LAW OF CREDIT & SECURITIES SOLUTIONS – MAY 2013
SECTION A
1. Explain the following terms within the context of credit securities:
(a) Equipment leasing. (5 marks) Pp. 9-10
Equipment leasing is an expression that is applied to various contracts all of
which have one thing in common: a contract of a simple hire or bailment of goods.
Under a contract of hire, the hirer receives possession of the goods the subject of
the hire and the right to use them in return for the payment of rental to the owner,
generally by instalments.
In an equipment lease agreement, the parties do not intend lessee to have any
proprietary interest the goods, in fact the contrary is the intention. In contrast
according to Helby v Mathews (1985) AC 471. HL, the hirer under a hire
purchase agreement does have a proprietary interest in the goods.
Therefore, whilst the lessee acquires possession of the goods, the absolute property
in the goods remains in the lessor throughout the period of hire. As a result, the
lesser cannot in any circumstances lawfully dispose of the property in the goods to
a third party.
It is worth underscoring here that, at all costs, the hiring must be a true hiring, as
the courts will look to ascertain the real nature of a transaction and not just the
nomenclature used.
(b) Pledge. (5 marks) Pp. 33-34
A pledge is the actual or constructive delivery of possession of the asset to the creditor
by way of security. As possessor, the pledgee enjoys a ‘special property’ or limited
legal interest in the asset, but ownership remains with the pledgor. The pledgee’s
interest goes beyond a mere right to detain the asset. It encompasses:

the right to use the asset at his own risk so long as this will not impair it;
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
to sell his interest as pledge or assign it by way of gift;

to deliver the asset to another for safe keeping;

to sub-pledge the asset on the same conditions as he holds it and for a debt
no greater than his own; and

to sell the asset in the event of default in payment by the pledgor.
(c) Money lenders. (5 marks) pp. 26-27
2. Jingle obtained a bank loan from Jungle Bank with lending interest rate
thereon at 18% per annum. Five months later, the lending interest rates
escalated to 44% per annum. Jingle is refusing to repay the loan arguing that
the contract with Jungle Bank has been frustrated. Advise Jungle Bank. (15
marks) Pp. 103-105.
The doctrine of frustration operates in situations where it is established that due to
subsequent change in circumstances, the contract is rendered is impossible to perform,
or it has become deprived of its commercial purpose by an event not due to the act or
default of either party. Frustration in not to be confused with initial impossibility,
which may render the contract void ab initio. See Couturier v Hastie (1856) 5 HL
Cas 673
There are two alternative tests for frustration:
(i)
The implied term theory, as was the case in Taylor v Caldwell (1863) 3 B&S
826. In FA Tamplin v Anglo-Mexican Petroleum (1916) 2 AC 397 Lord
Loreburn said that the court: “can infer from the nature of the contract and
the surrounding circumstances that a condition which was not expressed was
a foundation in which the parties contracted. Were the altered conditions such
that, had they thought of them, the parties would have taken their chance of
them, or such that as sensible men they would have said ‘’if that happens of
course, it is all over between us’’’.”
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(ii)
The radical change in the obligation test. This test was adopted by the
House of Lords in Davis Contractors v Fareham UDC (1956) AC 696. An
example of frustration is the destruction of the specific object essential for
performance of the contract will frustrate it. See Taylor v Caldwell (1863) 3
B&S 826
The doctrine of frustration must be applied within very narrow limits . See
Tsakiroglou Noblee Thorl (1961) 2 AII ER 179. In Pioneer Shipping v BTP Tioxide
[1982] AC 724 Lord Roskill said that the doctrine of frustration was “not lightly to
be invoked to relieve contracting parties of the normal consequences of
imprudent commercial bargain “
Accordingly, the doctrine of frustration has four main limitations which are:
(a)
The doctrine of frustration cannot be override express contractual provision
for the frustrating event;
(b)
The mere increase in expense or loss of profit is not a ground of frustration.
See Davis Contractors v Fareham UDC (1956) AC 696
(c)
Frustration must not be self-induced. See Maritime National Fish v
Ocean Trawlers (1935) AC 524
(d)
A party cannot rely on an event which was, or should have been, foreseen
by him but not by the other party. See Walton Harvey Ltd v Walker & Homfrays
Ltd (1931) 1 Ch 274.
The contract between Jingle and Jungle Bank has become more expensive and or
onerous to perform. The hardships being experienced by Jingle do not constitute a
frustrating event. They are foreseeable occurrences in a any commercial transaction.
3. Mrs. Worrisome is a wife to a very influential cabinet minister. Mrs.
Worrisome wants to overdraw her personal account by issuing a charge over
cash deposits of her husband. Politely explain to her the doctrine of privity of
contract. (15 marks) Pp. 94-95, 155-156
According to halsbury’s laws of England, 4th ed. “the doctrine of privity of contract is
that as a general rule, a contract cannot confer rights or impose obligations on
strangers to it, that is, persons who are not parties to it. The parties to a contract are
those persons who reach agreement and whilst it may be clear in a simple case who
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those parties are, it may not be so obvious where there are several contracts, or several
parties, or both, for example in the case multilateral contracts or collateral contracts.
This passage is quoted with approval by Tembo J. In National finance
company limited v Royal company limited civil cause Number 2170 of 2001.
Only those who are parties to a contract may, as a rule, enjoy the rights and be
subject to the obligations, which that particular contract gives rise to. See Eley
v positive Government security Life Assurance Co LTD (1875) 1 EX D 20
It therefore follows that a contract for credit facilities cannot impose
obligations ex contractu on a person not a party to the contract. The
archetypal case on this is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co
Ltd (1915) AC 847
In view of the above, Mrs Worrisome cannot encumber the cash deposits of
her husband.
4. Compare and contrast the following types of security instruments:
(a) Real security and personal security. (5 marks) Pp. 110
Real security means security in an asset, whether of the debtor or of a third
party. The asset may be tangible or intangible. Real security is to be
contrasted with personal security, that is, security in the form of a
personal undertaking which reinforces the debtor’s primary undertaking to
give payment or other performance. Typically the personal undertaking is
given by a third party, for example, as a surety under a suretyship
guarantee or a guarantor under a demand guarantee.
(b) Fixed security and floating security. ( 5 marks) Pp. 16-17
Security is of two kinds, fixed and floating. Under a fixed charge the asset
is appropriated to satisfaction of the debt immediately or upon the debtor
acquiring an interest in it. Under a floating charge appropriation is
deferred; the chargee’s rights attach in the first instance not to specific
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assets but to a shifting fund of assets, the debtor company being left free to
manage the fund in the ordinary course of business. It is only when the
debtor’s management powers are brought to an end that the charge
crystallizes and fastens on the specific assets then comprised in the fund or
subsequently acquired by the debtor. The floating charge is the only kind of
floating security encountered in practice.
(c) Continuing and non-continuing guarantees. (5 marks) Pp. 184-185
A guarantee may be confined to a single credit or transaction or may be
made to cover or comprise several credits or transactions on a running
account(for example bank overdrafts), in which latter case it is termed a
“continuing guarantee”, the fact that a guarantee is a continuing one may
be implied from a reference to a liability for an ultimate balance;
The effect of the term continuing is not to give a fresh right of action
against the guarantor from day to day but to extend the guarantee beyond
the original transaction to subsequent transaction.
Where however, a continuing guarantee was exp[ressly stated to apply to
the balance that there was or at any time thereafter might be owing , it was
held that that the period of limitation ran from the time the balance sued
for had been constituted
Especially in the case
of bank guarantees, the guarantee is usually
expressed so as to extend to subsequent transactions, in order to avoid the
operation of the rule in clayton’s case by which credit items are treated as
appropriated to the earliest debits to the account.
The question of characterising a guarantee as continuing can raise difficult
problems of construction. A guarantee stated to cover ‘future advances’
may not cover a situation in which on the date for repayment , a fresh loan
is arranged at an increased rate of interest, but no money is actually
transferred
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SECTION B
5. Gonthi agreed to supply cotton seed to buyers in China to be delivered in
instalments. The buyers obtained a confirmed irrevocable letter of credit with
Audze Bank who promised to pay Gonthi upon production of the shipping
documents and invoices. Two instalments were shipped and Audze Bank
paid under the credit. The buyers discovered that the moisture content of the
cotton seed was high and in breach of the contract. On production of the
documents in respect of the third instalment, the buyers instructed Audze
Bank not to pay. Advise the sellers. (20 marks) Pp. 17-19
Under the letters of credit agreement, the obligation of the bank to pay is independent
of the underlying contract of sale and so is not affected by any defects in the goods
supplied under the contract of sale. This is referred to as ‘autonomy of credit’.
The case of Gonthi herein is similar to the facts obtainable in Urquhart Lindsay &
Co v Eastern Bank, wherein the sellers agreed to supply some machinery to buyers
in India, to be delivered by instalments. It was a term of the contract that additional
charges could be made to reflect any increases in the costs of wages and materials, but
these would be settled by later adjustments and not be charged on theinvoices. The
buyers opened a confirmed irrevocable letter of credit with defendant bank, who
promised to pay the seller upon production of the shipping documents and invoices.
Two instalments of the machinery were shipped and the bank paid under the credit.
Then the buyers discovered that the sellers had included in the invoices additional
charges related to a rise in costs. The bank was instructed by the buyers not to pay the
sellers. The sellers sued the bank for breach of contract and succeeded. It was held that
the bank was not concerned with the terms of the sale contract. Where a bank has
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issued an irrevocable letter of credit and the seller has tendered the correct documents,
the bank must pay.
In Hamzeh Malas & Sons v British Imex Industries Limited, the judge said ‘it
seems to me plain enough that the opening of a confirmed letter of credit constitutes a
bargain between the banker and the vendor of the goods, which imposes upon the
banker an absolute obligation to pay, irrespective of any dispute there may be between
the parties as to whether the goods are up to the contract or not. A vendor selling
goods against a confirmed letter of credit is selling under the assurance that nothing
will prevent him from the price.’
The only exception to the autonomy of credit doctrine is fraud which is not the case
herein. The sellers’ instructions are wrongful and Audze Bank should not obey them.
6. Red Brown applied for a personal loan and submitted bank statements for his
personal business Red Brown Investments. Unknown to the bank, Red Brown
had sold his business two days before the date of the application. The bank
became aware of the sale three days after they had approved the loan. Explain
the likely consequences on the personal loan. Pp. 84-86
7. Explain the following terms in reference to credit contracts:
(a)
Presumed undue influence. (5 marks) Pp. 82-83
Undue influence is where the relations that exist between the parties are such that
one of the parties is in a position to dominate the will of the other. In cases of
presumed undue influence the claimant only has to show that there was a relation
of trust and confidence between himself and the wrongdoer of such a nature that it
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is fair to presume that the latter abused that relationship in procuring him to enter
into the impugned transaction. Such confidential relationships include parent and
child; solicitor and client and the like
In such cases, there is no need to procure evidence that actual undue influence
was exerted. Once the confidential relationship has been proved, the burden of
proof then shifts the alleged wrongdoer.
(b)
Counter offer. (5 marks) Pp. 74-75
If a person makes an offer and the other replies that he is willing to be bound on
terms that are materially differently from those contained in the offer. This is,
then, a counter offer. To amount to a counter offer, a declaration must be legally
operative as an offer and it will usually put an end to the previous offer.
Thus a mere inaccurate attempt to reduce a prior oral agreement to writing is not
a counteroffer. Furthermore, a counter offer must be distinguished from an
inquiry, request, or suggestion which does not itself proffer any new terms on
which an offeree is willing to be bound.
(c)
Past consideration. (5 marks) Pp 93
Past consideration is something that is done by a promisee before the promise
was made under a contract. Courts do not take a strict chronological view, so
that, provided the promises are part of one transaction, it does not matter in
what order they were given.
Past consideration does not suffice as sufficient consideration to support a
contract.
(d)
Revocation of an offer for credit facilities by the offeror. (5 marks) pp.
62-63
An offer for credit facilities may generally be revoked by a bank at any time
before it has been accepted provided that the revocation is communicated to the
customer. See Financings Ltd v Stimson
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8.
(a) An accounts clerk from the Ministry of Finance has come to your bank
alleging that the Government of the Republic of Malawi wants to borrow
K2 billion. In terms of the Public Finance Management Act, advise the
Bank Manager on any two statutory requirements that must be met before
extending the credit facility. (10 marks) P. 46
The borrowings of the government of Malawi are regulated by the public finance
management Act (PFMA). According to the PFMA, the government of Malawi
cannot borrow money unless:
(a) That the borrowing was duly sanctioned by the national Assembly
(Parliament) by way of an authorising Act and that Prior to the
borrowing, the minister of finance obtained cabinet approval and that
the secretary to the treasury had taken note of the borrowing. See
section;
(b) The credit facility availed to the government of Malawi is in the name
of “The Republic of Malawi” and every document that requires signing
on the part of the governmentis signed by the minister of finance by
any other person authorised by the minister of finance in writing. See
section 55 of the PFMA.
Any prudent bank should check that the above statutory requirements are met
before extending a credit facility to the government of Malawi that the borrowing
is satisfying the two requirements mentioned above.
It has to be mentioned though that section 56 of the PFMA allows the minister of
finance to borrow money on behalf of the government of Malawi if he is duly
authorised to do so by an act of parliament.
(b)
A limited company does not have all the capacity of a natural person. Discuss
the limitation on the borrowing powers of a limited company. (10 marks). Pp.
50-52
Companies are artificial persons. An artificial person does not have all the capacity of
a natural person.
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A company must have the power to borrow and such power should be incorporated in
a company’s memorandum of association when it is formed. In the case of trading
company or a commercial company, the courts will imply a power to borrow up to a
reasonable amount for the purposes of its business, provided that such borrowing is
not expressly prohibited by the memorandum of association. See RE Badger,
Manseli v Viscount Cobham (1905) 1 Ch 568 at 574.
When the artificial person acts outside its objects and/or outside its mandate, it is said
to have acted ULTRA VIRES and the transaction is void. See Ashbury v Riche
(1875) LR HL 653. Ultra Vires is a latin term which simply means “beyond
powers”
In addition to the express objects and mandate of the artificial personas are laid down
in its founding documents courts will imply that the artificial person may do all such
other things as are incidental or conducive to the attainment of its objects. See AG v
Great Eastern Railway Co (1880) 5 App Cas.473, H.L
For a company incorporated under the companies act to borrow money, it must,
therefore, have such power and such power should be incorporated in a company’s
memerondum of association when it is formed.
However, it has to be mentioned that in the case of
a trading company or a
commercial company, the courts will imply a power to borrow up to a reasonable
amount for the purposes of its business, provided that such borrowing is not
expressly prohibited by the memorandum of association. See Re Badger, Mansell v
Viscount Cobham (1905) 1 Ch 568 at 574
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