BUSINESS LAW Session 2011-12


Course Organiser: Nicholas Grier MA, LLB, WS, Solicitor


UNIVERSITY OF EDINBURGH MBA 2011/2012 BUSINESS LAW Week 1: The British Legal System

Essential Reading: Black: Business Law in Scotland, Ch.1, 2.

Meanings of the Term “Law” Law has a variety of meanings usually involving a fair method of resolving disputes, or following procedures that help establish certainty as to ownership or entitlement to certain assets or advantages. Law also lays down penalties for failure to adhere to certain social or economic norms. On a more philosophical level, law uses as its benchmark either a universal intangible sense of justice/equity (the Hartian view) or law is what the state pronounces to be the law, (“positivism”) usually taking into account social mores, religious views, economic attitudes (e.g. capitalism) and sometimes “national identity”. In this course we are mostly looking at a small section of law, known as private law, and in particular at the commercial aspects of private law. We are not looking at international law, criminal law, procedural law, family law or public law. We are just looking at the law relating to people’s rights and duties towards each other in the commercial world. Some basic concepts of private law relevant to commercial law Legal Rights Definition of a legal right: an interest protected by the law, and enforceable through the courts, which entitles one person to the uninterrupted enjoyment of an asset or method or means of living his life, together with the requirement that those who deprive that person of the interrupted enjoyment of the asset or method, or means of living his life, should be required to compensate him for his loss, refrain from depriving the person of the uninterrupted enjoyment, or carry out such acts as should enable him to continue with his previous enjoyment. Classification of rights There are two basic categories of rights: (a) Personal rights (jus in personam)


enforceable against an identifiable person or group of persons, or against an organisation or Government body, such as a right to sue someone if he injures you or doesn’t pay your bill. (b) Real rights (jus in rem) an exclusive interest or benefit enjoyed by a person in a thing, enforceable against the world at large, like a mortgage over a property.

Legal persons Definition of a ‘person’ in the legal sense: any being or entity which the law recognises as being capable of acquiring rights and duties – familiar examples being human beings, companies, local authorities, partnerships, universities, the Government etc; Legal personality is determined by the law “things” never have legal personality Legal Capacity This relates to the ability of legal subjects to perform valid legal/juristic acts: for example, children and the insane have limited legal capacity; local authorities are not authorised to carry out certain acts.

The Law of Obligations Generally concerned with personal rights and divided into voluntary and involuntary obligations

Voluntary obligations (a) Promises, one party makes a unilateral obligation to perform (b) Contract where both parties have obligations towards each other


Involuntary Obligations (a) Delict This is where one person must compensate another for wrongs committed, with damages being the measure of compensation claimable. Unjustified Enrichment This is where one person who is unjustifiably enriched at another’s expense (as in constructive trusteeship) is required to compensate the other person for his loss. Sources of Scots Law Statute The Legislature of United Kingdom of Great Britain and Northern Ireland The Scottish Parliament; International law: customs and treaties Common law This comes from the sources indicated below: The Courts The courts make law, by interpreting the legislation, by the use of case law (judicial precedent) (see later), by studying the institutional writers and by following custom. Custom Institutional writers In Scotland, Roman Law, especially Justinian, through to Stair, Bell etc Other sources obiter dicta legal literature foreign legal systems Sources of English law Statute Acts of the English Parliament and later the UK Parliament Common law and equity Common law derives from judicial precedent and from custom. In England there is a further body of law known as equity. This arose out of the fact that sometimes the strict adherence to a law, particularly a procedural law, could result in people taking advantage of the rules to their own benefit



without really deserving to have the law on their side. It also arose out of the fact that historically English law was very formalistic and if you did not have the exact form of wording, you were not allowed a remedy. The following are some of the 14 principles of equity: Equity follows the law (i.e. the common law or statute should in general be applied, but equity can displace it if necessary or permitted). Where the equities are equal, the first in time prevails. Equity looks to the substance, rather than the form. Equity will not permit a statute to be used as an instrument of fraud. Equity imputes an intention to fulfil an obligation. Equity regards as done that which ought to be done. Equity will not suffer a wrong to be without a remedy. He who seeks equity must do equity. He who comes to equity must come with clean hands. Delay defeats equity. Equality is equity. Equity will not assist a volunteer.

The distinction between enacted and unenacted (common) law Enacted law (legislation) is that which Parliament has decided is good for us. The virtue of legislation is that it has democratic force behind it, and it may be clearer and easier to access than having to look at lots of common law cases. The Sale of Goods Act 1979 sets out all the law relating to the sale of goods so that everyone knows what the rules are. On the other hand, politically-driven law does not always make clear law, and legislation often creates a new but not necessarily better set of winners and losers. Unenacted law, or common law, is very dependent on good judges and is not necessarily the democratic will of the people. It is constantly shifting according to different cultural, moral and commercial mores. Sometimes legislation has to be introduced to reverse the effect of a judge’s decision (particularly in, say, tax law). A certain amount of recent legislation has been trying to bring about a moral change in how things are carried out (e.g. Companies Act 2006 tries to make directors of companies behave more thoughtfully). This sort of law slides into what is known as “soft law” because there are few clear and obvious sanctions for failure to follow the law.

Public International Law: Customs and Treaties Customary International Law • • • what is customary international law? presumption that the legislature did not intend to legislate contrary to international law primacy of United Kingdom legislation over customary international law: international law gives way to a clearly worded statute to the contrary 5

Treaties • • • what are treaties? requires enabling United Kingdom legislation before the rights created by a treaty become part of national law Failure to implement a treaty may give rights to those disadvantaged by a state’s refusal or delay in implementing a treaty

Right at the moment, with the EU in turmoil, it is not very clear what the UK’s standing on a good deal of future EU law will be.

Legislation in more detail Definition legislation is the enunciation of binding rules of law in a formalised way, by an authority endowed with the legal capacity to do so Three types of legislation • Primary legislation (Acts of Parliament/Statutes) ⇒ pre-1707 by the Scots Parliament: e.g. Royal Mines Act 1424 ⇒ post-1707 by Westminster (and post 1999 by Scottish Parliament) • • • Increasing number of Acts per year Complexity of legislation Secondary (subordinate/delegated) legislation This is legislation made by a body or person other than Parliament under powers delegated by Parliament, sometimes to a minister or to a Government department. • European Community legislation

Interpretation of Legislation: the basics • Find the ordinary meaning of the word at the time the Act was passed, by using dictionaries, and the judge’s sense of language.


• • • •

“Golden Rule” - grammatical and ordinary sense of the words to be adhered to. But words must be taken in their context. If the meaning is still doubtful ("ambiguity") resort is made to other sections, short and long title, side-notes, heading, punctuation, etc. Also to other statutes, circumstances when Act was passed, reports of committees which led to Act (to find the "mischief" the Act was intended to correct). Hansard can now be looked at. While the intention of Parliament is generally to be found from the words Parliament has used, the statements in Parliamentary debates may be used to remove uncertainty. If the ordinary meaning is clear, it can be departed from only if it would lead to absurdity or a wholly unreasonable result. If the Act is addressed to specialists - whether tradesmen or scientists evidence can be led of the technical meaning of words used. The Government usually publishes explanatory notes though these vary in quality. Problem with legislation is that it is often drafted in a hurry and scrutinised by politicians who are not experts in the required field. Political legislation throws up problems of conflicting desirable aims. Legislation often throws up unintended consequences or unforeseen loopholes. Recently there has been a move towards more intelligible legislation (e.g. Companies Act 2006) Tension between those who believe that it is not Parliament’s job to make legislation intelligible but to get it right, and those who think that legislation ought to be intelligible. There are vested interests on both sides. Sometimes litigants think that they can take advantage of some ingenious interpretation of the law to get some remedy they seek. This rarely works, though it doesn’t stop them trying.

• •

• • • • •

Case Law and Judicial Precedent These are the past decisions of judges.


Scottish Law Reports Session Cases These are the case reports from the Court of Session and the House of Lords. Scots Law Times These cover most of the sheriff courts and the decisions from the higher courts. The SLT comes out weekly. There are also the Scottish Civil Law Reports and Green's Weekly Digest.

English Law Reports

The Law Reports ⇒ Appeal Cases: AG v De Keyser's Royal Hotel Ltd [1920] AC 508. ⇒ Queen’s (or King’s) Bench: Chappelton v Barry UDC [1940] 1 KB 532. ⇒ Chancery: Re Macaulay's Estate [1943] Ch 435. ⇒ Family: Jones v Jones [1976] Fam 8. Weekly Law Reports e.g. R v Secretary of State for Transport ex parte Factortame Ltd [1990] 3 WLR 818. All England Reports e.g. DPP v Shaw [1961] 2 All ER 446.

Structure of the Courts (i) The Scottish Civil Courts Supreme Court Court of Session (Inner House) [Privy Council]

Sheriff Court (Sheriff Principal)

Court of Session (Outer House)

Other courts & tribunals

Sheriff Court (Sheriff)


The Inner House sits as an appeal court from the lower courts. It is presided over by the Lord President. If the court really wishes to emphasise its judgement, it ropes in as many judges as possible. When the House of Lords is sitting on a Scottish appeal, there is normally a preponderance of Scottish-trained judges sitting in the appeal, though it is normal to have English and Northern Irish ones present too. If a matter of European Law arises, there can be an appeal at any time to the European Court of Justice. The sheriff court is divided into different types of court depending on the sums involved and there is a small claims court that deals with very small disputes (less than £1000). (ii) The English Civil Courts High Court of Justice Queen’s Bench Division [General] Contract, tort Chancery Division Family Division Trusts, equity, bankruptcy, property Admiralty Court

Commercial Court

From the three divisions of the High Court there is an appeal to the Court of Appeal, presided over by the Master of the Rolls. From there, there may be an appeal to the Supreme Court, formerly the House of Lords. Scottish trained judges commonly sit on the Supreme Court decisions. Below the High Court of Justice is the County Court, which is more or less the equivalent of our Sheriff Court and deals with matters up to £50,000 in value. Appeals are taken from it to relevant division of the HCJ or if the matter is suitably complex direct to the Court of Appeal and if necessary then on to the Supreme Court. If a matter of European law arises, there can be an appeal at any stage to the European Court of Justice.

The law relating to judicial precedent: The Doctrine of Stare Decisis (Lit. Let the decision stand) Judicial precedent works on the principle that the decision of a previously decided case should be followed when the same issues come up later on. This gives some degree of certainty and consistency to the law. A previous decision is known as a “precedent”. The most important part of the precedent is its ratio decidendi (the reasoning behind the decision) (see later). There are two factors which determine whether a precedent is binding: 1. the relative position in the court hierarchy of the court examining the ratio to the court which laid down the precedent initially;


2. whether there is a ratio in point (relevant to the particular matter) 1. The relative position in the court hierarchy of the court examining a ratio and the court which laid down the precedent initially In principle, where there is an existing decision on a point of law, that decision should be followed (or as lawyers say, is “binding”) on all subsequent occasions where the same point of law arises – in order to give some degree of certainty as to what the law is. However, if one of the litigants in a later case believes that the original decision is wrong, he may appeal the case to the court higher than the court whence the original decision came from in order to see if the higher court will overturn the original decision. If the original decision came from the highest court of all, the Supreme Court, the Supreme Court will be invited to reconsider its original decision – which it sometimes will do. The principle applies in criminal matters too. For example, the Scottish law of rape. The good thing about judicial precedent is that you know where you stand. By looking at past cases you can work out what the current law. The bad thing is that it requires a good knowledge of existing cases, it can change without your knowing of the change, and appealing to a higher court can be very expensive. But as a system, it works reasonably well. The basic rule: higher courts bind lower courts; 2. Ratio decidendi in Point This means relevant to the actual legal issue involved – in other words it must be the same legal point that is being discussed, not one that is either markedly or indeed subtly different. Identifying the ratio of a case. Unfortunately there is no perfect method of doing this, but generally speaking the ratio is the most significant part of the decision – the specific point of law, interpretation of the law, or shift in attitude to a particular law, that is central to the judge’s decision – and sometimes what the judge thinks is the ratio is not necessarily what later commentators find to be the ratio. A Ratio in Point ‘A prior decision is a precedent in point when there was raised, argued and decided in it as applicable to a certain set of facts some issue of law which is the same issue of law as arises in the instant case in relation to [the same set of


facts or] a different set of facts of the same general kind’ (Walker, The Scottish Legal System, 7th edn, 420)

Persuasive Precedent • • • obiter dicta decisions from the superior courts in England or even abroad factors that affect the weight of a persuasive precedent ⇒ the status of the court that made it ⇒ the reputation of the judge whose obiter it was Civil Procedure This is the law that relates to the operation of the courts. There are various rules for the different courts, the complexity increasing with the seniority of the court. Role of the Judge Principle of judicial passivity: Strictly speaking it is for the judge to judge the facts as they are presented to him, and on the law as it is argued in front of him. However, if the litigants have not done their homework and are unaware of new legislation or case law that affects the issue, he may have to make the litigants aware of these in the course of the trial. Types of possible outcomes 1) 2) 3) 4) Decree for pursuer, undefended (decree in absence) Decree for pursuer, defended (decree in foro) Decree for defender - dismissal Decree for defender - absolvitor (“to assoilzie”)

In England the courts pronounce “judgements”. The pursuer is known as the claimant, and the defender as the defendant. If the claimant fails to make out his case, the defendant is found “not liable”. Standard of proof In a civil case, the standard of proof is that of a balance of probabilities, not beyond possible doubt. This raises interesting issues (OJ Simpson type cases). 3.5 Some types of action or petition • • • • • • Debt. Damages. Divorce. Declarator. Reduction/ rescission. Interdict/injunction.


• •

Judicial Review Specific implement/specific performance.

3.6 Enforcement of decrees For money decrees: Extract decree or judgement

Diligence or enforcement

Sequestration (bankruptcy)

Liquidation Attachment Arrestment Inhibition

3.7. In many areas of life there are methods of dealing with legal disputes that do not involve going to the courts. These include various tribunals (such as employment tribunals, immigration tribunals etc) and arbitration. Some organisations use Ombudsmen.

Contract law

Reading: Black: Ch. 4, 5


Introduction: The Basis of Contractual Liability Importance of consensus in idem (agreement on the same matters) Consensus in idem means that both parties must be agreed on what they are buying or exchanging (Raffles v Wichelhaus (1864) 2 H&C 906 – two ships known as the Peerless).

2. 3. 3.1

The Role of Offer and Acceptance The Offer Requirements 12

a) b) c) d) e) f)

Firm - made animo contrahendi (an intention to contract or to trade). Complete. Clear and certain The contract must be legally permissible. The parties must have legal capacity. The contract must be a contract not a mere social agreement.


Offers and other pre-contractual statements

Offers must be distinguished from other pre-contractual statements - it must invite acceptance and be capable of resulting in a contract. Was the following a contract? (BHP was a property known as Bumper Hall Pen). Harvey v Facey [1893] AC 552. H: “Will you sell BHP? Telegraph lowest cash price.” F: “Lowest cash price for BHP £900.” H: “We agree to buy BHP for £900. Please send us your title deeds in order that we may get early possession.” Some pre-contractual statements are merely invitations to treat, i.e. requests for offers; others are statements of fact (e.g. quotations of prices) or verba jactantia (e.g. advertisements). But in every case, it all depends on the objective understanding of the words used. The intention of the person making the statement, as derived from the words used and their context, is all important. While you negotiate, or while you are willing to negotiate, you bear your own costs and no offer is made, no acceptance is received, and no-one can sue anyone. An expression of intention is not a binding contract (Dawson International v Coats Paton plc 1993 SLT 80).


Examples Shop Displays *Fisher v Bell [1961] 1 QB 394; Notice in shop window read - “Ejector knife - 4/-.” Shopkeeper charged with offering an offensive weapon for sale. These are known as “invitations to treat” and do not constitute an “offer for sale”, and consequently do not amount to a criminal act. Advertisements Partridge v Crittenden [1968] 1 WLR 1204; 2 All ER 421 – advertisement for bramblings – an advertisement is not necessarily an offer – though note that not to honour an advertisement may be a breach of the Trade Descriptions Act.


Withdrawal of offer Offers may be withdrawn within a reasonable time but not after acceptance. Philp v Knoblauch 1907 SC 994; 15 SLT 61; 44 SLR 666 In this case K made an offer to sell linseed at a certain price. P accepted it, and confirmed it by letter. K then tried to withdraw, but P was held entitled to hold K to the bargain. It is acceptable to put a time-limit on an offer so that it must be accepted within a certain time. Auctions A display of goods at an auction is an invitation to treat. Each bid is an offer and lapses when a higher bid is made. Acceptance is indicated by the drop of the hammer. Until the hammer drops the bidder can revoke his offer, by withdrawing the bid, and the seller may withdraw his goods (Sale of Goods Act 1979 s. 57(2)). Websites? See the Electronic Commerce (EC Regulations) 2002 and the Consumer Protection (distance Selling) Regulations 2000. Rewards/offers to the general public *Carlill v Carbolic Smokeball Co. [1893] 1 QB 256 The defenders speciously claimed that they were merely entering into negotiations, but the courts held that Mrs C did not have to do any negotiating at all: all she needed to do was follow the rules. For a Scottish application of Carlill Hunter v General Accident 1909 SC (HL) 30 Promises to accept highest/lowest offers *Harvela Investments v Royal Trust [1986] AC 207;[1985] 3 WLR 276; 2 All ER 966


Termination of Offers a) b) c) d) Revocation: McMillan v Caldwell 1991 SLT 325 – even a formal written offer for land can be withdrawn provided the other party receives the withdrawal before he accepts: Rejection Effluction of Time Death of Parties

4. 4.1

The Acceptance Requirements


a) b) c)

Conscious acceptance; Acceptance must match offer exactly; Acceptance must be by party to whom it was made;

*Wolf and Wolf v Forfar Potato Co 1984 SLT 100


Requests for Clarification This may have to be distinguished from the types of reply noted above: see Stevenson v McLean (1880) 5 QBD 346.


Cross Offers Tinn v Hoffman & Co (1873) 29 LT 271 2/2/91: A writes to B - ‘I wish to buy X for £1,000.’ 2/2/91: B writes to A - ‘I wish to sell X for £1,000.’


Battle of Forms Butler Machine Tools v Ex-Cell-O Corp [1979] 1 WLR 401; 1 All ER 965 (CA) Continental Tyre and Rubber Co Ltd v Trunk Trailer Co Ltd 1987 SCLR 58


Acceptance by Conduct In general, silence is not acceptance - there is no acceptance unless it is communicated to the offeror. In exceptional circumstances uncommunicated conduct may constitute acceptance.

4.6 4.6.1

Contracting at a Distance The Postal Acceptance Rule The common law postal acceptance rule is a mess. It stated that the mere act of posting concludes the contract. This no longer makes sense commercially, and it is prudent nowadays, if an offeror wishes to avoid its consequences, to state in his offer that any acceptance must reach him to be effective. The old rule was also applicable to telegrams but not to telexes. With regard to telexes it has been judicially observed that “no universal rule can cover all such cases; they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgement where the risks should lie” (Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34). There are many other dicta


against strict application of the postal rule, but the safest way is to specify how the acceptance must be made. 4.6.2 Contracting at a distance When businesses contract with each other, it is normally (unless provided otherwise) the case that the applicable law will be the law of the country that has the closest connection with the contract (Contracts (Applicable Law) Act 1990). Generally this will be the place where performance of the required act, service or manufacture takes place, as opposed to the law of the place where the payer is based. So it is usually the supplier’s law. However, in a business to consumer contract, it will generally be the consumer’s law that applies, since they are allowed to rely on their own consumer protection laws.


The requirement of writing The need for writing. Some contracts must be in writing, such as certain transactions involving land, or gratuitous unilateral obligations unless undertaken in the course of business property (Requirement of Writing (Scotland) Act 1995). Many consumer credit transactions must be in writing. Certain other documents also need to be in writing (wills, bills of exchange, HP agreements etc.) but they are not all contracts. How are other contracts formed? What if someone unscrupulous takes advantage of the requirement of writing to wriggle out of a contract by saying that it was not formally valid? Sometimes a contract which should be in writing is not put in writing. It might be tempting for one party to such a contract to wriggle out of it by saying that it was not signed and was therefore invalid. The “wriggler”, however, if he had benefited from the contract, or if the other party had incurred expenditure or suffered loss, would be “personally barred” from relying on the requirement for writing (Requirements of Writing (Scotland) Act 1995 s.1 (2)). This is known as estoppel in England. See Mitchell v Stornoway Trustees 1936 SC (HL) 56


The validity of contracts Some contracts are invalid. This is because they are ● void ● voidable ● unenforceable (dealt with later) A void contract is not a contract at all – there is a problem right at the heart of the contract, such as lack of true consent, such as, say, when one of the parties is under age, or does not have title to the goods (O’Neill v Chief Constable of Strathclyde 1994 SCLR 253 (two cars were exchanged by means of a barter, though one of the cars was in fact stolen. The non-stolen car was sold to a third party who bought in good faith for value. When it turned out that the other car was stolen, the original contract or barter was void, and the innocent


purchaser could not get title to the car. He did have a right against the person who sold him the car who in turn had a right against the thief) or where there was an error as to the subject matter of the contract (see Raffles v Wichelhaus later). With a void contract, even if goods are delivered and money paid, properly the parties should revert to the position before anything happened (restitutio in integrum), and the contract is deemed never to have existed. So if goods are stolen, even if the thief sells them on, the purchaser does not get “good title” and the victim can get the goods back. The innocent third party can sue the thief if he can catch him. Or if someone is forced to sign a contract against his will, he can have the contract set aside (technically “reduced”). He won’t get damages but at least he is no worse off that he was before he was forced into the contract. Example of void contracts includes contracts where the parties do not have legal capacity, where there is an “essential” error, where some vital paperwork is missing etc. These are examined later.

A voidable contract is one where there is a problem but that problem does not lie at the heart of the contract and there was consent to the contract at the time the contract was made. Distinguishing when something lies at the heart of the contract and when it does not is not always easy. If something is said in a contract to be “of the essence of the contract” then it does lie at the heart of the contract. Otherwise it is a question of degree. The significance of a voidable contract is that the contract is initially valid as far as third parties are concerned and if the challenger does not act quickly to establish his challenge, he can lose his opportunity to challenge the contract. See MacLeod v Kerr 1965 SC 253. Unfortunately, the precise difference between void and voidable is not easy to operate in practice. Furthermore the case law is not perfectly clear. As a further complication, where there is a voidable contract, but for some reason it is not possible to restore the parties to their original position, perhaps because the goods involved have been consumed, or someone has disappeared, the contract may be as a matter of practice irreducible and the innocent party just has to bear his loss. A voidable contract may also be irreducible if the innocent party has delayed in enforcing his rights or a third party has obtained rights in the assets involved.


Contractual capacity Children are protected under the Age of Legal Capacity (Scotland) Act 1995. Children under 16 have no contractual capacity except for “reasonable transactions” (relative to age etc.). Children aged 16 and 17 have full capacity, but any transaction that causes them “substantial prejudice” may be set aside by the court – and they have until they are 21 to do so. “Substantial prejudice” means that a sensible adult would not have entered into the transaction.


However, if a child has misrepresented his age, or been in the course of business, he cannot use these provisions. It is possible to present a contract to the sheriff for him to approve, thus removing the child’s potential objections (s.4). There are similar provisions for incapable adults whose affairs to be looked after by their guardians.

Effect of error and illegality, breach of contract, remedies and termination Reading: Black Ch.4, 5 1.01 Error Where error has arisen, damages will not normally be payable because normally the aggrieved party just wants the contract set aside. There are two main types of error. These are ● errors of law – these meet with little mercy – ignorantia juris neminem excusat – the contract will still be valid ● errors of fact. Errors of fact may be broken down into further categories: ● error of expression ● unilateral error ● common error ● mutual error ● incidental error ● essential error ● induced error/misrepresentation These will sometimes result in a contract being void, voidable or valid. With error of expression, it used to be the case that the courts could not rewrite the document, but could merely reduce the contract (Anderson v Lambie 1954 SC (HL) 43 – although only the farm was meant to be sold, the entire estate was sold – the disposition was reduced, and the solicitor taken out and shot). This was not always very helpful. Nowadays, under the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 ss.8 and 9 the court can rewrite the document to say what it ought to have said. There are cases in the past where people have tried (in bad faith) to take advantage of clerical mistakes. This Act resolves this problem. Unilateral error is where one party makes a bad bargain. Tough! See Gillespie v Russell (1856) 18 D 677. Still a valid contract. Common error is when both parties make the same mistake, but the contract may still be valid (Leaf v International Galleries [1950] 2 KB 86). Mutual error is where the parties misunderstand each other (Raffles v Wichelhaus above). This can make the contract void depending on what the issue is (in this case the subject matter of the contract).


Incidental error is close to unilateral error – it is something that does not go to the heart of the contract, and is no fault of the party being sued – see Cloup v Alexander (1831) 9 S. 448. So the contract is still valid. Essential error is an error without which one of the parties would have chosen not to have entered the contract, and it makes the contract void because of the absence of consent. Where the matter is not essential then it would still be a valid contract. Common examples of essential error include: ● subject matter ● price ● identity of the parties involved. ● quality, quantity or extent ● nature of the contract It is worth noting essential error as a concept has shifted over the years, and matters that once would have counted as essential error in the past have now been usually remedied by statute or common law. Subject matter – see (yet again) Raffles v Wichelhaus

Price – the lack of clarity as to price is now not fatal, since under Sale of Goods Act 1979 s.8 and common law a reasonable price will be fixed (Wilson


v Marquis of Breadalbane (1859) 21 D 957.

Identity – this is rare nowadays, but if you would only have contracted with a particular person, thus making it an essential part of the contract, and were misled as to that person, you did not truly consent to the bargain you entered into: Morrisson v Robertson 1908 SC 332. However, times change, and error as to identity is less likely to be an issue: Macleod v Kerr 1965 SC 253. If the quality is not what one of the parties thought it was, there is no contract: Patterson v Landsberg & Son (1905) 7F 675. This would now be dealt with under the Sale of Goods Act 1979. Nature of the contract: some people think they are signing one type of contract when in fact they are signing another: so if you sign a deed of conveyance while thinking it is a lease you have not given true consent. This does not arise much nowadays. Principle of unjust enrichment? This is a somewhat elusive area of law, but broadly speaking, where someone benefits from your mistake and gets more than he bargains for, he is under no obligation to return the extra benefit to you; but equally where someone obtains that which he should not have obtained, or obtained more than he bargained for without any mistake on your part, but particularly if he has not been straightforward in his dealings, he is obliged to return any extra benefit to you. 1.02 Misrepresentation otherwise known as induced error Where there is innocent misrepresentation, the remedy is restitutio in integrum as in Boyd and Forrest v Glasgow and South Western Railway Co No.1 1912 SC (HL) 3. No damages are payable. “Statements of opinion”, such as one


person’s view of what he might (or might not do) in the future, may well amount to innocent misrepresentation. Where there is fraudulent misrepresentation, the contract is either void or voidable, depending how serious the misrepresentation is. Trade puffs (verba jacantia) don’t count, but nowadays the Trade Description Act 1968 would nowadays help. Straight fraud – Bile Beans Manufacturing Co v Davidson (1906) 8F 1181. Damages are payable up to the extent of the loss. Negligent misrepresentation is where one party did not mean to provide false information as a result of which the other was induced to enter into the contract, but he nevertheless still did provide false information (Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] AC 465). Damages are again payable. See Law Reform (Miscellaneous Provisions)(Scotland) Act 1985 s.10. Under certain circumstances, the parties have to be particularly honest with each other – particularly in insurance contracts (the uberrimae fidei rule) (The Spathari (1925) SC (HL) 6). 1.03 Other factors which render a contract void or unenforceable Facility and circumvention (MacGilvray v Gilmartin 1986 SLT 89)(mental or physical frailty required) Undue influence (Gray v Binny (1879) 7 R 332) (delightful mum pressured her own son to make over his property to her) Force and fear (Earl of Orkney v Vinfra (1606) Mor. 16481) (my favourite case in the whole of Scots Law)


An unenforceable contract is one where there is nothing there to enforce because the goods do not exist, the parties have no contractual standing, or the contract is a sponsio ludicra. A legally recognised agreement is one that the courts will enforce. The courts will not uphold social contracts, gentlemen’s agreements or criminal contracts (known as pacta illicta) (Hamilton v Main (1823) 2 S. 356) on the basis of ex turpi causa non oritur actio and its similar rule, in turpi causa melior est conditio possidentis (Barr v Crawford 1983 SLT 481). These purported contracts have no legal standing at all and are therefore void. 2. Exclusion clauses Historically, the law assumed that adults should be able to enter into contracts freely with each other on whatever terms they wished without government interference. This was known as “sanctity of contract”. But over the years, this was found to be unreasonable, particularly in the context of large and powerful corporations trying to avoid any liability when dealing with ignorant consumers, and so in practice many former abuses have been stamped out (such as penalty clauses). There was also a growing awareness that conducting business on the basis of small print or other dubious get-out clauses did not do much for British business. So the original principle of sanctity of contract is now much reduced. But it does still exist, particularly on a business-tobusiness basis, where person is expected to look after his own interests and his failure to spot someone else’s contractual advantage is his own misfortune. The major area of judicial concern involves exclusion clauses. These are dealt with under the common law and under statute. Broadly speaking exclusion clauses must be drawn to the weaker party’s attention before he signs the contract (e.g. disclaimer notices in hotel receptions as opposed to bedrooms (Olley v Marlborough Court Ltd [1949] 1 KB 532). If they are not adequately brought to the attention of the weaker party, the contract will stand but those conditions are not binding (Henderson v Stevenson (1875) 2R (HL) 71). However, if both parties know what they are doing, or should know what they are doing, and are negotiating as businessmen at arms’ length, the exclusion clause will be perfectly valid: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, Ailsa Craig Fishing Co. v Malvern Fishing Co 1982 SC (HL) 14).


The Unfair Contract Terms Act 1977 The Act was passed to regulate the use of exclusion and limitation clauses in contracts. Its provisions on supply of goods contracts will be discussed later in the course; here we consider its generally applicable rules. UCTA s 16 - clauses in contracts and non-contractual notices excluding or restricting liability for any breach of duty arising in the course of any business are void in respect of death or personal injury, and otherwise subject to fairness and reasonableness test. Smith v Eric S Bush [1990] 1 AC 831


Four matters always to be considered - relative bargaining power, availability of alternative source, difficulty of task, practical consequences. UCTA s 17 - clauses in consumer and standard form contracts which exclude or restrict liability to the consumer or customer in respect of breach of a contractual obligation, or which allow a party to render no performance or a performance substantially different from that which consumer/customer reasonably expected from contract, will also be void, subject to the fairness and reasonableness test. “Consumer contract” - where one party deals, and the other does not, in the course of a business, and the goods sold are of a type ordinarily supplied for private use and consumption (UCTA s 25) “Standard form contract” - undefined in UCTA, but broadly any standard printed contract whose terms the business is unlikely to be willing to negotiate or alter much (as indicated in McCrone v Boots Farm Sales 1981 SLT 103). “Reasonable expectations” see UCTA s.17 Elliot v Sunshine Coast International Ltd 1989 GWD 28-1252 – a holiday company supplied a coach without a toilet despite having promised one in its brochure – and then had the cheek to rely on an exclusion clause. UCTA s 18 – in a consumer contract, a consumer cannot be required to indemnify someone else unless it is fair and reasonable for him to do so. UCTA s 19 - controls exclusions via manufacturer's guarantees UCTA s 23 - no evasion by means of secondary contracts Chapman v Aberdeen Construction Group plc 1993 SLT 1205 2.02 The Consumer Protection from Unfair Trading Regulations 2008 (SI 2008 /1277) These are paralleled by the Business Protection from Unfair Marketing Regulations 2008 (SI2008/1276 – not discussed in these lectures, but worth knowing about if you go into business). The regulations may be found at: These regulations replace much of the old Trade Descriptions Act 1968. What it does is prohibit unfair commercial practices. Under reg.3 unfair commercial practices are defined as follows: (3) A commercial practice is unfair if— (a) it contravenes the requirements of professional diligence; and


(b) it materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product. (4) A commercial practice is unfair if— (a) it is a misleading action under the provisions of regulation 5; (b) it is a misleading omission under the provisions of regulation 6; (c) it is aggressive under the provisions of regulation 7; or (d) it is listed in Schedule 1. Reg. 5 then outlines a whole lot of things that count as “misleading actions”. 3. Restrictive Covenants Clauses which restrict freedom to work of ex-employees, ex-partners or previous owners of business are void unless shown to be reasonable in the parties' interests and in the public interest. The test is therefore one of reasonableness and the onus of showing that a particular covenant is reasonable falls upon the person seeking to up hold it. Three relevant factors in determining reasonableness: (a) (b) (c) Spatial area over which restriction is to operate; Duration in time for which restriction is to operate; Nature of restriction imposed.

Example of factors (a) and (b) are *Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535

Empire Meat Co v Patrick [1939] 2 All ER 85 –five mile radius unreasonable so the whole terms set aside. The courts won’t rewrite the contract to give different terms. So far as factor (c) is concerned it depends on a balance being struck between reasonableness to the parties and reasonableness to the public. The latter element is rarely invoked; but see George Walker & Co v Jann 1991 SLT 771. Several broad types of covenant can be elicited from the cases.


1. 2.

Contracts where the seller of a business undertakes not to compete with the purchaser. (Nordenfelt (above)). Contracts where an employee agrees with his employer not to join a rival business or not to set up a similar business in competition with the employer when he leaves his employment (Mason v Provident Clothing and Supply Co. Ltd [1913] AC 724). Contracts of partnership Dallas McMillan & Sinclair v Simpson 1989 SLT 454. Contracts whereby manufacturers or traders combine to regulate output or disposal or price or commodities. Now covered almost entirely by statute, e.g. Fair Trading Act 1973; Deregulation and Contracting Out Act 1994; Competition Act 1998, Enterprise Act 2002. The EC Treaty Article 81 (formerly 86) prohibits any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it in so far as it may affect trade between member states. Article 80 (formerly 85) applies to concerted behaviour which may affect trade between member states. Contracts whereby manufacturers restrict the trading of a distributor “solus” agreements (Esso Petroleum v Harpers Garage (Stourport) [1968] AC 269; [1967] 2 WLR 871).

3. 4.


In some cases the courts will uphold the severable parts of the covenant and declare the other parts invalid. The enforceable elements will be severed from the unenforceable elements. Mulvein v Murray 1908 SC 528


Breach generally In every contract there are express and implied terms. If one of these terms is not fulfilled (non-performance), then the contract has been broken, hence "breach of contract". Breach can occur in a number of ways: • • • Total or partial failure to perform (or refusal to perform including anticipatory breach) Defective performance Failure to perform timeously (within the time allowed)

There are a variety of remedies for breach available to the innocent party. These may be classed as SELF-HELP (retention, lien, rescission) or JUDICIAL (implement, damages). 4.01. GENERAL PRINCIPLES OF SELF-HELP REMEDIES


The negative remedies of the innocent party (that is, the party faced by the breach), depend on two interrelated concepts - mutuality and materiality. 4.02 Mutuality In each contract the obligations are reciprocal so that either both parties are bound or neither is bound. This means that a party can only insist on performance by the other party if he himself has fulfilled his side of the bargain. Macari v Celtic FC 1999 SC 628 4.03 Materiality This simply means the degree of importance of the breach. The remedies open to the innocent party depend to some extent on whether the breach is serious or trivial. There are three approaches to materiality: (1) (2) It is not for every trifling breach that a party may with-hold performance. “It is familiar law, and quite settled by decision, that in any contract which contains multifarious stipulations there are some which go so to the root of the contract that a breach of those stipulations entitles the party pleading the breach to declare that the contract is at an end. There are others which do not go to the root of the contract, but which are part of the contract, and which would give rise, if broken, to an action of damages.” (Wade v Waldon 1909 SC 571, 576 per Lord President Dunedin). Wade, better known as George Robey, had failed to give 14 days notice (as required under his contract) to appear at a Glasgow theatre. The failure to give the required notice was not held to be “material” and the theatre manager was liable to Wade in damages for not letting him appear. The way to get round this in future would have been for the manager to say that 14 days notice was “of the essence of the contract”. Emphasis may fall on materiality of breach, rather than of term broken.

(3) 4.04

What breaches are material? Repudiation “Repudiation” is a wrongful act by one of the parties to the contract indicating that he is refusing to fulfil his contractual obligations. See: Blyth v Scottish Liberal Club 1982 SC 140 Wade v Waldon 1909 SC 571 Late performance?


Many contracts state the period within which performance is to be completed. If the contract itself is silent it is a matter for the court whether performance has been tendered within a reasonable time. The question usually asked is whether time is of the essence of the contract. If time is “of the essence” then delay amounts to material breach and justifies rescission. It is difficult to lay down precise rules as to when this occurs as the courts tend to treat each case on its own facts. But an express provision is of great importance and will generally be decisive. Defective performance? Lindley Catering v Hibernian FC 1975 SLT (Notes) 56 Strathclyde RC v Border Engineering Contractors 1998 SLT 175

Non-payment? The critical question is when non-payment gives rise to a claim to rescind the contract (see below). A long delay in payment might give rise to a right of rescission. Note also that the use of an ultimatum procedure may convert a non-material breach into a material breach.


The self-help remedies “Rescission” is the rightful act of the other party indicating that, as a result of the other’s repudiation, he regards himself as no longer required to fulfil his contractual obligations, i.e., effectively to treat his duties under the contract as at an end. Intimation of this fact is advisable. Some points about rescission: (a) (b) In the case of sale of goods, the primary right for breach is ‘rejection’ of the goods. Rescission brings the contract to an end, but care must be used in defining precisely what this means: Lloyds Bank v Bamberger 1994 SLT 424 This case is interesting because it brings in the concept of “approbate and reprobate”. The bank’s customer both wanted to rescind the contract and to collect certain interest payments, but it was held that he could not simultaneously rescind the contract while expecting to get the benefits of the contract. To get round this “all or nothing” approach it is common to specify in contracts that if any particular clause fails, its failure does not affect the validity of the other clauses. Not every breach gives rise to the right to rescind. The breach must be material. Parties may contract that certain stipulations are material. This will avoid uncertainty.



Retention and lien The breach may not be sufficiently material to allow rescission or it may simply be disadvantageous to the innocent party to rescind. In such a case he may be entitled to withhold performance of his part of the contract (retention) or retain possession of the other party’s goods (lien). General rule is that a liquid debt cannot be set off against an illiquid claim and claims must be contemporaneous. Set-off may be excluded by contractual terms. Bank of East Asia v Scottish Enterprise, 1997 SLT 1213 (HL) Lien - A particular form of retention, open to various people holding your assets in their hands until payment of their fees, e.g. solicitors, stockbrokers, bankers, inn-keepers, cobblers, garages etc


JUDICIAL REMEDIES So far we have been considering the defensive remedies open to an innocent party in the event of breach. We now turn to examine the positive remedies available at law, i.e. through the intervention of the courts.


Action for debt The most common action which arises out of contract is a simple action for the payment of money. In other words the contract price is sought, whether for goods sold and delivered, or for services rendered. Specific implement and interdict The second positive remedy is to secure performance by specific implement (or in the case of a negative obligation by interdict). Failure to obey such a decree is contempt of court punishable by up to 6 months imprisonment (Law Reform (Misc. Prov.) (Scotland) Act 1940). Implement is in theory the primary remedy to which the innocent party is entitled. But the court retains an equitable power to refuse the remedy. Apart from considerations of hardship specific implement will not be granted: (a) (b) (c) (d) to enforce an obligation to pay money (because otherwise it would result in imprisonment for civil debt). to enforce a contract involving a personal relationship (because this would be an undue restraint on personal liberty). where decree unenforceable or performance impossible where the subject matter is of no special significance in itself and money compensation would be adequate.



All this means that the remedy is used sparingly and in particular situations e.g. house sales, restrictive covenants. It is common to petition for implement with alternative of damages. Retail Parks v Royal Bank of Scotland 1996 SC 227 Highland & Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297 Co-operative Insurance v Argyll Stores [1998] AC 1 5.03. Damages Every breach gives rise to a claim for damages even if only for a nominal sum. What is loss? Generally an economic concept in contract cases - lost profit on resale, extra cost of replacement performance, cost of curing defective performance, wasted expenditure (see Anglia TV v Reed [1972] 1 QB 60 and Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344). But the courts have recognised that other forms of loss may be compensated by way of contract damages - see Jarvis v Swan Tours Ltd [1973] QB 233.


Measure of damages The purpose of damages is to compensate, i.e., to place the injured party in the same position he would have been in if there had been no breach. As compensation is the criterion, damages are measured by the loss to the innocent party, not gain to the guilty party (Teacher v Calder (1899) 1 F (HL) 39. Full compensation could however lead to undesirable results and the law limits the measure of damages in three main ways: (a) Causation The pursuer must show that loss suffered attributable to defender's breach. (b) Remoteness In general defender not liable for loss “too remote”. When is loss too remote? “The damages ... should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach.” (per Alderson B, Hadley v Baxendale (1854) 9 Exch 341, 354 Balfour Beatty v Scottish Power 1994 SC (HL) 20 Cosar Ltd v UPS Ltd 1999 SLT 259 (c) Mitigation of loss The pursuer is obliged to take all reasonable steps to minimise the loss occasioned by the defender's breach. He cannot recover a greater sum in


damages than if he had taken those steps. However, he need not take exceptional steps. 6. 6.01. CONTRACTUALLY STIPULATED REMEDIES Penalty and liquidated damages In order to remove the uncertainty of predicting the quantum of damages the parties may insert a clause in their contract stipulating that a fixed sum will be payable on breach. The courts will only enforce such a clause if it is a genuine pre-estimate of loss (liquidate damages). If the clause penalises or is intended to pressurise the party in breach then it will be treated as invalid and is not enforceable (penalty clause). Irritancies An irritancy clause in a contract is one which entitles one party to terminate the contract in the event of specified breaches or misconduct of the other party. Such clauses are common in leases. The landlord’s right to terminate for failure to pay the rent (or other payment) is now subject to his issuing a notice to the tenant - Law Reform (Misc. Prov.) (Scot) Act 1985, s 4. Ingenious other devices • • • • • acceleration clauses (if one instalment is not paid, the whole price is immediately payable); forfeiture clauses (on breach, the breacher forfeits his deposit); indemnity clauses; retention clauses; termination clauses.



Sale of Goods Reading: Black: Ch.5 Davidson and MacGregor Commercial Law in Scotland Ch.1 Sale of Goods Act 1979. Unfair Contract Terms Act 1977 Sale and Supply of Goods Act 1994, the Consumer Credit Act 1974 Consumer Protection Act 1987 Unfair Terms in Consumer Contracts Regulations 1999 Sale and Supply of Goods to Consumer Regulations 2002 The Consumer Protection from Unfair Trading Regulations 2008 (SI 2008 /1277)


Sale of Goods Act 1979 (“Soga”) 1. THE SALE OF GOODS ACT 1979 (“SOGA”)

In order to understand SOGA it is worth understanding the various definitions used throughout SOGA, and indeed throughout the rest of this Chapter. You need to read the Act very carefully to understand what it is saying. What it says is what it means. Definitions Goods means corporeal moveables, which in Scotland means physical, tangible and transportable assets including things growing on or subsisting within land and which can be detached or extracted from land in order to be sold (SOGA, ss.61). The term “goods” does not include money, except in the context of antique coins and banknotes. Land and buildings are not “goods”. If the goods have yet to be obtained or manufactured, they are called future goods (SOGA, s.5). A sale is defined in SOGA, s.2 as a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. Does this cover (a) a swap or (b) barter? Property means the right of ownership. How does “property” (sometimes known as “title”) differ from possession? A contract of sale of goods may be absolute or conditional (SOGA, s.2(3)). An absolute contract of sale is one where the property is transferred without anything needing to be done first. Where the transfer of the property is to take place after the completion of some act, or after a period of time, the contract is not a contract of sale, but an agreement to sell (SOGA, s.2(5)). An agreement to sell turns into a sale once the act has been performed or the requisite time has elapsed (SOGA, s.2(6)). Breach of contract occurs where a term of the contract is broken by one of the parties to the contract. If a term of the contract is broken by the seller, the buyer is entitled to 32

• • •

claim damages for his loss (SOGA, s.15B(1)(a)), but if it is a very serious breach of a term (known as a material breach) the buyer is entitled to reject the goods (i.e. to send them back to the seller without payment) and to treat the contract as repudiated (i.e. to refuse to recognise the continuing existence of the contract) which means he can ask for his money back.(SOGA, s.15B(1)(b)).

A material breach is a significant or serious breach as opposed to a trivial or minor breach of a term of the contract. SOGA, s.15B(2) states that in a consumer contract (to be explained later) any breach by the seller of a term in the contract as to the quality of the goods or their fitness for the purpose for which they were supplied (SOGA, s.15B(2)(a)) is a material breach. A consumer contract is defined in the Unfair Contract Terms Act 1977 (“UCTA”) as one where: (a) either the seller or the buyer is a consumer (i.e. someone not dealing, or holding himself out as dealing, in the course of a business) and the other party is dealing in the course of a business; and (b) the goods which form the subject of the contract are goods that are of a type ordinarily supplied for private use or consumption (UCTA, s.25(1)). If there is a dispute about the nature of the consumer contract, it is for the party who says that the contract is not a consumer contract to prove that this is the case (UCTA, s.25(1)). Risk is the term used to denote the exposure of the goods to the danger of loss or damage. Why is this important? Damages is the term used to describe the amount the court may award to cover the difference in value between the value of the contract if it had taken place properly and what the actual value turned out to be. In the context of a seller’s breach of contract, it is the estimated loss to the buyer directly and naturally resulting, in the ordinary course of events, from the breach (SOGA, s.53A(1)). Damages in general aim to restore or bring the claimant to the position he ought to be in if the contract is performed properly, but damages are not meant to be penal in nature. Normally damages will cover the cost of repair, upgrading to the expected standard, or the value of the loss occasioned by the seller’s delay or other fault. Interest is usually allowable as part of the damages. Where there has been bodily injury or consequential damage to property as a result of the faulty goods, there may be damages for these as well (SOGA, s.53A), though such damages are: (a) only available to the buyer and not to others who may be affected by the faulty goods; and (b) may only be claimed against the seller.


Under the common law, unless the buyer has specifically drawn the seller’s attention to matters which are important to the buyer (such as the need for the supplied goods to be ready by a certain date because some other matter was dependent on the goods being ready), the seller will not normally be liable for any further economic loss arising out of the seller’s delay or fault (Hadley v Baxendale (1854) 23 LJ Ex 179). 2. EXPRESS AND IMPLIED TERMS In contracts of sale there are usually express terms, which are ones clearly spelt out, and implied terms, which are not. An implied term is one that is deemed to be in the contract unless it is specifically disapplied in the actual contract, and even then the attempt to contract out of the implied term may in certain circumstances be declared void by the courts. In a consumer contract, you cannot contract out of the implied terms (with the exception of the implied terms under s.12). The implied terms in SOGA, ss.12, 13, 14 and 15 all impose “strict liability”. If the seller breaches the implied terms he will be liable, and it does not matter whose fault caused the breach. Furthermore, if the contract is silent on any of the undernoted matters the implied terms will automatically apply. The implied terms are that: (a) The seller has the right to sell the goods (SOGA, s.12(1)). Rowland v Divall [1923] 2 KB 500, McDonald v Provan (of Scotland St) Ltd 1960 SLT 231. (car welded together) (b) Up to the moment when the property is to pass to the buyer, there is no charge or encumbrance over the goods, or if there is, it must be disclosed to the buyer (SOGA, s.12(2)(a)). A “charge or encumbrance” is a term of English law and means that some-one else has some right in the goods, thus preventing their sale; (c) Irrespective of the time that the property is to pass, the buyer will enjoy quiet possession of the goods except to the extent of any disclosed charge or encumbrance (SOGA, s.12(2)(b)). Niblett Ltd v Confectioners Materials Co.

[1921] 3 KB 387. (d) Where either from the terms of the contract, or from the circumstances surrounding the contract, it is apparent that the seller or a disclosed further person does not have full title (i.e. ownership or the right to sell), provisions


(a), (b) and (c) continue to apply but the seller or other disclosed further person will only be liable to the extent of what he has not disclosed (SOGA, s.12(3),(4), and (5)). Unless it is made clear by the seller to the buyer that the seller is only transferring such (limited) right as he may have (as, say, when an administrator is selling a company’s assets under the powers given to him under a floating charge (SOGA, s.12(3))), any attempt to contract out of SOGA, s.12 is automatically void under UCTA, s.20(1)(a). Further implied terms are that: (e) Unless the contract of sale specifically says so, a stipulation as to when payment for the goods must be made is not deemed to be “of the essence of the contract” (i.e. a material matter which will entitle the seller to claim that the contract has been breached (SOGA, s.10(1))). (f) Goods sold by description will correspond with their description (SOGA, s.13(1)) (Beale v Taylor [1967] 1 WLR 1193) (another welded car: “Herald, convertible white, 1961”). The bulk of goods should correspond with any sample (as well as with their description if appropriate) (SOGA, s.13(2)) and even if a buyer selects his goods, his purchase may if necessary still be a sale by description if the buyer has relied on a description (SOGA s.13(3)). If the bulk doesn’t correspond with the sample, in a consumer contract, that would be a material breach. (g) Where goods are sold in the course of a business (but not necessarily otherwise), the goods supplied must be of “satisfactory quality” (SOGA, s.14(2)). “Satisfactory” is defined as meeting the standard that a reasonable person would regard as satisfactory, taking account of the description of the goods, the price (where relevant) and all other relevant circumstances (SOGA, s.14(2A)). “Quality” means the state and condition of the goods (SOGA, s.14(2B)), taking into account the fitness for the purpose for which the goods were supplied, the goods’ appearance and finish, freedom from minor defects, safety and durability (SOGA, s.14(2B)(a) to (e)). Clegg v Anderson [2003] 1 All ER (Comm) 721 (ocean going yacht costing £250K had a very heavy keel (heavier than the stated specification) which made the rigging unsafe –

therefore unsatisfactory) , Thain v Anniesland Trade Centre 1997 SLT 102 (Sh Ct) (buyer paid £3,000 for a six year old Renault with 80,000 miles on the clock; its gearbox made an awful noise after two weeks and ten weeks later packed up; the sellers refused to replace it and the


SP agreed that they did not have to – unreasonable to expect durability of

such a beat-up old car). However, if defects or unsatisfactory matters are especially drawn to the buyer’s attention, or where the buyer examines the goods and he ought to have noticed the defects, or in the case of a sample if a reasonable examination of the sample would have made the defects apparent, the protection afforded by SOGA, s.14(2) as to satisfactory quality is withdrawn (SOGA, s.14(2C)). Bartlett v Sidney Marcus Ltd [1965] 1 WLR 1013 (seller drew buyer’s attention to the fact that a Jaguar car he was selling had a defective clutch which would have cost £3 to fix. The buyer could have had the seller fix it but instead bought the car at a discount of £25 and had it repaired by his own garage which cost him £84. He then sued for the cost and lost, as the fault had

been drawn to his attention) Under SOGA s.14(2D), when the contract is question is a consumer contract, the “relevant circumstances” referred to in s.14(2A) include any advertising and labelling. If the contract is a consumer contract, and the goods are not satisfactory, breach of this term counts as “material”. (h) Where the buyer explains to the seller the purpose for which the goods are being bought, the goods must be reasonably fit for that purpose (Grant v Australian Knitting Mills Ltd [1936] AC 85)(woolly knickers impregnated

) (even if that with dermatitis inducing chemical discomfort purpose is not the usual use for those goods) unless circumstances show that the buyer was not relying on the seller’s skill and judgment in satisfying that purpose or where it was unreasonable of him to rely on the seller’s skill and judgment (SOGA, s.14(3)) (Griffiths v Peter Conway Ltd [1939] 1 All ER

658). Where it is perfectly understandable that the buyer is relying on the seller’s skill and judgment, the seller will be liable (Ashington 36

Piggeries v Christopher Hill Ltd [1971] 1 All ER 847 (HL) (buyers relied on seller’s skill in providing food for mink on a mink farm. The food turned out to be fatal to mink, though at the time of making the food no-one could have known mink couldn’t eat it. Nevertheless, the buyer relied on the seller and so could claim.)

S.14(3) applies to any seller of any goods in the course of a business, even if the goods in question are not those normally sold by the seller (Stevenson v Rogers [1999] QB 1028) (in this case a fishing boat was being sold by a commercial fisherman – the sale of the boat was still held to be in the course

of a business) (i) The above terms apply to a seller’s agents in the course of the seller’s business, and to agents for sellers not in the course of business, unless the fact that the seller is not in the course of business is already known to the buyer, or the fact of the seller’s not being in business is brought to the attention of the buyer (SOGA, s.14(5)). (j) Where there is a sale by sample, the bulk will correspond with the sample in quality and the goods will be free from any defect making the quality of the goods unsatisfactory, which would not be apparent on a reasonable examination of the sample (SOGA, s.15). Godley v Perry [1960] 1 All ER 36 (wholesaler liable to a retailer who sold the wholesaler’s dangerous toy

catapults) (k) If a term of the contract is broken by the seller, the buyer is entitled to • claim damages for his loss (SOGA, s.15B(1)(a)), • but if it is a very serious breach of a term (known as a material breach) the buyer is entitled to reject the goods (i.e. to send them back to the seller without payment) and • to treat the contract as repudiated (i.e. to refuse to recognise the continued existence of the contract) (SOGA, s.15B(1)(b)).


SOGA, s.15B(2) states that in a consumer contract any breach by the seller of a term in the contract as to the quality of the goods or their fitness for the purpose for which they were supplied (SOGA, s.15B(2)(a)) is a material

breach. See J&H Ritchie Ltd v Lloyd Ltd 2007 S.C. (H.L.) 89; In a consumer contract, breach of this term would be “material”. 3. The exclusion of implied terms It is not possible in any contract of sale to which SOGA applies to contract out of SOGA, s.12 (UCTA, s.20(1)) except, as stated above, to the extent that someone who does not have full title discloses his title as being less than full and discloses all charges in which case the only person who may destroy the buyer’s possession of the goods is a disclosed holder of a charge (SOGA, s.12(4), (5)). It is also not possible to contract out of the provisions of SOGA, ss.13 to 15 (referred to in paragraphs (f) to (j) above) in a consumer contract (UCTA, s.20 (2)). You can contract out of these implied terms in a commercial or non-consumer contract if the relevant contracting-out clause is “fair and reasonable” as defined in Unfair Contract Terms Act 1977 s.24. This states that to define what is fair and reasonable, regard should be had to the circumstances known to, or which ought reasonably to have been known to, the parties at the time the contract was made. You can also look at UCTA, Schedule 2 which lays down various guidelines as to: • the abuse of any strength of bargaining power; • the effect of any inducements to accept the contracting out clause; • normal business practice in the trade concerned or between the parties; • the practicality of compliance with any condition without which liability would be excluded; and • whether the goods were specially made or adapted to the buyer’s particular order. As regards the contracting out from implied terms (other than those specified in the previous paragraph), it is open to the parties to make such provisions as they choose, either expressly, by course of dealing, or by “such usage as binds both parties to the contract”, being actions which indicate that both parties do intend to be bound by any contracting-out of the relevant implied terms and have an interest in being contracted out (SOGA, s.55(1)).



Further exclusion clauses Under the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”), , where consumers are required to enter into contracts where the opportunity for individual negotiation is not available (as in standard term contracts for such things as satellite televisions, portable telephones, etc.), consumers will not be bound where a non-negotiable term is “unfair” (UTCCR reg.8). Unfairness is judged by the criteria of • being contrary to the requirements of good faith, • being significantly in favour of the non-consumer party to the contract, and • being detrimental to the consumer (UTCCR, reg.5(1)), although the courts are also required to take account of the nature of the goods and services referred to in the contract and to all the circumstances attending the conclusion of the contract (UTCCR, reg.6(1)). The seller or supplier must ensure that each written term of the contract is expressed in plain language intelligible to the consumer (UTCCR, reg.7(1)). If a term is ambiguous or unclear, the term will be construed in favour of the consumer (UTCCR, reg.7(2)).


Capacity to buy and sell Not everyone is legally empowered to enter into contracts. Some individuals are incapax which means that by virtue of mental incapacity or other cause they are incompetent to contract. Where such individuals are sold necessaries (i.e. items such as food, drink and clothing) they must pay (and indeed are only obliged to pay) a reasonable price for them (SOGA, s.3(2)). The law on sales to children is regulated by the Age of Legal Capacity (Scotland) Act 1991 (“ALC”). Children below the age of 16 have no contractual capacity and their guardians (normally their parents) must act on their behalf. However, below the age of 16 it is acceptable for them to enter into contracts appropriate to their age and on terms that are “not unreasonable” (ALC, s.2(1)). Children aged 16 or over may enter into contracts of sale and purchase in the normal manner, except that between the ages of 16 and 18 if a contract is prejudicial to the child’s interest the courts may set it aside at any stage up to the child’s 21st birthday if a prudent adult would not have entered into the contract on the terms that the child suffered (ALC, s.3(1),(2)). If the child has lied about his age in order to enter the contract he will not be protected, and if he is in the course of a business he also loses the protection of the statute (ALC, s.3(3)).


FORMATION OF CONTRACTS OF SALE OF GOODS Contracts for sale of goods may be made • verbally, 39

• • •

in writing, by a combination of these means or may be inferred from the actions of the parties to the sale (SOGA, s.4).

In any event the implied terms, referred to above, are deemed to be part of the contract of sale (except where variation of the implied terms is both agreed by the parties and permissible, which in the case of consumer contracts it may not be). As with all contracts, there must be consensus in idem (agreement on the same matters), a buyer and a seller, both with the necessary legal capacity, a price (which in the absence of any other agreement must be reasonable under the circumstances (SOGA, s.8)) and goods (present or future) to be transferred along with the property in the goods. Where specific goods have perished without the knowledge of the seller before or at the time that the contract is made, there are clearly no goods so the contract is void (SOGA, s.6) and no contract of any sort exists. See Asfar & Co Ltd v Blundell [1896] 1 QB 123. (A cargo of dates was on a ship that sank in the Thames: the dates were recovered from the river as a “pulpy mass” infected with sewage and the owner claimed on the insurance. The insurers said that the dates were still serviceable as alcohol could be made from them. The courts said that while that might be true for a chemist it was not true for a businessman and that the goods had indeed “perished”. This case demonstrated what is meant by “perished”.)



Where there is an agreement to sell specific goods and goods subsequently perish through no fault of the buyer or seller before the risk passes to the buyer, the agreement is “frustrated” (i.e. cannot be brought to fruition) or avoided, the contract terminated, the seller has no obligation to deliver the goods (SOGA, s.7) and any money the buyer had given to the seller for the now perished goods has to be returned to the buyer. This rule does not apply in the case of unascertained goods, since the seller ought to be able to produce more (unperished) goods from his warehouse. As stated above goods generally must be of satisfactory quality and fit for the relevant purpose for which they were acquired. 7. When does the buyer get the property in the goods? This depends whether or not the goods are unascertained. If the goods are unascertained, no property in the goods passes to the buyer until the goods are ascertained (SOGA, s.16). Where the goods are specific or ascertained, the property in the goods passes when the parties intend the property to pass. This will normally be established by the terms of any written or oral contract, the conduct of the parties and any other circumstances (SOGA, s.17). However, sometimes buyers and sellers are not as careful as they should be and do not expressly state when they intend the property to pass, and in the absence of any other expressed intention, SOGA, s.18 has set up five rules


which may be used to establish the intention of the parties. If you wish to find out more about them they are in all the books. 8. Retention of title There is nothing to prevent the seller retaining a right of disposal until the fulfilment of some condition (SOGA, s.19). This is commonly known as a retention of title clause. Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339 When does risk pass? Why is this important? Unless there is some agreement to the contrary, the normal rule is that the risk in the goods remains with the seller until the property is transferred to the buyer, irrespective of the date of delivery to the buyer (SOGA, s.20(1)). As exceptions to the general rule above, if there has been any delay in the delivery of the goods, and the delay is attributable to one of the parties to the contract, the goods are at the risk of the party at fault to the extent of the loss which arose as a result of the fault (SOGA, s.20(2), Pignataro v Gilroy (1919 1 KB 459) (bags of rice were left at the seller’s by the purchaser: the purchaser was asked speedily to uplift them, (since it was the purchaser’s rice) but he delayed doing so. The rice was stolen but because it was the purchaser’s fault that the rice had not been uplifted it was the purchaser’s loss and the seller was not liable) and secondly, sellers and buyers acting as custodiers or carriers cannot rely on the above general rule to avoid the duty to take adequate care of the goods while goods are in their care or in transit (SOGA, s.20(3)). If, however, the sale is a consumer contract, the goods remain at the seller’s risk until they are delivered to the consumer (SOGA s.20(4)). Why is this? 10. Transfer of title/property If someone obtains goods which he does not own, and sells those goods without the authority or consent of the owner, the buyer gets no better title than the person purporting to sell the goods (SOGA, s.21(1)), also known by the Latin phrase nemo dat quod non habet (no-one may dispose of what he does not own). So if a thief sells stolen goods, the buyer may be required to hand the goods back to the true owner and sue (if he can) the thief for the value of the goods that he had to relinquish. Are there any problems with this rule? This rule is disapplied where the owner’s own conduct prevents him from objecting to the seller’s right to sell the goods (SOGA, s.21(1)). This is known in Scotland as personal bar (in England, estoppel) and very rarely happens in practice, except perhaps where an owner has permitted his agent to sell the owner’s goods and then changes his mind.



This rule is also disapplied where goods are being sold following an attachment or other court order, or where agents are acting on the owner’s behalf even though the owner had withdrawn his authority (SOGA, s.21(2)). Where the seller of goods has a voidable title (i.e. a title that could be challenged, as when a seller sells goods obtained by fraud) but that title has not been reduced at the time he sells the goods to a buyer, the seller may transfer title to the goods to a buyer who buys in good faith and without notice of the seller’s defect in title (SOGA, s.23). This arose in Macleod v Kerr 1965 SC 253. The other significant feature is that section 23 only applies in the context of a voidable title. Where the contract is void from the beginning, because, for example, the seller does not have contractual capacity, section 23 does not apply and the original owner will be able to retrieve his goods from the person possessing the goods. In the context of hire purchase, where a purported seller of a motor vehicle being acquired by the seller under a hire purchase agreement sells that vehicle, a buyer (other than a car dealer) buying it in good faith without notice of the finance company’s interest in the vehicle may obtain good title to the vehicle (Hire-Purchase Act 1964, ss.27-29). Why is this? Where a seller has sold goods to a buyer and received payment for the goods, but the goods are in the possession of the seller, if the seller inadvertently or fraudulently transfers or delivers the goods to a new buyer buying in good faith and without knowledge of the fact that the goods belong to the first buyer, the new buyer gets good title to the goods (SOGA, s.24). What can the first buyer then do? Sometimes a seller will deliver goods to a buyer but will retain the ownership of those goods , usually until he has been paid (commonly known as “retention of title” as permitted under s.19). If the buyer then delivers or transfers the goods to a sub-buyer who buys the goods in good faith and without notice of any rights of the original seller, the sub-buyer obtains good title to the goods (SOGA, s.25(1)) (Archivent Sales and Development Ltd v Strathclyde Regional Council 1985 SLT 154). Accordingly section 25(1) limits the applicability of retention of title clauses. This rule does not, however, apply in the context of conditional sale agreements regulated under the Consumer Credit Act 1974, s.25 or in the context of acquisitions by car dealers (referred to above). 11.

How is the contract of sale to be carried out? It is the duty of the seller to deliver the goods and the duty of the buyer to accept the goods and to pay for them, all in accordance with the terms of the contract for the sale of the goods (SOGA, s.27).


Unless the contract says otherwise, delivery and payment are concurrent, and both parties should be ready to perform their parts of the contract simultaneously. There are varied and pragmatic rules to govern such matters as where delivery is to take place (SOGA, s.29), the delivery of more or less goods than had been requested (SOGA, s.30) delivery by instalments (SOGA, s.32) and delivery to carriers, where generally delivery to the carrier is deemed to be delivery to the buyer; but in each of these events the precise details may be varied by agreement between the parties, and if the buyer is a consumer, delivery of the goods to the carrier is not delivery of the goods to the buyer (SOGA s.32(4)). Where the seller delivers goods to the buyer, the buyer must be allowed a reasonable time to examine the goods to see if they conform to the contract or to see if the bulk of the goods matches previously seen samples (SOGA, s.34). He is not held to have accepted the goods until he has been afforded these opportunities for examination even if he has signed an acceptance receipt (SOGA, s.35(2)). In a consumer contract, a consumer is not deprived of this right even if apparently made to do so by the terms of his contract (SOGA, s.35(3)). The buyer is held to have accepted the goods where • he tells the seller he has done so (SOGA, s.35(1)(a)), or where • he treats the goods in a manner which is inconsistent with the ownership of the seller, for example, where he uses them as security for some other transaction. Subject to the next paragraph, if a buyer retains the goods for a reasonable time without telling the seller that he is rejecting them, he is deemed to have accepted the goods (SOGA, s.35(4)). If the buyer asks the seller to repair the goods, the request does not signify acceptance (SOGA, s.35 (6)(a)); and even if the goods are delivered to someone else through a sub-sale the buyer may still be entitled to reject the goods within a reasonable time (SOGA, s.35(6)(b), J&H Ritchie Ltd v Lloyd Ltd 2007 S.C. (H.L.) 89). Where the goods are units within a bigger but ultimately indivisible set of goods, as, for example, one print within a narrative series of prints all within a limited edition, the acceptance of the one item is deemed to be an acceptance of all the items (SOGA, s.35(7)). 12. The buyer’s right of rejection and other rights If the goods have something wrong with them, the buyer may if necessary reject the goods, except • where he has accepted the goods in the circumstances outlined in the previous paragraph (SOGA s.35), or • where the breach by the seller of a term of the contract is not sufficiently material to entitle the buyer to reject the goods (SOGA, s.15B). Accordingly, if the courts decide in a case that the time for rejection of delivered goods is past, but the goods are still not to the buyer’s satisfaction in terms of quality, the buyer’s remaining remedy, assuming the claim is


justified, is damages arising out of the loss directly and naturally resulting from the breach of the contract in terms of quality (SOGA, s.53A). It is sometimes possible both to claim damages and to reject the goods (SOGA, s.15B). Unless the terms of the contract say otherwise, it is possible to have partial rejection, where the buyer is entitled to reject all of an entire consignment of goods but instead chooses to keep the satisfactory goods and reject the unsatisfactory goods (SOGA, s.35A). If a buyer legitimately rejects goods, he is not bound to return them to the seller unless the terms of the contract of sale say otherwise. He must, however, intimate his rejection to the seller (SOGA, s.36). If the buyer after a reasonable time delays or refuses to accept the goods when he should properly do so, the buyer is liable to the seller for the cost of storage and care of the goods (SOGA, s.37). If the buyer is a consumer, the time for rejection is now up to six months from the period of delivery, (SOGA, s.48A(3)). Under SOGA, s.48B the buyer (if a consumer) may require the seller to repair the goods if they are faulty, or to replace them within a reasonable time and with minimal inconvenience and expense to the buyer. As a further option, the same buyer can insist on the price being lowered instead (SOGA, s.48C). These remedies are subject to safeguards for the seller to allow him reasonable time to effect repairs or replacements (SOGA, s.48D), or to allow him to prove that the goods were conform to requirements in the first place (SOGA, s.48A(3)). See J&H Ritchie Ltd v Lloyd Ltd 2007 S.C. (H.L.) 89. 13.

Other rights for the buyer Where the seller neglects or refuses to deliver the goods to the buyer, the buyer may claim damages for non-delivery (SOGA, s.51). Equally, in the case of a contract of sale of specific or ascertained goods, the buyer may raise an action of specific implement to enforce delivery of the goods (SOGA, s.52). If a seller has provided a guarantee either from himself or the manufacturer, the guarantee must be in plain intelligible English and comes into effect at the time of delivery of the goods. It also allows the consumer to sue the manufacturer directly without involving the retailer (SSGR, reg.15). Why might this be useful?


The seller’s rights Where a seller has not been paid (the “unpaid seller”) he is entitled to retain the goods until payment while he possesses the goods, even if the property in the goods has transferred to the buyer, and in the event of the insolvency of the buyer, he may also stop any goods that are in transit to the buyer (SOGA, s.39(1)(a), (b)).


Where some of the goods have been delivered by the unpaid seller to the buyer, but the remainder has not, the unpaid seller may withhold delivery of the remainder pending payment. The unpaid seller also has a right of resale (SOGA, s.39(2)), subject to intimation to the buyer giving him a reasonable time within which to make payment. Where the unpaid seller is no longer in possession of the goods or they are still in transit to the buyer as above, he may raise an action for the price (SOGA, s.49(1)), or claim damages for non-acceptance where the buyer ought properly to have accepted and paid for the goods (SOGA, s.50). 15. DELICTUAL LIABILITY Problems with SOGA, s.14 and the duty of care If a seller sells goods whose defects cause damage to the buyer, the seller incurs strict liability under SOGA, s.14. However, under SOGA only the buyer may sue only the seller for the goods’ defects, as opposed to suing the manufacturer (who may be better placed to meet any claim). So if a buyer bought goods as a present for his uncle, his uncle could not sue the seller for any injury caused to him by the goods. What the buyer can sue for is the estimated loss directly and naturally arising in the ordinary course of events from the breach (SOGA, s.53A) and any consequential losses where those cause damage to the buyer personally or to his property—but not to the uncle or the uncle’s property. So what could the uncle do? He could make a claim for negligence arising out of a breach of the manufacturer’s general duty of care, under the common law, as in Donoghue v Stevenson 1932 SC (HL) 1. Or when handing goods over to the uncle, the nephew could put a card saying “To Uncle Bert, with all my love and all my rights under the Sale of Goods Act 1979”. More seriously, where a victim suffers injury from defective components in manufactured goods, he may raise an action against the producer of the goods under the Consumer Protection Act 1987 (“CPA”), which provides for strict liability for defective products. This provide a remedy for victims of defective products produced by a producer (commonly a manufacturer, but the term “producer” can also mean retailer if it is not apparent who the manufacturer is (CPA, s.2 and see next paragraph)). Victims making a claim still have to overcome the hurdles imposed by the permissible defences open to producers under CPA, s.4. It is not possible for the producer to contract out of the strict liability provisions (CPA, s.7) though it is possible for a victim to be contributorily negligent, whereupon any damages payable by the producer will be abated to the extent of the victim’s own negligence (CPA, s.4, referring to the Law


Reform (Contributory Negligence) Act 1945 and the Fatal Accidents Act 1976, s.5). 16. The liability of producers Producers may try to evade liability by claiming that they were not the manufacturers of a harmful product. Accordingly producers, if they are not the manufacturers themselves, may be held liable where they unreasonably delay or refuse to identify who the true producer is (CPA, s.2(3)), although this rule does not apply where goods are supplied other than in the course of a business, in order to protect the parties in private transactions (CPA, s.4(1)(c)). Businesses that produce their “own brand” products, such as supermarkets, are treated as if they were producers themselves unless they make it clear who the actual manufacturer is (CPA, s.2(2)(b)). Importers bringing in goods from outside the European Union are treated as constructive producers (CPA, s.2(2)(c)). There is no requirement to prove that a producer is negligent in order to assert a claim: it is enough to prove that the product was defective, i.e. that its safety is not such as persons generally are entitled to expect (CPA, s.3(1)), and safety in this context applies to property as well as to personal injury or death (CPA, s.3(1)). However, the victim still has to prove the damage, the defect in the product and the causal relationship between the two. 17. Protection for the manufacturer and the “state of the art” defence When this Act was under consideration it was recognised that too strict an application of the principle for the requirement of safety could lead to a stifling of inventive talent, and so there are safeguards in CPA, s.4 to protect the producer: (a) where the goods are manufactured in compliance with E.C. safety rules; (b) where the products were used without the producer’s authority (as when the products have been stolen); (c) where the products have not been supplied in a commercial transaction; (d) where the fault is attributable to some other producer’s misuse of the products; (e) where the fault lies in the overall design which is not of the producer’s making ; (f) where the defect did not exist in the product at the relevant time; (g) where the state of the art defence applies. The most significant safeguard is the “state of the art” defence in CPA, s.4(1)(e): that the defect was such that given the state of scientific and technical knowledge at the time, a similar producer of similar products would also have been unaware of the defect.



Prohibition on small claims and on claims for pure economic loss Under CPA damages are available solely for personal injury or damage to property (including land), though to discourage small claims, only claims where the damages would amount to more than £275 will be entertained by the court (CPA, s.5(4)). CPA, s.5 prohibits claims for pure economic loss since that would be dealt with under SOGA s.53A Claims under the CPA may be made only up to ten years after the product was supplied, and within three years of the later of the date of the injury or damage (subject to certain exceptions) (CPA, Sch.2, amending the Prescription and Limitation (Scotland) Act 1973).

Property Law Reading: Scots Law – a student guide Ch.7 Business Law in Scotland Ch. 11 Understanding Scots Law Ch 12 1. Previously we looked at contract law and the law relating to sale of goods. This part of the course is to do with a few very basic ideas relating to property. 2. Property is classified in two ways, dating back to Roman law. The first relates to its physical nature: is it “corporeal” (i.e. tangible) or “incorporeal”? The second is its ability to be moved around: is it “heritable” or is it “moveable”? 3. Corporeal property covers physical objects, such as land, goods, objects, furniture, cars, crops etc. 4. Incorporeal property covers rights given by law such as intellectual property (i.e. copyright, patents), a right to sue a person who owes you money, a right to have the benefit of a payment from an insurance policy, a right to receive rent, a contractual right, a right to receive money from your parent to pay for your upbringing, a right to withhold payment until completion of some action etc., a right to receive a legacy under a will etc. These have no physical presence but you can go to court to assert these property rights. Shares are incorporeal property. 5. Heritable property is normally land, but it also includes rights attached to land, such as salmon fishing, or certain mineral rights. The idea is that this property doesn’t move around. The ownership of heritable property has to be established by a land registration system. In England it is known as real property. Moveable property is stuff that can be moved around. The word “heritable” is used because originally the heir would succeed to the property without the need for any legal process. 6. One can combine these categories, as in heritable corporeal property, moveable incorporeal property etc.


7. There can be difficult questions as to whether something on land is heritable but if it can be detached, does it become moveable? What if it is moveable, but very difficult to remove? If it can’t be moved, it becomes a fixture by “accession”. Long-standing plants (fruit trees) “accede” to the land but yearly crops do not. 8. Another distinction in property law is between a “real right” and a “personal right”. This is important in the law of ownership of things. A real right (ius in rem) such as ownership of a thing or of land (dominium) is the best right you can have. A right which you can only enforce against a person (ius in personam) is only as good as the solvency of the person against whom you have the right. This distinction is important in the context of granting security for a loan. 9. How is the ownership of property transferred? It depends on what it is. If it is goods, the ownership is transferred usually on payment but technically it depends on what seller and buyer have agreed (SOGA 1979). If it is land, there is normally an initial contract followed up by a registration of the “disposition” of the land in question in the Land Register. Registration means that no-one else can own it, and there is then no doubt about it. Registration gives a real right. Without registration there is no worthwhile right at all. For a lease, the tenant never actually gets ownership but he gets a right of use, usually (depending on the length of the lease) on the delivery of the lease (commonly simultaneous with the first payment of the rent) or registration as above. 10. What are the benefits of ownership? You can transfer the property (though this may be subject to certain restrictions). You can prevent other people using it. You can utilise the “fruits” thereof (e.g. enjoy fishing rights, mineral rights, etc.) You can grant leases of it or some of it. You can exploit it by building on it (subject to restrictions like planning permission) or by destroying buildings (subject to conservation orders). You can borrow against its value, provided there is security documentation (e.g. a standard security (mortgage)) or a floating charge. 11. What can’t do you with your property? You can’t use your property in a way that creates a nuisance to other people (e.g, pollution). You can’t use it in a way contrary to statute or some other prior condition in the titles (e.g. making candles out of tallow). 12. Can you co-own something? Yes, “common property” is usually found by couples co-owning a house. Each has a share in the overall value of the house,


but doesn’t physically own one half of the building. Each co-owner is entitled to transfer (subject to the titles) his share in the common property. Each coowner can insist on an action of division and sale if necessary. 13. Leases vary according to the type of property. There are commercial leases which load nearly all the responsibility for everything onto the tenant; shortish domestic/residential leases which are controlled by the Housing (Scotland) Act 1987; long-term residential leases which are much less controlled; agricultural leases which are designed to allow the children of tenant farmers some degree of opportunity to take over their parents’ farms; sporting leases and mineral leases etc. 14. Borrowing against the value of property. If you take out a standard security over land and buildings it must be registered in the Land Register. This protects the lender’s interest and gives him the right of repossession (subject to certain anti-homelessness legislation) of the property, and throwing out the owner (if he hasn’t paid his mortgage. Tenants’ rights are to some extent protected. 15. Borrowing against the value of moveables is commonly effected by pawnbrokers and regulated by the Consumer Credit Act. Note the importance of delivery. It is also possible to pledge assets, such as whisky in barrels, provided the whisky is under the control of the lender. Life policies and intellectual property rights can be assigned (in writing) to a lender. Companies may grant floating charges which will give them a right over some of a company’s assets in the event of a company’s liquidation.

Employment Law

Employment law Reading: Scots Law A Student Guide Ch.14 Understanding Scots Law Ch.9.

Employment law is a mixture of common law (especially contract and delict) and statute. In addition European Law has introduced certain directives mostly to benefit employees. It is a very politicised area of law. In general Labour governments increase the amount of employment law and Conservative ones reduce the amount.


Employment disputes are sometimes resolved through the ordinary courts and sometimes through specialist Employment Tribunals. ETs have normally an employment lawyer as chairman and two independent lay members, one usually from a managerial background, the other from a union background. A decision of one ET is not binding on another, albeit that it may be influential. The maximum award from at ET is about £70K. If you want anything bigger, you’ll have to go the ordinary courts. There is an appeal from an ET to an Employment Appeal Tribunal and from there to the Inner House of the Court of Session, but only on a point of law. The following items may be heard by ETs: National minimum wages Access to records Redundancy payments Discrimination on the grounds of age, race, religion, sexual orientation and disability Holiday pay and time off Unlawful deductions from wages Equal pay Appeals against Health and Safety improvement notices and other notices Failure to consult employees on business transfers or redundancy Exclusion from trades unions Refusal of employment on grounds of membership of a trade union Written statements of terms of employment or reasons for dismissal Unfair dismissal (see later) ET Litigants may be legal aided, and claims may be time-barred if not made within three months of the right being infringed. At the heart of much employment law is the question: is the litigant an employee or self-employed? If he is employed, he has all the rights of employment law (particularly the Employment Rights Act 1996) open to him, but if he is selfemployed he only has such rights as he has bargained for. However, a new concept of “worker” which can cover self-employed people and enables the provisions of the Sex Discrimination Act 1975, the Race Relations Act 1976 and the Disability Discrimination Act 1995 to apply to them even if not technically employed by the employer. There are also special protective provisions for agency workers where a contract of employment between a worker and an “end-user” (i.e. the organisation that approaches the agency to find a worker for it) may be implied from the facts (Brook Street Bureau (UK) Ltd v Dacas CA 2004 EWCA Civ. 217) and where the end-user insists on a particular worker and where the worker only works for the end user. However, where the end-user cannot insist on a particular worker and the worker is not working exclusively for the end-user, James v London Borough of Greenwich [2007] IRLR 168 indicates that the worker is not employed by the end-user. The issue is between a contract of service (i.e. an employee) or a contract for services (not an employee). So how does one tell whether a person is an employee or not?


The control test Performing Rights Society v Mitchell and Booker [1924] 1 KB 762 Provision of equipment Can the person hire other staff to help him? Who bears the financial risk? Opportunity to profit The label the parties put on their relationship is not conclusive as to what the relationship actually is, but the genuine intention of the parties may still have some validity. Tax and NI status Mutuality of obligation: O’Kelly v Trusthouse Forte plc [1983] ICR 728 Nethermere (St Neots) Ltd v Taverna [1984] ICR 612 Carmichael v National Power plc [2000] IRLR 43 As employers also have to pay NI and PAYE on employee’s wages, but don’t have to pay anything for self-employed people, they have an incentive not to have employees. Equally it is generally advantageous for a person to be an employee since he then gets paternity right, entitlements to pensions etc.

Creation of the employment contract This may be by any of the normal methods of creating a contract, but it is advisable to have them in writing. Even so, certain items of information must be given by way of some form of statement to any employee, these being The name of the employee The name of the employer Date the employment began The scale, rate or method of calculation of remuneration (i.e. payment) Working hours Holiday pay Sickness pay Pension arrangements Notice requirements Job title The period of employment (if a fixed term) The place of work Any collective agreements affecting all employees Terms applicable to working outside the UK An indication where to find any disciplinary rules Grievance procedure rules All this information must be provided to the employee within two months of the start of the employment. The information itself is not a contract: the contract may well be a separate document, but the information still needs to be provided. If a contract is reduced to writing, the assumption is that it contains all the terms that were meant to be in the contract (Contract (Scotland) Act 1997) but if the written contract does accurately reflect what was meant to have been in the contract, it is


possible to bring extrinsic evidence to the court to show what was meant to have been in the contract and thereby to have the contract amended. Wages If wages are specified in the contract, clearly they must be paid at the agreed rate. Unilateral reduction of wages by the employer entitles the employees to continue their contracts and sue for damages (Rigby v Ferodo Ltd [1987] IRLR 516). Employers are expect to pay Statutory Sick Pay to employees but they do so as agents for the Government and are reimbursed by the Government. Employers may not make unauthorised deductions from wages (Employment Rights Act 1996 s.13) but they may transfer their employees to less well paid work (provided the contract provides for this)(Hussman Manufacturing Ltd v Weir [1998] IRLR 288). If the employee is in the retail trade, the employer may not take more than10% of the employee’s wages if there is a shortfall in the cash takings or stock. There is a national minimum wage which goes up from time to time, and employers can be forced to adhere to this. HMRC will enforce this, as may employees who “shop” their employers. Working Hours The Working Hours Regulations 1998 prevent workers working more than 48 hours per seven day period unless they are domestic servants, workers who can determine their own hours (i.e. generally those in the professions) or where the worker has agreed in writing to work longer hours. There are special provisions for night workers and for rest periods for workers working long hours. Workers are entitled to four weeks paid annual leave (1998 Regulations reg.13). Workers are allowed time off for trade union duties, public duties and jury service. They may also take time off for retraining or to look for new work if they have worked for over two years and are being made redundant. Safety reps. may take time off for training and young employees are entitled to reasonable time off with pay for education and training. Maternity rights enable a worker to take 26 weeks paid Ordinary Maternity Leave and a further 26 weeks Additional Maternity Leave for women who have had 26 weeks continuous employment by the 14th week before their anticipated week of childbirth. The Mum gets Statutory Maternity Pay. There is also a right to return to work. Paternity rights enable a Dad (or whatever) to two weeks’ leave within a period of 56 days of the birth. The Dad gets paid too. His right to return to work is secured. There are special provisions for adoption. Workers are entitled to flexible working arrangements (Employment Act 2002 s.47) for parents (etc.) who had a child under 6 and who has worked for the employer for over 26 weeks. It enables the parent to insist to the employer that he give the parent certain changes to his or her hours. The employer has limited grounds for refusal. Workers are entitled to some time off for “domestic incidents”, such as when a child is unexpectedly ill at school. Mutual trust and confidence An employer and an employee should behave with mutual trust and confidence in each other, and the absence of this entitles the victim to damages (Malik v BCCI [1997] IRLR 462, TSB Bank plc v Harris [2000] IRLE 157). An employer is also entitled to expect a degree of obedience but not if the employer’s requirements are clearly oppressive and intolerable (Johnstone v Bloomsbury Health Authority [1991] IRLR 118) or pretty well impossible to carry out (United Bank Ltd v Akhtar [1989]


IRLR 507). Employees should not be expected to undertake risky activities for which they are unsuitable (Ferrie v Western District Council [1973] IRLR 162). An employee is expected to show fidelity to his employer but that does not necessarily preclude him working for a rival firm in his own time (Graham v Paton 1917 SC 203). He should not disclose trade secrets. He may have restrictive covenants imposed upon him, even worldwide ones (Bluebell Apparel v Dickinson 1980 SLT 157). Employee’s liability to the employer If an employee messes up and causes his employer loss, the employee could be sued by the employer (or his insurer) Lister v Romford Ice and Cold Storage Ltd [1957] AC 555. Frustration A contract of employment may become impossible to perform, in which case it is said to be “frustrated” (F C Shepherd Co Ltd v Jerrom [1986] IRLR 358). Can you be forced to work for a particular employer? As a contract of employment is one for the provision of personal services, specific implement is not available (Trade Union and Labour Relations (Consolidation) Act 1992 s.236). So you cannot be forced to work for someone, but you might have to pay your employer damages for your refusal to do so. Can you receive pay in lieu of notice? Generally, yes, since the worker is no worse off than he would have been. Unfair dismissal This is dismissal where the employer has either not acted reasonably or acted contrary to various statutory rules (Employment Rights Act 1996, Transfer of Understakings (Protection of employment) Regulations 1981, Trade Union and Labour Relations (Consolidation) Act 1992, ACAS Code of Practice). This is a matter for Employment Tribunals. To be protected by the rules, the employee must have been continuously employed for at least a year (subject to permitted reasons for time off (see above))(since 2011 two years). The rules still protect employees over the age of 65. An employee cannot contract out of his statutory rights save where there has been some agreement involving ACAS or made some other agreement with the benefit of independent advice. The police, armed forces, and certain civil servants are contracted out. To claim your rights under unfair dismissal, you do genuinely need to be dismissed and to be aware of it. An employee may also claim “constructive dismissal” which is where he terminates the contract (with or without notice) because of the employer’s conduct towards him. This is a tangled area of law, but an employee may not terminate the contract without notice merely because he thinks the employer’s conduct unreasonable. What the employer does must be something that is significant, or shows that that the employer does not see fit to adhere to the important terms of the employment contract. Once it has been established that the employee really is dismissed, it is for the employer to show that the dismissal was for a potentially fair reason, these being indicated in the Employment Rights Act 1996 s.98(2). Fair reasons include:


Related to the capacity or qualifications of the employee Related to the conduct of the employee (Thomson v Alloa Motor Co Ltd [1983] IRLR 403) Redundancy of the employee Contravention of a statutory requirement (e.g. to have a valid registration as a doctor) Retirement Some other substantial reason justifying the dismissal (usually criminal conduct (Singh v London Country Bus Services Ltd [1976] IRLR 176), sexual proclivities (Saunders v Scottish National Camps Assoc. [1981] IRLR 277 etc. Refusal to accept changes of conditions provided it can be shown that there are pressing business needs justifying the reason (Hollister v NFU [1979] IRLR 238) Where there has been a transfer of business and there is “economic, organisational or technical reason entailing charges in the workforce of the transferee, or transferor” (TUPE Regs 2000 reg.7) The employer may only produce in court evidence of which he was aware at the time of the dismissal, not later. The ET will then decide whether or not the dismissal was unfair and falls within the band of reasonable dismissals. Effect of Employment Act 2002 This was designed to make employers set up sensible grievance procedures. Normally an employer will first write to the employee about the employee’s conduct, invite him to discuss it, hold the meeting before any disciplinary action, inform the employee of any decision and tell him of his appeal rights, and after any appeal tell him of the final decision. The Employment Act 2002 makes much play of “procedural fairness” so unless the employer’s procedure is followed pretty much to the letter, any dismissal will be unfair. This particular rule has given rise to much misunderstanding and is likely to be revised shortly. There is a number of automatically unfair dismissals which echo the permitted grounds for time out: so to dismiss someone for his trade union activities would be unfair, as would be dismissing someone for asserting a statutory right. TUPE regulations 2006 In essence these protect employees when a business is being transferred, so that the existing employee’s rights are transferred and the business’s new owner has to take account of them. An employee may not be dismissed because of a transfer unless the dismissal was for an “economic, technical or organisational reason entailing changes in the workforce” (reg.7(2)). Whistleblowers Under the Employment Rights Act 1996 s.103A whistleblowers are protected. Even so, everybody still hates them. Remedies under the Employment Rights Act 1996.


The available remedies are re-engagement (in practice, rare), compensation (basic award, compensatory award and occasionally additional award where the employer will not re-employ). Redundancy Provided an employee has been continuously employed for two years, he is entitled to a payment if he is dismissed on the grounds of redundancy. If he is offered reasonable other employment he should take it unless the circumstances belie that: Cahuc, Johnson and Crouch v Allen Amery Ltd [1966] ITR 313. Discrimination Sex Discrimination Act 1975 Equal Pay Act 1975 There are a few exemptions where one sex may be used in preference to others (e.g. male or female parts in plays, lighthouse keepers, prison wardens, work in certain foreign countries etc.) Specifically, harassing of someone (of either sex) is actionable under s.4A of the SDA or the Protection From Harassment Act 1997. There are provisions to protect transsexuals or and to protect someone from being discriminated against on the grounds of their sexual orientation. Race Relations Act 1976. This is very similar to the SDA. Again, there are specific provisions to allow for the situation where someone of a particular race may be legitimately preferred (e.g. a Thai waiter in a Thai restaurant). Disability Discrimination Act 1995. This sets up extensive definitions of disability and puts the onus on employers to ensure that their premises are suitable for disabled persons, and that disabled persons (with certain exemptions) are not precluded from applying for or retaining jobs. The Human Rights Act 1998 guarantees freedom of religion and belief and employers may not discriminate against someone because of his religion (again, with certain exceptions, such as being a rabbi or imam). Employment Equality (Age) Regulations 2006 prevent employees being discriminated against because they are wrinkly. There are various bodies that will enforce these rights, now under the umbrella of the Equality and Human Rights Commission. Part-time workers are protected to some extent by the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000. Health and Safety Regulations This is a large area of law, beyond the ambit of the course, but if you are an employer, or potential employer, you will need to be aware of the regulations:



Purpose and effect of bankruptcy; constitution of bankruptcy; the trustee in sequestration; the ingathering of the debtor's estate; distribution to creditors; trust deeds for creditors; discharge of debtor. Black Ch.17 (first part) Davidson and MacGregor Ch.9 ??? Gloag and Henderson Ch.54 There is also an excellent website run by the Accountant in Bankruptcy, at . Once there you can access the Bankruptcy (Scotland) Act 1985, available at What is good about this version is that it is the up to date version with all the amendments in. You should also look at the Bankruptcy and Diligence etc (Scotland) Act (known as the BAD Act) at You should read all you can of the AIB website as it contains much useful information. 1. Definitions The process of bankruptcy in Scotland is known as sequestration, and is governed by the Bankruptcy (Scotland) Act 1985, as amended by the Debt Arrangement and Attachment (Scotland) Act 2002 and by the BAD Act The bankrupt is known as the debtor. The person who looks after a debtor’s affairs once he has been sequestrated is known as the trustee in sequestration. A trust deed is a form of bankruptcy where the debtor transfers all or most of his assets to a trust for his creditors, which is then administered by a trustee for the creditors’ benefit. Trust deeds may become “protected” trust deeds. A trust estate is the body of assets that the trustee looks after and comprises those of the debtor’s assets available for division amongst creditors. The person who keeps an eye on trustees etc is the Accountant in Bankruptcy (“AiB”). He, or his delegates, may also act as a trustee, particular for small estates. There are special cross-border provisions in the EU designed to cope with the fact that nowadays debtors commonly have assets in more than one country. The provisions are known as the Insolvency Scotland Regulations 2003 (SI 1346/2000). They enable “main” proceedings to be brought in the debtor’s main place of residence or business, and subsidiary ones elsewhere; each country’s trustees are to co-operate with each other and to give effect to each other’s rules, transfer surpluses etc where available etc. To be bankrupted, you must have had to pay all your money to the person who bought hotels in Mayfair and Park Lane. You must in law be apparently Reading


insolvent. For the definition of apparent insolvency see Bankruptcy (Scotland) Act 1985 s.7. 2. Apparent insolvency is triggered by (amongst other things) * sequestration; * bankruptcy elsewhere in UK; * written notice that the debtor can’t pay his debts; * the granting of a trust deed for creditors (see later in the course); * the expiry of the induciae of a charge (14 days) without payment (irrespective of the size of the debt); * the attachment or seizing of the debtor’s assets in pursuance of a summary warrant for rates or taxes without payment after 14 days; * a receiving order in England and Wales; Do the above mean that he is actually insolvent? * But the next item definitely makes him apparently insolvent: the failure to pay a debt or debts amounting to more than £750 within 3 weeks following notice in the prescribed form to do so without the debt being disputed (s.7(1)(d)). This does have to be a valid claim: if it is disputable then it will not do as a ground for sequestration.


Who may petition for sequestration ? The debtor may by means of a “debtor application” to the AiB: * provided the debtor’s debts are greater than £1,500, there has been no previous award of sequestration within the previous five years and the debtor is apparently insolvent or granted a trust deed which was unable to be a protected trust deed (s.5(2B)). A creditor may in the sheriff court, provided * the debtor has been apparently insolvent (see para.2 above) within the last four months, and * the creditor is qualified (i.e. the debt must be for over £3,000) unless he joins up with other creditors to make up the sum of £3,000 (s.5(2)(b)). The trustee under a trust deed may (s.5(2C)) provided * the debtor has unreasonably failed to comply with any term of the trust deed, or any order arising therefrom, or * the trustee asserts that it would be in the best interests of the creditors to have an award of sequestration. There are special provisions for LILA (low income, low asset) debtors to allow them to apply for to the AiB for sequestration (BSA 1985 s.5A), and separately other provisions for the very poor to have themselves certified as being eligible for sequestration (s. 5(2B)(c)(ib)). Who may be sequestrated ? * ordinary human beings (not estate agents as they are a form of insect life somewhat less advanced than cockroaches);



Estate agent cockroach * the estate of a dead debtor; * trust; * partnerships and limited partnerships; * bodies corporate and unincorporated (e.g. associations, clubs etc.) but not companies incorporated under the Companies Act or limited liability partnerships under the Limited Liability Partnership Act 2000. The debtor must habitually reside in Scotland or had an established place of business in the 12 months prior to the presentation of the petition for sequestration (s. 9(1),(4)). 5. Who may be a trustee ? Either a nominated insolvency practitioner, or the Accountant in Bankruptcy (see later). The award of sequestration can be granted by the Accountant in Bankrutpcy (for debtor applications) or by the sheriff (for all other applications) The date of sequestration The date of sequestration is significant for the calculation of certain periods of time. The date of sequestration is the date of the award where a debtor asks for his own sequestration (s.12(4)(a)) or the date of warrant of citation to the debtor where a creditor or a trustee under a trust deed seeks an award from the sheriff court (s.12(4)(b)) (in each case known as the “first order”). From the date of sequestration run the various time periods within which creditors may challenge the debtor’s antecedent transactions. Once the first order (as above) has taken place, the clerk tells the Register of Inhibitions in Meadowbank House (s.14). This means that the debtor is retrospectively effectively prevented from selling any heritage he may own with effect from the date of sequestration. Once the award is granted, all the debtor’s estate at the time of the award until his discharge belongs to his creditors. The trustee is thereupon appointed (s.2). Provided all the procedure is correct, the court has no discretion in granting the award, and must grant it there and then (“summarily”). But if the procedure is not correct, or the debtor has paid up, the award will not be granted. It is possible to recall an award of sequestration within certain time limits under limited circumstances (if for example the award was wrongly granted) (ss.15 - 17). The trustee looks after the debtor’s assets. If there is no nominated trustee or there would be no money to pay one, the Accountant in Bankruptcy will be the trustee , and he usually is appointed). He meets with the debtor to find out why he became insolvent, demands a list of his assets and liabilities within 7 days (s.19), and warns him of the dangers of continuing to obtain credit in excess of £250 without warning any lender first (s.67(9)). The debtor should neither pay any bills, nor let people remove his assets. The trustee takes possession of all







the debtor’s assets (s.18), posts notices in the newspapers and puts a notice in the Register of Insolvencies (that’s when blacklisting from the credit reference agencies begins). 12. The trustee must convene a first statutory meeting of creditors within 60 days of the date of sequestration (s.21). The AiB may convene one if it is worthwhile (s.21A). At the meeting there will be a statement of the debtor’s affairs, and the creditors, under the eye of the chairman (usually the trustee or AiB or his representative, but it might be a creditor (s.23)), will have their claims examined. Each creditor must vouch his claim (s.22). The trustee or AiB will then consider what the chances of repayment are (s.23(3)(c)) in the light of anything the debtor may say at the meeting. At the meeting the trusteee is confirmed in his position and given the authority to carry out his tasks (s.25(2)). Commissioners may also be elected from the body of creditors, to advise the permanent trustee (s.30). Vesting of the estate in the trustee What does this mean? The confirmation states that the trustee is vested in the debtor’s assets as at the date of sequestration. This places the ownership of the debtor’s goods and property in the trustee’s hands (s.31). 16. He may dispose of heritage, complete title etc. He must keep a record of his actions, known as a “sederunt book”. He has to watch out for any interest of entitled spouses in the debtor’s heritage (s.41). He has extensive powers under s.3 to do whatever may be necessary and to report any misdeeds to the AiB and/or the Lord Advocate. His accounts are checked by the commissioners and/or the AiB. He also has the power to demand sight of and copies of all documents relating to the debtor, even in the hands of third parties. He may continue the debtor’s business, subject to the decisions of committees of the creditors or commissioners. The trustee may get his hands on pensions, proceeds of policies, raise court actions, and may sell heritable and moveable estate. Post-sequestration capital assets (or more accurately any estate vesting in the debtor after the date of sequestration and before discharge) are known as acquirenda and the trustee is entitled to them (s.32(6)). So if a debtor inherits money or wins the pools those funds must be used to pay his creditors and the debtor is supposed to inform the trustee of his good fortune (s.32(7)). However income is different from acquirenda.. Post-sequestration income remains with the debtor(s.32(1)), though the trustee is entitled to ask for

13. 14. 15.

19. 20.



contributions therefrom, provided sufficient remains for the debtor’s aliment and any other relevant obligations (such as maintenance for an ex-spouse etc.). If agreement cannot be reached on the level of contributions the matter may go to the sheriff (s.32(2)) - see Brown’s Trustee v Brown 1994 SLT 470. 21. The trustee has no rights in assets owned by someone other than the debtor albeit in the debtor’s hands. In addition there is a large list of things which may not be vested in the trustee (s.33(1)(a)), these being things necessary for the upkeep of the debtor’s family and unattachable assets in terms of the Debt Arrangement and Attachment Act (Scotland) 2002 s.11. Under s.44 the trustee can examine the debtor to find out where the debtor has hidden his assets, and if necessary to further terrify the debtor, he may be examined before the sheriff (s.45) – where he will be put on oath (s.47) and thus potentially liable for contempt of court or perjury. Assets subject to the Proceeds of Crime Act 2002 cannot be seized by the trustee as they will be subject to confiscation orders etc. 22. The trustee may however sell heritable property, subject to the rights of any entitled spouse or the needs of any children of the debtor (s.40) and, where necessary, court approval. If there is a standard security over the house, he may still sell (s.31) provided the proceeds will cover the security-holder’s debt (s.39(4)). The standard security-holder in most cases would want to sell anyway, if it can. As a practical matter in domestic situations it is quite common for the debtor’s spouse to arrange to acquire the debtor’s share of the property and then to obtain a mortgage for the newly acquired share. The trustee’s job is to swell the estate so that there is more for creditors. He may do this by continuing the debtor’s business. To do this he is able to look at certain antecedent transactions, these being: * gratuitous alienations (s.34) * recalling of capital sum on divorce (s.35) * unfair preferences (s.36) * certain forms of diligence carried out within certain time-periods relative to the date of apparent insolvency * extortionate credit transactions (s.61) which may be varied or set aside by the courts * excessive pension contributions ss.36A-36C, which may be varied or set aside and more reasonable ones substituted therefor. Equalisation of diligence In sequestration, some diligence can be cut down by the trustee provided it comes within certain time limits and is the right type of diligence. Once a debtor is sequestrated he cannot suffer any further diligence (s.37(4)), since his assets are all vested in the trustee. Furthermore, any attachment or fully completed arrestment within 60 days prior to the date of sequestration, and any




time after, fails to create a preference for the creditor concerned (s.37(4)) though he may get his expenses (s.37(5)). Any inhibition in the 60 day period before the date of sequestration is ineffective to create a preference for that creditor (s.37(2)). A Deductions from Earnings Order under the Child Support Act 1993 also ceases to have effect on sequestration. 29. There are other methods the trustee can use to manage, realise and swell the estate, such as completing contracts, pursuing law suits etc. (s.39). He may even renounce contracts (s.42) If he does adopt the contract, he becomes personally liable on the contract. He also becomes liable for any new contracts (s.42). He may have the debtor publicly or privately examined by the sheriff to find out any further relevant information (ss.44,45). Once all the assets are in the hands of the trustee, he must divide them up between the creditors. The creditors are required to submit their vouched claims under s.48. and the trustee may accept or reject them. Once everything is in, the estate is divided up as follows (s.51)(and in order): * the trustee’s fees and outlays * funeral expenses etc. where appropriate * petitioning creditor’s expenses * preferred debts * ordinary debts * interest on preferred debts and ordinary debts. * postponed debts. What is the position if the debtor owns a house on which there is a standard security? Preferred debts are those in Sch.3 Part I, being mostly DSS contributions and employees’ wages. Postponed debts are loans by the debtor or his spouse to his business, and a creditor’s right to anything vesting in the trustee because it was grabbed back by the trustee following a challenge to a gratuitous alienation under s.34 (s.51). Normally there will not be enough to go round, and the ordinary creditors will only get a proportion of their claim. But if everyone is paid, there may be a surplus repayable to the debtor (s.51(2)). Creditors and insolvent debtors are able to set-off their debts to each other, even to the extent of an illiquid debt being set off against a liquid one; but only debts before insolvency may be set off against each other and debts after insolvency against each other. After one year the debtor is automatically discharged (s.54) unless there are good grounds for having it deferred. The trustee is discharged under s.57 once everything is complete. Just because the debtor is discharged doesn’t mean that all his debts disappear: he still has to aliment his wife and family, pay court fines, repay any sums he obtained by fraud, repay student loans etc (s.55). The trustee will eventually be discharged once he has prepared the final accounts (s.57 and Sch.4). During the period of his sequestration there are


31. 32.




various things which the debtor may not do, the commission of any of which constitutes a criminal offence (s.67). What are they? 35. It is possible for a debtor to come to a voluntary arrangement with his creditors. This is known as a “composition” (Sch.4) but they are little used. They require a majority in number and 2/3rds in value approval from the creditors and a payment of at least 25p in the £. They can only be used after the act and warrant is in place. Trust deeds and protected trust deeds A (private) trust deed for creditors is a unilateral undertaking, not binding on the creditors, by a debtor transferring some or all of his assets to a trustee for the benefit of his creditors. A protected trust deed is where all the debtor’s estate passes to a trustee (s.5(4A)), except for assets that were not his to pass, such as assets held in trust for another, or non-attachable property. See also Sch.5 to the Act.


THE LAW OF DELICT (TORT) Reading: Black Ch.10 If someone injures you, you can sue him for compensation. But to do so, you have to prove (a) that he injured you; (b) that he owed you a duty of care to you not to injure you; (c) that you suffered loss; (d) that it was his act that caused you to be injured; (e) that you didn’t make the situation any worse yourself; The law on the one hand wants those who have been injured to receive redress, but on the other, the law has to recognise that some people claim to be injured when they have not been, and that some people are chancers and should have acted with more sense (Titchener v British Railways 1984 SLT 192). On top of that, life is risky: sometimes bad things happen that are no-one’s fault- like tsunamis. Sometimes you have to live with misfortune (like the lady with the earwig in her chocolate liqueur). Sometimes you have to look out for yourself and take responsibility for your own actions. Sometimes an injury might indirectly be someone’s fault, but it is unreasonable to expect that person to have had you in mind when he carried out the negligent act that


caused the injury (Bourhill v Young 1943 SC (HL) 78).

The law has to strike a balance between making the negligent pay up while not compensating people who are either stupid or greedy. The law also has to recognise that there may be considerable commercial implications if people are found liable who did not expect to be found liable. Businesses may be closed down and insurance premiums may go up. People may not be allowed to do things which they used to be allowed to do. Business might leave the country to go to more business-friendly countries such as the USA. This is all part of the law relating to negligence, known in Scotland as Delict, and in England as Tort. Pursuer (Plaintiff or claimant in England) Defender (Defendant) Delict is part of the Civil law A delict is a legal wrong (a breach of duty) which causes loss or injury. It is however nothing to do with the criminal law. Delictual Remedies 1) Interdict 2) Compensation (reparation)(usually in the form of damages (money))


An act can be both a crime and a delict e.g. assault, careless driving.

General Principle Firstly, the loss or injury must have been caused by someone’s culpa (fault) This word covers intentional wrongdoing (i.e. deliberate) unintentional wrongdoing (i.e. negligent). Exceptions:- (i.e. culpa not required) strict liability e.g. under a statute vicarious liability- where the defender is liable for the acts of another person (commonly an employee)

Damnum injuria datum Secondly, the loss must be caused by a legal wrong. Only where these three elements (fault, loss and a legal wrong) are present may someone make a claim in delict. Damnum-loss or injury Injuria-legal wrong (breach of duty)(intentional or negligent) Datum-causation i.e. a link between the legal wrong and the loss It is possible to have injuria sine damno (a legal wrong without loss – as for example in an invasion of privacy or trespass) or to have damnum absque injuria (loss without a legal wrong, as for example where someone suffers loss without it being anyone’s fault, such as being affected by an earthquake). The main area where delicts take place is where someone has been negligent in his dealings with another. NEGLIGENCE does not simply mean general carelessness - it means carelessness within specific occasions, and in particular where there is a “duty of care”, and where that duty has not been exercised to a proper standard (known as the “standard of care”).

DUTY OF CARE Its existence is a question of law. When does it arise? When you do something silly or reckless, you should consider who would be affected by your actions. Donoghue v Stevenson 1932 SC (HL) 31


-Lord Atkin's "neighbourhood principle" "You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who then in law is my neighbour? The answer seems to be persons who are so closely and directly affected by my acts that I ought reasonably to have them in contemplation as being so affected." The duty is not owed to everyone but only those within the AMBIT of the duty, those whom you could reasonably foresee would be affected by your actions: Bourhill v Young 1942 SC (HL) 78. People cannot be expected to have an infinite duty to an infinite class of persons (Caparo Industries v Dickman [1990] 2 AC 605). STANDARD OF CARE The standard of care is that expected of the reasonable man. If you can actually find one, do let me know. It is therefore an objective test. Nettleship v Weston [1971] 2 QB 691. The reasonable man is neither over cautious nor over confident. Glasgow Corporation v Muir 1943 SC (HL) 3. The greater the risk involved, the greater is the care which is required to satisfy the reasonable standard. Strict Liability This means that it does not matter whether a duty of care was exercised to the proper standard: what is important is that the victim suffered loss by whatever cause at the hand of the defender and so the defender is automatically liable. In these cases, mostly which arise under statute, the standard of care of the reasonable man is ignored and a more demanding standard is expected. For example, see the Consumer Protection Act 1987. PROOF OF NEGLIGENCE Normally the burden of proof is on pursuer (this means that it is up to the pursuer to prove that the defender owed him a duty of care and failed in that duty) standard of proof -on the balance of probabilities (for example, see the O J Simpson civil claim for murder). However, the burden of proof is sometimes reversed when the facts so clearly show that the defender was at fault. This is known as "res ipsa loquitur", (the thing speaks for itself) Scott v London and St Catherine’s Docks, (1865) 3 H&C 596. It is then for the defender to show why he should not be liable, or how the damages that he would have to pay should be reduced. 66

CAUSATION The defender must have caused the injury to the pursuer (the victim). This is not always the case. McWilliams v Sir Wm Arrol & Co Ltd and Lithgows Ltd 1962 SC (HL) 70 What if there are several factors leading up to the act/omission which is the immediate cause of injury? (Wagon Mound No.2 [1961] AC 388) A new factor which disturbs the sequence of events is known as a novus actus interveniens (a new intervening factor). It breaks the chain of causation. The person responsible for the original breach is not liable for injury occurring after that point (McKew v Holland, Hannen & Cubitts (Sc) Ltd. 1970 SC (HL) 20) He is also not responsible if his failure to do something would not have made any difference anyway (Barnett v Chelsea and Kensington Hospital [1969] 1 QB 42). In deciding whether the chain of causation is broken the court applies the test of reasonable foreseeability. The person who caused the original breach of duty will be liable if a reasonable man in his position would have foreseen that the breach was likely to result in injury. 1) The wrongdoer remains liable if he creates a situation which was likely to lead to the injured party taking emergency action.


2) If a foreseeable result of wrongdoer's action is intervention by a third party which causes injury, the chain of causation is not broken. MacDonald v David MacBrayne Ltd. 1915 SC 716 Vicarious Liability The general rule for liability: culpa tenet suos auctores (he who does the wrong is responsible and liable for it). In some circumstances, the commission of a delict by one person imposes liability on another who is not at fault. The concept of vicarious liability can arise in the field of employment. ("vicarious"-in place of another). An employer is liable for the wrongful acts or omissions of an employee provided that the act is done within the scope of employment: Williams v Hemphill 1966 SC (HL) 31 Rose v Plenty [1976] 1 All ER 97 An employer is not liable if the employee goes off on "a frolic of his own." Where the employee commits a delict while doing something which he was not authorised to do, the court will consider the purpose of his actions. If the purpose was to 1. further the employer's interests 2. protect the employer's property that will be within the scope of employment: Poland v Parr [1927] 1 KB 236 and so the employer will be liable. The concept of vicarious liability is justified by two maxims: respondeat superior let the master be responsible qui facit per alium facit per se a person who does something through the actions of another is liable as if he had done it himself. The injured party may sue the employee personally and/or the employer who is vicariously liable. If the employer is found vicariously liable, he (or in practice his insurers) may sue the employee for damages: Lister v Romford Ice and Cold Storage Co [1957] AC 555. This is rarely done as the employer will be insured against such liability and the employee will not.


PROFESSIONAL NEGLIGENCE A professional person is expected to reach the standard of a reasonably careful member of that profession: Hunter v Hanley 1955 SC 200 No account is taken of inexperience: Wilsher v Essex Area Health Authority [1988] 2 WLR 557 The standard of care depends on the wrongdoer’s rank or position: greater skill is expected from a consultant than from a GP. In deciding whether the standard has been met, reference is made to professional knowledge, methods and practice possessed at the date of the alleged negligence: Roe v Minister of Health [1954] 2 QB 66 Denning LJ: "We must not look at the 1947 accident with 1954 spectacles." Departure from normal and accepted practice is not necessarily negligent. If no other member of profession would have taken such a course of action, that is a strong indication of negligence. In medical cases, causation can be difficult to prove: Kay's Tutor v Ayrshire and Arran Health Board 1987 SLT 577 PRODUCT LIABILITY EC directive on product liability -UK Parliament passed the Consumer Protection Act 1987 Part 1. Under the Act, pursuer does not have to prove negligence only that 1) there has been injury/damage 2) there is a dangerous defect in the product 3) the defect caused the injury/harm Liability is in the first place on the producer but liability will fall on the supplier who does not identify the producer/ his own supplier. DEFENCES IN DELICT There are defences which are applicable to particular types of delict only. e.g. self defence in assault veritas in defamation. Defences which are more generally available: Statutory authority Sometimes statute provides a defence


Metropolitan Asylum District Board v Hill 1881 6 App Cas 193 volenti non fit injuria -A wrongful act is not done to some-one who is willing to accept the risk: Morris v Murray [1991] 2 WLR 195 There must be evidence of 1) knowledge of the nature and extent of the risk 2) acceptance of the risk The pursuer must be sciens et volens Nature of one’s job White v Chief Constable of Yorkshire [1999] 2 AC 455 as compared to McLoughlin v O’Brian [1983] AC 410 Sporting Events -spectators:Wooldridge v Sumner [1962] 2 All ER 978 -participants – increasing cases involving rugby players and boxers – insurance problems Rescuer Situations Baker v Hopkins [1959] 3 All ER 225 Contributory negligence See the Law Reform (Contributory Negligence) Act 1945. Damages are reduced according to percentage blame which attaches to pursuer: Titchener v British Railways 1984 SLT 192 Onus is on defender to prove pursuer was at fault.

Illegality defence Duncan v Ross Harper & Murphy 1993 SLT 105

PRESCRIPTION AND LIMITATION The right to bring an action in delict or the obligation to pay damages may be lost or extinguished through passage of time by the Prescription and Limitation (Scotland) Act 1973 Prescription -5 year prescription extinguishes obligations to make reparation. -The prescriptive period usually (but not always) runs from the date when the loss, injury or damage occurred.

Limitation -differs from prescription


-limitation does not extinguish a claim but simply makes it unenforceable by legal action -an action of damages for personal injury or death must generally be commenced within 3 years from the date of injury or death -the court may extend the period if it deems it equitable to do so REMEDIES 1) Interdict a preventative proceeding directed against a continuing wrong or a threatened wrong: Webster v Lord Advocate 1985 SLT 361. 2) Compensation (reparation) The purpose of a damages award is to restore the pursuer as far as possible to the position he was in before the delict. The law lays down the heads of damages. The actual losses are questions of fact. Compensation for pain and suffering is known as solatium. Compensation for financial losses is known as patrimonial loss.

Agency Different types of agent; creation of agency; ostensible authority; ratification; liability of principal for agent; fiduciary duty of agent; delegation. Reading: Black, Ch 9 Davidson and MacGregor Ch. 1. Agency Agency may be defined as the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf, and the other of whom similarly consents so to act or so acts. Agency requires a principal and a person who carries out acts for him, known as the agent. The principal gives the agent authority to act on his behalf, to arrange deals for him etc. The agent's authority may be express (either clearly defined, commonly written, and limited to specific areas) or implied (arising out of circumstances, common for the type of business etc.). He is not to exceed that authority, though despite that, if he does, the principal may still be held liable for acts entered into by the agent on the principal's behalf if the act in question was within the apparent or ostensible authority of the agent. The principal may then claim against the agent personally. There are general agents and special agents. Why do we have agents anyway?




Agency arises in many contexts, such as estate agent and client solicitor and client director and his company a partner and his partnership insurance broker and an insurance company car dealer and his supplier employee and his employer (sometimes) servant and master etc. How is an express agency set up ? Ideally it is written, though it may be oral. An express agency will specify exactly what the agent’s duties are, his remuneration, the duration of the agency, his commission (if any), the terms applicable, the liability attaching to the agent for failure to bring matters to fruition (clawbacks etc.) A commercial agent is entitled to ask for written terms under the Commercial Agents (Council Directive) Regulations 8.1.1993/3053 reg. 13. If it is to be a sole agency it should say so (Lothian v Jenolite Ltd 1969 SC 111) and the position of commission not being paid if the sale falls though ought to be clearly stated to avoid difficulties (Menzies, Bruce-Low and Thomson v McLennan (1895) 22R 299). The principal must have a legal existence (Companies Act 2006 s.51 and Phonogram Ltd v Lane [1982] QB 938) and the principal must be legally capable of carrying out the act that the agent is carrying out for him (n.b. Age of Legal Capacity (Scotland) Act 1991). Negotiorum Gestio. This means an agency of necessity, and where an agent does what is vital to preserve a principal’s assets, where the principal is not in a position to do so himself, and where it is likely that authority would have been given. The agent (gestor) can get his expenses and be relieved of any liability (Fernie v Robertson (1871) 9M 347). Equally agency may be established from the actings of the parties (Barnetson v Peterson (1902) 5 F 86). It may be established by holding out which is where the principal takes no steps to counter the impression that the agent had the authority to act as he does (Freeman v Buckhurst Park Properties (Mangal) Ltd [1964] 2QB 480). Ratification is the post-dated approval by a principal of an act carried out by the agent. Such ratification may be express or may be established by the principal’s actings, in particular by accepting without demur the agent’s actions. But the ratifying principal must have the full facts before him and generally the principal must be lucratus as a result. Furthermore the agent must have made it clear to the third party that he was acting as an agent (Keighley Maxstead & Co. v Durant [1901] AC 240. Agency sometimes arises through operation of law, as a director acts for his company, or a partner for his partnership (Partnership Act 1890 s.5).








Agency depends upon the fiduciary relationship. This means that the principal must be able to trust that the agent will take no unauthorised benefits from his position, nor any incidental advantage, unless he has disclosed it first and sought approval. This concept is very important in company law, partnership law and to a certain extent employment law. This means no secret commissions (Boston Deep Sea Fishing Co. v Ansell (1888) 39 Ch D 339), no conflict of interest between the agent and the principal (McPherson’s Trs. v Watt (1877) 5R (Ill.-) 9 -see Lord 0’Hagan’s speech) -general requirement of uberrimae fidei. Consequences of secret commission: agent dismissed and commission recovered from the agent; damages from the “briber”; agent loses right to commission for the transaction from the principal; rescission of the contract and recovery of any deposit. Other duties of an agent include the fact that an agent mustn’t sell his own produce to the principal without approval (Maffett v Stewart (1887) 14 R 506), nor even a good idea to buy it (McPherson's Trs. v Watt, supra). He must keep accounts and make good any loss to the principal occasioned by the agent’s actions (Taylor v Logan (1904) 7F 123). There is also a duty of confidentiality (Liverpool Victoria Friendly Society v Huston (1900) 3F 42). If he acts beyond his authority, the principal may still be bound by the contract but the principal may recover from the agent (Milne v Ritchie (1882) 10 R.365). No delegation without approval: delegatus non potest delegare, though there are in fact many exceptions to this rule, especially where the agent's tasks are not particularly unusual or skilful. Normally a well drafted agency agreement will allow for some degree of delegation. An agent is not normally responsible for the actions carried out on behalf of his principal, and the principal must indemnify him for any loss he suffers (Stone & Rolfe Ltd v Kimber Coal Co Ltd 1926 SC (HL) 45). He is also normally entitled to be paid, according to the general custom of trade and where there is no custom, he should be paid reasonable remuneration (Commercial Agents Reg.6(1)) The principal is not bound to provide an agent with work unless the contract of agency says otherwise. An agent is entitled to a lien over the principal’s assets in his possession if he has not been paid (Glendinning v Hope 1911 SC (HL) 73). The contract is terminated by any of the normal methods of terminating contracts, though the Regs. allow for minimum notice and compensation for short notice, both of which must be exercised in good faith (Reg. 17 and see Graham Page v Combined Shipping and Trading Ltd [1997] 3 All ER 656). When an agent contracts with a third party, he does so either as agent for a named principal, as agent for an unnamed principal, or as agent for an undisclosed principal of whose existence the third party is unaware.








Where the agent is an agent for a named principal, he has no liability (see Bell Comm., I, 540) and no title to sue. However this may be disproved by precise circumstances, such as when the agent appears to be making his own obligation in writing) even though he is acting on behalf of a client (in a solicitor’s obligation to deliver writs Johnston v Little 1960 SLT 129) -so note the use of the words “on behalf of” or “acting on instructions received from” etc. Agent for an unnamed or undisclosed principal. If the principal could be identified without great effort, the agent is deemed to be an agent and hence the principal is liable for his contracts (Armour v T L Duff & Co. 1912 SC 120). Where there is an undisclosed principal but the agent is acting under the principal’s express authority, the agent will be liable unless he is prepared to reveal who the principal is (Gibb v Cunningham and Robertson 1925 SL T 608) since otherwise the third party would have no-one to sue. Where the agent contracts ostensibly as principal, both agent and the hidden principal are potentially liable (but not jointly liable) for any contracts that the agent may have set up, and may sue and be sued (Bell, Comm., 540, Gloag on Contract, 128/9). If the principal comes out of hiding he may sue and be sued without difficulty. In the absence of disclosure, the third party may sue the agent personally as he has relied on the agent’s credit (Bell, Comm., 540). The third party may, however, when he discovers the principal, elect to sue either the agent or the principal (guess which one!)( Laidlaw v Griffin 1968 SLT 278) but having done so may not change his mind (Ferrier v Dodds (1865) 3M 561). If the agent acts without any form of authority whatsoever, or acts in such a manner that no reasonable person could seriously believe that a principle would authorise him to behave in that manner, the principal is not bound (British Bata Shoe Co. Ltd v Double M Shah Ltd 1980 SC 311) by the apparent actions of the agent -which may mean that the third party still has to pay the principle even though he had already paid the agent. Ostensible authority arises where an agent has had dealings in the past with a principal, and the agent carries out an act for which he has no authority, but is not countermanded by the principal, or the principal suffered the third party to believe that the agent had authority (First Energy (UK) Ltd v Hungarian International Bank [1993] 2 LI. Rpts. 194; International Sponge Importers v Watt 1911 SC (HL) 57). The principal is personally barred from denying the authority. If there used to be such authority and it has been withdrawn, other parties should be informed or the principal will still be held liable for the acts of the unauthorised agent (Watteau v Fenwick [1893] 1 QB 346). Some professions, such as solicitors, have “general authority” which covers most matters and for which a principal will be liable. But you can have “special authority” for one matter alone, which is expressly limited. Ostensible authority doesn't arise in the context of special authority. Nor does it arise where the apparent agent's actions are well beyond the normal course of business practice (British Bata Shoe Co. Ltd v Double M Shah Ltd 1980 SC 311). Apparent authority is another term for ostensible authority, and arises






where an agent acts in the course of business common to people in his position, even if in reality he is up to something naughty (Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB

711). 17. An agent is expected to show the same standard of care as he would use in his own business dealings (“a prudent man acting in his own affairs” (Bell, Commentaries I 517), though if the agent has particular qualifications more may be expected of him (Ibid. 517). An agent is expected to keep proper accounts. An agent is normally liable only to the person with whom he is in an agency relationship (Caparo Industries pic v Dickman and Ors [1990] 2 AC 605). If an agent exceeds his authority, he may be sued for breach of warrant of authority (Anderson v Croall (1903) 6F 153). 20. The Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053 and 3173 are deemed to apply where the common law is silent, or possibly where a clause in an agency contract is to be set aside. The regulations are very sensible and designed to protect commercial agents from unscrupulous principals and indeed vice versa. They set up industry norms of fair treatment for agents and principals. They are slightly at variance with what under Scots law is treated as an agent: for example under Scots law an employee is an agent, but for the purposes of the Regulations he is not. The Regulations do not apply to one-off transactions and to agents who act for no remuneration. The expectation under the Regulations is that the agent must act dutifully and in good faith on the principal’s behalf, and likewise the principal must act dutifully and in good faith towards the agent. In the absence of a payment clause, the principal must pay the agent the normal commercial rates for the work the agent has done. There are sensible notice provisions and compensation payments for early termination. 21. One can still get round the regulations, however, by an artful use of choice of law clause (Reg. 1(3)) if one of the parties is from a non-EU country . For the application of the regulations in Scotland, see Roy v MR Pearlman Ltd 2000 SLT 727, 1999 SC 459. The emphasis will be on harmonisation of rules within the EC and accordingly the EU rules will prevail over any local common law rules where there is a disparity. But see Lonsdale (t/a Lonsdale Agencies) v. Howard & Hallam Limited [2007] UKHL 32, where the French rule of two years’ wages by way of damages was ruled inappropriate and a UK rule of what the agent might have been expected to earn on the basis of his past work was substituted instead.


Law of Partnership

Limited Liability Partnership Act 2000 (“LLP A”) Partnership Act 1890 (“PA”) If these links don’t work, google the names of the Acts. It is possible to see these Acts in books of statutes available from bookshops. You can also access more recent Acts at the Stationery Office Website, the Parliament website or the DBERR website. Case law Business Organisations There are five main types of business organisation and each will be examined in turn. • • • • • Sole Trader Partnership Limited Liability Company Limited Partnership Limited Liability Partnership

The sole trader

The advantages of being a sole trader are as follows: . complete independence . freedom to enter into any kind of legal business . flexibility . privacy . the benefit of self-employed taxation status . there are few difficulties in selling his business . there are very few procedural requirements for setting up his business . opportunities for significant wealth creation. The disadvantages of being a sole trader are as follows: . the law makes very little distinction between the person's assets and his business assets . he could be made personally bankrupt for his business losses


. .

. .


there is no one with whom to share his losses his business is as good as his health it may be difficult to raise working capital without mortgaging his family home it requires considerable financial ability and administrative skill he can never go on holiday he never has a social life it is generally very hard work.

Common businesses run as sole traderships include tradesmen, farmers, freelance authors and journalists, musicians, website designers, small shop-keepers etc. There are very few legal rules applicable to sole traders. Partnerships Partnership Act 1890 (“PA”) (if this doesn’t work, google the Act’s name) For a good overview, see Black: Ch.15 Davidson and MacGregor; Ch ??? As sole tradership is so risky, it is safer and indeed common to have initially a colleague, commonly a spouse, sibling or friend share the burden of running the business. Later on there may be many more partners: some big accountancy partnerships have many hundreds of partners. Partnerships are governed by the PA 1890, which sets out a standard set of rules to establish the following (amongst other things): . whether or not a partnership actually is in existence (sometimes it can be difficult to tell whether someone is actually a partner or a lender taking a variable rate of interest according to how the partnership prospers); . default rules relating to the management (s.25) and dissolution of the partnership(ss.32-44) (Popat v Shonchhatra [1997] 3 All ER 800). . default rules relating to the division of profits and losses of the partnership (s.24) . the liability of the partners for the partnership debts (s.9) . the joint and several liability of the individual partners (s.9) A partnership is defined in PA 1890 s.1 as a business involving two or more persons run in common with a view of profit. See Khan and Anr. v Miah and Anr. 1998] 1

WLR 477. In Scotland, and soon to be in England, a partnership has its own legal personality (s.4), although the practical benefits of this are negligible. A retiring partner is not normally liable for debts of the partnership after he leaves (s.17(2)) and an incoming partner is not liable for the debts of the partnership before he arrived (s..17(1)).


Advantages of partnership are: . sharing of risk . pooling of talent . privacy . support in the event of illness . ability to regulate the partners' responsibilities in terms of a partnership agreement . ability to enter any kind of legal business provided the partners’ work is “in common” . few bureaucratic requirements and little paperwork needed . no minimum capital . flexibility within the constraints of PA 1890 . self-employed status . entitlement of each partner to a pro indiviso share of his interest in the partnership Disadvantages of partnership are:


. .

the inability to borrow funds except on an unsecured basis (except over heritable assets or real estate) the partnership is only as good as its weakest partner, and no partner can claim ignorance of another partner's acts (s.16): any one partner can bind the firm (s.16) potential difficulty of transferring one's partnership interest high degree of trust required of fellow partners; joint and several personal liability for the partnership's debts -leading to potential sequestration (PA 1890 s.9) ADT Ltd v BDO Binder Hamlyn [1996] BCC 808

Not the significance of partnership agreements and the difference between the external rules that bind the partnership with outsiders (s.6) and the internal rules that apply to the partners alone (known as the agency rules) (Mercantile Credit v Garrod [1962] 3 All ER 1103). A partnership will be vicariously liable for the acts of its partners (s.10) provided those acts are within the normal range of acts carried out by partners in the course of their business: Kirkintilloch Co-operative Society v Livingstone 1972 SLT 154. But sometimes an act is clearly beyond the normal course of business: Paterson Bros v Gladstone (1891) 18 R 403 Fortune v Young 1918 SC 1 Historically certain professions, such as doctors, lawyers, accountants etc. used not to be allowed to safeguard themselves from personal liability for their actions. This was because the threat of personal liability was thought to concentrate people’s minds on doing the job properly. But equally, some claims are so huge that they could bankrupt


businesses. It is now possible to run these businesses as limited companies, but under the respective professional bodies’ rules in each case the business must still be insured up to the full extent of the potential losses, so that at least creditors have a chance of their claim being met in full. The size of potential claims was one reason why there was a call for limited liability partnerships (see later). Partners cannot pretend ignorance of their fellow partners’ acts, omissions or assertions (PA s.15,16). Partnership property is owned by the partnership but each partner is entitled to a pro indiviso share, and thus entitled to a portion of the sale proceeds (PA s.20). As regards other matters, PA s.24 applies to such matters as the division of profits and losses, expenses, loans, voting rights (usually majority voting), management rights, rights on change of business, access to partnership books all on normal commercial terms except where varied by the partnership agreement. Partners must render proper accounts to each other (PA s.28) and account for any profits deriving from the partnership (PA s.29). There must no competition (PA s.30 and see Pillans Bros. v Pillans (1908) 16 SLT 611, OH). Partners under common law exercise a fiduciary duty to each other - Finlayson v Turnbull (No. 1), 1997 SLT 613. Any method of expelling a partner must be written into the partnership agreement (s.25) and must be exercised in good faith (Blisset v Daniel (1853) 10 Hare 493). Dissolution is in terms of the partnership agreement, which failing one uses the methods in PA s.32. The court may dissolve the partnership on certain grounds (mental incapacity, dishonesty etc)(PA s.35). Partners remain liable until creditors all informed (PA s.36,37). Partners may continue to retain some rights even after dissolution but only for the purposes of winding up the partnership (PA s.38). Any surplus once all debts have been paid is made over to the partners (PA s.44). Where a partner has been fraudulent, the other partners may recover from him (PA s.41). Limited Partnerships Act 1907 (“LPA”) A limited partnership is a special entity which comes into existence on registration (LPA ss.5, 8, 13,14 and 15). There most be at least two partners, one of whom is the general partner, who bears all the risk (jointly and severally with any other general partners) but has management rights, and the other is whom is a limited partner, who only risks his capital investment but no rights of management (LPA s4(3)). If the limited partner takes part in the management he becomes liable for the debts arising during his period of management. It is common to have a partnership agreement but the LPA provides sensible rules in the absence of such an agreement. Limited partnerships are much used in the venture capital business where the investor wishes to minimise his exposure and so becomes a limited partner in a business.

Limited Liability Partnerships Act 2000. Limited Liability Partnership Act 2000 (“LLP A”) ( no guarantee that this works – if not, google the Act’s name) This Act introduced a new business form, known as the limited liability partnership (“LLP”). It is like a half way house between a company and a partnership. There are


also statutory instruments filling in the details which came into force on 6 April 2001 (Limited Liability Partnerships Regulations 2001 (SI 2001/1090) and the Limited Liability Partnerships (Scotland) Regulations 2001 (SI 2001/128), the latter needed because Scottish insolvency law differs from English insolvency law). It combines the flexibility of a partnership agreement with many of the requirement and benefits of a company. A LLP has its own legal personality and is registered in a special register of LLPs. Its accounts are published and may be audited. The limited liability of a LPP. The members (not “partners”) of a LLP are not normally liable for the debts of a limited liability partnership except to the extent of the capital they have contributed. However members may be liable for the LPP’s debts if the members have transgressed the rules in the Insolvency Act 1986 ss.212-217 (see Company law later). In addition a liquidator may recover withdrawals of property (including salary) by a member (i.e. a partner) in the last two years before liquidation if the member had reasonable grounds for believing that the LLP was insolvent or would be made insolvent by the withdrawal (cf. Insolvency Act 1986 s.214) - clawback provision (IA 1986 s.214A). As regards any potential personal liability by the members for the LLP’s acts, it is important that the members are always seen to act on behalf of the LLP (Williams v (1) Natural Life Health Foods Ltd and (2) Mistlin[1997] I BCLC 131, [1997] BCC 605). If they do so, they should avoid personal liability. Floating charges LLPs may grant floating charges in the same manner as a company (CA 1985 s.410 as amended by the Scottish regulations). Tax The transfer of a business from a partnership to an LLP is tax-neutral and the members are still treated as self-employed. Limited liability partnership flexibility Private arrangements between the members are acceptable and up to the members to negotiate between themselves. In default of this paras. 7 and 8 of the Regulations apply a standard set of internal arrangements which may be used.

The limited liability company Company law The law on companies is generally a mixture of statute law (predominantly the Companies Act 2006 and the Insolvency Act 1986) and case law. Reading Black: Ch.16 Grier, Company Law 3rd edition Sealy Cases and Materials on Company Law 9th ed. 80

Statutes The main statutes to which reference should be made are: Companies Act 2006 Company Directors Disqualification Act. 1986 (“CDDA”) Insolvency Act 1986 (“IA 1986”) Historically merchants have always sought a way of limiting their exposure to creditors' claims. Originally this was done by methods such as Crown Charters (like the Hon. East India Company or the Hudson Bay Company) or by Parliament (The Bank of Scotland) but since the middle of the 19th Century it has been possible to set up companies by registration. Registration involves lodging certain documents with the Registrar of Companies in Castle Terrace, Edinburgh. Provided the documents are in order, a certificate of incorporation is granted and with effect from the date of the certificate the company exists as a free-standing legal personality, separate from the people who own it (the members), who manage it (the directors), who are employed by it (the employees who may simultaneously be also members and directors) or who deal with it (creditors, suppliers, lenders and even members in their private capacity).
The concept of the separate legal personality

This is at the heart of company law. The company has, subject to certain exceptions noted later, a separate legal personality from those people described above. The company enters into its own transactions, hires its own staff, is responsible to its creditors, and has its own legal existence, and its members and/or directors are not liable for the company’s debts except where . they have chosen to accept such responsibility (say, by granting a guarantee); . they have behaved badly so that the company collapses and as a result of their behaviour the company's creditors have suffered losses (as in the IA 1986 s.213-217); . statute imposes certain requirements that they should be liable (see later); . the common law requires that they should be liable (see later); . the members have not fully paid the nominal value of their shares to the company (rare). Other than in those circumstances, the company alone is responsible for its own debts, and creditors have no claim against its members/directors. All the creditors have is a claim against the company, through the process of liquidation. Much of the time this will not be worth making. The separation between a company and those involved in it is known as the “corporate veil”. We come back to this. There are three famous cases reinforcing the idea of the separate legal personality:


Salomon v A. Salomon and Co. Ltd [1897] AC 22 Lee v Lee's Air Farming Ltd [1961] AC 12 MacAura v Northern Assurance Co. Ltd [1925] AC 619. Advantages of the limited liability company are as follows: . separate legal personality . freedom from liability (normally) for the business's debts . minimisation of risk for investors . encouragement for entrepreneurs and the promotion of commerce . macro-economic benefits for countries where limited liability companies are allowed to exist . the ability to carry out major enterprises under the umbrella of the one organisation . the ability to place risky ventures in subsidiaries . the ease of transferability of ownership of shares in a company . the requirement that company accounts be audited to some extent promotes good practice and enables businesses to borrow with relative ease . the opportunity for significant wealth creation if the company prospers . the ability to grant different types of security, such as the floating charge, thus enabling the company to borrow advantageously at short notice. The disadvantages of the limited liability company are as follows: . there are occasions where the members/directors are in fact liable for the company’s debts . risk passes to creditors, whose opportunity for safeguarding themselves from the company’s default may be slender . companies provide a perfect opportunity for ingenious frauds . directors running the company may not always behave with the company's best interests at heart . the danger of speculation . potentially impaired standards of professionalism . people may try to take advantage of the rules to evade legal if not moral responsibility . requirement (at least in larger companies) of a minimum capital of £50,000 . expense and formality of incorporation . continuing costs of compliance with company law . requirement to disclose accounts . requirement to disclose details about the directors and about the constitution of the company
Different types of company

There are several different types of company, but the most common is the private limited company, limited by shares. Other types of company are public limited


companies ("plcs"), companies limited by guarantee and unlimited companies. Certain companies may also be dormant, subsidiary or holding companies. Plcs may potentially offer their shares to the public, and have much more onerous accounting and legal requirements than do private limited companies. However, very few plcs do actually offer their shares to the public. In order to do so, there must be a market-maker willing to make a market in the shares of the company in question, or the company's shares must be traded on a recognised investment exchange, of which the best known are the London Stock Exchange, LIFFE, Plus Markets etc. There are other lesser exchanges such as the Alternative Investment Market. A company whose shares are traded on the London Stock Exchange is said to be “listed” and is subject to the “listing rules” which are promoted by the Financial Services Authority. The privilege of being listed is not lightly granted. Most plcs become plcs because of the apparent status. Plcs have demanding rules for accounting and legal purposes in order to present a degree of credibility to investors and creditors alike. The minimum requirement of £50,000 issued share capital ought to convince both parties that the company is worth dealing with - though in practice it makes little difference. There need to be at least two members and two directors of a plc, and the company secretary must be properly qualified. A private company need only have a share capital of one penny, though £100 is the more common figure. A private limited company may have only one member, in which case it is known as a single member private limited company. Such companies need to be careful in their paperwork - Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1996] Ch 274. Compliance with company law Unless you buy an “off the shelf” company, to set up a company requires a knowledge of company law and the completion of various documents, in particular the articles of association. This needs to be carefully drafted, to show the rights of members, directors and the company to each other, in a curious tri-partite contract which unusually is available for inspection by the outside world. Hickman v Kent and Romney Marsh Sheepbreeders Assn. [1915] 1 Ch. 881 Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693 The articles are based on a standard model, and the company may vary the model as much as it likes provided the variations are not inconsistent with company law in general, with statute in particular and with the memorandum. It is possible to provide in the articles for more than one type or “class” of shares, and to give those shares special rights: Bushell v Faith [1970] AC 1099 If a member does not like the articles, he may sell his shares if he can, make a fuss at a general meeting, or persuade enough other members to join with him in a special resolution to change the articles (CA 2006 s.283).


Shareholders may if they choose contract with each other secretly by means of a shareholders’ agreement, but they must adhere to its terms (A & BC Chewing Gum Ltd [1975] 1 All ER 1017)

Investment in a company If a company needs more funds, it can either borrow, or it can invite new and/or existing members to subscribe for shares. Normally existing members are given a preemptive right to acquire new shares (CA 2006 s.561) in order to maintain their equity. Only plcs may offer their shares to the public (s.755 ). Both shares and debentures (bonds) in listed companies may be publicly traded, as may options and warrants. Company names No company may have the same name as any other company's name, and the Registrar of Companies will not only prohibit this but strongly recommend the promoters of a company to avoid a name too like an existing name. The Registrar has extensive powers to prohibit company names that are offensive, criminal, purport to have an unjustified geographical or professional designation (CA 2006 ss.53-57, 6674). There is also a common law delict (tort in England) of passing off, which is the unauthorised use of a name of an existing business either to mislead the public or to grab another business's goodwill (Ewing v Buttercup Margerine Co Ltd. [1917] 2 Ch.1), but at the same time you cannot have a monopoly in a well-known word (Aerators Ltd v Tollit [1902] 2 Ch.319) or deprive people of the right to use their own surname as a business name (Wright, Layman and Unmey Ltd v Wright (1949) 66 RPC 149, CA). Opportunistic incorporation is frowned upon: Glaxo plc v Glaxowellcome Ltd [1996] FSR 388). Under the Companies Act 2006 there will be a company names adjudicator (s.70).
When is a company not a company?

A major issue in company law is when the "corporate veil" is lifted. As stated above, normally the company is separate from those who own it and those who direct it. But on occasion under the common law, the courts will lift the corporate veil to look at the underlying reality: Gilford Motor Co Ltd v Horne [1933] Ch. 935 Daimler v Continental Tyre and Rubber (Great Britain) Ltd [1916] 2 AC 30' In general, the courts are very reluctant to lift the veil of incorporation: Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, 1978 SLT 159 and in one case, Adams v Cape Industries plc [1990] Ch 433, the House of Lords stated that they would be reluctant to lift the veil except where there was a sham or “façade concealing the true facts”. This might arise where someone tries to put his assets into a company to avoid being personally liable for some other claim (see Trustor AB v Smallbone (No 2) [2001] 1WLR 1177, Re H [1996] 2 All ER 391) This is particularly problematic where an insolvent subsidiary of a profitable holding


company may be liable to involuntary creditors such as employees or the wider community. In the UK, at the moment, the holding company is not generally liable under these circumstances (see for example, Re Southard and Co Ltd [1979] 1 WLR 1198 and the out of court settled case of Lubbe v Cape Industries plc [2000] UKHL 41) Although this issue is more properly dealt with in the section of this course dealing with directors, there are cases that show the limits of this principle: Yukong Line of Korea Ltdv Rendsburg Corporation of Liberia [1.998] 2 BCLC 485 Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 But fraud is a step too far and one cannot use the benefit of a separate legal personality to avoid liability: Standard Chartered Bank v Pakistan National Shipping Corporation [2002] 3 WLR 1547, [2003] 1 All ER 173 This issue will always be at the heart of company law and every year will throw up hard cases. Lifting the veil under Statute The quasi-partnership company Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 - use of “just and equitable grounds” under which to wind up the company under what would now be IA 1986

s.122(1)(g). Fraudulent trading under IA 1986 s.213 (very rare indeed); Wrongful trading under IA 1986 s.214 (pretty rare) and applicable to directors only; Misfeasance under IA 1986 s.212, applicable to officers of the company; “Phoenix company” directors under IA 1986 s.216.


These last four items are dealt with later under liquidation. The criminal liability of a company This is a well known problem area. Certain crimes cannot be committed by companies - such as bestiality and bigamy. Who is responsible for the crime - a human or the company? The problem of mens rea. How do you punish a company? Relatively easy to punish a small company as in the Lyme Regis canoeing disaster (R. v OLL Ltd 1993 unreported) Should a company be liable for the criminal acts of its employees? Tesco Supermarkets Ltd v Nattrass [1972] Ac 153 Re Supply of Ready Mixed Concrete (no 2.)[1995] 1 AC 456 Companies are quite frequently found guilty of breaches of health and safety legislation and receive substantial fines. The difficult issue is whether or not companies and/or their directors can be found liable for crimes such as murder or culpable homicide (manslaughter in England). See Transco Plc v. HM Advocate 2004 S.L.T. 41 HCJ. 2004 J.C. 29 Now see the Corporate Manslaughter and Corporate Homicide Act 2007 at A company may be convicted of corporate homicide where if the way it is managed causes a person’s death and amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased (s.1)(1)). It is only liable if the way that the company is managed or is organised by its senior management is a substantial breach in the relevant duty of care (s.1(3)). A relevant duty of care is defined in s.2, and is a duty of care to its employees or other involved in the company, a duty as occupier of premises, and a duty owed in connection with the supply of goods and services, construction and maintenance, carrying of business on a commercial basis, or the use or keeping of any plant, vehicle or other thing. A “gross” breach is defined in s.1(4). It is for the judge to decide whether there has been a breach of the duty of care (s.2(5)) but the jury to decide if it has been a “gross” breach (s.8)). The judge may also order the breach to be remedied (a “remedial order” (s.9)). There is no individual liability under this Act (s.18). There may be a simultaneous conviction under Health and Safety legislation (s.19). Why do we have this Act? What will it achieve? Is it workable?

1. The normal process of issue of shares Suppose you decide that you do wish to issue more shares. What is the procedure? (a) CA 2006 s.549 states that in a private company with only one class of shares directors’ authority is not needed but if there is more than one class of shares or the company is public, directors’ authority is needed (s.551)


(c) If there is no such authority, you will need an ordinary resolution (i.e. a 50% majority) to give the directors authority. Alternatively there could be a written resolution but only for private companies. (d) Are the other shareholders happy about the allotment of the new shares? Does one have to take account of their pre-emption rights under CA 2006 s.561? Preemption rights will normally apply and must be exercised within 21 days, but they may be individually waived by each shareholder, or the members may collectively pass a special resolution (i.e. 75%) under CA 2006 s.571 disapplying the pre-emption rights generally or specifically for a "one-off' - though the directors must give their reasons for recommending this. Pre-emption rights do not, however, apply to subscriber shares, bonus shares, employee share scheme shares and preference shares (CA 2006 s.564). They also do not apply when shares are partly or wholly given in exchange for non-cash consideration (CA 2006 s.565). Normally a listed company's shareholders will agree that a company may issue up to 5% of shares without attracting pre-emption rights. What is the point of these rules? Under CA 2006 s.569 a private company may let its directors issue shares without worrying about pre-emption rights (w/e 1st October 2009) (e) Assuming the directors have authority under ss.549-551, and the members have either chosen to exercise their pre-emption rights or in some cases waived them, the process of allotment may take place. This is formally done at a board meeting: the directors record the number of applications for shares, and the secretary is instructed to allot the shares, to complete the necessary registers, to send a form to the Registrar of Companies and to issue the shares (i.e. enter the members' names into the register of shareholders) and sign the share certificates. If there is non-cash consideration, the form will need to be accompanied by the contract for the consideration which, if it involves the transfer of stampable assets such as heritage, will attract stamp duty land tax. In listed companies the process of sending out the share certificates may be done by professional registrars such as Computershare etc. Once the name is entered into the Register, the allottee becomes a shareholder (CA 2006 s.554). This must be done within two months. 2. Further rules for plcs. The above (in para.1) is the normal procedure for small private companies. However, there are some problems for plcs: (a) In a plc, if a company receives non-cash consideration for shares, any asset being transferred must be independently valued (CA 1985 s.103) (except where one company is buying out another company's shares);


(b) A p1c may not accept services for the company in exchange for shares (CA 1985 s.90(2)); (c) A plc may not accept an undertaking to be carried out more than five years after allotment in consideration of shares (CA 1985 s.102. In the event that a plc transgresses these rules, the recipient of the improperly issued shares is the one that suffers, in that he has to pay for the shares anyway, plus any interest. 3. The transfer of shares. Subject to the terms of the articles, shares may normally be transferred to whomever the transferor wishes to transfer them. But the articles may have restrictions on transfer, or the directors may have some discretion as to the registering of transfers (in which case they should exercise that discretion in good faith (re Smith and Fawcett Ltd [1942] Ch 304)). The terms of the articles must be closely followed. If the directors will not register a new member, it is open to the new member to apply to court for rectification of the register under CA 1985 so 359. Most transfers attract stamp duty at 0.50% subject to a minimum of £5.00. Two further matters about transfers of shares (a) “Stop notices” (with a 14 day period of grace) and “stop orders” allow a third party in England to prevent shares being sold or dividends being paid without reference to the third party. They can be obtained from court and sometimes arise in matrimonial disputes. In Scotland we could obtain an interdict or an arrestment order. (b) Where a transfer of shares is induced by deceit/misrepresentations by the seller, the seller can be liable for damages up to the full extent of the loss even if the purchaser could not necessarily have foreseen the extent of his loss because of some other factor (Smith New Court Securities Ltd v Scrimgeour Vickers (Assets Management) Ltd [1997] AC 254).

4. Share certificates These are prima facie evidence of the shareholder's entitlement to the shares (but see Re Baku Consolidated Oilfields Ltd [1993] BCC 653). If you lose a share certificate, you will have to apply to the company, ask for a new one and pay for an indemnity which will payout if the old certificate turns up in the hands of someone who should not have it. Companies except a certain amount of loss of certificates, but the general rule is that if a company issues a share certificate it is personally barred from denying its validity to third parties, though the company may have a right of action against the person who made it issue a share certificate which it would not have issued had it been in possession of the true facts (Royal Bank of Scotland v Sandstone Properties Ltd [1998] 2 BCLC 429). 5. The issue of shares in listed companies This is a very large issue and is covered predominantly by the Purple Book, (the rule book of the London Stock Exchange). Broadly speaking, nowadays all prospectuses


and indeed listing particulars must disclose anything that an investor might reasonably wish to know in order to make an informed assessment of the company's assets, liabilities and prospects etc (FSMA 2000 s.80). If an investor suffers loss as a result of untrue, misleading or omitted information, the investor has a remedy under FSMA 2000 s.90. There are common law rules to the same effect, though rarely used. This forms part of your assignment and so I am letting you do your own research on this. It is all on the internet anyway. 6. Insider dealing See the Criminal Justice Act 1993 ss.52-64 (the offences of and defences to insider dealing) and the FSMA 2000 Part VIII (market abuse - manipulating or distorting the market by, say, withholding price-sensitive information). The rules only apply to securities being traded on a recognized investment exchange. The rules appear not to apply to former Daily Mirror editors. 7. • • • • • • Different types of shares Ordinary Redeemable Convertible Preference Participating preference Deferred

THE ROLE OF THE DIRECTOR Every company must have at least one director, and plcs must have two. The normal role of the director is to manage the company, subject to any restraints imposed by the company's articles, statute, common law and by his own employment contract. He normally has the right, along with his other directors under the articles to deal with the commercial and administrative matters of the company. The members, who don’t normally wish to be involved in the management of the company and just want a good return on their money, trust him to get on with managing the company, and he equally must do his best for the company. In return he normally gets paid a reasonable amount of money - or in some cases a great deal of money. The members normally will not interfere with his management of the company, but if necessary they may impose restraints on him by special resolution (i.e. a 75% majority) or, in desperation, dismissing him. It is perfectly acceptable for a director to be a shareholder in his own company or to be a creditor of his own company.
The board of directors and types of directors.

Boards of directors usually meet monthly. Chairman Managing director 89

Executive directors Non-executives. Nominee directors. Limits on directors' powers? Historically there were many difficulties with directors who acted beyond the powers that were granted them under the company's constitution. Although technically that is still the case, CA 2006 s.40 says that in practice companies are bound by what their directors make their companies do, so that even if a director does something untoward which that director should not be doing, the company has to live with it, at least as far as third parties are concerned. At the same time, directors ought to address their minds to what they are supposed to be doing as directors, which is furthering the interests of the company of which they are a director (Bishopsgate Investment Management Ltdv Maxwell (No.2) [1994] 1 All ER 261, [1993] BCLC 1282 (CA)). So if the director does something he shouldn’t, he may be liable to his own company.


Although directors' rights are important, the law is more attentive to the duties of a director. This is because: (a) Shareholders have entrusted their capital to the management of the directors and they need to be sure that the directors are using it properly; (b) Shareholders cannot possibly monitor all their directors’ actions and so they have to trust the directors to do the job properly; (c) History suggests that some directors have trouble seeing any difference between their companies’ assets and their own; (d) Most people in a position of power after a while tend to have an exaggerated view of their own importance and entitlements. It should be noted that all the duties applicable to directors apply not only to properly appointed directors but also to de facto and shadow directors. Sometimes some of the duties apply to those associated with a director as well. This sometimes comes as an unwelcome surprise to them. What are the duties? Under common law there were two main duties: • The fiduciary duty • The duty of skill and care

The fiduciary duty – This is the duty to act in good faith in the best interest of the company as a whole and for a proper purpose. This means no • Undisclosed and unauthorised benefits (Guinness v Ward and Saunders [1990] 1 All ER 65, • Secret commissions (Boston Deep Sea Fishing Co Ltd v Ansell (1888) 39 Ch.D 339);


Taking advantage of opportunities, past, present and future, arising out of your position as a director (Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443); Diverting business to yourself from your company (Gencor A CP Ltd v Danby [2000] 2 BCLC 734 Using your (legitimate) powers for an improper purpose (see the Howard Smith case later); Misrepresenting of the company's financial affairs in order to mislead your fellow shareholders (Platt v Platt [2001] 1 BCLC 698); Paying of unjustified dividends (Bairstow v Queen's Moat Houses plc [2000] 1 BCLC 549 and Appeal Court 17 May 2001) Misapplying the company's assets (Bishopsgate Investment Management Ltd (in liq.) v Ian Maxwell (no.2) [1994] 1 All ER 261

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The duty of skill and care Historically the duty of care owed by a director to his own company was pretty light. Nowadays the test is twofold, in that you are expected to have a reasonable level of skill anyway (Re D’Jan of London Ltd [1994] 1 BCLC 561), plus an additional level of skill if you are, say, an accountant or lawyer, (Dorchester Finance Co. Ltd v Stebbing [1989] BCLC 498). This dual standard is also the same level as is expected in wrongful trading under LA 1986 s.214(4). The courts may be prepared to relieve an incompetent director of some or all of his liability by being merciful under CA 2006 s. 1157, which protects directors who have acted "honestly and reasonably"; though they were not willing to offer such relief in Re Simmonds Box (Diamonds) Ltd 2000 BCC 275. Under the articles - see CA 2006 s. 232 - any attempt to draw up articles that completely absolve the directors of any responsibility for anything is void. This common law duty is now enshrined in statute in CA 2006 s. 174.

New duties under the Companies Act 2006 The common law duties are now codified under the Act. To make it easier for directors to find out what the law is, the new legislation sets out “general duties” to be owed by the director to the company (s.170) and to be found at ss.171-177. Some of these continue in force even after leaving the company (i.e. duty to avoid conflicts of interest and the duty not to accept benefits from third parties). The general duties are based on the existing common law, though it is not apparent how directors are expected to know what that is. By virtue of the sections printed below, the common law is, as it were, hoisted in, in a novel method, into statute. It remains to be seen how well this works in practice. This part of the law came into force on 1st October 2007.


S.170(3): The general rules are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director. S.170(4) The general rules shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.
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The general rules are as follows: Duty to act in accordance with the company’s constitution (s.171); Duty to promote the success of the company (s.172); Duty to exercise independent judgement (s.173); Duty to exercise reasonable skill, care and diligence (note the retained dual standard of care) (s.174); Duty to avoid conflicts of interest (s.175); Duty not to accept benefits from third parties (s.176); Duty to declare an interest in any proposed transaction (s.177).

The following is the wording of the law relating to the duty to promote the success of the company (s.172) (this covers much of the common law fiduciary duty but also takes account of wider interests): (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. The duty that is owed by the director to have regard to these matters is owed to the company (s.170(1)). So to raise an action against a director for failure to have regard to these matters means that at least 50% of the members (depending on the articles) would have to vote to do this and have to feel strongly enough about the matter to be bothered to do anything about it. In practice this means that it is unlikely that companies will take action against their directors for breach of the above duties. Hitherto, there was nothing in statute to prevent a director voting in his own favour in his own interest (i.e. voting against an action being raised against himself) and trying to get the company to ratify his behaviour and thus absolve himself of breach, but following s.239 the director (and/or any other person connected with him) may no


longer vote in the director’s own interest. This does not apply, however, if there is a unanimous vote, as otherwise single member companies or husband and wife companies could not ratify anything. Where a company collectively will not act against a director, but an individual shareholder still believes it should, the shareholder is now provided with a potential remedy (see derivative actions later). Purpose of the new legislation The Government, under pressure from its back benches, is trying to shift business culture towards more responsible and ethical directing of companies by directors, to obtain what is called “enlightened shareholder value”. This is partly a result of such scandals as Maxwell’s looting of the Mirror Group Pension Fund and the corporate excesses of Enron and Worldcom. All these duties apply to shadow directors and to sole directors, and to spouses or anyone else “indirectly” interested. S.174 The duty of skill and care: how competent is a director expected to be in the exercise of his company duties? See the duty of skill and care above. Statutory duties owed by a director to his company There is a range of duties of duties CA 2006, covering the following:
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Long term service contracts (note however the new two year rule rather the former five year rule) (s.188); Substantial property transactions (the equivalent of CA 1985 s.320) (note the less than 10% of net asset value or £5,000 de minimis rule and the automatic requirement of approval for anything over £100,000, and that service contracts are not caught by this rule) (s.190); these transactions must have the approval of the members; Loans, quasi-loans and credit transactions (s.197) of more than £10,000(s.210) though directors may receive loans to defend court action against them in their capacity as directors provide they repay the loan on conviction or being found liable (s.205). If a director receives a loan from a company to enable him to defend himself in an investigation or action taken by a regulatory authority, there is no requirement to repay the loan (s.206); Payments for loss of office (s.215-219) (note that this applies to payments for loss of any type of office by a director, not just his directorship though there is a de minimis exception of £200); these require members’ approval.

With all of these, members’ approval must be obtained and unless ratified under s.239 (without the directors’ votes) the director has to indemnify the company for any loss. The rules, as at present, extend to those connected with the director. So how does a director protect himself!


Ideally, a company director seeks advice from the company secretary or a lawyer before he enters upon any transaction or activity that might be a breach of his fiduciary or statutory duty (or indeed, his duty of skill and care). What he is meant to do, if there is any element of conflict of interest, according to most companies’ articles, is that he should declare his interest in any matter in which he has a material interest at the first available board meeting after he becomes aware of the potential for unauthorised benefit. If it is material he may not then vote at the board meeting on that matter where it is discussed and approved (though some companies’ articles are not so strict). This basic procedure will normally protect a director. Broadly the same procedure arises whenever a director in his private capacity in involved in a “transaction or arrangement” with his own company (as when he sells something to a company) s.177). If the matter is illegal, such as a fraud on the company, no amount of approval from the members will validate it (Cook v Deeks [1915] 1 AC 554 (PC)). If the director has breached his fiduciary duty, his duty of skill and care or certain statutory duties, he may be able to persuade the members to ratify his breach and absolve him of any liability, provided that the breach was not illegal, contrary to statute or something that required a special resolution. Under the Companies Act 2006 s.239 he may no longer use his own votes to ratify his own breach except where there is a unanimous vote of approval in favour of the ratification. If an action is raised against a director for breach of any of his duties to his company, the courts may be prepared to relieve the director of some or all of the liability arising from his breach by the operation of CA 2006 s. 1157, where the director has acted “honestly and reasonably”. More cynical methods include • having no outside shareholders; • being a small company that does not require to be audited, • never selling the company since the incoming shareholders might discover more than the seller might wish. Regulatory duties Directors may be punished by fines and imprisonment if they fail to lodge proper returns with Companies House or in other respects fail to comply with company or insolvency law. They are also expected to co-operate with receivers, liquidators and administrators, DTI inspectors and other regulatory officials such as HSE executives, the Inland Revenue, Customs and Excise etc. Non-statutory duties - Corporate Governance There are additional requirements for directors of listed companies. Directors are expected to adhere to the Combined Code, (to be found in the "Purple Book" which is the rule book for companies whose securities are traded on the London Stock Exchange). The Combined Code promotes best practice of accountability and transparency as advocated in the Cadbury and subsequent Reports. Corporate Governance works on the principle of the “spirit of the law” as opposed to the “letter of the law” expressly to ensure high standards. Corporate Governance requires that


directors comply with the concept of “comply or explain” (i.e. companies should either comply with best practice or explain why they are not doing so). Corporate Governance is seen by some critics as a box-ticking, time-wasting, antienterprise and futile exercise. Promoters of Corporate Governance point to the failure by directors to adhere to proper standards of commercial probity - with disastrous effects on the share price - as a good reason for insisting that Corporate Governance be taken seriously (vide Worldcom, Tyco, Enron, Royal Bank of Scotland). Promoters of Corporate Governance assert that Corporate Governance is nothing but good common sense writ large. There are no specific sanctions for failure to adhere to corporate governance standards, but the market will generally make its own mind up and its view will be reflected in the company’s share price. Duty of care owed by directors to third parties On the whole, there is no liability to creditors or outsiders except when the company is heading towards insolvency, when there is a duty to consider the interests of the creditors (West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30). This can produce some tough decisions (Richardson v Pitt-Stanley [1995] 1 All ER 460). As indicated earlier, a director can be personally liable for his negligent acts but only if he accepts personal responsibility, and if the victim relied on the director personally (as opposed to relying on his company). Where the director acts through his company, however hopeless he is, he is safe (Williams v Natural Life Health Products Ltd [1998] 1 WLR 830). So a director may be negligent with impunity if he is negligent through his company. A director may be tempted to use the corporate structure to avoid paying the company's creditors or sometimes to hide assets by putting them into a company. If however he has entire control of the company, to the extent that the company itself can be seen as a sham or a façade to receive improperly removed funds from elsewhere, the corporate veil may be pierced and the director made liable to a creditor (Trust or AB v Smallbone and Others [2001] 3 All ER 987). Procuring that a company commits a wrongful act may make the director personally liable to creditors (C. Evans & Sons Ltd v Spitebrand Ltd [1985] 1 WLR 317) The fact that a director made a fraudulent misrepresentation through his company will not save him from liability Standard Chartered Bank v Pakistan National Shipping Corporation [2002] 3 WLR 1547, [2003] 1 All ER 173, not least because if it were otherwise, every dodgy director would commit frauds through his company and thereby avoid liability, particularly if the company was not worth suing. Where a director commits a fraud, he is on his own! Directors and insolvency When a company becomes insolvent, the liquidator is entitled to look at what was happening in the period leading up to insolvency, and if necessary to see how the directors had been behaving. If they had not been dealing properly with the company's assets, then that reduces the amount of assets available to the company’s creditors. The court can make the directors compensate the company for any loss occasioned by the directors' behaviour, under the following grounds: IA 1986 s.21.2 - misfeasance see Re D 'Jan of London Ltd above


IA 1986 s. 213 - fraudulent trading. On winding up and petition to court by liquidator, the court may hold that parties conducting business knowingly with intent to defraud creditors should be liable to contribute to the company's assets in liquidation. In practice this is very rare because of the difficulty of proving the intention to defraud. It is much more common to use ss.212 and 214. Fraudulent trading is also an entirely separate criminal offence - CA85 s 458 IA 1986 s 214 - wrongful trading This arises on winding up and following a petition to the court by liquidator or administrator. If director knew, or ought to have known that there was no reasonable prospect of the company avoiding insolvency, the director can be made liable to compensate the company. What are the practical consequences of this? The standard of care required is that of a reasonably diligent person would have taken, unless the director in question had some special qualification which would have raised his expected standards (such as being a qualified accountant). The directors' sole defence is that he took every step to minimise loss to creditors. This is a very demanding standard and really does mean that a director should seek professional advice for his company's difficulties at an early stage, rather than just hoping for the best. See Re Produce Marketing Consortium [1989] 3 All ER 1 IA 1986 s 216 - preventing "the phoenix" rising again. APPOINTMENT OF DIRECTORS At present, because the relevant bits of the Companies Act 1985 are still in force, directors are normally initially appointed when the company is founded, by signing the registration application. Thereafter they are appointed by whatever means is specified in the articles, which may be election by the members, appointment by the other directors etc. Each time a director is appointed he is required to fill in the required form (probably to eb called a form 167) and to disclose limited information about himself, such as his name, service address, occupation, nationality etc. A director is a director by whatever name called: CA 1985 s. 741. De facto directors. Shadow directors Dismissal of directors This is done by whatever means are indicated in the articles, which failing, the members may use CA 2006 s.168 (simple majority, but special notice and right of protest). One way of getting round this is by having special voting rights attaching to the director's shares (Bushell v Faith [1970] AC 1099, [1970] .1 All ER 53 (HL(E)), or by the use of shareholders’ agreements.


Disqualification This is governed by the Company Directors' Disqualification Act 1986. The court (but not the members) may make an order an order banning a director from being a director for up to fifteen years on the application of the liquidator, receiver, administrator or Official Receiver (in England), the Secretary of State or DTI inspectors. This rule applies to former and shadow directors as well (Re La-Line Electric Motors Ltd [1988] 2 All ER 692).

Company secretary For a private company, any legal person may be a company secretary, but if the company has only one director and it is a single member company, it is necessary to have a separate human being as the company secretary. In the case of a pIc, the company secretary has to be properly qualified (CA 1985 s.283). From 1 October 2008, private companies do not need to have a company secretary. The company secretary is treated as an officer of the company and the company is vicariously responsible for his actions (Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711). Commonly, for larger companies, a company secretary is a lawyer, chartered accountant or a chartered secretary. What does he do? He has to organise and minute meetings -no small matter when it comes to large AGMs with thousands of shareholders. He prepares the paperwork to be sent to the Registrar of Companies. He is a general dogsbody, who deals with all the stuff the directors don't know what to do with. So he commonly deals with tax, insurance, legal matters, employment, etc. Do we need company secretaries? Company secretaries commonly have to write the minutes and keep company recoreds. “The conscience of the company” Compliance officers The Institute of Chartered Secretaries and Administrators, the professional body for company secretaries, has a very useful website and a monthly journal which covers many of the practical and administrative matters that a company secretary has to deal with. The ICSA is particularly well informed on matters to do with corporate governance, best practice and the role of the company secretary in major listed companies - while dealing with matters pertaining to small private companies as well. After the board has gone to its dinner, The secretary stays and gets thinner and thinner:


Racking his brains to record and report What he thinks they think they ought to have thought. Auditors The need for auditors All companies with the exception of dormant companies (s.480) and certain small companies (s.477) need auditors (s.475). An auditor may be an individual, a partnership, a limited liability partnership or a registered company but under whatever form the auditor is operating, the auditor must be independent of the company, and eligible in terms of his professional requirements by being a member of a recognised professional supervisory accountancy body (s.1209). Should the auditor turn out not to be eligible the Secretary of State may order a second audit (CA 2006 s.1248). 2. Appointment of auditors A company's first auditors are appointed by the directors, and they hold office until the first general meeting at which accounts are laid, whereupon they may be reappointed for the period up to the next general meeting at which accounts are laid (CA 2006 s.485). Thereafter the auditors are usually re-appointed annually or until the next general meeting at which accounts are laid.

3. The rights of auditors Auditors have the right of access to all the company's books and accounts, and are entitled to obtain such information and explanation from the company's officers as they need (s.499). Misleading the auditors is a criminal offence. Directors of subsidiaries are required to give the auditors of holding companies all the information that the auditors of the holding company may reasonably require (CA 2006 s.500). Auditors have the right to receive notices of and attend all general meetings and to speak at such meetings. Auditors must disclose the terms of their appointment (CA 2006 s.493). Furthermore, auditors and their associates must also disclose in detail what other benefits the firm of accountants carrying out the audit receives from the audited company (CA 2006 s.494). 4. Removal and resignation of auditors When an auditor leaves, he must deposit a statement at the company's registered office (s.519). The statement must disclose any circumstances in connection with the auditor's ceasing to hold office and which he considers should be brought to the attention of the members or creditors of the company. What is the point of all this laborious procedure? 5. The role of the auditor Auditors have various tasks, of which the primary one is the scrutiny of the company's accounts. They are not there to check that every entry in the company's accounts is satisfactory. They could not possibly inspect every single entry in the company's


books. They merely provide some degree of reassurance as to the accuracy of the company's finances, but are not there to track down every transgression. Lopes L.J. in Re Kingston Cotton Mill (No.2), "the auditors are watchdogs not bloodhounds". Ultimately it is the directors' duty to prepare the accounts, even if the directors have accountants to do the work for them, and it is the directors who are responsible for the accounts. The auditors' job is to provide the report, qualified or not as the case may be, to the accounts, such that it reassures the members that it is reasonable for the directors to have paid a dividend. 7. The liability of auditors It is not permissible for the auditors to be indemnified by the company against claims by the company in the case of negligence or default (CA 2006 s.532), though the company may indemnify the auditor for his costs in the event of his defending himself against a claim successfully. Although there may be contractual arrangements to the contrary, the primary duty of care that auditors owe is to the company that hires them to carry out the audit. This was established in the well-known case of Caparo Industries pIc v. Dickman Touche Ross [1990] 2 WLR 358. Normally the only way the auditors could have a responsibility to individual members or bodies other than the company which commissioned the audit was if they were put on notice that a particular member or body was relying on the audit, (ADT Ltd v. Binder Hamlyn [1996] B.C.C. 808), or where it could be reasonably anticipated that a particular member (Electra Private Equity Partners v. KP MG Peat Marwick [2000] B.C.C. 368) or body would be relying on the audit even if there were no contractual relationship (Royal Bank of Scotland v Bannerman Johnstone Maclay 2003 S.C. 125,' 2003 S.L.T.181). Auditors of subsidiaries can reasonably expect that the holding company members will have an interest in their subsidiaries' accounts and auditors may then be liable to the holding company (Barings plc v. Coopers and Lybrand [1997] 1 BCLC 427, [1997] B.C.C. 498). The Caparo decision is still the current law, but increasingly the duty of care that is to be expected in each case will be specified in the terms under which the audit is carried out. Auditors are becoming very cautious as to the terms under which they will do their audit and making it quite clear that only the commissioners of the audit (generally the company) will have the legal standing to sue on the audit if it is inaccurate. In particular since the Bank of Scotland v Bannerman Johnstone Maclay case it is important that there should be a clear disclaimer of liability towards anyone other than the intended recipient of the audit. Auditors may now limit their liability by means of a liability limitation agreement if is fair and reasonable and is approved by the members (CA 2006 ss.534-589) 8. Fraudulent directors who mislead the auditors 99

Auditors will not in general be liable if they had been misled by fraudulent directors (Galoo Ltd v. Bright Graham Murray [1994] BCLC 319, Barings pic (in liqu.) v Coopers and Lybrand (No.5) [2002] EWHC 461 (Ch.D)) If autitors uncover fraud they are expected to report it to the relevant authorities and will be liable for any loss to the company arising out of their failure to do so (Sasea Finance Ltd v KPMG [2000] 1 BCLC 236, [2000] B.C.C. 989). Directors are expected to tell auditors everything that the auditors might be expected to want to know about (s.500).

Traditional minority protection Historically, minority shareholders had a raw deal, as a result of the logical severity of the Foss v Harbottle rule. Unless the minority shareholder's claim fell within one of the few permitted exceptions, minority shareholders just had to suffer in silence or sell their shares (if they could) unless they could persuade the courts to have the company wound up on the "just and equitable" grounds of IA 1986 s.122(1)(g). For a very long time judges were reluctant to entertain minority protection cases. Typical types of minority prejudice Common types of minority prejudice include the following: . lack of information about the company; high-handed decision-making; preferential treatment for some shareholders (re Bird Precision Bellows Ltd [1986] Ch.685) misuse of company funds, especially where the majority shareholders are also the directors; majority shareholders using their majority to approve a rights issue which the minority could not afford to take up (Re Cumana Ltd (1986) BCLC 430); majority shareholders using their voting power to give directors (themselves) excessive benefits; failing to raise an action which ought to be raised against a company with which the majority shareholders are closely connected; altering the articles in a way disadvantageous to the minority;


dismissing a minority shareholder from his directorship and and/or refusing to buyout his shareholding. General observations about minority protection Shareholders should look after their own interests (R A Noble (Clothing) Ltd 273[ 1983] BCLC The court may be merciful in its decisions Re H R Harmer Ltd [1958] 3 All ER 689). Litigants ought to know better. In Re Elgindata Ltd [1991] BCLC 959 there was a dispute over shares purchased for £40,000; after the £320,000 worth of costs, the shares were found to be worth £24,600. The problematic areas The courts will not entertain any commercial disputes, because judges consider that their role is to decide on the law, not to choose which of two commercial decisions is the better. At the same time it is sometimes difficult to establish where a legal dispute starts and a commercial dispute ends.

Need to prove unfair prejudice In order to petition successfully for minority protection, the minority shareholders need to prove that they fulfill the criterion of CA 2006 ss.994-999, in that the majority has conducted or proposes to conduct the affairs of the company in a way that is unfairly prejudicial to the interests of the minority members or indeed all members of the company. So an act by the majority may be prejudicial but not unfair, if, for example, the minority has previously consented to its happening, if it is in the articles (which the members are assumed to understand) (see Re Saul Harrison and Sons plc [1995] 1 BCLC 14, CA) or if it is anticipated in a shareholders' agreement.

The significance of O'Neill v Phillips [1999] 2 All ER 961 This case is the current leading case on minority protection, and what it has tried to do is rein back the law from being too generous to minority shareholders and to set out mechanisms to limit the opportunities for minority shareholders to make claims against majority shareholders. The case also clarifies some ambiguities arising from the Saul Harrison case. In O'Neill v Phillips the minority shareholder was unable to establish on the basis of either contract, statute, the memo or the arts that he had a valid claim against the majority shareholder who in the minority shareholder's eyes had let him down. How to avoid minority claims if you are a minority shareholder From the point of view of the majority shareholder, the way to avoid a potential claim is to do the following:


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make sure the matter to be objected about is a commercial matter; don't put undertakings to minority shareholders in writing; allow yourself room for manoeuvre and backing out: it may not be good for your eternal soul, but you are allowed to do this; remember that shareholders’ rights are normally as outlined in the memorandum, articles and any shareholders’ or other contractual agreements; if you stick within the wording of those three documents, it will be hard to fault you (Re Saul D. Harrison and Sons plc); it is unwise to prevent a former director receiving a fair offer for his shares, though for a minority shareholder either to lose his directorship or to have trouble withdrawing his capital from a company is in its own right not automatically good grounds for a petition unless the company is a quasipartnership company; remember that mere loss of trust by the minority in the majority is not automatically grounds for a successful petition; when drafting the articles or shareholders' agreement, make sure there is a fair and sensible exit route for minority shareholders.

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A fair and sensible exit route A fair and sensible exit route, as stated in 0 'Neill v Phillips, is that in the event of a dispute, the majority may consider offering to buy the minority shareholder out. If the majority offers to do this • at a fair value, • with no discount for a minority shareholding, • with the value if necessary being established by independent valuers acting as experts not arbiters, and • with both parties being entitled to equal access to all relevant information it will be difficult for the minority to complain that he is the victim of unfairly prejudicial conduct at least as regards the making of an offer to buy him out.

Derivative claims (CA 2006 ss.260-269) This part came into force on 1st October 2007. This is not to be confused with a CA 1985 s.459 (CA 2006 s.994) petition which is where a minority shareholder petitions for a personal remedy for himself. It is best used as an exit strategy. A derivative action is one where the shareholder seeks a remedy for the whole company on the grounds that the directors have been misbehaving and failing to promote the success of the company. The law on this area was seen as unsatisfactory, and in line with similar procedures in Canada, the law is being changed. Henceforth a shareholder will be able to use the new procedure to bring an action in respect of any actual or proposed act or omission 102

involving negligence, default, breach of duty (such as the ones above) or breach of trust by a director. It will be available even where the director has not personally benefited or even when the director or directors concerned does or do not control the majority of the company’s shares. It will provide a remedy for shareholders who otherwise would find it difficult to make a claim. The legislation also extends to former directors as well (CA 2006 s.260).

Winding up. As a more drastic alternative, it is possible to wind up the company under the just and equitable grounds ofIA 1986 s.122(1)(g), as in Ebrahimi v Westbourne Galleries [1973] AC 360 or the Scottish case of Jesner v Jarrad Properties 1993 SC 34, (1993) BCLC 1032. But the company must be solvent as otherwise there would be nothing to get back, and the petitioner must demonstrate that there is no better alternative (IA 1986 s.125). DTI inspections. It is also possible to ask for DTI inspectors to be sent in, but this is potentially expensive, and you need at least 10% of the members to support you (CA 1985 s.431) - this is to deter frivolous complaints. THE CAPITAL MAINTENANCE RULE The creditors’ buffer Company law postulates that capital once paid into a company is predominantly for the benefit of the creditors and forms a "creditors’ buffer" which may not be eaten into by the members except under restricted circumstances. The theory behind it is noble, in that there should always be some funds for creditors, and it prevents members extracting the company's money ahead of creditors before the company becomes insolvent. It is more of an issue for public companies because they all have to have a minimum capital of £50,000. This is to ensure that plc status is not lightly embarked upon and to give some reassurance to creditors. The commercial reality is that it is all a bit of a nuisance, especially for private companies with a share capital of only £100. Nevertheless we have it and we have imposed our rules, rightly or wrongly, upon Europe. The capital maintenance rule applies to: • the acquisition or redemption by a company of its own shares, • the prohibition on financial assistance, • reduction of capital • the payment of dividends only out of distributable profits, • the net asset rule for plcs. Acquisition or redemption by a company of its own shares


• •

Why was there a general prohibition on the purchase by a company of its own shares? Talking up the share price; Owning its own shares - how should it vote?

Why might a company wish to buy its own shares? • Getting rid of a shareholder • The company rich but the members poor • Buying shares could thwart a takeover bid • Increase in asset value per share • Increase in earnings per share - plus cash benefit for remaining shareholders • Company has more cash than it knows what to do with • Buying back employees' shares • Better home for the cash • Cheaper to borrow than to pay dividends? • Buying back shares from a manager The off-market method - see CA 2006 ss. 694-700 Not suitable for listed companies though technically available. Only really appropriate for private purchases • Contract in writing first; • special resolution to approve contract; • no voting by interested parties preferably; • time limit of 18 months for plcs; • contract retained for ten years. The market method - see CA 2006 ss.701 • Only really suitable for companies whose securities are traded on a recognised investment exchange; • ordinary resolution required; • limits of time period and amount that maybe spent or alternatively price may be within a certain price range (why?); • information to Stock Exchange. Law relating to both procedures: • Registrar of Companies must be informed on appropriate forms; • purchase price must be made from the proceeds of a new issue of shares or the from distributable profits, though private companies may under certain circumstances use capital; share premium account may also be used under restricted circumstances; • Creation of capital redemption reserve • if there are no funds with which to effect the redemption or repurchase the company cannot be liable in damages for failure to redeem or repurchase. Financial assistance (CA 2006 s.677) Sometimes a company wants to have a particular person as a shareholder, but that shareholder does not have the funds to pay for his shares. It is permissible under limited circumstances for a private company to lend that person money with which to buy the shares, or to provide security for a loan with which to buy the shares. It is very difficult for plcs to provide such assistance, unless it is to benefit employees. The 104

legislation on this area is well recognised to be unsatisfactory, but is designed both to permit innocent transactions while prohibiting Guinness-style scandals. The rules relating to financial assistance are likely to be much simplified for private companies, and clarified for public ones. Reduction of capital (CA 1985 ss.135-141) This is not very common, but sometimes a company has more capital than it knows what to do with, or the company's assets are not represented by its capital, because of the devaluation of the assets. In this case, it is possible to apply to court to reduce the company's capital, following prescribed procedures. This means that the company writes off its capital losses, but may be able to start paying dividends again. The theory is that reduction of capital could mean that there would be less recourse for creditors, and so creditors need to be protected by laborious court procedures. The rules relating to reduction of capital are soon likely to be much simplified for private companies and made easier for public ones. Dividends A company may normally only pay dividends where its accumulated realised profits exceed its accumulated realised losses (CA 2006 s.830). Note the importance of accumulated and realised. An unrealised profit does not count, as when a property is revalued upwards. You can create a revaluation reserve, but you cannot treat that as profit. You can only have profits when you actually sell (i.e. realise) an asset; you can't book a profit ahead of sale. Dividends for plcs For plcs the rules are stricter. The net asset rule applies (CA 2006 s.831) (sometimes known as the full net worth rule). This means that before a plc pays a dividend the company’s net assets must be greater than its share capital plus any other undistributable reserves (i.e. its share premium account, revaluation reserve and any other special reserves); and the dividend payment must not reduce the net assets to a figure less than all its capital and reserves. This can be a disadvantage for plcs and clients should be warned about this. Private companies don't need to worry about this. Payment of dividends It is the job of the directors to decide at what level to pay dividends. Fund managers don't like surprises, so directors like to smooth the dividend path. Some companies' articles prescribe when and how and at what level dividends may be made, but most leave it up to the directors. The members may not usually challenge their decision unless the articles say otherwise. The directors base their decision on the basis of the accounts. CA 2006 lays down various complicated rules about accounting, but broadly speaking, both under CA 1985 and the Listing Rules, you have to play straight by the accounts. Off-balance sheet accounting, as practised by Enron, should not be possible. If the directors declare a dividend which at the time was reasonable, even if in retrospect it was unwise, it can still be a valid dividend; but if it is a dividend that cannot be justified, the directors will become personally liable for the dividend and so will any recipients of the dividends who know that the dividend is unjustified (Bairstow v Queens Moat Houses plc [2000] 1 BCLC 549).


Why have meetings? Companies have meetings, but mostly they would prefer not to. Meetings are all about accountability - the accountability of the directors to the members. In addition, certain matters regarding the company are reserved to the members alone and not the directors. These include: (i) changes to the name and articles of association; (ii) changes to the capital of the company (iii) the removal of directors and auditors; and other matters as specified under the articles.
Annual general meetings

Only public limited companies have to have general meetings, though private companies may do so. When a plc is founded, it must have its first annual general meeting ("AGM") within at most 18 months of its incorporation(CA 2006 s.336). Thereafter it should have an AGM every year with no more than 15 months between each AGM. At an AGM, by convention, it is common to do the following: • • • • • • table and have signed the minutes of the last AGM (if there was one); approve the annual accounts and the directors' report; approve the recommended dividend; appoint or re-appoint auditors; direct the directors to fix the remuneration of the auditors; appoint any new directors.

The members may if they wish discuss anything else, or discuss any other resolutions including "requisitioned" resolutions (i.e. ones that the members have insisted be included in the AGM) (CA 2006 s.338). Normally the directors instruct the company secretary to send out a notice of the AGM to the members. The notice will contain all the required information (date, time and place, text of resolutions to be discussed, provisions for proxies, additional information, maps, parking arrangements etc). There must be 21 days notice of an AGM (CA 2006 s.337). It is possible to dispense with the 21 days notice if all the members agree (s.307). There are various provisions to enable all this to be done electronically. Extraordinary general meetings Any other meeting of all the members is known as an extraordinary general meeting ("EGM"). It is permissible for the members to requisition an EGM if necessary. Notice of an EGM is given in the same manner as for an AGM, but only 14 days notice is required (CA 2006 s.307), though the 14 days notice may be dispensed with.


Practice of the meeting

The chairman presides over the meeting and deals with each matter on the agenda, usually beginning with the approval of the previous minutes. The company secretary guides the chairman through the meeting, provides legal advice where needed and makes all the arrangements. He or she also takes the minutes. The minutes are deemed to be a proper record of the proceedings and of the passing of the various resolutions (CA 2006 s.355). If registrable resolutions are passed, the company secretary makes a certified copy of the relevant resolutions and sends them to the Registrar of Companies. Types of resolution The main types of resolution are as follows: • Special - 75% of the votes cast in favour - used for constitutional changes (i.e. to the Memorandum and Articles) and major alterations to the company's capital (CA 2006 s.283); all such resolutions must be registered with the Register of Companies within 15 days. • Ordinary - bare majority of votes cast in favour - used for less contentious matters; only some such resolutions, mostly involving capital, need to be registered as above (CA 2006 s.282). • Ordinary resolutions with special notice (CA 2006 s.312) - bare majority, but there must be 28 days notice to the company beforehand so that on the notice of the meeting it may say that "Special notice has been received of the following resolution". This is supposed to alert members to the significance of the resolution. Ordinary resolutions with special notice are used for the dismissal of directors and of auditors (and of an auditor's appointment under certain circumstances). The 28 days notice requirement for these matters overrides the normal ability to hold meetings at short notice.
Further types of resolutions for private companies

The above four types of resolution are common to all types of company. However, private companies may do everything by written resolutions, except dismiss director or auditors. Written resolutions must be signed by all the members, though not necessarily on the same piece of paper. A written resolution that were it not written would have been registered with the Register of Companies anyway will still need to be registered. Normally a written resolution will require to be signed within 28 days of its circulation date and the relevant percentage for approval obtained. Voting Voting is normally initially done by a show of hands, but there may be a demand for it to be done by poll (s.373), which means that you vote according to the number of shares you represent in person or in proxy. This sometimes overturns the vote on a show of hands. It is not permissible to "fix" the articles so as to make it difficult to prevent a poll being taken. Some companies will have a quorum without which meetings will be invalid. E-voting is permitted under the Companies Act 2006, and institutional investors in quoted companies will be required to be more transparent in their voting in quoted companies. Single member companies


Such companies are often particularly careless about meetings, but they still have to have meetings, to pass resolutions and to keep records (s.382B) of decisions. Ideally the company secretary (who must be different from the director) should be present. See Neptune (Vehicle Washing Equipment) Ltdv Fitzgerald [1996.] Ch 274. Board meetings These are a matter for the board to regulate, but records must be kept (s.248). Members are not normally allowed to see board meeting minutes.

The relevance of meetings On a wider scale, it is becoming apparent that general meetings are increasingly futile as a means of rendering directors accountable to the members, mainly due to the dominance of the Institutions, shareholder apathy, scepticism about the comprehensibility and accuracy of the information being given to the shareholders, not to mention the inability of most private shareholders to understand the accounts or read the directors' report. There is also a widening gap between small shareholders and the Institutions, many of which in their own right are invested in by smaller shareholders. The current view is that meetings in principle are a good idea, but there is very little need for them in private companies unless the members specifically want. them.

Corporate insolvency 1. Liquidation is the conversion (usually into cash) of a company’s assets in order that they may distributed in the first place to the creditors and in the second place to the members in accordance with the terms of the articles. The official carrying out this task is a liquidator who is an insolvency practitioner. Once a company is in liquidation it cannot carry on any further business except through the liquidator, no shares may be transferred and the directors cease to manage the company. The liquidator is like a director in that he is in a fiduciary relationship with the company. He also has various public duties such as reporting to the Secretary of State if there are matters concerning the directors’ conduct which may be significant. 2. If liquidation did not exist, what would happen ? Balance between punishing errant directors and allowing genuine but failed directors a second chance. A summary of liquidation procedure: (i) the company is put into liquidation; (ii) an interim liquidator is appointed; (iii) creditors are invited to submit their claims; (iv) a (full) liquidator is appointed; 108


(v) (vi) (vii) (viii)

the liquidator gathers in the company’s assets in all the permissible ways; the liquidator then pays out funds to the creditors, in full if possible, otherwise in proportion to their claims; if there are still funds, the shareholders are repaid their capital, in full if possible, otherwise in proportion to their shareholding; the liquidator applies to have the company struck off if necessary; if the company has been sold as a going concern this may not be necessary. Occasionally companies may be revived if undiscovered assets emerge later.

1. The liquidator can be contrasted with the (old style) receiver. (Note that receivers are gradually been phased out following the operation of the Enterprise Act 2002). So what exactly is the difference? 2. The receiver is only interested in the assets subject to a floating charge. The liquidator is interested in what is left over, subject to the prior claims of secured creditors such as standard security-holders and receivers. Liquidation in its own right will trigger receivership for any pre-Enterprise Act floating charges and will entitle fixed charge holders (such as standard security holders) to exercise their rights too. Where there are no charges, the liquidator can deal with all the company’s assets. Increasingly, however, following the Enterprise Act 2002 administrators are being appointed, and they will try to rescue the company if they can, rather than putting the company into liquidation. But the nuclear option of liquidation still will remain. 5. There are three types of winding up: * winding up by the court * members’ voluntary winding up * creditors’ voluntary winding up. Winding up by the court is compulsory in the circumstances where it is allowed. Voluntary means what it says: the company chooses to wind itself up. A members’ voluntary winding up means that there should be funds repayable to the members after payment in full to the creditors, and so the winding up is for the members’ benefit.


A creditors’ voluntary winding up means that there will be no funds repayable to the members but there should be some for the creditors. Consequently a creditors’ voluntary winding up is for the creditors’ benefit. 6. Winding up by the court See Insolvency Act 1986 s.122 Various grounds are stated, but the most common are * the inability to pay its debts (IA 1986 s.122(1)(f), which is defined in s.123 (1) as (a) a failure to pay £750 or more when given three weeks notice to do so (s.123(1)(a); (b) a failure to pay within the induciae of a charge (15 days) following an extract decree, registered bond or protested bill (S.123(1)(c); (c) the company’s inability to pay its debts as they fall due (S.123(1)(e). This means (i) that the company cannot pay its bills even though technically it is solvent - it is just that it has a severe cash flow problem; or (ii) that the company’s assets are less than its liabilities taking into account all its “contingent and prospective” liabilities (s.123(2)); * that it would be “just and equitable” to wind the company up(s.122(1)(g)). Grounds that have come within this definition include the following: (a) quasi-partnership cases (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, Virdi v Abbey Leisure Ltd [1990] BCLC 342) (b) oppressive conduct by the majority shareholders or directors (Loch v John Blackwood Ltd [1924] AC 783). 7. Who can petition to wind up the company (IA 1986 s.124) ? Basically, the company itself, the directors, creditors, contributories (members who owe the company money), the S of S, and various others. The commonest is a creditor, though the courts have a limited discretion if other creditors object and the petitioning creditor is motivated by bad faith (IA 1986 s.195). Once the petition has been granted, the interim liquidator is put in place and publicity given to the liquidation (use of Gazette, notices in the press etc.). The temporary (sometimes known as interim) liquidator convenes a meeting at which a (full) liquidator is appointed (IA 1986 s.138). He then has the task of dealing with all the company’s assets. Thereafter he proceeds with the liquidation as narrated later. Members’ voluntary winding up This is where the members choose to wind up the company in the expectation that they will get something out of it. They vote for the winding up, generally by means of an extraordinary resolution (IA 1986 s.84(1)(c)). Publicity is then given and a liquidator of the members’ choice appointed. Not more than 5 weeks (IA 1986 s.89(2)(a)) prior to the resolution the directors must have




made a statutory declaration to the effect that having made a full inquiry into the company’s affairs they are of the view that the company can pay all its debts within a year (IA 1986 s.89(1)). Why is this statutory declaration important? The liquidator then gets on with it as narrated later. 10. Creditors’ voluntary winding-up This is where the members vote to wind up the company (IA 1986 s.84(1)(c)) but they know there will be nothing left over for them. No statutory declaration is necessary. A creditors’ meeting must be arranged within 14 days and all creditors invited (IA 1986 s.98). At the meeting a liquidator is appointed, of the creditors’ choice usually (IA 1986 s.110(2)). The assets of the company are then vested in the liquidator in the usual manner. Getting in or “ingathering” the company’s assets The liquidator assesses what assets the company still has. He then tries to get in all the debts the company is due. In particular he can: (a) have certain forms of diligence against the company’s assets set aside under the “equalisation of diligence rules” (IA 1986 s.185) whereby any attachments and arrestments within a period of 60 days prior to the appointment of the liquidator are all treated as taking place at the same time: the creditors then have to hand back what they have received from the company and then can claim as ordinary creditors later; (b) set aside certain antecedent transactions (IA 1986 s.242, 243) if they are gratuitous alienations or unfair preferences: (c) set aside dodgy floating charges (s.245). (d) make directors repay or return to the company in liquidation such sums of money or other assets as they may have misappropriated or been otherwise liable for under the misfeasance provisions of IA 1986 s.212 (Re DKG Contractors Ltd [1990] BCC 903 – payment by about to be insolvent company to a sub-contractee company personally controlled by the directors)(Re Barton Manufacturing Co Ltd [199] 1 BCLC 741 – insolvent company made gifts for dubious purposes and circulated cheques (to give appearance of solvency) not in good faith, and diverted insurance funds payable to company into hands of others); (e) make anyone involved in fraudulent trading re-imburse the company in liquidation (IA 1986 s.213) (actual dishonesty must be proved – re Patrick and Lyon Ltd [1933] CH 786); make any officer of the company who had caused the company to trade wrongfully to contribute to the company’s assets (IA 1986 s.214) (Re Produce Marketing Consortium Ltd (No.2) [1989] BCLC 520);




(g) make any director involved in the management of a phoenix company contribute to the company in liquidation (IA 1986 s.216).

All these methods are known collectively as “swelling the company’s assets”. 12. Once the liquidator has got everything in, he begins the distribution. He makes sure he gets his own fees and expenses first. He doesn’t need to worry about the fixed security creditors, who sell their secured assets, take what they can, reimburse the receiver or the liquidator (as the case may be) if there is a surplus or claim as unsecured creditors for any deficit. Floating charge holders are given their entitlement and if they receive a surplus they hand it to the liquidator. If there is a deficit the floating chargeholder will claim for it as an unsecured creditor. The liquidator divides the remains between first the preferential creditors, then the unsecured creditors, the deferred creditors, and finally the members, in each case in proportion to their claim. 13. Administration is very procedural and technical so this is only a summary. Under the Enterprise Act 2002 instead of a company being put into liquidation, a qualifying floating charge holder (or indeed, the directors, a creditor or the members) may put the company into administration, either through the courts or directly, and this freezes the company (by means of a moratorium for up to a year) and insulates it from its creditors. The creditors’ claims remain the same but they cannot enforce them without leave from the court. The administrator, who is an IP, then takes over the management of the company, sorts out the mess, sells off the worthwhile bits and puts the rest into liquidation. Occasionally he may be able to nurse the company back into health. Most commonly nowadays he sets up a “prepack” which is the sale of the good bits of the company to people who have been set up beforehand to buy the good bits off the administrator. The good thing about this is that it keeps the company going and employees in jobs; the bad thing is that it stuffs the unsecured creditors as the liabilities are all left with the administrator who then puts the remaining bits into liquidation. The administrator’s primary job is to rescue the company as a going concern, which failing to repay all the creditors, which failing to repay the secured creditors. Out of the money he gathers in he has to pay a “prescribed part” to unsecured creditors. This is believed will save some small businesses from collapsing.





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