest to the parties themselves.
2.He will also give his reasons for reaching that decision: what
facts he regards as `material', the legal principles which he is
applying to those facts and why. This is called the ratio
19
decidendi (the reasoning vital to the decision), and it is this part
of the judgement which may bind future courts.
3.He may also, at the same time, discuss the law relating to this
type of case generally, or perhaps discuss one or two
hypothetical situations. These will be obiter dicta (other
comments) and while they may have persuasive force in future
cases, they are not binding.
Having become a precedent, a decision need not continue to be one
indefinitely. It can cease to be binding in various ways. A decision can
be reversed when the party who lost the case appeals to a higher court,
which allows the appeal. Where similar facts come before the courts in a
later case, then a higher court can overrule the previous decision of a
lower one. This does not affect the parties of the earlier case; so far as
they are concerned their decision still stands, but the earlier case is no
longer binding in future. If a later court is not in a position tc8 overrule a
previous decision, for instance, because the legal principles involved are
not the same, it may nevertheless disapprove it, usually by way of an
obiter dictum. Disapproval by a higher court obviously casts doubt on
the correctness of an earlier decision. Similarly, a later court which is
not bound can simply not follow a previous decision, which will itself
cast doubt on the earlier case. Finally, a previous decision can often be
distinguished where the material facts of the earlier case differ from the
present ones. There will always be some difference between the facts of
two separate cases and if the later judge feels that the difference is
sufficient to justify a different decision, he will distinguish the earlier
case. In this way even a lower court can avoid holding itself bound by a
previous higher decision.
Precedent or code?
Many other countries, particularly in Continental Europe, have no
doctrine of binding precedent. Instead, the main source of law in these
countries will be a code. Almost all of the rules of civil and of criminal
law have been written out fairly simply, and then formally enacted by
the legislature.
20
It is largely for historical reasons that the English legal system is
based mainly on precedent rather than on a code, and each alternative
has its advantages.
1. In favour of the English system of judge-made or case law, it is
argued that it gives more flexibility. The law steadily grows as new
cases come before the courts, and new rules develop to meet new
situations. A code, once enacted, can be changed only by a complex
legislative process, and can sometimes work injustice as the rules
become outdated.
2. Systems based on precedent are claimed to be more realistic and
practical in character, being based on actual problems that have come
before the courts. On the other hand, it is sometimes necessary to wait
until an actual dispute arises before the law can be known. This can
lead to uncertainty, and bringing a case to find out the law can be a
costly business. A code can, within limits, legislate in advance, so that
the parties know what their legal position is without having to go to
court to find out.
3. Finally, although case law provides us with many detailed rules, this
can itself be a drawback. In English law there are at least 1000
volumes of law reports in which precedents are to be found. The ease
with which cases may now be discovered by computerised retrieval
methods has already led to the courts expressing concern at the
number of precedents being cited.
Law reporting
The development of a doctrine of precedent has been very closely
tied to the growth of good law reporting in this country. Without a clear
and reliable record of earlier decisions, a doctrine of precedent simply
could not work.
21
Law reporting in England began in the thirteenth century with the
Year Books, which were very brief notes written by anonymous
lawyers, often in a curious mixture of English and Norman French.
From about 1530 the Year Books were replaced by private reports
published under the names of those compiling them. These continued
until the nineteenth century, but they vary considerably in value
according to the accuracy of the reporter. In 1865, the Council of Law
Reporting was established by the legal profession to provide for
systematic publication of professionally prepared and officially revised
volumes of reports.
Today, the main reports are still produced by what is now the
Incorporated Council of Law Reporting. It now publishes only one
volume each year of reports of decisions in the Queen's Bench Division
of the High Court, one of Chancery Division cases, and one of Family
Division decisions. Court of Appeal cases are included in the volumes
for the High Court Division from which the appeal came, but House of
Lords decisions are found in a separate volume of Appeal Cases. Since
1953 the Council has also issued the Weekly Law Reports, to enable
reports of certain cases to be available more quickly.
Some private reports did survive after the nineteenth century; the
main general ones now issued are the All England Law Reports,
published now in four volumes each year, and also periodically, about
weekly. An increasing number of more specialised private reports also
continues in fields such as commercial law, taxation and industrial law.
A further development in recent years has been the collection of case
reports and statutes in computer programs. Access can be bought on
computer terminal through schemes such as Lexis.
The report of a civil case is referred to by the names of the parties as
in example, Bolton v. Stone, but in speech the `v.' is said as `and' (not
`versus'). Plaintiff's name is placed first and the defendant's second. If
the case goes to appeal the parties are known as the appellant and the
respondent, but the order is not changed unless it is a House of Lords
case, when the appellant's name placed first. After the name of the case
will be found details for each reference the year, the series of reports
22
with the volume number if necessary, and the page. Thus in the Law
Reports, the House of Lords decision in Bolton v. Stone [1951 ', AC 850
is to be found on page 850 of the Appeal Cases reports for 1951. The
Court of Appeal decision in the same case was reported under the name
Stone v. Bolton [1950) 1 KB 201 (Miss Stone being the original
plaintiff), and is found on page 201 of the first volume of King's Bench
Division Reports for 1950. In the all England Law Reports, the Court of
Appeal decision in this case is reported under the reference Stone v.
Boston [1949] 2 All ER 851. and the House of Lord’s decision as Bolton
v. Stone [1951] 1 All ER 1078.
D- The judges and statutes
Construction and interpretation of statutes
The other major way in which the judges contribute to the
development of English law is in interpreting and construing the words
used in statutes and other legislation. Once a higher court has decided
that the words of an Act apply in particular way to a set of facts, this
decision will form a precedent to be followed should a similar problem
arise in a future case. Sometimes a complex body of case law may arise
out of the interpretation of a single statute, as happened with par of the
Sale of Goods Act 1893, for example.
The Interpretation Act 1978 gives certain statutory rules of
interpretation, for example that the masculine gender shall include the
feminine, and the single shall include the plural, and vice versa, unless a
contrary intention is obvious. Moreover, almost all Acts contain a series
of definitions of technical and other terms which the enactment contains.
Subject to this, it is for the judges to say what the words of an Act
mean should any doubt arise. Words will be given their literal or
everyday meaning unless this would lead to absurdity. If particular
23
words are followed by general words, the general words are restricted to
things similar to those specified particularly. Thus wheat, barley and
other crops' would include oats but not potatoes. On the other hand, if
there is particular mention only, nothing else is included. Thus `wheat
and barley would not include oats.
If the words used are ambiguous, or if their application is uncertain,
then more difficult questions of construction can arise. The courts will
look at the Act as a whole; often the way in which a word is used in
other parts of the Act will make it plain what it is intended to mean here.
If the meaning is still not clear, the courts will try to discover from the
wording of the Act what `mischief' the Act was designed to deal with,
and will try to interpret the words so as to give effect to what the Act
was intended to achieve. The courts will not, however, ask the
Government what the Act was intended to achieve, partly because the
Government might be tempted to give a meaning which best suited its
own immediate purposes; nor will account be taken of Parliamentary
debates or statements published by Ministers when the bill was first
proposed. It is the words of the Act alone which constitute the law.
Finally, there are certain presumptions which a court will make. Thus
it is presumed that a statute is not intended to bind the Crown unless the
statute expressly so provides. Since `the Crown' includes all crown
servants (e.g., civil service departments) this presumption can be very
important. Similarly, it is presumed that an Act is not intended to create
a strict criminal offence; the courts will assume that the defendant is
guilty only if he intended to commit the offence, or acted carelessly.
This presumption will, of course, be rebutted if the words of the Act
make it plain that the legislature wishes to impose strict liability.
Codes of practice
Section 45 of the Road Traffic Act 1930 provided that `The Minister
shall prepare a code (in this section referred to as the "Highway Code")
24
comprising such directions as appear to him to be proper for the
guidance of persons using roads...'. This code is not a piece of
legislation; it does not have binding force, it is not a criminal offence to
break it, nor will breach of it give rise to civil liability. It can always,
however, be cited in evidence, and a person who breaks it is much more
likely to be held negligent, or guilty of careless driving, than a person
who observes the provisions. The code must be treated as a source of
law to the extent that a court must accept its provisions in evidence.
The use of this type of code seems likely to increase in future. Under
the Industrial Relations Act 1971, a Code of Industrial Relations
practice was produced, having the same practical effect as the Highway
Code. Subsequent legislation preserved this code of practice, which is
still governed by the Employment Protection Act 1975, and further
codes have since been added. Codes with similar effect have been
produced under the Health and Safety at Work, etc., Act 1974, the
Control of Pollution Act 1974, and the Race Relations Act 1976.
In addition, there are many non-statutory codes of practice, produced
by professional bodies, making recommendations as to safety in such
matters as handling chemicals or other materials. Unlike statutory codes
of practice, these are the sources of law, in that the courts have no duty
to accept them in evidence. Nevertheless, they may in practice influence
a court in deciding whether or not particular conduct is reasonable.
E. Other sources of law
Law of the European Communities
By section 2 of the European Communities Act 1972, Community law is
incorporated in English law. The sources from which Community law is
derived are as follows:
The Treaties. The primary sources are the three foundation Treaties (of
Paris and Rome) with their supplementary schedules and appendices. To
these must be added further treaties which have been made or will be
made in the future between the member states, for example the Single
European Act of 1986, and treaties such as trade agreements concluded
between the Communities and states in the outside world. These treaties
25
are `self-executing in that the provisions automatically become part of
the law of the member states without the states having the right to
decide whether or not to implement them by their own legislation. Thus
the courts in the United Kingdom must accept and apply Article 85 of
the EEC Treaty which prohibits specified restrictive practice agreements
between commercial undertakings.
2. Secondary legislation. The Council and Commission have been given
lawmaking powers to enable the broad objects of the Treaties to be
achieved. These administrative acts from which rules of law emanate
may take various forms. Regulations are of general application, binding
in their entirety and directly applicable in all member states without the
need for further legislation. Directives also have a general scope but are
simply addressed to member states requiring them to make changes in
their own law to bring it into line with Community requirements. Each
state will decide how this is to be done; for example, in the United
Kingdom, it may be done by Order in Council or Ministerial regulation.
Decisions, like regulations, take effect immediately without further
implementation but they are only binding upon those to whom they are
addressed and they do not have general legislative effect.
3. Decisions of the Court of Justice. The Court has (in theory) no lawmaking powers and there is no doctrine of binding precedent.
Nevertheless (in practice), through interpretation of `statutory'
provisions, a body of rules is emerging in the Court's judgements which
have a strongly persuasive influence and are published here in the
Common Market Law Reports (CMLR).
Historically, custom formed the basis of common law. General
customs, almost without exception, have now fallen into disuse or been
recognised by the courts and incorporated into precedent. Occasionally,
a local custom may be put forward as still being law but the court will
accept this only on very stringent conditions. More frequently, the courts
will take into consideration what amount to special customs, such as
26
commercial and business practice, in cases where they have to decide
how existing legal rules should be applied in business situations.
Books by legal authors
These are not cited very frequently in the English courts, contrary to the
practice in many continental countries. At one time this practice was
seldom allowed here, and was restricted to a few notable authorities.
More recently the rule has been relaxed and the number of acceptable
authors increased.
Legal Personality and Capacity
A. Natural and legal persons
Legal personality
A legal person is anything recognised by law as having legal rights
and duties. With one main exception, a legal person in this country is
simply a person in the ordinary sense a human being. In general, his or
her rights begin at birth and end at death and, subject to rules such as
those of capacity (below), the same rules apply to everyone.
In one important instance, English law also grants legal personality to
an artificial person. This arises where a group of persons together form a
corporate body of some sort. The corporate body can acquire a
personality separate from that of its members, with some of the legal
powers of a natural person. It can, for example, own property and make
contracts, even with its own members, in its own name. The ways in
which such incorporation can occur are described later.
Capacity
English law limits the legal capacity of certain categories of natural
person. For example, special rules protect minors, i.e. those under 18
27
years of age. A minor is not generally liable on his contracts and may
escape liability in tort . He may own personal property, such as books or
even a car, but he cannot own land except indirectly as beneficiary
under a trust. He cannot make a will to dispose of his property on death
unless he is on active military service. Other special rules apply at
different ages: a person under 16 cannot marry, and the are special
provisions for young criminal offenders. A young person is not allow a
full driving licence until 17.
The legal capacity of mentally disordered persons is similarly restricted.
In general, they cannot enter into valid contracts, transfer property or
make wills, validly marry.
Many of the restrictions formerly placed on aliens have been
removed, but generally they still do not have a right of free entry to the
country. They remain liable to deportation in some circumstances, and
they cannot vote or become member of parliament. There are now also
restrictions on entry and powers to deport some Common Wealth
citizens, but new rights of entry for citizens within the European
Countries have established . Foreign sovereigns and some diplomatic
staff are normally granted the right of immunity from legal actions.
The main limits on the capacity of corporate bodies arise from their
very nature. First, there are things which they cannot physically do, such
as marry. Secondly, these are the creation of law and, therefore, only
have such powers as the law attaches them; anything outside those
powers (ultra vires) is void, although there is a special provision for
companies (see below).
B. Corporations
Corporations may come into being in one of these ways.
1. The earliest form of incorporation was by Royal Charter, issued under
Royal prerogative upon the advice of the Privy Council. This form of
incorporation was used to create the Bank of England and the great
trading companies such as the East India Company and the Hudson's
28
Bay Company. This type of a charter today is confined to noncommercial undertakings, for example universities.
2.
A corporation may be created by Act of Parliament. This method was
used the early railway and gas companies and more recently for the
nation industries such as British Coal. Most undertakings of a public
nature. for example the Independent Broadcasting Authority, are
statutory corporation. So far as local authorities are concerned, while
some towns first received their status by Royal Charter, the
authorities administering our system of local government from 1974
onwards owe their existence to the Local Government Act 1972.
Some have also received new Royal Charters since then.
3. It was found in the nineteenth century that the cumbersome and
expensive method of forming chartered and statutory corporations was
not ideal for private business concerns. Hence the Companies Act
1844 provided a third and easier method of incorporation, by
registration following a few relatively simple formalities. In 1855,
limited liability was introduced, whereby shareholders who invested
in companies could only be called upon for the amount they had
agreed to contribute and were not liable to creditors to the extent of all
their wealth. Formation by registration and limited liability together
helped provide the capital which the increasing scale of business then
needed. The law governing companies is now largely contained in the
Companies Act 1985, which consolidates many earlier Acts. Several
other statutes allow incorporation by registration today. Building
societies are created by registration under the Building Societies Act
1986, and many organisations such as working men's clubs and cooperative societies are incorporated under the Industrial and Provident
Societies Acts.
As we have seen a corporation, once formed, acquires separate legal
personality. It can sue its own members and be sued by them. It can
employ its own members. Its property belongs to the corporation, not to
the members. Limited liability developed naturally from this, the
corporation's debts and liabilities are its own and. in general, members
are not responsible for them.
29
In Salomon v. Salomon & Co. Ltd. (1897), Salomon, who
manufactured boots, formed his business into a company. Six members
of his family held one share each, and he held the remaining 20 000. He
lent money to the company on the security of its assets and, when the
company ran into financial difficulties, it was held that he took
preference over the ordinary creditors. Although he was, in effect, the
company, he was treated in law as an entirely separate person.
If a corporation exceeds its powers, the act in question is ultra vires
and void. While a natural person can do whatever the law does not
prohibit, an artificial person can only do what the law and the
documents creating it will permit. A statutory corporation's powers are
limited, therefore, so that in 1981 it was ultra vires for Greater London
Council to subsidise public transport out of rates.
A company's powers are set out in the `objects clause' of its
memorandum of association. This clause was partly to protect
shareholders, who invested their money on the understanding that the
company would only do the things specified therein. In practice, clauses
were often drawn widely, so that little protection was actually given .
The ultra vires doctrine was sometimes used by companies to avoid
their obligations.
In Ashbury Carriage Co. v. Riche (1875), the Ashbury company
formed to make railway carriages, contracted to finance the building of a
railway in Belgium. Ashbury then withdrew, but was held not liable
because the contract was outside of its powers.
The Companies Act 1989 has now largely abolished the ultra vires
rule as between companies and outsiders. The validity of something
done by a company cannot be questioned for lack of capacity by reason
of anything in the company's memorandum, and for someone dealing
with the company in good faith the power of the directors is deemed free
of any limits under its constitution. (Ashbury would probably be liable
today.) The ultra vires rule does still operate internally, and a
shareholder can restrain a proposed act by the directors . The 1989 Act
30
only applies to companies and does not affect ultra vires for other types
of corporation.
C. Unincorporated associations
People may combine to further a common interest without creating
an independent legal personality. Such interests may be sporting, social,
political or business. In the absence of incorporation, the law does not
normally recognise the association as a separate entity but regards it
instead as a number of individual persons. Any property belongs to the
members jointly, not to the association.
In some instances, however, limited recognition is given to the
association.
If its property is held by trustees on behalf of the members, the
trustees are then the legal owners, and they may bring and defend
actions and do other things necessary to safeguard it.
If the management of affairs is entrusted to a committee, all the
members of that committee may be liable for an act done with their
authority. Under the rules of court it is possible for some members to
sue or be sued on behalf of all the others in a representative action. In
Bolton and Others v. Stone , Miss Stone sued Bolton, the secretary, and
three other committee members of the cricket club, which was an
unincorporated association.
Special rules exist for particular types of unincorporated association.
For example, most trade unions are unincorporated. In the early
nineteenth century, they were unlawful, and members could be
prosecuted for the crime of conspiracy. Gradually their status was
recognised by law and, since 1871, their status (if not always their
activities) has been regarded as lawful. Today they can acquire some
features similar to those of corporations, particularly if they register with
the Certification Officer under the Trade Union and Labour Relations
Act 1974.
31
Most unincorporated associations for business purposes are
governed by the Partnership Act 1890 .
D. Partnerships
The Partnership Act 1890, section l, defines partnership as the
relation which subsists between persons carrying on business in
common with a view to profit'.
Formation
When a partnership is created, the parties often draw up a deed or
`articles' of partnership. This usually covers such matters as the
provision of capital, management, and the sharing of profits. The
Partnership Act provides for these matters, but only in the absence of
agreement to the contrary by the partners. This contrasts sharply with
the provisions of the Companies Acts, with which companies must
comply.
In some instances, partnerships are not formal or long term. They
may be created informally, or even inadvertently. If X and Y cooperate
in a once-only business venture, being paid jointly to remove rubbish
from Lord Z's back garden, then X and Y are partners under the Act,
although the thought may never have occurred to them. It is similar with
many very small or part-time businesses.
Difficulties do sometimes arise as to whether there is a partnership,
and the Act contains rules to help determine this. First, the persons
involved must be in business. Therefore, by section 2, the mere fact that
two or more people are co-owners of property does not of itself render
them partners, even if the property brings in income such as rent or
dividends. Similarly, the sharing of gross returns (not profits) does not
of itself create a partnership. Secondly, they must be carrying on the
business `in common'. If both carry on the business, then they are
partners under section 1. If someone shares in the profits without taking
32
part in the business, then section 2 applies. As a general rule anyone
sharing profits is presumed a partner, but this can be rebutted. For
example, repayment of a loan or debt out of profits, or at a rate varying
with profits, does not necessarily make the creditor a partner, nor is the
seller of a business who is being paid off out of the buyer's profits
necessarily still a partner. The section also provides that paying an
employee or agent at a rate varying with the profits does not necessarily
make him a partner.
In forming a partnership, the ordinary rules of contract apply. It is
voidable if induced by misrepresentation. It is void if formed for an
illegal purpose; see Foster v. Driscoll. By the rules of capacity, a
company, being a person, can be a partner. A minor can be a partner, but
can repudiate before or within a reasonable time after majority. He is not
liable for partnership debts, but cannot be credited with profits without
also being debited with losses.
By the Companies Act 1985, section 716, a partnership cannot
validly have more than 20 members, although exceptions exist for
professions such as solicitors and accountants, who cannot practice as
companies. A partnership is, therefore, at a disadvantage when raising
large amounts of capital. It is a suitable form of business organisation
where close co-operation between members is required, and where they
do not wish to have to publish their accounts .
The partners are known collectively as a `firm', and the name under
which they carry on business is the `firm name'. They can, within limits,
choose whatever name they think fit, subject only to the Business
Names Act 1985. This Act, like the Companies Act, consolidates earlier
legislation, and provides that whorever a firm carries on business in a
name which does not consist of the surnames of all partners, with or
without `permitted additions' such as first names, initials, phrases such
as `and Sons' or, where two or more partners have the same surname, the
addition of an `s' at the end of that surname (`Smiths'), then it is subject
to limits. It must not, for example, use a firm name which suggests
Government or local authority connections, is offensive, or falsely
suggests connection with another business. Other important checks are
that a partnership must not use `limited' or `public limited company' as
33
the last words of its name, although it can use `company' or an
abbreviation thereof. In any event, the true surnames of all partners must
appear on letter headings (although there are exceptions for firms with
more than 20 partners), and must be displayed in a prominent place to
which customers have access at the firm's business premises. Noncompliance with any of the above provisions is a criminal offence.
Relations between the partners and outsiders
Four main issues arise under this heading.
When can the acts of one partner render the whole firm liable?
By the Partnership Act, section 5, the rules are those of agency. The
firm is hound by anything which an individual partner was expressly
authorised to do. The firm may also be bound if the partner does
something for `carrying on in the usual way business of the kind
carried on by the firm', so that there is nothing to make the outsider
suspicious. The partner has implied authority, and the firm is bound
even if he has exceeded his actual authority. It follows, however, that
the firm will not be bound if the outsider either knows that a partner has
no authority, or does not know or believe him to be a partner .
The key question as regards the unauthorised acts of a partner is what
sort of thing is it `usual' for an individual partner to do? This depends
largely upon what sort of business it is, but the following can normally
be assumed to be within the partner's powers, so long as his actions are
not so unusual as to raise suspicious selling the firm's goods; buying
goods normally bought by the firm; giving receipts for debts; engaging
and dismissing employees; signing ordinary cheques. In trading
partnerships, as opposed to professional ones, it may also be usual for
one partner to borrow money on the firm's behalf.
In Mercantile Credit Ltd. v. Garrod (1962) G and P were partners in
a garage business concerned with repairing cars and letting lock-up
garages. They had expressly agreed not to sell cars. Nevertheless P,
34
without G's knowledge, sold a car to M Ltd. for £700. It then transpired
that P had had no title to the car, so M Ltd. demanded back the £700.
When P did not pay, G was held liable as his partner. There was nothing
to make M Ltd. suspect that P and G had restricted their authority to
repairing contracts. Therefore both of the partners were liable.
An outsider can doubly protect himself by contacting the other
partners to see whether they do in fact agree with what the one partner
proposes.
When is the firm liable for wrongs, such as torts, committed by one
partner?
By section 10, where one partner commits an act which is wrong in
itself, as opposed to merely being outside his authority, the firm will be
civilly liable for any harm caused, and criminally for any penalty
incurred if either:
(a) the act was done with the actual authority of his fellow partners; or
(b) the act was within his `usual' authority, in the ordinary course of the
firm business.
In Hamlyn v. Houston CPC Co. (1903), it was held to be quite `usual'
for a partner to obtain information about a rival business. His firm was
therefore held liable when. without actual authority, he used bribery for
this purpose.
Section 11 applies where a partner misapplies money or property
received for, or in the custody of, the firm. The problem can arise in two
ways. First, a partner may receive money or property for the firm, and
misapply it before it reaches the firm. Here, the firm is liable if it was
within the actual or `usual' authority of that partner to receive the
property. Secondly, the firm may already have custody of someone
else's money or property, and a partner then takes it from the firm. In
this case, so long as the money or property was in the firm's custody in
the ordinary course of its business, the firm and all of its partners are
liable.
35
When is an individual partner personally liable for the firm's debts
and liabilities?
Partners do not have limited liability. By section 9, they are jointly liable
on the firm's contracts. Each partner is liable for the full amount due, but
can apply to the court to have the others joined as co-defendants. In
practice, plaintiffs usually sue the firm in the firm's name, but can then
enforce the full judgement against any partner. By section 12, partners
are liable jointly and severally for torts committed by or on behalf of the
firm. Again, each can be made liable for the full amount.
New partners are not liable for things done or debts incurred before
they became partners. A retiring partner remains liable for debts
incurred before his retirement, but can be discharged if a contract of
`novation' is made between himself, the other partners, and the creditor.
He may also be liable for debts incurred after he leaves. Someone
dealing with a firm after a change in its constitution is entitled to treat all
apparent members of the old firm as still being members until he has
notice of the change. The retiring partner should, therefore, protect
himself by notifying all existing customers and suppliers of his
retirement, so that he no longer appears to them to be a partner. He
should also advertise his retirement in the London Gazette, which serves
as notice to those who have not previously dealt with the firm. In any
event, he is not liable to those who have not previously dealt with the
firm, and who did not even know that he had been a partner.
In Tower Cabinet Co. Ltd. v. Ingram (1949) Ingram and C traded as
partners under the name `Merry's' until 1947. Ingram then left, but C
carried on under the old name. In 1948, C ordered furniture from T Ltd.,
and failed to pay. T Ltd. obtained judgement against Merry's and tried to
enforce this against Ingram. Ingram was held not liable because T Ltd.
had never dealt with Merry's while he was a partner, and only knew of
his existence because, at a late stage C had used some old notepaper
showing Ingram's name. Discovery at this late stage did not make I an
`apparent member'. (Nevertheless he would have saved himself much
trouble had he destroyed al1 of the old headed note paper before
leaving.)
36
The estate of a partner who dies or becomes bankrupt is not liable for
partnership debts incurred after the death or bankruptcy.
When is a person who is not a partner liable for the debts of the
firm?
We have seen that a retiring partner can sometimes be liable for debts
incurred after he left. By section 14, others may also be liable. A nonpartner can be liable for the debt if he has by his words, spoken or
written, or by his conduct represented himself to be a partner and, as a
result, an outsider has given credit 1 the firm. Similarly, a non-partner
can be liable if he has allowed himself to be `held out' as being a
partner, and the creditor has relied on this misapprehension. The
`apparent' partner can be liable whether or not he knows that the
representation which he has made or allowed have been used to
persuade a potential creditor this way.
In Tower Cabinet v. Ingram, Ingram was not liable under section 14
because he is not allowed the use of the old headed paper.
Relations of partners to each other
This is basically a matter for agreement between the partners. Section
24, however, sets out rules which apply in the absence of express or
implied agreement to the contrary.
l. All partners are entitled to share equally in capital and profits,
and must contribute equally to losses.
2. The firm must indemnify partners in respect of expenses and
personal liabilities incurred in the ordinary and proper conduct
of the business, or in anything necessarily done to preserve the
firm's business or property.
3. A partner is entitled to interest on payments or loans which he
makes to the firm beyond his agreed capital.
4. He is not, however, entitled to interest on his capital before
ascertainment ,of profits.
37
Every partner may take part in managing the firm's business.
6. No partner is entitled to remuneration (such as salary) for
acting in partnership business. (This is often varied.)
7. No new partner may be introduced without the consent of all
the existing" partners. (This is sometimes expressly varied in
practice, so as to give a partner the right to introduce a son or
daughter. )
8. Ordinary management decisions can be by a majority, but
any change in the nature of the business must be unanimous.
9. The records and accounts must be kept at the main place of
business, and be open to all partners, or their proper agents
such as accountants, to inspect copy.
10. By section 25, no majority can expel a partner unless a
power to do so have been conferred by express agreement
between the partners.
5.
Partners also owe statutory duties of good faith to each other.
l. Section 28 imposes a statutory duty to account: `Partners are
bound to render true accounts and full information of all
things affecting the partnership to any partner or his legal
representative'.
2. Section 29 deals with secret or unauthorised profits: `Every
partner must account to the firm for any benefit derived by
him without the consent of the other partners from any
transaction concerning the partnership property, name or
business connection'.
In Pathirana v. Pathirana (1967), R and A were partners in a petrol
service station. A gave R three months' notice that he intended to leave.
Without waiting, R almost immediately took full control, and pocketed
the entire profits. A was held entitled to his own share of profits for the
rest of the notice period. 3. Section 30 imposes a duty not to compete
with the firm: `If a partner, without the consent of the other partners,
carries on any business of the same nature as and competing with that of
the firm, he must account for and pay over to the firm all profits made
by him in that business'.
38
Dissolution of a partnership
Partnerships may be dissolved in various ways. For example, a
partnership for a fixed term, or for a single venture or undertaking,
expires automatically when the term or undertaking ends. If the partners
continue working together after this, it is a new partnership.
If the partnership was for an indefinite period, as is more usual, it can
be ended by any partner giving notice to a1l of the others. Notice can be
oral unless the original partnership was created by deed, in which case
notice must be written.
Death or bankruptcy of any partner automatically dissolves the entire
partnership, unless otherwise provided. This can be inconvenient, so
partnership agreements often exclude this rule and provide, for example,
that the partnership shall continue, and that the others shall buy the
deceased or bankrupt's share at a valuation.
If a court makes a charging order over any partner's share as a result
of his private debts, the other partners may dissolve the firm.
A partnership is automatically dissolved by any event which makes it
illegal to carry on the business, or for the members to carry it on in
partnership.
In Stevenson Ltd. v. Cartonnagen-Industrie (1918), the outbreak of
war in 1914 automatically ended the partnership between a British
company and a German firm.
Any partner may apply for a court order to dissolve the partnership if
any of the following conditions apply.
1. If any partner becomes a patient under the Mental Health Acts,
or is shown to be permanently of unsound mind; application can
be either on behalf of the mentally ill partner, or by the others.
39
2. If a partner other than the one applying becomes in any other
way incapable of performing his partnership contract.
3. If a partner, other than the one suing, is guilty of such conduct
as, in view of the nature of the business. is calculated to affect it
prejudicially; an order might be made under this head if, for
example, a solicitor, accountant or other professional partner
was convicted of dishonesty, either within or outside the
business.
4.If a partner, other than the one suing, wilfully or persistently
breaks the partnership agreement, or otherwise so conducts
himself that it is not reasonably practicable for the others to
carry on business with him; examples might include persistent
absence or laziness, or simply unpleasantness.
5. If the partnership business can only be carried on at a loss;
merely making a loss at present is not necessarily enough.
6. If circumstances have arisen which, in the court's opinion,
render it just and equitable that the partnership be dissolved.
In Ebrahimi v. Westbourne Galleries Ltd. (1972), E and N had been
equal members for many years in a successful partnership. They then
formed a company to run the business, with themselves as the sole
shareholders and directors. Later, as a favour, E allowed N to introduce
N's son into the business, and E voluntarily transferred some of his
shares to the son. N and his son then combined deliberately to force E
out. The court granted E's application to wind up (dissolve) the
company, under provisions of the Companies Act very similar to those
of the Partnership Act.
In Re Yenidje Tobacco Co. Ltd (1916), similarly, the court ordered
winding up when a company's directors and sole shareholders quarrelled
and could no longer work together, even though the company was
profitable.
Finally, like any other contract, a partnership can be rescinded within
a reasonable time of formation if it was induced by fraud or
misrepresentation.
40
If a partnership is dissolved for any of the above reasons, the
authority, rights and duties of the partners continue, but only for the
purpose of winding up. Any partner may publicise the dissolution, and
the others must concur.
By section 39, partnership property must be applied in payment of
the firm's debts and liabilities. Any surplus must then be paid to the
individual partners as, in effect, repayment of capital. Any partner can
insist on this and, if necessary, ask the court to supervise it.
In settling accounts between the partners, the rules in section 44
apply unless otherwise agreed. Losses, including deficiencies in capital,
must be paid (a) out of profits, (b) then out of capital, and (c) lastly, if
necessary, by the partners themselves in the proportions in which they
were entitled to share profits. If there are no outstanding losses, assets
are to be applied (a) in paying trade and other creditors, (b) then in
repaying to partners any loans which they have made to the firm, (c)
then in repaying to each partner what he has contributed in capital, and
finally (d) anything left goes to the partners in the proportions to which
they were entitled to profits.
When there ought to be a final settlement and it does not take place,
for example if a partner dies or retires and the remaining partners carry
on without settling with him or his estate, then the outgoing partner may
claim either such share of the profits after he left as are attributable to
use of his share of the assets, or interest on the amount of his share;
In practice, partnership agreements often expressly exclude this part
of the Act. For example the agreement may provide that the partnership
shall not end on the death or retirement of one partner, but that the
surviving partners shall buy the interest of the out-going partner at a
valuation.
Limited partnerships
The Limited Partnerships Act 1907 allows the creation of firms
where, unlike in ordinary partnerships, some members can have limited
41
liability. Limited partners contribute a stated amount of capital, and then
have no further liability for the firm's debts. At least one member,
however, must have unlimited liability. A limited partner usually takes
no part in management, his death, bankruptcy or mental illness does not
dissolve the firm, and he cannot end the firm by notice. Unlike ordinary
firms, limited partnerships must register details of the firm, the business,
and the partners with the Companies' Registrar, who issues a certificate
of registration. In practice, limited partnerships are rare,
E.
The Crown
At common law, the Crown was above the law, and no action could
be brought against the King in the King's courts. This was summarised
in the maxim, `The King (or Queen) can do no wrong'. This legal
immunity applied also to public acts carried out in the King's name by
Ministers and Government departments.
As the activities of state vastly increased, the extent of this immunity
brought many cases of injustice. Thus, the Crown was not liable for the
negligent driving of an army lorry or for a dangerous post office floor,
as an ordinary employer would have been; nor were Government
departments liable if they broke their contracts. At common law there
was, in practice, some mitigation of this severe position, but the
important changes were made by the Crown Proceedings Act 1947,
which now largely governs the matter.
In tort, the Crown can now be liable for the wrongful acts of its
servants, for injuries arising out of the ownership and control of
premises and, where the statute expressly states that the Crown is to be
bound, for breach of statutory duty. An immunity preserved by the 1947
Act that no action would lie for death or personal injury suffered during
service in the armed forces if the Minister responsible certified that this
injury ranked for entitlement to pension was removed by the Crown
Proceedings (Armed Forces) Act 1987,
In contract, similarly, the Crown can be liable, particularly for
commercial agreements. It is doubtful if it is bound by the service
42
contracts of its employees (civil servants) but, in any event, they are
now protected by the unfair dismissal provisions of the Employment
Protection (Consolidation) Act 1978.
Civil actions may now be brought against the appropriate
departments or against the Attorney-General, who is empowered to
defend such actions on the Crown's behalf. There is still no legal way of
enforcing judgements against the Crown, although this is normally not
necessary. The Crown (i.e., the Government) can still stop disclosure of
certain evidence for which Crown privilege is claimed. The Queen in
her private capacity still enjoys complete immunity.
COMPANY LAW
Since 1844, companies have been created by registration under
various Acts. The position today is governed by the Companies Act
1985, which consolidates many earlier Acts. There are three main types
of company. In an unlimited company, each member is fully liable for
the company's debts in the same way as members of a partnership. In a
company limited by guarantee a member, on joining, guarantees the
company's debts, but only up to a stated figure. Again these are
uncommon, but are sometimes used for non-business bodies such as
cricket clubs. The vast majority of companies are limited by shares;
each member holds one or more `shares' issued by the company in
return for payment. A shareholder's liability to the company's creditors
is normally limited to that part of the nominal value of his shares which
he has not yet paid to the company. Most shares today are fully paid up,
and such shareholders, therefore, have no liability for the company's
debts; see Salomon v. Salomon & Co. Ltd.
Most of this unit deals with companies limited by shares, of which
there are two types. Some become public limited companies. To qualify
for this status they must have issued at least £50 000 worth of shares,
with at least one-quarter of the nominal capital paid up. The
memorandum of association must specifically state that the company is
43
public, and the name must end with the words `public limited company'
(`p.l.c.'). Any company not satisfying these requirements is a private
company and therefore must not offer its shares for sale to the public. A
private company can turn itself into a public one and vice versa. In
practice, most companies are formed as, and remain, private.
There are other classifications for special purposes which have little
to do with the Companies Acts. For example, if a public company
wishes its shares (or debentures, to be dealt with on a stock exchange, it
must apply to the exchange, which will only grant permission if the
requirements of the exchange (as to total value of the shares, and as to
disclosure, etc.) are met. A stock exchange `quotation' or `listing' is
often desirable in order to increase the saleability and value of a
company's shares. By no means are all public companies `listed'. For tax
purposes, it can be an advantage for a company to remain a `close'
company, that is, one `controlled' by directors who are also shareholders
or creditors, or `controlled' by five or fewer shareholders or creditors.
Accounting exemptions by which only modified accounts need to be
filed with the Registrar may be secured if the company is classed as a
medium or small company: this depends upon balance sheet total,
turnover and number of employees.
One company can hold shares in another, and most large companies
do control many subsidiary companies, for instance by holding most of
the shares in the subsidiary. Although in law each of these companies is
a separate person, in reality they are controlled by the `parent' company.
Often the arrangements are much more complex, and may involve
companies or their equivalents in many different countries. Some such
`multinational' enterprises include hundreds of companies throughout
the world.
A. Formation of companies
Those forming a company are called its `promoters'. The term
includes people doing any of the work necessary, those who acquire
property or a business for the company, and those who set out to provide
finance. The main tasks of the promoters are to prepare various
documents, and to lodge these, with the necessary fees, with the
44
Registrar of Companies (an official of the Department of Trade and
Industry). Several documents must be lodged.
1.The memorandum of association. This, in effect, defines the
company and w it can do. It must contain the following
details.
(a)It must state the company's name. The choice rests with the
promoters under the Companies Act 1985, the Registrar
must refuse a name which misleading. For example, he will
reject a name too like that of an existing company, or which
falsely suggests Government or local authority connections.
The last words must normally be `public limited company'
or simply `limited', depending on the type of company.
Members can later change the name by special resolution,
but again the Registrar's consent ` is required.
(b) If the company is to be a public one, the memorandum
must expressly say so.
(c)A clause must state whether the registered office is to be in
England a Wales, or in Scotland. Every company must have
a registered office, which is its legal home. It need not be
anywhere near the main, or any, place, business. The actual
address of the registered office must be given in t11
statement concerning directors, delivered with the
memorandum.
(d) The `objects clause' states the objects for which the
company is formed, and the power which it is to have
(see page 53). Existing objects may be altered by special
resolution and the inclusion of a statement that the
company was to carry on business as a general
commercial company allows it to carry on any trade or
business whatsoever. Thus a company may now
effectively opt out of the ultra vires rule even for internal
purposes.
(e) A clause must state that the members have limited
liability.
(f) There must be a statement of the nominal capital, and
how it is to be divided into shares. This clause may be
45
changed subsequently, for example so as to increase the
capital if the company expands.
The memorandum ends with a request by the `subscribers', whose
names and addresses appear at the end, to be formed into a company.
There must be at least two subscribers. Each must take at least one
share, and the memorandum must state how many he does take. Each
must sign, and the signatures must be witnessed.
2.Articles of association are usually submitted too. These regulate the
internal management, and the rights and duties of shareholders vis-àvis the company and each other. They deal with matters such as
transfer of shares, meetings, voting and other rights of shareholders,
dividends, and the directors' powers of management.
A company need not, in fact, submit any articles. If it does not do
so, it will be taken to have adopted Table A, a model set of articles in
regulations made under the Companies Act. In any event, Table A
always applies except in so far as it is expressly or impliedly
overruled by actual articles.
The articles of association may later be altered under the 1985 Act,
section 9, but the alteration must not (a) clash with the memorandum; or
(b) discriminate between members, or take away the rights of any class
of shareholders; and (c) the alteration must be for the benefit of all
shareholders. 3. There must be a separate statement of the nominal
capital.
4.A statement containing particulars of directors and company
secretary must be filed with the memorandum. It must be signed by
the subscribers, and contain a signed consent by each director to act as
such. It must also contain the address of the registered office.
5. A statutory declaration by a solicitor engaged in forming the
company, or by a person named in the articles as a director or the
company secretary, must also be filed. This must declare that the
46
requirements of the Act have been complied with, and may be
accepted by the Registrar as evidence of this.
If all the requirements in respect of a registration and matters
incidental to it have been satisfied, the Registrar issues a certificate of
incorporation, which is the company's `birth certificate'. A company
registered as private can start business immediately. A public company,
however, must not do business or borrow money until it has gone on to
satisfy the Registrar that the necessary share capital has actually been
raised. It must also show details of the expenses of formation, and of
any payments to promoters. If he is satisfied, the Registrar issues
certificate, whereupon the public company too can start to do business.
B. Capital
It takes money to set up and run a business. In companies with a
share capital, the money is raised partly by issuing shares in the
company. A shareholder the company for each share allotted to him, and
the money thus produced provides, in theory, the basic finance. In its
memorandum, a company must state nominal capital. This is the face
value of the total number of shares which company has, at present,
authorised itself to issue. The nominal (or `authorised capital may, for
example, be £60 000, divided into 60,000 shares of £1 each.
does not necessarily mean that all of these shares have been issued yet,
only that the company may issue them. The issued capital is so much of
the £60000 nominal capital as has actually been paid by the
Shareholders. It can issue £1 shares for 50p now, with the right to call
for the other 50p later. The second 50p is known as uncalled' capital.
More often today, shares are issued fully paid.
The real value of shares may be more than the nominal value. Thus if
a company's assets are worth much more than its nominal capital, its
shares may ': reflect this. If would-be shareholders pay £5 for each of
the £1 shares issued, the shares are said to be issued at a premium of £4.
47
In theory, an amount equal to the money actually paid to a company
in return for its shares has to be kept available in order, in the last resort,
to pay off ' creditors and repay the shareholders if the company is wound
up. The Companies .: Act, therefore, still contains detailed rules to
prevent or control reduction of this capital, although the rules have been
relaxed slightly since 1981.
When a company invites the public to buy its shares, it must issue a
prospectus, which must contain detailed information about the company
so that investors can make an informed choice. False statements in
prospectuses can be a criminal offence, and can also render the share
issue voidable.
When a company has allotted a share it must normally, within two
months. issue '. a share certificate to the holder. This is evidence of
ownership, and one certificate can cover a number of shares. The
company must also keep a register of shareholders, normally at its
registered office.
Once issued, shares can be transferred by the shareholder. For
example. if the business prospers, the shares may increase in real value,
and a shareholder may wish to sell his shares to someone else (at a profit
to himself, not to the company). The company's capital is maintained;
the shares are simply held by someone new. The procedure for
transferring shares is set out in the Stock Transfer Act 1963. as
amended; broadly, the share certificate and stock transfer form are sent
to the company's secretary, who alters the register and issues a new
certificate to the new holder. Shareholders may periodically be
rewarded by the company by the payment of a dividend out of profits.
This must come either from current profits, or from money set aside
from the profits of previous years. If it were paid otherwise than from
profits, it could be regarded as a payment out of capital, which generally
is not permitted.
Another way in which a company can raise finance is by borrowing
it. A document issued by a company evidencing a loan to it is called a
debenture. Debenture holders are not members of the company,
although they can acquire rights to influence management. Money
48
borrowed is not strictly `capital', although in practice it is often called
`loan capital'. It will be discussed later.
C- Membership and management
Shareholders
We have seen that there are three ways in which someone can become a
shareholder: the subscribers of the memorandum must each take at least
one share new shares may later be issued by the company: or the
shareholder may have acquired existing shares from another holder.
The general position of shareholders is set out in the 1985 Act,
section 14: “...the memorandum and articles, when registered, bind the
company and its each member, and contained covenants on the part of
each member to observe all the provisions of the memorandum and of
the articles”. Shareholders, therefore, have rights, based on the
memorandum and articles, as between themselves and the company, and
as between themselves. Their rights also depend upon the terms of issue
of the shares; some shares, for instance, carry voting rights while others
do not. The following are some common types of share.
Ordinary shares usually carry rights to vote at company meeting, that
a stated dividend be paid that year. Shareholders then have a right to
vote themselves a dividend up to , but not more than, that amount.
Holders of preference shares, on the other hand, are entitled to a
fixed rate of dividend before anything become available for ordinary
shareholders. Note, however, that even preference dividends can only be
paid out of profits; no profits, no dividends. Moreover, the preference
only extends to dividends. Unless the articles provide otherwise,
preference shareholders receive no preferential repayment of capital on
a winding up if, for example, the company is insolvent. Normally, the
articles give no voting rights to preference shareholders.
49
Different varieties of preference share exist. For example, preference
shares are “participating” if , in addition to the preferential dividend, the
holders are also entitled to participate in the ordinary dividend, if one is
declared. Unless otherwise provided, preference shares are presumed to
be `non-participating'. Preference shares are `cumulative' if, should the
preference dividend not be paid in one year, it is carried forward, so that
in the next year all arrears of preference dividend must be paid before
anyone else gets anything. Unless otherwise provided, preference shares
are presumed cumulative.
If authorised by its articles, a company limited by shares can issue
redeemable shares. Either the shareholder or the company can be
empowered to insist that the shares be bought back by the company, and
both preference and ordinary shares can be made redeemable. Normally,
redemption must be made either out of profits, or out of the proceeds of
a new share issue made for the purpose. Exceptionally, a private
company may also redeem or buy its own shares out of capital.
Company meetings
Shareholders can exercise their voting rights by voting on resolutions at
company meetings.
There are two types of meeting. An annual general meeting (`a.g.m.')
must be held initially within 18 months of incorporation, and thereafter
at least once in every calendar year, with not more than 15 months
between any two meetings . At least 21 days' notice of the a.g.m. must
be given to members. Any other general meeting is an extraordinary
general meeting (`e.g.m.'). Directors can call an e.g.m. whenever they
think fit. Furthermore, they must call one if holders of at least one-tenth
of paid-up shares so demand. Those requiring the meeting must say why
they want it, and at least 14 days' notice must be given to members.
The notice calling a general meeting must, under Table A, include
details of any special business to be discussed there. All business at an
e.g.m. is `special'. At an a.g.m., standard items such as declaring a
dividend, considering the accounts, balance sheets, directors' and
auditors' reports, and electing directors to replace those retiring, are
50
ordinary business and need not be mentioned in the notice . Even at an
a.g.m., however, anything else will be `special' business.
Irrespective of the type of business, there are three different types of
resolution at company meetings. Ordinary resolutions can be passed by
a simple majority of those voting. It should be emphasised, however,
that the normal rule is one vote, per share, not one per person.
Therefore, if one person holds most of the voting shares, he can
determine what is passed and what is not. Sometimes the articles and
terms of issue can give weighted voting rights, so that some shares carry
several votes. Secondly, by the Companies Act and/or the articles, some
powers of shareholders can be exercised only by extraordinary
resolution. This can be passed only by a three-quarters majority of votes
cast. Notice of intention to move an extraordinary resolution must have
been given when the meeting was called. Thirdly, some things can be
done only by special resolution-for example altering the objects clause
or the articles. Again a three-quarters majority is needed. Furthermore,
in this case at least 21 days' notice of the resolution must be given to
members, even if it is moved at an e.g.m. for which only 14 days' notice
is required.
Finally, as we have seen, notice must be given of meetings and of
resolutions, and the periods of notice required vary. In some situations,
for instance on a resolution to dismiss a director, special notice of 28
days must be given to the company, which must then give notice of the
resolutions to members when it calls the necessary general meeting.
These rules regarding meetings are relaxed for private companies if all
the members consent in writing, except where the resolution concerns
the removal of a director or of an auditor.
Directors and other officers
51
Every company must have directors, who are the persons responsible for
managing the company. The actual numbers depend upon the articles,
but a public company must have at least two, and a private company at
least one. No qualifications are needed, except that a director of a public
company must retire at 70 unless either the articles, or a resolution of
which special notice has been given specifying his age, provide
otherwise, The court can disqualify a person from being or acting as a
director for up to five years if he has been convicted of an offence under
the Act, and an undischarged bankrupt may not act as a director.
A director need not be a shareholder, although `qualification' shares are
often required by the articles in practice.The first directors are those
named in the statement filed with the memorandum. Subsequent
elections normally take place at the a.g.m. Articles commonly provide
that directors must retire or offer themselves for re-election every three
years, with one-third doing so each year. Changes of directors must be
notified to the Registrar of Companies.
Even if elected for a three-year term, directors can be removed at any
time under the 1985 Act, section 303, by an ordinary resolution of
shareholders, with special notice. However, if a director holds voting
shares, he can vote for himself.
In Bushell v. Faith (1970), a director's shares validly gave him two votes
per share on such a resolution, and this was enough to defeat the attempt
to sack him.
Directors are not as such employees of the company, and they are not
automatically entitled to payment. In practice, the articles often provide
for directors to receive fees and expenses, and executive directors such
as a `managing director' often, in addition to being directors, have
employment contracts under which they receive a salary.
Every company must also have a company secretary, who is the
administrative officer responsible for meetings, notices, resolutions,
records, registers, and accounts. A director, but not a sole director, may
serve as secretary.
52
A company must keep a register of directors and secretaries at its
registered office, and notify the Companies' Registrar of its contents.
The register is open to public inspection. Detailed statutory provisions
also require directors to disclose to the company and members matters
such as their financial interest in this and connected companies.
Duties of directors
In addition to their duties to manage, the directors owe duties of good
faith to the company. These duties are similar to those of partners or
agents.
The following are some examples.
l. A director must not make a secret profit from his position.
In Boston Deep Sea Fishing and Ice Co. v. Ansell (1888), a director
received an undisclosed commission from the builders of a new boat for
his company, and undisclosed bonuses from a company supplying ice.
After he had been dismissed as director, and his employment contract
ended, he had to account to the company for the money.
A director must not allow an undisclosed conflict of interest to occur.
For example, he must not take for himself contracts negotiated for the
company.In Cook v. Deeks (1916), the directors of a construction
company negotiated a contract in the usual way, as if they were making
it for the company. Then, however, they made the contract in their own
names, and took the profit. They ultimately had to account to the
company for the profit.
2.
In Regal (Hastings) Ltd v. Gulliver (1942), the company bought and
sold some cinemas at a profit. Some directors, who had also invested
their own money in the project, shared in the profit without the
knowledge or consent of the other shareholders. They had to account for
53
their profits, which were only made because of knowledge and
opportunities arising from their position as directors. (They could have
protected themselves by making full disclosure and seeking the consent
of the other shareholders in advance.)
Under the Companies Act, a director who is in any way, directly or
indirectly, `interested' in a contract which the company is making must
disclose his `interest' to the board of directors and, if it is a substantial
property transaction, to a general meeting. Failure to do so is an offence.
Subject to this and the above common law and equitable rules, however,
there is no reason why a director should not contract with his own
company. It is undisclosed conflicts of interest which are unlawful.
3. Directors must exercise their powers for the company's benefit, not
for their own or for any other ulterior motive. This has often arisen
when shares are issued.
In Piercy v. Mills Ltd (1920), the directors issued extra voting shares to
themselves and their supporters, not because the company needed the
extra capital, but solely to prevent the election of rival directors. The
share issue was held void.
In Howard Smith Ltd v. Ampol Petroleum Ltd (1974) the directors of
M Ltd issued 4.5 million new shares to Smith Ltd, so as to change the
balance of power in M Ltd. After the issue, the previous majority
shareholder, Ampol, would no longer have a majority. This issue was set
aside, because destroying Ampol's majority was not a proper motive for
issuing shares.
4. Directors must show reasonable care and skill.
In Re City Equitable Fire Insurance Co. (1925), the managing
director was able to defraud his own company partly because the
ordinary directors were careless in not checking suspicious entries in the
annual accounts. It was accepted that the negligence of the ordinary
directors was a breach of their duties to the company.
54
Relations between members and management
Directors and officers owe their duties to the company, not to
individual shareholders. Therefore, it is the company which must sue
them if they break their duties, and if the company decides not to sue,
then no further action can be taken. The company will not sue if the
majority of votes in a general meeting resolve not to do so. Therefore, if
the directors have the support of the majority of votes (or if they have
the majority of votes), the wrong can be condoned.
In Foss v. Harbottle (1843), two directors sold their own land to the
company, allegedly for much more that its true value. Some
shareholders tried to sue the directors, but the court would not hear the
action. It was up to the company to decide whether or not to sue.
The rule in Foss v. Harbottle does not, however, allow the majority
to get away with everything. In some situations, the court will hear an
action by a minority.
1.Under the Companies Act 1989, even one shareholder can still
restrain a future ultra vires act by the directors, unless the
proposed act is ratified by a threequarters majority.
2.If the directors try to do something which requires a special or
extraordinary resolution (with a three-quarters majority and
appropriate notice) without first obtaining such a resolution, a
simple majority cannot ratify it. To allow this would be to
destroy the whole protection given to minorities by special or
extraordinary resolutions, namely that a 26 per cent minority
can defeat the resolutions.
3.Sometimes the directors may commit a wrong to the member
personally, not to the company. If this occurs, the individual
member can sue to protect his own rights.
55
In Pender v. Lushington (1877), the chairman wrongfully
refused to accept the votes of certain shareholders and, as a
result, a resolution which they wished to oppose was passed.
It was held that the chairman had infringed the shareholders’
personal rights to vote, and the court granted them an
injunction restraining the company from acting on the
resolution.
4.
The court will not permit a `fraud on the minority'. `Fraud'
is used loosely here as meaning grossly inequitable conduct,
not necessarily criminal. A minority shareholder with no
other remedy may sue where directors use their powers
intentionally, fraudulently, or , or even only negligently in a
manner which themselves personally at the expense of the
company.
In Cook v. Deeks , the directors were made to account notwithstanding
that, as majority shareholders, they had passed a resolution declaring
that the company had no interest in the contract.
In Daniels v. Daniels (1978), it was alleged that the directors and
majority share holders had sold land belonging to the company to one
member of the board for less than its value. It was sold by the company
in 1970 for £4250, and re-sold by the director in 1974 for £120000. It
was then held that even though no dishonesty was alleged, a minority
shareholder could sue the directors for breach of their duties. A minority
shareholder may also be allowed to sue if those who control the
company exercise their powers over internal management inequitability,
for example by changing the company's constitution or membership in
some way so as to force out the plaintiff; see Clemens v. Clemens Bros.
Ltd. below. Under the Companies Act 1985, section 459, any
shareholder may petition the court for relief on the ground that the
company's affairs are being conducted in a manner which is unfairly
prejudicial to some section of the shareholders, including himself. The
court has wide discretionary powers. It can, for instance, order the
offending majority to buy the minority holder's shares from him (if he so
wishes) at a fair price. It can also allow a minority holder to sue in the
name and on behalf of the company.
56
Duties of majority shareholders
Unlike directors, shareholders as such owe no detailed duties of good
faith to the company. Generally, they can exercise their powers for
whatever motive they think fit. There are now, however, limits on this
freedom. For example, as we have seen, the activities of directors cannot
always be ratified by majority shareholders. Secondly, in altering the
articles, it is established that shareholders must act in good faith for the
benefit of the company. Thirdly, oppression by the majority of the
minority may be a ground for winding up the company. Fourthly, a
shareholder s powers are subject to equitable principles which may
make it unjust to exercise them in a particular way.
In Clemens v. Clemens Bros. Ltd. (1976) the defendant used her
majority holding to pass resolutions issuing new shares, with the effect
(and apparent motive) of increasing her own control and reducing the
plaintiff's holding to below 25 per cent. The court therefore set aside the
resolutions.
D. The company and outsiders
Agency of directors and officers
Since a company is an artificial person and cannot do anything by
itself, it must act through human beings. Most companies are larger than
partnerships and, therefore, unlike in partnerships, not every member is
presumed to have authority to act on a company's behalf. A shareholder
as such, even a majority shareholder, has no implied authority to make
contracts for the company. Even an individual director has no implied
authority to bind the company. Most of the company's activities are
carried on by the directors acting as a board.
57
A company will normally be bound by the activities of its board of
directors, or of others to whom the board has delegated authority to act,
for example the company secretary. This may be so even if the board is
acting outside its actual powers under the memorandum and the articles.
A party to a transaction with a company is not bound to enquire as to
whether there is authority for the act and the company may only escape
liability if it proves that the other party was not acting in good faith.
There are other rules which can protect outsiders.
1.
By the 1985 Act, section 285, the acts of a director or
manager shall be valid notwithstanding any defect which may
later be discovered in his appointment or qualification. This
is a limited provision, and does not cover either persons who
purport to be executive directors without ever having been
appointed at all, or who, having been properly appointed,
exceed their actual authority.
2.
If an outsider has no means of checking, he is entitled to
assume that the internal procedures of the company have been
properly carried out. In Royal British Bank Ltd v. Turquand
(1856), two directors borrowed money on behalf of the
company. They only had authority to borrow on such terms if
they had first been authorised to do so by an ordinary
resolution of members, and no such resolution had been
passed. Nevertheless the company was bound to repay the
loan, because the lender-who had no means of checking-was
entitled to assume that the proper resolution had been passed.
3.
In any event, an executive such as a managing director has,
from his position, certain implied powers. An outsider is
entitled to assume that such a director or officer, acting within
his `usual' authority, can in fact bind the company. The
company will only escape liability if (a) the director or officer
has no actual authority, and (b) there were suspicious
circumstances which should have made the outsider enquire
further. In Panorama Developments Ltd. v. Fidelis
Furnishing Fabrics Ltd (1971), the company secretary of
58
Fidelis Ltd hired cars in the company's name, but used them
for his own purposes. Although he had no authority from the
board to do this, the company had to pay the bill. It was quite
usual for a senior officer such as the secretary to hire cars for
the firm, to meet important visitors for example, and there
was nothing to make the car company suspect that the
secretary was acting outside his actual authority.
4. Furthermore, if a company has previously honored contracts
made by someone on its behalf, or has otherwise `held him
out' as having authority to bind the company, it may be
estopped from denying his authority. The company may be
bound by future unauthorised contracts which he makes.In
Freeman and Lockyer v. Buckhurst Park Properties Ltd
(1964), the board of B Ltd had allowed one of its number, K,
to act as if he were managing director, although he had never
been appointed to that position. The board had previously
honoured contracts made by K, but now claimed not to be
bound by a contract which he made with the plaintiffs. It was
held that (a) B Ltd was estopped from denying that K was
managing director, and (b) it was within the usual powers of a
managing director to make such contracts. Therefore, B Ltd.
was bound.
Personal liability of members
We have seen in previously that fully paid-up shareholders in a
company have no liability for the company's debts. There are only a few
exceptions to this.
1. Under the 1985 Act, section 24, if a company carries on business
without ;u least two members for six months, then the remaining
member is personally liable for the company's debts incurred
thereafter if he knows that he is the only member. Creditors can sue
the company and/or the member personally. (This section can affect a
`parent' company which owns all of the shares in a subsidiary. )
2. Under the Insolvency Act 1986, section 213, if in the course of
winding up a company it appears that any business has been carried
59
on with intent to defraud creditors, or for any fraudulent purpose, the
liquidator may ask the court to declare that persons knowingly party
to such fraudulent trading are liable to make such contribution to the
company's assets as the court thinks proper. 'I his can apply even if the
company was solvent when wound up.
3. If the company was insolvent when wound up, the Insolvency Act,
section 214 introduces the further concept of wrongful trading under
which directors can he held liable even if there was no fraud. When a
company has financial difficulties, and a director knows or ought to
conclude that it has no reasonable prospect of recovery, then he
should immediately take steps to minimise the loss to its creditors, for
example by applying immediately for a winding up order. A director
who fails to do so, and wrongfully carries on trading, may be ordered
to contribute personally to the company's assets on an eventual
insolvent liquidation. `Shadow directors' (e.g., dominant managers)
can also he liable.
4. Under the Disqualification of Directors Act 1986, if a person who
has been disqualified by the court from acting as a director disobeys
the court order. he can be personally liable for debts which the
company incurs while he is wrongfully involved in its management.
5. Under the Insolvency Act, section 216, a person who was a director
in the last 12 months' life of an insolvent company must not trade for
the next five years in a name too similar to that of the insolvent
company. If he does so, he can be personally liable for the new
company's debts.
6. Exceptionally, a director may be vicariously liable for torts
committed by the company, particularly if he had extensive control
over the company's conduct at the time in connection with the
tortious activity.
In Evans & Sons Ltd v. Spritebrand Ltd (1985), it was held that a
director personally, as well as the company, could be liable for the
company's breach of copyright. Many of these exceptions only affect
those shareholders who are either directors or persons involved in
management. Directors who, as occasionally happens, are not
shareholders can also be affected.
E.
Public controls over companies
60
Companies have the privileges of separate legal personality and,
usually, limited liability. In return, public controls are imposed, largely
requiring disclosure and publication of material regarding membership,
management, debts, and financial position generally. The purpose is
mainly to protect members, creditors, and those dealing with the
company. The following are some examples.
Annual returns. The Act requires a company to submit a detailed
`annual return' within 42 days after each a.g.m. (except in the year of
incorporation). The returns must contain, for example, current
particulars of members and officers, shares issued, and charges on the
company's property. There must also be certified copies of balance
sheets, profit and loss accounts, and auditors' and directors' reports.
2. Registers of various kinds must be kept at the company's registered
office and/ or at the Companies Registry. Examples are mentioned at
several places in this unit. Most registers can be inspected by
members and, in some instances, by outsiders. Accounts must also be
kept, usually at the registered office, but these are normally only open
to inspection by directors.
3. Inspection and investigation. The Department of Trade and Industry
has wide powers under the Acts to inspect a company's books, and to
conduct far-reaching investigations of its affairs if need be.
l.
F. Winding up
Voluntary winding up
The shareholders can resolve at any time to end (`wind up') the
company, and this is now governed by the Insolvency Act 1986, even if
the company is solvent. The resolution must usually be a special one,
needing a three-quarters majority.
Alternatively, an extraordinary resolution may be passed that the
company is insolvent and should be wound up.
61
The job of winding up is carried out by a liquidator (unlike a
partnership, which is dissolved by the members themselves). The
liquidator's tasks are (a) to settle lists of contributories, (b) to collect the
company's assets, (c) to pay off its creditors, and (d) to distribute any
surplus to the contributories. The `contributories' are present and past
shareholders who, if the shares were not fully paid up. would have to
contribute towards payments of debts. For practical purposes today, the
relevant contributories are the current shareholders, and they will not in
fact have to contribute if the shares are fully paid.
If the directors have made a statutory declaration that the company
can within 12 months pay its debts in full, and filed this with the
Registrar, matters will proceed as a members' voluntary winding up. The
members appoint the liquidator. who is responsible to them. If the
directors are unable to make a `declaration of solvency', then it will be a
creditors' voluntary winding up. The liquidator may be appointed by the
creditors, and will largely be responsible to them.
Compulsory winding up
A petition may be presented to the court by the company itself, the
Department of Trade and Industry or, most commonly, by a creditor,
asking that the company be wound up by the court. There are various
grounds on which such a petition may be granted, the most important
being that the company cannot pay its debts. or that `it is just and
equitable that the company should be wound up'; see Ebrahimi v.
Westbourne Galleries, and Re Yenidje Tobacco .
If a winding up order is made, a court officer, the Official Receiver,
acts as liquidator unless and until the creditors or shareholders apply for
the appointment of another. Having realised the assets, the receiver or
liquidator pays debts in the following order.
1. Costs of winding up.
2. Preferential debts, such as some tax arrears for the last year,
up to four months' arrears of employees' wages to an £800
maximum, and arrears of national insurance contributions.
62
3. If all preferred creditors have been paid in full, the remaining
money goes to pay off ordinary creditors.
If there is not enough to pay off any category, each gets a dividend of
so much in the pound. If anything remains after ordinary creditors are
fully paid, it goes in repayment of capital, and then division among
shareholders.
Secured creditors are in a fortunate position in that they are entitled
to payment in full from the proceeds of sale of the asset charged, before
anyone else gets any part of that money; The court can order that a
winding up which started voluntarily shall be conducted thenceforth
under the court's supervision. Such an order is rare today.
LIABILITY FOR WRONGFUL ACTS ( TORTS)
Tort is a French word meaning a wrong. It is a civil wrong, as opposed
to a crime, because it is committed by a private person against another
private person. A tort has been defined as "civil wrong, other than a
breach of contract or a breach o1 trust." The terms of a contract or trust
are agreed beforehand by the parties, and a breach of the terms by one
party gives the other a right of action. A tort, however, is a duty fixed by
law which affects all persons. For example, all road users have a duty
not to act negligently. They do not agree beforehand not to injure each
other; the duty or liability not to be negligent is fixed by law. A
pedestrian who jay-walks and causes injury to a motor-cyclist will be
liable to compensate the motor-cyclist for the injury suffered, in the
same way as a car driver who negligently damages another car will be
liable for the cost of the damage.
The usual remedy for tort is damages, but with certain torts other
remedies such as injunctions are necessary because damages would not
be an adequate compensation.
It is possible for one event to be a breach of contract, a crime and a tort.
For example, David hires Michael to drive Peter to the station, and
Michael exceeds the speed limit, crashes and injures Peter. Michael
63
could be liable for: (a) an action by David for breach of contract, (b) an
action by Peter for the tort of negligence and (c) a criminal prosecution
for dangerous driving.
Malice
The intention or motive with which an act is committed is generally
unimportant when deciding whether or not the act is tortuous. A wrong
intention will not make a lawful act into an .unlawful one. In Bradford
Corporation v. Pickles (1895), the corporation obtained water from
springs fed by undefined channels through Pickles' land. In order to
coerce the corporation to buy the land at a high price, Pickles sank a haft
which interfered with the flow of water. The plaintiffs sought an
injunction to restrain Pickles from collecting the underground water, but
the court held that the defendant had the right to draw water from his
own land. The motive behind his act was irrelevant.
Malice, however, in the sense of improper motive, is an essential
requirement or an important factor in the following torts:
(a) Malicious prosecution. This tort is committed when one party, out of
spite, brings an unjust criminal prosecution against the other party.
(b) Injurious falsehood. This tort occurs when a party makes a deliberate
false statement with the intention that the other shall suffer loss or
damage.
(c) Conspiracy. When two or more persons conspire together to injure
another person.
(d) Defamation. Malice can defeat certain defences.
(e) Nuisance. Malice may turn a reasonable use of one's own property
into an illegal use .
STRICT LIABILITY
A person is generally liable in tort when an act is done
(i) intentionally (e.g. trespass) or
(ii) negligently. In some cases,
however, a person may be liable when he acts neither intentionally nor
negligently. In these instances the law ha: imposed a strict limit on a
person's activities, and if this limit is exceeded the defendant is strictly
64
or absolutely liable. The most common example of such liability is
known as the Rule in Rylands v. Fletcher (1868). The rule applies when:
(i) a person brings on to his land for his own purpose some dangerous
thing, which is not naturally there (water, wild animals, gas, fire),
(ü) the dangerous thing escapes from the land, (strict liability does not
apply if the injury occurs on your own land), and
(iii) causes damage.
If these three events occur the occupier of land is liable for the damage
caused, but the following defences may be used (i) The untoward event
was caused by the act of a stranger (ü) It was the plaintiff s own fault.
(iii) It was an act of God. (iv) There was statutory authority.
NEGLIGENCE
A plaintiff must prove three things to succeed in an action for
negligence.
1.
The defendant owed the plaintiff a legal duty;'
2.
There was a breach of that duty;
3.
The plaintiff suffered damage.
1.
Duty owed to the plaintiff
In Donoghue v. Stevenson (1932), the plaintiff drank ginger beer from
an opaque (dark glass) bottle, in which there was decomposed snail
which caused the plaintiff to be ill. The House of Lords held that a
manufacturer of goods is liable the goods are used by a consumer
without an intermediate examination, because the manufacturer owes
the consumer duty of care.
Probably the most important principle to emerge from the judgement
came in the definition of Lord Atkin, of who is owe a duty of care. "You
must take reasonable care to avoid acts or
omissions which you can reasonably foresee would be likely to injure
your neighbour." My neighbours are " . . . persons who are so directly
affected by my act that I ought reasonably to have them in
contemplation . . . "
65
The neighbour principle has been used in many different situations, for
example to show that a duty of care was owed to (i) a lady locked in a
public lavatory, (ü) wearers of underpants who caught dermatitis from a
chemical in the material, (iii) persons living in the neighbourhood of an
open borstal, (iv) the users of a defective hair-dye.
To succeed in an action for negligence a plaintiff must show that a duty
of care was owed by the defendant.
In Bourhill v. Young ( 1943), a motor-cyclist crashed and was fatally
injured. A pregnant fishwife, who was 15 yards away, later looked at the
scene of the accident and the sight of the blood caused shock and,
subsequently, a miscarriage. the House of Lords held that the lady was
not owed a duty of care because it could not reasonably be foreseen that
the accident would cause her to suffer such injuries.
In King v. Phillips (1953) the Court of Appeal held that mother was not
owed a duty of care, when, after hearing he child scream and seeing the
child's tricycle under a taxi, she suffered shock. In fact the child was not
hurt.
The defendant might be liable if aware that the plaintiff was nearby. In
Board man v. Sanderson ( 1964) the defendant negligently backed his
car and injured the plaintiff’s son. The plaintiff who was nearby heard
his sons screams and suffered shock. The court held that plaintiff,
could recover damages because the defendant was aware the plaintiff
was nearby and the consequence of the act was foreseeable. The
decision in McLoughlin v. O'Brian should be considered carefully . The
plaintiff was entitled to damages for nervous shock, even though she
was not present at the accident, because it was a reasonably foreseeable
consequence of the defendant's negligence.
A breach of duty
Defendants will be in breach of duty if they have not acted reasonably.
The standard of care varies with each situation, but is a general rule, the
standard of care is that of a reasonable person who uses ordinary care
and skill.
The courts will consider the risk involved. In Paris v. Stepney Borough
Council (1951), the plaintiff had only one eye and the defendants
66
employed him on work that involved a certain risk to the eyes, although
not sufficient to warrant ordinary workers to wear goggles. Paris was
blinded as a result of his work and the court held that the defendants
were in breach of their duty to that particular worker.
A professional person must use the skill expected of the profession,
therefore in Carmarthenshire C.C. v. Lewis (1955) a teacher was
dressing young children before taking them out, when a four-year-old
under her control left the school premises and ran into the road. A lorry
driver was killed when swerving to avoid the child. The court held that
the teacher was not negligent, but the county council had been negligent
in allowing a situation to arise in which the child could leave the school.
A duty of care is not owed as a matter of public policy by a participant
to a crime, to a partner in the crime. In Ashton v. Turner and Another (
1980) the plaintiff and defendants had been drinking together and the
second defendant allowed Turner to drive his car without insurance.
Ashton and Turner later committed burglary and when driving away
from the crime had an accident which injured Ashton (the passenger).
Turner pleaded guilty to dangerous driving and driving while drunk.
Ashton claimed damages against both defendants and the court held that
as a matter of public policy the plaintiff was not owed a duty of care
when injured during the commission of a crime. The court also held that
Turner could successfully plead the defence of volenti non fit injuria .
Damage has been suffered
Although a plaintiff must prove damage, not all damage is actionable if
it is too remote. The general rule is that a defendant is only liable for
damages that a reasonable man should foresee.
In The Wagon Mound Case ( 1961 ), oil was negligently spilt from a
ship and floated across Sydney Harbour to a ship repairers, where sparks
ignited the oil and caused damage to the wharf and to a ship. At that
time it was not foreseeable that the oil would be set alight and cause the
damage, and the Judicial Committee of the Privy Council held that there
was no liability.
This decision was followed in Doughty v. 7'urner Manufacturing Co.
(1964). The plaintiff was injured when a fellow worker dropped an
asbestos cement cover into molten liquid. An explosion followed and
the plaintiff was injured. It was discovered later that a chemical reaction
67
would be caused by the cement and molten liquid. The Court of Appeal
held that the accident was unforeseeable and the defendants were not
liable.
It must be stressed that the plaintiff must suffer damage. A person
cannot be sued in negligence just because he acted negligently. The
negligent act must injure the plaintiff.
Res ipsa loquitur (the facts speak for themselves)
It is a general rule of law that a plaintiff must prove that the defendant
has been negligent. In cases, however, where the ac' or omission
obviously indicates negligence, the burden o: proof moves to the
defendant who must shown that, in fact, he was not negligent. This rule
has been applied where:
(i) Bags of sugar fell on the plaintiff from an upper floor of a
warehouse. Scott v. London & St. Katherine's Dock Co. (l 865).
(ii Swabs were left in a patient after an operation. Mahon v. Osborne (
1939).
(iii A customer slipped on yoghurt which had spilled on to the floor of a
supermarket. Ward v. Tesco Stores Ltd. ( 1976).
The application of the rule does not automatically mean that the
defendant was negligent, but it is presumed that the act or omission was
negligent, unless it can be shown otherwise. In Pearson v. N.W. Gas
Board ( 1968), a gas explosion killed the plaintiff's husband and
destroyed her home. The court applied the rule, but the defendants were
able to show that severe frost caused the gas leak and, as there was no
reasonable way in which the explosion could have been prevented, they
were not negligent.
Contributory Negligence
The Law Reform (Contributory Negligence) Act 1945 provides that
where a person suffers damage which is partly his own fault and partly
the fault of another, the injured party will be able to claim damages, but
the amount recoverable shall be reduced to the extent that the court
considers just and equitable, having regard to the claimant's
responsibility for the damage.
68
In practice the court usually awards damages and then reduces the award
by the percentage the plaintiff is deemed to be responsible.
For example, suppose a motor-cyclist suffered injuries caused by the
negligence of a motorist and was awarded £5,000 damages. This amount
would be reduced if it could be shown that the plaintiff contributed to
the damage suffered to the extent of 20 per cent. of the blame, by not
wearing a crash helmet. The damages received by the motor-cyclist
would be £4,000 (i.e. £5,000 less 20 per cent.).
In Sayers v: Harlow U.D.C. (l958), the plaintiff entered a public toilet
and, because of a faulty lock, could not open the door to get out. She
was due to catch a bus, so in order to climb over the door she stepped on
to the toilet-roll, slipped, and injured herself. The court held the
defendants to be negligent, and although the plaintiff had acted
reasonably in attempting to release herself, she had contributed to the
injury by stepping in a revolving toilet-roll. The damages were reduced
by 25 per cent.
The plaintiff in Meah v. McCreamer (1985) was a passenger n a car and
was injured as a result of the defendant's negligent driving. Both driver
and passenger had drunk a large amount of alcohol. Before the accident
the plaintiff had a criminal record, but was not particularly violent.
Afterwards he developed an aggressive personality and was convicted of
sexual assault and rape, and received a life sentence. His claim for
damages concluded compensation for the personality change and its
consequences, including the prison sentence. The court held that as the
injuries from the accident caused the personality change the defendant
was liable for the plaintiff's pain and suffering, his injury and the
consequences of the personality change. The judge awarded £60000, but
reduced the damages by 25 per cent. because of the plaintiff's
contributory negligence in accepting a lift, when he knew the
defendant's ability to drive had been affected by alcohol.
As a point of interest, in a later case a victim of his act successfully sued
for damages for the assault. It was the first occasion in English law that
a rape victim recovered damages from her attacker.
It is generally considered that a young child is never guilty of
contributory negligence.
Occupiers' Liability for Dangerous Premises
69
The Occupiers' Liability Act 1957, provides that the occupier of
premises, or the landlord if responsible for repairs to the premises, has a
common duty of care to see that all lawful visitors will be reasonably
safe when using the premises.
Lawful visitors include persons invited expressly or impliedly
(milkman, postman, paper-boy), or people who enter the premises under
a contract (spectators at a football match).
The standard of care varies according to the visitor. Obviously the care
shown for a child must be greater than for an adult. A notice "danger"
would be of little use to a young. Child who could not read. Some
dangers on premises may actually allure or attract children. In the case
of allurements the occupier must take greater care to protect children.
Occupier have been held responsible for injuries to children caused by a
railway turntable, red berries on trees, building sites, railway trucks, and
threshing machines.
An occupier may not be liable for injuries to a very young child if it
could be expected that the child would be accompanied by parents or
other responsible persons. In addition to the general defences , the
occupier may show that:
(i) adequate notices or warnings of the danger were given(e.g. a "wet
paint" sign).
(ii) with visitors under contract, liability was excluded. For example it
is usual for exclusion notices to be displayed at most sporting events,
but it should be noted that the Unfair Contract Terms Act 1977 may
limit exclusion clauses to a test of reasonableness .
(iii) the injury was caused by the negligence of a competent independent
contractor. For example, the occupier w0uld escape liability if electrical
fittings, erected by a qualified electrician, fell on a visitor. The occupier
would be liable, however, if the fittings had been erected by a gardener.
Independent contractors may be liable if they leave premises in a
dangerous state and lawful visitors are injured as a result.
A.C. Billings & Sons Ltd. v. Riden (1958). Building contractors had to
remove a ramp from the front of a house. Mrs. Riden left the house
after dark and fell into a sunken area and suffered injury. It was held
that the contractors were negligent as they had not taken reasonable
care to ensure that visitors were not exposed to dangerous premises.
(iv) the person injured was a trespasser and not a lawful visitor. The
occupier 1s liable for trespassers for intentional dangers such as man70
traps, and for injuries caused when all that a humane person should
have done for the safety of a trespasser had not been done.
British Rail ways Board v. Herrington ( 1972). A child trespasser was
electrocuted and severely injured on the defendant's land. The fence
guarding the line was broken. The House of Lords considered that there
was a high degree of danger and as the defendants were aware of the
possibility of such a trespass, and could easily have repaired the fence,
they had not acted humanely and were liable.
The Occupiers' Liability Act 1984 is concerned with civil liability of an
occupier to persons on his land who are outside he scope of the 1957
Act, namely trespassers. The aim of action is to resolve points of doubt
following British Railways Board v. Herrington (see above.)
An occupier has a duty to persons other than lawful visitors in respect
of any risk receiving injury on his premises by reason of any danger due
to the state of the premises, or to do things done or omitted to be done
on them.
The duty is owed by the occupier if:
(a) he is aware of the danger or has reasonable grounds to
believe that it exists,
(b) he knows or has reasonable grounds to believe that there are others
in the vicinity of the danger, or may come into the vicinity, and
(c) the risk is such that he may reasonably be expected to offer the other
persons some protection. The duty is to take such care as is reasonable
to see that the others do not suffer injury by reason of the danger on the
premises. The duty may be discharged by giving warning of the danger
or discouraging persons from taking the risk. No duty is owed by the
occupier if the other persons willingly accept the risk. There is no
liability in respect of loss or damage to the other person's property, only
personal injury.
Section 2 of the Act deals with visitors using premises for recreational
or educational purposes. Occupiers of business premises may exempt
themselves from provisions of the Unfair Contract Terms Act 1977,
where access is granted for purposes not connected with the business.
For example, a farmer allowing a football team to play on a field
normally used for pasture.
TRESPASS
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Trespass is probably the oldest tort, and many other torts owe their
origin to the writ of trespass, which has been described as the "mother
of actions." There are three forms of trespass:
l. trespass to the person ,
2. trespass to chattels (goods), and
3. trespass to land.
All trespasses are actionable per se (by itself); that is the plaintiff does
not have to prove that the defendant caused any damage.
1. Trespass to the person
This tort consists of three separate actions:
(a) Assault. This tort is actionable when a person threatens o attempts to
physically injure another, and the other person ha; reasonable fear that
the threat will be carried out. Words are not sufficient by themselves,
they must be accompanied by actions. If a person 100 yards away
shouted an abusive threat it would probably not be assault, because
there would be no fear of immediate danger and no action to indicate an
attack However, if a knife or fist was raised in close proximity to a face,
this would be assault as there would be good reason to be in fear of a
physical attack.
It is possible for words to remove the fear of an attack. For example, if
a person lifted a fist to strike another, but said " won't hit you because
it's your birthday."
(b) Battery. This occurs when an act goes beyond a threat and a person
is actually touched. The attacker does not have to physically touch the
other person, the injury could be caused indirectly by such as throwing
a stone.
It should be noted that the mere touching is actionable regardless of the
motive. A kiss given with love and affection is assault and battery if the
receiver does not authorise the act even if it takes place under the
mistletoe at Christmas time. It is intentional bodily contact and a
woman or man may claim damages if they did not voluntarily stand
under the mistletoe and accept the kiss.
Assault and battery are usually joined in one action, and both are
criminal offences. Conviction in a criminal court may be used as
evidence when claiming a remedy in a civil action
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(c) False imprisonment. This tort is committed when a person's liberty
is totally restrained by the intentional, but unjust, act of another. The
imprisonment must be for an unreasonable length of time, and be total
so that if a person has reasonable means of leaving the premises it is not
actionable.
In Bird v. Jones (1845) the public footpath over Hammersmith Bridge
was closed. The plaintiff climbed over a fence and was stopped by the
defendant from proceeding further along the footpath. The court held
that it was not false imprisonment as the plaintiff could have left the
bridge by the way he entered. In John Lewis & Co. Ltd. v. Tims (1952)
Mrs Tims and her daughter were suspected of stealing and were kept in
an office, against their will, until the store manager was informed. The
House of Lords held that, as the detention had not been for an
unreasonable period of time, there had not been false imprisonment.
A person may have a right of action even though he did not know at the
time that he had been locked in a room while he slept. Meering v.
Grahame-White Aviatron Co. (1919).
Specific defences to trespass to the person
(a) Parental or quasi-parental authority. Parents or guardians may use
reasonable force to chastise or imprison children. A similar authority
may be given to others who take the place of parents (quasi means "as
if"). A teacher, therefore , would not be liable for keeping pupils in
school after lessons provided good reason could be shown.
(b) Self defence. The force used must be reasonable, regarding the facts
of the case. It may not be a good defence to shoot an attacker dead if the
person was unarmed. In Lane v. Holloway (1968), the plaintiff aged 64
hit a 24 year-old man on the shoulder, and in return received a blow to
the eye which necessitated 19 stitches and a month in hospital. It was
held that the blow received by the older man was out of all proportion
to the provocation. (The defendant had also been found guilty in the
criminal courts.)
(c) Statutory or judicial authority. For example, lawful arrest by a police
officer.
2. Trespass to chattels (goods)
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Chattels are items of tangible moveable property, such as personal
possessions (pens, books, desks, cars, records, etc., and money and
cheques, etc.).
This tort is committed when a person intentionally interferes with goods
in the possession of another, or carries out an unjustifiable act which
denies a person of the legal right o possess the goods. The merest touch
of the goods without causing damage is sufficient, and it is not
necessary for the defendant to dispossess the goods.
Kirk v. Gregory (1876). In order to place another person's jewellery in a
safe place, the defendant removed the goods room one room to another.
The jewellery was later stolen by an unknown party and the defendant
was held liable in trespass.
The tort may also be committed without touching the goods, e.g.
opening a farm gate and driving cows or horses out of a field.
Possession is the basis of this tort, as it is the lawful possessor of the
goods, not necessarily the owner, who may bring an action. For
example, a hirer of a car, not the owner, would sue 'or damages from
the defendant who had taken possession of he car.
3. Trespass to land
This tort may be defined as the intentional entering on to another
person's land without lawful permission or remaining on the land after
permission has been withdrawn.
The entering or interference with the land must be direct. Rubbish
dumped on to another's land would be trespass, but if the rubbish was
blown on to the land by gales, it would not be trespass because it was
not the direct action of the defendant which caused the interference.
An invasion of air space may be a trespass of land, even though the land
is not touched. The courts have held in Kelson v. Imperial Tobacco Co.
(1957) that a sign erected on a building, but which protruded over
another person's land was trespass, as it was in Woolerton and Wrlson v.
Costain (1969), there a crane swung over another person's land. In Lord
Bernstern of Leigh v. Skyvrews and General Ltd. (1978) it was held that
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an aircraft which took an aerial photograph would not be trespassing if it
was at a height which did not affect the use of land.
Trespass is a civil wrong and a mere trespasser, as a general rule, is not
liable for criminal prosecution, and therefore the familiar sign,
"Trespassers Will Be Prosecuted," has no legal effect, except in relation
to certain government undertakings where an Act of Parliament has
provided a fine for tresspassing.
Specific defences to trespass to land
It is a defence to claim that entry on to land was justifiable. The
following reasons may be used as a defence to show that entry was
made:
(i) by leave or licence granted by the occupier of the land ,
(ii) by authority of law (such as a bailiff)
(iii) involuntarily (such as landing in a parachute),
(iv) where the highway was impassable, and
(v) to retake and retain possession of one's own property.
The remedies available to the plaintiff:
(i) Damages. If no real injury has been incurred the damages awarded
may be nominal (i.e. 1 p).
(ii) ) Injunction. This may be used to stop the defendant from repeating
the trespass.
(iii) Forcible ejection. The occupier may only use reasonable force to
move the trespasser after first requesting him to leave and giving him
reasonable time to do so.
NUISANCE
There are two forms of nuisance which have quite different meanings
and little in common. They are public nuisance and private nuisance.
Public Nuisance
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This wrong arises when acts or omissions have caused annoyance,
inconvenience or danger to a class or part of the general public. Public
nuisance includes such things as obstructing the public highway,
throwing fireworks in the road, smoke from chimneys causing damage
to cars parked on the highway and quarry blasting which projects stones
and dust on to the surrounding neighbourhood.
Public nuisance is a crime and the offender is prosecuted, usually by the
Attorney-General. A private person who has suffered special damage of
a different kind from that of the general public may sue in tort. An
example would be where, in the case of blasting, an entire
neighbourhood was covered in dust, but one individual was hit by
falling stones.
Private Nuisance
This tort covers the interference with the plaintiff's enjoyment or use of
his land or the disturbance of some legal interest over the land. An
example of interference with the enjoyment of land would be playing
music very loudly in the middle of the night so that your neighbour's
sleep is disturbed. To block your Nuisance 193 neighbour’s access from
the road to his house would be to disturb his legal right of way.
Nuisance and trespass
Nuisance differs from trespass to land in that,
(i) the interference must be indirect. Therefore the smell of . garden
compost heap would be a nuisance to your neighbour, the throwing of
the garden rubbish on to the neighbour's garden would be trespass. Esso
Petroleum v. Southport corporation ( I 956). A tanker ran aground and
had to discharge oil at sea, which was carried by the tide and wind on to
the foreshore. The Court of Appeal held the Corporation's action could
not succeed in trespass as the damage was not caused by he direct act of
the defendants, but by the indirect act of the wind and tide.
(ü) Nuisance is only actionable by proof of special damage.
The following factors have to be considered when establishing whether
or not a nuisance exists.
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a) Reasonableness
It is a good defence to claim the act was a reasonable use of one's own
property. The courts take an attitude of "live and let live." What is
reasonable is based on the conduct of the ordinary man.
b) Sensitiveness
An act which would not disturb a normal person will not be a nuisance
just because the plaintiff, or his property, is unduly sensitive. In
Robinson v. Kilvert (1889) the plaintiff stored brown paper in the
defendant’s premises. The heat from the defendant's boiler damaged the
paper, which was extremely sensitive to heat. The court held the
defendant was not liable in nuisance.
(c) Loca1ity
"What would be a nuisance in Belgrave Square would not necessarily be
so in Bermondsey" said a judge in 1879. He was pointing out that
different standards are necessary for different areas, so it is possible that
noise from a club in the city center may be reasonable, but would be
unreasonable in ~ residential area and would be a nuisance.
(d) Continuity
The general rule is that a single event is not a nuisance and the plaintiff
must show that there was some degree of repetition of the offending act.
In Stone v. Bolton(1950), a ball was hit out of a cricket ground and
injured a lady. It was shown that a ball had been hit out of the ground
only six times in 35 years. The court held that this was not often enough
to be a nuisance.
(e) Malice
The intention behind an act may be relevant in deciding whether a
person's act was reasonable or not.
To shout, shriek, whistle and bang trays may be a reasonable use of your
own property, but if it is done with the express purpose of spoiling your
neighbour's musical evening, it may be a nuisance, because the acts
would not be reasonable, Christre v. Davey (1893).
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The parties to an action
The occupier of property has the right to bring an action bu1 any other
person injured on the property has no claim in nuisance. The person
liable in an action for nuisance is likewise the occupier of the property
from which the nuisance emanated.
In Malone v. Laskey (1907), the plaintiff, the wife of a tenant was
injured when a bracket on a lavatory cistern fell or her. The defendants
who leased the property owned
generator which vibrated and caused the bracket to fall. The plaintiff
sued in nuisance but the court held that, as she was only the wife of the
tenant and not the tenant, she had no interest in the land.
Remedies
The usual remedies are damages and an injunction, which are obtained
from the courts. In Kennaway v. Thompson (1981) the plaintiff lived
near a lake used for motor boat racing. She was awarded damages by the
High Court for nuisance already suffered and damages for future
nuisance. The Court of Appeal varied the award and in the place of
damages for future suffering, substituted an injunction which restricted
the number of races that the defendants could hold.
With regard to the remedy of injunction, it must be stressed that it is
awarded at the discretion of the court.
In Miller v. Jackson (1977), the defendants, a cricket club, had played
on a village ground since 1905. The plaintiffs in 1972 moved into a
house that adjoined the ground. A ball was hit into their house causing
damage, and while a game was in progress there was always the danger
of personal injury. The plaintiffs sought an injunction to restrain the club
from playing cricket on the ground as it interfered with their enjoyment
of the land. It was held by the Court of Appeal that he interests of the
public should prevail over the plaintiffs' individual suffering. The public
78
had watched cricket for 70 years and their interest had to be guarded.
The injunction was not granted.
There is an extra-judicial remedy of abatement which is available when
the nuisance can be terminated without entering another person's land. It
could be applied to overhanging trees or roots, but it must be noted that
the branches which are cut away still belong to the owner of the tree. If
the nuisance cannot be abated without entering the other's land,
permission must first be obtained, unless there is immediate danger to
person or property.
Defences
l. Statutory authority
It is a complete defence that a nuisance was expressly authorised by an
Act of Parliament.
2. Prescription
When a nuisance has been in continuous existence for not less than 20
years, the right to carry on the act may be acquired.
3. Reasonable use of one's own property
4. That the damage caused was minute or minimal
It should be noted that it is no defence that the plaintiff came to the
nuisance. Sturges v. Bridgman (1879).
LIABILITY OF PARENTS FOR THE TORT OF CHILDREN
It is a general rule that parents are not liable for the torts of their
children. A parent will be liable, however, if he is negligent in allowing
his child to be in a position to commit a tort.
In Bebee v. Sales (1916), a father gave his 15-year-old son a shotgun,
and the father was held to be liable when the son injured another boy.
However, the parent is not negligent if he has taken steps to lessen the
risk of injury, as was the case in Dofzaldson v. McNiven (1952). A
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father showed his son how to use an airrifle, warned him of the dangers
and told him not to use it outside the house. The father was held not to
be liable when his son injured another child.
It should be noted that, under the Firearms Act 1958, it is an offence for
any person to make a gift of an air weapon o~ ammunition to a person
under 14 years of age.
DEFAMATION
Defamation is a false published statement, either made orally in writing
or by gestures which attacks a person's reputation. It has been defined as
a statement which tends to lower a in the estimation of right-thinking
members of society generally. Although there is the public interest of
freedom o speech, the tort of defamation protects an individual’s private
interest in his reputation. Two points from the definition must be noted:
(i) The statement must be published to a third party. It is not defamation
if the statement is published only to the plaintiff. It would be defamation
if a third party heard the defamatory words, even by accident. Each time
a defamatory statement is repeated, it is actionable even if the maker
does not know the statement is defamatory. So, if Peter made a
statement to Jim about David, Jim would be liable (as would Peter) if he
repeated the statement to any other person.
Post cards and telegrams are deemed to be published, even if the postal
authorities have not actually read them.
(ii) The statement must lower the plaintiff's reputation in the minds of
right-thinking members of society. A bank robber would not be liable
for defamation if he informed other thieves that one of the gang had
served a prison sentence for theft. This is because the gang would not
disapprove, and they are not held to be right-thinking members of
society.
In Byrne v. Dean (1937) a golf club had some illegal gaming machines
which the police removed. A verse was placed on the notice board,
which inferred that Byrne had informed the police. ("May he Byrne in
hell and rue the day.") Byrne sued, but it was held that he had not been
defamed, because right-thinking members of society would have
approved of a person informing the police of an illegal practice.
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In addition to showing that the statement was defamatory and published
to a third party, a plaintiff must prove that the third party understood that
the statement referred to the plaintiff. It is for the judge to decide if the
statement is likely to be understood as referring to the plaintiff and for
the jury (if here is one) to decide if the third party actually did so.
Not all defamatory statements are actionable. Consider the following
statements and decide whether or not they are defamatory.
"All students in class 1 A cheated in their examination." (There were six
students in the class.) "Half of the Maths `A' level class (four students)
cheated in examination."
The first statement would be defamatory because the class is small
enough for all students to consider that they have been individually
defamed.
The second statement would also be defamatory because, although it
referred to only half of the class, it is small enough 'or any of the class to
bring an action.
The last statement would not give a 1aw student a right to sue because
the class is too large for any one person to claim that it referred to him.
Innuendo
A statement may be defamatory by implication, even though the words
are not defamatory in their ordinary sense, if it Car be shown that
another person's reputation has been affected
In Cassidy v. Daily Mirror Papers Ltd . ( 1929), the newspaper
published a photograph of the plaintiff's husband and another lady, and
the caption announced the engagement of the couple. The plaintiff
alleged that the words inferred that she had lived with the man without
being married, and the court held that the picture and caption would lead
a reasonable person to that conclusion.
It should be noted, however, that only a person defamed by innuendo
may bring an action. If, for example, a student magazine wrongly stated
a brother and sister to be illegitimate children (or words to that effect),
the named persons would no1 be able to sue the editor, because they
have not been defamed, Their parents would be able to sue, because the
statement implies and infers that they are not married.
Libel and Slander
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Defamation is either:
l. Libel
This is defamation in a permanent form, such as writing, or broadcasting
on radio or television. It could be in a painting or cartoon, or on record,
cassette or tape recorder. Libel is actionable per se, that is, the plaintiff
does not have to show special damage. Libel may also be a crime.
2. Slander
This is defamation in a non-permanent form, such as by words and
gestures. Slander is not actionable per se, and a plaintiff must prove
special damage, except with regard to statements which:
(i) Impute that a person has committed a crime punishable by
imprisonment.
(ii) Impute that a person has an existing infectious disease (for example,
leprosy or venereal disease).
(iii) Impute unchastely of a woman.
(iv) Impute against the plaintiff in respect of his office, profession,
calling, trade or business.
Defences
l. Justification
It is a defence to show that the statement was completely or substantially
true. Defamation must be a false statement, and a true statement which
damaged a person's reputation would not be actionable.
2. Fair comment on a matter of public interest
People in public life, such as politicians, T.V. stars, footballers, etc.,
receive praise, and must by the same token accept criticism. Provided
the comments concern their public activities, and are not made with
malice or spite, they are not actionable.
3. Absolute privilege
The following carry complete protection from actions for defamation,
regardless of the truth or motive behind the statement.
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a) Parliamentary proceedings
This means any statement made by a Member of Parliament n either
House, and officially authorised reports on parliamentary proceedings.
b) Judicial proceedings
This includes all statements made in court by judge, jury, :counsel,
witnesses, etc.
c) Statements between solicitor or counsel and client
(d) State communications
(e) Statements between husband and wife
4. Qualified privilege
The following carry similar protection to absolute privilege, unless it
can be shown that the maker of the statement acted from malice, such as
an improper motive or out of spite.
(a) Reports on parliamentary and judicial proceedings
This covers newspaper and broadcasting reports and would also include
reports on the proceedings of other public and international
organisations (e.g. the United Nations).
(b) Statements made in performance of a duty
An employer has a duty to give a truthful reference concerning an
employee who has applied for a position with another employer,
although it should be noted that an employer is not legally bound to give
a reference.
(c) Statements made to protect an interest
The interest may be to the benefit of the maker of the statement, the
recipient or both, but the maker of the statement must have a duty, legal,
moral or social, to protect the interest. An example would be a company
director reporting to the chairman of the company about the
misbehaviour of an employee.
5. Apology
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A newspaper or periodical may offer this defence if it can show that the
libel was published without malice or gross negligence. In addition to
publishing an apology, a payment o money must be paid into court
before the commencement o~ the case. The Defamation Act 1952
provides that, as regard; unintentional defamation, apology and amends
will be a good defence.
While apology and amends is only a defence for defamatory statements
in newspapers, it may serve to reduce damages if offered by a private
person.
VICARIOUS LIABILITY
This expression is used when a person is liable for the torts of another,
and mainly arises in employer/employee relationships.
The reasoning behind such liability is:
(i) To stop an employer hiring an employee to commit a tort.
(ii) To encourage the employer to install and maintain a safe
system of operation.
(iii) That, as a general rule, the employer is in a better financial position
to compensate the injured. The employer is only liable for torts
committed by employees during the course of their employment.
In Lloyd v. Grace, Smith & Co. (1912), L asked the defendants, a firm
of solicitors, for advice. All the negotiation were with a managing clerk
and he persuaded L to sign documents which conveyed property to him.
The property was sold by the clerk and he kept the money. It was held
that the firm was liable because the clerk was employed to give advice
and convey property although in this case he did it for his own benefit.
An employer is liable if the employee commits a tort in the course of his
employment even though the latter performs his, duty in a manner
expressly forbidden by the employer.
In Limpus v. London General Omnibus Co. (1862) the defendants had
expressly warned their drivers not to race against buses of another
company. One of their drivers injured a third party while racing his bus
and the court held that he was acting within the course of his
employment. An employer is not liable, however, if the employee goes
on a "frolic of his own," and leaves his duties to follow a personal
pursuit. For example, a driver who decides to watch a football match
while on his delivery round, and damages another vehicle when parking.
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If an employee performs a function for which he has no authority, the
employer will not be liable. In Beard v. London General Omnibus (
1900) the conductor drove a bus and injured the plaintiff. The court held
that the employer was not liable because the conductor was not acting
within the scope of his employment.
An employer will be liable, however, when the employee carries out an
authorised task in an incorrect way. A porter thought a passenger was on
the wrong train and pulled the person off the train, causing him injuries.
The company was liable because the porter acted within the scope of his
employment.
In Harrison v. Michelin Tyre Co. Ltd. (1985)S, an employee, whose
duties included pushing a truck within a passage marked by chalk lines,
deliberately moved the truck outside the lines as a practical joke and the
plaintiff was injured. The plaintiff sued the company, arguing that S's
negligence was within the course of his employment. The company
contended that S was "on a frolic of his own." The court held that S's act
could reasonably be regarded as incidental to the performance of his
employment, regardless that the company had not authorised or
condoned it. The company, therefore, was vicariously liable.
An employer is not generally liable for the torts of independent
contractors, unless:
(i) They were expressly hired to commit a tort.
(ii) The work must create a dangerous situation.
(iii) The work obstructs the highway, thereby creating a public nuisance.
(iv) The employer delegates a duty imposed by statute or common law.
Independent contractors are employed to do specific tasks but can
choose the method of carrying out the work. An employee, on the
other hand, is under the control of hi: employer as to what to do, and
how to do it.
GENERAL DEFENCES IN TORT
There are specific defences to specific torts. Absolute privilege applies
to defamation only. Often the defence may be a straight denial of the
alleged facts. There are, however, the following defences which may be
raised in most actions for tort.
l. Statutory authority
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If a statute grants indemnity for a particular act, damages cannot be
claimed unless the statute provides for compensation to be paid.
2. Consent (volenti non fit injuria)
Where there is consent, there is no injury. Consent may be given
expressly or by implication. Most sporting activities involve a certain
element of risk and it is common practice for organisers to make it a
condition that spectators enter at their own risk. Next time you go to a
football or cricket match, look 'or the notice as you enter the stadium. It
is usually implied that participants in sport have consented to the risk of
injury. If a hockey player misses the ball and hits an opponent on the
shin, no action would arise, because the players accept "trespasses" s
part of the game. Knowledge of the existence of risk does not
necessarily imply consent. If a worker knows that a crane passes
dangerously overhead, he has not consented tot he danger, and, if
injured by a falling stone, may sue for damages. Smith v. Baker & Sons
( 1891 ).
In Dann v. Hamilton (1939), a young lady accepted a lift from a driver
whom she knew had been drinking, and, as a result of his negligence,
she was injured. The court held that, although she knew of the risk, she
had not consented to the driver's negligence. In Ashton v. Turner (1980)
the court Considered that the defence could be accepted when both
parties had been drinking together.
It is considered that, if a person has an alternative to riding with the
drunk, the defence of volenti would be accepted, because the plaintiff
has agreed to take the risk, rather than accept the alternative.
Rescue cases
A person who is hurt when attempting to rescue another person or to
save property from damage may wish to sue the person who created the
dangerous situation. The defence of consent may be invoked if there was
no immediate danger to others, as the courts may consider the injured
party volunteered to take the risk. In Cutler v. United Dairies Ltd.
(1933), C was injured when he tried to stop a runaway horse n a quiet
country road. It was held he had consented to the risk,
The plaintiff will not be a volunteer, however, if there was danger to
others or if the plaintiff acted under a moral or legal duty, as in Haynes
v. Harwood (1935). A police officer was injured when he tried to stop a
horse that had bolted in a town and was an immediate danger to women
86
and children. It was held that, although the plaintiff knew of the danger,
he had acted under a duty and had not consented to the risk.
In Baker v. T. E. Hopkins & Son Ltd. (1959), a similar decision was
made, when a doctor went down a well to help men overcome by fumes.
The doctor died as a result of the fumes and the court held that the
defendants who created the dangerous situation were liable.
3. Inevitable accident
It is a good defence to show that the injury was caused by an accident
which could not have been prevented through forethought or by taking
ordinary precautions. In Stanley v. Powell ( 1891 ) the plaintiff was
injured during a shooting party when a pellet glanced off a tree. It was
held that the defendant was not liable as his act was neither intentional
nor negligent
4. Necessity
It may be a defence to show that the damage was caused in trying to
prevent a greater evil.
In Cope v. Sharpe (1912), fire broke out on the plaintiff land and the
defendant, who was a gamekeeper, set fire to
4. Necessity
It may be a defence to show that the damage was caused in trying to
prevent a greater evil.
In Cope v. Sharpe (1912), fire broke out on the plaintiff's land and the
defendant, who was a gamekeeper, set fire to other parts of the plaintiff's
land with the intention of preventing the fire from spreading to his
employer's land , where there were pheasants. The fire was extinguished
by other means and the plaintiff sued for damages. The court held that
the defendant had carried out a reasonably necessary act and was not
liable.
5. Act of God
This is an act of nature which could not have reasonably foreseen.
In Nichols v. Marsland (1876) the defendant owned an artificial lake
which overflowed as a result of a thunderstorm and caused damage to
the plaintiff’s land. The court held the defendant was not liable as the
damage was caused by an act of God.
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CONTRACT LAW
Most people think that a contract is a formal written document which
has been signed by parties in the presence of independent witnesses. If
all contracts took this form, there would be little room for argument
about whether the parties had entered legally binding agreement in
practice however, few contacts are like this. The vast majority of
contracts are entered into without formalities. The parties may be
unaware of the legal significance of their action
For example, buying a newspaper taking the bus of train into work or
college, getting a cup of coffee at break-time, arranging to meet a friend
for lunch are all contracts that we are not at the time of making them
aware of them.
During our lecture we will deal with the questions such as what is a
contract, when is a contract formed, what happens if either party breaks
the agreement, so on.
Nature of Contracts: a contract has been defined as a legally binding
agreement or a promise or set of promises, which the law will enforce.
However not all promises or agreements give rise to contracts. If you
agree to keep the house tidy while your parents away on holiday, you
would not expect to be sued by your parents if you do not keep your
promise. So what kinds of agreements does the law recognize as
creating enforceable rights and duties?
TYPES OF CONTRACTS
Contracts may be divided into two broad classes:
1-SPECIALTY CONTRACTS: These formal contracts are known as
deeds.
Formerly these contracts had to be in writing and signed sealed and
delivered. However, a recent law (the law of property) abolished the
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requirement for a seal on a deed executed by an individual. The
formalities now are that the signature of the person making the deed
must be witnessed and attested. The use of seals by corporate bodies is
unaffected by the mentioned law. Certain contracts, such as
conveyances of land must be in the form of a deed.
2- SIMPLE CONTRACTS: Contracts that 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.
ESSENTIALS OF A VALID CONTRACT
The essential ingredients of a contract are1- Agreement: An agreement is formed when one party accepts the offer
of another
2- Consideration: The parties must show that their agreement is part of a
bargain. Each side must promise to give or do something for the other.
3- Intention: The law will not concern itself with purely domestic or
social arrangements. The parties must have intended their agreement to
have legal consequences.
4- Form: In some cases, certain formality (that is, writing) must be
observed.
5- Capacity: The parties must be legally capable of entering into a
contract.
6- Genuineness of consent: The agreement must have been entered into
freely and involve a meeting of minds.
7- Legality: The purpose of the agreement must not be illegal or
contrary to public policy.
A contract that possesses all these requirements is said to be valid. If
one of the parties fails to live up to his promises, he may be sued for a
breach of contract. The absence of an essential element will render the
contract either void, voidable or unenforceable.
1-Void contracts: The term void contract is contradiction in terms since
the whole transaction is regarded as a nullity. It means that at no time
has there been a contract between the parties. Any goods or money
89
obtained under the agreement must be returned. Where items have been
resold to a third party, they may be recovered by the original owner. A
contract may be rendered void, for example, by some forms of mistake.
2.Voidable contracts: Contracts founded on a misrepresentation and
some agreements made by minors fall into this category.
The contract may operate in every respect as a valid contract unless and
until one of the parties takes steps to avoid it. Anything obtained under
the contract must be returned, insofar as this is possible. If the goods
have been resold before the contract was avoided, the original owner
will not able to reclaim them.
3-An unenforceable contract is a valid contract but it cannot be
enforced in the courts if one of the parties refuses to carry out its terms.
Items received under the contract cannot be reclaimed. Contracts of
Guarantee are unenforceable unless evidenced in writing.
Now we will consider essential elements of a valid contract in more
details.
AGREEMENT
The first requisite of any contract is an agreement. At least two parties
are required. One of them, offeror, makes an offer which the other, the
offeree, accepts.
Offer:
An offer is a proposal made on certain terms by the offeror together
with a promise to be bound by that proposal if the offeree accepts the
stated terms. An offer may be made expressly -for example, when an
employer writes to a prospective employee to offer him a job- or
impliedly, by conduct- for example, bidding at an auction.
The offer may be made to a specific person, in which case it can only
be accepted by that person. If an offer is made to a group people, it may
be accepted by any member of the group. An offer can even be made to
the whole world, such as where someone offers a reward for the return
of a lost dog. The offer can be accepted by anyone who knows about it
and finds the dog.
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carill v. carbolic smoke ball co.(1893)
The company inserted advertisements in a number of newspapers stating
that it would pay 100pound to anyone who caught flu after using its
smoke balls as directed for 14 days. The company further stated that to
show its sincerity in the matter it had deposited 1000pounds at the
Alliance Bank to meet possible claims. Mrs. Carill bought one of the
smoke balls, used as directed but still caught flu. She claimed the 100
pounds reward but was refused, so she sued the company in contract.
The company submitted that it never intended to enter into any
contract with anybody but it was just an advertisement puff and further
it argued that it was impossible to contract with the whole world. The
court dealt with this argument by asking what ordinary members of the
public would understand by the advertisement. The court took the view
that 1000 pounds which deposited at a bank was evidence of an
intention to be bound by a valid contract. And the contract was
enforceable. The court held that in this kind of contract, which is known
as a unilateral contract, acceptance consist of performing the requested
act and notification of acceptance is not necessary.
The court concluded that Mrs. Carill was entitled to recover the 100
pounds. It is important to identify when a true offer has been made
because once it is accepted the parties are bound. If the words and
actions of one party do not amount to an offer, however, the other
person cannot by saying 'I accept' ,create a contract. A genuine offer
must ,therefore, be distinguished from what is known as 'invitation to
treat'.
An Invitation To Treat;
This is where a person holds himself out as ready to receive offers,
which he may then either accept or reject.
Examples:
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1-The display of goods with a price ticket attached in a shop window or
on a supermarket shelf.
This is not an offer to sell but an invitation for customers to make an
offer to buy.
Fisher v. Bell (1961)
A shopkeeper had a flick -knife on display in his shop window. He was
charged with offering for sale an offensive weapon contrary to the
provisions of the Restriction of Offensive Weapons Act 1959. His
conviction was quashed on appeal .The Divisional Court of the Queen's
Bench Division held that the display of goods with a price ticket
attached in a shop window is an invitation to treat and not an offer to
sell .
Pharmaceutical Society of Great Britain v. Boots Cash Chemists
(Southern)
Ltd.
(1953)
Boots operated a self-service 'supermarket' system at their Edgware
Branch in which their merchandise. including drugs on the Poisons List ,
was laid out on open shelves around the shop. The customers selected
their purchases from shelves, placed them in a wire basket and paid for
them at a cash-desk which was supervised by a registered pharmacist.
The Phar.Society claimed that by operating this system Boots had
committed an offense contrary to the Pharmacy and Poisons Act 1933,
which requires that the sale of drugs included on the Poisons List must
take place when a customer placed his purchase in the basket, which
was not supervised by a pharmacist . The Court of Appeal held that the
display of drugs on the open shelf constituted an invitation to treat. The
customer made the offer to buy at the cash-desk and the sale was
completed when the cashier accepted the offer. Since the cash-desks
were supervised by a registered pharmacist the requirements of the Act
had been fulfilled and therefore Boots had not committed an offense.
Thus, it is a clearly established principle of the civil law that if a
piece of merchandise is displayed for sale with an incorrect price
attached to it, the retailer is not obliged to sell at that price. Under the
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criminal law, however , the retailer may find himself facing a
prosecution for a breach of the provisions of the Consumer Protection
Act 1987.
2-Advertisements catalogues and brochures
.
Many businesses make use of the press, TV and commercial radio
to sell their products direct to the public. Even if the word offer is used
the advertisements is still an invitation to treat.
Partridge v. Crittenden (1965)
Partridge placed an advertisement in the Cage and Aviary Birds
magazine which read 'Bramble finch cocks , bramble finch hens, 25s
each'. Mr. Thompson replied to the advertisement and was sent a
bramble finch hen. Partridge was charged with 'offering for sale' a wild
bird contrary to the provisions of the Protection of Birds Act 1954 and
was convicted at the court. His conviction was quashed on appeal
was freed .The court held that since the advertisement constituted an
invitation to treat and not an offer to sell, Partridge was not guilty of the
offense with which he had been charged.
3- Company prospectus
When a company wishes to raise capital by selling shares to the
public, it must issue a prospectus (an invitation to treat). Potential
investors apply for shares (the offer) and the directors then decide who
to sell shares to (the acceptance).
4-Auctions
At an auction sale the call for bids by an auctioneer is an invitation to
treat. The bids are offers . The auctioneer selects the highest bid and
acceptance is completed by the fall of the hammer
Payne v. Cave (1789)
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The defendant made the highest bid for the plaintiff's goods at an
auction sale, but he withdrew his bid before the fall of the auctioneer's
hammer. It was held that the defendant was not bound to purchase the
goods. His bid amounted to an offer which he was entitled to withdraw
at any time before the auctioneer signified acceptance by knocking
down the hammer.
Advertising a forthcoming auction sale does not amount to an offer to
hold it. In Harris v. Nickerson (1873) it was held that the defendant
auctioneer was not obliged to compensate the plaintiff for a wasted
journey when the advertised lots the plaintiff had been commissioned to
buy were withdrawn from the auction.
5- Tenders.
Large undertakings, such as public authorities, often place contracts
inviting interested firms to tender(offer) for the business. An invitation
to tender can give rise to a binding obligation on the part of the inviter
to consider tenders submitted in accordance with the conditions of the
tender. The acceptance of a tender has different legal consequences,
depending on the wording of the original invitation to tender. There are
two possibilities;
(a)-Example 1. The municipality of Newtown invites tenders for the
supply of 100 tons of potatoes for the use of the School Meals Service in
the Newtown from 1 January to 31 December. The acceptance of tender
creates a legally binding contract. The successful supplier must deliver
100 tons of potatoes which the Municipality must pay for.
(b)-Example 2. The Municipality of Newton invites tenders for the
supply of potatoes, not exceeding 100 tons, for the period 1 January to
31 December as and when required by the School Meals .Service. The
acceptance of a tender in this situation has the effect of creating a
standing offer on the part of the supplier to deliver potatoes if and when
orders are placed by the School Meals Service. Each time an order is
placed by the School Meals Service it constitutes an acceptance which
creates an individual contract. If the supplier refuses to fulfill the order,
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he will be in breach of contract. The form of tender does not prevent the
supplier giving notice that he will not supply potatoes in the future or
the School Meals Service from not placing orders, if they decide to cut
potatoes from the school dinner menu. The process of competitive
tendering came under scrutiny in the following case.
Harvela investments Ltd. v. Royal Trust Co. of Canada Ltd.(1985)
The first defendants decided to dispose of shares in company by
sealed competitive tender. They sent identical telexes to two prospective
purchasers the plaintiffs and the second defendants, inviting tenders and
promising to accept the highest offer. The plaintiffs bids 2.175.000
pounds while the second defendants bid
2.100.000 or 100.000 pounds in excess of any other offer's. The first
defendants accepted the second defendants' offer . The House of Lords
held that the second defendants' referential bid' was invalid. The
decision was a practical one. The purpose of competitive tendering is to
secure a sale at the best possible price. If both parties had submitted a
referential bid, it would have been impossible to ascertain an offer and
no sale would have resulted from the process.
6- Statements of price in negotiations for the sale of land.
Where the subject matter of a proposed sale is land, the courts are
reluctant to find a definite offer to sell unless very clearly stated.
Gibson v. Manchester City Councel (1979)
n 1970 the council adopted a policy of selling its council houses to
tenants. The City Treasures wrote to Mr. Gibson in February 1971
stating that the council 'may be prepared to sell' the freehold of his house
to him at a discount price. The letter invited Mr. Gibson to make a
formal application, which he duly did. In May 1971 control of the
council passed from the Conservatives to Labour and the policy of
selling council houses was reversed. Only legally binding transactions
were allowed to proceed. The council did not proceed with Mr.Gibson's
application. The House of Lords held that the City Treasurer's letter was
an invitation to treat and not an offer to sell. Mr.Gibson's application
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was the offer and, as this had not been accepted by the council, a
binding contract had not been formed.
TERMINATION OF THE OFFER
An offer can end in a number of ways:
1- By acceptance: An offer which has been accepted constitutes a
contract. That is no longer available for acceptance.
2-By rejection: An offer is rejected if a) The offeree notifies the offeror that he does not wish to accepts the
offer.
b) The offeree attempts to accept the offer but subject to certain
conditions.
c)The offerree makes a counter-offer.
Hyde v. Wrench (1840)
Wrench offered to sell his farm to Hyde for 1000 pounds. Hyde replied
with a 'counter offer' of 950 pounds, which was refused. Hyde then said
that he was prepared to meet the original offer of 1000 pounds. It was
held that no contract had been formed. The counter-offer of 950 pounds
had the effect o rejecting Wrench's original 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 learns about it.
Byrne v. Van Tienhoven (1880)
The defendants posted a letter in Cardiff on 1 October to the
plaintiffs in New York offering to sell them 1000 boxes of tinplates. On
8 October, the defendants posted a letter withdrawing the offer, which
was received by the plaintiffs on 20 October. However, on 11 October
the plaintiffs telegraphed their acceptance, which they confirmed by
letter posted on 15 October. It was held that a revocation takes effect
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only when communicated to the offeree. The contract in this case came
into existence when the defendants' offer was accepted by the plaintiffs
on 11October. The letter of revocation was ineffective as it was received
after the acceptance was complete.
It is not necessary that the offeror himself should tell the offeree that
the offer has been revoked. The information may be conveyed by a
reliable third party.
Dickinson v Dodds (1876)
The defendant, on Wednesday, offered to sell some property to the
plaintiff, the offer to be left open until 9 am,Friday. On Thursday , the
plaintiff heard from Mr. Berry that the defendant had sold the property
to someone else . Nevertheless the plaintiff wrote a letter of acceptance
which was handed to the defendant at 7 am on the Friday morning. The
Court held that as the plaintiff had heard about the revocation from
Berry, who was reliable source, the offer was no longer available for
acceptance. No contract had been formed.
In Dickinson v Dodds the offer was expressed to be open until Friday
at 9am. Such an offer may be revoked before the end of the time limit,
unless it has already been accepted or the offeree has given some
consideration, for example, paying 1 pound to keep the offer open.
If someone has started to perform the act requested in the offer, the
offer cannot be revoked.
Errington v Errington (1952)
A father bought a house for his son and daughter-in-law to live in.
The father paid a deposit of one-third of the purchase price and
borrowed the balance from a building society . He told his son and
daughter-in-law that if they paid the mortgage he would convey the
house to them when all the installments had been paid. The Court of
Appeal held that the father's offer could not be revoked provided the son
and daughter-in-law continued to make the mortgage payments.
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4-If the offer is 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. Even if no time limit is mentioned, the offer
will not remain open indefinitely. I must be accepted within a reasonable
time.
Ramsgate Victoria Hotel Co. v. Montefiorre(1966)
The defendant offered to buy shares in the plaintiff’s company in June.
The shares were eventually allotted in November. The defendant refused
to take them up. The Court of Exchequer held that the defendant's offer
to take shares had lapsed through an unreasonable delay in acceptance.
What is a reasonable time will vary with the type of contract.
5- Death. If the offeror dies after having made an offer and the offeree
is notified of the death, any acceptance will be invalid. However, where
the accepts in ignorance of what has happened, the fate of the offer
seems to depend on the nature of the contract . An offer which involves
the personal service of the offeror clearly cannot be enforced, but other
offers may survive, be accepted and carried out by the deceased's
personal representatives. If the offeree dies, there can be no acceptance.
The offer was made to that person and no one else can accept.
6- Failure of a condition attached to the offer. An offer may be made
subject to conditions. Such a condition may be stated expressly by the
offeror or implied by the courts from the circumstances. If the condition
is not satisfied the offer is not capable of being accepted.
Financings Ltd v. Stimson (1962)
The defendant saw a car at the premises of a dealer on 16 March. He
wished to obtain the car on hire purchase. He signed a form provided by
the plaintiff finance company which stated that the agreement would be
binding only when signed by the finance company. The defendant took
possession of the car and paid the first installment on 18 March.
However, being dissatisfied with the car, he returned it to the dealer two
days later . On the night of 24-25 March the car was stolen from the
dealer's premises, but was recovered badly damaged. On 25 March the
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finance company signed the hire purchase agreement, unaware of what
had happened. The defendant refused to pay the installments and was
sued for breach of the hire purchase agreement. The court held that the
hire purchase agreement was not binding because the defendant's offer
to obtain the car on hire purchase was subject to an implied condition
that the car would remain in substantially the same state until
acceptance. Since the implied condition had not been fulfilled at time
the finance company purported to accept no contract had come into
existence.
Acceptance:
Once the presence of a valid offer has been established, the next
stage in the formation of an agreement is to find an acceptance of that
offer. The acceptance must be made while the offer is still open. It must
be absolute and unqualified.
Unconditional acceptance
If the offeree attempts to vary the terms offered, this will be treated
as a counter-offer. As we have already seen in Hyde v. Wrench this has
the effect of rejecting the original offer. A similar problem exists in '
battle of forms ' cases . This is where the offeror makes an offer on his
own pre-printed standard forms which contains certain terms, and the
offeree accepts on his own standard form which contains conflicting
terms.
Butler Machine Tools Co. v. Ex-Cell-O Corp. (England)(1979)
The plaintiffs offered to supply a machine tool to the defendants for
75.535 pounds. However, the quotation included a term which would
entitle the sellers to increase this price (price-variation clause). The
defendants accepted the offer on their own standard terms which did not
provide for any variation of their quoted price. The plaintiffs the
plaintiffs acknowledged the order. When the machine was delivered, the
plaintiffs claimed an extra 2892 pounds which the defendants refused to
pay. The court held that the defendants had not unconditionally accepted
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the original offer. They had made a counter-offer which had been
accepted by the plaintiffs. The defendants' terms governed the contract.
The plaintiffs' action to recover the increase in price, therefore, failed.
One form of conditional acceptance is the use of the phrase 'subject
to contract' in negotiations involving the sale of land. These words
usually mean that the parties do not intend to be bound at that stage.
however, if there is clear evidence of a contrary intention, a court may
be prepared to find that a contact has been concluded despite the use of
the customary words 'subject to contract' .
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.
Felthouse v. Bindley
The plaintiff had been negotiating to buy his nephew's horse. He
eventually wrote to his nephew: ' if I hear no more about him, I shall
consider the horse is mine at 30 pounds. The nephew did not reply to
this letter but he did ask the auctioneer, who had been engaged to sell all
his farming stock, to keep the horse out of the sale as he had sold it to
his uncle. The auctioneer by mistake included the horse in the sale and
was sued by the uncle in the tort of conversion. The basis of the uncle's
claim was that the auctioneer had sold his property. The court held that
the uncle had no claim. Although the nephew had mentally accepted the
offer, some form of positive action was required for a valid acceptance.
Since there was no contract between the uncle and nephew, ownership
of the horse had not passed to the uncle.
This case established the principle that the offeree's silence of failure
to act cannot constitute a valid acceptance. The rule has a particularly
useful application to the problem of 'inertia selling'. This is where a
trader sends unsolicited goods to a person's home, stipulating that if he
does not receive a reply within a specified time, he will assume that his
offer to sell the goods has been accepted and the indicated price is
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payable. The Felthouse rules makes it clear that a recipient of goods in
these circumstances is not obliged to pay because his silence or inaction
cannot amount to an acceptance. Many people however, have paid up in
ignorance of the law.
Felthouse v. Bindley would seem to suggest that only oral or written
acceptance will be valid. However, acceptance may be implied from a
person's conduct.
Brogden v. Metropolitan Railway Co (1877)
Brogden had supplied the railway company with coal for many years
without benefit of a formal agreement. Eventually the parties decided to
put their relationship on a firmer footing. A draft agreement was drawn
up by the company's agent and sent to Brogden. Brogden filled in some
blanks, including the name of an arbitrator, marked it as 'approved, and
returned it to the company's agent who put it in his drawer. Coal was
ordered and supplied in accordance with the terms of the 'agreement'.
However, a dispute arise between the parties and Brogden refused to
supply coal to the company, denying the existence of a binding contract
between them. The court held that a contract had been concluded.
Brogden's amendments to the draft agreement amounted to an offer
which was accepted by the company either when the first order was
placed under the terms of the agreement or at the latest when the coal
was supplied. By their conduct the parties had indicated their approval
of the agreement.
Examples of acceptance by conduct include returning a lost dog in a
reward case, or using a smoke ball in the prescribed manner in Carill v
Carbolic Smoke Ball Co.
The offeror may state that the acceptance must be in a particular
form. It follows that the offeror' wishes should be respected. So if he
asks for an acceptance in writing, a verbal acceptance by telephone will
not be valid. Sometimes the offeror may say 'reply by return post', when
he really means 'reply quickly' and a telephone call would be acceptable.
Provided the chosen method of acceptance fulfils the intentions of the
offeror it will be binding.
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Yates Building Co Ltd v. R J Pulleyn & Sons (York)
The owners of a piece of land stated that an option to buy it should be
exercised by ' notice in writing .... to be sent registered or recorded
delivery'. The acceptance was sent by ordinary post. The court held that
the owner's intention was to ensure that they received written
notification of acceptance. The requirement to use registered or recorded
delivery was more in the nature of a helpful suggestion than a condition
of acceptance.
Communication of acceptance
The general rule is that an acceptance must be communicated to the
offeror, either by the offeree himself or by someone authorized by the
offeree. The contract is formed at the time and place the acceptance is
received by the offeror. If the post, however , is the anticipated method
of communication between the parties, then acceptance is effective
immediately the letter of acceptance is posted, provided the letter is
properly stamped, addressed and posted, the contract is formed on
posting even if the letter is delayed or never reaches its destination.
Household Fire Insurance Co v. Grant
Grant applied for shares in the plaintiff company. A letter of allotment
was posted but Grant never received it. When the company went into
liquidation Grant was asked, as a shareholder, to contribute the amount
still outstanding on the shares he held. The Court held that Grant was a
shareholder of the company. The contract to buy shares was formed
when the letter of allotment (acceptance) was posted.
Conditions of a valid acceptance
As it is important to know the exact time an offer is made, it is
equally important to know the exact time an acceptance is made,
because from that moment all the duties, obligations and liabilities of the
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contract are binding on the parties. The following rules ,which some of
them mentioned above , have been decided by the courts over many
years, but are still subject to change by the introduction of new
techniques of communication.
1- Acceptance may only be made by the person to whom the offer
was made.
An offer made to a specific person may be accepted by that person
only. Otherwise there could be some odd situations, such as A offering
C, a famous painter, 1,000 pounds for a portrait, and D, a housepainter
who was standing nearby, accepting the offer. The rule only applies
when the offer is made to a specific person and not to the world at large.
2- Acceptance must be absolute and unqualified.
The offeree must accept the offer as made, and not add any
conditions or terms. If a counter-offer is made the offer is terminated
and the offeror is under no obligation to honor the offer, even if at a later
date the acceptor wishes to accept the original terms. In effect, when a
counter-offer is made the acceptor is saying "I do not accept your offer,
will you accept my offer?" (see above mentioned Hyde v. Wrench case).
Generally a seller would probably be prepared to sell at the price in
the original offer but circumstances may change, for example another
party may wish to buy at a higher price. It must be noted, however, that
a request for further information (e.g. an inquiry as to whether or not
credit would be granted) is not a counter-offer.
3-Acceptance must be communicated to the offeror
Generally, this must be actual communication, either orally or in
writing, but in Carill v. Carbolic Smokeball Co. the Court considered
that acceptance may be implied from conduct of the acceptor. In this
case, Mrs. Carill's action in buying the remedy implied her acceptance
of the terms of the offer, and it was not necessary to actually
communicate her acceptance.
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Silence does not amount to an acceptance as no communication is
made by offeree.(see above Felthouse v. Bindley case.)
4- Acceptance must generally be in the mode specified in the offer.
If a particular method of acceptance is not specified in the offer, any
reasonable method of communication may be used, but if the offeror
stipulates a specific mode of acceptance, it must be carried out in this
manner. In Eliason v. Henshaw(1819) the plaintiff offered to buy flour
from Henshaw. The offer stipulated that acceptance must be given to the
waggoner who delivered the offer. The acceptance was sent by post and
arrived after the return of the waggoner. It was held that as the spesific
performance was not followed there was no contract.
This rule may be relaxed if it is shown that a different method of
acceptance places the offeror in a no less advantageous position.
Offer and Acceptance By Postal Services
Provided that the post is considered a reasonable means of
communication between the parties, the following rules apply:
a) An offer is effective when it actually arrives
An offer in a letter posted on July 1 and delivered on July 6 because
of a postal delay, becomes operative on July 6 and not when it would be
expected to be delivered. (Adams v. Lindsell)
b) Acceptance
The general rules of acceptance apply when using the post, that is,
the acceptance must actually be received by the offeror. Howell
Securities v. Hughes (1974). However, if it can be clearly or reasonably
shown that the offer intended that it be sufficient for acceptance to be
posted, acceptance is effective as soon as it is placed in the post-box,
provided the letter is correctly addressed and properly stamped. It would
be considered a good acceptance if the letter was lost in the post and not
delivered to the offeror.( Household Fire Insurance Co. v. Grant.).
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When Telex is used as a means of communication, the rule
established by the Court in Entores Ltd. v.Miles Far East Corporation
(1955) is that acceptance takes place when the telex is received. Telex is
considered similar to using the telephone and not the post. However, in
Brinkibon Ltd. v. Stahag Stahl (1982) the Court held that this is not a
universal rule and would not apply in every case. For example, if the
telex was sent at night and was not read until next morning when the
office staff arrived as work.
c) Revocation
Revocation of acceptance takes place when actually received by the
offeree, not when posted. Bryne v. Van Tienhoven(1880).
CONSIDERATION
Consideration is merely the price in a bargain. The price does not
have to be a money, but it must have a monetary value. In a simple
contract a party must promise to give consideration in return for a
promise of consideration from the other party. A bookseller promises to
give you sole ownership of a book, if you promise to pay him the cost of
the book. The bookseller’s consideration is the promise to give you the
book, and your consideration is the promise to pay the price. The
promise for a promise (quid pro quo) is essential, because in English law
a promise by only one party is not enforceable (unless made by deed).
If a person promised to give you a 100 pounds as a gift at the end of
the month, the promise would not be enforceable, because it is a
gratuitous gift. It has not been supported by a promise from you.
Consideration may, therefore, be defined as the price, although not
necessarily a monetary one, which induces a party to enter into a
contract. Over the hundreds of years in which the doctrine of
consideration has developed, the courts have ruled whether or not the
following promises are sufficient to be valuable consideration:
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a-) The position of a third party: A plaintiff bringing an action must
show that he made a promise of consideration. If my father and may
uncle promise each other to pay me 100 pounds if I pass an
examination, I will not be able to enforce the contract if my uncle
refuses to pay, because I gave no consideration for his promise. The
contract was between my uncle and my father and I was not a party to
the agreement. My father could sue my uncle because he gave
consideration. In Tweddle v. Atkinson, William Guy and John Tweddle
each promised the other party to pay a sum of money to William
Tweddle. Guy died before paying and William Tweddle sued Guy’s
executor.
His action failed because he had not provided any
consideration.
b-) Value and adequacy: Although consideration must be valuable, it
need not to be adequate. The courts will not consider the merits of the
bargain, provided that each party received what was promised. For
example, a football fan may consider ðaying 100 pounds for a 10
pounds ticket for a cup final. In Chappel and Co. Ltd. V. Nestle Co.
Ltd. The court held that the wrappers of three bars of chocolate were
good consideration.
c-) The promise must be more than a duty: It would not be good
consideration for a school teacher to promise a class that in return for
extra money would teach the best of his ability, because it is his duty to
teach in such a manner. IT may be , however, good consideration if the
teacher promised extra lessons after school hours, because this would be
outside his duty. In Stilk v. Myrick (1809) two seamen deserted their
ship, and the captain offered to share their wages between the rest of the
crew if they brought the ship back to London. Stilk sued for his share
but the court held that he had not provided consideration as it was his
duty to work the ship back to London.
In a similar case Hartley v. Ponsonby (1857) the ship was in a
dangerous situation, and because of this the court held that the promise
to bring the ship home was good consideration because of the
unexpected new danger.
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d-) Promises involving debts: A promise to pay smaller sum to be
released from paying a larger sum already owing, is not good
consideration.
A promise to pay 50 pounds as payment in full settlement of a debt
of 100 pounds, is not consideration, and the other party may sue for the
balance. This is known as the Rule in Pinnel’s case , and applies because
in promising to pay 50 pounds the debtor is doing nothing more than he
is already legally obliged to do.(Foakes v. Beer) (1884).
e-) Consideration must not be past : The promise must be to do
something in the future. A party may not offer an act previously carried
out as consideration for a future promise. In Roscorla v. Thomas a hors
was bought at an auction. As the purchaser was leading the horse away,
the previous owner promised that if the horse was vicious, he would
return the price. The horse was in fact vicious, but the court held that the
promise by the original owner was not supported by consideration from
the plaintiff. His action in paying the purchase price was before the
second promise of the seller, and therefore his consideration was past.
In most recent case, Re McArdle (1951) a widow had a life interest
in a house and she repaired and decorated the property at a cost of 488
pounds. The person wo would eventually become the owner of the
property, after the widows death, later promised to pay was made after
the work was completed the consideration was past and there was no
legal obligation to pay.
INTENTION
As was shown when dealing with offer and acceptance, it is essential to
a contract that the parties intend to create legal relationships. The courts
presume that with business contracts the parties intend legal relations,
and if the parties intend otherwise it must be clearly expressed.
In Rose and Frand Co. V Crompton a written agreement between the
parties stipulated that it was not a formal or legal agreement and should
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not be subject to the legal jurisdiction of the courts. The court held that
the agreement had no legal effect.
With social or domestic agreements the courts are reluctant to hold
that a contract exists and will look at the relationship of the parties and
facts of the agreement before declaring the intention of the parties. In
Balfour v. Balfour the husband went to work in Ceylon and agreed to
pay his wife 30 pounds per month. He did not pay the money and the
wife sued. It was held that there was no contract because the parties did
not intend to create legal relationship.
However, in Merritt v Merritt a married couple separated and the
husband agreed to make over the ownership of the house to the wife
when she had completed paying all the mortgage repayments. The court
held that there was an intention to be legally bound because the parties
were apart and consideration had been provided.
FORM
As we mentioned before there are two classes of contract:
I-) Specialty ( or contracts mad by deed)
ii-) Simple contracts.
The important difference is that a simple contract may me formed
orally, in writing or by conduct and must be supported by consideration.
Specialty contracts must be written and signed and do not need
consideration.
While the majority of contracts may be made informally by word of
mouth or by implication the following contracts need to be made
formally to be effective.
Contracts Which Must Be In Writing
Certain Acts of Parliament have laid down that the following contracts
must be in writing:
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Contracts of Marine Insurance
Transfer of shares in a registered company
Bills of Exchange, cheques and promissory notes
Hire-purchase contracts, and other regulated
agreements.
consumer
credit
Contracts Which Must Be Evidenced In Writing
The following contracts must be in writing ýf they are to be enforced
in the courts. Technically, without writing they are good contracts but
the courts will not enforce them unless the plaintiff has a memorandum
in writing signed by the defendant.
1-Contracts of guarantee
This is a promise the answer for the debt, default or miscarriage of
another person. For example, a person may obtain an owedraft (a loan)
from a bank on condition that his or her employer or parents may give
the bank a guarantee (a promise) to repay the loan if the borrower fails
to do so.
2- Contracts for the sale of land
This Act covers any contract for the sale or other disposition of land
or any interest in land. The note or memorandum must contain the
following information:
a- the parties ( their names and description )
b- the property ( the subject matter of the contract)
c- the price ( the consideration )
d- any particular or special terms.
There is an exception to this section, in that the equitable doctrine of
part performance permits a party who has partly performed the contract
to obtain from the court an order of specific performance to enforce the
contract, even though there is no evidence in writing. ( for example if
you pay half price of the property).
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CAPACITY
Generally, any person may make a contract, but the law sometimes
protects certain classes. In the main, where a person is denied full
contractual capacity, the aim is to protect and not to prohibit, and
difficulty in enforcing the contract is usually experienced by the party
with full contractual capacity.
This section deals with persons, both natural ( minors, drunks, mental
patients) and legal ( corporations) who have slightly less than full
capacity.
Minors
The age of majority is attained on the first moment of the eighteenth
birthday. It must be understood that minors may enter into contracts and
do so most days. They buy chocolate, papers, clothes, records, travel on
buses and trains, pay to watch films and football etc. The law does not
stop a person under 18 from making a contract, but aims to protect the
minor from certain types of contract. Contracts with minors come into
three categories:
1- Binding contracts
The minor has full contractual capacity and may be enforced against,
as well as by, the minor for these contracts.
There are two types:
A-contracts for necessaries, and
B- beneficial contracts of service.
A-Necessaries
These may be defined as ‘goods suitable to the condition in life of such
a minor, and his contractual requirements at the time of sale and
delivery.’
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It has been considered that a luxury cannot be a necessary, but it
must be borne in mind the what might be considered a luxury for a
person of small income might be a normally accepted part of life for the
more fortunate.
In addition to the nature of the goods supplied, consideration must be
given to the actual requirements at the time of sale. A pair of shoes
would be necessaries if the minor was barefooted, but they would not be
necessaries if the minor had several pairs of shoes.
In Nash v. Inman, a Cambridge undergraduate, who was a minor
ordred 11 fancy waistcoats from a tailor, but refused to pay the bill. The
court held that the tailors action failed because the minor already had a
sufficient supply of clothing and therefore the waistcoats were not
necessaries. The minor did not have to pay the bill.
However, in Chapple v. Cooper, an infant widow contracted with an
undertaker to arrange for the funeral of her deceased husband, and later
refused to pay the cost. It was held she was liable, as the funeral was for
her private benefit and a necessary service.
It is the responsibility of the party supplying the goods to prove that
they are necessaries, a minor need not pay the contract price, but must
pay a reasonable price.
B-Beneficial contracts of service
Included under this heading are contracts for training, education,
apprenticeship, and other similar contracts They are binding if , taken as
a whole, they are for the minor’s benefit.
In Doyle v. White City Stadium, Doyle was a professional boxer and
he entered into a contract which provided a clause that if disqualified he
would lose the prize money. He was disqualified, but claimed that as a
minor the contract was not binding on him. It was held that although
this particular clause appeared onerous, the contract taken as a whole
was for his benefit.
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This case must be contrasted with De Francesco v. Barnum, in which
a minor became apprenticed as a dancer, on the terms that she would not
marry, would receive no pay and would not dance professionally
without the plaintiff’s consent. When she made a contract to dance for
the defendant, the plaintiff sued for damages and the court held that the
terms of her contract of apprenticeship to be unreasonably harsh and
would not enforce against the minor.
2-Void contracts
The Infants Relief Act 1874 provided that the following contracts made
by a minor shall be void.
a-Contracts for money lent or to be lent
b-Contracts for goods supplied or to be supplied (other than necessaries)
c-Accounts stated.
The effect of the Act is that is that a minor cannot be sued on the
contract, and goods or money which have been transferred to a minor
cannot be recovered by the other party. Iff, however, a minor obtained a
load or goods by fraud. E.g. claiming to be over 18, the courts may order
the property to be returned, or if sold to a thrd party, order the proceeds
of the sale to be returned. (Stocks v. Wilson)
3- Voidable contracts:
All other contracts which are not binding or void on a minor are
voidable at the minor’s option. This means that the minor may force an
adult to perform the contract but it cannot be enforced against the minor.
If, however, a minor repudiates a contract which has been partly
performed by the other party, the minor will have to pay for the benefit
received. For example, if a minor contracted to rent a flat for six months
at 100 pounds per month, and after three months wished to end the
contract, he would be able to do so, but would have to pay 300 pounds
for the three month in which he lived in the flat. A minor who pays a
deposit on goods may not, after returning the goods, claim back the
deposit unless there has been a total failure of consideration. (Steinberg
v. Scala Ltd. )
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Drunks and mental patients
Drunks and mental patients are liable on contracts for necessaries,
and, similarly to minors, must pay a reasonable price. Other contracts
are voidable at the option of the drunks or mental patients if they can
prove that at the time of making the contract:
1- they were so drunk or ill that they did not know what they were doing
and
2- the other party knew of their condition.
Mental patients will be liable on contracts made during a lucid period
and contracts made while the patient was of unsound mind may be
ratified during the lucid period. A mental patient whose property is
under the control of the court may not make a contract and any contracts
purported to be so made are void.
Corporations
The limitations placed upon corporations to make contracts arise
from the manner in which they are created.
Chartered Corporations ( e.g. The Institute of Chartered Secretaries
and Administrators ) are created by a Royal Charter, which lays down
the purpose and objects of the corporation. The corporation is not
restricted and may make any contract, but the Charter may be withdrawn
if contracts are persistently made against the spirit of the Charter.
Statutory Corporations are usually public bodies, created by Acts of
Parliament ( e.g.British Rail). Contracts may only be made within the
scope of the creating statute, and any contracts outside of the Act is
‘ultra vires’ (beyond the power of ) and void.
Companies registered under the Companies Acts have their powers
specified in the objects clause of the Memorandum of Association, and
contracts should not be made which go beyond these objects. If a
person makes a contract with the company, knowing it to be outside the
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powers of the memorandum, the contract is ‘ultra vires’ and void. The
European Communities Act 1972 provides that if a person deals with the
company in good faith. (I.e. does not know the powers of the objects
clause ) any contract is valid, whether or not it is outside the powers of
the objects clause.
GENUINENESS OF CONSENT
If a party to enter into a contract because of fraud, misrepresentation
or mistake, the contract may be void or voidable. What may appear to
be a valid contract, may be invalid because consent was affected by one
of these elements . There is no consensus ad idem, ( a genuine consent)
no real agreement, if one party enters into a contract believing that
certain facts, important to the contract, are different from what actually
exist.
Mistake
Mistake, as a general rule, does not avoid a contract, unless the
mistake was such that there never was a real agreement between the
parties.
Raffles v. Wichelhaus. A contract was made for the sale of cotton
abroad the S.S ‘Peerless’ sailing from Bombay. Unknown to the parties,
there were two ships of this name, one sailing in October and the other
in December. The buyer thought he was buying cotton on the first ship,
but the sale was for cotton on the second ship. The court held that there
was no contract.
Mistake as to the quality of goods will not avoid a contract if all
relevant facts are revealed. The courts have avoided the following
contracts for mistake:
1- Mistake as to the subject matter
Where one party sells goods, but the other party thinks he is buying
something different (Raffles v. Wichelhaus)
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2- Mistake as to the existence of the subject matter
Courtier v. Hastie . A contract was made for the sale of corn which
was being shipped by sea. Unknown to the parties, the corn had begun
to perish and had been sold at a port en route. The court held that at the
time of making the contract the corn was not really in existence , having
already been sold.
2- Mistake as to the nature of the contractual document (Non est
factum: not my deed)
A contract will be avoided if it can be shown that the party who
signed a document:
a- thought the document to be of a completely different nature, and
b- was not negligent in signing the other document.
In Foster v. McKinnon . An old man of feeblee sight thought he was
signing a guarantee, but a bill of exchange had been substituted. It was
held that he was not liable on the bill.
In Saunders v. Anglia Building Society an old lady signed a deed of
gift of a house to her nephew. She had not read the document but a
rogue had substituted his own name for that of her nephew, and later
mortgaged the house to the building society. The court held that the
contract was valid and the plea of non est factum (not my deed) could
not be used because the lady had signed the kind of document she
intended to sign, it was the contents which were different.
4- Mistake as to the identity of the other party
As a general rule, where parties are in a face-to-face position, the
courts consider the identity of the parties unimportant, because it is
presumed that the parties intended to contract with each other.
In Phillips v. Brooks a rogue purchased jewelry and paid by cheque.
The jeweler would not allow him to take the jewelry until the cheque
was cleared by the bank, but when rogue claimed he was Sir George
Bullough he was allowed to take a ring from the shop. The rogue
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pawned the ring. It was held by the court that the contract was not void,
because the jeweler ‘s mistake was not the customers identity, but his
financial position. The pawnbroker thereby acquired a good title.
This decision was followed by the court in Lewis v. Averay. The
facts were similar to the case above and the rogue, when buying a car,
claimed to be Richard Greene, a well-known film and TV actor (Robin
Hood), and signed a cheque for the price as agreed. The court held there
was a presumption that the seller intended to deal with the person in his
presence, although he was mistaken as to his identity. As a third party
had acquired the car in good faith, the seller could not avoid the
contract.
Where the parties do not meet, but negotiate at a distance, say by
using the post or telephone, identity is important, and a contract is more
likely to be avoided for mistake.
Candy v. Lindsay. A person named Blenkarn ordered goods by post
and signed his name on a letter-head so that it appeared that the order
came from Blenkiron, a well-known and reputed company. The rogue
also used a similar address. Goods were sent to Blenkarn and he resold
them to Cundy. When fraud was discovered, Lindsay (the supplier )
sued Cundy in the tort of conversion, claiming that the goods were sent
to Blenkarn by mistake. It was held that the contract was void for
mistake, because the supplier never intended to deal with rogue.
LEGALITY
There is a rule of law that no court action will arise from an illegal act.
If the contract requires either party to act against the law, the courts will
not help the guilty party. A contract may be illegal because it is :
a- forbidden by statute
b- against public policy.
The first type is easy to understand. If A made a contract with B to
steal the motorbike of B for 50 pounds, the court would not award A a
remedy if B later refused to carry out the contract.
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The second type is more difficult, because in this instance the courts
consider that in the public interest the contracts should bot be enforced.
Examples of contracts considered to be against public policy are as
follows:
1- Contracts to commit a crime
In Alexander v. Rayson the rent for a flat was reduced to avoid
paying ratesi but the difference was charged as ‘services. ‘ The contract
was illegal, because one of its purposes was to defraud the local council.
2- Contracts to corrupt public life
It is considered illegal for a person to make a contract to purchase a
public honour. In Parkinson v. College of Ambulance, the plaintiff
donated 2,000 pounds on condition of obtaining a knighthood. When no
honor was awarded Parkinson sued for the return of his money. The
court held the contract was against public policy and illegal, therefore no
money was recoverable.
3- Immoral contracts
Contracts which are against public morals or against the sanctity of
marriage are considered illegal.
In Pearce v. Brook a prostitute hired a coach to help her acquire
clients. The coach owner sued for the hire charge when she refused to
pay, but the court held that the contract was illegal, and, as the coach
owner knew the purpose of the contract, he could not recover the charge.
4- Contracts in restraint of trade
The courts are reluctant to enforce a contract which stops a person
from carrying on employment or a business, even if only for a limited
period of time. The courts attitude varies according to the nature of the
contract, as follows:
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a- Contract between employer and employee (contract of employment)
An employer may make it a condition of employment that if the
employee leaves his job, he will not work for a competitor for a period
of time and/or within a stated distance. Generally the courts will not
enforce such agreements unless it is protecting a proprietary interest,
such as a trade secret.
In Attwood v. Lamont, Attwood employed Lamont a a tailor on the
condition that if he left, he would not work as a tailor within 10 miles.
The court held that the agreement to be illegal, because had no trade
secrets to protect.
Finch v. Dewes was a contrasting case in that a solicitor in Tamwood
employed his managing clerk on the agreement that if the clerk left his
employment he would not practice as a solicitor within seven miles.
The court held that this was reasonable and legal because it protected the
interests of the masters clients.
The court, in Oswald hickson Collier and Co. V. Carter-Ruck, held
that a partnership agreement which restrained a retiring partner from
advising previous clients of the firm, to be, as a general rule, contrary to
public policy, as it would deny a client the right to choose his own
solicitor.
b-Contracts for the sale of a business
A business may be sold on condition that the seller will not carry on
a similar business within a fixed time and/or distance. The courts are
more likely to uphold such agreements if they are considered reasonable
between the parties.
In Nordenfelt v. Makim Nordenfelt Guns & Ammunition Co.
Nordenfelt was known throughout the worl as an inventor, and a maker
of machine guns and similar weapons. He sold his business on
condition that he would not, for 25 years, engage in similar work
anywhere in the world. It was held that because of this reputation, the
restriction was reasonable.
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It was held in British Reinforced Concrete v. Shellf that a similar
agreement was not binding on a small local company, because it was not
reasonable between the parties.
c- Solus agreements
Traders agree to be supplied by only one company. For example a
garage may agree to be supplied for the next 21 years by only one
particular petrol company. The courts consider such restraints as illegal
unless reasonable. In Esso Petroleumm Co. Ltd. V. Harpers Garage Ltd,
the court held that an agreement for 21 years was too long, but an
agreement for five years was reasonable. The court held in Alex Lobb
(Garages) Ltd. V. Total Oil (G.B.) that an agreement to purchase the
defendants petrol exclusively for 21 years, with a provision for a mutual
break after 7 or 14 years, was a reasonable restriction on trading.
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