Black Branch Jonathan International Business Law

International
Business Law
J. Black-Branch
This document was prepared for the University of London by:
 Jonathan Black-Branch, Professor of International Law Royal Holloway University of London
It is part of a series of chapters developed for the module on International Business Law by the same
author, and published by the University of London. We regret that the author is unable to enter into any
correspondence relating to, or arising from, this chapter. Correspondence should be addressed to the
module leader, via the WWLC.
Publications Office
University of London International Programmes
Stewart House
32 Russell Square
London WC1B 5DN
United Kingdom
www.londoninternational.ac.uk
Published by the University of London
© Royal Holloway, University of London 2013
All rights reserved. No part of this work may be reproduced in any form, or by any means, without
permission in writing from the publisher.
Contents
Module Overview 1
About the Author 1
How to approach the module 2
Module Introduction 4
Module Contents 6
Module Review 8
Chapter 1: International Business Contracts 11
Introduction 11
Resources 12
1.1 International Business Contracts 13
1.2 A Synopsis of English Contract Law 20
Summary__________________ 42
Chapter 2: Case study questions 43
Introduction 43
Resources 44
2.1 Case study question 1 45
Summary__________________ 50
Feedback on Activities 52
Chapter 3: Company Law – The constitution of the company 63
Introduction 63
Resources 64
3.1 Legal format of the business 65
3.2 Setting up A Company 72
3.3 Types of company 75
3.4 Constitution of The Company 80
3.5 The Company Directors’ 84
Summary__________________ 100
Appendix I 101
Chapter 4: Company Law – Finances 109
Introduction 109
Resources 110
4.1 Shares 111
4.2 Finances – Capital and shares 132
4.3 Financing the company 146
4.4 Companies and the law 164
Summary__________________ 167
Appendix 1 168
Appendix 2 181
Chapter 5: Sale Contracts 189
Introduction 189
Resources 190
5.1 Introduction: The Sales Contract 191
5.2 INCOTERMS – FOB 197
5.3 INCOTERMS - CIF 202
5.4 Documentation 209
Summary__________________ 215
Chapter 6: Sale of goods 217
Introduction 217
Resources 218
6.1 Sale of Goods Act 1979 219
6.2 Passing of Property & Risk 224
6.3 The passing of risk 228
Summary__________________ 231
Chapter 7: Buyer’s & seller’s rights & remedies 233
Introduction 233
Introduction 233
Resources 234
7.1 Buyer’s Rights & Remedies 235
7.2 Seller’s Rights & Remedies 241
Summary__________________ 244
Chapter 8: Contract of finance and letters of credit 245
Introduction 245
Resources 246
8.1 Contract of Finance & Letters of Credit 247
8.2 Letters of Credit & UCP 600 254
Summary__________________ 258
Chapter 9: Carriage of goods by sea 259
Introduction 259
Resources 260
9.1 Contract of Affreightment – Bills of Lading 261
9.2 Common law and The Hague-Visby Rules 268
9.3 Types of Cargo & Carrier’s Immunities 275
9.4 Limitation of Liability & Hamburg Rules 281
Summary__________________ 285
Chapter 10: Charterparty contracts 287
Introduction 287
Resources 288
10.1 Charterparties Introduction and Voyage Charters 289
10.2 Voyage Charters – Laytime, NORs & Demerrage 294
10.3 Time Charters – Hire & Off-Hire 298
Summary__________________ 303
Module Overview
About the Author
Prof Jonathan Black-Branch

Canadian-born, Jonathan joined Royal Holloway as a
substantive member of staff (with a part-time post as
Professor of International Law) in 2007/08 following
previous service as a visiting professor and non-
established teacher. His classes have proved extremely
popular and gained consistently high scores in student
feedback. As a practising Barrister at Law with a DPhil from Oxford
University, his research and practice interests cover a broad
spectrum of law including: conflict dispute resolution in
international business; human rights protection relating to business,
conflict resolution and arbitration of contracts and ethical practice
in the international community.
Jonathan is Chair of the International Law Association’s nuclear
weapons non-proliferation committee and consults for the
Transportation Security Agency (TSA) in the USA as well as for
various governments and companies internationally. Jonathan is
also a sitting Justice of the Peace (JP).
1
International Business Law
How to approach the module

It is commonly accepted that people learn in different ways and at
different speeds and that any individual needs to find an approach
to learning that suits them best. There are some broad guidelines,
however, that might be useful for you to follow when studying a
module such as this.
Your study materials include any text books that have been
recommended for the module, plus a number of booklets such as
the one you are reading from at present! Each of the remaining
booklets (that is, all except this introduction) is pertinent to a
particular chapter of the module; there are ten of these. The
booklet for a particular chapter will contain a commentary on each
of the topics to be studied in that chapter, plus any articles or other
reading material which, together with the textbook, are essential
reading for that chapter.
You will find that the chapters follow a logical progression in
setting out and elaborating the subject matter, but you can move
about between chapters and sections if this suits you. Learning is an
iterative process. It is often useful to go back to something studied
earlier. You may also find it useful to move about between different
chapters according to what interests you, or according to the
connections that you make between different topics. It is always
important to be clear about the objectives of a particular section.
What are you trying to achieve in completing the section? What are
you expected to accomplish?
You will find that the module contains ten chapters and that each of
these is divided into a number of sections. You can view each
section as a discrete topic. However, you must always remember
that the commentary on the topic that you find here is merely a
guide to the literature and other materials that you also receive. It is
NOT a substitute for it.
So, once you have decided which topic you are going to study today
(or any other day!), you could read through the appropriate
commentary and then read the associated literature, or explore the
relevant websites or other resources, making appropriate notes as
you do so.
As we suggested, there is no single rule about how best to learn, but
you will see in the commentaries that go with each topic, that there
are activities for you to undertake. These are very important to the
learning process. They are intended as a guide for you to know
whether you have appropriately understood the topic you have
been studying. So, even if you think you have no difficulties with a
particular topic, it’s still worthwhile doing the associated activity,
because you may have unwittingly misinterpreted something! A
good rule to follow, then, is not to proceed to a new topic before
you have successfully completed the activity(s) for the previous
one.
There is feedback on these activities, at the end of the commentary,
but you are encouraged to attempt the activities first before you go
to the feedback. If you have any difficulties understanding or
interpreting any of these activities or questions, always sort out
your problems before you leave the topic:
2
Module Overview
 First of all, go back to your reading materials to check if you

have misinterpreted something, or found something too
difficult or obscure.
 If you still have problems, go online and seek assistance. This
can be from your online tutor, or you might ask help from your
fellow students. You can even ask both! But be sure to seek help
before moving on. If you leave it until later, you may forget
when you get absorbed by new topics, and find that you start
your revision for examinations with a host of unresolved
questions. Your tutor is there to help you, so allow him or her
to do their job!
It is also important for your learning to attempt the ‘short’

assignments as you go through. There is a separate note here on
these, but please bear in mind that they are designed to assist you
in the learning process and to develop the way you think about the
subject matter so that, when you take the examinations, you will be
familiar with the approach required.
Finally, remember that learning is fun! Enjoy the module.
3
Module Introduction
Module Outline
Welcome to this module. In this module we aim to provide you with
a basic introduction to law and business law. We will introduce you
to international law as well as the common law system describing
in brief some of the differences to the civil law system.
We will also look at the main principles of company law and
introduce you to the different types of companies recognized at law
and the legal requirements for these various types. Then we will
explore the concept of legal personality and the veil of
incorporation as well as the constitution of a company after which
we examine the legal duties a company director owes to the
company as a registered entity.
After this we provide an introduction to company law relating to
finances and capital, looking at the main aspects of company law,
including issues relating to shares in the company such as the legal
nature of a share, the various classes of shares and class rights as
well as discuss the rights of minority shareholders. We also examine
issues relating to company finances, including capital and shares
and the financing of a company including loan capital and
debentures. Further we will examine the recent development
relating to the concept of corporate manslaughter.
We go on to explore issues relating to international trade contracts.
We look at the main types of contracts, namely fob and cif,
explaining their main features under international law,
INCOTERMS.
After that we look at the Sale of Goods Act 1979 and examine the
Scope of the Act, the concept of Sale of Goods Contract, and issues
relating to the Contract and its Terms. Here we also look at the
concept of the Passing of Property and the issue of Risk,
highlighting the Seller's Title to Goods as per Section 12(1) of the
Act and discuss what is meant by the Passing of property.
Then we examine the rights and remedies pertaining to buyers and
sellers. We will look at the classification of contractual terms with
emphasis on the notion of acceptance as per Section 35 and action
for damages for non-delivery under Section 51 and also explore a
seller's remedies and the issues of damages.
We go on to examine issues relating to contract of finance and
letters of credit, looking at payment in international sale,
documentary credits, types of credit, and recent developments and
new rules for letters of credit and UCP 600.
Towards the end of the module, we will explore legal issues relating
to the carriage of goods by sea, introducing you to the contract of
affreightment, including bills of lading, types and functions. We
look at the Hague & Hague-Visby Rules and highlight carrier's
immunities & limitation of liability as well as the concept of
charterparties – types and formation.
Finally we explore legal issues relating to the Carriage of Goods by
Sea, introducing you to the subject and exploring the concept of
Charterparties – Types & Formation.
4
Module Overview
Module Aims
The main aims of this module are to:
 Explore the basis of international law
 Explore the various types of companies (public and private)
 Examine legal issues regarding company finances, including loan capital
 Explore the basis of international trade contracts
 Explore the requirements under the Sale of Goods Act regarding the transfer
of risk
 Explore the concept of Sale of Goods Contract
 Develop an understanding of the Rights & Remedies of the Buyer and Seller
 Develop an understanding of the Financing of the Sale, including Contract of
Finance and Letters of Credit
 Explore the basis of contracts of affreightment, including bills of lading
 Develop an understanding of Charterparties – Types & Formation
Module Objectives
By undertaking the course, you will be able to:
 List and describe the various types of companies (public and private)
 Discuss legal issues regarding company finances, including loan capital
 Explain the basis of international trade contracts
 Outline the requirements under the Sale of Goods Act regarding the transfer
of risk
 Explain the classification of contractual terms and the notion of acceptance
as per Section 35
 Outline the Financing of the Sale, including Contract of Finance
 Explain the basis of contracts of affreightment, including bills of lading
 Discuss Charterparties – Types & Formation
Resources
Recommended Reading
 Students are encouraged to read the cases listed to develop further
understanding. There are other articles available through the main
electronic resources which can be obtained through Westlaw, Lawtel or
Lexis.
5
Module Contents
Chapter 1: International Business Contracts

1.1 International Business Contracts
1.2 A Synopsis of English Contract Law
Chapter 2: Case study questions

Case Studies
Chapter 3: Company Law – The constitution of the company

3.1 Legal format of the business
3.2 Setting Up A Company
3.3 Types of company
3.4 Constitution of The Company
3.5 The Company Directors
Chapter 4: Company Law – Finances

4.1 Shares
4.2 Finances – Capital and shares
4.3 Financing the company
4.4 Companies and the law
Chapter 5: Sale Contracts

5.1 Introduction: The Sales Contract
5.2 INCOTERMS – FOB
5.3 INCOTERMS - CIF
5.4 Documentation
5.4 Documentation
Chapter 6: Sale of goods

6.1 Sale of Goods Act 1979
6.2 Passing of Property & Risk
6.3 The passing of risk
Chapter 7: Buyer’s & seller’s rights & remedies

7.1 Buyer’s Rights & Remedies
7.2 Seller’s Rights & Remedies
6
Module Overview
Chapter 8: Contract of finance and letters of credit

8.1 Contract of Finance & Letters of Credit
8.2 Letters of Credit & UCP 600
Chapter 9: Carriage of goods by sea

9.1 Contract of Affreightment – Bills of Lading
9.2 Common law and The Hague-Visby Rules
9.3 Types of Cargo & Carrier’s Immunities
9.4 Limitation of Liability & Hamburg Rules
Chapter 10: Charterparty contracts

10.1 Charterparties Introduction and Voyage Charters
10.2 Voyage Charters – Laytime, NORs & Demerrage
10.3 Time Charters – Hire & Off-Hire
7
Module Review
This section describes the key learning outcomes that you should be
familiar with once you have completed the module. It is for you to
use as a reference point to ensure that you have understood the key
parts of the module.
It can be particularly useful as an aid to your revision, although you
may wish to refer to appropriate parts of the review as you go
through the work, in order to consolidate your understanding and
ensure that you have not missed key elements of your learning.
Chapter 1
This chapter served to introduce you to business contracts
specifically listing the main elements of a contract under English
law. It sought to explain the essential elements of a contract,
focusing on the terms of a contract and the termination of
contractual obligations.
Chapter 2
The main purpose of this chapter was to apply the materials from
Chapter 1 to the scenarios presented in Chapter 2.
Chapter 3
This chapter introduced you to the main issues regarding company
registration and the legal implications of incorporation, including
the different types of companies recognized at law and the legal
requirements for these various types, the concept of legal
personality and the veil of incorporation as well as the constitution
of a company and the legal duties a company director owed to the
company.
Chapter 4
This chapter explored a number of issues relating to shares in the
company including the legal nature of a share, the various classes of
shares and class rights as well as discussed the rights of minority
shareholders. It also examined issues relating to company finances,
including capital and shares and the financing of a company
including loan capital and debentures. Further, it examined the
recent developments relating to the concept of corporate
manslaughter.
Chapter 5
This chapter examined various aspects of international trade
contracts. It explored the main types, f.o.b and c.i.f, under
INCOTERMS. It also explored the documentation needed for such
contracts and their relevance.
8
Module Overview
Chapter 6
The purpose of this chapter was to examine issues regarding the
Sale of Goods Act 1979. It examined the Scope of the Act, the
concept of Sale of Goods Contract, and issues relating to the
Contract and its Terms. It also looked at the concept of the Passing
of Property and the issue of Risk. It highlighted the Seller’s Title to
Goods as per Section 12(1) of the Act and discussed what is meant
by the Passing of property.
Chapter 7
This chapter examined the rights and remedies of buyers and
sellers, examining the classification of contractual terms with
for damages for non-delivery under Section 51. It also explored a
seller’s remedies and the issues of damages.
Chapter 8
The purpose of this chapter was to examine issues relating to
contract of finance and letters of credit. It examined payment in
international sale, documentary credits, types of credit, and recent
developments and new rules for letters of credit and UCP 600.
Chapter 9
The purpose of this chapter was to explore legal issues relating to
the Carriage of Goods by Sea. It introduced you to the subject and
explored the contract of affreightment including bills of lading,
types & functions. It discussed the Hague and Hague-Visby Rules
and highlighted carrier's immunities and limitation of liability as
well as the concept of charterparties, its types and formation.
Chapter 10
The purpose of this chapter was to examine charterparties and
voyage charters, and time charters, hire and off-hire.
9
Introduction
Overview
The purpose of this chapter is to provide a basic introduction to law
and business law. It will introduce you to international law as well
as the common law system describing in brief some of the
differences to the civil law system.
The chapter will focus mainly on the basis of contracts from an
English common law perspective.
Aims
The purpose of this chapter is to:
 Explore the basis of international law.
 Explore the basis of common law.
 Explore the basic principles underling the law of contract.
 Develop an understanding of the main elements of contract law.
Learning Outcomes
After studying this chapter, you will be able to:
 Explain the basis of international law.
 Explain the basis of common law, distinct from civil law.
 Explain the main elements of a contract.
 Discuss the basic principles underling the law of contract.
 List the essential elements of contract law.
11
Resources
Essential readings
The materials in this unit stand as the essential readings.
Readings for further study

Students are encouraged to read cases listed to develop further
electronic resources which can be obtained through Westlaw
http://www.westlaw.co.uk/, Lawtel http://www.lawtel.com, or
Lexis http://www.lexis.com.
12
1.1 International Business Contracts

Business transactions are usually based on some form of contract,
be it formally recognized in signed form or informally
acknowledged in a verbal agreement. Different jurisdictions have
various laws pertaining to the legality of such arrangements. The
following will focus on the main elements within common law
jurisdictions making some comparisons where appropriate. This is
achieved by firstly examining the hallmarks of international law
and the common law.
Learning Objectives
 Explain the basis of international law.
 Explain the basis of common law.
Introduction
International contract law is about contracts that concern persons
in more than one nation. Business contracts are about contracts that
concern business interests rather than consumer contracts.
Consumer contracts are those where one party is dealing as a
consumer, and English and EU law has developed to protect
consumers from being pressurised or exploited by often large
commercial bodies. Contract law is based on obligations that are
entered into on the basis of agreement between the parties as
opposed to those civil obligations that are imposed by the law
generally, as in tort (called delict in Scotland and some other
European countries that use Roman Law).
To quote a barrister friend of mine, contract law is about one
person selling an apple to another, commercial law is about
someone selling a box of apples. Typically, contract law courses in
English universities deal with principles of law. They do not look in
detail at the different types of particular contract that may exist,
such as landlord and tenant contracts, construction and technology
contracts, intellectual property contracts, employment contracts.
These may be dealt with in more specialised courses but they all
depend on a grasp of the basic fundamentals of contract law.
Commercial law as taught in universities was sometimes called
‘mercantile law’ in that it dealt with the merchant community. It
may consist of a more detailed consideration of the law of agency
(where one person acts on behalf of another, the Principal, in
dealing with Third Parties), the international sale of goods, and
credit arrangements.
International law
Lawyers tend to divide international law into public international
law (concerned with treaties and inter-state relations, perhaps with
human rights) and private international law, which is more
concerned with persons and comprises such matters as contract
law, civil obligations, family law, the law of wills and property, and
similar matters. By persons we mean ‘natural persons’, i.e. human
beings, as well as ‘artificial persons’, of which the most important
part will be companies (the company having a separate legal
personality from the individuals — human beings — who comprise
13
its directors and shareholders). Legal personality is important

because it gives, among other things, the right to sue, or the
possibility of being sued.
Private international law is also called ‘Conflict of Laws’, or
‘Conflicts’, because it concerns, for instance, the differences
between the rules of contract law in England and those in France or
Germany. Each country has its own legal system, i.e. is own courts
and procedure, but it will usually have its own rules regarding what
a contract is or what are the rights and obligations regarding civil
wrongs or what is considered a crime. Some countries may have
individual state laws (such as the USA, where attorneys are licensed
to practise in specific states and cannot generally exercise their
professional expertise in other states where they are not members
of the Bar. They may also, as in the USA, have federal laws that
apply to all the states. These often consist of economic and
commercial laws in that many transactions will be undertaken
between different states.
Procedure and evidence do not generally concern us when looking
at the rules of specific legal subjects like contract or crime. These
rules are generally called ‘adjective law’ while the rules that deal
with the actual law of tort, crime, and so on are called ‘substantive
law’. We look at the substantive law of contract without really
considering the adjective law or worrying about that other major
concern to businessmen, the economic realities of contracts and
their enforcement.
It will already have become apparent that lawyers are very
concerned with the use of words. Definitions are very important
and, although they may need many qualifications and exceptions
form a good starting point to deal with any area of substantive law.
The other thing that lawyers are often interested in is classification.
In other words, into what legal box or compartment should a
particular set of facts or problem be placed? Sometimes they will
not fit into a single area of law and, as lawyers tend to be
specialists, (there is usually too much for any one person to be able
to advise on more than a few subjects because of the complexity of
modern systems and life in general, as well as the pace of change) a
whole team of consulting lawyers may be involved. Some may be
commercial lawyers, some company specialists, others tax
specialists and so it is clear that a major project may involve entire
legal teams, each contributing its specific expertise to the end
result. That’s why lawyers’ fees tend to be so large — the more
complicated the problem, the greater the number of people
involved, and hence the expense.
Of course, one gets what one pays for. Those involved in a multi-
million pound deal will probably think that paying hefty lawyers’
fees is worthwhile just to get it right and thus it is justified in
consulting a large international or City firm. A simpler problem can
be solved by going to a ‘High Street’ firm, or perhaps a ‘niche firm’
that has a specialism anyway in the required subject.
14
Common law
Before going into more detail it is worth saying a little more about
classifications of law. English law is part of the Common Law
system, a family of legal thinking that is found in most of the USA
(except Louisiana) and Canada (except Quebec), New Zealand,
Australia, Malaysia and Singapore, large parts of the West Indies,
and Africa. The French-speaking parts mentioned above, as well as
most of continental Europe, belong to a different family called ‘Civil
Law’, derived from Roman Law, which was given a boost by the
European expansionism of Napoleon, who was also important in
introducing a new ‘Codified system’ into Europe. The codified
system means that nations such as France, Germany and Italy have
a set of Codes (commercial, civil, criminal, etc) for different areas
of law and for that reason the relevant rules can be found in a
single text that is usually updated every year. This sounds very
simple but in practice codified systems have their own
complications.
Other families of law also exist such as Islamic Law, Chinese Law,
Hindu Law, Soviet Law, and so on. Some countries have a mixture,
such as Israel, which combines common law with Jewish law with
other traces as well. South Africa has a Roman-Dutch system. This
is an important consideration for international business contracts
because the parties might choose the law of any country or system.
An international business contract will need to state what law is to
be used in deciding disputes (the applicable law). It will also need
to state in what country disputes are to be adjudicated. Obviously,
it would be silly for English courts to decide cases involving Islamic
law, for instance, although expert evidence might be taken as to the
rules in question, but England is a popular country for dispute
resolution, whether by litigation (going to court) or arbitration,
because it has a reputation for able, commercially aware judges
dealing with the large number of disputes that arise from English-
speaking contracting parties, and the courts are relatively efficient
and certainly free from corruption. International contracts will need
to state both the type of law that applies to the contract and the
place (the jurisdiction) and manner (arbitration being popular in
commercial dispute resolution) where differences will be settled.
Scotland, as a separate jurisdiction, has a mixture of Civil and
common law. Ireland is based on common law. England is a
common law country and here the term ‘civil law’ will more often
tend to refer to contract and tort as matters that are dealt with in
the civil courts (trials take place in the county courts, which have a
limited financial jurisdiction of up to £50,000, or in the Queen’s
Bench Division — QBD — of the High Court). Appeals may be
taken from these courts to the Court of Appeal (Civil Division) or
the House of Lords (to be re-named and re-structured as the
Supreme Court next year). Commercial disputes tend to be dealt
with in the Commercial Court, a more specialised part of the QBD.
Criminal law deals with what the state denominates as crimes (e.g.
insider dealing and corporate killing, as well as theft and
sophisticated varieties of that such as false accounting) and the end
result is usually denunciation of the guilty and punishment. Civil
courts are more concerned with resolving the dispute between the
parties and in finding a remedy, usually compensation. As such,
many disputes are settled or compromised before they reach trial
(about 95% of claims), sometimes literally at the door of the court.
15
That is unlikely in criminal cases, but then we are not really

concerned with criminal prosecutions in contract matters.
When a person, the claimant (the term ‘plaintiff’ is used in older
cases) sues another in contract the aim is to establish ‘liability’ (i.e.
whether the defendant is responsible or not for the wrong) and
then it is a question of working out the amount (quantum) of
compensation to be awarded (assessment of damages). The
enforcement of judgment is another matter altogether. When
reading cases it is easy to get the impression that many things can
go wrong with a contract and lawyers are trained to spot the
problems and so seem a bit pessimistic as they point out what might
go wrong and how to forestall that. As businessmen know, most
contracts are performed to the complete satisfaction of both parties
who may be looking for repeat business anyway and will not want
their reputation or goodwill sullied by litigiousness. Most glitches
can be solved by a few words with other side but there are cases
where negotiations break down and recourse to law, or the threat
of it, becomes inevitable.
Where do the rules of the common law come from?

Whilst there are certain internationally agreed rules, as we have
said, contract law will probably be based upon the law of a
particular jurisdiction. This will, as has been said, need to be
written in the contract. Commercial arrangements may involve a
complex series of transactions derived from different countries. An
English company may make goods that comprise components
imported from different countries, the finished products being
shipped by Greek ships to the Middle East for distribution there.
This may require a series of different but interlocking contracts.
They need to interconnect because of the need, if there are
problems, to establish liability and to be protected. English law is
helpful in this respect because many of the contracting parties will
have English as a common language and because, as has been
suggested, English law has developed a number of well-established
rules and it has a sophisticated court system.
In what follows, therefore, we shall look at the English law of
contract, bearing in mind that it will have strong links to the whole
common law family. Many East European countries have, for
example, moved to accept common law thinking as communism
receded — English contract law is fundamentally derived from a
capitalist system. We need first to establish what the principal
features of common law are; a system that originated in England
and was exported along with the language and Shakespeare
throughout the English-speaking world.
The common law was the creation of the judges of the King’s courts
in the middle ages. There were many courts then, some of them
market courts and royal authority was loose so that contract
problems might well be dealt with by a system called the ‘law
merchant’ (lex mercatoria). The royal courts became more efficient
than others (especially in matters of procedure like the use of juries
and their superior forms of enforcement). As litigation brought in
revenue, the King’s courts were competing with other forums and
they needed to be in touch with what merchants wanted in order to
attract business. The same is true today. The courts are not just
interested in the rarefied theory of law but attract solicitors and
barristers (and hence judges recruited from their ranks) who are
16
expert practitioners with banking and commercial experience. They

understand the world of business (it is hoped) and can fit the law to
commercial realities. They are experts who do not need to have
things explained in detail because they are familiar with the
business world and its practices.
The great age of developing contract law was the eighteenth
century when Lord Mansfield developed many of the rules and was
known to enjoy the company of the men of commerce with whom
he would often dine. These rules were further refined in the
nineteenth century when the predominant philosophy was ‘laissez
faire’, a sort of free market economy which left the capitalist spirit
open to exploit commercial possibilities. This led to a doctrine
known as ‘freedom of contract’ that posits the view that parties are
free to choose whether to contract or not, with whom, and on what
terms. It implies that both parties are of equal bargaining power
and could negotiate freely. This is, of course, not true in that a
monopolistic or dominant party could effectively impose its terms
on the other side that might be offered no choice but to accept or
simply to forgo the opportunity, which would be difficult where the
goods or services were essential. This led to a more communitarian
(one might say humanitarian) approach in the later part of the
nineteenth century and in the twentieth century, especially with the
onset of the welfare state.
The majority of the rules of contract law are derived from decided
cases, judicial precedent or judge-made case law. The doctrine of
binding precedent is peculiar to the common law system where the
way in which a case is decided can form a rule that binds
subsequent similar situations through what is called the ratio
decidendi of the case. In other jurisdictions, cases are usually only of
persuasive effect. The principles or rules derived from cases are
reported in ‘law reports’ where editors will usually help by
providing a headnote that identifies what the judge or judges ‘held’
as the ratio of the case — i.e. the material facts leading to the
principle to be applied to them. Judicial precedent relies on two
concepts: first, the argument by analogy (from like to like — a
similibus ad similis) where the principle in an earlier case will be
authority for deciding a later one that is sufficiently similar to it
(i.e. cannot be distinguished from it). The second element is the
idea of the hierarchy of courts, because a higher court binds a lower
level. Thus the House of Lords (which until 1966 considered itself
bound by its own previous decisions and is reluctant to depart from
them today because of the consequence of uncertainty in the law),
binds the Court of Appeal (that still, with exceptions, binds itself)
and that binds the High Court and anything lower. The High Court
sits as a court of first instance or trial, determining the facts and
giving a ruling based upon the principle to be applied to them and
each court is presided over by a single judge, sometimes called a
‘red judge’. There are about 100 in all and they are almost always of
high intellect and have 20 – 25 years of experience in practice
before appointment to the bench (this is different in civil law
countries with a code where the judiciary is a separate career for
law graduates). The Court of Appeal sits usually as groups of three
Lords Justices of Appeal and the House of Lords as five Lords of
Appeal in Ordinary (‘Law Lords’). Both are appellate courts and it is
worth remembering that many questionable decisions of lower
courts will not reach them if the losing party decides it has had
17
enough and declines to appeal, perhaps by reaching a post-trial

settlement.
It is not easy to know what the rules of judicial precedent are unless
one looks at the textbooks or practitioner works and then back to
the published judgments themselves. The history of a particular
judgment can be traced in various sources, most easily in the
electronic ones like Westlaw, Lawtel or Lexis. Sometimes the rules
of cases are put into statutory form (codified) like the Sale of Good
Act 1893. Acts of Parliament are less commonly found in contract
law than in other subjects like land law or company law. The Sale
of Goods Act 1893 was up-dated by a process called consolidation
in the current Act of 1979 but this too has been amended in turn.
Other important statutes on contract include the Misrepresentation
Act 1967, the Unfair Contract Terms Act 1977, the Supply of Goods
and Services Act 1983, and the Contracts (Rights of Third Parties)
Act 1999.
Apart from judicial precedent and Acts of Parliament, there remain
two other important sources of English contract law. One is
delegated legislation, made by a special process usually by a
minister under powers granted to him by an ‘Enabling’ or ‘Parent’
Act. These usually come out in the form of Statutory Instruments
and they are significant because there are so many of them, usually
about 3,000 to 5,000 annually whereas there are generally only
about fifty Acts of Parliament each year.
International contract law

We can now turn to the substantive law of English contract, but
whilst we have emphasised that there are certain international
conventions and codes on contract law, although they are generally
entered into voluntarily by the contracting parties. They may be
convenient because they represent a set of internationally agreed
rules. Parties will know of them and may be prepared to be bound
by them. This is similar to the use of standard form contracts. A
company may use routinely a standard printed form of contract in
its dealings because it is cheap, convenient and has the virtue of
relative certainty. This may have been drafted by the company’s
own in-house lawyers or specifically for its needs by an
independent firm. A few agreements may still be too unusual or
complex to fit into the standard form and will thus need to be
negotiated individually and drawn up specifically. Often a group of
businesses will combine to provide a standard form like the Joint
Contracts Tribunal (JCT) that has drafted a substantial contract
form for the use of building contracts — the parties just have to fill
in the names, date and appropriate monies. These forms can be
amended by the parties but, although they are revised from time to
time to keep abreast of developments n the law and to remove
glitches, such personal amendments can be risky as they may
interfere with the overall structure of the document which is
intended to be read in its entirety and changes may have an
unforeseen knock-on effect.
International agreements include UNCITRAL (United Nations
Commission on International Trade Law), UCC (Uniform
Commercial Code — applicable in the USA) PCEL (Principles of
European Contract Law), UNIDROIT (International Institute for the
Unification of Private Law), and the American Re-statement on
18
Contracts. The London Court of International Arbitration is an

important private tribunal.
Activity 1.1.1
 What is the difference between international law and national law?

 Is there an international contract?
19

This section will highlight the main elements of a contract under
English law.
Learning Objectives
 To explain the essential elements of a contract.
 To explain the terms of a contract.
 To explain the termination of contractual obligations.
The “Essentials” of contract

There are a number of ‘essentials’ that underlie contract. They are:
Agreement (offer and acceptance)
Consideration
Intention to Create Legal Relations
Form
Capacity
Reality of Consent
Mistake
Misrepresentation
Duress
Undue Influence
Legality of Object
Legality
Immorality
Restrictive Covenants
In addition, it is worth considering

Terms of Contract
Termination of Contract
Remedies
Some introductory remarks

Contracts can be made in writing (not essential but useful as a
reference and as evidence), orally (commonly) or by conduct (e.g.
at an auction, a handshake).
A contract may be simply defined as ‘a legally enforceable
agreement’.
Contracts usually consist of mutual promises. A promise creates for
the promisor (the person making the promise) a future obligation.
For the promisee (the person to whom the promise is made) it
creates an expectation that the promise will be fulfilled.
A gratuitous promise (one where nothing is offered in return) is not
legally enforceable unless it is accompanied by special formalities,
ie in a deed or covenant.
Collateral contracts
In SHANKLIN PIER LTD v DETEL PRODUCTS LTD [1951] 2 KB
854; [1951] 2 All ER 471 the plaintiffs obtained warranties from
the defendants, who had visited them in the knowledge of the work
about to be undertaken, that their paint would last from seven to
20
ten years if used on the plaintiffs’ pier. The use of the defendants’
paint had then been specified to the plaintiffs’ contractor instead of
bituminous paint originally required. In fact, it lasted three months.
McNair J held that the plaintiffs could recover damages.
Agreement
In classical contract analysis, agreement requires an offer by one
party to be accepted by the other. Sometimes the agreement is not
so simply concluded:
In BSC v CLEVELAND BRIDGE & ENGINEERING CO LTD [1984] 1
All ER 504, 24 BLR 9 the plaintiffs manufactured a number of cast-
steel nodes on the understanding that a formal contract would be
entered into and, when this did not happen, they were still able to
claim on a quantum meruit basis, i.e. as much as the work which
they had done was worth.
But see also Regalian Properties plc v London Docklands Development
Corpn [1995] 1 WLR 212 where compensation for pre-contract
work was refused.
A more ‘liberal’ or modern approach departs prefers a more general
overview of the negotiations as a whole.
Denning LJ stated in Butler Machine Tool Ltd v Ex Cell-O Corp
[1979] 1 All E.R. 965
...In many cases our traditional analysis of offer, counter
offer, rejection, acceptance and so forth is out of date... The
better way is to look at all the documents passing between
the parties and glean from them or from the conduct of the
parties, whether they have reached agreement on all
material points.
See also
Gibson v Manchester City Council [1979] 1 All E.R. 972
G. Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyds
Rep.25
An offer (i.e. a statement by which the maker intends to be bound)
needs to be distinguished from an invitation to treat (ITT a
statement that the maker intends to attract an offer from the other
side). A negotiation may contain a number of statements that are
either ITTs, offers, or counter-offers. See
Gibson v Manchester City Council [1979] 1 All E.R. 972
Storer v Manchester City Council [1974] 1 W L R 1403
Clifton v Palumbo [1944] 2 All ER 497
The following are more likely to be regarded as ITTs
Advertisements Partridge v Crittenden [1968] 2 All ER 421
An advertiser may have limited supplies
Shop Displays Pharmaceutical Society of GB v Boots
[1953] 1 QB 401
Fisher v Bell [1961] 1 Q.B. 394
The customer is offering to buy rather than the shopkeeper offering
to sell — it seems to make commercial sense: think of a 17-year-old
buying alcohol — the shop can refuse
21
Tenders Harvela v Royal Trust Of Canada [1985] 2 All ER

966
Auctions Barry v Davies [2000] 1 WLR1962
Auctioneer undertakes to sell to the highest bidder one he starts the
auction, unless he announces beforehand that there is a reserve
price
Ticket machines Thornton v Shoe Lane Parking [1972] 1 All
ER 686
Is the machine offering or the customer?
Acceptance must be unqualified and match the offer. There can be

no acceptance without an offer.
The Mirror Image Rule Hyde v Wrench [1840]
If the ‘acceptance’ seeks to introduce a new term or, as here, to
offer a different price, it will be a counter-offer and that rejects and
cancels the offer
Request For Information Stevenson, v Mclean [1880] 5 QBD
346
A request for information does not act as a rejection — it’s a matter
of interpretation
Battle Of The Forms Butler Machine Tool v Ex-Cell-O [1979] 1
AER 965
Communicating The Acceptance Felthouse v Bindley [1863]
142 ER 1037
Silence is not an acceptance — ‘If I don’t hear from you, it’s mine’
The offeror may waive the need to communicate
The Postal Rule Adams v Lindsell [1818] 1 B & Ald 681
Acceptance dates from time of posting
Henthorn v Fraser [1892] 2 Ch 27
Holwell Securities v Hughes [1974] 1 All ER 161
Modern Communication
Entores v Miles Far East Corp [1955] 2 QB 327
Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34
Mondial Shipping v Astarte [1995] CLC 1011
Should acceptance be when the recipient’s office opens, when he
read it, or ought to have read it? Emails are, in a sense,
‘instantaneous’ communications, almost like speaking to someone in
the same room, but the other person may not be online at the time.
Termination of offers
Lapse of time
Either when the offer says it terminates or after a reasonable time
Death
Rejection
Revocation
Dickinson v Dodds [1876] 2 Ch D 463
Revocation must be communicated to the offeree
Byrne v Van Tienhoven [1880] CPDD 344
22
The terms of the agreement must be certain

Raffles v Wichelhaus [1864] 2 H&C 906
The parties were not just uncertain but under a mistake as to the
identity of a ship
Scammell v Ouston [1941] AC251
‘Hire purchase terms’ were too vague
Consideration
Definitions
Currie v Misa [1875] LR 10 153
‘A valuable consideration, in the sense of the law may consist in
some right, interest, profit or benefit accruing to one party or some
forbearance, detriment, loss or responsibility, given, suffered, or
undertaken by the other.’ Per Lush J
Pollock — ‘An act or forbearance of the one party, or the promise
thereof, is the price for which the promise of the other is bought,
and the promise thus given for value is enforceable.’
Treitel states that the element of bargain is not always present in
contracts which the courts are willing to enforce.
The traditional view is that contracts were based on bargains not
mere promises. In practice all business contracts will be based on a
tit for tat (quid pro quo) as businessmen are unlikely to give
something away for nothing
Consideration must be legal

Consideration may be executory or executed but not ‘past’
Roscola v Thomas [1842] QB 234
Re McArdle [1951] Ch. 669
Exceptions
i. Task undertaken whee payment is expected —
Lampleigh v Brathwaite [1615] Hob 105
ii. When a debt which has become statute-barred is
revived by a subsequent acknowledgement of it by
the debtor
Consideration must move from the promisee

Tweddle v Atkinson [1861] 1 B&S 393
Consideration must be sufficient though it need not be adequate.

Adequate?
Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87
Courts will not examine the nature of the bargain (unless fraud
alleged).
Performance of an existing duty

(a) Public duty
Glasbrook Bros v Glamorgan County Council [1925] AC 270
Harris v Sheffield United FC [1987] 2 All ER 838
Ward v Byham [1956] 2 All ER 318
23
(b) Contractual duty

Stilk v Myrick [1809] 2 Camp
Hartley v Ponsonby [1857] 7 E&B 872
North Ocean Shipping v Hyundai Construction (The Atlantic
Baron) [1979] QB 705
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 All
ER 512
(c) Contractual duty to third person
New Zealand Shipping Co. Ltd v AM Satterth waite & Co Ltd
(The Eurymedon)
[1975] AC 154
‘An agreement to do an act which the promisor is under an
existing obligation to a third party to do, may quite well
amount to a valid consideration.... the promise obtains the
benefit of a direct obligation’ (Lord Wilbertorce)
Pao On v Lau Yiu Long [1980] AC 614
2. Promise to pay part of a debt.

The Rule in Pinnel's case (Common law rule)
Payment of a lesser amount than the full debt to a creditor cannot
discharge the debtor from liability for the full amount even though
the creditor agrees to it, and accepts the lesser amount.
Pinnel's case [1602] 5 Co Rep 117a
Foakes v Beer [1 884]9 App Cas 605
Re Selectmove [1995] 1 WLR 474
Ferguson v Davies [1997] 1 All ER 315
Exceptions to the rule in Pinnel's case

a. Early payment of a reduced amount if agreed by the
creditor
b. Substituted performance
c. Payment of a lesser sum by a 3rd party
d. A creditor's composition
e. Where the equitable doctrine of promissory estoppel
applies
Promissory Estoppel
The doctrine derives from the equitable principle stated by Lord
Cairns LC in Hughes v Metropolitan Rhy Co [187712 App Cas 439.
Denning J, developed the doctrine further in Central London
Properties v High Trees House [1947] KB 130
The conditions for the application of promissory estoppel:

1. The promise must be clear and unequivocal
2. The promise must be acted on — The Post Chaser [1982] 1
All ER 19
3. The doctrine is a shield and not a sword — Combe v Combe
[1951] 1 All ER 767
4. It must not be inequitable for the promisor to go back on
his promise — D&C Builders v Rees [1966] 2 QB 617
24
Is the doctrine merely to suspend legal rights rather than to

extinguish them?
Consideration be abolished and be replaced by the doctrine of
intentional economic duress. It looks unnecessary in most
commercial situations.
Intention to create legal relations

This might be said to rise naturally out of the situation.
Two presumptions, depending on the type of contract concerned.
Domestic agreements
It is presumed that in domestic, social and family agreements that
no legal relationship is intended
Balfour v Balfour [1919] 2 KB 571
Merritt v Merritt [1970] 2 All E.R. 760
Parker v Clark [1960] 1 All E.R. 93
Jones v Padavatton [1969] 1 WLR328
Commercial contracts will barely be concerned with this but there

might be family businesses.
Commercial agreements
These will be presumed to be legally binding, a presumption
difficult to rebut, but see
Rose & Frank v Crompton [1925] AC 445
An ‘honour clause’ made the contract unenforceable.
Comfort letters
Kleinwort Benson v Malaysian Mining Corporation [1989] 1
All ER 785
This case concerned a letter that the bank considered to be a
guarantee of the loan granted by them to the defendant’s
subsidiary.
Form_________
Most companies have their own written standard terms of contract.
They are convenient and cheap.
Contracts do not need to be written except when they are:
• For the sale or other disposition of land
• As guarantees
• Credit Agreements
• Deeds
Writing means that the terms can be referred to and they can be
evidence at a trial if it comes to that: many disputes are actually
about the meaning of terms.
25
Capacity
Minors’ contracts
This area is unlikely to arise in international business contracts
unless you are dealing with pop stars or footballers.
Controlled by common law and Minors Contracts Act 1987.
Contract not void (therefore, other party bound).
Those under the age of 18 have limited capacity to enter into
contracts.
Exceptions exist in relation to necessaries, beneficial contracts of
service, and certain voidable contracts.
Necessaries Nash v Inman (1908) 2 KB 1
Beneficial contracts of service
De Francesco v Barnum (1889) 45 Ch D 430
Doyle v White City Stadium (1935).1 KB 110
These must not be oppressive.
Trading contracts are always unenforceable against the minor

Voidable contracts are valid unless repudiated before, or within a
reasonable time of, reaching majority
Void contracts - may be ratified on the minor’s reaching
majority.
Voidable contracts - repudiation does not affect obligations
which have been performed, unless there has been a total
failure of consideration from the adult party.
Enforceable contracts - the minor must pay a reasonable
price for delivered necessary goods (s3 Sale of Goods Act
1979).
Restitution - s3(1) Minors’ Contracts Act 1987 will be ordered

where:
Minor has obtained goods by fraud and still has possession of
them;
Minor has obtained goods by fraud and has sold them -
accountable for the proceeds;
Minor has obtained money by fraud - accountable for such as
in his control;
In all cases, the court has jurisdiction to order minor to make other
restoration where equitable.
Mental disability and drunkenness

Hart v O’Connor [1985] AC 1000
Lucid moments
Corporations
Companies Act 1989 (amending Companies Act 1985, now CA 2006)
regulates the current position as regards ultra vires agreements:
The capacity of the company is now unaffected by the objects
clause in its memorandum — third parties are now able to
26
enforce ultra vires agreements (shareholders may restrain

company from entering ultra vires agreement).
The capacity of directors — they remain liable to the
company for exceeding their powers but this does not affect
the position of the third party dealing with the company.
Reality of consent
Mistake
Idea of consensus ad idem.
At common law where a mistake was found the contract was void
ab initio (i.e. from the start — i.e. no contract)
Later an equitable doctrine of mistake evolved where the contract
was held not to be void ab initio but voidable (i.e. from the time the
innocent party avoided it)
The mistake must be related to a fundamental underlying fact that
existed at the moment the contract was entered into.
Amalgamated Investment v John Walker And Sons Ltd [1976]
3 All ER 509
See now Great Peace Shipping v Tsavliris Salvage [2002] EWCA Civ
1407; [2002] 3 WLR 1617 — Lord Phillips MR
1. Mistake at common law

The contract may be void ab initio if the mistake was one which
was fundamental to the contract. This may occur in two broad
ways:
(a) Common mistake

Mistake as to (the existence of) the subject matter
Sale Of Goods Act 1979, S.6
Couturier v Hastie (1856) HL Cas 673
McRae v Commonwealth Disposals Commission [1951] 84
CLR 377
Associated Japanese Bank v Credit Du Nord [1988] 3 All ER
902,
Mistake as to the quality of the subject matter of the contract

Is it possible for the contract to be void on the basis that the
subject matter of the contract does not have the quality it is
thought to have by the parties to the contract.
Bell v Lever Bros [1932] AC161
Leaf v International Galleries [1950] 1 All ER 693
Great Peace Shipping v Tsavliris Salvage [2002] 3
WLR 1617.
(b) Consensus mistake

Such a mistake might arise where the parties are at cross purposes
with one another. There are two basic categories, mutual mistakes
and unilateral mistakes:
27
Mutual mistake (the parties are at cross purposes) .

Raffles v Wichelhaus (1864) 2 H&C 906
Scriven Bros & Co v Hindley & Co [1913] 3 KB564
Unilateral mistake
Where one party is actually aware of the other party's mistake

as to the terms of the contract.
Hartog v Colin And Shields [1939] 3 All ER 566
as to the identity of the person contracted with.

Car And Universal Finance Co Ltd v Caldwell [1964]1
All ER 290
King's Norton Metal Co v Edridge, Merrett & Co Ltd
[1897] 14 TLR 98
Cundy v Lindsay (1878) 3 App Cas 459
Phillips v Brooks Ltd [1919] 2 KB 243.
Ingram v Little [1960] 3 All ER 332,
Lewis v Averay [1971] 3 All ER 907
Shogun Finance Ltd v Hudson [2003] UKHL 62
2. Mistake in Equity
Mistake in equity has the effect of merely rendering the contract
voidable — difficult to see if this decision has survived Great Peace.
Rescission
All equitable remedies its award are discretionary and it follows
that the courts can apply rescission subject to any terms they feel
appropriate to fulfil the principle of restitutio in integrum.
Grist v Bailey [1966] All ER 875
Magee v Pennine Insurance Co Ltd [19691 2 All ER
Rectification
This arises where a written document does not represent the
agreement reached between the parties. It is discretionary. In order
to obtain rectification, three conditions have to be satisfied:
a) The instrument has failed to reflect the agreement of the
parties.
b) The party seeking rectification has to provide evidence that
the instrument does not reflect the common intention of
the parties at the time of contracting;
c) There must be a literal disparity between what was agreed
and what was recorded
Joscelyne v Nissen [1970] 2 QB 86

Agip Spa v Navigazione Alta Italia Spa [1984] 1
Lloyd's Rep 353.
Mistake and the allocation of risk
28
William Sindall Plc v Cambridgeshire CC [1994] 1

WLR1016 (CA)
Mistake as to the nature of the document signed

Non est factum —‘it is not my deed’.
Saunders v Anglia Building Society [1970] 3 All ER
961 (Gaille v Lee)
Lloyds Bank Plc v Waterhouse [1990] Fam Law 23.
Misrepresentation
Statements may be terms of the contract, ‘mere representations’,
or ‘puffs’
Oscar Chess v Williams [1957] 1 All ER 325
Dick Bentley v Harold Smith Motors [1965] 2 All ER
65
A misepresentation is a false statement of fact made by one party to
another that induces the other party to enter the contract (NB — it
is an extra-contractual statement, if in the contract it couldm be
sued as a breach of a term)
The inducement
The false statement must be a statement of fact, not
Statements of law
Statements of opinion - a ‘statement of a belief based on
grounds incapable of actual proof'.
Bisset v Wilkinson [1927] AC 177
Smith v Land And House Property Corporation [1884]
28 Ch D 7
Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5
Statements Of Intention
Edgington v Fitzmaurice (1885) 29 Ch D 459
Silence
With v O'Flanagan [1936] Ch 575,
The inducement
The misrepresentation must be material
JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All
ER 583,
Reliance
Attwood v Small (1838) 6 Cl & Fin 232.
Redgrave v Hurd (1881) 20 Ch D 1
The nature of the misrepresentation

Originally, at common law only two types of misrepresentation
were recognised:
1. Fraudulent Misrepresentation
29
Derry v Peek (1889) 14 App Cas 337

Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All
ER 573
2. Innocent misrepresentation
Common law negligent misrepresentation
Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5
Caparo Industries Plc v Dickman [1990] 1 All ER
568.
Misrepresentation Act 1967 S 2(1) provides:

Where a person has entered into a contract after a
misrepresentation has been made to him by another party
thereto and as a result thereof he has suffered loss, then, if
the person making the misrepresentation would be liable to
damages in respect thereof had the misrepresentation been
made fraudulently, that person shall be so liable
notwithstanding that the misrepresentation was not made
fraudulently unless he proves that he had reasonable
grounds to believe and did believe up to the time the
contract was made that the facts represented were true.
No need to prove a ‘special relationship’: see Hedley Byrne v Heller
Remedies for misrepresentation
Rescission — Car and Universal Finance v Caldwell [1964]1 All

ER 290.
Bars to the remedy of rescission
Affirmation. - Long v Lloyd [1958] 1 WLR 753
Lapse of Time. - Leaf v International Galleries [1950] 1 All
ER 693,
Where restitutio in integrum has become impossible.
The intervention of third parties. - Car and Universal Finance
Co Ltd v Caldwell (above)
Damages in lieu of rescission

The right of rescission may be lost where the court decides to
exercise its discretion under s2(2) Misrepresentation Act 1967 and
award damages in lieu of rescission.
Damages for
Fraudulent misrepresentation
Negligent misrepresentation at common law
Negligent misrepresentation under s2(1)
Royscot Trust Ltd v Rogerson [1991] 3 All ER 294
Naughton And Another v O'Callaghan [1990] 3 All
ER 191.
Innocent misrepresentation
30
Damages are not recoverable for innocent misrepresentation

unless the court decides to exercise its discretion under
s.2(2) and award damages in lieu of rescission.
Measure of damages under s2(2)

Damages under s 2(2) are to be awarded in lieu of rescission and
since the purpose of this remedy is to effect a restitution between
what the representee handed over and what he received then the
damages awarded under s2(2) should reflect such a measure. Such
a measure would therefore preclude sums representing
consequential losses.
See William Sindall Plc v Cambridgeshire County Council [1994] 1
WLR 1016 (CA),
Exclusion of liability for misrepresentation

This area of exclusion is now covered by s 8 of the Unfair Contract
Terms Act 1977, which replaced and repealed s3 of the
Misrepresentation Act 1967.
Duress
Duress is a common law concept which, if established, renders the
contract voidable.
Barton v Armstrong [1975] 2 All ER 465
Physical theat
The Siboen [1976] 1 Lloyd’s Rep 293
‘duress of goods’ is now recognised
Pao On v Lau Yiu Long [1979] 3 All ER 65
the basis of duress is an unlawful threat amounting to ‘coercion of
the will’
North Ocean Shipping Co.v Hyundai Construction Ltd
[1978] QB 705
Universe Tankships Of Monrovia v ITTF [1983] 1
AC366
Atlas Express Ltd v Kafco Ltd [1989] 3 WLR389
‘economic duress’
Undue influence
The doctrine applies to situations where improper pressure (not
amounting to duress at common law) is brought to bear on a party
to enter a contract. Undue influence renders the contract voidable.
No special relationship (actual undue influence needs to be proved)

Williams v Bayley (1866) LR 1 HL 200.
Where there is a special relationship (presumed undue influence)

A transaction may be set aside on the ground that a presumption of
undue influence arises from the nature of the relationship between
the parties.The presumption applies to the following relationships:
Parent and child
Guardian and ward
31
Solicitor and client

Trustee and beneficiary
Religious adviser and disciple
Principal and agent
Lloyds Bank v Bundy [1975] QB 326

National Westminster Bank v Morgan [1985] AC686
What is the effect of establishing that a presumption of undue

influence arises?
• Unless the presumption is rebutted, the transaction is liable
to be set aside.
• Goldsworthy v Brickell [1987] 1 All ER 853
In practice the cases show that there are three ways in which the
presumption may be rebutted:
1. Transaction not manifestly disadvantageous (relevant to
presumed undue influence only).
See National Westminster Bank v Morgan [1985] AC
686
2. Independent advice obtained
3. Spontaneous act of free will
Rescission
The remedy for a plaintiff who has entered into a contract tainted
by undue influence is rescission of the contract. The remedy may be
lost in two ways:
(i) affirmation see Allcard v Skinner (1887) 36 Ch D 145
(ii) third party rights
Notice
See Barclay’s Bank v O’Brien [1993] 4 All ER 417
If the creditor had actual knowledge of the undue
influence/misrepresentation the contract will be avoided;
Constructive notice.
This often relates to banks lending money to a husband for
his business and the wife must also be aware of the debt.
See also CIBC Mortgages v Pitt [1993] 4 All ER
‘inequality of bargaining power’: Lloyds Bank v Bundy
Royal Bank of Scotland v Etridge
32
Legality of object
Illegality
Courts will not enforce contracts that are considered illegal;
• There is a wide disparity in seriousness of illegal contracts;
complicated by public policy considerations
• Illegal in manner of performance — dependent on aim of
legislature?
• Illegal in inception — the contract is void ab initio. eg Cope v
Rowlands [1836]
Unlawful manner of performance

Shaw v Groom [1970] 2 QB 504
St John Shipping v J Rank Ltd [1956] 3 All ER 683
See the relevance of the innocent party’s knowledge of the
illegality;
Archbold’s (Freightage) Ltd v Spanglett Ltd [1961] 1 AER
Acts illegal by statute
Acts illegal at common law

based on public policy, this contradicts the idea of freedom of
contract:
• contracts to commit a crime / civil wrong (void)
o Bigos v Bousted [1951] 1 All ER 92
o Alexander v Rayson [1936] 1 KB 169
o Hughes v Asset Managers plc [1995] 3 All ER 669
Contracts contrary to public policy

• contracts prejudicial to the administration of justice; (void)
Harmony Shipping Co v Davis [1979] 3 All ER 177
• contracts to oust the jurisdiction of the courts;
consider arbitration clauses in commercial agreements (sometimes
called Scott v Avery clauses
Williams v Williams [1957] 1 All ER 305
• contracts corrupting public service
• contracts prejudicial to marriage/family: eg pre-nuptial
contracts (although attitudes to these may be changing
• sexually immoral contracts — Armhouse Lee Ltd v Chappell
[1996] The Times 7 August
The effects of illegality

At common law, no person who was aware of an illegality could
enforce that contract or recover money or property transferred
under it. However, this strict approach has recently been tempered
by the courts;-
Saunders v Edwards [1987] 2 All ER 651
Tinsley v Milligan [1993] 3 WLR 126
Where contract lawful in inception but performed illegally -
INNOCENT party may still recover damages.
33
Where contract prohibited by statute... contract void and

unenforceable by either party.
Recovery of money or property

possible in 3 situations:
(i) where parties not in pari delicto, eg Kiriri Cotton Co Ltd v
Dewani [1960] AC 192
(ii) where parties have voluntarily withdrawn from illegal
contract, Bigos v Bousted [1951] 1 All ER 92
(iii) where recovery of the goods not based on contract; Tinsley v
Milligan [1993] (above)
Severance
Severance is possible where:
(i) it is possible to sever only the objectionable part leaving the
remainder of the contract intact - Goldsoll v Goldman [1915]
1 Ch 292
(ii) illegality not the main part of the contract Bennett v Bennett
[1952] 1 KB 249
(iii) it does not alter the ‘scope and intention of the agreement’
Attwood v Lamont [1920] 3 KB 571
Terms of contract
Distinguishing between representations and terms may involve
statements and intentions of the parties
Gill & Duffus Sa v Societe …Des Sucres SA [1985] 1 Lloyd's
Rep 621
L Schuler Ag v Wickham Machine Tool Sales [1973] 2 All ER
statement maker’s special knowledge

Bannerman v White ( 1861 ) 10 Cb (Ns) 844
Routledge v McKay [1954] 1 All ER 855
Oscar Chess Ltd v Williams [1957] 1 All ER 325
Dick Bentley Productions Ltd v H Smith [1965] 2 All ER 65
Express terms
The parol evidence rule
L’Estrange v F.Graucob Ltd [1934] 2 KB 394
Oral statements later put into writing

J Evans & Son v Merzario [1976] 2 All ER 930
Incorporation of written terms into an oral contract

‘ticket’ or ‘notice’ cases: Chappleton v Barry UDC [1940 ] 1 KB 532
Reasonable notice
Olley v Marlborough Court [1949] 1 All E.R. 1
Thornton v Shoe Lane Parking Ltd [1971] 1 All E.R. 686
34
Interfoto Picture v Stilletto Visual [1988] 1 All E.R. 348
Incorporation by course of dealing/common knowledge

McCutcheon v McBrayne [1964] 1 WLR125
British Crane Hire v Ipswich Plant Hire [1975] QB 303
Implied terms
Terms implied in law
Liverpool City Council v Irwin [1977] AC 239
Terms implied in fact

a) the intention of the parties: Jones v Assoc Tunnelling Co
[1981] IRLR 477
b) Business Efficacy: The Moorcock [1889] 14 PD
64
c) Reasonableness: BAC v Austin [1978] IRLR
332
Terms imposed by statute

In employment: Equal Pay Act 1970 (the ‘equality
clause’)
Employment Rights Act 1996
Rights not to be unfairly dismissed;/ redundancy/ maternity
In commerce: Sale Of Goods Act 1979
Conditions and warranties

A condition is a fundamental obligation which goes to the root of
the contract. Breach of condition allows the innocent party to
repudiate (rescind) further performance of the contract and to seek
damages. A warranty is a subsidiary obligation which leads only to
a remedy in damages.
Bernstein v Pamson Motors [1987] 2 All ER 220
Poussard v Spiers (1876) 1 QBD 410
Bettini v Gye (1876) 1 QBD 183
Innominate Terms
Sometimes the weight to be attached to a clause is not governed by
what it is called but rather by its significance if it is breached.
Exclusion/Limitation clauses
These are perfectly legal subject to the restraints below.
At common law L'Estrange v Graucob [1934] 2 KB 394
1: Has the clause been incorporated into the contract?

Signature L'Estrange v Graucob [1934] 2 KB 394
Curtis v Chemical Cleaning Co [1951] 1 KB 805
35
1. Notice
Nature of the Document Chapelton v Barry
UDC [1940] 1 KB 532
Incorporation by reference to standard terms
Time of the Contract Olley v
Marlborough Court [1949] 1 All ER 127
Onerous or Unusual Clauses Interfoto
Pictures v Stiletto Visual [1988] 1 All ER 348
2. Course of Dealing
Circle Freight v Medeast Gulf Exports [1988] 2
Lloyd's Rep 427
Hardwick Game Farm v Suffolk Agricultural Assn
[1969] 2 AC 31
Hollier v Rambler Motors [1972] 2 QB 71
3. Trade Custom
British Crane Hire Corp. v Ipswich Plant Hire [1975]
1 QB 303
4. Battle of the Forms

BRS v Arthur Crutchley Ltd [1967] 2 All ER 285
Butler Machine Tool Co v Ex-cell-O Corp [1979] 1
WLR 401
BSC v Cleveland Bridge [1984] 1 All ER 504
2: Construction of the clause

Does the clause upon which the client is relying actually cover the
liability in question?
1. Contra Proferentem Andrews Bros. v Singer [1934] 1 KB

17
Ailsa Craig v Malvern Fishing [1983] 1 All ER 101
2. Special Rule for Negligence EE Caledonia v Orbit Valve

[1995] 1 All ER 174
3. Fundamental Breach
Serious Breach George Mitchell v Finney Lock Seeds [1983]
2 All ER 737
Deviation
3: Statutory Control
Does the clause fall principally within —
(a) the Unfair Contract Terms Act 1977,
(b) The Misrepresentation Act 1967, s3
If it does, is it enforceable?
36
UNFAIR CONTRACT TERMS ACT 1977
A Scope of the Act

Business Liability St. Albans DC v ICL [1996] 4 All ER
481
Stevenson v. Rogers [1999] 2 WLR 1064
Dealing as a Consumer R&B Customs Brokers v UDT [1988]
1 WLR 321
Types of Clause Covered Gill v Myer [1992] 2 All ER 257
Contracts Specifically Excluded
International Scope of the Act
B Controls Imposed by the Act

Negligence Liability - s 2
Breach of Contract - s 3
Breach of Implied Terms under the Sale and Supply of Goods
Legislation – s Indemnity Clauses - s 4 Thompson v Lohan [1987] 2
AER 631
Phillips Products v Hyland [1987] 2 AER
620:
Guarantees - s 5
C The Reasonableness Test

Burden of Proof
Time of Assessment
The Nature of an Appeal
Statutory Guidelines Smith v Bush [1989] 2 All ER 514
Schedule II Green v Cade Bros. [1978] Lloyd's
Rep 602
G Mitchell v Finney Lock Seeds [1983] 2 All ER 737
Resources and Insurance Spriggs v Sotheby Park Ltd.[1984]
272 EG 1171
D Excluding Liability for Misrepresentation

The Scope of s 3 Misrepresentation Act 1967 Walker v Boyle
[1982] 1 WLR 495
E Unfair Terms In Consumer Contracts Regulations 1999
37
Termination of contractual obligations
There are four ways to terminate or discharge a contract:

Performance
Breach
Agreement to discharge / variation of contract (accord and
satisfaction)
Frustration
Discharge by performance
Performance must generally be precise and exact

Re Moore & Landaeur [1921] 2 KB519
Arcos v Ronaasen [1933] AC470
Partial provision of services
‘entire’ performance’ —see Cutter v Powell [1795]
Divisible contracts or obligations
Bolton v Mahadeva [1972] 2 All ER 1322
Non-performance due to promisee
quantum meruit basis (‘as much as has been
earned’): Planché v Colburn [1831].
Acceptance of partial performance
Sumpter v Hedges [1898] 1 QB 673
Substantial performance
Hoenig v Isaacs [1952] 2 All ER 176
Dakin v Lee [1916] 1 KB 566
Tender of performance
cf s 27 SGA 1979
Time of performance
Time is not generally ‘of the essence’ unless the
contract makes it so (cf s10 SGA 1979)
Bunge Corp v Tradax
Rickards v Oppenheim [1950] 1 KB 616.
Discharge by breach
‘Repudiatory’ breaches will lead to discharg: Rigby v Ferodo [1987]
IRLR 516
Classification of terms
Bettini v Gye (1876)
Poussard v Spiers (1876)).
Labelling of terms by the parties
Schuler Ag v Wickman Tools Sales Ltd (1973)
Intermediate terms
Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962]
Instalment contracts
s31 SGA 1979
38
Maple Flock Co Ltd v Universal Furniture Products (Wembley)

Ltd (1934)
Anticipatory breach
An advance indication of an intention to break a contract may in
itself be treated as a repudiatory breach (Hochster v De La Tour
[1853]). However, it does not have to be accepted as such (White &
Carter (Councils) v Mcgregor [1962] AC 413).
Right of election
An innocent party may accept a repudiatory breach, or affirm the
contract,
Vitol SA v Noreif Ltd [1996] 3 All ER 193. Treatment of the breach
as repudiatory if not justified, may itself be a breach of contract.
Affirmation will prevent future reliance on the breach.
Discharge of contract by agreement/ variation

The contract of employment
Hawker Siddley v Rump [1979] IRLR 425
Jones v Associated Tunnelling [1981] IIRLR 477
A change in the terms of the agreement should be distinguished

from a change in the way in which an agreed role or task is to be
performed.
Cresswell v Inland Revenue [1984] IRLR 190
Burdett-Coutts v Herts CC [1984] IRLR 91
Discharge of obligations by frustration

A frustrating event is one which, without any fault by either party,
prevents performance of the contract or makes it radically different.
It was originally not thought to discharge obligations (Paradine v
Jane (1647)), but since Taylor v Caldwell (1863) it has been
accepted that this is its effect.
Frustrating events
‘Radically different’: see Davis Contractors Ltd v Fareham UDC
(1956) AC 696
Destruction Of The Subject Matter Taylor v Caldwell
[1863] 3 B & S 326
Personal Incapacity Condor v Barron
Knights [1966] 1 WLR 87
Persistent Illness/Absence - FC Shepherd v
Jerrom [1986] IRLR 358.
Non-Occurrence Of An Event Krell v Henry
[1903] 2 KB740
Goernment Intervention Met Water Board v
Dick Kerr [1918] AC 119
Supervening Illegality Denny Mott &
Dickson v Fraser [1944] AC 265
39
Industrial Action The Nema [1982]

AC 724
The Effects Of War Finelvet Ag v
Vinava Shipping Co Ltd [1983]
Limitations on the doctrine

The contract must not still have some surviving purpose
Herne Bay Steam Boat Co v Hutton (1903) 2 KB
683.
Tsakiroglou & Co v Noblee And Thorl (1962) AC 93.
Self-induced frustration
If the impossibility results from a choice exercised by one party,
then the contract will not be frustrated — Maritime National Fish v
Ocean Trawlers (1935) AC 524.
Events foreseen and provided for

Parties may include a clause dealing with the consequences of
frustration. The courts will generally give effect to this, provided
that the clause was intended to cover the circumstances which have
occurred — Jackson v Union Marine Insurance Co (1874) LR 8 CP
125.
Land
Contracts for the sale of land can be frustrated
Amalgamated Investment v J Walker (1976) 3 All ER
509
National Carriers Ltd v Panalpina (Northern) Ltd
(1981) AC675.
The Effect Of Frustration

At common law
The contract is automatically terminated;
Only future obligations are discharged, those which arose
prior to the event still survive (Chandler v Webster (1904) 1
KB 493)
Recovery of money paid will be allowed if there has been a
total failure of consideration (Fibrosa Spolka v Fairbairn
Lawson (1943) AC 32 )
However, there can be no recovery for work done before the
frustrating event but for which payment was not yet due
(Appleby v Myers). This may be dealt with under the idea of
risk, i.e. who should insured against the event, in this case a
machine installed in a factory that was destroyed by fire
before the machine was commissioned.
Under Law Reform (Frustrated Contracts) Act 1943

The Act does not apply to all contracts,
Section 1(2): money paid or payable prior to frustration will
be recoverable, or cease to be payable, subject to a deduction
40
for expenses incurred by the other party. This is subject to

the courts’ view as to what is just in all the circumstances.
Section 1(3): compensation may be ordered for a valuable
benefit.
If a party has obtained a valuable benefit, the other party can
obtain compensation, to the extent that the court considers
just in all the circumstances. The benefit must survive the
frustrating event, otherwise there can be no recovery
BP Exploration v Hunt (1982) 1 All ER 925
Activity 1.2.1
 List and discuss the main elements of a contract.
41
Summary__________________
This chapter served to introduce you to business contracts
specifically listing the main elements of a contract under English
law. It sought to explain the essential elements of a contract,
focusing on the terms of a contract and the termination of
Self-Assessment Activity
Write a paragraph in which you summarise what you now know
about the termination of contractual obligations.
[200-300 words]
Online discussion topic

Could there be a uniform concept of an international contract?
42
Introduction
Overview
Chapter 1 provided an overview of the essential elements of
contract law. The purpose of this chapter is to allow the student an
opportunity to apply these principles to actual questions. The
student will then have an opportunity to read through model
answers.
Aims
The purpose of this chapter is to enable you to:
 Apply the materials from Chapter 1 to case studies.
 Reflect on model answers to compare their answers.
 Revisit the questions with the view to reviewing their positions.
Learning Outcomes
 Apply the materials from Chapter 1.
43
Resources
Essential readings
Chapter 1 of this module.

electronic resources which can be obtained through Westlaw,
Lawtel or Lexis
44
2.1 Case study question 1

This case focuses on the student applying their knowledge gained
from Chapter 1. They must refer back to the chapter to complete
the questions and then again when reviewing the feedback.
Learning Objectives
 To apply the materials from Chapter 1 to the present questions.
 To highlight the key points within a practical case study approach.
Question 1
On Monday Gandalf posted a letter to the home of Hoodoo, the chairman of the
Trustees of the Boolean Library in Oxford. He offers to sell the library a manuscript
of Professor R R J Trollkind’s book, The Salamandrine Quintet, A Lost Chronicle of
A Xlotyl for £200,000. The letter is opened by Hoodoo’s secretary, Innogen, on
Tuesday but Hoodoo is away on holiday until Thursday and she merely mentions
this in passing to Jonquil, Head of the Boolean Library. Jonquil says, ‘We must
have it because of its local interest; but it’s pretty expensive. We’ll offer Gandalf
£100,000.’ On Wednesday Gandalf rings to see if Hoodoo has any views about
the letter and Innogen tells him that Hoodoo is away until the next day but when
she mentioned the matter to Jonquil he thought it might be worth rather less.
On Thursday, Gandalf emails Hoodoo, saying, ‘In consideration of the happy years
I spent at Oxford, I’ll let you have the manuscript for £100,000.’ Unaware of this
email, Hoodoo, who has heard Jonquil’s advice but also, erroneously, that
Gandalf had disposed of the manuscript to an American university, telephones his
fellow trustees and they agree to spend up to £200,000. On Friday Hoodoo
writes to Gandalf and says, ‘I have approval to spend £150,000. Have you
already done a deal with the Americans?’ This letter is lost in the post. Later on
Friday, Hoodoo reconsiders and writes to Gandalf again and says, ‘I accept your
offer of Monday and am prepared to agree a figure of £200,000.’
On Saturday, Gandalf hears that his supplication for a doctorate has been turned
down by Oxford University, the same day as he receives Hoodoo’s second letter.
Infuriated, he telephones Hoodoo and says, ‘You won’t get the manuscript at any
price — in fact, I’m going to keep it and leave it in my will to Cambridge.’
i. Do you think that an agreement has been reached and, if so, what do you
think the terms of the agreement are?
ii. How would you advise Hoodoo?
Feedback: See page 52
45

Learning Objectives
Question 2
A year ago, Harold, a second-hand car dealer, was in financial difficulties. He
approached Ivan, the landlord of his showroom premises and persuaded him to
accept a rental of £100 per month instead of the £200 per month to which the
landlord was entitled under the lease. This arrangement was to last ‘until Harold’s
financial position improves.’
Harold also owed £2000 to Juliet for a loan she made him a year ago. The sum is
now due. He tells her that his situation has not improved and he offers to pay her
£1000 in full settlement of the debt. She reluctantly agrees.
Kevin undertook some car repair work for Harold. Kevin agreed to do the work for
£800 but he discovers that the vehicles in question are badly rusted and he needs
to spend more time. Harold offers to pay him another £400 to complete the work
and Kevin does so but when the cars are finished, Harold refuses to pay the extra
£400.
Harold has now inherited a fortune from a rich aunt. Ivan, Juliet and Kevin wish
to recover the whole of the sums originally owed to them by Harold.
Advise Harold.
46

Learning Objectives
Question 3
Minghella, the props buyer for Patient Englishmen Ltd, a television film company,
recently bought from Mazarin Antiques a high-backed gilt ‘Louis XIV’ throne chair
priced at £5,400 for use in a period film. This fact was made known to René
Demi-Monde, the owner of the shop, who confirmed in writing that the chair was
from the period of ‘Louis XIV’.
Two days later the chair was placed on the set ready for the day’s filming.
Tarantino, the director, and an expert on period furniture noticed that the chair
was in fact a ‘Louis XV’ chair, and therefore wholly unsuitable for a film set in the
time of Louis XIV.
‘Louis XIV’ throne chairs are, in fact, quite rare, but three were available at
Camden Fine Arts & Furniture, priced between £6,500 and £6,900, whereas
‘Louis XV’ chairs retail for about £5,000.
Minghella purchased one of the throne chairs for £6800, but by the time he got
back to the studio a day of filming had been lost at a cost of £3,000.
Advise Minghella. Would it make any difference if Minghella had been able to
acquire a reproduction ‘Louis XIV’ chair for £2,000?
47

Learning Objectives
Question 4
Waterman has done plumbing work as a sub-contractor for Rascally Brothers
(Building contractors) for a number of years. During a slump in the building trade
Rascally have succeeded in obtaining a contract to build a block of fifty flats for
Clovis. Clovis wants the flats ready in a year’s time and he presses a hard
bargain, including a liquidated damages clause of £1000 per flat per week for
unfinished work. Rascally thinks that this is extremely high as the rents would
normally be about £600 per week but they agreed as they feel that they have no
option. They negotiate with Waterman to do the plumbing for £1000 per flat.
Waterman says that this is a very hard bargain as he really needs £1200 to make
a reasonable profit. Nonetheless, he agrees as times are hard. With three months
to run, there are still twenty-five flats to complete.
The situation of the building industry has improved a few months later and
Waterman has other, more profitable, contracts to perform. Rascally says to
Waterman that they are worried about completion and the fact that they will
incur cost penalties if they are not on time. Waterman replies, ‘You know the
score. I was hard pressed and you drove an unfair deal. The boot is on the other
foot now. I can get the work done if you pay me £500 extra per unfinished flat.’
Knowing that it will be difficult if not impossible to find another plumber at this
short notice, and aware that the penalty clause will soon bite, Rascally agrees.
They pay £7,500 and promise the remaining £5000 when the work is completed
(this is in addition to the sums already agreed under the original contract).
The work, as far as Waterman is concerned, is completed on time. Rascally now
refuses to pay the remaining amount. After two months of negotiation,
Waterman decides to sue Rascally for the remaining £5,000. A year later, before
the case comes to court, Rascally counterclaims for the £7,500 already paid.
Advise the parties.
48

Learning Objectives
Question 5
Keith is a tour operator who arranges for his clients to travel on barges on the old
canals and waterways of England and Wales. The boats can reach sites of historic
interest and outstanding beauty that are otherwise inaccessible. Lionel and
Miranda, both local history enthusiasts, book a two-week tour for their
honeymoon. Some months before their marriage a disease affects fish and
mammal life in the waterways and government scientists are unsure as to
whether it can spread to human beings. Government regulations are introduced
that require the use of a disinfectant on boats to stop the spread of the disease.
Consequently, the price of the disinfectant goes up and Keith realises that if he is
to comply with the regulations it will cost more than any profit from running the
tours. He decides to cancel all bookings.
Advise the parties.
49
Summary__________________
The main purpose of this chapter was to apply the materials from
Chapter 1 to the questions.
Self-Assessment Activity: A moot problem
In the Court of Appeal
Bismarck gmbH v Buckland Industries plc
The plaintiffs ('Bismarck') manufacture machine tools in Germany. The

defendants ('Buckland') are a general industrial company based in Birmingham.
On 1 November 1988 Bismarck sent Buckland a document headed 'Offer of
Supply', offering to sell Buckland a grommet extruder at a price of £330,000,
including delivery. On its face, the document stated that the price was liable to
be varied upwards to reflect any depreciation of the £ against the Dm. between
the date of contract between the date of contract and delivery.
Buckland replied on its own standard form headed 'acceptance' dated 14
November 1988. This stated that Buckland agreed to purchase the extruder for
£330,000 on the terms on the reverse of that form. No price variation clause
appeared thereon. Buckland's form included a tear-off acknowledgment slip to
be returned by the recipient, but Bismarck never did so.
On 1 December 1988 Bismarck wrote to Buckland stating that it was
commencing to manufacture the extruder pursuant to Buckland's acceptance of
its offer dated 1 November 1988. Buckland did not reply to this letter.
On 1 June 1989 the extruder was delivered to Buckland without any further
discussion and it was immediately commissioned by Buckland.
On 15 June 1989 Bismarck sent Buckland an invoice for £353,000, which
reflected the depreciation in the £ between 14 November and delivery. Buckland
replied stating that Bismarck's invoice was incorrect and enclosed a banker's draft
for £330,000 which Bismarck presented and which was duly paid. Bismarck then
sued for the balance of £23,000.
At trial Grumpy J held:

(1) Bismarck's letter of 1 December 1988 was an acceptance of Buckland's
counter-offer of 14 November 1988;
(2) Accordingly, the contract was one at a fixed price of £330,000;
(3) In any event, having presented Buckland's draft for payment, Bismarck
could not now sue for the balance.
Butler Machine Tool Co Ltd. v Ex-Cell-O Corporation [1979] 1 WLR 401.

Central London Property Trust Ltd. v High Trees House Ltd. [1947] KB
130.
Cooper v Parker (1855) 15 CB 822.
50

i) Provide a summary of the various legal problems/questions generated by the
case above.
ii) How would you advise both Bismarck and Buckland to proceed?”
51
Feedback on Activities
Question 1
This question deals with offer and acceptance and the tangle of communications
needs to be unravelled in order to establish whether an agreement has been
reached and, if so, on what terms. If there is an agreement, it may also be
enquired as to the likely remedy.
Gandalf’s letter, posted ‘to the home of Hoodoo’, may suggest that this was not a
communication to Hoodoo personally but in his capacity as chairman of the
trustees of the library, a view supported by his offering to sell the manuscript to
‘the library’. An offer must be communicated and can only be accepted by the
person or body to which it is addressed, or his agent: Powell v Lee. It may well be
that Jonquil’s position enables him to negotiate The fact that Jonquil wants to
offer a lower sum is irrelevant in that there is no suggestion that his thoughts as
to an actual price are actually communicated to Gandalf. The fact that he thinks
the manuscript is worth less than Gandalf is initially offering does not therefore
seem to be a counter-offer. A counter-offer operates as a rejection and it follows
that the counter-offeror cannot then revive the original offer and purport to
accept it: Hyde v Wrench.
In any event, whether as a result of his conversation with Innogen or otherwise,
Gandalf makes a fresh offer at a lower price, that proposed by Jonquil, although
we are not told whether he was aware of the proposed offer and influenced by it.
At that point it appears that both Jonquil and Gandalf are ad idem but, even if
Jonquil’s statement were communicated to Gandalf it would operate as a cross-
offer. This will not form a contract as an offer still needs an acceptance (the
mirror-image rule) to convert it into an agreement. In classical contract analysis,
this will be necessary but there are arguments, notably by Lord Denning, in Butler
Machine Co Ltd v Ex-cell-o Corporation (England) Ltd when dealing with the so-
called ‘Battle of the Forms’, that a more realistic basis should be sought from the
negotiations in trying to work out whether a contract has been formed. This is
more uncertain but provides flexibility in an area where precise academic analysis
may not be appropriate. The classical view was, however, reasserted by the
House of Lords in Gibson v Manchester City Council.
Perhaps the better view here is that Gandalf makes a fresh offer. Although he
says, ‘In consideration of the happy years I spent at Oxford …’ the word
‘consideration’ here seems to have a general meaning rather than being used as
a term of art, referring to the legal definition that it is the price of the other’s
promise, or as in Currie v Misa, a benefit or forbearance. A specific sum of money
is mentioned and, in any event, Gandalf’s happy nostalgia is probably not legal
consideration as it has no value in the eyes of the law. White v Bluett, where a
son’s ceasing to complain was not sufficient to release him from a debt to his
father, might be argued as an example for this and it seems that love and
affection will not be good consideration.
Hoodoo’s offer of £150,000 is made in ignorance of Gandalf’s new offer.
Communication should be actual knowledge of the offer and it cannot be claimed
that Gandalf’s offer was communicated just because it was received when it was
unread. We are told that this offer never reaches Gandalf and so lacks the
essential requirement of communication. Hoodoo’s question seems irrelevant to
the nature of the offer. It seeks to impose no condition on Gandalf and is merely
a request for information, in this case not even information that should affect the
sale. It appears that, still unaware of Gandalf’s revised offer, Hoodoo panics and,
being authorised to increase the sum to be spent on the manuscript, accepts
Gandalf’s original offer. Had the offer from Hoodoo been received it could,
however, be argued that Gandalf’s original offer would have been rejected on the
52
basis of a Hyde v Wrench type of counter-offer. Hoodoo does not know that his
counter-offer has been lost but it has not been communicated.
The question here must be whether Gandalf’s early offer still stands or whether it
has been revoked by the later offer. Revocation must normally be actually
communicated to the offeree by the offeror using the same means as the original
offer was made or a more efficacious method. It may also be possible that a
revocation can be relayed to the offeree by a reliable third party: Dickinson v
Dodds. Actual communication may not be necessary where an offer is made to all
the world, provided the offeror does all he reasonably can to draw attention to
the fact that the offer has been revoked.
In Pickfords Ltd v Celestica Ltd, considered by Dyson LJ as a set of facts that
would constitute an ideal offer and acceptance problem for examination
purposes, the Court of Appeal held that a later offer could revoke an earlier one,
although the defendants had actually accepted the terms of the earlier one.
In an ordinary situation, if an offer were made for a sum and the offeree accepted
that offer and wished to pay more, the offeree would be delighted and it is
difficult to see why he would say that an offer at one price could not be accepted
by an acceptance at twice the price.
The phrase ‘am prepared to agree’ in Hoodoo’s letter is somewhat reminiscent of
the ‘may be prepared to sell’ the council house in Gibson v Manchester City
Council but there the phrase, in its ordinary meaning left an uncertainty and this
is not the case in Hoodoo’s letter. The postal rule (Adams v Lindsell) would
presumably operate here in that the negotiations began by letter and there is,
despite the possible intervention by American buyers, no indication that the
negotiation should proceed faster, as it might if the goods concerned were
perishable. The postal rule might be excluded by a requirement by the offeror for
actual notice but he otherwise takes the risk of the acceptance being lost in the
post. The postal rule demands that the letter of acceptance should be properly
stamped and addressed.
The acceptance of Gandalf’s £200,000 offer would take effect from Friday, when
it was posted, and, as stated above, it seems that this offer still stands. It seems
that Hoodoo’s acceptance is read by Gandalf before he hears the bad news about
his degree. This does not matter as the postal rule means that acceptance has
already taken effect. It is submitted that there is a contract between the Boolean
Library and Gandalf.
A further problem remains. In the ordinary course of events, a breach of contract,
as may now be assumed, would sound in damages that would compensate the
innocent party. This is all well and good where the contract is for the loss of a
bargain, such as a motor car that the seller has agreed to supply at a certain price
and, as a result of the seller’s default, it costs the buyer more money to acquire a
similar vehicle elsewhere. A valuation of a replacement vehicle in such
circumstances should be fairly easy to obtain. Here there are two problems. First,
the value of the manuscript is uncertain as Gandalf himself is prepared to accept
widely differing sums at different times. It would be hard for the court to come a
true monetary value. This does not mean that the court can avoid its task of
assessment of damages, but the second difficulty is that Gandalf is no longer
willing to sell the manuscript to Oxford at any price and intends to give it to
Cambridge. The Boolean Library is keen to acquire the manuscript because of its
unique link to Oxford. Assuming that the contract has been formed the way
ahead would be for the Boolean Trustees to seek an order for specific
performance on the ground that damages would be an inadequate remedy.
Specific performance is an equitable remedy that involves a personal order being
made against Gandalf at the discretion of the court and acting on the basis of the
conscience of the parties. It is appropriate when the contract concerns goods that
are unique or a transaction for land. It will be refused where it is more onerous on
the defendant (Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd)
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and where the court sees itself as having to supervise the order (Ryan v Mutual
Tontine Westminster Chambers).
Were Gandalf to seek to try to sell the manuscript elsewhere, an injunction might
be appropriate and, whilst still an equitable order, might be more likely to
succeed. If Gandalf were merely a dealer in books and manuscripts specific
performance would not be a hardship. If, however, the manuscript has the nature
of an heirloom it would seem harsh to force him to part with it and his intention
to leave it to the other place might imply that is the situation. A happier solution
might be for Oxford to seek in some way to placate the angry Gandalf as it seems
that he is not entirely unprepared to sell the manuscript to Oxford.
Question 2
This question deals with attempts to vary contracts and with promissory estoppel.
Some treatment of consideration, as now reviewed by Williams v Roffey Brothers,
is also required in relation to Kevin.
Harold owes £200 a month under the terms of his existing lease and the basic
rule is that he cannot discharge that liability by paying less: Pinnel’s Case. It is
possible to vary a contract but there is a likely to be a problem with what the
consideration is for the entry into this new contract. The commonest definition of
consideration is given in Currie v Misa by Lush J where he spoke of the benefit
may accrue to one side or a detriment be suffered by the other.
As far as Harold is concerned, the reduction of the rent by Ivan is not reciprocated
by anything that he has done. The closest authority to urge here would be the
decision of Denning J (as he then was) in Central London Properties Trust Ltd v
High Trees House Ltd. This, as he admits in The Discipline of Law, was reached
after he had been out on assize and he had clearly been waiting for this
opportunity. He admits that the decision was not appealed but could be
otherwise defended although it is not obvious on what ground. In High Trees the
landlords allowed the tenants of a block of flats in London to remain at half rent
when war-time bombing drove many of them out. At the end of the war, when
the flats were full again, the landlord sought to put the rent up again. Denning J
allowed the rents to be restored but the money which the landlords had forgone
during the war was not recovered. This decision was in line with Pinnel’s Case,
decided in the early seventeenth century, when it was held that a debt of a sum
of money could only be discharged by the payment of that sum exactly, although
some exceptions were admitted. Thus payment of a lesser sum at an earlier date,
or a different place (this might be less advantageous now), or with the addition of
a thing such a s a ‘horse, a hawk or a robe’ might be a full discharge of the debt.
A later addition was where the payment of the lesser sum was made by a third
party: Hirachand Punamchand v Temple.
In Central London Property Trust Ltd v High Trees House Ltd Denning J, as he was
then, a new High Court judge fresh from the Assizes, decided that, when the
defendant tenants had negotiated a half rent during the war years, when the flats
were largely empty because of the bombing, that the plaintiff landlords could
increase the rent to its pre-war level. He held that they could not recover the
difference between the full and the half rent during that period. He was not
appealed and thus was born the doctrine of promissory estoppel. Denning J was
sceptical about the need for consideration and stated that ‘a promise intended to
be acted upon, and in fact on, is binding so far as its terms properly apply’. He
relied heavily on Hughes v Metropolitan Railway where the concept of ‘estoppel
by representation’ could cause a waiver of rights that might cause them to be
suspended but permitted them to be revived upon the giving of appropriate
notice.
Since 1947, when High Trees was decided, the doctrine of promissory estoppel
has been refined. First, although Lord Denning himself may not have wanted to
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limit its scope, the doctrine, has generally been held to apply only to situations
where a contract has already been in existence and this serves only to vary it.
Secondly, the promisee must have relied on the promise, sometimes, it is claimed
to his detriment. Lord Denning himself did not think that detrimental reliance was
essential: W J Alan & Co v El Nasr. Thirdly, estoppel could only be used to found a
‘shield not a sword’ and thus needed to be based on an existing relationship. In
Combe v Combe, where a wife had succeeded at first instance on the basis of a
promise that her husband had made to pay maintenance to her, the Court of
Appeal (including Denning) held that estoppel could not be used to found a cause
of action. He accepted there that ‘consideration was a cardinal necessity to the
formation of a contract’. Fourthly, it would have to be inequitable for the
promisor to renege on his promise. The equitable origins of the doctrine meant
that the judge had discretion as to the use of this remedy.
A striking example of the equitable aspect being asserted is in D & C Builders v
Rees. A basic maxim of equity is that anyone who comes to equity must come
with clean hands. D & C Builders were a small firm who had done work for Mr
and Mrs Rees agreed at £480. There was a dispute and the defendant offered
them £300 on a ‘take-it-or leave-it’ basis, knowing it seems that they needed the
money. Faced with no alternative they took what was offered and promised that
it would be in full and final settlement. They then sued the defendants for the
remainder, as a debt according to the rule in Pinnel’s Case. The defendants
argued promissory estoppel but this was refused on the ground that they had
coerced the plaintiffs’ promise to seek no more. Fraud would have led to the
same result as the doctrine only works where the defendant, in order to obtain
equity, must be prepared to do equity.
A fifth point is that is that the doctrine normally suspends rather than
extinguishes the rights. This was the case in High Trees, where the suspended
right was revived at the end of the war. In Tool Metal Manufacturing Co Ltd v
Tungsten Electric Co Ltd the promise was withdrawn on the giving of reasonable
notice. This is a problem where a particular debt is concerned rather than a right
to receive a continuing sum. Where the right extends over time, the difference
between the full sum and the reduced amount cannot be recovered. Some
comments about the development of estoppel are contained in Evans v Amicus
Healthcare Ltd where the promises given by a man in relation to the implant of
embryos for IVF treatment could be resiled from after the relationship broke
down, because the relevant legislation permitted this.
Looking at the situations here, it seems that the relationship between Harold and
Ivan is very much on all fours with High Trees. The original rent can now restored
as Harold’s financial position has improved because of his inheritance. There
seems to be no reason to say that Harold’s business capacity here is to be
distinguished from his personal capacity. The debt to Juliet falls first within
Pinnel’s Case but she has agreed to forgo payment of the whole amount
reluctantly and we do not know whether Harold’s statement that his financial
situation had not improved was false, in which case Juliet could sue Harold and
he would not be able to raise promissory estoppel because of the possible duress
and fraud. Moreover, as stated, estoppel tends to be used to suspend a right
rather than extinguishing it, as would happen here.
Kevin’s position is somewhat different and analogous to Williams v Roffey. The
broad proposition is that a person cannot avoid a contract just because it
becomes unprofitable. The situation would have been avoided had a variation
clause been inserted initially, possibly linked to the amount of time required.
Kevin is likely to recover the extra payment in that it is freely offered by Harold
and there is no suggestion of duress or fraud by Kevin. Kevin’s position would be
improved if he could say that the amount of rust was something that he did not,
and could not have been expected, to have detected when he first undertook and
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priced the work. He might argue that the discovery of the rust and the additional
work it necessitated could constitute fresh consideration.
Question 3
This problem is primarily about misrepresentation although it also concerns
breach of contract. The breach of contract occurs because Mazarin supplies a
Louis XV chair whereas it is obligated to provide a Louis XIV chair. Minghella
makes this clear to Mazarin by informing its owner of the specific need and it may
be inferred that he relies on René’s expertise in this respect.
For an action for breach of contract to succeed there must be a failure on the part
of Mazarin to fulfil the express or implied terms of the contract. Minghella did not
simply buy that chair he saw in Mazarin’s showroom, nor was its purpose just to
be sat upon: he required a Louis XIV chair for a period film. Whilst the relevance
of its authenticity might be viewed as of minor importance in that few people
would recognise its being anachronistic, it seems to have been crucial to
Tarantino and as such, not de minimis. Patient Englishmen Ltd did not get what it
bargained for.
The statement by René confirms the provenance of the chair and this implies that
it is not, having been made after the contract has been formed, a term of it. If the
initial statement were a term, either expressly that the chair were a Louis XIV, or
impliedly that, under s 14(3) Sale of Goods Act 1979, it was fit for the purpose of
being used in a film of that period, then the best route would be to sue for breach
of that term. This would enable English Patient to recover the difference between
the cost of a real Louis XIV chair and the Louis XV supplied. It is submitted that
the fact that a reproduction chair could have been obtained for a considerably
lower sum is immaterial as this was not ever part of the bargain. Admittedly, it
might have been satisfactory for the purposes of the film but it is not for
Minghella to have an afterthought here. Had such a reproduction been acquired it
is unlikely that Tarantino could have rejected it. Under the second limb of the
rules for recovery of damages in Hadley v Baxandale the claimant can recover
what 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
of it.’ This could include the day’s filming.
Alternatively. René’s statement may be a representation. A misrepresentation is a
false statement of fact made by one party that induces the other to enter a
contract with him. The remedies that flow from misrepresentation depend on the
type: fraudulent, negligent or innocent. Misrepresentation must be of fact not
opinion, although some opinions may seem like facts: in Bisset v Wilkinson a
statement that a specific number of sheep could be kept on a farm was an
opinion as the farm had not been used for that purpose before. Some opinions
may be acceptable as statements of fact if the maker’s has special knowledge or
expertise: Smith v Land & House Property Co. René’s statement here is not true
about a fact and its specific nature makes it more than a ‘mere puff’, or
salesman’s exaggeration. It also induces Minghella to enter a contract to buy the
chair. A false statement that did not lead the misrepresentee into the contract,
perhaps because he would have entered it regardless, is not actionable, but it will
be presumed that a false statement did induce the contract unless the maker can
rebut it: County NatWest Bank Ltd v Barton. In these circumstances there will be
no need for Minghella to check the veracity of the statement and he cannot be
considered negligent by not doing so.
It is difficult to say whether Rene’s misrepresentation is fraudulent, negligent or
innocent. Fraud is more difficult to argue and, in any event, the remedy for
negligent misrepresentation is the same: rescission and damages. Fraud,
according to Derry v Peek, is where a statement is made ‘knowingly or without
belief in its truth or recklessly, careless of whether it be true or false’. An action
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for misrepresentation may be combined with an action for damages in the tort of
deceit. There is, however, no evidence that René was fraudulent. Negligent
misrepresentation occurs, according to s 2(1) Misrepresentation Act 1967 where
a person has entered into a contract after a misrepresentation, the misrepresentor
will be liable for damages in the same way had the misrepresentation had been
made fraudulently unless he can prove that he had reasonable ground to believe
and did believe up to the time the contract was made that the facts represented
were true.
The burden of proof in negligent misrepresentation is on the defendant to prove
that he had reasonable grounds and that may, in the light of his experience and
the reliance that Minghella places on his statement. Royscot Trust Ltd v Rogerson
is authority for the proposition that all the damage directly following the
misrepresentation may be claimed even if the loss were not reasonably
foreseeable. Some doubts have been cast on this case by the House of Lords
decision in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset
Management) Ltd but it seems that the calculation of damages may not be so
difficult here, the real issue being the recovery of the day’s filming and not just
the difference in the value of the chair.
It may be that the misrepresentation is innocent. This is governed by s 2(2) of the
1967 Act and it, like s 2(1), is not clearly drafted. It provides for damages in lieu
of rescission, but it may be that damages are only available where the right to
rescind has been lost. Certainly it seems that the right to damages exists only
where the contract subsists. The rescission of a contract can work hardship on a
party who has innocently misrepresented a matter as it means that the two
parties must be restored to their pre-contractual position and if the statement
were of a relatively minor matter it might provide a means of trying to avoid a
contract that should be maintained. Damages offer a much better option in this
respect as they can reflect the real loss.
The right to rescission is lost in four circumstances: where the contract has been
affirmed, where there has been a lapse of time, if restitutio in integrum is not
possible (where the parties cannot be restored completely to their original
position, and where a third party has acquired rights under the initial contract.
None of these bars seems to operate in the circumstances here.
Minghella will seek to have his contract with Mazarin rescinded so that he will
return thee chair to them and recover back his money. He seems to have good
prospects of doing so. The price he paid for that chair would have been a bargain
for a Louis XIV chair, but that is irrelevant, and he has to pay a further £1,800 for
the genuine object (it’s not clear why he could not buy the £6,500 chair) so he
should be able to recover that difference in price. Mazarin might well argue that
Minghella is under a duty to mitigate his loss and should obtain the reproduction
chair but this only goes to the cost of the day’s filming and it appears that only
one day has been missed. It seems (and the reason for this need not be enquired
into) that only a genuine chair will do. It is submitted that the phrase ‘from the
period of Louis XIV’ would not cover a chair from a later period. Although
Minghella paid a sum at the top end of the Louis XV range, this is immaterial as it
was not what he bargained for and it is suggested that it is probably irrelevant
that the contract will be between Patient Englishmen Ltd and Mazarin with
Minghella as the film company’s agent, although it would be important to
establish that René knew this if damages were to be sought under Hadley v
Baxandale in relation to what is reasonably foreseeable as consequential loss.
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Question 4
The facts in this case are similar to those in Williams v Roffey Brothers, except
that here there are suggestions of duress, especially economic duress. The effect
of the liquidated damages clause needs examination. Finally, can money paid be
recovered back and can the further sum be recovered as consideration?
First, the contract between Clovis and Raskally is perfectly legitimate in that,
although Cloivis drives a hard bargain in view of the slump, Raskally can always
reject the deal if they feel that it is unprofitable. No improper pressure is applied.
This is not duress as the doctrine of freedom of contract implies that there is
always a choice to refuse and look elsewhere. This has been mitigated by
parliamentary and judicial intervention in consumer contacts where one party is
weaker than the other, but it does not follow that businesses need to be
protected. A drive towards ethical business may place a high regard on reputation
and safeguard continued relations with commercial partners but hard economic
times do not amount to economic duress. In a buoyant market when I am in no
hurry to move, I may be able to hold out for a high price for my house;
alternatively, where buyers are few and I am desperate to re-locate, I may have to
accept a much lower sum. This is mere market pressure. Even if the contract
Raskally negotiates with Clovis is unprofitable there may be some sense in it.
Solicitors, for instance, assert that they undertake will-drafting as a loss-leader in
order to pick up more lucrative administration of estates in the future. Raskally
may believe that the Clovis contract will help to tide them over.
Liquidated damages clauses are common in building contracts. They are
expressed to be a ‘a genuine attempt to estimate in advance the loss which the
plaintiff would be likely to suffer from a breach of the obligation in question: it is
enforceable irrespective of the loss actually suffered.’ (Chitty, 27th ed. Vol. 1, §
26-061). Penalties are irrecoverable. A penalty clause would seek to penalise a
party for failing to perform its contractual obligations. Liquidated damages are
beneficial to both sides because they facilitate recovery of damages without the
trouble and expense of proving actual loss, avoid under-compensation and
guarantee performance. The other side, by contrast, can see what it is liable to
pay in the event of default and can therefore limit its liability to the amount of the
liquidated sum. Damages that are unliquidated are at large and fixed by the
judge. Liquidated damages may be attached to a specific breach.
It is not significant as to how the clause itself is labelled as often these clauses
are commonly called ‘penalties’. The court will decide its effect and uphold it or
not accordingly. If it is a genuine pre-estimate of loss and not unconscionable it
will be upheld: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd.
Even if the clause is treated as a penalty, it may be tat the innocent party can sue
on clause for the actual loss: Jobson v Johnson. To that extent, therefore, it seems
that the liquidated damages clause will be valid, even though the amount seems
excessive.
Due to changes in the cost of labour and materials, or of unforeseen additional
costs during the period when the work is undertaken, building contracts often run
over budget, as those concerned with the construction of the Scottish Parliament
well know. It may be prudent to include variation clauses in the contract from the
outset to cover these eventualities. Waterman claims that the deal he has
negotiated with Raskally is cutting profits to the bone but he nonetheless accepts
the offer. Where a contract proves onerous or unprofitable to perform, it does not
free the party obligated. As in Williams v Roffey Brothers, where a carpenter was
sub-contracted to do work on flats, the original estimate was, as the defendants
knew, low and the claimant also failed to supervise the work properly. As a
result, progress was slow, as here, and the main contractor was likely to incur
liquidated damages for delay. Two facts are different from the case here,
however. First, Roffey knew at the start that the estimate was too low. Secondly,
when they realised that the work was not being completed on time, it was they,
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advised by their surveyor, who offered Williams more money to finish each flat.
They then argued that the additional sums were not payable as there was no
consideration for them: Stilk v Myrick. The Court of Appeal found for Williams,
holding that ‘practical consideration’ had been given by him in that it enabled (or
would have) Roffey to avoid the liquidated damages payments. It is important to
note that in Williams, there was no suggestion of either fraud or duress (although
there was inefficiency on the claimant’s part).
It is perfectly proper for contracting parties to enter a new agreement (novation)
where they wish to vary the terms of the old one. This traditionally would require
‘satisfaction and accord’ whereby there should be a freely entered agreement for
the change and some, albeit small, consideration from either side. This might be
the actual entry into the new contract. This is all based on the increasingly
artificial requirement of consideration as the mark of an enforceable contract,
although when businessmen carefully contemplate and arrange a variation, as is
quite common and commercially sensible, it does not require some formality to
make it binding. Williams has been greeted with general approval, at least as to
the result, if not the reasoning. O’Sullivan and Hilliard state rather broadly, ‘In any
event, English law now holds that performance (or even a promise to perform) an
existing obligation can now amount to good consideration for the other party’s
promise to vary their obligation, generally (as in Roffey) by increasing the contract
price.’ The New Zealand case of Trawling Co Ltd v Smith shows that once a
contractual variation has been relied upon it does not need consideration. On that
basis, it seems that Raskally’s promise to pay Waterman is valid and that both the
sum already paid can be retained and he is entitled to the rest.
It seems that in the present case that Waterman has been unscrupulous in taking
on the contract at a rate he knew was unprofitable and then putting the pressure
on Raskally to extract more money to complete when he knows that he is in a
stronger position. Good plumbers are, after all, in shorter supply than lawyers.
Moreover, unlike Williams, he completes the task and Raskally avoids the
liquidated damages clause. Against him, it might be urged that he has used
economic duress. Duress is usually held to make a contract voidable, although
some argue that it is void. It appear that the apparent consent is revocable and
the contract is then void if the complainant chooses not to affirm: Universe
Tankships of Monrovia v International Transport Workers Federation (The
Universe Sentinel. If a contract is voidable it follows that the innocent party must
act swiftly and third party rights are unaffected.
Duress covers violence or threats of violence (Barton v Armstrong) and Chitty

(27th ed.) refers to the criminal case of Lynch v DPP of Northern Ireland and says
there appears to be no difference between duress at criminal and civil law. Duress
is now seen as deflecting the will of the victim rather than entirely overbearing it,
as he still makes a choice. Economic duress was recognised in Pao On v Lau Yiu
Long and is to be differentiated from acceptable commercial pressure: Alec Lobb
Ltd v Total Oil. In Pao On, Lord Scarman spoke of coercion vitiating consent and it
seems that the demand must be illegitimate or unwarranted. He set out some
indicia of coercion:
1 Did the victim protest at the time?

2 Was there an alternative course of action, such as a legal remedy open at
the time?
3 Was independent advice available?
4 Were steps taken promptly to avoid the contract once entered.
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In North Ocean Shipping v Hyundai Corporation shipbuilders refused to carry on

work unless they were paid a further10% and, as the clients had already
obligated themselves to contracts for the ship in question, they agreed under
protest in the short time they were given. This as held to be duress by Mocatta J
but they failed to recover because their delay in taking action to recover the
overpayment. Atlas Express v Kafco is an example of an increased payment being
demanded for carriage but being unenforceable through duress.
It seems quite likely that the agreement between Waterman and Raskally will be
upheld if consideration is no longer so significant as a badge. If a successful plea
of duress were raised Raskally might recover their £7,500 although the delay
seems fatal, but they might not have to pay the remainder.
Question 5
This question requires an examination of the law regarding discharge of contract.
Contracts may be discharged in any of four ways: performance, breach, variation,
and frustration. The issues here are concerned with frustration and breach but
variation is possible.
A person who enters a contract undertakes to perform obligations that are often
strict, i.e. they must be completed by the party who has promised to perform
them to the letter. The absence of fault, or the assertion by the party that he has
done his best to perform does not exonerate him. Where a contract is for the
goods and services, it will imply that the party undertaking these will use
reasonable skill and care. Thus, a doctor will not guarantee to cure his patient nor
a lawyer to win his case.
Under s 13 of the Supply of Goods and Services Act 1982 it is an implied term
where a person undertakes to carry out a service, that this will be performed with
reasonable skill and care. There are regulations relating to Package Travel,
Package Holiday and Package Tours and these provide that the organiser must
either repay money paid by the consumer or have a substitute package arranged.
It would be worth looking at these terms in detail and to see if ABTA(Association
of British travel Agents) has any arbitration procedures in a case like this. For
present purposes, however, this problem will be approached from the position of
the general principles of contract law.
A contract may be frustrated if a supervening event occurs that the parties have
not provided for and makes it impossible to perform or radically different.
Obviously, if a term of the contract provides for a situation such as this, the
contract may provide an answer by, e.g. allowing a variation in price. This might
happen where fuel prices or taxes increase and it allow the organiser to pass on
these costs to his clients. There is, however, no doubt that where changed
circumstances make a contract more difficult to perform, or even unprofitable to
the extent that a loss will be sustained, it does not exonerate the party from its
obligations: Tsakiroglou & Co v Noblee and Thorl. The plaintiffs agreed to buy
300 tons of groundnuts from the defendants to be shipped from Sudan to
Hamburg, The normal route was via the Suez Canal but this was closed as a
result of military operations. The freight via Suez was £7.10s per ton, but via the
Cape was £15 per ton. Tsakiroglou refused to ship via the Cape and Noblee
responded by saying they would buy the groundnuts elsewhere. The House of
Lords held that this did not frustrate the contract. Tsakiroglou’s argument that the
use of the Suez route was implied in the contract also failed. Alternative routes
could still be used.
It looks here as if Keith takes the decision to cancel the bookings because of
increased expense alone but he could still run the tours. This will not, it is
submitted, suffice to frustrate the contract but any attempt by him to repudiate
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may be accepted by Lionel and Miranda who may decide anyway that they would
rather not spend their honeymoon risking their health on polluted waterways.
Were they to contract disease, it is submitted that any attempt to exclude liability
by Keith would be void under s 2(1) Unfair Contract Terms Act 1977 but the
honeymooners would probably need to prove that, despite the requirement of
using disinfectant, Keith had been negligent in letting them contract the disease.
It might also be hard to prove causation as a matter of fact. In those
circumstances they might be inclined to accept the breach and sue for damages.
In this case damages would include loss for disappointment in that the contract
should have provided not just for their special interests but because of the special
occasion: Jarvis v Swans Tours Ltd and Jackson v Horizon Holidays Ltd. In Jarvis
Lord Denning MR awarded quite substantial damages for disappointment and
distress in respect of an Alpine holiday that was very inferior. In Jackson a
husband’s disappointment was more richly compensated because of his family’s
unhappiness. These commonsense decisions of Lord Denning are controversial. In
Watts v Morrow it was held that damages cannot normally be awarded for
distress but Bingham LJ, as he then was, did say that contracts the objects of
which were ‘pleasure, relaxation, peace of mind or freedom from molestation’
would be an exception. Disappointment for mere breach is unlikely to be
recovered: Farley v Skinner does not really take the matter further.
It was suggested above that frustration might not be successful here.
Nonetheless, it must be considered in advising Keith. The legal requirement to
disinfect the boats does not make it impossible to perform the contract, but it
does, arguably make it radically different. Under the Law Reform (Frustrated
Contracts) Act 1943 money paid should be repaid and money payable ceases to
be payable. It seems that Lionel and Miranda have paid nothing so far but should
they have paid a deposit, that should be recoverable and they will cease to have
any further financial obligations. This will mean that Keith will receive no money
for the cancelled bookings but it should mean that that is the limit of his loss. It is
possible under s 1(2) that expenses may be retained but it is difficult to what
Keith could claim here. It is unlikely that the disinfectant costs can or should be
retained. Keith has done, it is submitted nothing else. Even in Gamerco SA v ICM
/Fair Warning Agency the court held that where money had been paid, it could be
recovered without deduction. The main thing is to extricate the parties with the
minimum of pain to either side, on the assumption that the frustrating event is
the fault of neither. Keith’s decision not to proceed, even if it is frustration at all,
which seems unlikely, is self-induced by his decision not to pay this enhanced
price: Maritime National Fish v Ocean Trawlers.
It remains possible that Lionel and Miranda might themselves seek to frustrate
the contract. The disease has, after all, struck some time after their initial
arrangements and they may feel that they do not want to spend their
honeymoon, presumably a unique moment in their lives, on waterways where fish
and mammals are dying and where they might also contract the illness. They
might have this holiday at a more auspicious time. In fact, the easiest approach
would be for both sides simply to agree not to proceed further with the booking
at this time. Keith might offer to give them a holiday in the future at the same or
a discounted price and Lionel and Miranda might agree, if they propose the
change, to re-book at a better time.
This case calls for an amicable settlement. There may well be sufficient time for
the honeymooners to book elsewhere. It remains possible, however, that, as in
White & Carter (Councils) Ltd v McGregor, the parties intend to adhere to their
rights and insist on performing their part of the contract rather than accepting any
purported repudiation. In White & Carter a contract was made to undertake
advertising and then some short time later the same day, the person who had
booked space cancelled it. The advertisers refused to accept this repudiation and
proceeded, long after, to perform their obligations, suing for the price. The case,
61
a majority decision in the House of Lords, has been criticised, rightly so in this
writer’s opinion, as it seems to reflect a remarkably hard-nosed attitude to
business to hold a party to a contract that he does not want. From that point of
view the decision in Williams v Roffey Brothers, however awkward it makes the
treatment of a variation in obligations, is a sensible answer to a commercial
situation and it displays a practical attitude to solving the problem. It might be
mentioned in passing that this approach is endorsed in the current Civil Procedure
Rules of which CPR 1.1 states as an overriding objective:
(2) Dealing with a case justly includes, so far as is practicable –

…
(b) saving expense;
(c) dealing with the case in ways which are proportionate –
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issues; and
(iv) to the financial position of each party.
If the parties agree to disentangle themselves, no further contract is needed. A

simple letter waiving rights should suffice as each is giving up something in return
for not having the other enforce his rights. This would, it is submitted, act as an
estoppel as well, should the other suddenly seek to renege on the agreement.
Indeed, assuming that both sides are prepared to keep cool in this matter the
situation may be easily salvaged, provided they have acted with sufficient notice:
Rickards (Charles) v Oppenhaim.
62
Chapter 3: Company Law – The constitution

of the company
Introduction
Overview
The purpose of this chapter is to provide a basic introduction to the
main principles of company law. It will introduce you to the
different types of companies recognized at law and the legal
requirements for these various types. It will explore the concept of
legal personality and the veil of incorporation as well as the
constitution of a company. The chapter also examines the legal
duties a company director owes to the company as a registered
entity.
Aims
 Explore the various types of companies (public and private).
 Develop an understanding of the concept of corporate personality.
 Explore the basis of registering different types of companies under law.
 Explore the basic duties required by company directors under company law.
Learning Outcomes
 List and describe the various types of companies (public and private).
 Explain an understanding of the concept of corporate personality.
 Discuss the basis of registering different types of companies under law.
 Explain the basic duties required by company directors under company law.
63
Resources

Lawtel or Lexis
A tour of helpful websites

Parliament for Companies Act 2006
http://www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf
Explanatory notes for the Act
http://www.opsi.gov.uk/acts/acts2006/en/ukpgaen_20060046_en.pdf
Table of Origins
http://www.opsi.gov.uk/acts/acts2006/related/ukpgatoo_20060046_en.pdf
Table of Destinations
http://www.opsi.gov.uk/acts/acts2006/related/ukpgatod_20060046_en.pdf
Companies House
http://www.companieshouse.gov.uk/
FOR:
Forms on setting up a company
http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml
Information booklets on company matters
http://www.companieshouse.gov.uk/about/guidance.shtml
The Insolvency Service
http://www.insolvency.gov.uk/
The Institute of Directors
http://www.iod.co.uk/is-bin/INTERSHOP.enfinity/eCS/Store/en/-
/GBP/IODContentManager-Start?TemplateName=homePage.isml
The DTI (This is now called the Department for Business, Enterprise and Regulatory
Reform)
http://www.dti.gov.uk/
FOR:
company law reform reports
http://www.berr-ec.com/cgibin/perlcon.pl
64
3.1 Legal format of the business

Companies are at the heart of most business activities. One may
register different types of companies, designed to meet the
individual needs of their owners and those doing business with
them. This section will explore different types of companies, and
the concept of legal personality.
Learning Objectives
 Examine various types of companies.
 Examine the concept of corporate personality.
Introduction
The ‘enterprise’
a generally for profit-making activities
b not-for-profit companies
The term ‘company’ can include

a huge multinational commercial ventures, having many
complex subsidiaries in different countries;
b public companies which may have been former nationalised
industries and services, now with many small shareholders as
well as large holdings by pension funds;
c small family businesses;
d charitable undertakings like Oxfam, schools and universities;
e groups of professionals, like accountants, estate agents,
auctioneers, etc (solicitors are generally required to combine
as partners in a firm, not a company, but they may now be
members of a Limited Liability Partnership (LLP) which
reduces individual risk 1);
f one-person businesses.
Traditionally, there are three forms of business enterprise:

a the sole trader (who may work alone or employ many others
but who is essentially identified as one and the same as the
business);
b the partnership (a group of people who work together and
may adopt a business name but who are still individually
responsible for the partnership as a whole);
c the company, whether public or private, limited or unlimited,
which has a separate legal identity from its owners (members
or shareholders).
1
See the disaster that hit Arthur Andersen and partners, a major firm of accountants,
after the collapse of Enron in the USA.
65
The sole trader

a is a natural person (human being)
b can employ others to act for him
c whole profit and debt is personal — if he is unable to pay his
creditors, his personal property is at risk
d can build up goodwill (i.e., the business’ trading reputation)
but may have problems with illness or death
e may choose a business name
f has no public disclosure requirements (he will pay income
tax as a self-employed person and pay NI contributions on
the same basis)
g there will be the usual difficulties about opening a bank
account because of money-laundering regulations and, while
the sole trader may choose and be able to operate from the
kitchen or a garden shed there may be implications for
business rates, planning permission, and even ramifications
for a domestic mortgage, insurance, etc
The partnership
a governed by Partnership Act 1890
b until 2002 number of partners was restricted to twenty
(except solicitors, accountants and the Stock Exchange)
c partnerships are formed and governed by the contract of
agreement between the partners — ‘a suitable framework for
an association of a small body of persons having trust and
confidence in each other’
d partners are ‘jointly and severally’ liable for the partnership
debts — each individual partner is responsible (several) for
the entire debts of the partnership as a whole (joint) 2
e notice that some professional partnerships are now very
large — look at some of the leading firms of solicitors — and
that means that partners will not be meeting on a regular
basis and may work in different countries
The company
a a company is a separate legal person (an ‘artificial’ person)
b a company is a separate entity from its members (the
owners/shareholders)
c the law of agency will often apply as a company has no
hands or brain of its own (although a company can be
punished as a separate entity)
d it can provide limited liability for its members — hence it can
attract investment (but see legislation and other personal
liability for directors/members
2
This means that if Peter, Quentin and Roger set up a partnership, Swingers, that owes
debts of £12,000, the creditors can sue Swingers as a partnership, but can sue P, Q
and R separately. If P has to pay the whole £12,000 he can sue Q and R for a
contribution of £4,000 each but it will be his bad luck if either of them cannot pay
him. P is not just liable for his £4,000 share of the debts to the creditors but for the
entire amount (just as Q and R would be).
66
e while a small (e.g. family) company may well have members

(investors) who are also directors and employees, it is
helpful to keep their different roles in mind: larger
companies will tend to divide managers and investors
A case study: terms and concepts
The opening act

Management of interpersonal relationships
Capital and profit structure
Shares - Participation in the way the company is run
Financial return for investment (dividend and increased share
price)
A (fictional) success story and a few comments about the world of

business
A little story may be appropriate here as a way of introducing some of the
vocabulary and concepts.
Are you sitting comfortably? Then I’ll begin. Once upon a time a law student
called Alan who became a trainee solicitor but realised that he was not totally
fulfilled in his new role. He also realised that he had spent much time at university
organising social events, at which he was both popular and extremely efficient.
He helped friends to organise their parties and recognise that people would pay
him to do this. He set up a business on the side as a sole trader, called ‘Ladd’s
for Fun’. This did very well and soon he was making a substantial amount of
money from this activity and after a while he decided to give up the day job in
order to concentrate on his business. He was now making sufficient money to
consider taking on a personal assistant as he thought this would help him to
develop the business further. He hired Belinda as his employee. Things
continued to prosper and one day he talked to Charles, a cheerful chappie, who
owned a joke and party shop. They decided to go into partnership on a 50-50
basis. Charles also employed a couple of people part-time to work in the shop.
The partnership was called ‘Charlie’s Ladds’ and it prospered.
Later, Alan and Charles saw a business opportunity in buying up a rather run-
down disco and club on Cowley Road. Understanding that they need to raise
more money than the two of them possessed together, they decide to form a
company. They invited Dalvinder, a DJ, to join them to run the club, and Charles’
wicked Uncle Ernie, who has lots of money. The company, Ladds and Lassies Co
Ltd, is a private company, limited by shares. They decide to have a share capital
of £600,000, divided into £1 shares. Ernie is allocated £100,000 shares which
are fully paid up; Dalvinder is allocated £70,000 and pays £35,000. Alan and
Charles sell their existing partnership to the new company for £50,000 in shares
each and each is allocated a further £70,000 of shares of which £35,000 is paid
up. Therefore the capital structure looks like this:
Alan £120,000 shares paid up £35,000

Charles £120,000 shares paid up £35,000
Dalvinder £70,000 shares paid up £35,000
Ernie £100,000 shares paid up £100,000
Total £410,000 shares issued paid up £235,000
67
They calculate that to buy a fifty year lease on the premises they want and to
refurbish them, it will cost about £500,000. Clearly, they are short by £280,000
so they go to Floyd’s Bank which is prepared to make them a loan of that sum to
the company. The loan is secured by a debenture on the fixed charge (asset)
of the club’s premises. The capital is thus raised by equity finance (the shares)
and debt finance (the debenture). If the bank had not thought that the lease
was sufficient security, it could have asked for a personal guarantee on Alan’s
and Charles’ homes.
Alan and Charles are the promoters of the company and they, Dalvinder, and
Ernie are the subscribers to the original memorandum. Each one becomes a
director, each having an equal vote at board meetings. Their voting power at
the Annual General Meeting (AGM) is in proportion to their respective
shareholdings. Alan becomes the Managing Director, Charles and Dalvinder
are Executive Directors with responsibilities for the sourcing of party items and
the running of the club respectively. Charles is Company Secretary. Ernie is a
Non-Executive Director. Alan, Charles and Dalvinder are all paid salaries by
company and, as employees, they have service contracts. Ernie receives a fee
as director, related to the meetings he attends and any other tasks he undertakes.
Now things are really on a roll, a rock and roll to be precise. The party business is
doing well, the shop with its supplies is thriving and the club is gathering crowds
of students from both universities at weekends, is popular with foreign students,
and on Mondays and Thursdays they have special nights for sophisticated thirty-
and forty-somethings from the kind of people who don’t want to wallow in the
mud at Glastonbury but now turn up in Chelsea tractors, drink champagne and
cocktails in evening dress. On Wednesdays they have live rock and jazz bands.
Some of the profits are retained by the company, but apart from handsome
salaries and fees, they are able to declare and pay themselves substantial
dividends.
Belinda suggests that she could run a sideline called ‘Executive Experiences’
which specialises in producing directors’ lunches, providing a high-class escort
service, and giving special guided tours to visiting business people. The directors
of Ladds and Lassies Co Ltd are sure that she has the necessary drive and insight
to run such a company so Executive Experiences is set up a private company
limited by shares, as follows:
Belinda £10,000 fully paid up shares allocated £20,000

Alan £5,000 fully paid up shares allocated £5,000
Charles £5,000 fully paid up shares allocated £5,000
Ladds and Lassies Co Ltd £25,000 fully paid up shares allocated £30,000
Total capital £45,000 Total authorised capital £100,000 (£60,000 issued)
Executive Experiences Co Ltd, managed by Belinda as director, is a subsidiary of

Ladds and Lassies Co Ltd, the latter being the parent or holding company.
Alan, Charles and Dalvinder all have offices above the club premises, Nite Moves.
Hard work and astute business opportunities means that their business continues
to thrive. All the executive directors are trustworthy and grow into their jobs,
acquiring and developing the necessary skills. They acquire more club premises in
Bicester and Aylesbury, forming another subsidiary, L & L (Clubs) Co Ltd, of which
Dalvinder is the managing director and all the shares are owned by Ladds and
Lasses Co Ltd (a wholly owned subsidiary). Other subsidiaries are formed to
deal with different aspects of the enterprise. Alan is now designated Chief
Executive and Chairman as he continues to be the driving spirit behind new
68
projects. Needing fresh investors to expand, Alan and his co-directors decide on a
public flotation and they form L & L (Holdings) plc. The shares are sold to the
public through a merchant bank, Borings, and the issue is handsomely over-
subscribed. Had this not occurred the bank would have had to purchase any
shares not bought (as happened with BP years ago) but in fact, once floated, the
shares are sold above the original price asked (so a few investors can engage in
‘stagging’ (buying shares at market value to sell them immediately when the
price rises sharply). They make takeovers, acquisitions and mergers with a
number of other businesses. Many of these operations are run by managers.
One is Jolly Jokes Co Ltd, a shop that specialises in selling conjuring tricks,
costumes, etc. [there was a real store called Ellisdon’s in High Holborn years ago
which issued a great catalogue and, was a dream of a place to visit — alas I only
went once and sadly it no longer survives]. This venture proves to be a disaster
and after a while it goes into insolvent liquidation and it is wound up. The
rest of the enterprise is unaffected by this. We’ll end on a happy note with L & L
going from strength to strength in the leisure management business.
Years ago I was a director of a subsidiary of BPP (this stands for (Richard)
Brierley, (Richard) Price and (Charlie) Prior. They were all accountants who began
by set up a company to train accountants and then diversified into legal
publishing (Blackstone Press, fairly recently sold to OUP by Alistair MacQueen and
his co-directors for £12m, I believe). They had an accountancy publishing part,
and training for qualified accountants, as well as an A level college (called
Mander Portman and Woodward, I think) and then they diversified into legal CPD
(my part, called Cadmus Legal Education), and language training (Linguarama)
and then, of course, BPP Law School. I only met Brierley once as he retired early
to play golf. Dick Price was the Chief Executive, and I was never quite sure what
Prior did, although he was quite a big wheel in the law school (he was related to
the politician Jim Prior). It is evidently a thriving business.
Coming to Denmark on the ferry this Christmas I saw a film on Stelios, the creator
of Easyjet. By stripping out all of the frills of airline travel the business seems to
have been a great success. He has applied the same acumen to Easyhotels, and
the programme showed him taking on the film industry. He decided to open an
Easycinema in Milton Keynes but seemed to be facing a lot of anti-competitive
pressure from distributors who were reluctant to supply films to him. The no-frills
philosophy meant that the cost of the seat was only 20p but there was no pop-
corn (reducing cleaning costs and turn-around time) and tickets had to be booked
in advance on the internet (saving box-office staff and usherettes). Stelios was
shown in MK selling the idea with a couple of billboards round him and his
energy was fascinating. The idea did not, however, really seem to be taking off,
unlike his airline. If I want to travel somewhere my main concerns are cost, safety,
reliability, ease, and punctuality. I don’t want luxury (at least not on short-haul
flights) or food, or a glossy magazine to keep. He got the mixture right, I believe.
Whether this is the case with Easycinema is another matter. 20p is very cheap
and he was clearly not getting blockbuster films, and whilst he said that major
commercial cinemas might be partly empty, hence requiring high prices, the same
might be said of the need to keep flights full and in the air (no money in ground
time). I don’t go to the cinema as much as I would like, although years ago I had
a sort of professional interest because I taught film studies (a slightly highbrow
version of media studies) but going to the cinema can be a bit of a treat, a sort of
special occasion rather than a mere matter of getting from A to B as cheaply as
possible, or staying in a basic hotel because I don’t mind saving money as I’m not
spending the rest of my life in some Spartan minimalist room that might make a
prison cell look luxurious. As the cinema is something special I quite like being
pampered and for that I don’t so much mind paying.
69
My point in telling this story, and referring to BPP, Stelios, or at Richard Branson’s
Virgin Group, is that business is about wealth-generation and optimism. There is
something quite exciting about the commercial world although I must admit that
if I had to choose a career from scratch it would not be in business. My own
interests don’t really lie in that direction, something that I recognised when I was
interviewed by Unilever for a Management traineeship at the age of 18. At the
second round of selection I was asked a question about my rather academic
interests and I agreed and promptly applied to university. I should probably thank
them for that. There is a difference between lawyers who tend to look at the
problems that might arise rather than optimistically believing, like entrepreneurs,
that anything can be achieved. The main point for company-commercial (CoCo)
lawyers is that they are there to facilitate or to implement the dreams of others.
Perhaps that is what we should have in mind in some of the drearier parts of
company law!
It might also be worth mentioning that, whilst there are plenty of con-men
around, and greed might be seen as a major stimulus in business, there is a
growing emphasis on corporate responsibility and wealth creation which concerns
making money for a whole lot of people, not just oneself. Employees, the public,
and the government all benefit from a strong business community. It’s not just
about taking the money and running — good business depends on acquiring a
good reputation and maintaining it. Company law is concerned to protect
investors and the public generally from shysters.
Some terminology
shareholders (or members, or charge-holders (chargees) Department of Trade and
owners) mortgagor/mortgagee Industry (DTI)
promoters consumers auditors
subscribers suppliers insolvency practitioner
directors distributors administrator
managing director creditors liquidator
executive directors preferred creditors agents
service contract flotation officers
employee subsidiary company secretary
non-executive director holding company Companies House
managers merger vicarious liability
investors take-over winding up.
debenture rather than a share- de-merger
holding. Alternatively, the
pensioners
bank may decide to take a
inspectors
Stakeholders
 the company as (artificial) person
 the directors
 the shareholders
 its creditors
 its employees
 its consumers
 potential investors
 those who might be given sponsorship or charitable or other
support
70
 political parties
 the public as a whole
 the government
 the environment
Question 3.1.1
 List and discuss the various types of companies.
71
3.2 Setting up A Company

There are various advantages to registering one from of company
over another. This section will explore the advantages of adopting
one form over another.
Learning Objectives
 Explore the advantages of registering one form of company over another.
 Examine the legal implications of one form of registration over another.
Setting up a company
Royal charter
Act of Parliament
Registration under Companies Act 1985
Cost — £20
Companies House website
‘Off-the-shelf’ company— see the ‘Exchange and Mart’ for examples
Companies House seems user-friendly and efficient, and the process

of incorporating a company is not difficult if one manages to be
accurate in following the simple precedents in Table A of the
Companies Act 1985 (see Statutory Instrument 1985 No 805
Companies (Tables A to F) Regulations 1985 for details).
The following should be completed and sent to the Registrar of

Companies with the fee:
The memorandum
The articles
Form 10 — See:
http://www.companieshouse.gov.uk/forms/generalForms/10.pdf
Form 12 — See:
http://www.companieshouse.gov.uk/forms/generalForms/12.pdf
Under the 2006 Act there will be a ‘constitution’ that will remove
the need for separate ‘Mem and Arts’. There will still be mode
Articles.
Legal personality
Natural (human beings) or artificial (corporations and companies)
‘Corporation’ derived from Latin ‘corpus’, (body).
Certificate of incorporation (company’s birth certificate)
72
Advantages of the registered company

 it is a legally distinct entity from its shareholders, directors and
employees
 it can make a contract
 it can borrow
 it can hold property
 the members of the company can change but the company does
not die
 limited liability of the members of the company
 constructive knowledge
 directors can be pursued in insolvency (see wrongful and
fraudulent trading)
 personal guarantee from the directors (i.e. over their homes)
 undue influence in contract
Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2001]
3 WLR. 1021; [2001] 4 All ER 449; [2002] 1 Lloyd's Rep 343
This set of eight conjoined appeals concerned wives’ interests in the
matrimonial home when it was offered as surety for their husbands’
business indebtedness. Held, dismissing three of the appeals and
upholding the other five,
(1) a lender was placed on enquiry whenever one party of a cohabiting couple
offered to stand surety for the other’s debts. That included married and unmarried
couples, heterosexual or homosexual, where the bank knew about the
relationship. If a wife were surety for the debts of a company in which she held
shares with her husband, the bank was similarly placed on enquiry, even where
the wife was a director or company secretary;
(2) a bank would be required to insist that a wife attend a private meeting (i.e.
without her husband) in order to explain the nature of the risk and urge her to
seek independent advice. The bank could only be expected to take reasonable
steps to satisfy itself that the practical consequences of the proposed transaction
had been clearly explained;
(3) the decision whether to proceed with the transaction or not had to rest with
the wife and it was not a solicitor's role to intervene and attempt to prevent the
transaction even if it was thought not to be in her best interests. Guidance was
given as to the minimum extent of a solicitor's advice to such circumstances.
Exceptionally, where the transaction was clearly seriously adverse to the wife’s
interests, a solicitor should decline to act further;
(4) as well as being retained by the wife, a solicitor was entitled to act for the
bank or for the husband so long as this arrangement did not give rise to a conflict
of interest. A solicitor was not an agent for the bank and accordingly could not be
held liable to the bank for any deficiencies in the advice;
(5) in order to ensure that a wife had been provided with independent advice a
bank should communicate directly with her regarding the nature of the advice
that she was to receive and ensure that the confirmation required by the bank
from her nominated solicitor was fully explained to her.
Perpetual succession — partnerships need to be renewed every time

a partner joins or leaves. The company carries on even when the
original shareholders have sold their shares and completely
different people have become the owners.
73
Disadvantages of the registered company

a requirements regarding publicity of accounts
b need to file documentation with Companies House.
c cost and inconvenience of annual audits and returns
submitted to Companies House (relieved in the case of small
companies, in 2000, the turnover of these had to be below
£1 million)
‘Dormant’ companies (where ‘no significant accounting transaction’

has occurred) 3.
The exempt companies constitute about 95% of registered

companies.
Question 3.2.1
 What are the advantages and disadvantages of registering one form of

company over another?
3 Davies, 563-567.
74
3.3 Types of company

This section explores the various types of companies that may be
may be registered. We also explore the concept of legal personality
and its legal relevance to business activities.
Learning Objectives
 Examine the various types of companies (public and private).
 Examine the concept of corporate personality.
 Explore how to register different types of companies under law.
Types of company
 Public and private
 Limited liability or not
 Limited by shares or guarantee
The private company limited by shares

 This is the archetypal (paradigm) company
 It is like a partnership or sole trader
 Its shares cannot be offered to the public
 A one-member company is possible
Although the share capital stated on the Memorandum may be

£100,000 in £1, or 50p shares, the initial allocation is likely to be
two shares only to the subscribers. Other shares will be allocated
and paid for later. Thus the company may allocate only 80,000 £1
shares, leaving the rest to be allocated at some future date. Of the
80,000 allocated, only a proportion may be paid up. Thus, A may
have paid up in full for his 20,000 shares, B might have presently
paid nothing for his 20,000, C might have paid 50p per share for
the 40,000 allocated to him. The company will have £40,000 in
cash, with a possible call on B of £20,000 and a call on C for the
same as he has already paid 40,000 times 50p and is still liable for
the remainder.
The public limited company limited by shares

It can offer its shares to the public.
‘Listing’ requires a vetting process by the market concerned.
A plc requires that the share capital is a minimum of £50,000 and
at least 25% of the shares be fully paid up together with any
premium. This means that if the share capital of the company is
£100,000 in £1 shares, £25,000 must have been subscribed and
paid up.
Premium: a £1 share might be seen as such a bargain that someone

is prepared to pay £1.50 for it. Hence the paid up shares would
have to be £25,000 plus 25,000 at 50p (£12,500) and the total paid
up shares would have to be £37,500. The face value of the share is
called its ‘par value’. Shares may go up or down in price, according
to whether the company is doing well or badly.
75
Because public companies can, and have, given rise to concern

about the way in which the board has acted (the Maxwell and
Enron cases are classic examples of how not to run a company)
there is a great need to keep an eye on ‘corporate governance’.
There is, for instance, a Combined Code, published by the Financial
Services Authority (FSA) on
http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf
See Tom Nash’s ‘Split Personalities’ (Director, May 2008, 41-42) on

the appointment of Sir Stuart Rose as chairman and chief executive
of Marks & Spencer, when these two roles are normally separated.
The private company limited by guarantee

This is suitable for a not-for-profit company, e.g. a charity. This
needs to comply with charities legislation as well as the companies
statutes.
The liability of the members is limited to the amount of the
guarantees they give. This is frequently a nominal sum of £1 or £5.
The private unlimited company

The purpose of the private company with unlimited liability for its
members seems to be just to create a legal personality.
It is vital to understand that ‘liability’ refers to a legal responsibility
to pay debts. In a limited company, the liability of the members is
limited to the amount unpaid on their shares; the company itself
has no limit on its liability but if it cannot pay its debts the creditors
cannot pursue the members beyond the amount just mentioned. If a
shareholder has paid in full for his shares this is the full extent of
his liability and it limits his risk, or the extent of his exposure to a
situation where the company is insolvent (i.e. unable to pay its
debts). Of course, a shareholder’s shares may be worth little or
nothing in such a situation, but at least he knows that his other
assets are not at risk, as they would be if a sole trader were to
become bankrupt. This makes shares in a company a relatively safe
investment and at least the investor knows exactly how much he
will lose if the company crashes. If A pays for 10,000 £1 shares in
Bubble.com, the value might increase to £20 per share and hence A
will have shares worth £200,000; if they crash to 25p per share, the
value is £2,500 but his ‘loss’ will never be more than the £10,000
he initially invested.
Corporate personality and liability

Salomon v Salomon & Co Ltd [1897] AC 22 HL
This remains the classic case. In the Court of Appeal it was called.
Broderip v Salomon [1895] 2 Ch 323 CA

The ‘veil of incorporation’ .
s1159 CA 06 (s736 CA 85) defines ‘Subsidiary’, ‘holding

company’ and ‘wholly owned subsidiary’.
76
Re Southard & Co Ltd [1979] 3 All ER 556 at 565:

s1162 and Sch 7 (s258 CA85).
Problems of corporate personality

Macaura v Northern Assurance Co Ltd [1923] AC 619 PC
Lee v Lee’s Air Farming Ltd [1961] AC 12 [1960] 3 All ER

420 PC
Multinational Gas etc Co Ltd v Multinational Gas etc Services Ltd and
others [1983] 2 All ER 563
Attorney-General’s Reference (No 2 of 1982) [1984] 2 All ER 216
Lifting the veil of incorporation

Statutory provisions or judicial discretion.
Statutory exceptions
s 24 Companies Act 1985
ss 82, 84 (s349 CA 85)
Osh Kosh B’gosh v Dan Marbel Inc [1989] BCLC 507 CA
Ss 974 – 982 CA 06 (ss428-430 CA 85)
Ss 213 and 214 Insolvency Act 1986
Taxation.
Judicial exceptions
(a) Impropriety (Abuse of the corporate form)
Gilford Motor Co Ltd v Horne [1933] Ch 935; [1933] All ER
Re Bugle Press [1961] Ch 270; [1960] 3 All ER 791 CA
Jones v Lipman [1962] 1 All ER 442
Creasey v Breachwood Motors Ltd [1993] BCLC 480
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447

But see fraudulent trading under s 993 CA 06 (was s458 CA 85)
and s 213 Insolvency Act 1986.
Dimbleby & Sons Ltd v NUJ [1984] 1 All ER 751
77
(b) Public policy

Daimler Co Ltd v Continental Rubber & Tyre Co Ltd [1916] 2 AC 307
(c) Agency
Re FG Films Ltd [1953] 1 All ER 615
Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All

ER 116 CA
DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462
Woolfson v Strathclyde Regional Council (1978) 38 P & C R 521
In no case has the agency argument prevailed so as to require a

parent company to pay the debts of a failed subsidiary.
(d) The ‘enterprise’ theory

Woolfson v Strathclyde Regional Council (above)
Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER

785; [1989] 1WLR 379
‘letter of comfort’
National Dock Labour Board v Pinn & Wheeler Ltd and others [1989]
BCLC 647
Alec Lobb (Garages) Ltd v Total Oil GB [1985] 1 All ER 303, [1985]
1 WLR 173 CA
Adams v Cape Industries plc [1990] Ch 433

‘involuntary creditors’
Groups of companies
Cape Industries above
Lonrho Ltd v Shell Petroleum and another [1980] 1 WLR 627
Re Augustus Barnett Ltd [1986] BCLC 170
78
Question 3.3.1
 What is meant by the veil of incorporation and what is the legal significance
of this concept?
79
3.4 Constitution of The Company

A company must have a constitution highlighting its main
objectives and how it will operate. This section will introduce you
to the constitution, in particular the memorandum and articles of
the company.
Learning Objectives
 Examine the constitution of a company
 Explore what is meant by the memorandum and articles of the company.
The constitution of the company

Memorandum and articles of the company (mem and arts).
These are now called the ‘constitution’ of the company.
The memorandum
Form of memorandum for a private company
1. The name of the company is XYZ company limited.

2. The registered office is to be situated in ... (England, Scotland,
Wales).
3. Objects clause.
4. The liability of the members is limited.
5. The company’s share capital is £50,000 divided into 50,000
shares of £1 each.
6. Subscription clause. Minimum of two subscribers.
This is in the form: We, the subscribers to this memorandum of

association, wish to be formed into a company pursuant to this
memorandum; and we agree to take the number of shares shown
opposite our respective names.
(i) The company name
To be exempt from using the word ‘limited’, a company must be

(i) a private company limited by guarantee;
(ii) the objects of which must be the promotion of commerce, art,
science, education, religion, charity or any profession;
(iii) and the memorandum or articles of association must say that:
(a) any profits, or other income, are to be spent in
promoting the company's objects;
(b) no dividends are to be paid to members;
(c) if the company is wound up, all the assets are to be
transferred to another body which has similar objects,
or which promotes a charity.
80
A prospective name may be rejected if it is ‘the same as’ or too

similar to one already on the index, or would be offensive, or its use
might constitute a criminal offence.
R v Registrar of Companies ex parte Attorney-General [1991] BCLC

476
Attorney-General had the decision to register the business (‘Lindi
St Claire (Personal Services) Ltd’ ) judicially reviewed and quashed
as contrary to public policy.
‘Passing off’
Company may change its name by passing a special resolution in a

general meeting, or where all the members sign a written resolution
that it be changed.
The Secretary of State may issue a direction to a company change

its name.
A company may be directed to change its name:
(a) within 12 months of registration if it is the same as or, ‘too
like’ a name appearing on the index at the time of its
registration;
(b) within five years of registration, where misleading information
for the purposes of registration has been provided;
(c) at any time if the name gives so misleading an indication of
the nature of the company's activities as to be likely to cause
harm to the public. This direction must be complied with
within six weeks unless an application is made to the Court to
set it aside: s 32 Companies Act 1985.
Checking the register before applying for registration reduces the

risk of confusion and other difficulties, e.g.:
(a) subsequent objections to the company’s name;
(b) confusion with other companies with a poor trading record;
(c) a 'passing off' action in civil law.
(ii) Conversion from public to private (and vice-versa)

Effected by a special resolution.
New public company must conform to the criteria of a public
company.
(iii) The registered office

The registered office of a company may not be moved between
jurisdictions.
New address of registered office must be notified to the Registrar
but does not appear on the memorandum.
(iv) The objects clause and the reform of the ultra vires
rule
‘Ultra vires’ rule
81
‘Constructive notice’
Ashbury Carriage & Iron Co Ltd v Riche (1875) LR 7 HL 653 HL
s 3A Companies Act 1985:
Companies Act 1989

The old s 35 Companies Act 1985 was totally recast by the
Companies Act 1989, and new ss 35A and 35B (CA 85) were
added.
International Sales and Agencies Ltd v Marcus [1982] 2 CMLR

[1982] 3 All ER 551
s 9(1) European Communities Act 1972
s 322A modifies s 35A (CA 85)

LLB: Company Law
Form of memorandum for a public company

The memorandum is the same as for a private company, but with
the following alterations:
1. The name of the company is XYZ public limited company (or plc)
2. The company is to be a public company.
3. The share capital must be at least £50,000.
Publication of company accounts

Criminal Justice and Police Act 2001 (see ss 723B - 723F CA 85).
This is of assistance to those concerned with threats of violence

from animal rights protestors as it protects them and their families
from harassment.
Small companies (which for this purpose are defined as having a

turnover not exceeding £1m in the financial year) are exempt from
having their accounts audited.
The ‘s 14 contract’
s 33 CA 2006 (s 14(1) CA 1985)
The rule in Royal British Bank v Turquand

‘Internal management’ rule
Royal British Bank v Turquand (1856) 6 E & B 327
Rolled Steel Products (Holdings) Ltd v British Steel Corporation

[1986] Ch 246
82
Company Promoters
Twycross v Grant (1877) CPD 469
Re Great Wheal Polgooth Co (1883) 53 LJ Ch 42.
Gluckstein v Barnes [1900] AC 240
Omnium Electric Palaces v Baines [1914] 1 Ch 322
Erlanger v New Sombrero Phosphate Co (1978) 3 App Cas 1218
Re Leeds & Hanley Theatres of Varieties Ltd [1902] 2 Ch 809
Re Cape Breton Co (1885) 29 Ch D 795
PRE-INCORPORATION CONTRACTS
Kelner v Baxter (1866) LR 2 CP 174
‘for and on behalf of XYZ Co Ltd’
Newborne v Sensolid (Great Britain) Ltd [1954] QB 45; [1953] 1 All

ER 708
‘XYZ Co Ltd, AB director’
Phonogram Ltd v Lane [1981] 3 All ER 182 CA
Osh Kosh B’gosh v Dan Marbel Inc and another [1989] BCLC 507
(CA).
Cotronic(UK) td v Dezonie [1991] BCLC 721.
Badgerhill Properties Ltd v Cottrell [1991] BCLC 805
Braymist Ltd v Wise Finance Co Ltd [2002] Ch 273
Question 3.4.1
 What is meant by the constitution of a company and what does it consist

of?
83
3.5 The Company Directors’

It is important to study the duties of a company director as these
duties have many legal implications. This section will introduce
you to the various duties of a company director.
Learning Objectives
 Examine the concept of directors’ duties.
 Explore the legal obligations of a company director.
Company directors: an introduction

Directors’ duties:
1 common law duty of care and skill; secondly
2 fiduciary duty (i.e. to avoid conflicts and not to make secret
profit).
Jackson v Invicta Plastics Ltd [1987] BCLC 329
The board of directors

S 282 Companies Act 1985.
Obligations are imposed upon any ‘officer’ of the company: s 744

Companies Act 1985.
Appointment of directors
s 292 Companies Act 1985.
Executive and non-executive directors

Dorchester Finance Co Ltd v Stebbing and others [1989] BCLC 498.
Agents
LLB: Company Law
Trustees
Managing director
Freeman & Lockyer v Buckhurst Park Properties [1964] 2 QB 480
[1964] 1 All ER
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 [1967] 3 All ER

98
El Ajou v Dollar Land Holdings PLC [1994] BCLC 464
Directors’ duty of skill and care at common law

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 per Romer LJ
84
Donoghue v Stevenson [1932] AC 562
Norman v Theodore Goddard [1991] BCLC 1028
There has been a perceptible shift in the law on two fronts:
(a) Objective rather than subjective test
Re D’Jan of London Ltd [1994] BCLC 561
(b) Winkworth v Edward Baron Development Co Ltd [1987] BCLC

193 [1987] 1 All ER 114
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250

Week 4 – Directors’ Duty of Care and Disqualification
Brady v Brady [1989] AC 755; [1988] 2 All ER 617
Directors’ personal liability to company creditors

C Evans Ltd v Spritebrand Ltd and Sullivan [1985] BCLC 105 [1985]
2 All ER 415
Mancetter Developments Ltd v Garmanson Ltd & another [1986]

BCLC 196, [1986] 1 All ER 449
Director-General of Fair Trading v Buckland [1990] BCLC 162
Williams v Natural Life Health Foods Ltd [1997] 1 BCLC 131
Contribution orders under ss 213 and 214 Insolvency Act 1986
Directors’ service contracts

Must be available for inspection at the registered office: s 318
Companies Act 1985
Must be for no more than five years, unless approved by a special
resolution: s 319
Removal of directors
Runciman v Walter Runciman PLC [1992] BCLC 1084
Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22
Miscellaneous statutory provisions affecting directors

Company Directors (Disqualification) Act 1986
85
Companies Act 1985:

S 80: authority to allot shares derives from the articles or the
general meeting.
S 303: dismissal of directors by the shareholders.
Section 323: prohibition on dealing in certain share options.
Ss 324 and 328: notification of directors’ shareholdings.
Section 320–322B: substantial property deals involving directors.
Re Duckwari PLC [1997] BCC 45
Ss 330–342: loans etc. to directors.
S 346: connected persons.
S 741: shadow directors.
The directors’ report

ss 234B and 234C directors of quoted companies are required to
prepare a directors’ remuneration report and approve and sign it.
Much of the duties that directors owe are now in the Companies Act
2006 but that part is not yet in force. It is included below for ease
of reference. The Explanatory Notes to the Act are helpful and can
be found via the Parliament website. http://www.opsi.gov.uk/
See Appendix I on p. 101 for General Duties of Directors.
Company directors — continued

The word ‘director’ is not a term of art. A person may be
denominated as a director, such as training director, without having
a position on the board of directors or having directorial
responsibilities. We have seen that it is important in company law
to establish in what capacity persons act. In a small company the
shareholders, perhaps only a handful in number, may also be
directors. In a plc the directors will effectively manage the company
and be relatively remote from the shareholders who are likely to be
concerned only that their investments prosper.
The duties that directors owe are of two sorts: first, there is a
common law duty of care and skill; secondly, there is a fiduciary
duty (i.e. to avoid conflicts and not to make a secret profit).
Directors might be employees of the company, being paid a salary
and paying income tax and national insurance like any other
employee. They may be self-employed, probably receiving in that
case a fee for their services. What a director takes out of the
business as salary or dividend will probably be subject to the advice
of his accountant as to the most beneficial way according to the
respective tax advantages to him and the company.
In Jackson v Invicta Plastics Ltd [1987] BCLC 329 the Managing
Director was treated as an employee. It was held that whilst a
director could be summarily dismissed for serious misconduct or
incompetence, this was not the case here.
86
The board of directors

S 154 CA 2006 (was s282 CA 85) requires all companies to have
directors but their functions are dictated largely by the constitution,
itself under the control of the shareholders, although art 70 Table A
provides that management of the company is in the hands of the
board. The shareholders, nonetheless, maintain considerable
control. Paul Davies says,
‘Shareholder involvement in decision-making is required by
the Act where the decision is likely to have an impact upon
the shareholders’ legal rights as contained either in the
company’s constitution or in the terms of issue of the shares.’
He continues, as regards their ‘mandatory functions’ that the duties

are scattered throughout the Act and:
‘… they relate to two main sources of corporate life, the
production of the annual financial statements and the
regular administration of the company, in particular its
communications with Companies House.
These obligations are imposed upon any ‘officer’ of the company,

defined in ss 1121(2), 1173(1) CA 06 (was s744 CA85):
‘“officer”, in relation to a body corporate, includes a
director, manager or secretary’.
Whilst this contemplates that officers includes those managers at

sub-board level, it seems that such a responsibility for the
submission of statutorily required documentation is confined to
those working under the immediate authority of a director.
Appointment of directors
The particulars of the company’s first directors are submitted to the
Registrar in Form 10, together with their consent to act. The
Companies Act does not require that the directors should be elected
or that they should submit themselves for periodic re-election. This
is, of course, common practice but it is governed by the articles.
Where directors are elected the procedure is contained in s160 CA
06 (s292 CA85) and requires that where this is at a general meeting
but that they should be elected individually (hence avoiding a slate
of nominees to be accepted or rejected en bloc). In some private
companies directors may be appointed for life.
Where an election takes place, a shareholder who controls 51% of
the shares can ensure that he can elect the whole board of
directors. Depending on the provisions in the articles, a director
need not be a member of the company. This may emphasise the
division between ‘managers’ and ‘proprietors’ but many plcs do
require directors to take shares and may, indeed, offer them
attractive share options. If a director needs to take up shares, he
should do so within two months or his office will be vacated.
Executive and non-executive directors

Typically, a company will have on its board of directors a number
of executive directors who will often be employees with specific
tasks such as the Finance Director, the Marketing Director, the
87
Research and Development Director, etc. Their functions will be

allocated according to the needs of the company. In addition to
these, many companies will have non-executive directors who will
attend board meetings and perhaps spend a few days a month on
company business. They are, however, directors like any other.
Recent reports on company law have suggested that in a plc these
non-executives should act as a sort of watchdog over their
colleagues, ensuring that their full-time colleagues behave properly.
This is in response to scandals such as the Maxwell collapse in the
UK and Enron in the USA. There have been others, usually affecting
large numbers of company pensioners who reasonably complain
that they have been unwilling victims of the company’s bad
investments or, more likely, actual sharp or actively dishonest
practice. Policing the interests of these investors might be seen to
have a special priority in that they have had money taken from their
pay to put into what they assume to be a safe company pension
scheme; they are not quite like ordinary speculative investors who
must realise that share values can go down as well as up.
In DORCHESTER FINANCE CO LTD v STEBBING AND OTHERS
[1989] BCLC 498 there was no difference in the duty owed to a
company by an executive or a non-executive director. This is an
interesting case concerning a director’s failure to attend directors’
meetings regularly.
Agents
A company as an artificial person cannot act for itself. It can only
act and, indeed, think, through human agents. Directors act as
agents when carrying out their duties for the company. The
principal is the company, not the shareholders. This applies
whether or not the directors are employees or not.
LLB: Company Law
Trustees
Directors are entrusted with the undertaking, and to that extent are
in a position of trust and are accountable to the shareholders for
their stewardship. They are not, however, trustees in the strict
sense of that word, and they may have a personal interest in a
company contract. As the property of the company is vested in the
company itself, the directors are not the legal owners administering
it for a beneficiary, as would be the case in a normal trust.
Managing director
A managing director (now often called a Chief Executive Officer
after the US model) may be appointed under Art 72 of Table A. He
and other directors appointed to executive positions are not liable
to retirement on a rotating basis. He could undertake a number of
specific duties granted to him by the board and can bind the
company without authorisation for each contract.
In FREEMAN & LOCKYER v BUCKHURST PARK PROPERTIES
[1964] 2 QB 480 [1964] 1 All ER 630 the articles allowed for the
appointment of a managing director but none was appointed
although one of the two directors acted as such and he was held by
the Court of Appeal to have ostensible if not actual authority and
88
hence the company was liable for fees that he had incurred on
behalf of the company.
In HELY-HUTCHINSON v BRAYHEAD LTD [1968] 1 QB 549 [1967]
3 All ER 98 the chairman of the defendant company agreed to
indemnify another director of a company which the defendants
wanted to take over. The chairman was not formally appointed
managing director although he acted as such and his actions were
not always taken with the prior knowledge of the board, although
he reported back to them and they acquiesced in this practice. He
was held to have bound the company by actual authority.
EL AJOU v DOLLAR LAND HOLDINGS PLC [1994] BCLC 464 was a
fraud case where the fraud known to the director who was the
‘directing mind and will’ was attributed to the company. This
involved setting up a bubble company by some fraudulent
Canadians who fooled the plaintiff, a businessman in Riyadh, and
money they obtained was subsequently invested with the Nine Elms
Project. The director who introduced the Canadians must have
known that their involvement was fraudulent. The assets could be
traced into the Nine Elms Project and these could be recovered
from the defendant company that was held to have known of the
fraud as well.
Directors’ duty of skill and care at common law

In general, a director must exercise some degree of both skill and
diligence, as well as acting honestly: RE CITY EQUITABLE FIRE
INSURANCE CO LTD [1925] Ch 407 per Romer LJ. He added three
guiding principles to determine whether that duty had been
fulfilled. First, ‘a director need not exhibit in the performance of his
duties a greater degree of skill than may reasonably be expected
from a person of his knowledge and experience.’ Secondly, he is not
bound to give continuous attention to the company’s affairs,
although he should attend meetings where possible, and, thirdly, he
may leave to some other official, in the absence of grounds for
suspicion, matters that he trusts that official can perform honestly.
This case occurred before the general tortious duty in negligence
was established in Donoghue v Stevenson [1932] AC 562. Ignorance
and a failure to inquire are unlikely to exonerate a director.
In NORMAN v THEODORE GODDARD [1991] BCLC 1028 a
director of a company relied on a partner in Theodore Goddard, an
eminent firm of City solicitors and, when the partner was found to
have been fraudulent, they sought contribution from him as the
other director. The director was entitled to rely on what he was told
and had taken sufficient steps. The principle remains that directors
are entitled to trust persons in responsible positions until there is
reason to distrust them 4.
There has been a perceptible shift in the law on two fronts:

(a) There is some move towards making the test objective rather
than subjective: s 214 Insolvency Act 1986 and NORMAN v
THEODORE GODDARD (above). The judge (Hoffmann J) was of
the opinion that s 214(4) Insolvency Act accurately stated the test
4 See 1983 All ER Ann Rev 82 for comments on directors’ liability for negligence
known and acquiesced in by all the shareholders.
89
of a director’s duty of care. This case did not involve company

insolvency.
In RE D’JAN OF LONDON LTD [1994] BCLC 561, a director signed
a fire insurance proposal form which was completed by somebody
else, and which he did not check before signing. Under the terms of
the policy the insurance company was able to repudiate liability for
fire. The liquidator sued the director for negligence in signing such
a contract without checking. The director was found negligent
(although exonerated on other grounds), but the case is chiefly
significant because the judge ruled that the duty of care owed at
common law was the equivalent to that in s 214 Insolvency Act
1986 – failure to act as a normally prudent person in those
circumstances would have acted. By signing the insurance form
without reading it, the director might have been found subjectively
negligent in any event.
(b) There is some debate as to the persons to whom this duty is
owed. There is a growing feeling that directors should have regard
to the interests of creditors. In WINKWORTH v EDWARD BARON
DEVELOPMENT CO LTD [1987] BCLC 193 [1987] 1 All ER 114 a
husband mortgaged the matrimonial home without the wife’s
knowledge or consent. She was a director in their jointly owned
company. The company’s money had been used to acquire the
house and she did not therefore obtain an equitable interest in the
property. The House of Lords held that, by using the company’s
money to purchase their shares and for other personal
expenditures, the husband and wife as directors had been in breach
of their duties to the company and its creditors to ensure that
company property was not dissipated to the prejudice of the
company’s creditors. As the husband and wife had failed to
maintain the solvency of the company, equity would not treat the
payment of the share in the house as conferring on her an interest
ranking in priority to the creditors.
In WEST MERCIA SAFETYWEAR LTD v DODD [1988] BCLC 250
the defendant, a director of two companies, one a wholly-owned
subsidiary of the other, sought to save personal guarantees when he
saw that insolvency loomed. It was held that, once a company was
insolvent the interests of the creditors overrode those of the
shareholders since the company’s assets belonged in a practical
sense to them and they could displace the power of the
shareholders and directors to deal with them.
In BRADY v BRADY [1989] AC 755; [1988] 2 All ER 617 the House
of Lords examined a scheme to divide a company between two
brothers. The question was whether the company should provide
financial assistance for the purchase, such assistance being normally
forbidden: (s678 -680 CA 06) (was s 151(1) CA85). This case will
be discussed later.
Directors’ personal liability to company creditors

For signature on cheques or other documents on which the
company’s name is misdescribed see ss 82 and 84 CA 06 (was s 349
CA85). This prescribes a penalty.
Personal liability for tort may be held where the individual is
perceived to have been the prime instigator. See C. EVANS LTD v
SPRITEBRAND LTD AND SULLIVAN [1985] BCLC 105 [1985] 2 All
90
ER 415 and MANCETTER DEVELOPMENTS LTD v GARMANSON

LTD & ANOTHER [1986] BCLC 196, [1986] 1 All ER 449
In Director-General of Fair Trading v Buckland [1990] BCLC 162 it
was held that a director may be personally liable in contempt
proceedings against his company where his own act or omission
caused the contempt or he showed willful disregard of what was
going on.
In WILLIAMS v NATURAL LIFE HEALTH FOODS LTD [1997] 1
BCLC 131 the Court of Appeal held, by a majority that a director of
what was essentially a ‘one-man’ company could be personally
liable for negligent misstatement in connection with a franchise. Sir
Patrick Russell, dissenting, did not think the circumstances
exceptional enough to warrant the departure from the SALOMON
principle. In the House of Lords, however, it was held that a person
who makes a negligent mis-statement while contracting on behalf
of his company does not assume personal liability for that unless
the claimants can establish that there had been an assumption of
personal liability by him and that they had reasonably relied upon
it. It is normally the company that has committed the tort and its
liability is direct, not vicarious.
The benefit of limited liability may be of little use to shareholders
who are the directors of a private limited company in that if they
seek loans from their banks they are likely to be asked for personal
guarantees, usually secured on their own homes.
Contribution orders under ss 213 and 214 Insolvency Act 1986 may
be required, in which case, the contribution will be to the general
assets of the company and not to any individual creditor.
Directors’ service contracts

These must be available for inspection at the registered office: ss
228-230 CA 06 (was s 318 CA85), and they must be for no more
than five years, unless approved by a special resolution: ss 188 and
189 CA 06 (s 319 CA 06).
Removal of directors
In RUNCIMAN v WALTER RUNCIMAN PLC [1992] BCLC 1084 the
plaintiff had been chairman of the defendant company, which had
been acquired after a hostile take-over bid and he had been
dismissed. The dispute arose as to the quantum of damages, the
dismissal being conceded as unfair. The company contended that a
purported extension of the plaintiff’s contract of service to five years
was invalid because (a) the extension had not been authorised by
the directors required by the company’s articles of association, and
(b) that even if the extension had been properly authorised the
contract was voidable because he had not disclosed his interest in
it, or (c) the extension had not been made in the interests of the
company. Similar objections were made with respect to ancillary
benefits, such as his car, health insurance, telephone facility.
It was held, (1) that the extension of the contract to a term of five
years had been concurred in by the directors and this was effective
since the directors, provided they were unanimous, could determine
matters within their jurisdiction informally. (2) The plaintiff’s
failure to disclose his interest with respect to the extension, as
91
required by the company’s articles was a mere technicality and

could not be relied on by the company’s new owners. (3) The
board’s decision to extend the length of the service contract had
been reached bona fide and in the interests of the company, and
there was no basis for finding that in making the extension the
directors had breached any fiduciary to the company. (4) Although
the decision to confer ancillary benefits on the plaintiff had been
made more informally than the method by which the terms of his
service contract were determined, the directors had acquiesced in
these benefits, and accordingly they had been validly made 5.
In LEE PANAVISION LTD v LEE LIGHTING LTD [1992] BCLC 22
where an indemnity against dismissal was given to directors it was
asked whether this made them interested in a company contract
and hence should it have been disclosed under ss 182, 183, 185,
187 (was s 317 CA 85). A second management agreement had been
entered into, although it was known that the shareholders intended
to deprive the directors of all powers. The second agreement was
unconstitutional in that it would deprive the new directors of all
powers. It was said, per curiam, that the court would hesitate to
find that the failure formally to declare at a board meeting an
interest common to all members and, ex hypothesi already known to
all of the board, was a breach of s 317 CA 85.
Miscellaneous statutory provisions affecting directors

The effects of the Company Directors (Disqualification) Act 1986
will be discussed later but it should be noted here that the impact of
disqualification would be a major disincentive to improper conduct
on the part of a director.
All references below are to the Companies Act 1985 and relevant
sections are reproduced at the end of this chapter.
S 549-551 CA 06 (was s 80 CA 85): authority to allot shares derives
from the articles or the general meeting.
S 168 CA 06 (was s303 CA85): dismissal of directors by the
shareholders.
S 323: prohibition on dealing in certain share options.
Ss 324 and 328: notification of directors’ shareholdings.
Section 320–322B: substantial property deals involving directors.
In RE DUCKWARI PLC [1997] BCC 45 it was held that a director
was not required to pay damages to the company following a
substantial property transaction which was not put to the
shareholders. The property was transferred at a proper price and
the company had not suffered a detriment.
Ss 197-213 CA 06 (was ss330–342 CA 85): loans etc. to directors.
S 252-254 CA 06) (was s346 CA 85): connected persons.
Ss 250, 251 CA 06 (was s741 CA 85): shadow directors.
See also 1994 JBL 325 ‘Punishing directors’ on civil actions in the
nature of criminal proceedings.
5 1993 JBL 280 on termination and 1993 JBL 279 on s 317.
92
The directors’ report

Under ss 415, 417, 418, 419 CA 06 (was s 234 CA 85) the directors
are required to produce a report for each financial year. This had to
be approved by the board and signed.
Under ss 420-422 CA 06) (was ss 234B and 234C CA 85) directors
of quoted companies are required to prepare a directors’
remuneration report and approve and sign it. As can be seen from
s234 CA, the information to be provided is not solely financial.
Fiduciary duties of directors

Apart from their legal and statutory duties, directors also have
fiduciary duties. Promoters also have fiduciary duties. These duties
are owed to the company: Percival v Wright [1902] 2 Ch 421, but
other cases show that they may act on behalf of the shareholders:
Allen v Hyatt (1914) TLR 444; Gething v Kilner [1972] 1 WLR 337.
It may be problematic where a minority of the shareholders think

that their interests have been harmed by damage to the company,
especially where that damage has been instigated by or acquiesced
in by the majority. According to the rule in Foss v Harbottle (1843)
3 Hare 461; 67 ER 189 only the company itself can take action
where it has sustained injury. If the majority do not perceive this
(and hence the directors wish to take no action) there would be
little that the minority can do. This might be the case where two
shareholders (who might also be directors) gang up on a third in a
family squabble. It might make more sense in a large plc where a
person (some sort of industrial anarchist) might buy shares for the
purpose of constantly challenging decisions of the majority and
making the enterprise impossible to run. Hence the normal rule is
that a simple majority of shareholders (ie, where each share
probably comprises one vote so that one shareholder might have
many more votes and thus much more clout than a large number
with small numbers of shares) will be required to pass resolutions,
and the need to restrict the right to challenge board decisions by
calling an extraordinary general meeting.
Trustees
Directors are entrusted with the undertaking, and to that extent are
in a position of trust and are accountable to the shareholders for
their stewardship. They are not, however, trustees in the strict
sense of the word, and they may have a personal interest in a
company contract. In any case, as the property of the company is
vested in the company itself, the directors are not the legal owners
administering it for a beneficiary (as would be the case in a normal
trust).
The directors’ fiduciary duties can be classified as follows:
(a) Directors must act bona fide in the interests of the company.
Directors are required to act in good faith in the interests of the
company. The test is a subjective one, not what the court thinks: Re
Smith & Fawcett Ltd [1942] Ch 304. They should not fetter their
discretion (Fulham FC Ltd v Cabra Estates plc [1994] BCLC 363) but
it would not be a breach of duty to enter a contract that might in
93
the future fetter their discretion, provided they believe that it is in

the interests of the company: Dawson International plc v Coats
Patons plc [1989] SLT 655.
While the courts are reluctant to become involved in commercial

decision-making, which would require the judges to second-guess
the benefit of what the directors had done, it seems that the phrase
‘best interests of the company’ may include consideration of the
best interests of the shareholders as a body rather than the
company as a separate entity.
Directors are statutorily required to have regard to their employees
as well as their shareholders (s 172 CA06 (was s309 CA 85, derived
from the CA 1980).
(b) Directors may not exercise their power for any collateral
purpose.
Directors must act for a proper purpose. Their powers must be
entered into intra vires (see ss 76, 80, 81 CA06 (was s 35 CA 85).
Thus, when they allot unissued shares in return for cash they are
acting, presumably in the interests of the company, for the proper
purpose of raising money. This will, however, have the effect of
altering the voting rights of the existing shareholders. They might
be allotting the shares to affect that voting power in their own
interests or to facilitate a take-over. This might be considered a
misuse of their powers. It is now a principle that, where the new
issue has the effect of turning a majority into a minority, that issue
will be set aside. It will be allowed if it merely consolidates an
existing majority. A consolidated majority might vote to ratify the
directors’ misuse of their powers, but there is a principle that the
newly issued shares should not used to ratify the directors’ action.
See the following cases: HOGG v CRAMPHORN LTD [1967] Ch
254, [1966] 3 All ER 420; BAMFORD v BAMFORD [1970] Ch 212,
[1969] 1 All ER 969 in which the issue was allowed. It was
disallowed in Howard Smith v Ampol Petroleum [1974] AC 821. The
attempt to create a large enough majority to enable the company to
do something that it could not otherwise do was disallowed in Punt
v Symons & Co Ltd [1903] 2 Ch 506; Piercy v Mills & Co Ltd [1920]
1 Ch 77; Clemens v Clemens Bros Ltd [1976] 2 All ER 268. Such
cases might now be dealt with under s 459 Companies Act 1985
(see later).
Share issues are governed by ss 549, 551 CA 06 (was s 80 CA 85)

where the allotment of shares by the directors must be authorised
either by the articles or by a general meeting. That authority must
last for more than five years. In respect of private companies, this
may now be an indeterminate period or a fixed period. There may
be a right of pre-emption by existing shareholders when a company
proposes an issue under ss561, 566, 568 CA 06, (was s 89 CA 85)
but this can be disapplied under ss 567 CA 06 (was s91 CA 85) and
ss 570-572 CA 06 (was s 95 CA85).
(c) Directors may not place themselves in a position where their

personal interests conflict with their duty to the company.
94
COOK v DEEKS [1916] AC 554 was a Privy Council decision on

appeal from the Supreme Court of Ontario. Three directors of a
railway company obtained a contract for themselves in
circumstances that amounted to breach of trust. They were trustees
of the benefits on the company’s behalf. Using their votes
controlling three-quarters of the shareholding they passed a
resolution at a general meeting to declare that the company had no
interest in the contracts. It was held that the benefit of the contracts
belonged in equity to the company and it was not possible for the
directors to use their voting powers to vest the contracts in
themselves.
REGAL (HASTINGS) LTD v GULLIVER [1942] 1 All ER 378 6 was
based on a deal to make a sale of the company’s property as a going
concern and, following the demands of landlord of property that
the company wanted to acquire, a subsidiary was formed and
shares allocated to various directors and to the company’s solicitor
at the company’s request. The shares were subsequently sold at a
profit. The directors had to account for this as they had dealt in a
fiduciary relationship but the solicitor was entitled to keep his profit
as he had only bought the shares at the company’s express request
and the was not in a fiduciary relationship. The principle in its early
form may be seen in he next case.
Keech v Sandford (1726) Sel Cas Ch 61; 25 ER 223 is the basis of
the rule that someone in a fiduciary relationship, such as a trustee,
is not allowed to make a profit, unless expressly provided for and if
he does so, is liable to account. .
INDUSTRIAL DEVELOPMENT CONSULTANTS LTD v COOLEY

[1972] 2 All ER 162 shows that where a person obtains a contract
in the course of his employment he is liable to account for the profit
he makes to his employer, even where that employer would never
have obtained the contract himself. The managing director of the
plaintiff construction company negotiated with gas boards on
behalf of the company and the boards made it known to the
director that the company would never be awarded the contract
because they did not approve of it. The director realised that he
might obtain the contract for himself and, representing himself as
sick, terminated his employment early, having taken certain steps to
obtain the contracts while still employed. He was held to have acted
in breach of duty and had to give an account.
(d) Directors may not profit from their position with the
company (other than properly authorised remuneration).
In MULTINATIONAL GAS ETC. LTD v MULTINATIONAL GAS ETC

(SERVICES) LTD [1983] 2 All ER 563 , although the plaintiff
company had a separate existence from its shareholders, it existed
for their benefit and provided they acted intra vires and in good
faith they could manage its affairs as they chose while it was
solvent. It will be seen here that the shareholders (albeit an other
company) were involved in managerial tasks. It was further held
that the shareholders owed no duty to third parties or to future
creditors, by approving the directors’ acts had made those acts the
6 See Davies, 417.

95
acts of the plaintiff and that company could not now complain of
the lack of commercial judgment of the directors in making the
decisions.
BOSTON DEEP SEA FISHING & ICE CO LTD v ANSELL (1888) LR

39 Ch D 339 concerned a director of a company who received a
secret commission in the course of his employment which involved
his being a director of the plaintiff company dealing with fishing
smacks. There were also questions as to the relevant terms of the
contract, i.e. that between the defendant and the promoter of the
company and the defendant and the company. The defendant was
dismissed before the secret commission was discovered but, as to
the secret commission, he was held to account.
In ISLAND EXPORT FINANCE LTD v UMUNNA [1986] BCLC 460 7

the defendant had been managing director of a company that did
business in West Africa. He secured a contract with the Cameroons
for postal caller boxes and there was no indication that further
orders might result, despite the plaintiff company’s hope that they
would. The defendant resigned from the company a year later but
not in order to appropriate the plaintiff’s business opportunities. He
subsequently succeeded in obtaining contracts from the Cameroons
for postal caller boxes and the plaintiff claimed that he continued to
owe a duty after his resignation and that he had used confidential
information. It was held by Hutchison J in the High Court that the
defendant had not breached his duty.
(1) A director’s fiduciary duty did not necessarily come to an end
when he ceased to be a director in that a director was precluded
from diverting to himself a maturing business opportunity which his
company was actively pursuing even after his resignation, where
that resignation was prompted or influenced by a desire to acquire
that opportunity for himself. Here, however, there was no breach of
fiduciary duty the plaintiff’s hope of obtaining further orders was
not a maturing business opportunity and the company was not
actively pursuing further orders either when the defendant resigned
or subsequently obtained the contracts.
(2) Moreover, the defendant had not improperly exploited any
confidential information he had acquired as a director. The plaintiff
company had claimed on the basis of a principle that knowledge of
the existence of a particular market acquired as a director was
confidential information which a director could not use for his own
purposes on termination of his directorship. This was too wide a
proposition and conflicted with public policy on restraint of trade.
Directors’ interest in company contracts

There is no total prohibition upon a director from having a personal
interest in a company contract. Art 85 Table A contains a standard
provision permitting a director to have such an interest, subject to
disclosure to the board. In the absence of such a provision in the
articles, every such contract would require ratification by the
general meeting. Failure to comply would render the contract
voidable at the instance of the company. Ss 182, 185, 185, 187 CA
7 1986 All ER Ann Rev 55 (casenote)
96
06 (was s 317 CA 85) contains a statutory requirement for

disclosure of such an interest to the board, failure to do so carrying
a criminal penalty. There was for some time doubt whether s 317
CA 85 carried a civil sanction as well. This was discussed by the
House of Lords in GUINNESS PLC v SAUNDERS ET AL [1990]
BCLC 402.
There a committee of the board of Guinness plc had awarded,
without any authority, a sum of £5.2m to one of the directors,
Thomas Ward, for services rendered during the celebrated take-
over battle for Distillers plc. S 317 CA 85 was held to carry criminal
penalties only, and did not affect the contract. However, the
transaction in this case also contravened the articles. The
committee, headed by the chairman, Saunders, had no authority to
authorise the payment. The contract was, therefore, void and Ward
was ordered to repay the money. He then claimed remuneration on
the basis of ‘quantum meruit’ as he had carried out duties in good
faith for the benefit of the company. The court would not allow
this. Such an equitable payment to a company director would
seriously undermine the principle of fiduciary duty and might
encourage directors to flout the law.
In connection with the ‘Guinness affair’, which led to a number of
convictions for contraventions of company law as well as conspiracy
to defraud, Earnest Saunders made a final appeal to the European
Court of Human Rights. This was a very interesting case, as
suspects in corporate, ‘white collar’ criminal investigations do not
have protection against self-incrimination. The Police and Criminal
Evidence Act 1984 does not apply to investigations by the Serious
Fraud Office, nor to inspectors sent in to a company under powers
in the Companies Act. After his release from prison, Saunders
appealed on the ground that information that he was legally bound
to give to the investigating authorities was used as evidence against
him at the trial. This practice was condemned by the Court of
Human Rights, but the UK government declined to act upon this
finding. It is interesting to speculate on what the situation might be
in the future if the European Convention is incorporated into UK
law, as the present government has indicated.
There is a need for compliance with s 317 CA 85 even in the case of
a sole director: NEPTUNE (VEHICLE WASHING EQUIPMENT) LTD
v FITZGERALD [1995] BCLC 352. The interest in the company
contract still has to be declared (verbally, if another person is
present at the meeting), and recorded in the minutes.
There is a potential conflict between Art 85 of the model articles
and ss 532, 533 CA 06 (was s 310 CA 85). S 310 CA prohibited any
article of a company (or any term of contract) from indemnifying
any company director against ‘any liability for… breach of duty’,
etc. On the other hand, Art 85 appears to condone the conduct of a
director who has disclosed an interest in a company contract.
MOVITEX LTD v BULFIELD [1988] BCLC 104, differentiates
between a director’s conflict of interest and his right, under the
articles, to have an interest in a company contract. Vinelott J gave a
rational explanation for the distinction between a director who
places himself in a position of conflict between his duty to the
company and his personal interest, and, secondly, where a
director’s duty to promote the interests of the company when it
conflicts with his own. The second principle cannot avoid s 310 CA
85 but the ‘overriding principle of equity’ in the first proposition
97
may be excluded or modified by the articles as they are drawn up

by the shareholders. The second aspect is related to the director’s
subjective duty to act bona fide for the company. There seems to be
no prospect of reconciling the conflict but the Company Law
Review sets out a statutory position for situations where a director’s
duties are in conflict with his own and this will thus no longer be a
common law matter.
Directors duties in connection with takeovers

In situations involving takeover bids, shareholders of target
companies are often greatly influenced by the advice of their board
of directors. The advice, therefore, has to be honest and
disinterested.
Howard Smith v Ampol Petroleum (above) established a principle
that where directors issue information to the shareholders, such as
in a takeover, it should be accurate and complete.
In HERON INTERNATIONAL LTD v LORD GRADE AND ACC PLC
[1983] BCLC 244 the Court of Appeal held, inter alia, that the
directors, when exercising their power under the articles to register
a proposed transfer, were under a fiduciary obligation to exercise
the power in the interests of both the company and the
shareholders, even though they, as individuals, held a majority of
the voting shares. Furthermore, the directors of the target company
could not advise the shareholders to refuse the bidder’s offer and at
the same time, as directors, allow their own voting shares to be
transferred to it. Where directors had to consider rival bidders, the
interests of the company were the interests of the current
shareholders.
The directors in RE A COMPANY NO. 008699 OF 1985 [1986]
BCLC 382 were under no duty to make known the existence of a
higher bid but were under a duty to where they decided to advise
the shareholders on the merits of competing bids, to provide
sufficient information and advice to enable the shareholders to
reach an informed decision.
See also DAWSON INTERNATIONAL v COATS PATON PLC
(above). This case involved agreement by directors of a target
company with an acquiring company not to co-operate with a rival
bidder. There is an increasing number of cases on the propriety of
this kind of agreement, and also on its legal effectiveness. In this
case, the Court of Session held that directors in takeover
proceedings do not owe a fiduciary duty to current shareholders as
sellers of shares. They do, however, have a duty to consider
shareholders in the discharge of their duty to the company. If
directors take it upon themselves to give advice to shareholders
(e.g. on the rival merits of competing bids), that advice must be
given in good faith and must not be misleading, either deliberately
or carelessly.
In JOHN CROWTHER GROUP PLC v CARPETS INTERNATIONAL

PLC [1990] BCLC 460 it was held that directors of a target
company were not obliged to honour an undertaking given to an
acquiring company where circumstances had changed, and the
undertaking was no longer perceived to be in the interests of the
shareholders. FULHAM FOOTBALL CLUB LTD v CABRA ESTATES
98
PLC [1994] BCLC 363 provides an interesting gloss on the decision

in the JOHN CROWTHER GROUP case above. This was a
complicated case which related to the future development of the
Fulham Football Club’s ground. The directors of the club had
entered into binding covenants not to oppose the respondents’
application for planning permission. The directors then had a
change of heart and considered that the proposed development was
not in the best interests of the club. They therefore intended to
oppose the application at the enquiry. One of the points discussed
was whether directors of companies could fetter their discretion as
to future action by making binding contracts of this sort. Reference
was made to the JOHN CROWTHER case, where an undertaking
given by directors was held to be unenforceable. While that case
might be justifiable on its facts, it must not be read as laying down
a general proposition that directors can never bind themselves as to
the future exercise of their fiduciary powers. In that case, the
directors were bound by their undertaking 8. Directors voting their
own shares was considered in NORTH-WEST TRANSPORTATION
CO LTD v BEATTY (1887) 12 App Cas 589 where it was held by the
Privy Council that a vendor was entitled to exercise his voting
power as a shareholder in general meeting to ratify a contract and
doing so could not be deemed oppressive by reason of the director’s
individually possessing a majority of votes, acquired in a manner
authorized by the company’s constitution.
Question 3.5.1
 Discuss the main duties of a company director.
8 See casenote at 1993 JBL 576.
99
Summary__________________
This chapter introduced you to the main issues regarding company
registration and the legal implications of incorporation, including
the different types of companies recognized at law and the legal
requirements for these various types, the concept of legal
personality and the veil of incorporation as well as the constitution
of a company and the legal duties a company director owed to the
company.
Registering a company serves to protect its directors and its members. Discuss
the legal implications of registering a company.

It is better to register a private company over a public company.
100
Appendix I
Quoted from the Act….

PART 10
CHAPTER 2
GENERAL DUTIES OF DIRECTORS
Introductory
170 Scope and nature of general duties
(1) The general duties specified in sections 171 to 177 are owed by
a director of a company to the company.
(2) A person who ceases to be a director continues to be subject—
(a) to the duty in section 175 (duty to avoid conflicts of interest) as
regards the exploitation of any property, information or opportunity
of which he became aware at a time when he was a director, and
(b) to the duty in section 176 (duty not to accept benefits from
third parties) as regards things done or omitted by him before he
ceased to be a director.
To that extent those duties apply to a former director as to a
director, subject to any necessary adaptations.
(3) The general duties 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.
(4) The general duties 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.
(5) The general duties apply to shadow directors where, and to the
extent that, the corresponding common law rules or equitable
principles so apply.
The general duties

171 Duty to act within powers
A director of a company must—
(a) act in accordance with the company’s constitution, and
(b) only exercise powers for the purposes for which they are
conferred.
172 Duty to promote the success of the company

(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
101
high standards of business conduct, and

(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist
of or include purposes other than the benefit of its members,
subsection (1) has effect as if the reference to promoting the
success of the company for the benefit of its members were to
achieving those purposes.
(3) The duty imposed by this section has effect subject to any
enactment or rule of law requiring directors, in certain
circumstances, to consider or act in the interests of creditors of the
company.
173 Duty to exercise independent judgment

(1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting—
(a) in accordance with an agreement duly entered into by the
company that restricts the future exercise of discretion by its
directors, or
(b) in a way authorised by the company’s constitution.
174 Duty to exercise reasonable care, skill and diligence

(1) A director of a company must exercise reasonable care, skill and
diligence.
(2) This means the care, skill and diligence that would be exercised
by a reasonably diligent person with—
(a) the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the functions
carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director
has.
175 Duty to avoid conflicts of interest

(1) A director of a company must avoid a situation in which he has,
or can have, a direct or indirect interest that conflicts, or possibly
may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property,
information or opportunity (and it is immaterial whether the
company could take advantage of the property, information or
opportunity).
(3) This duty does not apply to a conflict of interest arising in
relation to a transaction or arrangement with the company.
(4) This duty is not infringed—
(a) if the situation cannot reasonably be regarded as likely to give
rise to a conflict of interest; or
(b) if the matter has been authorised by the directors.
(5) Authorisation may be given by the directors—
(a) where the company is a private company and nothing in the
company’s constitution invalidates such authorisation, by the
matter being proposed to and authorised by the directors; or
(b) where the company is a public company and its constitution
includes provision enabling the directors to authorise the matter, by
102
the matter being proposed to and authorised by them in accordance

with the constitution.
(6) The authorisation is effective only if—
(a) any requirement as to the quorum at the meeting at which the
matter is considered is met without counting the director in
question or any other interested director, and
(b) the matter was agreed to without their voting or would have
been agreed to if their votes had not been counted.
(7) Any reference in this section to a conflict of interest includes a
conflict of interest and duty and a conflict of duties.
176 Duty not to accept benefits from third parties

(1) A director of a company must not accept a benefit from a third
party conferred by reason of—
(a) his being a director, or
(b) his doing (or not doing) anything as director.
(2) A “third party” means a person other than the company, an
associated body corporate or a person acting on behalf of the
company or an associated body corporate.
(3) Benefits received by a director from a person by whom his
services (as a director or otherwise) are provided to the company
are not regarded as conferred by a third party.
(4) This duty is not infringed if the acceptance of the benefit cannot
reasonably be regarded as likely to give rise to a conflict of interest.
(5) Any reference in this section to a conflict of interest includes a
conflict of interest and duty and a conflict of duties.
177 Duty to declare interest in proposed transaction or

arrangement
(1) If a director of a company is in any way, directly or indirectly,
interested in a proposed transaction or arrangement with the
company, he must declare the nature and extent of that interest to
the other directors.
(2) The declaration may (but need not) be made—
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with—
(i) section 184 (notice in writing), or
(ii) section 185 (general notice).
(3) If a declaration of interest under this section proves to be, or
becomes, inaccurate or incomplete, a further declaration must be
made.
(4) Any declaration required by this section must be made before
the company enters into the transaction or arrangement.
(5) This section does not require a declaration of an interest of
which the director is not aware or where the director is not aware
of the transaction or arrangement in question.
For this purpose a director is treated as being aware of matters of
which he ought reasonably to be aware.
(6) A director need not declare an interest—
(a) if it cannot reasonably be regarded as likely to give rise to a
conflict of interest;
103
(b) if, or to the extent that, the other directors are already aware of
it (and for this purpose the other directors are treated as aware of
anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract
that have been or are to be considered—
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under
the company’s constitution.
Supplementary provisions
178 Civil consequences of breach of general duties
(1) The consequences of breach (or threatened breach) of sections
171 to 177 are the same as would apply if the corresponding
common law rule or equitable principle applied.
(2) The duties in those sections (with the exception of section 174
(duty to exercise reasonable care, skill and diligence)) are,
accordingly, enforceable in the same way as any other fiduciary
duty owed to a company by its directors.
179 Cases within more than one of the general duties

Except as otherwise provided, more than one of the general duties
may apply in any given case.
180 Consent, approval or authorisation by members

(1) In a case where—
(a) section 175 (duty to avoid conflicts of interest) is complied with
by authorisation by the directors, or
(b) section 177 (duty to declare interest in proposed transaction or
arrangement) is complied with, the transaction or arrangement is
not liable to be set aside by virtue of any common law rule or
equitable principle requiring the consent or approval of
the members of the company.
This is without prejudice to any enactment, or provision of the
company’s constitution, requiring such consent or approval.
(2) The application of the general duties is not affected by the fact
that the case also falls within Chapter 4 (transactions requiring
approval of members), except that where that Chapter applies
and—
(a) approval is given under that Chapter, or
(b) the matter is one as to which it is provided that approval is not
needed, it is not necessary also to comply with section 175 (duty to
avoid conflicts of interest) or section 176 (duty not to accept
benefits from third parties).
(3) Compliance with the general duties does not remove the need
for approval under any applicable provision of Chapter 4
(transactions requiring approval of members).
(4) The general duties—
(a) have effect subject to any rule of law enabling the company to
give authority, specifically or generally, for anything to be done (or
omitted) by the directors, or any of them, that would otherwise be
a breach of duty, and
104
(b) where the company’s articles contain provisions for dealing with
conflicts of interest, are not infringed by anything done (or
omitted) by the directors, or any of them, in accordance with those
provisions.
(5) Otherwise, the general duties have effect (except as otherwise
provided or the context otherwise requires) notwithstanding any
enactment or rule of law.
181 Modification of provisions in relation to charitable

companies
(1) In their application to a company that is a charity, the
provisions of this Chapter have effect subject to this section.
(2) Section 175 (duty to avoid conflicts of interest) has effect as
if—
(a) for subsection (3) (which disapplies the duty to avoid conflicts
of interest in the case of a transaction or arrangement with the
company) there were substituted—
“(3) This duty does not apply to a conflict of interest arising in
relation to a transaction or arrangement with the company if or to
the extent that the company’s articles allow that duty to be so
disapplied, which they may do only in relation to descriptions of
transaction or arrangement specified in the company’s articles.”;
(b) for subsection (5) (which specifies how directors of a company
may give authority under that section for a transaction or
arrangement) there were substituted—
“(5) Authorisation may be given by the directors where the
company’s constitution includes provision enabling them to
authorise the matter, by the matter being proposed to and
authorised by them in accordance with the constitution.”.
(3) Section 180(2)(b) (which disapplies certain duties under this
Chapter in relation to cases excepted from requirement to obtain
approval by members under Chapter 4) applies only if or to the
extent that the company’s articles allow those duties to be so
disapplied, which they may do only in relation to
descriptions of transaction or arrangement specified in the
company’s articles.
(4) After section 26(5) of the Charities Act 1993 (c. 10) (power of
Charity Commission to authorise dealings with charity property etc)
insert—
“(5A) In the case of a charity that is a company, an order under this
section may authorise an act notwithstanding that it involves the
breach of a duty imposed on a director of the company under
Chapter 2 of Part 10 of the Companies Act 2006 (general duties of
directors).”.
(5) This section does not extend to Scotland.
105
CHAPTER 3
DECLARATION OF INTEREST IN EXISTING TRANSACTION OR
ARRANGEMENT
182 Declaration of interest in existing transaction or
arrangement
(1) Where a director of a company is in any way, directly or
indirectly, interested in a transaction or arrangement that has been
entered into by the company, he must declare the nature and extent
of the interest to the other directors in accordance with this section.
This section does not apply if or to the extent that the interest has
been declared under section 177 (duty to declare interest in
proposed transaction or arrangement).
(2) The declaration must be made—
(a) at a meeting of the directors, or
(b) by notice in writing (see section 184), or
(c) by general notice (see section 185).
(3) If a declaration of interest under this section proves to be, or
becomes, inaccurate or incomplete, a further declaration must be
made.
(4) Any declaration required by this section must be made as soon
as is reasonably practicable.
Failure to comply with this requirement does not affect the
underlying duty to make the declaration.
(5) This section does not require a declaration of an interest of
which the director is not aware or where the director is not aware
of the transaction or arrangement in question.
For this purpose a director is treated as being aware of matters of
which he ought reasonably to be aware.
(6) A director need not declare an interest under this section—
(a) if it cannot reasonably be regarded as likely to give rise to a
conflict of interest;
(b) if, or to the extent that, the other directors are already aware of
it (and for this purpose the other directors are treated as aware of
anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract
that have been or are to be considered—
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under
the company’s constitution.
183 Offence of failure to declare interest

(1) A director who fails to comply with the requirements of section
182 (declaration of interest in existing transaction or arrangement)
commits an offence.
(2) A person guilty of an offence under this section is liable—
(a) on conviction on indictment, to a fine;
(b) on summary conviction, to a fine not exceeding the statutory
maximum.
106
184 Declaration made by notice in writing

(1) This section applies to a declaration of interest made by notice
in writing.
(2) The director must send the notice to the other directors.
(3) The notice may be sent in hard copy form or, if the recipient has
agreed to receive it in electronic form, in an agreed electronic form.
(4) The notice may be sent—
(a) by hand or by post, or
(b) if the recipient has agreed to receive it by electronic means, by
agreed electronic means.
(5) Where a director declares an interest by notice in writing in
accordance with this section—
(a) the making of the declaration is deemed to form part of the
proceedings at the next meeting of the directors after the notice is
given, and
(b) the provisions of section 248 (minutes of meetings of directors)
apply as if the declaration had been made at that meeting.
185 General notice treated as sufficient declaration

(1) General notice in accordance with this section is a sufficient
declaration of interest in relation to the matters to which it relates.
(2) General notice is notice given to the directors of a company to
the effect that the director—
(a) has an interest (as member, officer, employee or otherwise) in a
specified body corporate or firm and is to be regarded as interested
in any transaction or arrangement that may, after the date of the
notice, be made with that body corporate or firm, or
(b) is connected with a specified person (other than a body
corporate or firm) and is to be regarded as interested in any
transaction or arrangement that may, after the date of the notice,
be made with that person.
(3) The notice must state the nature and extent of the director’s
interest in the body corporate or firm or, as the case may be, the
nature of his connection with the person.
(4) General notice is not effective unless—
(a) it is given at a meeting of the directors, or
(b) the director takes reasonable steps to secure that it is brought
up and read at the next meeting of the directors after it is given.
186 Declaration of interest in case of company with sole

director
(1) Where a declaration of interest under section 182 (duty to
declare interest in existing transaction or arrangement) is required
of a sole director of a company that is required to have more than
one director—
(a) the declaration must be recorded in writing,
(b) the making of the declaration is deemed to form part of the
proceedings at the next meeting of the directors after the notice is
given, and
(c) the provisions of section 248 (minutes of meetings of directors)
apply as if the declaration had been made at that meeting.
107
(2) Nothing in this section affects the operation of section 231

(contract with sole member who is also a director: terms to be set
out in writing or recorded in minutes).
187 Declaration of interest in existing transaction by

shadow director
(1) The provisions of this Chapter relating to the duty under section
182 (duty to declare interest in existing transaction or
arrangement) apply to a shadow director as to a director, but with
the following adaptations.
(2) Subsection (2)(a) of that section (declaration at meeting of
directors) does not apply.
(3) In section 185 (general notice treated as sufficient declaration),
subsection (4) (notice to be given at or brought up and read at
meeting of directors) does not apply.
(4) General notice by a shadow director is not effective unless given
by notice in writing in accordance with section 184.
108
Introduction
Overview
The purpose of this chapter is to provide a basic introduction to
company law relating to finances and capital. It will introduce you
to the main aspects of company law, including issues relating to
shares in the company such as the legal nature of a share, the
various classes of shares and class rights as well as discuss the
rights of minority shareholders. It also examines issues relating to
company finances, including capital and shares and the financing of
a company including loan capital and debentures. Further it will
examine the recent development relating to the concept of
corporate manslaughter.
Aims
□ Explore issues relating to shares in the company.
□ Explore the legal nature of a share.
□ Explain the rights of minority shareholders.
□ Examine legal issues regarding company finances, including loan capital.
□ Examine the concept of corporate manslaughter.
Learning Outcomes
□ Discuss issues relating shares in the company.
□ Discuss the legal nature of a share.
□ Discuss the rights of minority shareholders.
□ Discuss legal issues regarding company finances, including loan capital.
□ Discuss the concept of corporate manslaughter.
109
Resources
Essential readings
Students are encouraged to read the cases listed to develop further

Lawtel or Lexis.

Companies House: http://www.companieshouse.gov.uk/ for forms on setting up a
company
http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml
Information booklets on company matters
http://www.companieshouse.gov.uk/about/guidance.shtml
The Insolvency Service
http://www.insolvency.gov.uk/
The Institute of Directors: http://www.iod.co.uk/is-

bin/INTERSHOP.enfinity/eCS/Store/en/-/GBP/IODContentManager-
Start?TemplateName=homePage.isml
The DTI (This is now called the Department for Business, Enterprise and Regulatory
Reform): http://www.dti.gov.uk/ for company law reform reports
http://www.berr-ec.com/cgibin/perlcon.pl
110
4.1 Shares
This section will examine issues relating to shares in the company
including the legal nature of a share, the division of power between
the directors and the shareholders, discuss the various classes of
shares and class rights as well as discuss the rights of minority
shareholders and explore the concept of dividends.
Learning Objectives
□ Explore the basis of shares in the company.
□ Discuss the legal nature of a share.
□ Examine the division of power between the directors and the shareholders.
□ Explore the various classes of shares and class rights as well as discuss the
rights of minority shareholders.
□ Discuss the concept of dividends.
Legal nature of a share

A share is a ‘chose in action’, i.e. it is a right that may have to be
enforced through the courts, like a cheque.
BORLAND’S TRUSTEE v STEELE BROS. LTD [1901] 1 Ch 279. ‘The
interest of a shareholder in a company measured by a sum of
money, for the purpose of liability in the first place, and of interest
in the second, but also consisting of a series of mutual covenants
entered into by all the shareholders inter se in accordance with the
[s 33 contract CA 2006]’.
LLB: Company Law
Division of power between the directors and the

shareholders
The CA 1985 reserved a number of decisions for the shareholders’
meeting.
S 4 – alteration of the memorandum
S 9 – alteration of the articles
S 80 – power to issue shares (normally conferred upon the
directors)
S 121 – alteration to the capital structure
S 135 – reduction of capital
S 142 – consultation on serious loss of capital in a public company
S 164 - 166 – company’s re-purchasing its own shares.
S 312 - 316 – approval for some kinds of ‘golden handshake’ for
directors
S 319 – director’s service contract for more than five years
S 320 – substantial property transactions
Section 84(1)(b) Insolvency Act 1986 – petition for voluntary
liquidation
In addition, there is the right of shareholders to remove any

director by ordinary resolution: (CA 2006 s 168; was s 303 CA
1985). In Bushell v Faith [1970] AC 1099, [1970] 1 All ER 53 the
articles provided that where there was a proposal to remove a
111
director, his shares would constitute for that purpose three votes
each. A and B wished to remove C. They contended that the
resolution was carried by 200 votes to 100 but C pointed out the
voting value of his shareholding was increased in such
circumstances and said that the resolution has thus been defeated
by 300 votes to 200. The House of Lords held that C’s contention
was correct and this part of the articles was not void.
Other than these statutory provisions, the division of power

between the directors and shareholders will be settled by the
articles. The provision in the present Table A is to be found in
Article 70, which states:
‘Subject to the provisions of the Act, the memorandum and
the articles and to any directions given by special resolution,
the business of the company shall be managed by the
directors who may exercise all the powers of the company.’
For companies that have adopted the present version of Table A,
the situation is straightforward – there can normally be no
interference by the shareholders in the day-to-day running of the
company. This applies to a majority shareholder but if the holder(s)
of 75% of the shares wishes to intervene, then this is permissible. In
the older version of Table A, the corresponding article (Art 80) was
less than clear on this matter, but even so, the courts were reluctant
to allow shareholder interference on a simple majority vote.
In BRECKLAND GROUP HOLDINGS LTD v LONDON AND SUFFOLK

PROPERTIES LTD [1989] BCLC 100 legal proceedings commenced
by a company could not be continued without the board approval
required by a shareholder’s agreement. Under the terms of the
articles, the members could not interfere with this. L Co had two
corporate members, B Co and C Co, of which C Co was the majority
shareholder. A shareholder’s agreement required board approval for
any legal proceedings to be commenced by C Co. L Co. started
proceedings without such approval and B Co sought an order to
restrain them. It was held that it could not be said that B Co would
be bound to vote in approval as B Co’s appointee would have to
fulfil his fiduciary duties and therefore the order was granted.
Classes of shares and class rights

Companies may issue shares in different classes with different rights
attached to each. The rights may be ascertained by referring to the
articles, or to the terms of issue. Only rarely will details of rights be
given in the memorandum. The typical example is ‘Ordinary shares’
and ‘Preference shares’, with possibly different voting rights
attached to them, or the right to receive a dividend before other
shareholders, though perhaps with certain drawbacks attached.
CUMBRIA NEWSPAPER GROUP LTD v CUMBERLAND AND

WESTMORELAND HERALD NEWSPAPER ETC. LTD [1986] BCLC
286 9 dealt with a novel point. The articles conferred rights upon
one specific holder of shares (to appoint a director). It was held
that class rights could be conferred upon an individual shareholder
9
1986 All ER Ann Rev 51 provides a note on this case.
112
in this manner, and the consent of that class was needed to vary
them.
‘Dilution’ of the enjoyment or power conferred by a shareholding by

means of an alteration to the capital structure does not involve an
‘alteration of class rights’ and thus does not entitle the shareholders
affected by the alteration to vote upon it at a class meeting: WHITE
v BRISTOL AEROPLANE CO LTD [1953] CH 65, [1953] 1 All ER
40, where a holder of preference shares sought a declaration as to
whether there should be a meeting after the company proposed to
issue a large number of new ordinary and preference shares.
In GREENHALGH v ARDERNE CINEMAS LTD [1951] 286 the same

obtains where an entire class of shareholder is expelled from a
company in connection with a reduction of capital under s.135. In
this case it was alleged that a special resolution passed by a
company at a meeting constituted a fraud on the minority
shareholders in that it was not passed bona fide and in the interests
of the company as a whole. The following considerations applied:
(1) it was clear that ‘bona fide for the benefit of the company as a
whole’ meant not two things but one thing. It meant that the
shareholder must proceed on what, in his honest opinion, was for
the benefit of the company as a whole, and (2) the phrase ‘the
company as a whole’ did not mean the company as a commercial
entity as distinct from the corporators or members. It meant the
corporators as a general body. One might ask whether an individual
hypothetical member might benefit from a resolution, in the honest
opinion of those who voted in its favour. In other words, a special
resolution can be impeached if the effect of it is to discriminate
between the majority shareholders and the minority so as to give to
the former an advantage of which the latter have been deprived.
Persons voting for a special resolution do not need to dissociate
themselves altogether from the prospect of personal benefit and
consider whether the proposal is for the benefit of the company as a
going concern. If an outsider offers to buy all the shares, if the
corporators think it is a fair offer and vote in favour of the
resolution, the resolution cannot be impeached because they are
considering the position of themselves as individual persons.
‘When a man comes into a company, he is not entitled to assume

that the articles will always remain in a particular form, and so long
as the proposed alteration does not unfairly discriminate [e.g., by
giving a majority the right to expropriate a minority shareholder,
whether he wanted to sell or not], I do not think it is an objection,
provided the resolution is bona fide passed, that the right to tender
for the majority holding of shares would be lost by the lifting of
[restrictions on transfer in the existing articles]’ per Evershed M R.
RE HOUSE OF FRASER PLC [1987] BCLC 478 was a case where the
capital and accrued dividend on preference shares was to be repaid.
This was not considered by the Inner House of the Court of Session
to be a variation. This case followed the decision in the earlier case
of PRUDENTIAL ASSURANCE v CHATTERLEY-WHITFIELD
COLLIERIES [1949] AC 512, [1949] 1 All ER 1094 where a
company, whose colliery had been compulsorily acquired by the
113
National Coal Board as part of nationalisation, decided to embark

on two new ventures in Eire and Northern Ireland for which only a
fraction of the available existing funds was required. Consequently
a special resolution was passed, providing for the reduction of the
company's capital by returning to the preference shareholders the
amounts paid up on their shares. It was held that the proposed
reduction of capital was fair and equitable and ought to be
confirmed.
Ss 334, 630, 632, 633, 635, 556, 557, 636 CA 2006 (was ss 125 -
128 CA 1985) consider variation of class rights. Ss 561 – 563, 566 -
568, 570, 571, 573, 575, 576 CA 2006, (was ss 89 - 96 CA 1985)
deal with pre-emption rights. A private company can disapply ss
561, 566, 568 CA 2006 CA 2006 (was s 89 CA 1985) in its articles.
In fact, old s 89 will be automatically disapplied if the articles are
inconsistent with it. All companies may, by ss 549 and 551 CA 2006
(was s 80), give directors a general power to allot shares
unconditionally. This power lasts for a maximum of five years,
renewable. Where such a general power is given, directors can
ignore ss 561, 566, 568 CA 2006 (was s 89 1985 (and ss 570 – 573
CA 2006, was s 95 1985).
Rights of minority shareholders
(a) Exceptions to the rule in FOSS v HARBOTTLE (1843)
(i) The act complained of is illegal or ‘ultra vires’

The rule in FOSS v HARBOTTLE is, put simply, that the majority
will bind the company. This exception to that rule has to be read in
the light of the reform of the ‘ultra vires’ rule brought about by the
Companies Act 1989. In addition, the definition of ‘illegal’ in this
context needs careful consideration. Where a fraud has been
perpetrated upon a company, the loss occasioned can seemingly
only be recovered if the majority wishes it. It is a ‘wrong done to
the company’, and indeed, FOSS v HARBOTTLE itself can be seen in
this light.
TAYLOR v NUM DERBYSHIRE AREA [1985] BCLC 237 was a

controversial case on the application of the ‘ultra vires’ rule to the
misuse of Trade Union funds during the miners’ strike in 1984. The
case concerned the calling of an unlawful strike and the
misapplication of funds. The situation of the members was seen as
analogous to the members of a company.
In SMITH v CROFT (NO. 2) [1988] Ch 114, [1987] 3 All ER 909 it

was held that minority shareholders do not have an absolute right
to bring an action against directors for losses caused by past ‘ultra
vires’ acts where the majority is unwilling that this should happen
‘in the best interests of the company’. This decision could still stand,
even where no formal special resolution is passed under the new
law to relieve the directors from liability.
114
(ii) Requirement of a special majority

Where the irregularity cannot be ratified by a simple majority – eg.
where a special procedure or majority is specified in the articles – a
minority shareholder action will lie where that procedure etc. has
been ignored. To hold otherwise would enable the majority
shareholders to alter the articles unconstitutionally.
In EDWARDS v HALLIWELL [1950] 2 All ER 1064 a two-thirds

majority was required under the rules to alter contribution rates.
Although the case concerns trade union matters, it is a very useful
statement and explanation of the rule in Foss v Harbottle.
In QUIN & AXTENS LTD v SALMON [1909] AC 442 certain

transactions needed the consent of both managing directors;
shareholders in a general meeting tried to ratify a transaction
consented to by one only of those directors. The company was
restrained by the House of Lords from acting in breach of its
articles.
(iii) Personal rights

Where it is alleged that there has been an infringement of personal
rights, the person affected can bring proceedings. There is some
argument among the authorities as to whether an individual
shareholder has a contractual right under s 33 CA 2006 (was s 14
1985) to have the company run, in a general sense, according to its
constitution.
In PENDER v LUSHINGTON (1877) 6 Ch D. 70 a vote was not

recorded at the AGM. The articles of association of the company
provided that it should not be affected with notice of any trust, and
contained provisions that every member should be entitled to one
vote at a general meeting for every ten shares he held, but should not
be entitled to more than 100 votes in all. In addition, no member
should vote at any general meeting unless he had been possessed of
his shares for three months previously.
An action had been brought by a shareholder whose vote was
rejected, on behalf of himself and all others who had voted with him,
naming the company as co-plaintiff, against the directors, for an
injunction to restrain them from acting on the footing of the votes
being bad.
It was held, that the plaintiffs were entitled to an injunction and,
also, that until a meeting should be called to decide whether or not
the company's name should be used as plaintiff, the company's name
should remain on the record.
In addition, Jessel MR held, that, according to the articles, a member
of the company was a person whose name was on the register of
shareholders; that the register was the only evidence by which the
rights of members to vote at a general meeting could be ascertained;
and that at a general meeting no votes of shareholders properly
qualified and whose names had been three months on the register
should be rejected on the ground that their shares had been
transferred to them by other shareholders for the purpose of
increasing their own voting power, or with an object alleged to be
adverse to the interests of the company, or on the ground that the
115
holders were not beneficial owners of the shares.
In WOOD v ODESSA WATERWORKS CO (1889) 42 Ch D 636 a

waterworks company applied the profits to the construction of
productive works instead of paying a dividend to the shareholders. A
resolution was passed proposing to give to the shareholders
debenture bonds bearing interest, and redeemable at par, by an
annual drawing, extending over thirty years. The articles of
association empowered the directors, with the sanction of the
company, to declare a dividend ‘to be paid’ to the shareholders. It
was held, that what was proposed to be done by the passing of the
resolution was not in accordance with a true construction of the
articles, and it followed that an injunction would issue to restrain the
directors from acting on the resolution.
In DEVLIN v SLOUGH ESTATES LTD [1983] BCLC 497 the

accounts of the defendant company had for a number of years
contained a note of a possible contingent liability for damages in an
action commenced against the company and one of its subsidiaries
in France for breach of contract. The accounts for 1979 omitted all
references to this contingent liability. The company’s articles of
association required the directors to prepare and lay before the
company in a general meeting annual accounts prepared in
compliance with the Companies Act and to distribute these to the
shareholders in advance of the meeting. The plaintiff shareholder
commenced an action alleging that the failure to disclose the
contingent liability rendered the accounts defective. Accordingly he
had either as a shareholder a personal right to complain, or
alternatively, a right to bring a derivative action on behalf of the
company on the grounds that the directors had breached their duty
to the company to prepare proper accounts.
It was held that the scope of the standing of an individual
shareholder to bring either a personal or a derivative action to
challenge the form of a company’s accounts was not unlimited. A
personal action would not lie, as the duty to prepare accounts
imposed on the directors by the articles of association was a duty
owed to the company and not to the shareholders individually. A
shareholder could bring a derivative action to prevent the
dissipation of the company’s funds by, for example, the payment of
a dividend out of capital based on inaccurate accounts or, where
there was doubt on what the statutory requirements on the
preparation of accounts meant, a shareholder could seek guidance
from the court. However, a shareholder did not have standing to
complain, as in the present case, of the manner in which a
company’s accounts were prepared, as this type of dispute involved
matters of business judgment with which the courts would not
interfere in the absence of allegations of bad faith. The proper way
of dealing with such a matter was to complain to the Department of
Trade or raise the matter at a shareholders’ meeting.
PRUDENTIAL ASSURANCE CO LTD v NEWMAN INDUSTRIES LTD
(NO. 2) [1982] Ch 204; [1982] 1 All ER 354 was a relatively
complex case in which it was held in the Court of Appeal, inter alia,
that individuals do not suffer a personal loss, separate from the
general loss to the company, by the fall in value of their shares. The
point was not argued out in full, and opinions to the contrary have
been expressed.
116
(iv) Fraud on the minority

This is the most important of the exceptions to the rule in FOSS V
HARBOTTLE. The action is considered to be ‘derivative’, that is, the
plaintiff shareholder is taking action, not on his own behalf but for
the company, and he must establish that:
(a) a wrong has been done to the company and
(b) the wrongdoers are in control.
‘Fraud’ in this context extends beyond the normal definition of that
word and includes abuse of power generally. There has been some
argument as to whether loss occasioned to a company through the
negligence of those in control can amount to fraud on the minority.
It seems that it may do so, particularly where those in control have
made some personal gain. Many of these cases will concern sale of
company property at an undervalue.
COOK v DEEKS [1916] AC 554 was a Privy Council decision on

appeal from the Supreme Court of Ontario. Three directors of a
railway construction company obtained a contract in their own
names to the exclusion of the company. The contract was obtained
in circumstances amounting to breach of trust by the directors and
constituted them as trustees of its benefits on behalf of the company.
These directors as holders of three-quarters of the issued shares
subsequently passed a resolution at a general meeting declaring that
the company had no interest in the contract. The Privy Council held
that the benefit of the contract belonged in equity to the company,
and thus the directors could not validly use their voting power to vest
it in themselves.
In PAVLIDES v JENSEN AND OTHERS [1956] Ch; [1956] 2 All ER

518 a minority shareholder of the company sought to bring an
action on behalf of himself and all other shareholders, except three
who were directors of the company, against those directors and the
company for damages for negligence. He alleged that the directors
had been guilty of gross negligence in selling a valuable company
asset at a price greatly below its true market value. The company
was controlled by another company, the majority voting power of
which was controlled by the same directors. The defendant
directors claimed that the action was not maintainable. It was held,
that since the sale of the asset in question was not beyond the
powers of the company, and since there was no allegation of fraud
on the part of the directors or appropriation of the assets of the
company by the majority shareholders in fraud of the minority, the
action did not fall within the admitted exceptions to the rule in Foss
v Harbottle. The action could not be maintained.
On the other hand, in DANIELS v DANIELS [1978] Ch 406, [1978]
2 All ER 89, the plaintiffs, who were minority shareholders in a
company, brought an action against the two directors and the
company. They alleged that in October 1970 the company, on the
instructions of the two directors, who were majority shareholders,
sold the company’s land to one of the directors, who was the wife of
the other, for £4,250. In 1974 she sold the land for £120,000. The
minority claimed that the directors knew, or ought to have known,
that that sale was at an undervalue. The directors issued a
summons to strike out the statement of claim as disclosing no
117
reasonable cause of action or as an abuse of process. Templeman J

held, dismissing the summons, that the exception to the rule in Foss
v Harbottle, enabling a minority shareholder to bring an action
against a company for fraud where no other remedy was available,
should include cases where, although there no fraud was alleged,
there was a breach of duty by directors and majority shareholders
to the detriment of the company and the benefit of the directors. It
would seem that an allegation of fraud might have been made here
but it seems that the minority did not know exactly what had
happened and as allegations of fraud can be notoriously hard to
prove, preferred not to allege so much in their statement of claim.
In the absence of impropriety, Templeman J said, ‘… even a foolish
and negligent loan to a director, if made in good faith and within
the powers of the directors, does not enable a minority shareholder
to recover in an action.’
In CLEMENS v CLEMENS & BROS. LTD [1976] 2 All ER 268 the

plaintiff (aged about 50) held 45%, and her 68-year-old aunt 55%,
of the issued share capital of a successful family building company
incorporated in 1913. There were 200 preference shares, of which
the plaintiff and the aunt each held 100, and 1,800 ordinary shares
of £1 each fully paid, the plaintiff holding 800 and the aunt 1,000.
The aunt was a director of the company but the plaintiff had ceased
to be after disagreements. There were four other directors. The
total directors’ emoluments exceeded the company’s net profits
before taxation in each of the years 1971 to 1974. The directors
proposed to increase the company’s share capital from £2,000 to
£3,650 by the creation of a further 1650 ordinary shares, all to
carry voting rights. The four directors would receive 200 shares
each, and the balance of 850 shares would be placed in trust for
long service employees of the company. The niece was sent a notice
of an extraordinary general meeting at which the resolutions would
be proposed.
Her solicitor wrote to the aunt pointing out the scheme would
reduce the plaintiff’s shareholding to under 25 per cent and stating
the plaintiff’s opposition. The aunt replied that she was fully aware
of the implications of the changes in the company’s structure but
intended to support the scheme. The plaintiff’s solicitor attended
the meeting as her proxy and proposed an adjournment but the
aunt voted against this, and the three resolutions were then passed.
The plaintiff brought an action against the company and the aunt,
seeking a declaration that the resolutions were oppressive of the
plaintiff and an order setting them aside.
It was held that the aunt was not entitled to exercise her majority
votes as an ordinary shareholder in any way she pleased; her right
was subject to equitable considerations which might make it unjust
to exercise it in a particular way. Although it could not be disputed
that she would genuinely like to see the other directors have shares
in the company and a trust set up for long service employees, the
inference was irresistible that the resolutions had been framed in
order to put complete control of the company into the hands of the
aunt and her fellow directors, and hence to deprive the plaintiff of
her existing rights as a shareholder with more than 25% of the
votes and to ensure that she would never get control of the
company. Those considerations were sufficient in equity to prevent
118
the aunt using her votes as she had, and the resolutions would thus
be set aside.
PRUDENTIAL ASSURANCE CO LTD v NEWMAN INDUSTRIES LTD

AND OTHERS (NO. 2) [1981] Ch 257, [1980]2 All ER 841; [1982]
Ch 204; [1982] 1 All ER 354 (CA) has been mentioned above.
The plaintiffs held 3.2% of the issued ordinary shares in Newman
Industries Ltd, the first defendant. Bartlett, the second defendant,
was at the material time the chairman and chief executive of
Newman Industries Ltd. and the third defendant, Laughton, was a
non-executive director and its vice-chairman. Bartlett was also the
non-executive chairman of the fourth defendant, Thomas Poole &
Gladstone China Ltd. (TPG) and Mr. Laughton its vice-chairman and
chief executive. Newman Industries agreed to buy TPG’s holdings in
two companies and under the agreement (the ‘January agreements’),
unbeknown to the board, Newman paid £215,950. Bartlett then
prepared a memorandum (‘the strategy document’) which
recommended that the board of Newman should purchase from TPG
all its assets, except its shareholding in Newman and a loan from
another company, in consideration of Newman assuming TPG’s
liabilities and paying TPG the sum of £350,000. At a board meeting
all the directors except a Mr. Murray agreed to accept the proposals
in principle. On Murray’s suggestion a report was obtained from
Newman’s auditors. The January agreements were concealed from
the auditors who valued the assets as £ 325,000 and the board of
Newman accepted that valuation as a basis of negotiation.
After further agreements, all the members of a committee of
Newman’s board, apart from Murray, approved a letter agreeing the
purchase of TPG. The extraordinary general meeting was postponed
as a result of the pressure by Murray, the plaintiffs and other
institutional investors in order that a report be prepared by a
merchant bank, but before the report was ready, the meeting was
held and a resolution passed approving the purchase of TPG’s assets
by Newman.
The plaintiffs were claiming first, in a direct capacity, secondly, in a
derivative action on behalf of Newman and, thirdly, in a
representative capacity on behalf of the shareholders. The
defendants applied by summons to have heard as a preliminary issue
whether the plaintiffs as a minority shareholder could maintain the
claim against them. Vinelott J dismissed the summons and at the
hearing of the action itself he held, inter alia, that Bartlett and
Laughton, in order to benefit TPG had conspired to injure Newman
and indirectly its shareholders. Thus the shareholders had suffered
damage and that, on the evidence, the interests of justice required
that the plaintiffs as a minority shareholder in Newman should be
permitted to prosecute an action on behalf of the company.
Bartlett and Laughton appealed. The Court of Appeal held, allowing

the appeal in part, (1) that on the evidence the serious findings
against the appellants of conspiracy and fraudulent conduct were not
substantiated other than that they dishonestly concealed the January
agreements and payments thereunder from the directors and
shareholders of Newman in order to facilitate the acceptance of the
proposals in the strategy document. The dishonest concealment
involved and included a misleading statement in the circular of the
119
origin and purpose of the payment by Newman of £216,000 to TPG

whereby the assets purchased by Newman were overvalued by
£45,000, thereby causing damage to Newman by that amount.
(2) That where fraud was practised on a company, it was the
company that prima facie should bring the action and it was only in
circumstances where the board of the company was under the control
of the fraudsters that a derivative action should be brought. The
question whether a company was under the control of those
practising an alleged fraud on it should be determined before a
derivative action was heard and, accordingly, the judge erred in not
determining as a preliminary issue whether the plaintiffs should be
allowed to proceed in their derivative action. As, however, the action
had been heard, plaintiffs’ status to bring the derivative action did
not arise for determination.
The right to bring a derivative action should not be determined as a
preliminary issue on the hypothesis that all the allegations in the
statement of claim of ‘fraud ‘ and ‘control’ are facts. Whatever may
be the properly defined boundaries of the exception to the rule, the
plaintiff before proceeding with his action ought at least to be
required to establish a prima facie case that the company is entitled
to the relief claimed and the action falls within the proper boundaries
of the exception to the rule in Foss v Harbottle.
(3) The plaintiffs’ personal action, to which the representative
action was linked, was an action to recover damages on the basis
that the company in which the plaintiffs were interested had
suffered damage. Since the plaintiffs’ right as holders of shares was
merely a right of participation in the company on the terms of the
articles of association, any damage done to the company had not
affected that right and, accordingly, the action was misconceived.
GEORGE FISHER LTD v MULTI CONSTRUCTION LTD [1995] BCC

(CA). The plaintiffs (holding company) sued for loss to itself due to
defendant’s breach of contract causing loss to a wholly-owned
subsidiary. The loss to the holding company was in the form of a
diminution of value of its shares. The Court of Appeal ruled that the
plaintiffs had a cause of action, and that PRUDENTIAL ASSURANCE
CO LTD v NEWMAN INDUSTRIES LTD was not authority for the
proposition that shareholders had no claim for infringement of a
personal right.
ESTMANCO (KILNER HOUSE) LTD v GREATER LONDON

COUNCIL [1982] 1 All ER 437 concerned the creation of a
company whose shareholders were the owners of long leases of
flats owned by the council. There was a change of policy at the
council and those who had long leases were offered compensation
if they wished to give them up. It was held that the question of
whether the rule in Foss v Harbottle applied should be determined
as a preliminary issue. At that point only the council was entitled to
vote. It was held that the exercise of voting rights in a selfish
interest did not entitle that shareholder to vote in such a way as to
ignore the interests of his fellow voteless shareholders. As the initial
purpose of the company was to enable long leases to be sold to the
shareholders, this would be stultified and it was a fraud on the
minority and the applicant could be substituted as plaintiff and the
120
company added as defendant and the applicant could proceed on

the basis of a derivative action.
In WALLERSTEINER v MOIR (NO. 2) [1975] QB 373, [1975] 1 All

ER 849 concerned in part the issue of payment of costs in bringing a
case. The defendant Moir was a minority shareholder in two
companies in which the plaintiff was a director. Wallersteiner
claimed damages for libel against Moir in respect of a circular letter
sent to the shareholders of the two companies. Moir’s defence and
counterclaim joined the two companies with Wallersteiner as
defendants to the counterclaim which alleged breaches of the then
Companies Act and claimed declarations that Wallersteiner had been
guilty of fraud, misfeasance and breach of trust and orders that he
should pay sums totalling some £500,000 to the two companies.
There was no reply or defence to the counterclaim. As to the costs,
which had been borne by Moir personally as he was unable to obtain
legal aid, it was open to the court in a minority shareholder's action
to order that the company indemnify the plaintiff against the costs of
the action and Moir should have an indemnity for the costs incurred
by him on behalf of the companies up to and including discovery, at
which point he should obtain further directions from the court.
Despite the virtual eclipse of ‘fraud on the minority’ by the statutory
remedy described in the paragraph below, there has been an
interesting recent case concerning a successful derivative action:
BARRETT v DUCKETT AND OTHERS [1995] BCLC 73. B and D

each owned 50% of the shares in Nightingale Travel Ltd D and
another, W, ran Nightingale Coaches Ltd (D, therefore, having a
substantial interest in each company. B. commenced a derivative
action on behalf of ‘Travel’ against D. and W. jointly for allegedly
diverting business destined for ‘Travel’ to ‘Coaches’, and against D.
for paying money due to ‘Travel’ into his own bank account.
The defendants applied for the action to be struck out on the

grounds that B. had no right to proceed by way of such an action,
and, in any event, D. had already presented a petition for the
compulsory winding up of the company, and any action should
await the outcome of the hearing of the petition. The court ruled
that the derivative action could proceed. The company would
certainly have a right to proceed, and in the circumstances it was
not unreasonable for B. to take action on its behalf. On the
evidence, D. had a formidable claim to meet. The outcome of any
winding-up petition was too uncertain.
(b) Sections 994 – 996 CA 2006 (was ss 459-461 CA

1985) – unfair prejudice
This is one of the fastest-growing areas of the company law, and
has largely eclipsed ‘fraud on the minority’ as a means of relief for
minority shareholders. Since the Companies Act 1989, the conduct
complained of may affect all of the shareholders, not simply part of
them.
In R.A. NOBLE & SONS (CLOTHING) LTD [1983] BCLC 273 R A

Noble & Son (Clothing) Ltd was a small private company, set up by
121
Mr R A Noble and Mr B M Bailey, to take over a business previously

run by Mr Noble. It was agreed that Mr Bailey would introduce
£10,000 into the venture, Mr Bailey and Mr Noble would each have
fifty shares in the company, Mr Bailey would bear the expense of
fitting out a new shop to be acquired by the company, and Mr
Noble would have responsibility for conducting the company’s
affairs for which he would receive a salary. Mr Bailey’s contribution
was made through two companies which he controlled, Anafield
Builders Ltd (Anafield) and Anafield Builders (London) Ltd
(Anafield (London)). Anafield made a loan of over £10,000 to R A
Noble Ltd and Anafield (London) carried out renovations to a shop
acquired by the company. Considerable dispute followed between
Mr Noble and Mr Bailey, their diminished and finally Mr Bailey
wrote to Mr Noble saying that he wished to sever his connection
with the company, seeking repayment of the loan made by Anafield
and payment for work carried out by Anafield (London). A consent
order was made against Mr Noble for repayment of the loan, and
the company was given leave to defend the action in relation to the
claim of Anafield (London). Anafield presented a petition in which
it sought an order for the winding up of the company on the
grounds that it was just and equitable to do so. The grounds
included an allegation that Mr Noble had improperly assumed
control of the company and had excluded Mr Bailey from
involvement in its affairs, and that the company’s accounts and
directors’ reports were irregular or defective.
It was held –
(1) A member of a company can bring himself within s 75 of the
Companies Act 1980 (from which s 459 is derived) where it can be
shown that the value of his shareholding in the company has been
seriously diminished or jeopardised by the unfair conduct of those
controlling the company. Jurisdiction under s 75 was not, however,
limited to such a case.
The test of unfairness was objective in the sense that the reasonable
bystander would have regarded the petitioner as having been
unfairly prejudiced and there was no need for a petitioner to show
that the persons controlling the company acted either in bad faith
or with a conscious intent to treat the petitioner unfairly. On the
facts, the treatment of Anafield was not unfairly prejudicial under
what would now be s 459 in that its exclusion from participation in
the company’s affairs was not unfair since it was to a large extent
due to Mr Bailey’s lack interest and Mr Noble merely wanted to get
on with the management of the company’s affairs and was not
guilty of any underhand conduct.
(2) On the facts, Mr Noble’s conduct had been the substantial
cause of the irreparable destruction of the mutual confidence
involved in the personal relationship between him and Mr Bailey.
Accordingly, an order would if necessary be made for the winding
up of the company.
(3) On the facts, Anafield (London) was entitled to recover the
costs of fitting out the company’s shop.
In RE BIRD PRECISION BELLOWS LTD [1985] 3 All ER 523;

[1985] BCLC 493 the petitioners were consultants who were former
members of the board of a small private company, described as a
122
‘quasi-partnership. The petitioners held 7,800 out of 30,000 issued

share capital and claimed that they should be bought out, or,
alternatively, that the company should be wound up. The Court of
Appeal held, inter alia, that s 75(3) Companies Act 1980 conferred
a very wide discretion on the court to give whatever relief it
considered was in all circumstances fair and equitable. Where the
court was exercising the discretion under s 75(4)(d) to order the
purchase of a petitioner’s shares, the court had an unfettered
discretion to fix a purchase price which was fair in all the
circumstances, and in exercising its discretion it was entitled to take
into account the merits of the case.
In RE CUMANA LTD [1986] BCLC 430 the Court of Appeal held

that the trial judge was entitled to find the facts as he did. Where a
court found unfair prejudice under s 75 of the Companies Act 1980
and ordered the shares of the petitioner to be purchased, the trial
judge had a broad discretion to determine the basis on which the
purchase should be made. On the facts, the trial judge had not
erred in selecting the date of the minority shareholder, Lewis’s,
petition as the proper date for valuation of his shares.
RE A COMPANY [1985] BCLC 80 shows that in certain

circumstances, even a rights issue could amount to unfair prejudice.
The applicant, a Mr Lewis, was granted an injunction by Harman J
who held that there was an arguable case that a rights issue of
shares on a pro rata basis could unfairly prejudice a shareholder
even where the price at which they were offered was a proper value
for the shares in the sense of being below market value and
advantageous to the subscriber. Furthermore, it resulted in no
diminution of the proportionate interest of the shareholder who
objected to it, and it benefited the company by increasing its equity
base. Such an allotment could be unfairly prejudicial where, for
example, (i) it was known that the objecting member could not
afford to take up the offer and this had been a reason for making
the offer, or (ii) the objecting member was engaged in litigation
against the majority shareholders and the offer was designed to
deplete his resources available to finance the litigation. Accordingly,
as there was an arguable case that the proposal to make a pro rata
rights issue could be unfairly prejudicial to the interests of the
applicant, and as it was desirable in the case of a petition under s
75 of the Companies Act 1980 that the status quo should be
preserved except where change was absolutely essential, the
injunction sought would be granted.
RE BLUE ARROW PLC. [1987] BCLC 585 concerned a company

that grew from small beginnings under a lady known as Stella
Birch, the petitioner under s 459, to floatation on the Stock
Exchange. Ms Birch met a Mr Berry and was duly impressed by him
so that she re-organised her companies into two divisions under
what was then named Blue Arrow and she took 45% of the shares
of the parent company whilst Mr Berry took 55%. The petitioner
was an executive director of the company and of its subsidiaries.
She was appointed president and Mr Berry was appointed
chairman. The company flourished under Mr Berry’s leadership and
it was sought to float it on the Stock Exchange. Ms Birch moved to
Florida where she took no active part in the company but she
123
returned and wished to do so, contrary to the wishes of the other

directors. She petitioned under s 459 Companies Act 1985 alleging
that the affairs of the company were being conducted in a manner
unfairly prejudicial to her in that she had a legitimate expectation
that she would participate in the company’s affairs and that
contrary to such expectation the proposed alteration to the articles
of the company would result in her exclusion. She applied for
interim relief restraining the company from putting the resolution
to a general meeting. Her petition was struck out. Her right to be
president of the company was not a class right but a right personal
to her and it could therefore be altered by special resolution. Since
the outside investors were entitled to assume that the whole of the
constitution of the company was contained in the articles and
legislation, there was no basis for finding that the petitioner had a
legitimate expectation that the company’s articles would not be
altered so as to enable her office to be terminated in ways other
than those already provided for in the articles.
In RE A COMPANY [1987] BCLC 94 a breakdown in the

relationship, leading to the exclusion of one person from the
company is not necessarily unfair prejudice.
In RE A COMPANY EX PARTE SCHWARCZ [1989] BCLC 427 it was

said that not every small company is a ‘quasi-partnership’ based on
mutual confidence and trust and where all members have a
‘legitimate expectation of participating in management’. Schwarcz
and his son were dismissed from the company as directors and they
were informed that their shares would be purchased. In the
circumstances, there was no need to invoke s 459.
RE A COMPANY EX PARTE KREMER [1989] BCLC 365 showed that

there was no unfair prejudice where there had been a breakdown of
relationship between shareholders, and the majority shareholder
has made a fair offer to buy out the petitioner, a minority
shareholder. (In this case, the minority shareholder concerned was
not a ‘founder member’ of the company, and had contributed
comparatively little; the special considerations applying to a ‘quasi-
partnership’ were not appropriate here.
It was held in RE A COMPANY EX PARTE HARRIES [1989] BCLC

383 that a secret allotment of additional shares to one shareholder
not only contravened the pre-emption provisions of the Companies
Act, but was capable of being regarded as ‘unfair prejudice’ against
persons whose voting power was thereby ‘diluted’. An offer to buy
the shares of the petitioning shareholder was considered by the
court to be unfair, and an enquiry was ordered to determine what a
fair price would be. The judge pointed out that in a ‘quasi-
partnership’ it was normal to price shares ‘pro-rata’ based on the
value of the company as a whole. In other cases, the shares would
be valued at a discounted price to reflect the fact that it was a
minority shareholding. As this particular company had ceased to
operate as a ‘quasi-partnership’ for some time, it was appropriate
for the price of the shares to be discounted.
124
It had for some time been considered that a refusal by a minority

shareholder to accept an offer by the ‘offending parties’ to purchase
his shareholding at a fair valuation made by an independent valuer
was ‘unreasonable’: see RE A COMPANY (NO. 002567 OF 1982)
[1983] 2 All ER 854. However, the Court of Appeal in VIRDI v
ABBEY LEISURE LTD [1990] BCLC 342 was of the opinion that
such a refusal was not necessarily unreasonable, particularly where
the value might be discounted in inappropriate circumstances. Both
these cases concerned winding-up on ‘just and equitable grounds’
(see later).
RE A COMPANY EX PARTE HOLDEN [1991] BCLC 597 applied the

VIRDI case above to extend the right of any shareholder to refuse to
accept a valuation of his shares, even under a provision in the
articles, where there might be a risk that they might be discounted.
This was a petition brought under s 459. The court pointed out
than an expert valuer does not have to give reasons for his
valuation and cannot be questioned or challenged.
In RE ELGINDATA LTD [1991] BCLC 959 it was held that

mismanagement alone would not normally constitute a ground for
unfair prejudice. In this case, the additional fact that one of the
directors had improperly used the assets of the company for
himself, his family and friends did amount to unfair prejudice, even
though it had only a limited affect on the value of the petitioner’s
shares 10. Gross mismanagement could support a s 459 petition, and
it would not be necessary to establish that the directors involved
had benefited personally, or, indeed had been in charge of the
company.
MCGUINNESS v BREMNER PLC. [1988] BCLC 673 shows that a

failure by a company to call a meeting at the request of
shareholders until seven months after the requisition constituted
‘unfair prejudice’.
RE SAM WELLER & SONS LTD [1990] BCLC 80 contains some

interesting comments relating to conduct affecting all shareholders
alike.
(i) The test is objective – i.e. it is the effect of the conduct that
matters, not the intention behind it.
(ii) ‘Interests’ of members has a wider meaning than ‘rights’.
(iii) The low dividend declared could be a legitimate cause for
complaint, as a shareholder has a right to a return on his
investment.
RE TOTTENHAM HOTSPUR PLC. [1994] BCLC 655 was largely of

interest because of the personalities involved. Terry Venables
attempted, unsuccessfully, to establish that the circumstances of his
appointment as Chief Executive of the company gave him a
legitimate expectation to remain in that position, and his
subsequent dismissal by the board could not found a petition under
10
1993 JBL 283 deals with unfair prejudice in RE ELGINDATA LTD. This article illustrates how s 459
can be used in circumstances where ‘fraud on the minority’ might not be available.
125
s 459. His claim lay purely in breach of contract and unfair

dismissal.
In RE SAUL D. HARRISON AND SONS PLC [1995] BCLC 14 a

shareholder petitioned under both s 459 and s 122 Insolvency Act
1986 (compulsory liquidation) on various grounds, including the
fact that the directors allowed the company to continue trading at a
loss (the company was not insolvent). The judge struck out the
petition on the application of the directors as showing no good
cause of action. The petitioner’s appeal was dismissed by the Court
of Appeal. The judgment is important for the discussion on the
meaning of unfairness in s 459. It has to be judged in a commercial
context. The starting point was always the articles: was the conduct
alleged to be unfairly prejudicial in accordance with the articles?
There may be circumstances where the articles do not reflect the
‘understandings’ on which the shareholders were associated, and
this may result in an exercise of power being considered unfair,
albeit in accordance with the articles. There was no evidence in this
case that the relationship of the shareholders to the company was
other than that contained in the articles, or that the directors had
abused their powers.
However, one should now see RE BSB HOLDINGS LTD (NO. 2)

[1996] BCLC 155, where it was commented that, while the
circumstances described in RE SAUL D. HARRISON would cover
most cases, the categories of unfair prejudice were not closed.
RE FULL-CUP INTERNATIONAL LTD [1995] BCC 682 concerned

remedies under s 461. The court was of the opinion that the
situation was not open to a ‘remedy’ in the normal meaning of that
word, and stayed proceedings to allow the petitioner to petition for
compulsory liquidation. This decision has been upheld by the Court
of Appeal.
RE A COMPANY NO. 00836 OF 1995 [1996] BCC 432. The court

ordered the s 459 petition to be struck out where the petitioner had
received an offer for the purchase of his shares, where his
accountant was to effect the valuation under an elaborate scheme.
The court considered Re Abbey Leisure.
In QUINLAN v ESSEX HINGE LTD [1996] 2 BCLC 417 the

petitioner, who was not an original ‘partner’ in a quasi-partnership
but has worked his way up to that position from a junior level, was
entitled to compensation in the form of purchase of his shares
without any discount for a minority shareholding 11.
11
JBL January 1995 p56 considers ‘Valuation of shares – a legal and accounting conundrum’.
126
(c) Winding-up on ‘just and equitable grounds’.

This is covered by s 122 of the Insolvency Act 1986. In EBRAHIMI v
WESTBOURNE GALLERIES LTD [1973] AC 360; [1972] 2 All ER 492
it was held, inter alia, that, while the ‘just and equitable’ provision
did not entitle a party to disregard the obligation which he assumed
by entering the company, the court could subject the exercise of legal
rights to equitable considerations of a personal character between
individuals which might make it inequitable to insist on legal rights
or to exercise them in a certain way. Thus, in that case, where the
appellant (Ebrahimi) and Nazar had joined in the formation of the
company on the basis that the character of the association, ie. that
the appellant would be entitled to participate in the company’s
management, would, as a matter of personal relation and good faith,
remain the same and N had repudiated that relationship with the
result that the appellant lost his right to a share in the profits and
was at the mercy of Nazar and his son (as directors) and could not
dispose of his interest without their consent, the proper course was
to dissolve the association by winding up the company. This reversed
the Court of Appeal decision but restored that of Plowman J at first
instance.
In RE POSGATE & DENBY (AGENCIES) LTD [1987] BCLC 8 it was

held that the concept of unfair prejudice in s 459 enabled the court
to take into consideration not only the rights of the members under
the company’s constitution but also their legitimate expectations
arising from agreements and understandings of the members inter
se. Thus, where a shareholder claimed that it would be unfair for
the board to exercise powers conferred by the articles without the
approval of the shareholders, who under the company’s articles had
no right to vote on the matter, the shareholder had to demonstrate
some special circumstances which created a legitimate expectation
that the directors would not exercise their power in such a way
which the shareholder alleged was unfair.
VUGANOVICH v VUGANOVICH [1990] BCLC 227, a Privy Council

appeal from New Zealand shows that the petitioner’s conduct in a
‘just and equitable’ case is only relevant where that conduct has
caused the breakdown in confidence.
RE A COMPANY [1983] 2 All ER 854 demonstrates that the court

has a discretion to refuse a compulsory winding-up order if another
remedy is available, and the petitioner is acting unreasonably.
RE A COMPANY EX PARTE ESTATE ACQUISITIONS AND

DEVELOPMENT LTD [1991] BCLC 154 is a case on the relationship
between s 459 Companies Act 1985, and s122 Insolvency Act 1986.
Alleged acts of oppression on the part of the management included
threats to alter the articles; threats to remove the petitioner as a
director, and a failure to provide necessary information so that the
petitioner’s shares could be valued. The court held that there was
no case for winding up the company (a view disputed by Professor
Prentice), but there was a case for relief under s 459.
127
RE COPELAND AND CRADDOCK LTD [1997] BCC 294 is an

important Court of Appeal case on s 459 Companies Act 1985 and s
122 Insolvency Act 1986. It may sometimes be perfectly reasonable
for a petitioner, even where s 459 is available, to ask for the
company to be compulsorily wound-up.
Disclosure of ‘substantial’ shareholdings is dealt with in s 798 CA

2006, (ss198 - 202 CA 1985). Holders of ‘substantial’ shareholdings
must notify the company of that fact. A ‘substantial’ shareholding is
now 3% – CA, 1989. Ss 824, 825 CA 2006 (was ss 204 - 206 CA
1985) deals with the disclosure of ‘concert parties’. Under ss 793,
820 – 825 CA 2006 (was s212 CA 1985) a public company has the
right to require information concerning the ownership of its shares.
In RE GEERS GROSS PLC. [1988] BCLC 140 the Court of Appeal

held that s 212 could not be circumvented by the sale of the
relevant shares.
Dividends
Dividends are covered by ss 829 – 836, 844, 849 - 852 CA 2006
(was ss 263 – 281 CA 1985). Dividends on shares are restricted to
profits available for distribution. There has been a considerable
tightening-up of the rules since 1980. See the Law Commission
Proposals for the Reform of Shareholder Remedies.
The Law Commission was consulting widely on the reform of the
law in three main areas:
(i) FOSS v HARBOTTLE – the derivative action
(ii) s 459 CA 1985
(iii) s 14 CA 1985 – the shareholder’s contract with the company.
In a sense, these three topics are related. (i) and (ii) are aimed at
rationalising the main remedies for minority shareholder action,
and eliminating some of the anomalies and uncertainties that have
crept in over the years as a result of judicial decisions. In particular,
the uncertainty over the inclusion of negligence (at least where it
does not border upon fraud, or lead to serious mismanagement) as
a ground for shareholder action, and the exclusion of rights other
than those pertaining to shareholders. This has, in the past, led to
some remarkable feats of mental gymnastics on the part of judges
to achieve essential justice where the core of the complaint has
been unfair behaviour to a director.
S 459 CA 1985 has proved, in practice, to be somewhat

cumbersome in its operation.
S 14 CA 1985 should be looked at again in connection with the
rather narrow interpretation that has been accorded to it in the
past. In particular, the restriction to the rights of shareholders qua
shareholders, and, perhaps more importantly, operation of FOSS v
HARBOTTLE preventing shareholders from exercising their right to
have the constitution of the company observed.
128
Variation of class rights

It is important to ask:
(a) Where are the class rights set out?
(b) Is there a ‘variation of rights’ provision?
In the memorandum
1 This may be stated to be unalterable. These class rights
cannot be altered at all in the normal way, but there may,
however, be a possibility under the scheme of arrangement
provisions of ss 895, 899, 901 CA 2006 (was s 425 CA
1985), by means of a special resolution plus a court order.
2 Alternatively, the class rights may be stated to be alterable.
In this case, any procedure laid down must be followed.
3 The memorandum may be silent on questions of alteration.
In this instance, the statutory procedure ss 630, 334 CA 2006
(s 125 CA 1985) will be followed.
In the articles
1 There may be a provision for alteration. If so, the procedure
must be followed before the articles can be altered to contain
the alteration.
2 Where the articles are silent on variation of rights, the
statutory procedure in s 125 1985 should be followed.
Sections 630, 633, 635 CA 2006 (was ss125 – 127 CA 1985)

Ss 630(2) 630(4) CA 2006 (was s 125 (2) CA 1985) covers class
rights in articles with no provision for alteration. Rights may be
varied if :
(a) holders of 3/4 in nominal value consent in writing, or
(b) a special resolution is passed at a separate class meeting
(and any other requirements, however imposed, have been
complied with).
LLB: Company Law
S 125(4) deals with situations where rights are attached to a class
of shares by the memorandum or otherwise, and there is a
provision in the articles for a variation of class rights. In this case,
the variation must be in accordance with the provision in the
articles.
S 125(5) (no destination, presumably because now the constitution

will be one document?) says that if the class rights are in the
memorandum, and neither the memorandum nor the articles
contain a provision for variation, these rights may be varied only if
all the members of the company agree in writing to the variation.
S 632 CA 2006 (was s126 1985) allows for the possibility that
alterations can take place in connection with other areas of
company law, such as the reconstruction and amalgamation of
companies.
129
Ss 633, 635 CA 2006 (was s 127 CA 1985) applies where the share
capital is divided into different classes and the class rights have
been varied quite properly under the provisions of the
memorandum or articles or under s125(2).
S 633(2) and (3) 2006 (was s 127(2) CA 1985) provides that

holders of 15% or more of the equity who did not vote for the
variation may apply to the court to have the variation cancelled. In
this case, the variation
cannot take effect until the court confirms it. The dissidents have 21
days to apply to the court. If the court thinks that the variation
would unfairly prejudice the shareholders of the class, it will
disallow the variation.
Pre-emption rights
This is covered in ss 560 – 568 CA 2006 (was ss 89 – 95 CA 1985).
The provisions apply to both public and private companies.
Companies proposing to allot any equity shares must offer them
first to existing holders of the relevant shares or relevant employee
shares. Relevant employee shares are apparently indistinguishable
from other relevant shares except that they are acquired through an
employee share scheme. Where a company issues shares specifically
to an employee share scheme, those shares do not have, first, to be
offered to existing holders of equity shares, but employees who
hold shares, as individuals, in an employee share scheme do have
pre-emption rights in subsequent issues of shares.
Equity shares do not include subscribers’ shares, bonus shares,

shares with limited rights to dividend or capital on a distribution
(this would catch most preference shares), and shares distributed as
part of an employees’ share scheme.
Ss 561, 566, 568 CA 2006 (was s 89 CA 1985) do not apply in the

following circumstances:
1 To private companies which have an article excluding it or

which is inconsistent with it.
2 In either public or private companies, where directors have
been given a general power to allot shares, the company may
provide that the director is free to allot the shares without
regard to s.89. This can be in the articles or by special
resolution. This freedom to allot shares in disregard of s.89
will cease when the general authority to allot shares ceases.
Directors are usually granted their authority to allot shares on
appointment (appointments of executive directors cannot be
for more than 5 years (renewable): s 188, 189 CA 2006 (was
319 CA 1985).
3 To any equitable security to be paid for wholly or partly
otherwise than in cash.
130
Alteration to capital structure (share capital)

Companies re-purchasing their own shares
Companies giving financial assistance for share purchase
Question 4.1.1
Discuss the legal nature of a share.
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4.2 Finances – Capital and shares

This section will examine issues relating to company finances,
including capital and shares.
Learning Objectives
□ Explore the obligations of the company Secretary
□ Explore issues relating to the raising of capital
First heading
Company secretary
Each company is required to appoint a secretary, and where a
private company has only one director, he cannot also act as
secretary. A secretary is an ‘officer of the company’ under the
Companies Acts, and there are restrictions upon the eligibility of
persons to act as secretaries of public companies: s 273 CA 2006
(was s 286 CA 1985).
In PANORAMA DEVELOPMENTS (GUILDFORD) LTD V FIDELIS

FURNISHING FABRICS LTD [1971] 2 QB 711 [1971] 3 All ER 16 a
company secretary committed frauds for which he was imprisoned
by hiring Rolls Royce and Jaguar cars purported to be used for
company purposes such as picking up important clients. He signed
contracts as the company secretary. A secretary in this context can
bind the company to contracts of an administrative character. Lord
Denning MR said, referring to the defendant’s submissions,
‘a company secretary fulfils a very humble role: and that he has no

authority to make any contracts or representations on behalf of the
company’, citing Barnett, Hoares & Co. v. South London Tramways
Co (1887) 18 QBD 815, where Lord Esher MR said:
‘A secretary is a mere servant; his position is that he is to do what
he is told, and no person can assume that he has any authority to
represent anything at all; ...’ (at 817).
These words were subsequently approved by Lord MacNaghten.
Lord Denning continued, however:

‘But times have changed. A company secretary is a much more
important person nowadays than he was in 1887. He is an officer of
the company with extensive duties and responsibilities. This
appears not only in the modern Companies Acts, but also by the
role which he plays in the day-to-day business of companies. He is
no longer a mere clerk. He regularly makes representations on
behalf of the company and enters into contracts on its behalf which
come within the day-to-day running of the company's business. So
much so that he may be regarded as held out as having authority to
do such things on behalf of the company.’ (at 716 - 717).
Salmon LJ added,
132
‘At the end of the last century a company secretary still occupied a
very humble position - very little higher, if any, than that of a minor
clerk. Today, not only has the status of a company secretary been
much enhanced, but that state of affairs has been recognised by the
statutes to which Lord Denning M.R. has referred. I think there can
be no doubt that the secretary is the chief administrative officer of
the company. As regards matters concerned with administration, in
my judgment, the secretary has ostensible authority to sign
contracts on behalf of the company.’
It might now be necessary to revise the views of some earlier cases

where companies were held not liable for the issue of fraudulent or
forged share certificates by the company secretary.
In RUBEN v GREAT FINGALL CONSOLIDATED [1906] AC 439 the

appellants, acting in good faith, advanced money to the secretary of
the respondent company on the security of a share certificate
issued to them by the secretary certifying that the appellants were
registered in the company’s register of shareholders as transferees
of chares. This certificate appeared regular, as it bore the seal of the
company, and appeared to be signed by two directors (in fact,
forged) and was counter-signed by the secretary. The company was
sued for refusing to register the appellants as owners of the shares.
The House of Lords held, that, in the absence of any evidence that
the company ever held out the secretary as having authority to do
anything more than a mere ministerial act, the company were not
estopped by the forged certificate from disputing the appellants’
claim. As the Panorama case above shows, this view seems
untenable today.
A secretary was not implicated in fraudulent trading by failing to

give advice that the company was insolvent, and should cease
trading. This clearly differentiates the management function from
the merely administrative: RE MAIDSTONE BUILDING
PROVISIONS LTD [1971] 3 All ER 363. The secretary of a company
which trades fraudulently is not personally liable merely because he
fails to advise the directors to stop trading. The party concerned
was a partner in the firm of accountants acting as auditor of a
company. He was appointed company secretary. He attended the
board meetings and drew attention to large losses being made by
the company. It continued to trade and incurred debts without any
reasonable prospect of being able to pay them. They went into
liquidation owing £99,000. The liquidator sought to make the
company secretary personally liable, alleging he had been a party to
the fraudulent trading because he had failed to advise the directors
to stop trading.
Under s 270 CA 2006 a private company is no longer required to

have a secretary. For further details see ss 270 – 280 CA 2006.
LLB: Company Law
Company capital
A person cannot live on air alone and a company must have money
before it starts business. This will generally be accumulated by
trading but must be raised in the first instance by the shareholders
133
providing the initial funds to prime the pumps. There are naturally
commercial risks when any new business is started. Many close
within the first few years. Businessmen seem by nature to be pro-
active, to see the glass as half full already, whilst lawyers are taught
to be cautious and see the pitfalls that may lie in the way.
Accordingly, the rules regarding the management and raising of
capital are designed to protect the unwary and gullible from the
possible excesses of over-optimistic or simply fraudulent
businessmen.
See Part 17 CA 2006.
Raising of capital
Payment for shares
All shares, whether in private or public companies, must be paid for
in money or money’s worth, which includes ‘goodwill’ and ‘know-
how’, as well as simple work: s 582, 585 2006 (was s 99 CA 1985)
Shares taken by subscribers to the memorandum must always be

paid for in cash, but as this could involve two shares only, the rule
is not significant. There is, of course, nothing to stop all the
shareholders from putting in their investments in cash as soon as
the company is founded.
Shares at a premium
In HENRY HEAD LTD v ROPNER HOLDINGS LTD [1952] Ch 124;
[1951] 2 All ER 994 a holding company was incorporated to
acquire, for the purposes of amalgamation, two shipping companies
who formerly carried on under the same management. The assets of
these two companies were of slightly unequal value. The
shareholders in these two companies were issued the entire
authorized capital of the amalgamated company, which was
£1,759,606. The real value of the shares at par was £5,066,506 in
excess of that sum. The balance sheet of the holding company
showed that the latter sum of was appropriated to the credit of
‘Capital Reserve - Share Premium Account’ and this was held to be a
proper appropriation, the transaction being within the provisions of
s 56 Companies Act, 1948, which said:
‘(1) Where a company issues shares at a premium, whether for cash

or otherwise, a sum equal to the aggregate amount or value of the
premiums on those shares shall be transferred to an account, to be
called 'the share premium account,' and the provisions of this Act
relating to the reduction of the share capital of a company shall,
except as provided in this section, apply as if the share premium
account were paid up share capital of the company.’
In SHEARER (INSPECTOR OF TAXES) v BERCAIN LTD [1980] 3 All

ER 295 it was held that a company, obliged by law to create a
‘share premium account’ in respect of shares issued in a takeover,
could not distribute dividends from pre-acquisition profits. The
acquiring company issued £4000 worth of shares for capital in the
two companies acquired valued at £96,000. It was common ground
134
that if the taxpayer had to create a share premium account in

respect of the excess value of the shares, it was precluded by law
from distributing the dividends received out of pre-acquisition
profits. It was held, that where shares were issued at a premium,
the company issuing the shares was bound to create a share
premium account.
The law, as amended, is now contained in ss 611 – 613, 615, 616

CA 2006 (was ss131 - 134 CA 1985).
Shares at a discount
It is not permitted to sell shares at a discount (ie. at a price below it
par or face value) and it is disallowed under s 580 CA 2006 (was s
100 CA 1985).
It remains possible to sell shares by installments so that a £1 share

might be paid for by separate calls of, eg. 40p, 30p and 30p at
different stages. Payment of brokerage or underwriting commission
is not regarded as issuing shares at a discount.
Payment for shares in a public company

(a) A public company may not accept payment for shares, or any
premium on shares, in the form of work or services to be
performed for the company or any other person: s 585(1) CA
2006 (was s 99(2) CA 1985).
(b) where a public company is to receive a non-cash asset in

consideration for shares, or any premium on shares, the
company shall not allot the shares until the asset has been
valued by an independent valuer, and a copy of the valuer’s
report has been sent to the proposed allottee: ss 593 – 595 CA
2006 (was s 103 CA1985).
The above restrictions do not apply to private companies, so that

there could, in fact, be some discounting of the nominal value of
the shares. However, even in a private company, the transaction
can be called into question where the consideration is essentially
non-existent or in some way dubious: RE WRAGG LTD [1897] 1 Ch
796
Week 6 – The Company Secretary and Company Capital
Protection of investors in public companies

(a) Statutory protection – Financial Services and Markets Act 2000.
This area of the law has been the subject of EC Directives, aimed at
harmonising rules relating to the advertising of securities. The
protection of investors is merely incidental.
The public may only be offered shares by a plc. It is a criminal

offence for a private company to do so: ss 755(1), 760 CA 2006
(was s 81 CA 1985). There are over 1.2 m registered companies but
only about 2000 are listed. The Financial Services Authority (FSA)
is the UK’s designated listing authority. The UK Listing Authority
135
(UKLA) operates under the Listing Particulars Directive (80/390

EEC) which requires that a company that seeks listing must submit
a public document (Listing Particulars). Under the Public Offer of
Securities Regulations 1995 (implementing 89/298 EEC)
The rules relating to listed and unlisted securities are now

approximated, and public offers of both are now referred to as
‘prospectuses’.
I have not looked for an update of these.
Heads of liability
(i) Any person responsible for listing particulars, or
supplementary listing particulars, shall be liable to compensate
anyone who has acquired relevant securities and has suffered
loss as a result of any untrue or misleading statement.
(ii) Anyone who fails to issue supplementary listing particulars
when required to do so, is liable to compensate any person
who has acquired these securities and has suffered a loss as a
result of that failure.
The plaintiff only has to prove misstatement (or omission) and loss
to establish liability. The burden of proof then shifts to the
defendant who can plead any of six defences. If the defendant is, in
fact, covered by some other part of the legislation, (eg. s 148 –
information withheld on the ground of public interest) no liability
will arise on the ground of misleading information.
Six available defences

(i) Reasonable belief in the truth of the statements.
(ii) Expert’s statements. Where the statement is made by, or on the
authority of, an expert, the defendant (other than the expert
involved) will be excused if he can show reasonable belief in
the competence of the expert.
(iii) Reasonable steps have been taken to correct a defect and bring
the correction to the attention of the potential investor.
(iv) The statement was a fair and accurate reproduction of a
statement by official persons, or contained in an official
document.
(v) The plaintiff was aware of the misrepresentation or omission
before purchasing the securities.
(vi) A reasonable belief that a change in circumstances after the
publication of the material was not such as to require
supplementary listing particulars.
Persons responsible
(i) Issuer of the securities.
(ii) Directors of the issuer.
(iii) Anyone named, and who has authorised himself to be named,
in the document as a director of the issuer, or as having agreed
to become a director at a future time.
136
(iv) Those who accept, and are stated as having accepted,

responsibility for all or part of the document.
(v) Anyone who has authorised the contents of all or part of the
document.
With regard to prospectuses, the issuer and directors under (i) to
(iii) above are only liable in respect of a prospectus if they have
made, or authorised, the offer.
Common law protection

This will relate to remedies for fraud or negligent
misrepresentation:
(i) Rescission of the contract. This will be governed by the rules
relating to bars to rescission.
(ii) Damages. Damages are now recoverable against the company
itself, and the old rule which prohibited shareholders from
claiming damages against the company while still remaining
shareholders (HOULDSWORTH v CITY OF GLASGOW BANK
(1879 - 80) LR 5 App Cas 317) has now been abolished: CA
1989, now incorporated as s 655 CA 2006 (was 111A CA
1985).
Damages claims against individuals responsible are now covered by

the FSMA 2000 s 90, sch 10 and the 1995 Regulations (above),
and are much more effective than the previous law particularly as
regards purchasers on the market.
Liability of company auditors

HEDLEY, BYRNE v HELLER [1964] AC 465, [1963] 2 All ER 575 is
a well known case on the liability of a banker for a negligent mis-
statement. The crucial point is that the recipient of the statement
must be known to be relying on what the representor is saying.
In JEB FASTENERS LTD v MARKS BLOOM & CO [1983] 1 All ER

583 12 the plaintiffs relied upon the audited accounts of a firm that
they wished to take over and which traded in the same products as
the plaintiffs themselves. The defendants knew that the plaintiffs
were considering the takeover which was, in any event,
unsuccessful. The plaintiffs knew that the value of the target
company was lower than the auditors’ report stated by the time of
the takeover and, as far as any misrepresentation was concerned,
the main object of the takeover, it was contended, was for the
plaintiffs to acquire the services of two of the defendants’ directors.
Both at first instance and in the Court of Appeal, the plaintiffs were
unsuccessful in maintaining a claim against the defendant
accountants. The decision in JEB FASTENERS would probably be
decided in the same way on its facts.
CAPARO INDUSTRIES PLC v DICKMAN AND OTHERS [1990]

BCLC 273 is a well-known case on the duty of care in tort. Plaintiffs
increased their shareholdings in a company and eventually took it
12
See 1990 JBL 177 for editorial comment on the case.
137
over on the strength of the auditors’ report. It proved to be

misleading as the target company was in fact in debt rather than in
profit. The House of Lords held that where a document is put into
general circulation and might foreseeably be relied upon by a
number of people for a number of different purposes, there was
normally no proximity, and therefore, no duty of care between the
maker of the statement and the person relying on it. The situation
would be different if the maker of the statement knew that a
specific person, or a member of an identifiable class, would be
relying upon it. Thus, neither as potential investors or as existing
shareholders did the auditors owe a duty to the plaintiffs. This is
obviously a good decision for accountants and, added to the
difficulty of showing that a duty of care should indeed exist as far
as the plaintiffs are concerned, there is a difficulty in showing
actual breach. The auditors are not, after all, there to act as
detectives hunting out possible fraud.
In AL SAUDI BANQUE V CLARKE PIXLEY [1989] BCLC 46 the

plaintiff banks made loans to a company on the strength of the
defendant auditors’ report. Some of the banks were already
creditors and made fresh loans; others were new creditors. The
report was misleading and the company was insolvent. It was held
that, even if it was foreseeable that the report might be relied upon
in this way, there was not a sufficiently close relationship to give
rise to a duty of care. The decision was approved by the House of
Lords in CAPARO v DICKMAN.
It seems, therefore, whilst it is not inconceivable that the auditors

might be made liable (and there will, no doubt, be a long fight to
ensure that the auditors of the failed giant, Enron, Arthur Andersen,
are held so, with horrendous implications for their partners world-
wide) it is difficult to establish the necessary assumption of a duty
of care.
Alteration to capital structure (share capital)

(a) Alterations other than a reduction of capital
This is governed by s 617 CA 2006 (s121 CA 1985). A company
having a share capital may make the following alterations
(provided that this is allowed by the articles):
(i) increase capital;
(ii) consolidate and divide its present capital into shares of a
greater nominal amount;
(iii) convert all or any of its shares into stock (and vice versa);
(iv) subdivide its shares, or any of them, into shares of a smaller
nominal amount;
(v) cancel shares which, at the date of the resolution, have not
been taken up, or agreed to be taken up.
The last has the effect of diminishing the company’s authorised
capital but it is not a reduction. The alteration must be effected by
the company in a general meeting, but other than this, the
procedure to be adopted is governed by the company’s articles. In
other words, it may be effected by an ordinary resolution, if that is
what the articles provide.
138
This is virtually the only place in the Companies Act where

reference is specifically made to the holding of a company meeting.
(b) Reduction of capital

A company may reduce its capital according to ss 641, 645,
646648, 649 CA 2006 (was ss 135ff. CA 1985) which provides for:
(i) power in the articles to reduce capital;
(ii) a special resolution;
(iii) court sanction – fairness to creditors and shareholders.
Where the scheme for reduction affects the rights of a class of

shareholder, the class has to agree by special resolution in a class
meeting.
In PRUDENTIAL ASSURANCE CO LTD v CHATTERLEYWHITFIELD

COLLIERIES [1949] AC 512; [1949] 1 All ER 1094 a company,
whose colliery undertaking had been compulsorily acquired by the
National Coal Board under nationalisation , decided to embark on
two entirely new ventures in Eire and Northern Ireland. Only a
fraction of the available existing funds was required and
consequently it passed a special resolution providing for the
reduction of the company's capital by returning to the preference
shareholders the amounts paid up on their shares. It was held that
this proposed reduction of capital was fair and equitable and ought
to be confirmed. This was followed by HOUSE OF FRASER PLC v
ACGE INVESTMENTS LTD [1987] AC 387 where a special
resolution was passed to reduce the company’s capital by paying off
the preference shareholders. No class meeting of the preference
shareholders as held. They appealed to the House of Lords from the
Scottish courts where it was held that the fulfillment and
cancellation of the shareholders’ contractual rights including the
return of capital in priority to the preference holders. As there had
been no variation, no agreement was required between the
company and the holders.
In RE OLD SILKSTONE COLLIERIES LTD [1954] Ch 169, [1954]1

All ER 68 the company existed after the nationalisation of the coal
industry solely for the purposes of collecting compensation. It was
proposed to pay the preference holders at par. As some reduction of
capital was involved, class meetings should have been held among
the different classes of shareholder.
RE NORTHERN ENGINEERING INDUSTRIES PLC [1993] BCLC

1151. The articles provided that a reduction of capital on shares
was a variation of shareholder rights. A proposal to reduce capital
by expelling the preference shareholders amounted, therefore, to a
variation, and required a special resolution in a class meeting.
HOUSE OF FRASER PLC was distinguished. The decision in RE
NORTHERN ENGINEERING INDUSTRIES PLC was upheld by the
Court of Appeal [1994] BCLC 704.
In RE MACKENZIE & CO LTD [1916] 2 Ch 450 Astbury J held that
139
where, under the memorandum and articles, preference

shareholders have no priority as to capital and no voting power but
are merely entitled to a fixed cumulative preferential dividend on the
nominal amount of the capital from time to time paid up on their
shares, and the company has power to reduce capital, a rateable
reduction on all the shares, preference and ordinary, though
diminishing the actual preferential dividend, is not an alteration of
the rights of the preference shareholders so as to require their
sanction under an ordinary modification of rights clause.
RE MEUX’S BREWERY CO LTD [1919] 1 Ch 28 it was held that,

prima facie, creditors are not concerned in a question of the
reduction of capital where it does not involve the diminution of any
liability in respect of any unpaid-up capital or the payment to any
shareholder of any paid-up capital. This would safeguard the
position of the creditors.
In RE JUPITER HOUSE INVESTMENTS (CAMBRIDGE) LTD [1985]

BCLC 222 it was held that where a company seeks to reduce its
capital on the grounds that it has been lost, the loss of capital must
be a permanent loss so far as presently foreseeable and not a
temporary fall in the value of some capital asset. Here the loss of
capital might, on counsel’s advice, be recovered through litigation
and it was hence not proved that there had been a permanent loss
of capital and the court could not confirm the reduction on that
ground. However, as the company had given an undertaking to
place in capital reserve any sums recovered with respect to the
defective property up to the amount of the reduction sought and
thus there would be no possibility of money representing capital
being used to pay a dividend, the court would exercise its discretion
to confirm the reduction on this basis.
RE GROSVENOR PRESS PLC [1985] BCLC 286 shows that a

reduction of capital was confirmed by the court on terms. These
two cases illustrate an increasing tendency among companies which
have suffered losses, to reduce capital in order to pay dividends.
Clearly, it is not possible to reduce capital in order to give less
security to the shareholders.
(c) Serious loss of capital sustained by a public company

The procedure to be followed for this is contained in s 656 CA 2006
(s142 CA 1985).
Companies re-purchasing their own shares

TREVOR v WHITWORTH (1887) LR 12 App Cas 409 disallowed
this at common law as it was a reduction of capital. The law in this
area has been greatly relaxed since 1980 under pressure from the
EC.
(a) Redeemable shares

Under ss 684, 686 – 688 CA 2006 (ss159 - 160 CA 1985) a
company may issue any shares as redeemable, provided that:
(i) there is power in the articles;
140
(ii) at least two shares remain unredeemable;

(iii) the date of redemption appears in the articles, or is fixed
before issue by the directors under powers contained in the
articles. This last provision was laid down by the Companies
Act 1989;
(iv) the redeemed shares are fully paid-up.
(b) Purchase by a company of its own shares

This is governed by ss 690, 691, 706, 724 CA 2006 (was ss162–167
CA 1985) – a company may repurchase any of its shares, on or off
the market, provided that:
(i) there is power in the articles;
(ii) as far as purchases on the market are concerned, there may be
a general authority to purchase given by ordinary resolution in
a general meeting. Reliance is placed on the authorities
regulating the market to be vigilant.
(iii) where the purchases are off-market, (which includes all
purchases of shares in a private company), the purchase by the
company must be approved by a special resolution in which
the shareholder whose shares are to be purchased does not
participate.
(c) Provisions affecting both redeemed and re-purchased shares

(i) the shares involved must be cancelled – this is to stop the
company creating a false market in its own shares;
(ii) the company’s capital is maintained.
The maintenance of capital can be effected in one of two ways:
(i) by a fresh issue of shares for the purpose;

(ii) out of distributable profits.
In the latter case an equivalent sum must be transferred to the

‘capital redemption reserve’. If there is a shortfall on (i) above, the
difference must be transferred out of distributable profits to the
capital redemption reserve.
Under ss 709, 710, 734 CA 2006 (was s 171 CA 1985) a private

company, subject to certain stringent safeguards, may pay for such
shares partly out of capital. This may be resorted to only where
insufficient funds have been raised by (i) and (ii) above.
Companies giving financial assistance for share purchase

Ss 677 – 683, 840 CA 2006 (ss 151 - 158 CA 1985). There is a
general prohibition on a company’s giving financial assistance to
shareholders to enable them to purchase shares in the company
itself or in its holding company. Contracts which contravene this
prohibition are void for illegality.
SELANGOR RUBBER ESTATES v CRADOCK (NO. 3) [1968] 2 All

ER 1073 is a fairly complex case dealing with this issue. The
141
significant point is that Ungoed-Thomas J held that the director was

a ‘constructive trustee’ in relation to moneys held in the company’s
account and which were sought to be transferred to enable the
purchase of shares in a bid approved by 79% of the stockholders. By
using this approach equitable relief could be given. The action was
taken by inspectors of the Board of Trade.
Contravention is also a criminal offence, making the company liable

to a fine, and every officer who is in default liable to fine, or
imprisonment, or both. Ss 678, 681, 682 CA 2006 (s 153 CA 1985)
contains exceptions to ss 678 -680 CA 2006 (s 151 CA 1985).
(a) Lending by a company, part of whose ordinary business is the
lending of money, and where the transaction is made in the
ordinary course of business. Making a loan for the specific
purpose of share purchase in that company or its holding
company is not a transaction in the ordinary course of
business:
STEEN v LAW [1964] AC 287, [1963] 3 All ER 770 is a Privy

Council case from Australia on that matter. There, a provision
allowing a company to lend money for the purchase of its own
shares where money lending was part of its business and the
money was lent in the ordinary course of business, applied
only where the lending of money was part of a business of
lending of money in general, in the sense that money lending
was part of the business of a registered moneylender or bank,
where the money made available was at the borrower's free
disposition. It was virtually impossible for loans, big or small,
to be made by a company for the direct purpose of financing a
purchase of its shares in the ordinary course of business.
(b) Loans to enable the setting up and maintenance of an

employee share scheme.
(c) Loans to individual employees (other than directors) to enable

them to buy the shares of that company or of its holding
company.
In connection with (a), (b) and (c) above, there is further
restriction in the case of public companies in that the
assistance given must not reduce the company’s net assets.
This virtually restricts the company to the use of distributable
profits.
(d) The purpose of the company in giving assistance to enable a

person to acquire shares (or to reduce or discharge a liability
he has incurred) is not primarily to facilitate the purchase etc.,
but:
(i) as an incidental part of some larger purpose of the
company, and
(ii) the assistance is given in good faith in the interests of
the company.
142
Ss 155 - 158 1985 greatly relaxed these restrictions in the case of a

private company (provided that it is not a subsidiary of a public
company).
(a) The assistance must be approved by a special resolution in a

general meeting, and if a holding company’s shares are
involved, there must be a special resolution of the holding
company as well.
(b) The directors must make a statutory declaration of the
assistance to be given, the person who will receive the
assistance, and declaration that the company is able to pay its
debts and will be able so to do if wound up within a year. An
auditors’ report must be annexed. The special resolution in (a)
above must be passed within one week of the statutory
declaration.
(c) Dissident(s) holding 10% of the issued equity can apply to the
court for cancellation of the resolution. The court may make
such order as it thinks fit, including ordering that the
dissident(s) be bought out.
BRADY v BRADY [1988] BCLC 579, [1988] 2 All ER 617 involved a

‘family’ group of companies, essentially owned and controlled by
two brothers. The brothers quarrelled and wished to go their
separate ways, dividing the combined assets between them. They
wished to achieve this without liquidating the companies, which
procedure they thought would have a bad effect on customers and
employees. The original group consisted of a holding company and
two subsidiaries, and the new scheme envisaged the detachment of
the two subsidiaries, each passing under the control of one of the
brothers. The problem was that the two subsidiaries were not equal
in value, and in order to achieve some equality in the distribution of
the assets, a very complicated scheme was devised to enable the
brother taking the smaller of the two subsidiaries to acquire assets
from the larger. The scheme involved financial assistance for the
share purchase involved. One of the brothers became dissatisfied
with the arrangement and refused to implement it, claiming that it
contravened s 151 1985.
It was held by the House of Lords that the scheme involved

financial assistance by a company for the acquisition of its shares,
and this appeared to contravene s151 1985. It was therefore
necessary to determine whether the case fell within the exception
provided by s 153(1) (described at (d) above). The court had to
determine whether the scheme was:
(i) an incidental part of a larger company purpose, and
(ii) given in good faith in the interests of the company.
To take (ii) first, the scheme did come within the provision. This
was contrary to the majority of the Court of Appeal which held that
it did not. The proposed transfer was to avoid liquidation and to
safeguard the employees. It was in the interests of the company and
its creditors that the company should continue under proper
management and without deadlock between the managers. Part (i),
however, was more difficult. The words ‘larger purpose’ in the
143
statute did not mean the same thing as ‘more important reason’,
and in the present case the benefits accruing from the transaction
were not an incidental part of some larger purpose, but were the
essence of the scheme itself.
Lord Oliver said,
‘If one postulates the case of a bidder for control of a public

company financing his bid from the company's own funds - the
obvious mischief at which the section is aimed - the immediate
purpose which it is sought to achieve is that of completing the
purchase and vesting control of the company in the bidder. The
reasons why that course is considered desirable may be many and
varied. The company may have fallen on hard times so that a
change of management is considered necessary to avert disaster. It
may merely be thought, and no doubt would be thought by the
purchaser and the directors whom he nominates once he has
control, that the business of the company will be more profitable
under his management than it was heretofore. These may be
excellent reasons but they cannot, in my judgment, constitute a
“larger purpose” of which the provision of assistance is merely an
incident. The purpose and the only purpose of the financial
assistance is and remains that of enabling the shares to be acquired
and the financial or commercial advantages flowing from the
acquisition, whilst they may form the reason for forming the
purpose of providing assistance, are a by-product of it rather than
an independent purpose of which the assistance can properly be
considered to be an incident.’
However, as this was a group of private companies, and the scheme

did not involve the reduction of assets (it could financed out of
distributable profits) and the directors could give a declaration
under s 155 CA 1985, the scheme was not prohibited. This is the
first interpretation, at the highest level, of the meaning of s153 CA
1985. The House of Lords chose to give a very restrictive
interpretation, possibly in order to prevent the law on financial
assistance being too easily circumvented. If ‘excellent reasons for
the survival of the company’ cannot, of themselves, amount to ‘an
incidental part of a larger purpose’, it is very difficult to envisage a
set of circumstances in which the giving of financial assistance by a
public company would not fall foul of the law. Management buy-
outs would not pass the test, and it was always said that s 153 CA
1985 was intended to assist such purchases.
One of the counts on which the defendants in the Guinness trial

were convicted was a breach of s 151 CA 1985. A loophole in the
law relating to financial assistance was brought to light in ARAB
BANK PLC v MERCANTILE HOLDING LTD [1994] BCLC 330. An
overseas subsidiary may provide financial assistance for the
purchase of shares in its English holding company. In that case,
Arab Bank plc granted a loan facility to the second defendant,
Shelfco Ltd. It was to enable Shelfco to acquire the share capital of
Queensbridge Estates Ltd, the parent company of Merchantile
Holdings Ltd, the first defendant. Merchantile granted a charge
over its assets to secure the moneys advanced to Shelfco to enable it
144
to acquire the shares of Queensbridge. The bank wanted to realise

its security by entering into a contract for the sale of the secured
assets and application was made to the court for the sale of the
assets. The questions before the court included: (a) Did the mere
giving of financial assistance by a subsidiary constitute ipso facto
the giving of financial assistance by the parent? (b) Did s 151 CA
1985 make it unlawful for a foreign subsidiary of an English parent
company to give financial assistance for the purpose of the
acquisition of the shares of its parent company?
Millett J in the Chancery Division held that,

(1) The mere fact that a subsidiary provided financial assistance did
not entail that such assistance had been provided by the parent
since the prohibition in s 151 CA 1985 was directed towards the
assisting company and not to its parent. The answer to question (a)
was therefore ‘no’.
(2) The phrase ‘any of its subsidiaries’ in s 151 must be construed
as limited to subsidiaries which are companies registered under the
Companies Acts and accordingly the answer to question (b) was
that a foreign subsidiary was not prohibited from giving financial
assistance in connection with the acquisition of shares in its English
parent.
Question 4.2.1
Discuss the role of the company secretary, highlighting his or her importance.
145
4.3 Financing the company

This section will examine issues relating to the financing of a
company including loan capital and debentures, company charges
and the crystallisation of floating charges.
Learning Objectives
□ Explore the financing of a company.
□ Discuss loan capital.
□ Explore the concept of debentures.
□ Discuss company charges.
□ Examine the concept of the crystallisation of floating charges.
First heading
Loan capital and Debentures
Loan capital
Trading companies have an implied power to borrow money in a
variety of ways. There are recognised ‘economic’ constraints on the
amount borrowed at any one time (known as ‘gearing’). A loan is a
commercial contract, and it is permissible for interest to be paid out
of capital. In this sense one should compare a debenture with
preference shares.
Debentures
A debenture is an instrument (a document) evidencing a debt, with
or without security. Although the term ‘debenture’ is of great
antiquity, it has no precise legal form. Section 738 CA 2006 (s 744
CA 1985) states that the term ‘debenture’ includes debenture stock,
bonds and any other security of a company, whether constituting a
charge on the assets of the company or not. It clearly includes a
mortgage on fixed assets.
Company charges
Professor Paul Davies 13 says that a number of questions can be
asked relating to company securities.
1 Is the charge fixed or floating? A mortgage is an example of a
fixed charge.
2 Is the interest created under the charge equitable or legal? This
concerns priorities and the equitable charge holder can be
defeated by the bona fide purchaser for value.
3 Is the security interest possessory? A pledge is an example of a
possessory interest and, to an extent, so is a lien.
4 What kind of proprietary interest vested in the chargee? This
affects the remedy available. A mortgage is different from a
charge in that involves a conveyance and a chargee cannot
take possession or foreclose. A pledgee can sell the pledged
13
See Gower and Davies chapter 32, from which these points are drawn.
146
goods or sub-pledge them; a lien-holder can only detain the

goods until the debt has been paid.
5 Is the security interest created by the parties or by operation of
law? This is important as regards registration.
6 Can the charge be registered under the provisions for the
registration of charges?
Why take security?

1 A secured creditor has priority over unsecured creditors and
takes precedence over less senior secured creditors.
2 A secured creditor may have the right of pursuit, thus if the
charged property is wrongfully disposed of, the chargee may
pursue the proceeds of the disposition.
3 A security interest gives the holder a right of enforcement. This
may have been mitigated by the administration procedure
(and moratorium) and its extension by the Enterprise Act
2002. A chargee does not have to participate in insolvency
proceedings but can enforce the charge outside them.
4 The chargee has a measure of control over the debtor
company and has effective and exclusive control over the
extension of future credit.
Fixed and floating charges

It is not obligatory for debentures to be secured by a charge on the
company’s assets, but it is customary for banks to require security.
It is, incidentally, is not unusual for banks to require, in addition,
personal guarantees from the directors or major shareholders – thus
making a significant inroad into principle of limited liability.
(a) Fixed charges

The most common form of fixed charge is a charge by way of legal
mortgage on land. Fixed charges may also be created over chattels
and choses in action (intangible property) such as book debts.
The leading case in this area is now National Westminster Bank Plc v
Spectrum Plus Ltd (In Creditors Voluntary Liquidation) (2005) UKHL
41, (2005) 2 AC 680.
From Lawtel:
The appellant preferential creditors of a company (S) appealed

against the decision ((2004) EWCA Civ 670) that a charge over
book debts in a debenture given by S to the respondent bank (N)
was a fixed charge. S had opened an account with N, obtained an
overdraft facility of £250,000 and executed a debenture to secure
its indebtedness to N. The debenture was expressed to create a
specific charge of all book debts owing to S and required S to pay
into its account with N all moneys which it received in respect of
such debts, and not without the prior consent in writing of N to sell,
factor, discount or otherwise charge or assign the same in favour of
any other person or purport to do so, and required S if called upon
to do so by N to execute legal assignments of such book debts and
other debts to N. S had gone into creditors' voluntary liquidation
147
owing £165,407 to the bank. Its liquidators had collected £113,484

in respect of book debts. S's unsecured creditors included £16,136
due to preferential creditors who claimed that the charge over book
debts was only a floating charge and that accordingly they were
entitled to be paid out of the proceeds in priority to the bank under
the Insolvency Act 1986 s.175. N submitted that (1) the debenture
created a fixed charge on book debts in accordance with the
decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd 2 Lloyd's
142; (2) in the interests of commercial certainty a debenture in the
Siebe Gorman form should be held to create a fixed charge because
it had been taken to have that effect for some 25 years; (3) if the
court overruled Siebe Gorman it should do so only for the future
and not in respect of transactions already entered into.  HELD: (1)
It was possible to create a fixed charge over book debts, Tailby v
Official Receiver (1888) 13 App Cas 523 applied. The debenture in
this case did not create a fixed charge. The essential characteristic
of a floating charge which distinguished it from a fixed charge was
that the asset subject to the charge was not finally appropriated as a
security for the payment of the debt until the occurrence of some
future event and in the meantime the chargor was left free to use
the charged asset and to remove it from the security, Agnew v
Commissioner of Inland Revenue (2001) UKPC 28 , (2001) 2 AC
710 applied. Where the chargor remained free to remove the
charged assets from the security, the charge should, in principle, be
categorised as a floating charge. It was not possible to create a
charge on book debts which was fixed while they were uncollected
but floating in respect of the proceeds when collected, New Bullas
Trading Ltd, Re (1994) BBC 36 overruled. The debenture in the
instant case and in Siebe Gorman required the proceeds of book
debts to be paid into the bank account but placed no restriction on
the use that could be made of the balance on the account
thereafter. It did not matter whether the account was overdrawn or
not. The fact that the charge was expressed as a fixed charge did
not prevent S drawing on the account. The account was an ordinary
account on which S could draw for normal business purposes. S's
freedom to draw on the account was inconsistent with the charge
being a fixed charge. (2) Siebe Gorman had stood unchallenged for
many years but the construction placed on the debenture in that
case was wrong. Like any other first instance decision, it had always
been open to correction and those who relied upon it must be taken
to have been aware of that. Siebe Gorman overruled. (3) The House
of Lords had jurisdiction in an exceptional case to decide that its
decision should only take effect for the future or should otherwise
be limited but in the instant case there was no good reason for
postponing the effect of overruling Siebe Gorman.
Appeal allowed.
The following two cases are now over-ruled:
SIEBE, GORMAN & CO LTD v BARCLAY’S BANK LTD [1979] 2 Ll

Rep 142 has quite complex facts. Slade J held, inter alia, that it was
possible in law for a mortgagor, by way of continuing security for
future advances, to grant to a mortgagee a charge on future book
debts in a form which created in equity a specific charge on the
proceeds of debts as soon as they were received and consequently
148
prevented the mortgagor from disposing of an unencumbered title

to the subject matter of such charge without the mortgagee's
consent even before the mortgagee had taken steps to enforce its
security. Book debts create something of a problem in that they will
generally be paid into an account that the debtor controls — he
needs to do so in order to run his business — but, once collected,
these debts can be the subject of a charge.
RE NEW BULLAS TRADING LTD [1994] BCLC 485 was a case

where the assets of the company were insufficient to cover the
preferential debts, and so the status of the charge created over book
debts was vital. The debenture provided for the creation of a
designated account to receive the book debts as they were paid in.
The unusual feature in this case was that, although the charge was
stated to be fixed, the monies became subject to a floating charge
after they had been paid in. It was argued on behalf of the
liquidator that this made the charge a floating one for all purposes.
The judge at first instance agreed, but this was reversed on appeal.
The Court of Appeal held that parties can make any contractual
arrangement concerning the charging of company property. There
is no legal difficulty where a contract between a company and a
debenture-holder provides that book debts shall be subject to a
fixed charge while uncollected and a floating charge after collection
and payment into a bank account.
RE CIMEX TISSUES LTD [1995] 1 BCLC 409 involved a badly-

drafted debenture (based on an out-of-date precedent) which
appeared to create a fixed charge, while giving the company some
right to deal with the charged property. The subject of the charge
was capital equipment that the company was permitted to replace
without reference to the chargee. The court, quoting NEW BULLAS
TRADING saw no objection to treating this as a fixed charge 14.
WILLIAM GASKELL GROUP LTD v HIGHLY [1994] BCLC 197. A

fixed charge properly created over book debts remains after
assignment to a third party. The consent of the third party is
necessary before the company can deal with the money.
ORION FINANCE LTD v CROWN FINANCIAL MANAGEMENT LTD

[1994] 2 BCLC 607. Atlantic Computer Systems plc (later
insolvent) leased computers to clients at an agreed rental. It would
acquire the computers on hire purchase terms, lease them to clients,
and assign the rent to the finance company to repay the hire
purchase debt. Among other matters, the court considered whether
the assignment of the rentals due (which was money owing to the
company) constituted a charge over book debts which should have
been registered. It was held that it did create a charge over book
debts, and was void against the liquidator as it was not registered.
That decision was upheld by the Court of Appeal [1996] 2 BCLC
382.
14 See further on charges over book debts: (1994) 110 LQR 592: a criticism of the New Bullas Trading
decision by R.M. Goode; 1995 JBL 433 has a reply to Professor Goode’s article by Alan Berg.
149
RE G. E. TUNBRIDGE LTD [1995] BCLC 34. By using the words

‘over assets other than floating assets’ a company thought that it
was creating a fixed charge. It was held, however, that as the assets
covered by this charge were a class of assets, present and future,
which the company was free to deal with, the charge was in fact
floating.
(b) Floating charges

In RE YORKSHIRE WOOLCOMBERS ASSOCIATION [1903] 2 Ch
284 the Court of Appeal gave a definition of a floating charge:
(i) it is charge on a class of assets of a company, present and
future;
(ii) that class is one that in the ordinary course of business changes
from time to time;
(iii) it is contemplated that until some future step is taken by or on
behalf of the chargee, the company may carry on its business
in the ordinary way.
(c) Comparison of the two types of charges
(i) Fixed charges

A fixed charge can only be created over limited types of assets, but
the fixed charge-holder has an advantage in insolvency
proceedings.
A company cannot deal freely with assets subject to a fixed charge.
(ii) Floating charges

A floating charge may be created over all the assets of a company.
In an insolvency, there are a number of debts that rank in priority
to a floating charge debenture. These include all preferential debts,
and rent owed to a landlord.
In RHODES v ALLIED DUNBAR PENSION SERVICES LTD: RE

OFFSHORE VENTILATION LTD [1989] BCLC 319 there were
competing claims between a landlord for rent and a bank in respect
of its floating charge. As the chargees (the bank) had allowed the
company to retain possession of the premises, and the premises had
been let to a head tenant and then sub-let, the head tenant was
entitled, as against the bank, to receive the rent and could ask for it
directly from the sub-tenants.
Certain floating charges may be invalidated where a company goes

into liquidation – s 245 Insolvency Act 1986. This complicated
section seeks to prevent the creation of a floating charge
retrospectively (that is, to secure an existing, unsecured debt) too
close in time to the company’s going into liquidation. A
differentiation is made between creditors who are connected with
the company and those who are not.
150
Creditors who are not connected with the company

The charge will be invalidated where it was created within twelve
months of the company’s going into liquidation, and the company
was insolvent when the charge was created, or became insolvent as
a result.
Creditors who are connected with the company

The charge will be invalidated where it was created within two
years of the company’s going into liquidation. In this case it is
immaterial whether the company was solvent or insolvent at the
date of the creation of the charge.
In either case the charge will be valid if, in consideration for it, the
company receives fresh cash, goods or services, or any debt of the
company.
In Re G. T. WHYTE & CO LTD [1983] BCLC 311 it was held that if

the creation of a floating charge was in substance no more than the
substitution of a secured for an unsecured debt, or of a better for an
existing security, moneys advanced on the security of the charge
were not ‘cash paid to the company’ within the exception to s
195(1), (2) CA 2006 (s 322(1) CA 1985). On the facts, the
advances made before 2 April 1974 were in substance made by
Lloyds and not by Labco and the floating charge was initially no
more than the substitution of a better security for Whyte’s existing
indebtedness to Lloyds. Accordingly, the charge was to that extent
invalid under s 322. It was also held per curiam that underhand
conduct on the part of the chargee is not a prerequisite to the
operation of s 195 CA 2006 (s 322 CA 1985).
In RE FAIRWAY MAGAZINES LTD [1993] BCLC 643 a floating

charge was created in favour of a director who advanced £15,000.
The company went into liquidation soon afterwards.
(a) Preference: the presumption of ‘preference’ rebutted as the
charge was not created with the desire to put the director in a
preferential position.
(b) S 245 Insolvency Act 1986: a floating charge not invalidated as
the company had received a benefit. The director had also
guaranteed the company’s debt to the bank. He had paid two
separate sums of his own money into the bank (£20,000 in all),
thereby reducing the company’s overdraft (and the size of his
guarantee). It was held that this £20,000 was not ‘new money’, and
was therefore not covered by the floating charge.
In POWER v SHARP INVESTMENTS LTD [1994] 1 BCLC 111 a

company, Shoe Lace Ltd, borrowed a considerable sum of money
from its parent company, Sharp Investments Ltd. The money was
advanced over a four-month period, April to July, and an ‘all
moneys charge’ was created by Shoe Lace in favour of Sharp
Instruments in July. The court held that there was too great a gap
between the loan and the creation of the floating charge and it was
therefore caught by s 245 IA 1986. A court will only ignore a gap in
time if it is minimal.
151
Crystallisation of floating charges

‘Crystallisation’ is the process whereby a floating charge becomes
fixed, and attaches to the assets, present and future, to which the
charge relates.
Crystallisation occurs by operation of law:

(i) on the commencement of a winding-up;
(ii) on the appointment of a receiver.
In either of these cases, although the floating charge has

crystallised and is now, in effect, a fixed charge, the debenture
holders are treated as floating charge holders in the order of
distribution.
(iii) on the company’s ceasing to trade.
In RE THE REAL MEAT CO LTD (IN RECEIVERSHIP) [1996] BCC

254 a company created a floating charge over all its assets to
‘Coutts’ in 1988, and created fixed and floating charges again over
all its assets to ‘NatWest’ in 1991. The two debenture holders
agreed, by deed, to give partial priority to the charges created in
1991. In 1994, joint administrative receivers were appointed under
the ‘1991’ debenture, and the company’s business was sold to the
Real Meat Co Ltd, a company created for the purpose. On the day
of the sale, the company created fixed and floating charges over all
its assets in favour of Barclays Bank. The money raised constituted
the purchase price, which was distributed by the receivers to pay off
the creditors under the 1991 debenture.
Among the assets acquired by the purchasing company were
outstanding book debts of the former business, which, when they
were collected, were paid into Barclay’s Bank. This money was
claimed by ‘Coutts’, the floating-charge debenture holder under the
1988 debenture, on the ground that when the former business was
sold it had ‘ceased to trade’ and therefore its floating charge had
crystallised into a fixed charge.
The judge upheld this contention, and ordered Barclays Bank to pay
over the moneys collected by way of book debts from the former
business to ‘Coutts’. The money had been held on a constructive
trust, the circumstances of which could have been ascertained by
Barclays if proper enquiries had been made.
Prior crystallisation in other circumstances

A complex body of law has grown up around the question of
crystallisation before a liquidation or a receivership. This could
come about as a result of either of two events:
(i) an occurrence stated in the debenture to have the effect of
crystallising the floating charge (automatic crystallisation);
(ii) the chargee giving notice of crystallisation in accordance with
a power in the debenture (crystallisation by notice).
152
In RE BRIGHTLIFE LTD [1987] Ch 200; [1986] 3 All ER 673 it

appeared that if the provisions in the debenture are sufficiently
precise, the events to which they relate will have the effect of
causing the floating charge to crystallise. This could have an
adverse effect on the normal repayment of creditors because the
relevant floating charge debenture holders would have had their
status automatically elevated to that of fixed charge holders before
the onset of the insolvency proceedings (liquidation or
receivership). The difficulty has been resolved by legislation: the
combination of s 754 CA 2006 (s 196 CA 1985) and s175
Insolvency Act 1986 (read together with s 251 IA 1986 – definition
of a floating charge as a charge that was floating when created).
This ensures that, however the crystallisation has come about, the
holders of charges that were floating when created will be treated
as secured creditors in the appropriate category in a liquidation or a
receivership. That means, in effect, that the preferential creditors
will be paid off before them. For any purpose other than insolvency
proceedings it would appear that the floating charge will be treated
as having crystallised into a fixed charge 15.
Priorities of Debentures
It is possible for assets to be charged more than once as security for
company debts, and questions sometimes arise as to the order of
priority. The following basic rules apply:
(i) a subsequent legal charge ranks ahead of an earlier

equitable charge, provided that the holder of the legal
charge is bona fide and without notice. Problems arise
where the company creating the earlier equitable charge
undertakes not to create subsequent charges that will rank
in priority to it. Where the later legal chargee has notice of
this, he will not be able to enforce his priority; but where
he does not have actual notice, but the restriction is
registered on the charges register at Companies House, he
will have priority. Although the restriction is on the
register, this is not deemed notice to the public.
(ii) as between equitable charges, the rule in DEARLE v HALL
applies: where the equities are equal, the first in time has
priority.
All relevant charges on a company’s assets must be registered both

in the company’s own charges register (CA ss884, 886 2006) (was s
411 CA 1985) and at Companies House (s 860, 861 CA 2006 -- s
396 CA 1985).
Whereas the fact of registration at Companies House creates notice

to the public (deemed notice) that there is a charge on the
company’s assets, any restrictions relating to the charge are not part
of the ‘deemed notice’ even if registered (see above). Another
potential problem arises from the fact that equitable charges rank in
15
1986 All ER Ann Rev 53 for a note on RE BRIGHTLIFE and 1986 JBL 350 on automatic
crystallisation.
153
the order in which they were created, not in the order in which they
were registered. As a company has, under the Companies Act 1985,
three weeks in which to register a charge, the difficulty is obvious.
The recommendation in the Diamond Report (A Review of Security
Interests in Property, HMSO, 1989) that priority should date from
registration was not accepted by the government.
Week 8 – Loan Capital and Debentures
Registration of charges
The law relating to the registration of charges is that contained in
Part 25 Companies Act 2006, (CA 1985, Part XII). An unregistered
charge is void against the liquidator – i.e. it is relegated to the
status of an unsecured debt 16.
Receiverships and Winding-up

A company that cannot pay its debts is insolvent. There may be
ways of rescuing a company that is in difficulties as the
consequences of insolvency can be catastrophic for the employees
and creditors, as well as for the economy generally. If all else fails,
however, the only way forwards may be to liquidate the company
— i.e. bring it to an end. This involves the distribution of assets to
creditors and, if anything is left, to the members of the company.
Receiverships
The appointment of a receiver is a debenture-holder’s remedy. A
receiver can be appointed to deal with specific assets under a fixed
charge, or can be appointed to deal with the assets generally under
a floating charge debenture. In the latter case, he is known as an
administrative receiver. A receiver can be appointed by the
debenture-holder under a power contained in the debenture or by
the court. In either case, the authority of the directors of the
company ceases, and the receiver takes over. The basic task of a
receiver is to recover the debenture-holder’s money, and to this end
he is empowered to sell as much of the undertaking as is necessary.
In theory, what remains of the company’s undertaking is then
handed back to the directors, and the task of the receiver is
completed. In practice, the business is no longer viable, and the
receivership usually results in a full-scale liquidation.
The process of receivership has come in for some criticism. Some

receivers have been sent in by nervous debenture-holders, notably
the banks, where the company involved has merely been suffering a
temporary problem. In this way a number of companies, it is
thought, have been destroyed unnecessarily. The additional
criticism in years gone by of the dubious competence and probity of
some receivers has been dealt with by the Insolvency Act 1986,
which has introduced stringent qualifications for those persons
acting as ‘insolvency practitioners’ – ss.389-91. The Insolvency Act
also introduced two additional regimes to deal with insolvent
companies with the intention of salvaging the more viable of them.
These are described in the following two sections.
16
1996 JBL 482: Equitable Property Rights in Insolvency: the Ebbing Tide.
154
In POWDRILL v WATSON [1994] 2 BCLC 118 the decision of the

Court of Appeal was upheld by the House of Lords (heard with Re
Leyland DAF Ltd (No 2); and Re Ferranti International plc): [1995] 1
BCLC 386 . The respondents were employed as pilots by operated a
charter airline company. Administrators were appointed by court
order on 7 August 1989 under s 8(1) Insolvency Act 1986. On 14
August the administrators wrote to the employees stating that the
company would continue to pay their salaries, adding the
administrators ‘are not and will not at any future time adopt or
assume personal liability in respect of your Contracts of
Employment’. In September the administrators wrote again to all
captains and first officers stating that additional payments would be
made to all captains and first officers who remained and worked for
the company. The administrators hoped to be able to keep the
company afloat, hoping to sell it as a going concern. By the end of
November the administrators had not found a buyer and on 5
December sent letters of dismissal to all staff. The respondents
issued a petition under s 27 Insolvency Act 1986, claiming two
months’ salary in lieu of notice on their dismissal, holiday pay and
interest. The judge ordered accordingly and the administrators
appealed. The respondents cross-appealed contending that the
bonus payments referred to in the September letter were in fact a
concealed pay rise and therefore their termination payment should
be based on a salary which included the bonus payment. The Court
of Appeal held that if the administrators continued after 14 days of
their appointment substantially to employ staff and paid them in
accordance with their previous contracts of employment they would
be taken to have impliedly ‘adopted’ the contracts of employment
pursuant to s 19(5) Insolvency Act 1986. Hence, they would be
liable to pay, as part of the administration expenses, salary in lieu
of notice and holiday pay on dismissal of the employees. Both
appeal and the cross-appeal were dismissed.
This case caused immense perturbation in the world of company

insolvencies and was overturned with speed by an Act of
Parliament. However, the amending Act does not affect
receiverships and administration orders granted before it came into
force. The case related to the collapse of Paramount Airways Ltd
and turned on the meaning to be ascribed to s.19(5) Insolvency Act
1986, dealing with employment contracts of employees in the
stricken company. The section makes the seemingly innocuous
provision to the effect that nothing done by the receiver (or
administrator) within the first two weeks of taking office shall be
construed as his adopting the employment contracts. A practice had
grown up whereby administrators and receivers would issue
employees, whom they wished to keep on, with a statement after
two weeks that the contracts were not being adopted, although
salaries would continue to be paid. It was widely supposed that this
would prevent the contract from becoming the personal
responsibility of the administrator etc., and therefore from
becoming charged as part of the administrative cost.
This case disclosed that this device failed to achieve its purpose,
and that the adoption or otherwise of employment contracts was a
matter of fact, and could not be avoided by the wording of any
155
notice to the employees. Despite the notice, the administrators had

personally adopted the contracts of the two airline pilots that they
had elected to keep on and were therefore liable for payment in lieu
of notice, holiday pay and interest. The decision in this case had a
far-reaching effect on the conduct of company insolvencies. The
case involved an administration order but has equal relevance to
receiverships. Insolvency practitioners were given the incentive to
wind-up companies within the first two weeks of their appointment,
in order to avoid becoming personally responsible for the whole of
the employment contracts of the employees. This ran counter to the
declared purpose of the Insolvency Act 1986, which was to salvage
companies in financial trouble, if this was feasible. The Insolvency
Act 1994, while not denying the adoption of contracts, as in
Powdrill v Watson, cuts down the liabilities in respect of those
contracts which are to be treated as ‘supra-preferential’ debts. These
are now confined to wages or salary, holiday pay and pension
contributions for the period of the receivership (administration)
only. Arrears of pay, pension contributions and payment in lieu of
notice are excluded 17.
Voluntary arrangements
Part I of the Insolvency Act introduced a simple procedure whereby
a company might come to a legally enforceable arrangement with
its creditors, which would enable it to continue to trade. The
equivalent in personal bankruptcies, the composition with creditors,
has a long history. The Companies Act procedure in ss 895 – 901
CA 2006 (was ss 425 – 427 CA 1985) was expensive and
cumbersome and therefore unsuitable for companies in financial
difficulties. It was rarely used. The Insolvency Act procedure is as
follows:
(a) Proposal for the arrangement

The following persons may initiate a proposal:
(a) the directors (where a ‘nominee’ must be appointed to act)
(b) the administrator of a company in administration
(c) the liquidator of a company in liquidation.
(b) Procedure where a ‘nominee’ has been appointed.

The nominee must be a qualified insolvency practitioner. The
nominee must report to the court within 28 days as to whether, in
his opinion, meetings of the members and creditors should be
called to consider the proposals. The necessary meetings are
summoned to decide whether to approve the proposal, with or
without modifications. Such a meeting shall not approve any
proposal which affects the right of a secured creditor to enforce his
security, except with the concurrence of the creditor concerned.
Similar protection is given to preferential creditors. The nominee
must report the result of the meetings to the court.
Both meetings (members and creditors) must vote on identical

proposals. If the proposal is approved it will be binding on all of
17
See 1994 JBL 1 on Administrative receivers – identity and double identity.
156
those who had notice of it. 28 days are allowed for a challenge on
grounds laid down by the Act. The Insolvency Rules 1986, have
provided the following:
(a) the members meeting requires only a simple majority;

(b) the creditors attend one combined meeting (i.e. the classes of
creditors do not meet separately) and the vote must be 75% by
value in favour. The provisions of the Act already preserve the
priorities of the preferential and secured creditors. The various
reports to the court are really only a matter of filing, and do
not involve a hearing.
Administration orders
Part II of the Insolvency Act introduces the entirely new concept of
company administration. Care should be taken not to confuse this
with administrative receivership (above). Where an administration
order is granted by the court, a ‘moratorium’ is declared on the
recovery of the company’s debts, to give it a ‘breathing space’.
An administration order can be petitioned for by the company itself,

the directors, a creditor or creditors, or a combination of any of
these. The company must, at the time, be unable to pay its debts, or
must be likely to become unable so to pay. The power of the court
to make such an order is discretionary, and can be made only if at
least one of the following purposes is likely to be achieved:
(a) the survival of the company, and the whole or any part of its
undertaking as a going concern;
(b) the approval of a voluntary arrangement under Part I; (a
governmental proposal of 1995 to introduce a procedure for a
moratorium, in the case of small companies, to allow a
voluntary arrangement to be put in place, has not as yet been
implemented);
(c) the sanctioning of an arrangement under ss 895, 899, 901, 907
CA 2006 (was s 425 CA 1985);
(d) a more advantageous realisation of the company’s assets than
would be effected on a winding-up.
The effect of an order is to put the affairs of the company in the

hands of an administrator, who must be a qualified insolvency
practitioner. His position is similar to that of an administrative
receiver, except that he acts for the benefit of all classes of creditor.
During the currency of the order, a petition for the winding-up of
the company cannot be presented, nor can any attempt be made to
recover any outstanding debts of the company without the consent
of the court.
In RE ATLANTIC COMPUTERS PLC [1990] BCLC 859 the Court of

Appeal laid down guidelines for the giving of such consent. Consent
will be given if it will not impede the achievement of the purposes
of the order. In other cases, the court has to balance the interests of
the claimant against those of the other creditors. The right of any
floating charge debenture-holder to appoint an administrative
157
receiver has been preserved. If exercised, this would have the effect
of nullifying the administration order. This was thought, at the
outset, to present a serious handicap to the implementation of the
new regime, but it does not appear to have done so in practice.
In RE HARRIS SIMONS LTD [1989] BCLC 202 it was held that

before an administration order is granted, the court must be
satisfied that there is a ‘real prospect’ of achieving at least one of
the purposes set out in s 8 Insolvency Act 1986. This test was
approved and adopted in RE SCL BUILDING SERVICES LTD [1990]
BCLC 98.
RE ROWBOTTOM BAXTER LTD [1990] BCLC 397 was a curious

case where the judge refused an administration order where a
‘hiving-down’ operation was proposed. He said that this could not
save the company (presumably because the viable parts of the
company would be ‘hived-down’ into a separate company), nor was
there any prospect of a voluntary arrangement or a scheme of
arrangement under s 425 Companies Act 1985. The question of the
selling of the enterprise for a better price seems not to have been
considered. The sale would, of course, have been of the separate
company, but the judge seems to have taken an excessively
legalistic view. The separate company will be a specially created
subsidiary.
See the discussion on Powdrill v Watson (above, under
‘receiverships’) on the obligations of administrators to employees.
Liquidations
(a) Voluntary liquidation
There are two kinds of voluntary liquidation (i.e. where the assets
of the company are realised for distribution to creditors, etc).
(a) Members’ voluntary liquidation

(b) Creditors’ voluntary liquidation.
(b) Compulsory liquidation by court order

Alternatively, a liquidation may be effected by an order of the court.
Possible petitioners under s 124 Insolvency Act 1986 are:
(a) the company itself
(b) the directors
(c) creditors
(d) contributories
(e) the Secretary of State
(f) the Official Receiver
Grounds for a compulsory winding-up order are given in s 122

Insolvency Act 1986 lists a number of which two are more
important than the others:
(a) Section 122(1)(f) the company is unable to pay its debts
158
(b) Section 122(1)(g) the court is of the opinion that it is just and
equitable that the company should be wound up.
The company is unable to pay its debts.

Inability to pay debts has a number of definitions – s 123 Insolvency
Act 1986. They include:
(a) where a creditor for more than £750 has made a demand for
payment in proper statutory form, and has not received
payment for three weeks;
(b) where it is proved to the satisfaction of the court that the
company is unable to pay its debts as they fall due;
(c) where it is proved to the satisfaction of the court that the value
of the company’s assets is less than the amount of its liabilities.
CORNHILL INSURANCE PLC v IMPROVEMENT SERVICES LTD

[1986] BCLC 26 shows that even a solvent debtor may find a
winding-up order made against it. Cornhill Insurance plc were
indebted to the defendants for the sum of approximately £1,150
under an insurance policy covering fire damage occurring in the
autumn of 1984. Negotiations dragged on for the payment and in
June 1985 the defendants made a demand for payment and stated
that they would petition to wind up Cornhill if payment were not
made within 21 days. Cornhill sought an injunction to restrain the
defendants from presenting any petition on the ground that it
would constitute an abuse of process. Harman J held that where a
creditor’s debt was clearly established, the creditor had a right to
present a winding-up petition even though it appeared that the
company was solvent. The persistent non-payment of the debt
suggested that the company was unable to pay its debts. A company
faced with a winding-up petition based on the non-payment of an
undisputed debt possessed its own remedy in that it could pay.
Accordingly, the defendants could present a winding-up petition
against it.
This case was approved by the Court of Appeal in TAYLOR’S

INDUSTRIAL FLOORING v M & H PLANT HIRE (MANCHESTER)
LTD [1990] BCLC 216 (CA). A failure by a company to pay a debt,
where there are no reasonable grounds for dispute, is evidence of
an inability to pay. The court pointed out that in such a case it was
not necessary to present a statutory demand. Indeed, it was usually
inadvisable to do so, as this would give the company three weeks in
which to dispose of its assets.
Winding-up on just and equitable grounds

The most important aspect of this is in connection with minority
shareholder rights, and has already been dealt with. The other
major example, that the substratum of the company has gone (as
typified by the case of RE GERMAN DATE COMPANY CO) is
unlikely to recur given the liberalisation of the law relating to
company objects’ clauses.
VIRDI v ABBEY LEISURE LTD [1990] BCLC 342 concerned the

valuation of a minority shareholding. Petitioning for a winding-up
159
order is not unreasonable, even where the directors have offered to

purchase the shares of the petitioner. The liquidator might be in a
better position than a valuer to value the shareholding.
VUGANOVICH v VUGANOVICH [1990) BCLC was an appeal to the
Privy Council from New Zealand. The petitioner’s conduct in a ‘just
and equitable’ case is only relevant where that conduct has caused
the breakdown in confidence.
‘Ceasing to trade’
S 652 CA 1985 provides a procedure whereby defunct companies
can be wound up. This procedure can also be used where a
company (usually a small private company) wishes to liquidate but
is unable (or unwilling) to pay the costs of a formal winding-up.
Non-trading companies
A new procedure has been introduced (by the Deregulation and
Contracting Out Act 1994) for striking non-trading companies off
the register: ss 1000 – 1002 CA 2006. See ss 1000 – 1008 CA 2006
(was new ss 652A - 652F CA 1985).
General matters concerning insolvency

(a) Do directors of companies owe obligations to creditors? 18
In the case of solvent companies, the answer is no: Multinational
Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical
Services Ltd: [1983] Ch 258. It is perhaps different on insolvency.
See dicta Street CJ in the Australian case of Kinsela v Russell Kinsela
Pty Ltd (1986) 4 ACLC, approved in West Mercia Safetywear Ltd v
Dodd[1988] BCLC 250. Shareholders do not have any power to
absolve the directors from a breach of duty to the creditors in order
to bar the liquidator’s claim. Professor Sealy suggests that no duty
has generally developed for two reasons. First, the provisions of ss
213 and 214 Insolvency Act 1986 provide for liability for fraudulent
and wrongful trading and this would be the recourse of
disappointed creditors. Secondly, the right to obtain recovery for
economic loss is not widely accepted in English law and a creditor
may consider a claim for misfeasance under s 212 Insolvency Act
1986.
(b) Unlawful preferences and transactions at an undervalue.

This is dealt with in ss 238 - 40 Insolvency Act 1986. The relevant
times are (reckoning back from the onset of the insolvency):
(a) persons connected with the company – two years

(b) persons unconnected with the company – 6 months
In WEST MERCIA SAFETYWEAR v DODD [1988] BCLC 250 a

director caused an insolvent company to pay a debt of which he
was the guarantor. This was not permitted by the Court of Appeal.
18
See generally, 1991 JBL 365 and 1991 JBL 1.
160
In RE CLASPER GROUP SERVICES LTD [1989] BCLC 143 the son

of the Managing Director was dismissed from his employment and
given £2,000 in compensation – far in excess of what was owed to
him. This was immediately before the liquidation of the company. It
was held to be an unlawful preference.
RE M C BACON LTD [1990] BCLC 324 is an important case on the

definition of ‘preference’. A bank required a first mortgage
debenture as the ‘price’ of continuing to support the company. It
was claimed in later liquidation proceedings that this amounted to
a fraudulent preference in favour of the bank. The court held that
this was not a fraudulent preference. For this to be proved, it was
necessary to show that the company was influenced by a desire to
produce the effect set out in s.239(4). ‘Desire’ is subjective, and a
company does not necessarily desire the consequences of an act
that it may have to carry out. In this case, the company had no
alternative to granting the mortgage to the bank – it could not
otherwise have continued to trade.
In RE FAIRWAY MAGAZINES LTD [1993] BCLC 643 the applicant

was a director of Fairway Ltd and had guaranteed the overdraft of
the company with its bank, Coutts & Co, up to a limit of £70,000.
By an arrangement of 21 August 1990, the applicant agreed to
grant Fairway a borrowing facility of £75,000 and the company
agreed to secure its repayment by a debenture. On 28 August the
applicant advanced £15,000 to the company. On 27 September the
company executed a floating charge in favour of the applicant,
registered in early October. Two sums of £10,000 were paid in to
Fairway’s account with Coutts in November 1990 and January 1991
respectively. The company then went into liquidation and the
applicant sought a declaration that the sums advanced by the
applicant were secured by the floating charge created in his favour
by the company.
Mummery J held that (1) The applicant had successfully rebutted

the presumption created by s 239(6) Insolvency Act 1986 that the
floating charge executed in his favour by Fairway had been done
with the desire of putting the applicant in a better position than he
would be in should the company go into insolvent liquidation.
Hence, the charge was not invalid as being a preference.
(2) The charge created in favour of the applicant in September
1990 was validly created within the terms of s 245(2)(a) Insolvency
Act 1986 at the same time as the payment of the £15,000 was made
to the company and therefore the floating charge was valid to the
extent of this sum.
(3) Since the payment of the two sums of £10,000 into the
company’s bank account did not go to swell the assets of the
company but had the effect of reducing the applicant’s liability
under his guarantee to Coutts, they did not constitute the provision
of new moneys within the meaning of s 245 and the floating charge
to the extent of £20,000 was void under that section.
161
In WILLS V CORFE JOINERY LTD (in liquidation) [1997] BCC 511

the operative date, in cases of alleged preferential repayment, was
the date of payment, not the date of the agreement to pay.
Company directors had made loans that were repayable on
demand. The directors agreed a repayment date in advance while
the company was solvent, but when the payment was actually
made, the company was unable to pay its debts. This constituted an
unlawful preference.
The Insolvency Act (No 2) 1994 was passed to protect persons who
acquire property for value and in good faith ‘at one remove’, where
that property was first acquired by gift or at an undervalue. The Act
further protects any third party who gains any benefit, for value
and in good faith, from the transaction or preference. (‘Good faith’
in this context means ‘without notice’.)
(c) Order of repayment of creditors

Fixed charge debentures
Administrative costs (including the fees of the liquidator)
Preferential creditors
Floating charge debentures
Unsecured creditors
(d) Position of public utilities

S 233 Insolvency Act 1986 states:
(e) Client trust accounts

In RE KAYFORD LTD [1975] 1 AER 604 clients’ money deposited in
a trust account was held to belong to the clients, and could be
recovered by them in a liquidation.
In RE EASTERN CAPITAL FUTURES LTD [1989] BCLC 371, where

clients’ money was kept in a segregated account, but it was
impossible to say which money belonged to each client, it would be
distributed pari passu (on an equal footing) among them all. It was
permissible for the liquidator’s fee to come out of that account, as
though it belonged to the company 19. ‘Crisis points’ include: refusal
of supply; loss of major customer; advice from professionals etc.
The statutory defence to misfeasance under s 1157 CA 2006 (s 727
CA 1985) was not available for wrongful trading.
See generally1993 JBL 213 which deals with the duties of a

mortgagee and a receiver, and 1996 JBL 113 which has the text of
Mr Justice Lightman’s address to the Insolvency Lawyers’
Association.
There is an EC Convention on Insolvency Proceedings. The United

Kingdom has produced a consultative document on this issue.
19 assets
See 1993 JBL 256 ‘Swelling the for corporate insolvencies’ and 1993 JBL 338 — Wrongful
trading: predicting insolvency.
162
The assets of a company that is dissolved are ‘bona vacantia’ and

pass to the Crown.
The Crown may, however, not enforce this right.
Question 4.3.1
Discuss what is meant by the crystallisation of floating charges.
163

The purpose of this section is to examine recent developments
relating to the concept of corporate manslaughter.
Learning Objectives
□ Explore the concept of corporate manslaughter.
□ Explore the background to this development.
Corporate Manslaughter
The 2007 Act provides for a new offence of corporate manslaughter
(corporate homicide in Scotland) and for this to apply to companies
and other incorporated bodies, Government departments and
similar bodies, police forces and certain unincorporated
associations.
Corporate killing before the Act

Prior to this legislation it was possible for a corporate body, such as
a company, to be prosecuted for a wide range of criminal offences,
including manslaughter. To be guilty of the common law offence of
gross negligence manslaughter, a company had to be in gross
breach of a duty of care owed to the victim. The prosecution of a
company for manslaughter by gross negligence was often referred
to as “corporate manslaughter”. As the law stood, before a company
could be convicted of manslaughter, a “directing mind” of the
organisation (that is, a senior individual who could be said to
embody the company in his actions and decisions) also had to be
guilty of the offence. This is known as the identification principle.
Crown bodies (those organisations that are legally a part of the
Crown, such as Government departments) could not be prosecuted
for criminal offences under the doctrine of Crown immunity. In
addition, many Crown bodies, such as Government departments, do
not have a separate legal identity for the purposes of a prosecution.
The Law Commission

In 1996 the Law Commission’s report “Legislating the Criminal
Code: Involuntary Manslaughter” (Law Com 237) included
proposals for a new offence of corporate killing that would act as a
stand-alone provision for prosecuting companies to complement
offences primarily aimed at individuals. The Law Commission’s
report, including its proposals on corporate killing, provided the
basis for the Government’s subsequent consultation paper in 2000
“Reforming the Law on Involuntary Manslaughter: the
Government’s Proposals”.
The Draft Bill

A draft Corporate Manslaughter Bill (Cm 6497) was published in
March 2005. This set out the Government’s proposals for legislating
for reform and proposed an offence based on the Law Commission’s
proposals, with some modifications, including the application of the
new offence to Crown bodies.
164
The Act was brought into force on 6 April 2008.
R v P and O European Ferries (Dover) Ltd (1990) 93 Cr App R 72

Zeebrugge ferry disaster
Attorney-General’s Reference (No 2 of 1999) [2000] QB 796
R v Kite [1996] 2 Cr App R (S) 295

Lyme Regis Bay
NOTE: See Appendix 1 on page 168.
Company Directors (Disqualification) Act 1986

The disqualification of a director may be one of the most severe
penalties imposed, short of imprisonment. In most cases, seeking
disqualification is discretionary, and the granting of an order and its
duration, is also discretionary on the part of the court (subject, of
course, to the statutory limits). The text of the Act is in the
Additional Materials.
Section 2 Conviction on an indictable offence in connection

with the promotion, formation, management or liquidation of a
company, or with the receivership or management of a company’s
property. In such a case, it is for the court sentencing the defendant
to include a disqualification order. It is noteworthy that the court
sentencing the defendants in the GUINNESS trial did not consider
disqualification appropriate. It is virtually impossible under this
section to secure the disqualification of directors for disasters, such
as the capsizing of the ferry off Zeebrugge in 1985, because of the
necessity to secure a conviction on an indictable offence.
Section 3 Persistent default. This includes such matters as a

failure to file accounts and annual returns. The court will generally
only grant a disqualification order in serious cases involving
dishonesty. (Such defaults are already punishable by a fine.) It is
notable that many companies seem to be seriously in arrears with
their annual returns.
Section 4 Where, on a winding-up, a person has been found

guilty of fraudulent trading, or has otherwise been guilty of any
fraud while an officer or liquidator of a company, or a receiver or
manager of its property. It is not necessary for the person to have
been convicted of the offence in a criminal court. This could give
rise to problems relating to the differing standard of proof in civil
and criminal cases.
Section 6 Disqualification for unfitness in connection with a

company insolvency. This is the most frequent ground for
disqualification, and arises where the person concerned is, or has
been, a director of a company that has become insolvent, and the
conduct of that person makes him unfit to be a company director.
The conduct may relate to that company or any other. The
165
appropriate insolvency practitioner (Official Receiver, liquidator,

administrator, administrative receiver) must report to the Secretary
of State any circumstances that would satisfy s 6, and the Secretary
of State may apply to the court for an order. Where the court finds
that a director is unfit, it MUST make a disqualification order
(though not necessarily for the maximum period).
Section 8 This provides for a disqualification order on the

application of the Secretary of State, following a report made by
DTI inspectors.
Section 9 This deals with findings of ‘unfitness’, and refers to

criteria laid down in Schedule I of the Act. Part I concerns ‘matters
applicable in all cases’, and Part II concerns ‘matters applicable
where a company has become insolvent’ – that is, relevant to s 6.
LLB: Company Law
Section 10 This provides that where a person has had a
contribution order made against him under ss 213 or 214 of the
Insolvency Act 1986, the court itself may make a disqualification
order against that person (without an application by the liquidator).
Section 11 Undischarged bankrupts are prohibited from acting

as directors or from being concerned, directly or indirectly, in the
promotion, formation or management of a company, except with
the leave of the court. Without such leave, the person is
automatically disqualified, and contravention of this is a criminal
offence that can be tried summarily or on indictment.
NOTE: See Appendix 2 on page 181 for Cases and Materials

relating to disqualification
Other offences
These include
Insider Dealing
Failure to submit various returns to Companies House
Question 4.4.1
What is meant by corporate manslaughter?
166
Summary__________________
This Chapter explored a number of issues relating to shares in the
company including the legal nature of a share, the various classes of
shares and class rights as well as discussed the rights of minority
shareholders. It also examined issues relating to company finances,
including capital and shares and the financing of a company
including loan capital and debentures. Further, it examined the
recent developments relating to the concept of corporate
manslaughter.
The financing of a company can be complex. Critically discuss some of the main
issues regarding raising capital and the legal obligations of the company to its
creditors.
167
Appendix 1
Manslaughter and Corporate Homicide Act 2007
CHAPTER 19
CONTENTS
Corporate manslaughter and corporate homicide
1 The offence
Relevant duty of care
2 Meaning of “relevant duty of care”
3 Public policy decisions, exclusively public functions and statutory
inspections
4 Military activities
5 Policing and law enforcement
6 Emergencies
7 Child-protection and probation functions
Gross breach
8 Factors for jury
Remedial orders and publicity orders
9 Power to order breach etc to be remedied
10 Power to order conviction etc to be publicised
Application to particular categories of organisation
11 Application to Crown bodies
12 Application to armed forces
13 Application to police forces
14 Application to partnerships
Miscellaneous
15 Procedure, evidence and sentencing
16 Transfer of functions
17 DPP’s consent required for proceedings
18 No individual liability
19 Convictions under this Act and under health and safety
legislation
20 Abolition of liability of corporations for manslaughter at
common law
General and supplemental
21 Power to extend section 1 to other organisations
22 Power to amend Schedule 1
23 Power to extend section 2(2)
24 Orders
25 Interpretation
26 Minor and consequential amendments
27 Commencement and savings
28 Extent and territorial application
29 Short title
168
Schedule 1 — List of government departments etc

Schedule 2 — Minor and consequential amendments
2007 CHAPTER 19
An Act to create a new offence that, in England and Wales or
Northern Ireland, is to be called corporate manslaughter and, in
Scotland, is to be called corporate homicide; and to make provision
in connection with that offence.
[26th July 2007]
BE IT ENACTED by the Queen’s most Excellent Majesty, by and
with the advice and consent of the Lords Spiritual and Temporal,
and Commons, in this present
Parliament assembled, and by the authority of the same, as
follows:—
Corporate manslaughter and corporate homicide
1 The offence
(1) An organisation to which this section applies is guilty of an
offence if the way in which its activities are managed or
organised—
(a) causes a person’s death, and
(b) amounts to a gross breach of a relevant duty of care owed by
the
organisation to the deceased.
(2) The organisations to which this section applies are—
(a) a corporation;
(b) a department or other body listed in Schedule 1;
(c) a police force;
(d) a partnership, or a trade union or employers’ association, that is
an employer.
(3) An organisation is guilty of an offence under this section only if
the way in which its activities are managed or organised by its
senior management is a substantial element in the breach referred
to in subsection (1).
(4) For the purposes of this Act—
(a) “relevant duty of care” has the meaning given by section 2, read
with sections 3 to 7;
(b) a breach of a duty of care by an organisation is a “gross” breach
if the conduct alleged to amount to a breach of that duty falls far
below what can reasonably be expected of the organisation in the
circumstances;
(c) “senior management”, in relation to an organisation, means the
persons who play significant roles in—
(i) the making of decisions about how the whole or a substantial
part of its activities are to be managed or organised, or
(ii) the actual managing or organising of the whole or a substantial
part of those activities.
(5) The offence under this section is called—
(a) corporate manslaughter, in so far as it is an offence under the
law of
169
England and Wales or Northern Ireland;

(b) corporate homicide, in so far as it is an offence under the law of
Scotland.
(6) An organisation that is guilty of corporate manslaughter or
corporate homicide
is liable on conviction on indictment to a fine.
(7) The offence of corporate homicide is indictable only in the High
Court of
Justiciary.
Relevant duty of care
2 Meaning of “relevant duty of care”

(1) A “relevant duty of care”, in relation to an organisation, means
any of the following duties owed by it under the law of
negligence—
(a) a duty owed to its employees or to other persons working for
the
organisation or performing services for it;
(b) a duty owed as occupier of premises;
(c) a duty owed in connection with—
(i) the supply by the organisation of goods or services (whether for
consideration or not),
(ii) the carrying on by the organisation of any construction or
maintenance operations,
(iii) the carrying on by the organisation of any other activity on a
commercial basis, or
(iv) the use or keeping by the organisation of any plant, vehicle or
other thing;
(d) a duty owed to a person who, by reason of being a person
within subsection (2), is someone for whose safety the organisation
is responsible.
(2) A person is within this subsection if—
(a) he is detained at a custodial institution or in a custody area at a
court or police station;
(b) he is detained at a removal centre or short-term holding facility;
(c) he is being transported in a vehicle, or being held in any
premises, in pursuance of prison escort arrangements or
immigration escort arrangements;
(d) he is living in secure accommodation in which he has been
placed;
(e) he is a detained patient.
(3) Subsection (1) is subject to sections 3 to 7.
(4) A reference in subsection (1) to a duty owed under the law of
negligence includes a reference to a duty that would be owed under
the law of negligence but for any statutory provision under which
liability is imposed in place of liability under that law.
(5) For the purposes of this Act, whether a particular organisation
owes a duty of care to a particular individual is a question of law.
The judge must make any findings of fact necessary to decide that
question.
170
(6) For the purposes of this Act there is to be disregarded—

(a) any rule of the common law that has the effect of preventing a
duty of care from being owed by one person to another by reason of
the fact that they are jointly engaged in unlawful conduct;
(b) any such rule that has the effect of preventing a duty of care
from being owed to a person by reason of his acceptance of a risk of
harm.
(7) In this section—
“construction or maintenance operations” means operations of any
of the following descriptions—
(a) construction, installation, alteration, extension, improvement,
repair, maintenance, decoration, cleaning, demolition or
dismantling of—
(i) any building or structure,
(ii) anything else that forms, or is to form, part of the land,
or
(iii) any plant, vehicle or other thing;
(b) operations that form an integral part of, or are preparatory to,
or are for rendering complete, any operations within paragraph (a);
“custodial institution” means a prison, a young offender institution,
a secure training centre, a young offenders institution, a young
offenders centre, a juvenile justice centre or a remand centre;
“detained patient” means—
(a) a person who is detained in any premises under—
(i) Part 2 or 3 of the Mental Health Act 1983 (c. 20) (“the
1983 Act”), or
(ii) Part 2 or 3 of the Mental Health (Northern Ireland)
Order 1986 (S.I. 1986/595 (N.I. 4)) (“the 1986 Order”);
(b) a person who (otherwise than by reason of being detained as
mentioned in paragraph (a)) is deemed to be in legal custody
by—
(i) section 137 of the 1983 Act,
(ii) Article 131 of the 1986 Order, or
(iii) article 11 of the Mental Health (Care and Treatment)
(Scotland) Act 2003 (Consequential Provisions) Order
2005 (S.I. 2005/2078);
(c) a person who is detained in any premises, or is otherwise in
custody, under the Mental Health (Care and Treatment)
(Scotland) Act 2003 (asp 13) or Part 6 of the Criminal Procedure
(Scotland) Act 1995 (c. 46) or who is detained in a hospital under
section 200 of that Act of 1995;
“immigration escort arrangements” means arrangements made
under section 156 of the Immigration and Asylum Act 1999 (c. 33);
“the law of negligence” includes—
(a) in relation to England and Wales, the Occupiers’ Liability Act
1957 (c. 31), the Defective Premises Act 1972 (c. 35) and the
Occupiers’ Liability Act 1984 (c. 3);
(b) in relation to Scotland, the Occupiers’ Liability (Scotland) Act
1960 (c. 30);
171
(c) in relation to Northern Ireland, the Occupiers’ Liability Act

(Northern Ireland) 1957 (c. 25), the Defective Premises
(Northern Ireland) Order 1975 (S.I. 1975/1039 (N.I. 9)), the
Occupiers’ Liability (Northern Ireland) Order 1987 (S.I. 1987/
1280 (N.I. 15)) and the Defective Premises (Landlord’s Liability)
Act (Northern Ireland) 2001 (c. 10);
“prison escort arrangements” means arrangements made under
section 80 of the Criminal Justice Act 1991 (c. 53) or under section
102 or 118 of the Criminal Justice and Public Order Act 1994 (c.
33);
“removal centre” and “short-term holding facility” have the
meaning given by section 147 of the Immigration and Asylum Act
1999;
“secure accommodation” means accommodation, not consisting of
or forming part of a custodial institution, provided for the purpose
of restricting the liberty of persons under the age of 18.
3 Public policy decisions, exclusively public functions and
statutory inspections
…
4 Military activities
…
5 Policing and law enforcement
…
6 Emergencies
…
7 Child-protection and probation functions
…
Gross breach
8 Factors for jury

(1) This section applies where—
(a) it is established that an organisation owed a relevant duty of
care to a person, and
(b) it falls to the jury to decide whether there was a gross breach of
that duty.
(2) The jury must consider whether the evidence shows that the
organization failed to comply with any health and safety legislation
that relates to the alleged breach, and if so—
(a) how serious that failure was;
(b) how much of a risk of death it posed.
(3) The jury may also—
(a) consider the extent to which the evidence shows that there were
attitudes, policies, systems or accepted practices within the
organisation that were likely to have encouraged any such failure as
is mentioned in subsection (2), or to have produced tolerance of it;
(b) have regard to any health and safety guidance that relates to
the alleged breach.
(4) This section does not prevent the jury from having regard to
any other matters they consider relevant.
172
(5) In this section “health and safety guidance” means any code,
guidance, manual or similar publication that is concerned with
health and safety matters and is made or issued (under a statutory
provision or otherwise) by an authority responsible for the
enforcement of any health and safety legislation.
Remedial orders and publicity orders
9 Power to order breach etc to be remedied

(1) A court before which an organisation is convicted of corporate
manslaughter or corporate homicide may make an order (a
“remedial order”) requiring the organisation to take specified steps
to remedy—
(a) the breach mentioned in section 1(1) (“the relevant breach”);
(b) any matter that appears to the court to have resulted from the
relevant breach and to have been a cause of the death;
(c) any deficiency, as regards health and safety matters, in the
organisation’s policies, systems or practices of which the relevant
breach appears to the court to be an indication.
(2) A remedial order may be made only on an application by the
prosecution specifying the terms of the proposed order.
Any such order must be on such terms (whether those proposed or
others) as the court considers appropriate having regard to any
representations made, and any evidence adduced, in relation to
that matter by the prosecution or on behalf of the organisation.
(3) Before making an application for a remedial order the
prosecution must consult such enforcement authority or authorities
as it considers appropriate having regard to the nature of the
relevant breach.
(4) A remedial order—
(a) must specify a period within which the steps referred to in
subsection
(1) are to be taken;
(b) may require the organisation to supply to an enforcement
authority
consulted under subsection (3), within a specified period, evidence
that those steps have been taken.
A period specified under this subsection may be extended or further
extended by order of the court on an application made before the
end of that period or extended period.
(5) An organisation that fails to comply with a remedial order is
guilty of an offence, and liable on conviction on indictment to a
fine.
10 Power to order conviction etc to be publicised

(1) A court before which an organisation is convicted of corporate
manslaughter or corporate homicide may make an order (a
“publicity order”) requiring the organisation to publicise in a
specified manner—
(a) the fact that it has been convicted of the offence;
(b) specified particulars of the offence;
(c) the amount of any fine imposed;
173
(d) the terms of any remedial order made.

(2) In deciding on the terms of a publicity order that it is proposing
to make, the court must—
(a) ascertain the views of such enforcement authority or authorities
(if any) as it considers appropriate, and
(b) have regard to any representations made by the prosecution or
on
behalf of the organisation.
(3) A publicity order—
(a) must specify a period within which the requirements referred to
in subsection (1) are to be complied with;
(b) may require the organisation to supply to any enforcement
authority
whose views have been ascertained under subsection (2), within a
specified period, evidence that those requirements have been
complied with.
(4) An organisation that fails to comply with a publicity order is
guilty of an
offence, and liable on conviction on indictment to a fine.
Application to particular categories of organisation
11 Application to Crown bodies

…
12 Application to armed forces
…
13 Application to police forces
…
14 Application to partnerships
(1) For the purposes of this Act a partnership is to be treated as
owing whatever duties of care it would owe if it were a body
corporate.
(2) Proceedings for an offence under this Act alleged to have been
committed by a partnership are to be brought in the name of the
partnership (and not in that of any of its members).
(3) A fine imposed on a partnership on its conviction of an offence
under this Act is to be paid out of the funds of the partnership.
(4) This section does not apply to a partnership that is a legal
person under the law
by which it is governed.
Miscellaneous
15 Procedure, evidence and sentencing

(1) Any statutory provision (whenever made) about criminal
proceedings applies, subject to any prescribed adaptations or
modifications, in relation to proceedings under this Act against—
(a) a department or other body listed in Schedule 1,
(b) a police force,
(c) a partnership,
(d) a trade union, or
174
(e) an employers’ association that is not a corporation,

as it applies in relation to proceedings against a corporation.
(2) In this section—
“prescribed” means prescribed by an order made by the Secretary of
State; “provision about criminal proceedings” includes—
(a) provision about procedure in or in connection with criminal
proceedings;
(b) provision about evidence in such proceedings;
(c) provision about sentencing, or otherwise dealing with, persons
convicted of offences; “statutory” means contained in, or in an
instrument made under, any Act
or any Northern Ireland legislation.
(3) A reference in this section to proceedings is to proceedings in
England and Wales or Northern Ireland.
(4) An order under this section is subject to negative resolution
procedure.
16 Transfer of functions
(1) This section applies where—
(a) a person’s death has occurred, or is alleged to have occurred, in
connection with the carrying out of functions by a relevant public
organisation, and
(b) subsequently there is a transfer of those functions, with the
result that
they are still carried out but no longer by that organisation.
(2) In this section “relevant public organisation” means—
(a) a department or other body listed in Schedule 1;
(b) a corporation that is a servant or agent of the Crown;
(c) a police force.
(3) Any proceedings instituted against a relevant public
organisation after the transfer for an offence under this Act in
respect of the person’s death are to be instituted against—
(a) the relevant public organisation, if any, by which the functions
mentioned in subsection (1) are currently carried out;
(b) if no such organisation currently carries out the functions, the
relevant public organisation by which the functions were last
carried out.
This is subject to subsection (4).
(4) If an order made by the Secretary of State so provides in
relation to a particular transfer of functions, the proceedings
referred to in subsection (3) may be instituted, or (if they have
already been instituted) may be continued, against—
(a) the organisation mentioned in subsection (1), or
(b) such relevant public organisation (other than the one
mentioned in subsection (1) or the one mentioned in subsection
(3)(a) or (b)) as may
be specified in the order.
(5) If the transfer occurs while proceedings for an offence under
this Act in respect of the person’s death are in progress against a
175
relevant public organisation, the proceedings are to be continued

against—
(a) the relevant public organisation, if any, by which the functions
mentioned in subsection (1) are carried out as a result of the
transfer;
(b) if as a result of the transfer no such organisation carries out the
functions, the same organisation as before.
This is subject to subsection (6).
(6) If an order made by the Secretary of State so provides in
relation to a particular transfer of functions, the proceedings
referred to in subsection (5) may be continued against—
(a) the organisation mentioned in subsection (1), or
(b) such relevant public organisation (other than the one
mentioned in subsection (1) or the one mentioned in subsection
(5)(a) or (b)) as may be specified in the order.
(7) An order under subsection (4) or (6) is subject to negative
resolution procedure.
17 DPP’s consent required for proceedings

Proceedings for an offence of corporate manslaughter—
(a) may not be instituted in England and Wales without the consent
of the Director of Public Prosecutions;
(b) may not be instituted in Northern Ireland without the consent
of the Director of Public Prosecutions for Northern Ireland.
18 No individual liability
(1) An individual cannot be guilty of aiding, abetting, counselling
or procuring the commission of an offence of corporate
manslaughter.
(2) An individual cannot be guilty of aiding, abetting, counselling
or procuring, or being art and part in, the commission of an offence
of corporate homicide.
19 Convictions under this Act and under health and safety

legislation
(1) Where in the same proceedings there is—
(a) a charge of corporate manslaughter or corporate homicide
arising out of a particular set of circumstances, and
(b) a charge against the same defendant of a health and safety
offence arising out of some or all of those circumstances, the jury
may, if the interests of justice so require, be invited to return a
verdict on each charge.
(2) An organisation that has been convicted of corporate
manslaughter or corporate homicide arising out of a particular set
of circumstances may, if the interests of justice so require, be
charged with a health and safety offence arising out of some or all
of those circumstances.
(3) In this section “health and safety offence” means an offence
under any health and safety legislation.
176
20 Abolition of liability of corporations for manslaughter at

common law
The common law offence of manslaughter by gross negligence is
abolished in its application to corporations, and in any application
it has to other organisations to which section 1 applies.
General and supplemental
21 Power to extend section 1 to other organisations

(1) The Secretary of State may by order amend section 1 so as to
extend the categories of organisation to which that section applies.
(2) An order under this section may make any amendment to this
Act that is incidental or supplemental to, or consequential on, an
amendment made by virtue of subsection (1).
(3) An order under this section is subject to affirmative resolution
procedure.
22 Power to amend Schedule 1

(1) The Secretary of State may amend Schedule 1 by order.
(2) A statutory instrument containing an order under this section is
subject to affirmative resolution procedure, unless the only
amendments to Schedule 1 that it makes are amendments within
subsection (3).
In that case the instrument is subject to negative resolution
procedure.
(3) An amendment is within this subsection if—
(a) it is consequential on a department or other body listed in
Schedule 1 changing its name,
(b) in the case of an amendment adding a department or other
body to Schedule 1, it is consequential on the transfer to the
department or other body of functions all of which were previously
exercisable by one or more organisations to which section 1 applies,
or
(c) in the case of an amendment removing a department or other
body from Schedule 1, it is consequential on—
(i) the abolition of the department or other body, or
(ii) the transfer of all the functions of the department or other body
to one or more organisations to which section 1 applies.
23 Power to extend section 2(2)

(1) The Secretary of State may by order amend section 2(2) to
make it include any category of person (not already included)
who—
(a) is required by virtue of a statutory provision to remain or reside
on particular premises, or
(b) is otherwise subject to a restriction of his liberty.
(2) An order under this section may make any amendment to this
Act that is incidental or supplemental to, or consequential on, an
amendment made by virtue of subsection (1).
(3) An order under this section is subject to affirmative resolution
procedure.
177
24 Orders
(1) A power of the Secretary of State to make an order under this
Act is exercisable by statutory instrument.
(2) Where an order under this Act is subject to “negative resolution
procedure” the statutory instrument containing the order is subject
to annulment in pursuance of a resolution of either House of
Parliament.
(3) Where an order under this Act is subject to “affirmative
resolution procedure” the order may not be made unless a draft has
been laid before, and approved by a resolution of, each House of
Parliament.
(4) An order under this Act—
(a) may make different provision for different purposes;
(b) may make transitional or saving provision.
25 Interpretation
In this Act—
“armed forces” has the meaning given by section 12(1);
“corporation” does not include a corporation sole but includes any
body corporate wherever incorporated;
“employee” means an individual who works under a contract of
employment or apprenticeship (whether express or implied and, if
express, whether oral or in writing), and related expressions are to
be construed accordingly; see also sections 11(3)(a), 12(2) and
13(3) (which apply for the purposes of section 2);
“employers’ association” has the meaning given by section 122 of
the Trade Union and Labour Relations (Consolidation) Act 1992 (c.
52) or Article 4 of the Industrial Relations (Northern Ireland) Order
1992
(S.I. 1992/807 (N.I. 5));
“enforcement authority” means an authority responsible for the
enforcement of any health and safety legislation;
“health and safety legislation” means any statutory provision
dealing with health and safety matters, including in particular
provision contained in the Health and Safety at Work etc. Act 1974
(c. 37) or the Health and Safety at Work (Northern Ireland) Order
1978 (S.I. 1978/ 1039 (N.I. 9));
“member”, in relation to the armed forces, is to be read in
accordance with section 12(3);
“partnership” means—
(a) a partnership within the Partnership Act 1890 (c. 39), or
(b) a limited partnership registered under the Limited Partnerships
Act 1907 (c. 24), or a firm or entity of a similar character formed
under the law of a country or territory outside the United Kingdom;
“police force” has the meaning given by section 13(1);
“premises” includes land, buildings and moveable structures;
“public authority” has the same meaning as in section 6 of the
Human Rights Act 1998 (c. 42) (disregarding subsections (3)(a)
and (4) of that section);
“publicity order” means an order under section 10(1);
178
“remedial order” means an order under section 9(1);

“statutory provision”, except in section 15, means provision
contained in, or in an instrument made under, any Act, any Act of
the Scottish Parliament or any Northern Ireland legislation;
“trade union” has the meaning given by section 1 of the Trade
Union and Labour Relations (Consolidation) Act 1992 (c. 52) or
Article 3 of the Industrial Relations (Northern Ireland) Order 1992
(S.I. 1992/807 (N.I. 5)).
or
(b) a limited partnership registered under the Limited Partnerships
Act 1907 (c. 24),
or a firm or entity of a similar character formed under the law of a
country or territory outside the United Kingdom;
“police force” has the meaning given by section 13(1);
“premises” includes land, buildings and moveable structures;
“public authority” has the same meaning as in section 6 of the
Human Rights Act 1998 (c. 42) (disregarding subsections (3)(a)
and (4) of that section);
“publicity order” means an order under section 10(1);
“remedial order” means an order under section 9(1);
“statutory provision”, except in section 15, means provision
contained in, or in an instrument made under, any Act, any Act of
the Scottish Parliament or any Northern Ireland legislation;
“trade union” has the meaning given by section 1 of the Trade
Union and Labour Relations (Consolidation) Act 1992 (c. 52) or
Article 3 of the Industrial Relations (Northern Ireland) Order 1992
(S.I. 1992/807 (N.I. 5)).
26 Minor and consequential amendments

Schedule 2 (minor and consequential amendments) has effect.
27 Commencement and savings

(1) The preceding provisions of this Act come into force in
accordance with provision made by order by the Secretary of State.
(2) An order bringing into force paragraph (d) of section 2(1) is
subject to affirmative resolution procedure.
(3) Section 1 does not apply in relation to anything done or omitted
before the commencement of that section.
(4) Section 20 does not affect any liability, investigation, legal
proceeding or penalty for or in respect of an offence committed
wholly or partly before the commencement of that section.
(5) For the purposes of subsection (4) an offence is committed
wholly or partly before the commencement of section 20 if any of
the conduct or events alleged to constitute the offence occurred
before that commencement.
28 Extent and territorial application

(1) Subject to subsection (2), this Act extends to England and
Wales, Scotland and Northern Ireland.
(2) An amendment made by this Act extends to the same part or
parts of the United Kingdom as the provision to which it relates.
179
(3) Section 1 applies if the harm resulting in death is sustained in

the United Kingdom or—
(a) within the seaward limits of the territorial sea adjacent to the
United Kingdom;
(b) on a ship registered under Part 2 of the Merchant Shipping Act
1995 (c. 21);
(c) on a British-controlled aircraft as defined in section 92 of the
Civil Aviation Act 1982 (c. 16);
(d) on a British-controlled hovercraft within the meaning of that
section as applied in relation to hovercraft by virtue of provision
made under the Hovercraft Act 1968 (c. 59);
(e) in any place to which an Order in Council under section 10(1)
of the Petroleum Act 1998 (c. 17) applies (criminal jurisdiction in
relation to offshore activities).
(4) For the purposes of subsection (3)(b) to (d) harm sustained on
a ship, aircraft or hovercraft includes harm sustained by a person
who—
(a) is then no longer on board the ship, aircraft or hovercraft in
consequence of the wrecking of it or of some other mishap affecting
it or occurring on it, and
(b) sustains the harm in consequence of that event.
29 Short title
This Act may be cited as the Corporate Manslaughter and Corporate
Homicide
Act 2007.
SCHEDULE S
SCHEDULE 1 Section 1
LIST OF GOVERNMENT DEPARTMENTS ETC
SCHEDULE 2 Section 26
MINOR AND CONSEQUENTIAL AMENDMENTS
180
Appendix 2
Cases relating to disqualification
In RE LO-LINE ELECTRIC MOTORS LTD [1988] Ch 477; [1988] 2
All ER 692 the conduct complained of must display a ‘lack of
commercial probity’. Browne-Wilkinson, V-C also gave it as his
opinion in that case that extreme examples of gross negligence or
total incompetence could merit disqualification. Ordinary
commercial misjudgment is, of itself, not sufficient. The term
‘director’ also applies to de facto as well as de jure directors. The
period of disqualification, as there was no dishonesty, was three
rather than fifteen years.
In RE MAJESTIC RECORDING STUDIOS LTD [1989] BCLC 1 a

disqualification order was granted against a director who had not
involved himself in the financial affairs of the company. ‘He could
not shirk his duties by leaving everything to others.’ The company
had collapsed within five years leaving considerable debts to the
Crown and other creditors. In regard to an estate agency, the
director could continue to run this without the benefit of limited
liability. In the case of another directorship, he was, it seems
permitted to continue, provided he had a co-director approved by
the court and audited accounts being regularly filed. It seems that
that company had good record keeping and the jobs of a number of
employees would be jeopardised. However, one might compare this
with RE CLADROSE LTD [1990] BCLC 204, where one director who
was not an accountant was held to be entitled to rely, in financial
affairs, upon the other who was. In this case, the growing practice
of severely penalising directors who failed to pay Crown debts was
followed and justified.
Doubt was cast upon this practice by the Court of Appeal in RE

SEVENOAKS (RETAIL) LTD [1991] BCLC 325. The court expressed
disquiet about the wild variations in the length of terms of
disqualification handed down by different courts, revealed in the
statistics published by the Official Receiver.
The court offered the following guidelines:
(a) each case turned on its own facts;
(b) no special weight was to be accorded to Crown debts;
(c) matters justifying disqualification should be set out in the
Official Receiver’s affidavit, and the court should not take
other matters into consideration, unless it is in mitigation;
(d) 10–15 years for very serious misconduct;
2–5 years for relatively mild misconduct;
5–10 years for cases falling in between!
R v GOODMAN [1994] BCLC 349 concerned a disqualification in

respect of insider dealing. The director concerned (chairman and
major shareholder of a public company) had off-loaded shares and
resigned following a meeting at which it was revealed that the
company’s results would be poor. He contended that his
disqualification of ten years in this respect was not an offence
committed in connection with the management of a company. The
181
Court of Appeal disagreed. Since the appellant’s conduct in

disposing of his shareholding before he resigned and the results
were announced had a relevant factual connection with the
management of the company it was therefore an offence in
connection with the management of that company. His appeal was
dismissed.
RE SEAGULL MANUFACTURING CO LTD [1994] BCLC. In view of

the fact that companies are quite international these days and
modern communications enable companies to be controlled from
overseas, the CDDA 1986, must be intended to extend to foreign
directors resident out of the jurisdiction and to conduct which
occurred out of the jurisdiction.
RE HITCO LTD [1995] BCLC 63 was the first example of an appeal

(successful) by the Official Receiver against a judge’s dismissal of
an application for a disqualification order. The director was
disqualified. He failed to monitor the company’s financial situation,
and continued to trade without any reasonable prospect of being
able to pay creditors.
RE CARECRAFT CONSTRUCTION CO LTD [1993] BCC 336. An

informal agreement was approved whereby the DTI and the
director concerned agreed on an appropriate disqualification
period, and the director undertook not to act during this time. Such
an undertaking had the approval of the Vice-Chancellor, who had
expressed the view that such undertakings did not have the force of
court orders, but a legislative amendment to that effect should be
considered. In the meantime, a somewhat unsatisfactory situation
has developed whereby some courts are willing to give approval to
such arrangements and some not. Due to delays, a period of two
years was imposed after mitigating factors were heard. The
question was addressed by the Court of Appeal in SECRETARY OF
STATE FOR TRADE AND INDUSTRY v ROGERS [1997] BCC 155.
The court of first instance (Harman J) had accepted the agreed (or
not disputed) statement of facts which did not mention dishonesty
and, with the agreement that the disqualification should be for the
upper end of the middle bracket, an eight year period was imposed.
Then, in the transcript, the judge made a statement about the
defendant’s dishonesty. He objected. The Court of Appeal was of
the opinion that it was not for the court to object, but to invite the
Secretary of State to reconsider his agreement. They went on to
impose the eight year disqualification, anyway.
RE CONTINENTAL ASSURANCE CO OF LONDON PLC [1996] BCC

888. This case re-iterates the liability of non-executive directors.
The judge, with some reluctance, accepted the opinion of the
Secretary of State that this was a case meriting a ‘minimum bracket’
order for the non-executive director, that is, 2 - 5 years. The judge
ordered three years disqualification.
In the same case the chairman and MD (a full-time director)
received nine years.
182
RE LIVING IMAGES LTD [1996] 1 BCLC 348 contains an interesting

review of disqualification cases and preferences (unlawful
preferential repayments in a company insolvency). As these are civil
proceedings the appropriate balance of proof is the civil standard of
a balance of probabilities. Bearing in mind the nature of the
sanction, however, more cogent evidence would be required for
proof. The court should be aware of the benefit of hindsight when
viewing the events that led to insolvency. There was evidence of
false statements being made to the Official Receiver. Periods of six
years disqualification were imposed on the two principal directors.
Fraud Act 2006

2006 CHAPTER 35
An Act to make provision for, and in connection with, criminal

liability for fraud and obtaining services dishonestly. [8th
November 2006]
BE IT ENACTED by the Queen’s most Excellent Majesty, by and
with the advice and consent of the Lords Spiritual and Temporal,
and Commons, in this present Parliament assembled, and by the
authority of the same, as follows:—
Fraud
1 Fraud
(1) A person is guilty of fraud if he is in breach of any of the
sections listed in subsection (2) (which provide for different ways
of committing the offence).
(2) The sections are—
(a) section 2 (fraud by false representation),
(b) section 3 (fraud by failing to disclose information), and
(c) section 4 (fraud by abuse of position).
(3) A person who is guilty of fraud is liable—
(a) on summary conviction, to imprisonment for a term not
exceeding 12 months or to a fine not exceeding the statutory
maximum (or to both);
(b) on conviction on indictment, to imprisonment for a term not
exceeding 10 years or to a fine (or to both).
(4) Subsection (3)(a) applies in relation to Northern Ireland as if
the reference to 12 months were a reference to 6 months.
2 Fraud by false representation

(1) A person is in breach of this section if he—
(a) dishonestly makes a false representation, and
(b) intends, by making the representation— (i) to make a gain for
himself or another, or
(ii) to cause loss to another or to expose another to a risk of loss.
(2) A representation is false if—
(a) it is untrue or misleading, and
(b) the person making it knows that it is, or might be, untrue or
misleading.
(3) “Representation” means any representation as to fact or law,
including a
183
representation as to the state of mind of—

(a) the person making the representation, or
(b) any other person.
(4) A representation may be express or implied.
(5) For the purposes of this section a representation may be
regarded as made if it (or anything implying it) is submitted in any
form to any system or device designed to receive, convey or
respond to communications (with or without human intervention).
3 Fraud by failing to disclose information

A person is in breach of this section if he—
(a) dishonestly fails to disclose to another person information
which he is under a legal duty to disclose, and
(b) intends, by failing to disclose the information—
(i) to make a gain for himself or another, or
4 Fraud by abuse of position

(1) A person is in breach of this section if he—
(a) occupies a position in which he is expected to safeguard, or not
to act against, the financial interests of another person,
(b) dishonestly abuses that position, and
(c) intends, by means of the abuse of that position—
(i) to make a gain for himself or another, or
(2) A person may be regarded as having abused his position even
though his conduct consisted of an omission rather than an act.
5 “Gain” and “loss”

(1) The references to gain and loss in sections 2 to 4 are to be read
in accordance
with this section.
(2) “Gain” and “loss”—
(a) extend only to gain or loss in money or other property;
(b) include any such gain or loss whether temporary or permanent;
and “property” means any property whether real or personal
(including things in action and other intangible property).
(3) “Gain” includes a gain by keeping what one has, as well as a
gain by getting what one does not have.
(4) “Loss” includes a loss by not getting what one might get, as well
as a loss by parting with what one has.
6 Possession etc. of articles for use in frauds

(1) A person is guilty of an offence if he has in his possession or
under his control any article for use in the course of or in
connection with any fraud.
184

7 Making or supplying articles for use in frauds

(1) A person is guilty of an offence if he makes, adapts, supplies or
offers to supply any article—
(a) knowing that it is designed or adapted for use in the course of
or in connection with fraud, or
(b) intending it to be used to commit, or assist in the commission
of, fraud.
8 “Article”
(1) For the purposes of—
(a) sections 6 and 7, and
(b) the provisions listed in subsection (2), so far as they relate to
articles for use in the course of or in connection with fraud, “article”
includes any program or data held in electronic form.
(2) The provisions are—
(a) section 1(7)(b) of the Police and Criminal Evidence Act 1984 (c.
60),
(b) section 2(8)(b) of the Armed Forces Act 2001 (c. 19), and
(c) Article 3(7)(b) of the Police and Criminal Evidence (Northern
Ireland) Order 1989 (S.I. 1989/1341 (N.I. 12));
(meaning of “prohibited articles” for the purposes of stop and
search powers).
9 Participating in fraudulent business carried on by sole trader

etc.
(1) A person is guilty of an offence if he is knowingly a party to the
carrying on of a business to which this section applies.
(2) This section applies to a business which is carried on—
(a) by a person who is outside the reach of section 458 of the
Companies Act 1985 (c. 6) or Article 451 of the Companies
(Northern Ireland) Order 1986 (S.I. 1986/1032) (N.I. 6)) (offence
of fraudulent trading), and (b) with intent to defraud creditors of
any person or for any other fraudulent purpose.
(3) The following are within the reach of section 458 of the 1985
Act—
(a) a company (within the meaning of that Act);
185
(b) a person to whom that section applies (with or without

adaptations or modifications) as if the person were a company;
(c) a person exempted from the application of that section.
(4) The following are within the reach of Article 451 of the 1986
Order—
(a) a company (within the meaning of that Order);
(b) a person to whom that Article applies (with or without
adaptations or modifications) as if the person were a company;
(c) a person exempted from the application of that Article.
(5) “Fraudulent purpose” has the same meaning as in section 458 of
the 1985 Act or Article 451 of the 1986 Order.
10 Participating in fraudulent business carried on by company

etc.: penalty
(1) In Schedule 24 to the Companies Act 1985 (punishment of
offences), in column 4 of the entry relating to section 458 of that
Act, for “7 years” substitute “10 years”.
(2) In Schedule 23 to the Companies (Northern Ireland) Order
1986 (punishment of offences), in column 4 of the entry relating to
Article 451 of that Order, for “7 years” substitute “10 years”.
11 Obtaining services dishonestly

(1) A person is guilty of an offence under this section if he obtains
services for himself or another—
(a) by a dishonest act, and
(b) in breach of subsection (2).
(2) A person obtains services in breach of this subsection if—
(a) they are made available on the basis that payment has been, is
being or will be made for or in respect of them, Fraud Act 2006 (c.
35) 5
(b) he obtains them without any payment having been made for or
in respect of them or without payment having been made in full,
and
(c) when he obtains them, he knows—
(i) that they are being made available on the basis described in
paragraph (a), or
(ii) that they might be,
but intends that payment will not be made, or will not be made in
full.
186

Supplementary
12 Liability of company officers for offences by company

(1) Subsection (2) applies if an offence under this Act is committed
by a body corporate.
(2) If the offence is proved to have been committed with the
consent or connivance of—
(a) a director, manager, secretary or other similar officer of the
body corporate, or
(b) a person who was purporting to act in any such capacity,
he (as well as the body corporate) is guilty of the offence and liable
to be proceeded against and punished accordingly.
(3) If the affairs of a body corporate are managed by its members,
subsection (2) applies in relation to the acts and defaults of a
member in connection with his functions of management as if he
were a director of the body corporate.
13 Evidence
(1) A person is not to be excused from—
(a) answering any question put to him in proceedings relating to
property,
or
(b) complying with any order made in proceedings relating to
property, on the ground that doing so may incriminate him or his
spouse or civil partner of an offence under this Act or a related
offence.
(2) But, in proceedings for an offence under this Act or a related
offence, a statement or admission made by the person in—
(a) answering such a question, or
(b) complying with such an order, is not admissible in evidence
against him or (unless they married or became civil partners after
the making of the statement or admission) his spouse or
civil partner.
(3) “Proceedings relating to property” means any proceedings for—
(a) the recovery or administration of any property,
(b) the execution of a trust, or
(c) an account of any property or dealings with property,
and “property” means money or other property whether real or
personal (including things in action and other intangible property).
(4) “Related offence” means—
(a) conspiracy to defraud;
(b) any other offence involving any form of fraudulent conduct or
purpose.
14 Minor and consequential amendments etc.
187
(1) Schedule 1 contains minor and consequential amendments.

(2) Schedule 2 contains transitional provisions and savings.
(3) Schedule 3 contains repeals and revocations.
15 Commencement and extent

(1) This Act (except this section and section 16) comes into force
on such day as the Secretary of State may appoint by an order
made by statutory instrument; and different days may be appointed
for different purposes.
(2) Subject to subsection (3), sections 1 to 9 and 11 to 13 extend to
England and Wales and Northern Ireland only.
(3) Section 8, so far as it relates to the Armed Forces Act 2001 (c.
19), extends to any place to which that Act extends.
(4) Any amendment in section 10 or Schedule 1, and any related
provision in section 14 or Schedule 2 or 3, extends to any place to
which the provision which is the subject of the amendment extends.
16 Short title
This Act may be cited as the Fraud Act 2006.
The Companies Act 2006 has in addition:
PART 29
FRAUDULENT TRADING
993 Offence of fraudulent trading
(1) If any business of a company is carried on with intent to
defraud creditors of the company or creditors of any other person,
or for any fraudulent purpose, every person who is knowingly a
party to the carrying on of the business in that manner commits an
offence.
(2) This applies whether or not the company has been, or is in the
course of being, wound up.
(a) on conviction on indictment, to imprisonment for a term not
exceeding ten years or a fine (or both);
(b) on summary conviction—
(i) in England and Wales, to imprisonment for a term not exceeding
twelve months or a fine not exceeding the statutory maximum (or
both);
(ii) in Scotland or Northern Ireland, to imprisonment for a term not
exceeding six months or a fine not exceeding the statutory
maximum (or both).
188
Introduction
Overview
The purpose of this chapter is to explore issues relating to
international trade contracts. It will introduce you to the subject
and explore the main types of contracts, namely fob and cif,
explaining their main features under international law,
INCOTERMS.
Aims
 Explore the basis of international trade contracts.
 Develop an understanding of the main types of international trade contracts.
 Explore the basics of INCOTERMS.
 Develop the basics of FOB trade contracts.
□ Develop the basics of CIF trade contracts.
□ Explore the documentation procedure.
Learning Outcomes
□ Explain the basis of international trade contracts.
□ List and discuss the main types of international trade contracts.
□ Discuss the basics of INCOTERMS.
□ List the basics of FOB trade contracts.
□ List the basics of CIF trade contracts.
□ Explain the documentation procedure.
189
Resources

Lawtel or Lexis.
190
5.1 Introduction: The Sales Contract

This section aims to introduce you to the concept of the sales
contract in relation to international trade.
Learning Objectives
 Examine the components of the sales contract.
 Introduce the main features of trade contracts under the International
Chamber of Commerce (ICC) INCOTERMS.
International trade – Outline

Trade presupposes movement of goods from one point to the other.
Depending on the nature of the trade, whether it is domestic or
international, goods are either transported within or outside the
national boundaries. Goods would normally be destined to an
overseas buyer, when the sale contract is international in nature. It
may then attract a host of customary laws and trade practices,
national laws and international conventions in its performance.
National laws or international conventions could either govern the
entire contract of trade, the carriage of the cargo or to any one of
its components. It could either be moved by land (rail/ road), sea
or air, and either as containerised cargo or as ordinary cargo. We,
in our study are concerned with the performance of the
International Trade Contract as carried by sea.
International trade could be called as;

 A contract for commercial sale between parties, most
importantly, operating in different parts of the world
 Carrying the additional feature of being international in its
performance and character
 Usually the sellers and buyers do not meet each other and
communicate through their intermediaries, using fax-messages,
e-mails, telephones, etc.
Salient Features
In this form of trade:
 Special trade terms are used (f.o.b., c.i.f., etc) in the transaction
 Goods sold are transported through air, sea or land (or in a
combined format) – For the purposes of our study we will
consider only the sea transport.
 Goods sold are insured against various risks &
 To acquire goods meeting the contract description
 Stowage arrangement, etc.
 Provides for payment across the national boundaries using the
credit facilities of international bankers – terms of payment
It is important that all legal requirements are complied with in an

international trade transaction. See the case law Continental
Enterprises Ltd v SHANDONG Zhucheng Foreign Trade Group Co
[2005] EWHC 92 (COMM)
191
The Parties to the Sales Contract

The parties involved in an international trade transaction are
numerous. The buyer and seller could be identified as the primary
parties to the contract and the rest are described variously. The
buyer and the seller to the sale contract normally act through
agents. It is the practice with big firms to have their own export
departments and in the case of smaller ones to engage bodies with
specialized knowledge in the area of export operations. Big firms
have their own export department or in-house experts and sell
directly abroad avoiding an intermediary.
Export House/ Confirming House:

These firms are commonly referred to Export Houses or Confirming
Houses and play a key role to help finalising the export deal. They
either become an “agent” or a “principle”. The legal consequence
would also differ depending on how they are portrayed and what
duties they perform. A commission would be paid by the importer
when the exporter sells directly to the importer abroad using the
confirming house as an agent, and the same would be governed by
the laws of agency.
In case where the confirming house happens to buy from the seller/
exporter and resells it to the overseas buyer it takes on the role of a
principal. Here it makes itself personally responsible to the seller
abroad since acting as principal. The consequences are that the
overseas buyer may not have any contractual relation with the first
seller.
See the following: Rusholme & Bolton & Roberts Hadfield Ltd v SG
Read & Co (London) Ltd [1955] 1 WLR 146; Sobell Industries Ltd v
Cory Brothers & Co Ltd [1955] 2 Lloyd’s Rep 82
Documentary Sale:
International sale contract involves making of contracts with i.
Carriers, insurers and banks, ii. involves execution and processing
of a number of documents and iii. referred to as a “documentary
sale” as the deals are finalised on the strength of the documents!
Documentary Credits
Banks act as the trusted intermediaries and help finance the
transaction through the arrangement of “Letters of Credit”. This
allows, on the one hand, for the buyer to collect the key/ title
documents to the goods bought while on the other hand allowing
the seller to withdraw the proceeds of sale from the bank. Letters of
credit, or L/Cs are also referred to as documentary credits or bankers
commercial credits. The English Courts have referred to the system
of documentary credits as “the life blood of international
commerce”.
See the following: RD Harbottle (Mercantile) Ltd v National

Westminster Bank Ltd[1978] QB 146 at 155 - Per Kerr LJ; Hong
Kong and Shanghai Banking Corporation v Kloeckner & Co AG
[1989] 2 Lloyd’s Rep 323 at 330 - Per Hirst J
192
The two major types of letters of credit are

i) Revocable and irrevocable credits and
ii) Confirmed and unconfirmed.
In its simple working, the payment for the goods purchased would
be made by the banks on the presentation of specific documents as
agreed under contract of sale and the performance of other
conditions. The documentary character of the letter of credit makes
it unique in its function and character. If in case the “bills of lading”
were to represent the goods sold it could be treated as “the
security” for extending any credit facility by the bank. In the words
of Lord Wright the functions of the Letters of Credit could be
described as;
“The general course of international commerce involves the
practice of raising money on the documents so as to bridge
the period between the shipment and the time of obtaining
payment against documents”
- Per Lord Wright in TD Bailey, Son & Co v Ross T
Smyth & Co Ltd (1940) 56 TLR 825 at 828
The first contract – sale contract

Sale contract is the first contract evidencing the agreement between
the seller/ shipper and the buyer/ consignee for sale of
goods/ commodity.
 This forms the basis for the conduct of the trade and contains
all the terms and conditions of the sale,
 The specifications about the goods – quality, quantity
 The date and place of shipment
 The name of the vessel and so on
 The appropriate INCOTERMS would govern
Special Trade Terms

While drawing up the sale contract the parties use special trade
terms which in turn determine the
 Method of delivery of goods sold / where delivery is to take
place
 How much they indicate the calculation of the purchase price
 Traditional terms for example are Ex Works, CIF, C&F, FAS
It is to be noted that in an international trade contract the duties of

the parties would vary according to the arrangements they have
made
i) About the place of delivery,
ii) The method of payment and
iii) The mode and method of transport used for delivering the
goods.
The most important thing to be noted here is that one form of

contract is distinguished from the other by the stages at which the
responsibility for the goods and the expenses associated with it are
transferred to the buyer.
193
Besides allocation of the obligations and responsibilities, the type of

contract would also go to determine the price that is paid for the
goods.
INCOTERMS 2000
The International Chamber of Commerce (ICC) has produced a set
of rules which is referred to INCOTERMS. In common parlance they
are a set of rules for the interpretation of the most frequently used
trade terms in international trade. The main purpose of the
INCOTERMS could be stated as a set of rules to clearly set out the
obligations of the seller and buyer in relation to the delivery of the
goods and the division of functions, costs and risks related to the
delivery.
The first set of rules was published by the ICC in 1936 which was
followed up by revisions in the years 1953, 1967, 1976, 1980, 1990
and finally the most recent version in 2000. Some countries have
given it the force of law and some recognise it as the custom of the
trade. The UK has neither given it the force of law nor recognises it as
custom of the trade.
The primary idea is to arrange for the transfer of risk from seller to
buyer. The risk is transferred at an unambiguous point/ place where
the goods could be inspected (depends with the nature of goods
and the mode of carriage).
A list of thirteen terms are listed in INCOTERMS 2000 and
categorised as follows:
Group E EXW Ex-works

Departure from Factory – Carriage Paid
Group F FCA Free Carrier

Main Carriage Unpaid by seller FAS Free Alongside Ship
FOB Free on Board
Group C CPT Carriage Paid to

Main Carriage Paid by Seller CIP Carriage & Ins. Paid
CFR Cost & Freight
CIF Cost, Ins. & Freight
Group D DAF Delivered at Frontier

Arrival of Carriage to DES Delivered ex-ship
Delivered Paid by Seller DEQ Delivered ex-quay
DDU Deliv. Duty Unpaid
DDP Delivered Duty Paid
Which INCOTERM to Incorporate?

Parties should take special care while deciding which INCOTERM to
incorporate into their sale contract. Mere use of the expressions c.i.f
or f.o.b in the contract will not trigger the application of
INCOTERMS to the contract. The contract should very clearly state
that INCOTERMS 2000 would apply to the contract. Parties should
also take into consideration the modes of transportation to be used
for the sale while deciding on the INCOTERMS and delivery terms.
194
See Zenziper Grains & Feed Stuffs v Bulk Trading Corp Ltd [2001] 1
All ER (Comm) 385 at 391.
Some of the common types of sale contract used in the
international sale are explained below:
i. Ex Works:
Theseller’s responsibility stops at his factory and buyer is required
to arrange for the contract goods to be collected and transported to
its destination. Besides transportation the overseas buyer would
also have to arrange for insurance cover for the cargo.
The obligations of the seller would include
a) supply the conforming goods,
b) the invoice together with other documents which had been
agreed upon,
c) deliver the conforming goods and place it at the buyer’s
disposal at the place and time agreed upon,
d) pay any incidental costs and
e) assist the buyer in furnishing information on documentation
and insurance.
The buyer’s obligation then would include

a) to accept delivery of the goods,
b) to pay for the goods,
c) process the licensing and obtain necessary authorization for
exporting or moving the goods and
d) pay any fee or for processing the exportation of the goods.
Normally, in this form of contract the export price becomes payable

on the goods being delivered and under the INCOTERMS the seller
is required to package the goods.
See Commercial Fibres (Ireland) Ltd v Zabaida [1975] 1 Lloyd’s Rep
27. Also see Amiri Flight Authority v BAE Systems Plc [2004] 1 All
ER (Commercial) 385 for qualifying as an international supply
contract as opposed to domestic sale.
ii. Ex Ship/ On Arrival Contracts:

In this form of contract delivery is made from a ship that has
arrived at the port of discharge. Here the seller pays the freight and
instructs the buyer on an “effectual direction” to the ship. The
“effectual direction” is usually formatted as a delivery order. It
should be further noted that the property in the goods passes when
buyer takes actual delivery of goods buyer takes actual delivery of
goods. See case lawYangtze Insurance Association v Lukmanjee
[1918] AC 585
In the event of the seller failing to deliver the goods, the buyer will
not be liable for the price. But if the buyer had paid for the goods,
then the same could be recovered as a total failure of consideration.
See case lawThe Julia [1949] AC 293
195
iii. FAS (Free alongside ship):

The contract is concluded for the seller to deliver the goods in a
named port “alongside the named ship”. This implies that the goods
are to be entrusted to the carrier for loading. This would also mean
that it is the buyer’s responsibility to load the cargo and not the
seller’s. See the case law Metro Meat Ltd v Fares Rural Co Pty Ltd
[1985] 2 Lloyd’s Rep 13
By convention the seller will have to render every reasonable
assistance to procure an export licence. Like in the f.o.b. contract it
is the duty of the buyer to nominate a suitable ship giving sufficient
notice of the vessel’s name and berth. See port rates and dock dues
and responsibility of the buyer.
One would notice the similarities and dissimilarities between a f.a.s
contract and a f.o.b contract. See case law MW Hardy & Co. Inc v AV
Pound & Co Ltd [1955] 1 QB 499 at 512
iv. Free carrier (named place):

When the cargo is containerised and to be carried by ship, rail, road
or in a multi-modal transport operation this form of contract is
used. The seller’s obligation is discharged the moment the goods
are delivered to the named carrier at the named point. At this point
the risk of loss or damage is as well transferred.
Question 1.1.1
 Discuss the International Chamber of Commerce (ICC) rules, referred to

INCOTERMS.
196
5.2 INCOTERMS – FOB

This section will introduce you to the fob contract under
INCOTERMS.
Learning Objectives
 Examine the fob contract.
 Explore the elements of this form of contract.
The f.o.b. Contract:

The abbreviation stands for “free on board”. This form of contract
has been defined in INCOTERMS 2000 as follows;
FOB (….named port of shipment)

Free on Board means that the seller delivers when the goods pass the
ship’s rail at the named port of shipment. This means that the buyer
has to bear all costs and risks of loss or damage to the goods from that
point. The FOB Term requires the seller to clear the goods for export.
This term can be used only for sea or inland waterway transport. If
the parties do not intend to deliver the goods across the ship’s rail, the
FCA Term should be used.
FOB – What is?

The f.o.b. contract is probably the longest serving international
trade contract in usage, covering all forms of transport.
i. In this form of contract the ship’s rail is the legal barrier dividing
the responsibilities of the f.o.b. seller and his buyer.
ii. In this form of contract the seller assumes the responsibility to
place the goods/ cargo on board a named ship in a named port. The
seller also bears the expense of transporting the cargo up to the
point of delivering the goods on board the named vessel, while the
buyer pays for any subsequent charges, namely, stowage of cargo,
freight or marine insurance, unloading charges and import duties in
the country of arrival.
See the following: i) Stock v Inglis (1884) 12 QBD 573; ii) Carlos
Federspeil & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep
240
The Types:
The f.o.b contract can be tailored to the requirement of the parties
to the contract and has been described as a flexible document Devlin
J in the Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 1 Lloyd’s
Rep 321.
Also see the following: i. The El Amria & El Minia [1982] 2 Lloyd’s
Rep 28 at 32; ii. NV Handel My J Smits Import-Export v English
Exporters (London) Ltd [1957] 1 Lloyd’s Rep 517; ii. Ian Stach Ltd v
Baker Bosley Ltd [1958] 1 Lloyd’s Rep 127
197
The three types of f.o.b. contract are i. Strict or classic f.o.b., ii. f.o.b
with additional services and iii. f.o.b with buyer contracting the
carrier (seller not a party to the contract of carriage).
Note: it is to be stressed that the incidental obligations arising from
an f.o.b. contract differ considerably and is to be ascertained going
through the express/ implied intention of the parties. See MW
Hardy & Co Inc v AV Pound & Co Ltd [1955] 1 QB 499, 508, 510.
The House of Lords affirmed this judgement. See [1956] AC 588
The Duties/ Responsibilities/ Obligations of the Parties

The obligations of the seller and buyer could be summarised as
below.
Seller’s Duties:
The f.o.b seller’s obligations would include;
i. to supply the conforming goods fully packed to the
specifications found in the sale contract together with
ii. a commercial invoice,
iii. to deliver the conforming goods on board the named vessel
at the time agreed upon giving sufficient notice,
Make goods available at port of loading and then ship free on board
goods answering description in the contract of sale.
i. Port of delivery is a condition – Petrotrade Inc v Stinnes GmbH

[1995] 1 Lloyd’s Rep 142.
ii. The courts would rather rescue than rush, as long as the port is
certain and ascertainable – David T Boyd & Co v Louise Louca
[1973] 1 Lloyd’s Rep 209
iii. The nomination / description of the port is binding on the seller
and buyer – Peter Turnbull & Co Pty Ltd v Mundas Trading Co
(Australia) Pty Ltd [1954] 2 Lloyd’s Rep 198 (Australian High
Court).
iv. The seller delivers if it is in relation to the seller’s contract. See
the House of Lords decision in Albright & Wilson UK v Biochem Ltd
[2002] UK HL 37.
iv. to pay any handling charges and other incidental costs and
v. to obtain an export license (if required) along with other
necessary documents
i. It is the duty of the seller to pay all charges incurred in

delivering the goods to the vessel. It is also to be noted that
there are no general rules as to the direct responsibility for
paying charges or securing documentation
ii. Export licences – the real issue. Must Read Case Laws – AV
Pound & Co v Hardy & Co Inc [1956] 1 AC 588; Brandt & Co
v Morris [1917] 2 KB 784
iii. The seller is to put in the best efforts to obtain an export
licence – this is seen as the “best endeavour approach”. The
burden is on the seller for any “inaction” on his part. See
Vidler & Co (London Ltd) v Silcock & Sons Ltd [1960] 1
Lloyd’s Rep 509
198
vi) to give notice of readiness to load to buyer, so that the buyer

can arrange necessary insurance
vii) to provide proof of delivery and assist the buyer in obtaining
information on documentation
i. Section 32(3) Sale of Goods Act 1979 makes it statutory.

See Wimble Sons & Co Ltd v Rosenberg & Sons [1913] 3 KB
743
ii. There is a strict duty on the seller to put the goods on
board the named vessel & give notice of readiness to load –
if he does not then the buyer’s duty to nominate a vessel to
take delivery is not triggered
Buyer’s Duties:
The buyer’s obligation as shipper of the goods would include
a) to give sufficient notice to the seller to accept delivery of the
goods at the agreed place
i. The buyer will have to fix the dates within the shipment
period when the goods are to be loaded and procure space
on a vessel fit to carry the goods
ii. To nominate a suitable ship within a suitable & reasonable
time (important). This duty is central to the performance of
the f.o.b. contract. See Bunge Corporation v Tradax Export
SA [1981] 2 Lloyd’s Rep 1
iii. Time to nominate a suitable ship is a condition in the f.o.b.
contract. If the buyer does not nominate a vessel within the
stipulated time or within a reasonable time, then the seller
can repudiate the contract. See Olearia Tirrena SpA v NV
Algermeene Oliehandle; The Osterbeck [1972] 2 Lloyd’s Rep
341.
iv. The seller could also repudiate if the nomination is found
to be manifestly artificial (Mickey mouse nomination). See
Texaco Ltd v The Eurogulf Shipping Co Ltd [1987] 2 Lloyd’s
Rep 541 at 545.
v. It should be noted that the onus is on the seller to prove
that the buyer would not be able to nominate a suitable
vessel.
vi. To nominate a suitable vessel. It is the duty of the buyer to
inform the seller of a suitable ship in which goods can be
loaded. See J & J Cunningham Ltd v Robert A Monroe & Co
Ltd (1922) 28 Comm. Cas. 42 at 46, per Lord Hewart CJ
Suitable Ship – The Vicmar Navigator [1981] 2 Lloyd’s Rep
466 (AC) Per Mustill J at 482; Richco International v Bunge
& Co, The New Prosper [1991] 2 Lloyd’s Rep 93
vii. But, can the parties use a suitable ship, waiving the
nomination? The Vicmar Navigator [1981] 2 Lloyd’s Rep
466
viii. It would be seen as a failure on the part of the buyer to
nominate a suitable ship if the notice of readiness is not
given within stated time – Timely loading notice. The f.o.b
contract at times expressly provides that the buyer shall
give the seller notice of readiness within a stated time of
the probable readiness of the nominated vessel to load. See
199
Bunge Corporation v Tradax Export SA [1980] 1 Lloyd’s Rep

294 (CA); [1981] 1 Lloyd’s Rep 1 (HL)
ix. Timely loading notice coupled with clause inserting a
shipment period? Good are “at buyer’s call”. See The
Belgarno, Financial Times, November 26, 1985
x. It is important to observe that “notice of readiness to load”
is a condition. See Bunge Corporation v Tradax Export SA
[1981] 1 Lloyd’s Rep 1 (HL) - per Lord Wilberforce
xi. Once notice of readiness to load has been given the seller
must comply with that date. If the seller causes delay, he
would then be liable for such losses suffered by the buyer.
xii. Conversely if the goods are brought alongside much earlier
than the “notified date” – the seller does so at his own peril!
See J & J Cunningham Ltd v Munro Ltd (1922) 28 Comm.
Cas. 42
Can the buyer substitute the vessel already nominated? What would
be the legal consequences of such an action?
i. The buyer has every right to substitute a vessel if he sees

fit, while bearing any additional cost and expenses arising
out of such substitution. See Agricultores Federatos
Argentinos v Ampro SA [1965] 2 Lloyd’s Rep 157
Howard Bennett, “F.O.B. Contracts: Substitutions of
Vessels”, [1990] LMCLQ 466
ii. When contract expressly provides that the first nomination
shall be final – “final notice of nomination”. See Cargill v
Continental [1989] 1 Lloyd’s Rep 193, [1989] 2 Lloyd’s Rep
290 (CA)
iii. When nomination is ineffective or unsuitable – see Coastal
(Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (The
Marine Star) [1993] 1 Lloyd’s Rep 329 (Note – although a
c.i.f case it equally applies to f.o.b contracts)
iv. See the case Bunge Corporation v Tradax Export SA [1980]
1 Lloyd’s Rep 294 (CA); [1981] 1 Lloyd’s Rep 1 (HL),
where the second nomination became a repudiatory
breach.
v. When the contract of sale has a shipment period/ or stated
time, he can only nominate it within that contract time
(unless it can be implied, that trade custom allowed
reasonable time - very rare and usually in c.i.f cases).
b) to bear the risk when cargo passes over the ship’s rail,
c) to process the licensing and obtain necessary authorization
for importing the goods after custom clearance
d) to pay any incidental expenses pursuant to the import of
goods and
e) to pay for the goods.
Note: In most parts of the trading world, including the UK, the
expression f.o.b would mean f.o.b. vessel. In contrast in the USA the
expression f.o.b is used as a general delivery term.
200
Question 1.2.1
 What are the main elements of the fob contract?
201
5.3 INCOTERMS - CIF

This section will introduce you to the c.i.f contract under
INCOTERMS.
Learning Objectives
 Examine the c.i.f contract.
 Explore the elements of this form of contract.
The c.i.f contract:

The c.i.f is the most popular and widely used form of sale contract
in the international seaborne trade. The short form c.i.f stands for
cost, insurance & freight. This form of contract is seen as an
agreement to sell goods at an inclusive price covering the cost of the
goods, insurance and freight. The seller arranges for the insurance of
goods and for the carriage as well. The c.i.f transaction embodies all
three contracts in it, namely,
i. The contract of sale,
ii. The contract of carriage by sea and
iii. The contract of marine insurance.
The question that one may ask is does the seller actually deliver the
goods or just delivers the documents to the seller? When studied
closely it emerges that it is a pure documentary sale! So, from a
commercial point of view, it could be said that the c.i.f contract is
not a sale of goods themselves but a sale of the documents
pertaining to the goods.
“It is not a contract that goods shall arrive, but a contract to
ship goods complying with the contract of sale, to obtain,
unless the contract otherwise provides, the ordinary contract
of carriage to the place of destination, and the ordinary
contract of insurance of the goods on that voyage, and to
tender these documents against payment of the contract
price”
- Scrutton, J. in Arnold Karberg & Co v Blythe, Green
Jourdine & Co [1915] 2 KB 379 at 388
“…the seller discharges his obligations as regards delivery by

tendering a bill of lading covering the goods”
- McNair, J. in Gardano and Giampieri v Greek
Petroleum George Mamidakis & Co [1962] 1 WLR 40
at 52
See Roskil. J’s observation in Margarine Union GmbH v Cambay

Prince Steamship Co [1967] 2 Lloyd’s Rep 315 at 332. Hence, in a
c.i.f contract the buyer would be really eager to secure the
document and the right of disposal of the goods (for resale) and the
seller would be keen to receive the purchase price. The banks
facilitate the transaction by effecting payment as against the
presentation of the stipulated documents.
202
Definitions:
Of the numerous definitions the following summarises the position
clearly;
“The obligation of the vendor is to deliver documents rather
than goods – to transfer symbols rather than the physical
property represented thereby”……“for the purchaser in case
of loss will get the documents he bargained for; and if the
policy be that required by the contract, and if the loss be
covered thereby, he will secure the insurance moneys. The
contingency of loss is well within and not outside the
contemplation of the parties”
- Per McCardie. J, in Manbre Saccharine Co Ltd v
Corn Products Ltd [1919] 1 KB 198
“It is not a contract that goods shall arrive, but a contract to

ship goods complying with the contract of sale, to obtain
unless the contract otherwise provides, the ordinary contract
of carriage to the place of destination, and the ordinary
contract of insurance of the goods on that voyage and to
tender those documents against payment of the contract
price.”
- Per Scrutton. J, in Arnold Kahberg & Co v Blythe,
Green, Jourdain & Co [1915] 2 KB 379 at 388
The Characteristics of c.i.f contract

The characteristics of a c.i.f contract were summarised Lord Wright
in TD Bailey Son & Co v Ross T Smyth & Co [1940] LI.L. Rep 147 as,
“The essential characteristics of this contract have often been
described. The seller has to ship or acquire after that
shipment the contract goods, as to which if unascertained he
is generally required to give a notice of appropriation. On or
after shipment he has to obtain proper bills of lading and
proper policies of insurance. He fulfils his contract by
transferring the bills of lading and the policies to the buyer.
As a general rule he does so only against payment of the
price, less the freight, which the buyer has to pay. In the
invoice which accompanies the tender of the documents on
the "prompt," that is, the date fixed for payment, the freight
is deducted for this reason. In this course of business the
general property in the goods remains in the seller until he
transfers the bills of lading.”
Tendering Goods Afloat: The most important characteristic of

the c.i.f contract is the obligation of the seller to procure and
arrange shipment to the place of delivery. This in fact could be
achieved in two ways, namely,
i. To actually ship the goods or

ii. Buy goods already afloat. This would mean that under c.i.f
terms one could appropriate goods to the contract after
“shipment” unlike f.o.b terms where one must procure
goods before shipment.
“The contract called for Chinese rabbits c.i.f. Their
obligation was, therefore, to tender documents, not
203
to ship the rabbits themselves. If there were any

Chinese rabbits afloat, they could have bought
them.”
- Per Donaldson. J, in PJ Van der Zijden
Wildhandel NV v Tucker & Cross Ltd [1975] 2
Lloyd’s Rep 240 at 242
iii. To actually procure goods afloat may pose practical
problems as numerous buyers would end up chasing fewer
goods at sea. This could result in astronomical prices. See
below the observation of Lord Denning M.R.
“Take the usual case of a string of contracts between
the shipper and the receiver. If there were an
obligation to buy afloat, who is to do the buying? Is
each seller to do so in order to fulfil his obligation to
the buyer? If that were so there would be ‘large
numbers of buyers chasing very few goods and the
price would reach unheard of levels’. Alternatively, is
the first seller in the string to do so? Or the last
seller? No one can tell. It seems to me that if there is
prohibition of export or force majeure, the sellers are
not bound to buy afloat in order to implement their
contract.”
- Per Lord Denning M.R. in Tradax Export SA
v Andre & Cie SA [1976] 1 Lloyd’s Rep 416
at 423
iv. If the c.i.f contract states that goods are to be “shipped”
from a particular port, and if despatch from that port
becomes impossible due to a frustrating event, the seller is
not obliged to buy goods afloat.
v. In such a situation the seller will only be compelled to
procure goods afloat if the terms of the contract are very
clear that the goods should be bought from other suppliers
to meet the contract, before or after shipment or the c.i.f
contract expressly provides that goods should be shipped
“afloat” or with reference to a particular ship.
The Rights of the Buyer

The c.i.f contract creates two independent rights in the buyer,
namely;
i. The right to receive conforming documents and
ii. The right to receive conforming goods
“The right to reject the documents arises when the
documents are tendered; and the right to reject the
goods arises when they are landed and when after
examination they are not found to be in conformity with
the contract.”
- Per Devlin J. in Kwei Tek Chao v British Traders and
Shippers Ltd [1954] 2 QB 459 at 481
iii. It is important to note that these rights are distinct from
one another, arising at different stages of the transaction.
See, Comptoir d’Achat et de Vented u Boerenbond Belge SA v
Luis de Riddler Ltd (The Julia) [1949] AC 293 – a must read
case!
204
Also see Gill & Dufus SA v Berger & Co Inc (No 2) [1983] 1
Lloyd’s Rep 622. One cannot retrospectively validate the
rejection of the documents on the basis that the goods that
arrived did not conform to the contract.
iv. Do these two distinct rights in any way affect each other?
The classic situation could be where the buyer has accepted
documents which on their face appear to conform but are in
fact defective as he has no way of knowing at the time that
the goods were non-conforming (late shipment or not
conforming to the description).
v. In such a situation the right to reject the documents is lost
when the buyer or the bank via letter or credit accepts the
documents and pays the price against the tender of the
documents without objection, even if the documents are
inaccurate! See the observation of Denning J. in Panchaud
Freres SA v Establissements General Grain Co [1970] 1 Lloyd’s
Rep 53
“By taking up the documents and paying for them, they
are precluded afterwards from complaining of the late
shipment or defect in the bill of lading.”
- Per Denning J
vi. While the buyer has lost the right reject the documents by
accepting and the bank paying for the same, he still has
the right to reject the goods upon their arrival if
he finds them not conforming to contract specification.
See the observation of Hobhouse J. in Bergco USA v Vegoil
Ltd [1984] 1 Lloyd’s Rep 440 at 446 where he went on to
state that;
“…the exercise of the right to reject goods is one
which he is entitled to postpone until the goods
arrive. He can make up his mind then to exercise his
right as it suits him best…….. [as long as] this
rejection of the goods has been made clear and
unequivocal – he must indicate that he wants
nothing more to do with the documents or
goods…….. He may lose his right meanwhile if he
deals with the goods or documents so as to disable
himself from restoring title to the sellers or by actual
waiver”
vii. The Exceptional Case… In the event that the defect in
the document comes to light before taking delivery of the
goods, the buyer is still entitled to reject the
consignment even if he has paid for the goods and
property has passed to him. In c.i.f sales conditional
property passes on tender of documents.
viii. Another scenario… Where the buyer (or his agent) does
not realise that the documents are inaccurate, he can claim
damages from being prevented from rejecting the
documents, even in a situation where he has subsequently
disposed of the goods (falling market loss damages). See
Kwei Tek Chao v British Traders & Shipper Ltd [1954] 2 QB
459, Finlayv Kwik Hoo Tong [1929] 1 KB 400
Note: Kwei Tek Chao & Finlay should be distinguished from

the rule laid down in Proctor & Gamble Philippine
205
Manufacturing Corp v Kurt A Becher GmbH [1988] 2 Lloyd’s

Rep 21 (CA) where the buyer could claim only nominal
damages.
In contrast in Kwei Tek Chao & Finlay the sellers as shippers
had committed two major breaches, namely, a. failing to
tender a genuine document and b. not shipping goods
within the shipment period.
Doctrine of Estoppel & Waiver

These legal doctrines come into play in situations where the parties
have chosen to do or not to do something in the course of the
transaction to the detriment of the other party.
i. Estoppel has no standard definition and could be by
record, by deed, estoppel in pais or promissory estoppel.
Estoppel is more of promise + reliance by the
other party + detrimental + and notrequiring
notice as it is simply based on inequity. If a
person through his representation induces/ convinces
another individual to change his position/ status, then
he cannot afterwards deny his representations made by
him.
ii. Waiver could be viewed as the abandonment of one’s
legal right. Waiver, technically it would be election +
notice + finality. A buyer would lose his right to
reject non-conforming documents if he waives (by word
or conduct) his right to do so.
“…As an inchoate doctrine negating any liberty to
blow hot and cold in commercial conduct”
- Per Winn LJ. In Panchaud Frere SA v
Establissements General Grain Co [1970] 1
Lloyd’s Rep 53
One should note that Winn LJ., saw it more as a
requirement of fair conduct rather than as being a
“doctrine of waiver or estoppel”. He was wary about
introducing “constructive notice” into waiver in
commercial conduct and did not base his decision on
either waiver or estoppel!
See the following;

i. Panchaud Frere SA v Establissements General Grain Co
[1970] 1 Lloyd’s Rep 53,
ii. Proctor & Gamble Philippine Manufacturing Corp v Peter
Cremer BmbH & Co (The Manilla) [1990] 1 Lloyd’s Rep 391
iii. One should take care to distinguish the doctrine of waiver
from estoppel. See Motor Oil Hellas (Corinth) Refineries SA
v Shipping Corp. of India (The Kanchenjunga) [1990] 1
Lloyd’s Rep 391
“…the representation (estoppel) itself is different in
character (from election). The party making his
election is communicating his choice, whether or not
to exercise a right which has become available to
him. The party in an equitable estoppel is
representing that he will not in future enforce his
206
legal right. His representation is therefore in the

nature of a promise which though unsupported by
consideration can have legal
consequences….(promissory estoppel).
- Per Lord Goff The Kanchenjunga [1990] 1
Lloyd’s Rep 391
iv. It is clear that it is possible for a buyer to claim damages

(right to reject goods) even if documents are in conformity
(not all defects in goods can be apparent on the face of the
document). See Kwei Tek Chao, damages will be
calculated according to section 53(3) of Sale of Goods Act
1979. The damages that could be claimed is the difference
in value between goods at time of delivery and value of goods
if they had been conforming.
The Duties/ Responsibilities/ Obligations of the Parties

The duties of the c.i.f seller is different from that of the f.o.b seller
as the c.i.f contract embodies three different contracts; namely,
contract of sale, contract of carriage & contract of marine insurance.
This situation naturally gives raise to complex legal problems.
In a c.i.f contract the conforming documents play a key role in the
performance of the contract. The seller’s duties under a c.i.f
contract could be summarised as;
a. To acquire goods meeting the contract description or
procure goods afloat conforming to contract description
b. Ship the goods from port shipment to agreed port of
destination
c. To obtain the bill of lading for such cargo loaded
d. To take an insurance cover for the cargo on board for the
benefit of the buyer
e. To attach a commercial invoice and
f. To tender these documents; namely, the bill of lading,
insurance policy and invoice, together with any other
documents which might have been agreed upon
The buyer’s duties under a c.i.f contract could be summarised as;

a. To accept such documents tendered by the seller and pay
the contract price
b. To receive such goods when they arrive at the port of
discharge
c. To pay all import duties, consular fees and all incidental
expenses necessary for the goods to be allowed entry
207
Question 1.3.1
 What are the main elements of the c.i.f contract?

 What is your view on Scrutton J’s observation in Arnold Kahberg & Co v
Blythe, Green, Jourdain & Co [1915] 2 KB 379 at 388?
208
5.4 Documentation
In this section you will be introduced to the documentation
necessary for trade contract under INCOTERMS.
Learning Objectives
 Examine the concept of documentation.
 Explore the elements needed for trade contract.
Documentation in c.i.f Sales

In a c.i.f contract documentation plays a vital role and will have to
be examined closely. As seen earlier the c.i.f contract is based on
three contracts; namely sale contract, carriage contract and
insurance contract.
The three conforming documents that would be required in a c.i.f
contract are as follows:
A. A bill of lading
Note: The bill of lading would be discussed in much detail
during the next term. Here, it is discussed as in a different light.
B. An insurance cover and
C. A commercial invoice
At the heart of the c.i.f contract is the commitment of the seller to
arrange for the carriage of goods. According to section 32 (2) of the
Sale of Goods Act 1979, the contract tendered must be
“reasonable having regards to the nature of the goods and
other circumstances of the case”.
This would mean that the seller must provide the buyer with
“continuous documentary cover” against the carrier – a continuous
cause of action against the carrier taking the buyer from the port of
loading to its destination. See Hanson v Harmel & Horley Ltd [1922]
2 AC 36 (HL). The seller was in breach here.
The Bill of Lading

A bill of lading could be said to be conforming if it is a clean,
genuine bill of lading (to be a shipped bill of lading) that clearly
demonstrates that the seller had entered into a contract of carriage
that provides continuous cover from port of shipment to the port of
discharge.
i. The bill of lading will have to be issued on shipment –
See Lord Sumner’s observation in Hanson, Harmel &
Horley Ltd [1922] 2 AC 36 at 47 (HL). Some contracts
makes it clear that the bill of lading will be conclusive
evidence of the date of shipment James Finlay & Co Ltd v
Kwik Hoo Tung [1929] 1 KB 400.
There could be other issues as well, like the delayed
issue of the bill of lading. If the delay is not reasonable it
could cause problems as it could fail to provide
continuous cover. See Foreman & Ellams Ltd [1928] 2 KB
60 Further, the date of loading of the cargo should also
coincide with the contractual time of shipment.
209
ii. Shipped bill of lading : It is normally expected of the

seller to tender a “shipped bill of lading” (as opposed to
a received for shipment bill of lading) unless the trade
custom allows otherwise. See Yelo v SM Machado & Co
[1952] 1 Lloyd’s Rep 183. The terms of credit required
that a “shipped bill of lading” and it was held that a
received for shipment bill of lading was insufficient.
A must read case – Diamond Alkali Export Corporation v
Bourgeois [1921] 3 KB 443. McCardie J observes that
there is a difference in principle both “legally and in a
business sense” between the shipmaster acknowledging
that he has received the goods and they are in his
warehouse awaiting shipment, as opposed to they have
been put over the ship’s rail. One would end up saying
that “a mere receipt for goods at a dock warehouse for
future shipment might be called a bill of lading!” See the
observations of McCardie J at page 452.
iii. Clean bill of lading: The expression clean is used as
“opposed to claused”. A clean bill of lading would mean
that there is “no qualification” on the statement that
goods have been shipped in apparent good order and
condition.
It should be borne in mind that the expression “clean”
refers to the state of goods as at the time of loading (pre-
shipment). One could have a clean bill of lading
qualifying post-shipment conditions of goods! This is
where “unacceptability of qualified statement” attaches.
It does not attach post-shipment! See the must read case
of The Galatia [1980] 1 All ER 501 – here a cargo of
sugar caught fire after being put on board, while the
shipmaster had already indicated that the goods were
received in good order and condition.
iv. A Genuine Bill of Lading – as opposed to a fraudulent bill
of lading. See Kwei Tek Chao v British Traders & Shippers
Ltd [1954] 2 QB 459, involving a fraudulently altered
bill of lading concealing the fact that the goods were
shipped outside the shipment period. It was seen as bad
tender entitling the buyer to damages for loss of right to
reject documents.
Also see The Raffaella [1984] 1 Lloyd’s Rep 102, it was
held that the bill of lading “was a sham piece of paper”
as the contract was non-existent. The buyer could
recover his money under a mistake of fact. In Proctor &
Gamble v Kurt Becher [1988] 2 Lloyd’s Rep 21, the bill of
lading was inaccurate (wrongly dated) but the goods
met the contractual description (and shipped within the
shipment period) and the buyer could only recover
nominal damages.
See Motis Exports Ltd v Dampskibsselskabet [2000] 1
Lloyd’s Rep 211, where the bill of lading was found
forged. It was not treated as a bill of lading and thus void
ab ignition – a nullity in law, as the bill of lading
represents title to the goods as well as physical
possession of the goods during the carriage at sea.
210
v. The bill of lading cannot be altered –as this would defeat

the whole purpose of the bill being a form of security in
international sales. See SIAT dal Ferro v Tradax Overseas
[1980] 1 Lloyd’s Rep 53 – here the shipmaster went
about altering the destination as found in the bill of
lading! It was held that the sellers could not try and use
a trade clause demanding the acceptance of the bill of
lading regardless of the state of the bill of lading. Must
read!
vi. Valid & Effective – transferable:For the bill of lading to be
valid and effective it need to be transferable and it is not
sufficient that it is clean & genuine! It should be able to
transfer the property right in the goods to the buyer.
See Girvin (2006) JBL 86-116 The Raphaela S [2005] 1
Lloyd’s Rep 347
Should be transferable: to be dealt with in detail in later
chapters. See The Chitral [2000] 1 Lloyd’s Rep 529 –
here the court refused to accept a straight consigned bill
of lading as a “to order” bill or negotiable bill.
If the contract contained in a bill of lading is void, the
same is not transferable. See Arnhold Karberg & Co v
Blythe Green Jourdain & Co [1915] 2 KB 288
The bill of lading is still effective even if the goods that it
represents has been lost after shipment.
vii. Valid & Effective – Continuous Documentary Cover: The
bill of lading should cover the entire sea transit. See
Hanson, Harmel & Horley Ltd [1922] 2 AC 36, there was
a 13-day gap when goods were transhipped. See page 46
for Lord Sumner’s observation on the lacuna, “….the
buyer is plainly left with a considerable lacuna in the
documentary cover to which the contract entitles him”.
The continuous cover is a must under c.i.f contracts
unless one can prove the existence of a local custom. See
Meyer v Aune [1939] 55 TLR 876
viii. Should provide for an agreed route without any wide
deviation (shall be discussed during term 2).
The question that we ask is – “are there any substitutes
for a bill of lading?”
The Insurance Cover:

The insurance policy should provide continuous cover against the
usual and expressly agreed risks from the port of shipment to the
port of discharge. The cover should be with respect to the cargo and
voyage in question. See Reinghart Co v Joshua Hoyle & Sons Ltd
[1961] 1 Lloyd’s Rep 346 at 352.
i. The seller is obliged to take out a marine insurance
policy for the buyer, which is assignable or simply assign
the policy to the buyer. See Diamond Alkali Export
Corporation v Bourgeois [1921] 3 KB 443 at 446
211
“[T]he buyer could sue [only if] he would have to

show that he was an assignee of the [insurance]
certificate…. A marine policy may be assigned by
endorsement or in any other customary manner”
- Per McCardie J in Diamond Alkali Export
Corporation v Bourgeois [1921] 3 KB 443 at
446.
ii. Valid & Effective Tender: The marine insurance cover
taken out by the seller should be valid and effective. If
the policy is procured by misrepresentation of any
material facts it becomes invalid and unenforceable. The
policy would then become illegal. See the observation
made in Strauss v Spillers & Bankers [1911] 2 KB 759 at
773
“[does] not come within the category of policies
which are intended to be attached to the documents
under a CIF contract. The transaction is the
plaintiff’s private speculation”
- Per Hamilton J in Strauss v Spillers &
Bankers [1911] 2 KB 759 at 773.
A buyer could get only what has been bargained for
under the contract. See Groom Ltd v Barber [1915] 1 KB
316. The policy, although valid, may not offer the cover
the loss that has actually occurred. The buyer may have
to accept the same as the seller might have made it clear
in the contract of sale that the particular risk was not
covered by the policy.
iii. The policy will have to cover only the goods mentioned
in the bill of lading. See Manbre Saccharine Co v Corn
Products Co [1919] 1 KB 198 at 204
“A policy of insurance which covers and covers only
the goods mentioned in the bill of lading and
invoices”
- Per McCardie J Manbre Saccharine Co v
Corn Products Co [1919] 1 KB 198 at 204
See Hickox v Adams (1876) 34 LT 404
The policy while referring to the buyer should cover the

buyer and state exactly what risks it is protecting the
buyer from. It should be for the exclusive benefit of the
buyer. See The Julia [1949] AC 293
iv. Continuous Documentary Cover: The buyer should ensure
that the policy has a clause providing for uninterrupted
documentary cover. The clause would normally contain
a “warehouse to warehouse” or “transit” clause. This
would mean it would offer cover even in situations
where the cargo is transhipped.
See Belgian Grain & Produce Co v Cox & Co (France) Ltd
[1919] 1 Lloyd’s Rep 256. Also see Yuill & Co v Scott –
Robinson [1908] 1 KB 270
v. The policy should be in accordance with express terms of
the contract of sale
vi. The policy should cover the value of the goods and
include value of freight
212
vii. Can there be any substitutes for such policies? See

Koskas v Standard Marine Insurance [1927] 32 Comm.
Cas. 160 at 163. Scrutton J observes that it is a rule of
English law that a certificate of insurance cannot be
tendered as a policy of insurance to satisfy a c.i.f contract!
Also see the observation of McCardie J in Diamond Alkali
Export Corporation v Bourgeois [1921] 3 KB 443 at 454
(inserting appropriate clauses). Also see Koskas v
Standard Marine Insurance (1927) 32 Comm. Cas. 160.
The Commercial Invoice

Can a second tender by the seller cure the defects? The answer: it
can be cured by a second tender of documents by the seller. See
Borrowman Philips & Co v Free & Hollis (1878) 4 QBD 500.
The buyer could also call for a second tender of documents. If the
buyer chooses not to do so, his choice is final and binding on him
and he had effectively waived his right to reject the tender. See
Lord Goff in The Kanchenjunga [1990] 1 Lloyd’s Rep 391.
Anticipatory breach by either party ends the seller’s right to re-
tender!
Certificate of Quality:
A certificate of quality could be requested in a c.i.f sale contract.
Most parties do mention so in their contract!
See the following cases:

• Gill v Dufus SA v Berger & Co Inc [1984] AC 382
• Peter Cremer v General Carriers SA [1974] 1 All ER 1
• SIAT dal Ferro v Tradax Overseas SA [1980] 1 Lloyd’s Rep
53
Further Reading:
i. Sassoon [1967] JBL 32 – Explains the origins of f.o.b & c.i.f
Documents in c.i.f sales:

ii. AHDAR [1990] LMCLQ 364
iii. APPS [1994] LMCLQ 525
iv. Todd [1999] LMCLQ 449
Rights to documents & rights to goods;

v. Treitel [1984] LMCLQ 565
vi. Treitel [1988] LMCLQ 457
vii. Feltham [1975] JBL 273
213
Question 1.4.1
 A bill of lading is at the heart of documentation in trade contracts. Discuss

its importance.
214
Summary__________________
This chapter examined various aspects of international trade
contracts. It explored the main types, f.o.b and c.i.f, under
INCOTERMS. It also explored the documentation needed for such
contracts and their relevance.
 Compare and contrast the merits of selecting an f.o.b contract over a c.i.f.
215
Introduction
Overview
The purpose of this chapter is to introduce you to issues regarding
the Sale of Goods Act 1979. It will examine the Scope of the Act,
the concept of Sale of Goods Contract, and issues relating to the
of Property and the issue of Risk. It will highlight the Seller’s Title
to Goods as per Section 12(1) of the Act and discuss what is meant
Aims
□ Explore the requirements under the Sale of Goods Act regarding the transfer
of risk.
□ Explore the concept of Sale of Goods Contract.
□ Examine the concept of the Passing of Property and the issue of Risk.
Learning Outcomes
□ Outline the requirements under the Sale of Goods Act regarding the transfer
of risk.
□ Discuss the requirements under the Sale of Goods Act regarding the transfer
of risk.
□ Outline the concept of Sale of Goods Contract.
□ Discuss the concept of the Passing of Property and the issue of Risk.
217
Resources
Essential readings
Students are encouraged to read the cases listed to develop further

Lawtel or Lexis.

Parliament for Companies Act 2006
http://www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf
218
6.1 Sale of Goods Act 1979

The purpose of this section is to examine issues regarding the Sale
of Goods Act 1979. It will examine the Scope of the Act, the
Contract and its Terms.
Learning Objectives
□ Examine the Sale of Goods Act 1979.
□ Examine the Scope of the Act.
□ Examine the concept of Sale of Goods Contract.
□ Examine the Contract and its Terms
Introduction
The first statute on sale of goods in the UK was the Sale of Goods
Act 1893. This statute was primarily concerned with the needs of
the commercial buyers and sellers in the market. The Sale of Goods
Act 1979 which replaced the 1893 Act also recognises the needs of
the average consumer. It came into effect on 1st January 1980 and
consolidated the law on the subject. This Act was again amended in
1994 by the Sale and Supply of Goods Act 1994.
The Sale of Goods Act 1979 primarily focuses on contractual
elements, as they are crucial to the needs of the buyer and seller of
goods.
Scope of the Act:

Like its predecessor the Sale of Goods Act 1979 applies to contracts
for the sale of all types of goods. The old Act did not make any
distinction between commercial sales and private sales, between
merchants’ sales and retail sales, or between sales of new and
second-hand goods.
As regards the SGA 1979, it applies generally to every kind of
contract, regardless of the circumstances in which it may have been
formed. It applies to both the first hand and second hand sale.
The Sale of Goods Contract:

It would be our first task to ascertain “what is a contract of sale”
according to the SGA 1979. The discussion would be incomplete if a
“contract of sale” is not distinguished from “sale” and “agreement to
sell”.
The definition is to be found in s.2 (1) to (6) of the Sale of Goods
Act 1979.
A contract of sale of goods is 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.
A reading of the section reveals that it contains two types of
contracts in it, which are
i. A contract of sale, and
ii. An agreement to sell
219
a. Contract of Sale:
In a contract of sale the ‘property in the goods’ (the title or
ownership) is transferred with immediate effect upon the contract
being made. A classic example is the goods purchased across the
counter like a packet of tissues or a bar of chocolate. Here the buyer
becomes the owner in possession of the packet of tissues or the bar
of chocolate the moment the sales assistant hands it over across the
counter.
The important thing to note here is that the contract of sale could
exist only if the goods are already there and are in possession of the
seller and allocated to the contract. In addition they should also be
specific goods and agreed upon at the time of sale.
b. Agreement to Sell:
Under the Act an agreement to sell is a binding contract which then
will become a contract of sale once the goods exist and is specified.
It means the ownership in the goods is capable of being transferred.
A classic example would be when you buy a car and await delivery.
Till such time the car manufacturer notifies that the car is ready for
delivery you don’t become the owner.
In simple term one could say that if the contract takes effect to
immediately to pass the ownership on to the buyer it is called a sale,
and when the contract takes effect so that the ownership is passed at
some future time or when some condition is fulfilled it is called an
agreement to sell.
Important Provisions Covered by the Act:

The following are some of the important provisions covered under
the Sale of Goods Act 1979
a. Goods
Under section 61(1) of the Act, goods in s.2(1) would include all
personal property (referred to as chattels) capable of physical
possession and control, but not property interests like shares in a
company, or intellectual property such as a trade mark or copyright.
Chattels are seen as personal property which can be touched and
moved (a car, a computer, etc). It is worth noting here that land
(real property) is not goods. However crops (wheat, corn,
vegetables) which are attached to the earth and have to be removed
before being sold is treated as goods.
A guarantee is a thing in action. It might be written on a piece of
paper but the piece of paper is not the property but it is the right
which is contained in the guarantee that is seen as property.
Goods can be in existence or may arise in future. Existing goods
could be owned or possessed by the seller and the future goods are
to be manufactured or acquired.
b. Price
A sale cannot be successful without any monetary consideration.
So, for a transaction to be classified as a contract of sale of goods
the buyer’s consideration must consist of money. S.8 of the Act
clarifies the term ‘price’ in s. 2(1). It makes it very clear that the
220
consideration should be money. The same can be paid in cash,

cheque or credit card.
Would a part-exchange together with a payment of money be
termed as “sale of goods”? See Aldridge v Johnson (1857) 7 El & BI
885
c. Contract outside the 1979 Act

It could be said from the above discussion that not all contracts
would be covered by the Sale of Goods Act 1979. The following
could be identified as contracts falling outside the Sale of Goods Act
1979.
i. Goods & Services Contract – Installing a kitchen
worktop with cookers
ii. Hire-purchase Contract – here possession of the goods
is given and not the ownership of the goods. The person
supplied with goods is referred to as the “hirer”. The Hirer
becomes the owner when all the instalments are paid.
iii. Hire Contracts – once again the possession and not the
ownership passes to the hirer.
iv. Contracts of Barter – here parties exchange goods are
services. Even though goods are involved it is not a sale
contract as no money changes hands.
The Contract and its Terms

Certain terms need not be mentioned by the buyer or the seller in
the contract. The Sale of Goods Act 1979 would automatically
imply terms which favour the buyer into contracts of sale of goods.
The following is a summary of the terms implied by the Act into
such contracts.
Terms Implied by the Sale of Goods Act 1979

The Sale of Goods Act 1979 under sections 12 to 15 imply terms
into the contract. These terms favour the buyer which means a
seller would automatically assume certain obligations to the buyer
as a result.
As such the seller is required to promise that
a) Under s. 12(1) the seller has the authority to transfer

ownership of the goods.
This is the most fundamental of all the implied terms as a seller
who does not have the right to sell will not be able to transfer
ownership in the goods.
See Rowland v Divall [1923] 2 KB 500 (Court of Appeal)
b) Under s. 12(2) the goods are free from encumbrances

and the buyer will enjoy quiet possession
The section is seen as one providing a warranty and in the event of
any breach the buyer is entitled to only damages. It implies that at
the time when ownership is to pass to the buyer nobody else had
any ownership rights over the goods. The other warranty is that no
one would interfere with the buyer’s right to ownership.
221
See Microbeads AG v Vinhurst Road Markings [1975] 1 WLR 218
c) Under s. 13(1) the goods will match their description

Goods are normally sold by their description. The seller would be
found in breach of the contract if the goods do not conform to the
description. If the goods are not sold by description then the section
13 would not apply.
Unascertained, future and specific goods are some of the types of
goods which need to be looked into in this regard. Unascertained
goods are not identifiable as they could form part of a bulk and in
the same way future goods are to be manufactured. Both these
forms of goods are sold by description.
See Arcos v Ronassen [1933] AC 470 (House of Lords)
d) Under s. 14(2) the goods will be of satisfactory quality

One of the most significant of the statutory implied terms is the one
relating to satisfactory quality of the goods sold. The expression
“satisfactory quality” was introduced by the Sale and Supply of
Goods Act 1994 replacing the expression “merchantable quality”
appearing in the Sale of Goods Act 1979. This term would only be
implied if the goods were sold in the course of a business.
See Stevenson v Rogers [1999] 1 All ER 613 (Court of Appeal)
e) Under s. 14(3) the goods are fit for the buyer’s purpose
The goods should also be reasonably suitable for purpose for which
it is sold. As in the earlier case s. 14(3) will not be implied if the
goods are not sold in the course of business. The buyer should also
expressly or implied should make known to the seller the purpose
for which the goods are being bought. The buyer could only
succeed if it can be proven that the buyer placed reliance on the
seller.
See Grant v Australian Knitting Mills Ltd [1936] AC 85 (Privy
Council)
f) Under s. 15(2) the goods will match any sample shown

prior to the contract being made – in quality and free
from defects
In a case of sale by sample it is an implied condition that i) the bulk
will correspond to the sample and that ii) the goods will be from
any defects rendering them unsatisfactory. These terms are implied
into all sales by sample – whether made in the course of business or
not.
See Godley v Perry [1960] 1 ALL ER 36
The above implied terms impose strict liability. The terms are
to be seen as being conditions of the contract and any breach would
only enable the wronged party to refuse further performance of the
222
Question 6.1.1
Discuss the importance of the Sale of Goods Act 1979 for the consumer.
223
6.2 Passing of Property & Risk

The purpose of this section is to examine the concept of the Passing
of Property. It will highlight the Seller’s Title to Goods as per
Section 12(1) of the Act and discuss what is meant by the Passing
of property.
Learning Objectives
□ Examine the Passing of Property.
□ Examine the Seller’s Title to Goods.
□ Discuss what is meant by the Passing of property.
Seller’s Title to Goods: Section 12(1)

If the transfer of property is the essence of the contract then the
seller should first have the title to the goods. The buyer may not
acquire any title to the goods if the seller did not have the right to
sell the goods, in other words there would be a total failure of
consideration.
See section 12(1) of the SGA makes it clear that there is an implied
term that the seller would have right to sell or title to the goods
which he seeks to sell.
i. In the case of a sale there is an implied term on the part of the
seller that he has a right to sell the goods property.
ii. In the case of an agreement to sell there in an implied term on
the part of the seller that he will have such a right at the time
when the property is to pass.
i. It is to be noted that the section here imposes a strict

liability on the seller. The section enshrines the common
law rule.
See Rowland v Divall [1923] 2 KB 500 at 505
Niblett v Confectioners’ Materials Ltd [1921] 3 KB 387 at
402 – “a right to sell the goods” is not limited to the ability
to pass a good title, it is more than that. It was the sale of
tinned milk from New York to London.
“The defendants impliedly warranted that they had
the right to sell them. In fact they could have been
restrained by injunction from selling them, because
they were infringing the rights of third persons. If a
vendor can be stopped by process of law from selling
he has not the right to sell”
- Per Scrutton L.J in Niblett v Confectioners’
Materials Ltd [1921] 3 KB 387 at 398.
ii. The expression “a right to sell the goods” has both a wider
and a narrower significance. It would simply mean that the
seller has the power to vest full and complete rights over
the goods in the buyer.
iii. The seller only promises that he will be able to create the
appropriate rights in the buyer!
See The Elafi [1981] 2 Lloyd’s Rep 679 at 685
224
Passing of property:
The purpose of a contract of sale of goods is to pass the property
(ownership) in the goods to the buyer in return for payment of the
price. The possession and ownership are not necessarily transferred
at the same time in a sale of goods contract. The reasons are that
the risk (liability for loss or damage to the goods) would still rest
with the seller unless specified by the contract.
The passing of ownership and risk in the goods sold is one of the
important areas covered by the Sale of Goods Act 1979. When
goods are sold under a sale contract the seller contracts to pass
ownership of the goods to the buyer. While possession merely gives
the party the right to physical control ownership empowers the
owner to enjoy the same and dispose of the goods in any way he or
she chooses.
The general scheme of passing of property under the SGA 1979 is
to be found in Sections. 16-20. Sections 17 of the SGA 1979,
provides that the property in specific goods would be transferred at
the particular time or in the particular circumstances which the
parties intend (refer to the INCOTERMS 2000 from previous
lectures). This may be specified in the contract itself or be implied
from the parties conduct, custom of the particular trade or any
other relevant circumstances. It is the intention of the parties that
determines when the property in the goods should pass.
The Significance
In certain circumstances it is important to establish where the
property in the goods lies. One of the most important circumstances
is when either the seller or the buyer has become insolvent.
i. Where the seller becomes insolvent, the seller’s creditor’s
will seek to establish that the goods sold were the property
of their debtor, namely, the seller at the time of
insolvency. This is obviously done to increase the assets of
the fund available for distribution to the creditors.
See Carlos Federspiel & Co SA v Charles Twigg & Co Ltd
[1957] 1 Lloyd’s Rep 240
Re Goldcorp Exchange Ltd [1995] 1AC 74
ii. If the buyer were to go insolvent, the roles would reverse
and the buyer’s creditor’s who will try to establish that
the goods belonged to the buyer on insolvency.
iii. The litigation that follows would invariably seek to
establish the as to who owns the “property” in the goods
under the SGA 1979 as amended by the Act of 1995.
Ascertained or Specific Goods

i. Ascertainment: Section 16 of SGA makes it clear that
property in goods cannot pass till such time it is
ascertained. Specific goods are those identified at the
time of the contact itself. In contrast ascertained goods
are those which are unidentified when the contract was
made but is identified later.
See Re Goldcorp Exchange Ltd [1995] 1AC 74
ii. Intention: Once ascertained (section 17 takes over), the
property in the goods does not immediately gets
225
transferred to the buyer. It is transferred to the buyer at

such time as the parties to the contract intend it to be
transferred.
iii. Unconditional Appropriation: Section 18, Rule 5 of SGA
1979 lays down the procedure to be followed where the
contract is silent about the moment at which the
property in the goods is to pass. This rule is important in
both f.o.b and c.i.f sale.
iv. Appropriation & Ascertainment: These are two different
expressions (but could happen at the same time). When
the seller identifies a particular consignment of goods to
a buyer he appropriates the goods. In contrast to
ascertain goods is to separate them from a bulk.
Key words – allocation & separation
v. Property in the goods cannot pass unless the goods are
ascertained unconditionally. Appropriation can be
conditional in two ways – expressly or impliedly. If the
seller has been paid he may not want to retain title.
See Pyrene Co v Scindia Navigation Co [1954] 2 QB 402
Where the seller has intended to retain the title subject
to a condition (payment of price), property could pass
only on the satisfaction of the condition.
See The Antares III [2002] 1 Lloyd’s Rep 233
The Elafi [1981] 2 Lloyd’s Rep 679 (Was the passing of
property deferred by operation of law until
ascertainment? Interesting case.)
Unascertained Goods
One of the reasons for passing of The Sale of Goods (Amendment)
Act 1995 was to address the issue of passing of property under s.16
of SGA 1979. Section 16 operated as an absolute bar on the passing
of property in unascertained goods.
i. Under s.16 property in goods, which form part of an
undivided bulk, did not pass until they were ascertained.
This led to a situation were they could only pass on
discharge from the vessel.
ii. Section 16 is now subject to section 20A of The Sale of
Goods (Amendment) Act 1995. This means that in
certain situations the buyer would have an ownership
right over the equivalent of goods he has paid for.
Note: Read 20A (2) & (3)
Passing of property in a c.i.f contract –

See The Julia [1949] AC 293 at 309
“In such a case [c.i.f] the property may pass either on
shipment or tender; the risk generally passes on shipment or
as from shipment, but possession does not pass until
documents which represent the property are handed over in
exchange for the price. In the result, the buyer after receipt
of the documents can claim against the ship for breach of
contract of carriage and the underwriters for any loss
covered by the policy”.
- Per Lord Porter in The Julia [1949] AC 293 at 309
226
i. Passing of risk: under a c.i.f clause, risk passes to the buyer

on shipment. Even though, under a c.i.f contract, the
seller is responsible for payment of freight and marine
insurance premiums, the goods travel at the buyer’s risk.
ii. Passing of property: passing of property deals with at what
point in time can the buyer dispose of the property/ deal
with the property.
iii. In a c.i.f contract, property passes on tender of
documents/ when the bill of lading is delivered to the
buyer or the bill of lading is delivered to the bank if
payment is arranged under a letter of credit.
iv. It is important to note that the buyer only acquires
conditional property meaning that it is subject to the
condition that the goods shall revert to the seller if upon
examination they are found not to be in accordance with
the contract.
v. The buyer’s dealings with documents are merely dealings
in conditional property in the goods and the seller retains a
reversionary interest in the goods.
vi. The buyer cannot therefore, deal with the goods in a
way that is inconsistent with seller’s ownership of goods.
See Hardy & Co v Hillerns Fowler [1923] 2 KB 490
vii. Sometimes it works fine for the buyer!
See Kwei Tek Chao v British Traders & Shippers Ltd
[1954] 2 QB 459. The buyer was able to claim damages
for his loss of right to reject goods!
Taylor & Sons Ltd v Bank of Athens (1922) Comm. Cas.
142 – only nominal damages!
Question 6.2.1
Discuss what is meant by the Passing of Property and the issue of Risk.
227

The purpose of this section is to examine the concept of the Passing
of risk as it relates to property.
Learning Objectives
□ Examine the Passing of Risk.
Passing of risk
In domestic sales risk and property are transferred at the same
time. Section 20(1) of the SGA 1979 starts to read as;
“Unless otherwise agreed, the goods remain at the seller’s
risk until the property in them is transferred to the buyer…”
The section assumes that risk would pass with the property. In
international sales risk and property are separated as the physical
risk of loss in transit is greater.
i. What is? The best place to start is to understand what is
risk. Goods are said to be at a party’s risk if he has to bear
the loss resulting from their damage or destruction.
ii. Seller’s risk: This means that if the goods suffer damage,
the seller being unable to deliver the goods, would not
be in a position to recover the price from the buyer. This
would also mean he would have to repay any part
payments made by the buyer.
iii. Buyer’s risk: This would mean that the buyer must pay the
full price even if the goods have been lost or damaged
before the he has taken possession and where property
has not passed.
iv. The buyer, in such instances, should either sue the
carrier or claim under the insurance policy and not
against the seller.
“…the true analysis [of the goods being at the
buyer’s risk] is that he has contracted to buy and pay
for the goods in whatever state they may be when
the voyage ends”.
- Per Sir John Donaldson MR in The
Aliakmon [1985] QB 350
F.o.b. and c.i.f. Contracts:

i. Both under f.o.b and the c.i.f contracts risk would pass to
the buyer on shipment. Under c.i.f sales goods are often
purchased afloat, where risk would pass retrospectively
as from shipment. This is seen as a very convenient
mechanism, as risk is deemed to have passed from a time
before the contract was concluded.
228
“The passage of risk on or as from shipment is

convenient in eliminating difficult questions of proof
of the time goods were lost or damaged while at
sea”.
- JD Feltham, Appropriation to a C.I.F.
Contract of Goods Lost or Damaged at Sea
[1975] JBL 273
ii. If one looks at the scheme of events it would be noticed

that if risk were to pass later than shipment, reselling the
goods/ cargo while being carried at sea would pose
problems.
iii. Exact point of transfer of risk:
See Frebold and Sturznickel (Trading as Panda OHG) v
Circle Products Ltd [1970] 1 Lloyd’s Rep 499 – ship’s rail
Pyrene Co v Scindia Navigation Co [1954] 2 QB 198
Colley v Overseas Exporters [1921] 3 KB 302, 307
Shipment Contracts and Arrival Contracts:

i. The two forms of international transaction primarily
differ where the seller performs his obligation of
delivering the goods
ii. Under shipment contracts he performs his duty at the
agreed port of loading and under the arrival contract at
the agreed port of discharge
iii. If it is a shipment contract then the risk is passed on to
the buyer at the point of shipment. If in the event the
goods are damaged the buyer’s remedy would be against
the carrier or the insurer and not against the seller.
Statutory Exceptions:
The Sale of Goods Act 1979 lists the circumstances where the seller
would run the risk of loss even though it might happen after
shipment.
i. Where loss is caused by delayed delivery [s.20(2)]
See The Rio Sun [1985] 1 Lloyd’s Rep 350
ii. Breach of duty to take reasonable care of warehoused
goods [s.20(3)]
iii. Where the seller has failed to make a “reasonable
contract of carriage” [s.32(2)]
iv. Losses occasioned as a result of failure to pass on
insurance information to the buyer [s.32(3)]
v. Losses occasioned as a result of breach of duty to ship
goods likely to withstand normal sea voyage. [s.14(2)]
See Mash & Murrell v Emanuel [1961] 2 Lloyd’s Rep 326
229
Question 6.3.1
What is meant by the Passing of Risk in relation to property?
230
Summary__________________
The purpose of this chapter was to examine issues regarding the
Sale of Goods Act 1979. It examined the Scope of the Act, the
of Property and the issue of Risk. It highlighted the Seller’s Title to
Goods as per Section 12(1) of the Act and discussed what is meant
231
Chapter 7: Buyer’s & seller’s rights &

remedies
Introduction
Introduction
Overview
The purpose of this chapter is to examine the rights and remedies
pertaining to buyers and sellers. You will examine the classification
of contractual terms with emphasis on the notion of acceptance as
per Section 35 and action for damages for non-delivery under
Section 51. You will also explore a seller’s remedies and the issues
of damages.
Aims
□ Develop an understanding of the Rights & Remedies of the Buyer and Seller.
□ Develop the classification of contractual terms and the notion of acceptance
as per Section 35.
□ Develop an understanding of the action for damages for non-delivery under
Section 51.
□ Develop an understanding of a seller’s remedies.
□ Develop an understanding of the issues of damages.
Learning Outcomes
□ Explain the classification of contractual terms and the notion of acceptance
as per Section 35.
□ Explain the action for damages for non-delivery under Section 51.
□ Discuss a seller’s remedies.
□ Discuss the issues of damages.
233
Resources
Essential readings

Lawtel or Lexis.

Companies House: http://www.companieshouse.gov.uk/
234
7.1 Buyer’s Rights & Remedies

The purpose of this section is to examine the rights and remedies of
buyers. You will examine the classification of contractual terms
with emphasis on the notion of acceptance as per Section 35 and
action for damages for non-delivery under Section 51.
Learning Objectives
□ Develop an understanding of the Rights & Remedies of a Buyer.
□ Develop the classification of contractual terms and the notion of acceptance
as per Section 35.
□ Develop an understanding of the action for damages for non-delivery under
Section 51.
Introduction
The Sale of Goods Act 1979 imposes duties on both sellers and the
buyers. When a seller or buyer’s rights are breached they would
seek to remedy the situation through legal recourse. Here, we look
at the rights of the buyer and the remedies open to him in the event
of any breach under the contract.
The Classification of Contractual Terms

When a term of the contract is breached the innocent party would
be entitled to claim damages. English law has classified contractual
terms as
i. Conditions
ii. Warranties and
iii. Innominate or Intermediate terms
The terms are divided on their importance to the contract and the
remedy that is available to the party that has been wronged. In
certain cases the innocent party would have the right to treat the
contract as being repudiated.
Conditions: A condition of the contract could be said to be an

undertaking by any one of the party and seen as being fundamental
to the contract. Any breach of such a term would go to the very root
of the contract and entitle the aggrieved party to rescind the
contract. The Sale of Goods Act 1979 implies conditions into the
contract under sections 12, 13 and 14.
i. Any breach of a condition would allow one to elect
whether they want to repudiate the contract or seek
damages
ii. S.12 of SGA 1979 implies a condition as to title – it
means the buyer could reject the goods
iii. S.13 of SGA 1979 implies a condition that it shall meet
contractual description – includes the time of shipment
iv. S. 14 of SGA 1979 implies a condition as to satisfactory
quality of the goods sold
235
Warranties: A warranty is seen as a term of a contract which is of

minor importance compared to that of a condition and, a breach of
which would not have the same consequences as that of a
condition. It would not entitle the innocent party to rescind the
contract but only to seek damages as a remedy.
Innominate or Intermediate Term: The nature and effect of the breach

would determine an innominate term – if it would entitle the
affected party to terminate the contract. If the breach is very serious
and goes to the root of the contract, then the party would have the
right to terminate the contract. One might ask the question why
innominate terms are used in contracts when they lead to
uncertainty? See the cases below:
The Hansa Nord [1975] 2 Lloyd’s Rep 445 &
The Hong Kong Fir [1961] 2 Lloyd’s Rep 478
See Schuler v Wickman [1974] AC 235 – a term referred to in the

contract as a “condition” was held to be an intermediate/
innominate term!
The Notion of Acceptance – Section 35

Acceptance of goods is about ‘when a buyer is barred from rejecting
the goods. The key word here is “deemed to accept”! The courts
tend to treat it more as a breach of warranty.
It actually limits the buyer’s right to reject the goods. It should be
borne in mind that mere receipt of goods is no acceptance! The
following would characterise an “acceptance”:
i. The buyer can “accept” by approval – Section 35(1)
intimating to the seller that he accepts them by act or
conduct. It could also be said that it is through lapse of
time!
ii. The buyer can “accept” them if he is indecisive and keeps
them for an unreasonably long time – Section 35(3)
acceptance via “lapse of reasonable time”. This is to target
the indecisive buyer!
What is “reasonable time” is a question of fact rather than a fixed
time – Section 59. See Truk (UK) Ltd v Tokmakidis GmbH [2000] 1
Lloyd’s Rep 543. The court considered the reasonable time for
“goods bought on resale”.
i. Reasonable time depends on whether the buyer has had
a reasonable opportunity to examine the goods to see if
they are in conformity – Section 34
ii. Though flexible, the prudent buyer will examine them
when they arrive and decide whether to keep them or
reject them
iii. The buyer can “accept” by doing an act inconsistent with
the ownership of the seller – Section 35(2). This is again
subject to Section 34 meaning,
“Once goods are delivered to buyer” – Once goods are
delivered to buyer, if the buyer acts as though he
accepts title to the goods e.g., by despatching them to
a sub-buyer or pledging them as security, he is then
deemed to have accepted the goods!
236
See Kwei Tek Chao v British Traders [1954] 2 QB 459;

Bergerco USA v Vegoil Ltd [1984] 1 Lloyd’s Rep 440 at 445
iv. Making Section 35, subject to Section 34 meant that the

buyer would lose his right to reject if he had had
reasonable opportunity to examine the goods and still
resold and dispatched the goods to a third party.
It is to be noted that the Sale of Goods Act does not make the
examination of the goods a condition precedent of their acceptance.
Under section 35(2) it only requires that the buyer be given a
reasonable opportunity of examining the goods. The seller is not
deemed to have accepted the goods until he is given the opportunity.
See the article by I. Brown, “Acceptance in the Sale of Goods” [1988]
JBL 56
See Hardy Co Ltd v Hillerns & Fowler [1923] 2 KB 490 – It seemed

unfair that the sub-buyer retained the right to reject the goods
while the mid-buyer was deemed to have “accepted” them. Indeed a
strict interpretation of Section 35, which was overriding! E&S Ruben
Ltd v Faire Bros & Co Ltd [1949] 1 KB 254 – Notion of Delivery. See
the New Zealand case in Hammer & Barrow v Coca Cola (1963) 26
Modern Law Review 194. Seems to have pre-empted a much wider
interpretation of Section 35 (6).
v. Section 35 (6) (b) now provides that a buyer is not
deemed to have accepted the goods simply because the
goods are delivered to another person under a sub-sale.
It should be noted that under Section 36, the buyer is
not bound to return the goods to the seller to show lack
of acceptance – he can still reject them if they are still
physically at the sub-buyer’s premises and the sub-buyer
has not returned them.
vi. Indeed cases like Molling & Co v Dean & Son (1901) 18
TLR 217 has now become part of law - Section 35 (6).
vii. Documentary sales – see Devlin J in Kwei Tek Chao v
British Traders [1954] 2 QB 459, where the position is
different, as property passes through the documents first.
What is not acceptance – see Section 35(6) which was inserted by
Sale of Goods Act 1994.
It is not acceptance if you have merely agreed to remedial works –
Section 35(6)(a) – where the buyer is requesting to have the goods
repaired but does not mean that he is accepting the goods!
Also see the House of Lords decision in J & H Ritchie Ltd v Lloyd Ltd
[2007] UKHL 9.
It is not acceptance if goods have been delivered to another person
under a sub-sale or some other disposition – Section 35(6)(b) See
Clegg v Anderson [2003] EWCA Civ 320, where buyer does not
reject the goods until after 3 weeks they are delivered – court
deems there is no acceptance!
viii. But acceptance hinges on examination! – see Section 34.
ix. The effect of acceptance - Section 11(4) – applies only
to indivisible contracts. Treated as a breach of warranty
and not as repudiation of the contract or a ground for
237
rejecting the goods (unless express or implied term to

that effect).
x. Section 11(4) only applies to indivisible contracts. It is a
contract that deems to be one whole transaction and is not
divided up, but cannot exclude the other transaction. See
Gill v Dufus SA v Berger & Co Inc [1984] 2 WLR 95.
Other qualifications on Buyer’s Right to Reject

Severable and non-severable contracts – See section 31(2). See
Regent OHG Aisenstatdt v Francesco of Jermyn Street [1981] 3 All ER
327 (buyer could not repudiate the contract). This case illustrates
the difference between divisible and indivisible contracts.
i. If the contract is not severable (indivisible), a partial breach
is a total breach and one can repudiate the contract.
ii. If the contract is severable (divisible), the buyer’s right to
reject the whole lot depends on facts and circumstances of
the case – Section 31(2).
See Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd
[1934] 1 KB 148 at 157 – explains in detail the things to consider,
whether the buyer can reject the goods completely.
See RA Munro v Meyer [1930] 2 KB 312 – if the breach is serious &
persistent. Warinco AG v Samor SPA [1977] 2 Lloyd’s Rep 582
iii. Forfeiture of the right to reject goods – Section 15A. This
section was inserted by the Act of 1994. Where the breach
is so slight as to be unreasonable to reject the goods.
Does this section actually prevent the buyer from rejecting the
goods where the discrepancy is greater than de minimis but still
slight? What would be the case if the contract allows for 9%
moisture content in the cargo shipped and the cargo has 11%
moisture content?
Has the situation changed after the amendment to the Act? See
South Caribbean Trading v Trafigura Beheer [2005] 1 Lloyd’s Rep
128
iv. Breach of “shortfall” - Section 30 (2A) – deals with seller
delivering too little or too much. Under this new section the
buyer is no longer able to reject all the goods purely for a
shortfall or excess where the shortfall or excess is so slight as
that it would be unreasonable for him to do so.
Note: You don’t lose your right to reject goods in
bulk simply because you accepted other goods in
large bulk that were not defective - Section 35A
Action for Damages for Non-Delivery – Section 51

Dam ages additional to breach of condition
Also applies where seller rejects goods for breach of condition – he
can reject goods and get the price back and also additionally be
entitled to damages for breach of contract, calculated on the basis
of cost of restoring the claimant to position he would have occupied
if contract performed.
Whether buyer should mitigate his loss?
i. Damages for late delivery – difference in value of goods at
the contractual delivery date and on the date on which they
were actually delivered.
238
ii. Available market rule applies – but if no available market,

the difference in value of cargo when it should have been
delivered and value in absence of a market based on what
the courts consider to be relevant factors in assessing value
of goods. See Contigroup Companies Inc v Glencore [2004]
EWHC 2750 (Comm)
iii. Damages for loss of sub-sale – losing his potential profit.
The Sale of Goods Act requires the buyer to show it was a
loss in “the usual course of events” demonstrable by
showing that the seller is aware of the sub-sale.
See Re Hall (R&H) Ltd & WH Pims Jr & Co Arbitration
[1928] All ER 763
Truk (UK) Ltd v Tokmakidis GmbH & Ors [2000] 1 Lloyd’s
Rep 543 – buyer entitled to refuse delivery and damages
calculated on the basis of loss of profit on a sub-sale.
iv. What is further recoverable analogous to loss on resale then
turns on “remoteness” of damages/ it being within the
parties “reasonable contemplation” – any kind of liability to
the sub-buyer
Action for Damages for Breach of Defective Goods

The above provision is governed by Section 53 – it is covers
damages recoverable for breach of warranty.
i. Issue of quantum under Section 53 is based on the
estimated loss directly and naturally resulting in the
ordinary course of events from the breach
ii. It will be the difference between value on delivery and
value if they had complied with the warranty
iii. Turns on relevant factors. Generally, the buyer’s damages
will not be reduced simply because he has been able to sell
them to a third party on sub-sale. See Slater v Hoyle &
Smith [1920] 2 KB 11. This was criticised in Bence Graphics
International Ltd v Fasson UK Ltd [1998] QB 87.
Also see Treitel (1997) 113 LQR 188
Louis Dreyfus Trading Ltd v Reliance Trading Ltd [2004]
EWHC 525 (Comm) – open to seller to demonstrate the
buyer is not entitled to reject the goods to reduce the
quantum
Hammond & Co v Bussey (1887) 20 QBD 79
Reliance on Liquidated Damages Clause

The important thing to note is that courts in the UK recognise the
“liquidated damages clause” in contracts, as long as it is not a
penalty clause.
Dunlop Pneumatic Tyre Co Ltd v New & Motor Co Ltd [1915] AC 79
But note the case below
Cenargo Ltd v Empresa Nacional Bazan de Construcciones Navales
Militares SA [2002] CLC 1151 While construing a penalty clause
one must also consider the parties’ presumed intentions.
239
Certificate Final Clauses

The Bow Cedar [1980] 2 Lloyd’s Rep 601
Question 7.1.1
Discuss the classification of contractual terms and the notion of acceptance as per
Section 35.
240

The purpose of this chapter is to examine the rights and remedies
pertaining to sellers. You will examine a seller’s remedies and the
issues of damages.
Learning Objectives
□ Develop an understanding of the Rights & Remedies of a Seller.
□ Develop an understanding of a seller’s remedies relating to specific
performance.
□ Develop an understanding of the issues of damages.
Introduction:
The Sale of Goods Act 1979 primarily focuses on contractual
elements, as they are crucial to the needs of the buyer and seller of
goods. In part 2 we look at the rights of the seller and the remedies
open to him in the event of any breach under the contract. We saw
earlier that the contractual terms were classified as conditions,
warranties and innominate terms and it was to be determined on the
basis of their importance to the contract and the remedy that is
available to the party in the event of a breach.
Seller’s Remedies for the Price – Specific Performance

It is the action brought by the wronged party for the price of goods.
Section 49 of the SGA limits this remedy to two instances where the
seller can maintain action against the buyer for price. The section
states that in order for the seller to be able to sue for the price, the
price must have become due under the terms of the contract.
See the following instances
i. Colley v Overseas Exporters (1919) Ltd [1921] 3 KB 302 an
interesting set of facts to claim for the price of the goods.
Has the property passed?
ii. Otis Vehicle Rentals Ltd v Ciceley Commercials Ltd [2002] 2
All ER (D) 203 Payment on a day certain! Dealings where
goods are sold but payment is conditional –the condition
was when the buy-back agreement would occur!
1.2.1 Reservation of property until paid – Rom alpa Clauses

Section 19 of Sale of Goods Act allows to validly use a clause but
can confuse with regard to a “charge”. One will have to distinguish
between a charge and “reservation of title”.
i. Armour Thyssen Edelstahlwerke [1990] 3 WLR 810
Illingworth v Houldsworth [1904] AC 355 – floating
charge (Per Lord Macnaughten)
The contracts would also have to contain an appropriately drafted
retention clause. See Aluminium Industries Vassen BV v Romalpa
Aluminium Ltd [1976] 2 All ER 552 See the clause 13. This was the
famous case which gave birth to the Romalpa Clause!
The clause as drafted indicated an intention by seller to retain title
i. Required goods belonging to seller to be set apart – “kept
separate from buyer’s own material and goods”
241
ii. Made clear that it was a fiduciary relationship – buyers

were to hold the goods as “fiduciary owners” for sellers
iii. And once fiduciary relationship satisfied, the seller could
trace his proprietary interest to the proceeds of any sale
of the goods. It is a fiduciary relationship that allows the
seller to trace his proprietary interest
Contrast with:
Re Andrabell Ltd [1984] 3 All ER 407 If the goods are intermingled
then no express provision for fiduciary relationship and proceeds of
sale being kept in a separate account. Also see Borden (UK) Ltd v
Scottish Timber Products Ltd [1981] Ch 25
“It is a fundamental feature of the doctrine of tracing that
the property to be traced can be identified as every stage of
its journey through life, and that it can be identified as
property to which a fiduciary obligation still attaches in
favour of the seller”.
“The manufacturer had amalgamated the resin and other
ingredients into a new product by an irreversible
process…(and) for all practical purposes it had ceased to
exist and the ownership in that resin must have also ceased
to exist” – Per Buckley J.
See Re Peachdart Ltd [1984] 1 Ch 131 the clause was well drafted
and contrasted with the Romalpa clause. If the seller fissures
equitable ownership from legal ownership (the woes of over-
comprehensive drafting), he would be creating a charge! Any
drafting here would have to be done carefully. See Re Bond Worth
Ltd [1980] Ch 228
Rights where property has Passed before Payment

See Sections 38 & 39 of Sale of Goods Act.
i. Section 38 contains the definition of “unpaid seller”.
ii. Section 39 – two types of unpaid sellers, the prudent one
who protects himself contractually and the one who
doesn’t!
The real remedies available (remedies against the goods)
i. Lien if in possession and buyer in default – sections 41
and 43 of Sale of Goods Act 1979 (when in possession of
property)
ii. Stoppage in transitu where buyer becomes insolvent.
This is exercised only if the buyer is insolvent. To quote
Schmithoff, “the seller’s outstretched arm snatching back
goods over which he has lost control from danger route
leading to insolvent buyer”
iii. Section 45 – defines duration of transit and lasts only
while in neutral hands
iv. Section 44 – restores possession and lien. See Berndston
v Strang (1868) LR 3 Ch App 588.
“There is no contract or agreement which entitles
the vendor to go beyond those goods in the state in
which they arrive”
- Per Lord Cairns LC, Berndston v Strang
(1868) LR 3 Ch App 588
242
v. Section 47 Loss of right on sale to third party. But, note

Lickbarow v Mason (1794) 5 T.R.683.
vi. Section 48 limits the rights of re-sale, damages. The
unpaid seller has a right to resell the goods but it is a
very narrowly limited right.
vii. Exercising a right of re-sale rescinds the contract R v Ward
Ltd v Bignall [1967] 1 QB 534
Damages
Where the seller cannot bring an action for the price, he will usually
seek damages for non-acceptance. Damages for non-acceptance is
estimated as loss arising directly and naturally in the ordinary course
of events, from buyer’s breach. See Victoria Laundry (Windsor) Ltd v
Newman Industries Ltd [1949] 2 KB 528 – Calculating contract
damages/ and indeed what losses are recoverable.
Question 7.2.1
Discuss what is meant by specific performance.
243
Summary__________________
This chapter examined the rights and remedies of buyers and
sellers, examining the classification of contractual terms with
for damages for non-delivery under Section 51. It also explored a
seller’s remedies and the issues of damages.
List and discuss the rights and remedies pertaining to buyers and sellers,
explaining the importance of this area of law.
244
Chapter 8: Contract of finance and letters of

credit
Introduction
Overview
The purpose of this chapter is to examine issues relating to contract
of finance and letters of credit. You will examine payment in
Aims
□ Develop an understanding of the Financing of the Sale, including Contract of
Finance and Letters of Credit.
□ Develop an understanding UCP 600.
Learning Outcomes
□ Outline the Financing of the Sale, including Contract of Finance.
□ Outline issues relating to Letters of Credit.
□ Outline UCP 600.
245
Resources
Essential readings

Lawtel or Lexis.

246
8.1 Contract of Finance & Letters of Credit

The purpose of this section is to examine issues relating to contract
of finance and letters of credit.
Learning Objectives
□ Discuss issues relating to contract of finance and letters of credit.
□ Discuss payment in international sale.
□ Discuss documentary credits.
Payment in International Sale – Introduction

When goods are purchased across the counter, payment for the
same would be made in cash, or by card (debit/ credit) or by
cheque. Payment in an international trade transaction does not
appear to be simple, as the parties to the contract live in different
countries following different regimes. The price of the exported
goods will have to be paid following the payment arrangements
agreed upon.
The price could be payable on shipment (following the Sale of
Goods Act), or paid by documentary bill or one may opt for
payment through banks.
Documentary Credits
In international trade the mechanism of documentary credit
provides the seller with security. The banks, acting as trusted
intermediaries, charge a fee for their services which the seller
normally passes back to the buyer.
Bill of exchange
A bill of exchange is defined under s.3 of the Bills of Exchange Act
1882. The bill of exchange is accompanied by shipping documents
where the seller sends the bill of exchange along with the shipping
documents directly to the buyer. It could either be a sight bill or a
time bill. A sight bill is paid on presentation while the time bill is to
be paid when it matures after a fixed time.
Bankers’ Commercial Credit

In an international trade operation banks act as the trusted
intermediaries and help finance the transaction through the
arrangement of “letters of credit”. This allows, on the one hand, for
the buyer to collect the key/ title documents to the goods bought
while on the other hand allowing the seller to withdraw the
proceeds of sale from the bank. Letters of credit is also referred to
as documentary credits or bankers’ commercial credits. It is the most
common method of payment for goods in export trade. Under this
arrangement the seller is better protected by the bankers’
commercial credit, as the issuing bank takes the risk of fraud. The
English Courts have referred to this method of payment as “the life
blood of international commerce”.
See RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd
[1978] QB 146 at 155 - Per Kerr LJ;
247
Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG

[1989] 2 Lloyd’s Rep 323 at 330 - Per Hirst J
The two major types of letters of credit are
i. Revocable and irrevocable credits and
ii. Confirmed and unconfirmed.
Other types too exist which are variations of the above. In its simple
working, the payment for the goods purchased would be made by
the banks on the presentation of specific documents as agreed
under contract of sale and the performance of other conditions.
The documentary character of the letter of credit makes it unique in
its function and character. If in case the “bills of lading” were to
represent the goods sold it could be treated as “the security” for
extending any credit facility by the bank. In the words of Lord
Wright the functions of the Letters of Credit could be described as;
“The general course of international commerce involves the
practice of raising money on the documents so as to bridge
the period between the shipment and the time of obtaining
payment against documents”
- Lord Wright in TD Bailey, Son & Co v Ross T Smyth
& Co Ltd (1940) 56 TLR 825 at 828
Types of Credit
The Uniform Customs and Practice of Documentary Credits (1993
Revision) in Article 6 states that a credit may either be revocable or
irrevocable. It is important that it is mentioned in the contract of
sale the type of credit that is to be arranged.
i. Revocable credits are the ones that could be cancelled or
changed by the issuing bank at anytime without prior
notice [Art 8(a)]. This form of credit is not so popular.
ii. Irrevocable credits in contrast cannot be revoked by the
issuing bank. Irrevocable and confirmed credits are the
most favoured form of the exporters. Here the bank cannot
withdraw from its liability to the seller/ exporter.
See Ian Stach Ltd v Baker Bosley Ltd [1958] 2 QB 130;
Hamez Malas & Sons v British Imex Industries Ltd [1958] 2 QB 127
UCP and Its Application

The Uniform Customs and Practice of Documentary Credits (1993
Revision) provides a comprehensive working definition of the
letters of credit.
“For the purposes of these Articles, the expression
‘Documentary Credit(s)’ and ‘Standby Letter(s) of Credit’
(hereinafter referred to as ‘Credit(s)), mean any arrangement,
however named or described, whereby a bank (the ‘Issuing
Bank’) acting at the request and on the instructions of a
customer (the ‘Applicant’) or on its own behalf.”
i. is to make a payment to or to the order of a third party
(the ‘Beneficiary’), or
ii. authorise another bank to effect such payment, or to
accept and pay such bills of exchange (Draft(s)), or
iii. authorize another bank to negotiate,
248
against stipulated document(s), provided that the terms and

conditions of the credit are complied with.”
The UCP are a set of rules which has been issued by the
International Chamber of Commerce. The UCP which was first
published in 1933 had undergone six revisions - 1951, 1962, 1974,
1983, 1993 and most recently in 2007. Under English law it does
not have the force of law and would only apply if the same were to
be incorporated by the parties into their credit agreements. UCP
600 had come into force from 1st July 2007 but the older version
(UCP 500) would continue to apply to contracts entered into prior
to 1st July 2007. This topic refers to both UCP 500 and UCP 600 and
point to changes wherever necessary. UCP 600 is dealt with in the
next chapter.
See the following;
Royal Bank of Scotland v Cassa di Risparmio delle Province Lombard
[1992] 1 Bank LR 251
Article 1: The Uniform Customs and Practice for Documentary

Credits, 1993 Revision, ICC Publication No 500, shall
apply to all Documentary Credits (including to the
extent to which they may be applicable, Standby
Letter(s) of Credit) where they are incorporated into the
text of the Credit. They are binding on all parties
thereto, unless otherwise expressly stipulated in the
Credit.
Even if the UCP were to be incorporated into the credit the parties
could still contract out of them. The Courts in England have on
several occasions interpreted the provisions of the UCP.
See the following:
European Asian Bank AG v Punjab & Sind Bank (No 2) [1983] 1
WLR 642;
Forestal Mimosa v Oriental Credit Ltd [1986] 1 WLR 631
Four Stages of the Letter of Credit

i. A letter of credit agreement is finalised by the parties
and the same is incorporated in the sale contract
ii. The buyer applies for credit and instructs the bank
(issuing bank) at its end of business to open a letter of
credit (L/C) for the exporter/ seller specifying
appropriate terms. The exporter/ seller will be referred
to as the beneficiary.
iii. The issuing bank acting on the instructions of the
applicant/ buyer interacts and arranges with a bank in
the exporter’s territory/ country for purposes of
negotiating, accepting or effecting payment on delivery
of transport documents. The bank here would be
referred to as the advising bank.
iv. The advising bank will negotiate, accept and or pay the
draft upon delivery of the appropriate transport
document before the expiry of the credit.
The relationship created between parties could be summarized as
follows:
249
i. The Issuing Bank will be acting as a special agent for

the Buyer.
ii. The Advising Bank will be a special agent for the
Issuing Bank.
Fundamental Principles of Letters of Credit

i. The letters of credit is independent of the sale contract.
This could be easily seen in the way the bank operates a
credit. The bank would only be concerned if the
documents tendered corresponded with the
instructions of the credit. The bank could refuse to
pay in the event it is proved that the transaction was
fraudulent.
See the following;
United Merchants (Investments) Ltd v Royal Bank of Canada [1983]
1 AC 168;
Tukan Timber Ltd v Barclays Bank Plc [1987] 1 Lloyd’s Rep 171 at
174
The independent nature of the Credit is recognised in Art 3 (a)
and 4 of the UCP 500;
Article 3: a) Credits, by their nature, are separate transactions

from the sales or other contract(s) on which they may
be based and banks are in no way concerned with or
bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the Credit.
Consequently, the undertaking of a bank to pay, accept
and pay Draft(s) or negotiate and/ or to fulfil any other
obligation under the Credit, is not subject to claims or
defences by the Applicant resulting from his
relationships with the Issuing Bank or the Beneficiary.
Article 4: In credit operations all parties concerned deal with

documents, and not with goods, services and/ or other
performances to which the documents may relate.
See the observations made by Lord Denning M.R in the

Power Curber International Ltd v National Bank of Kuwait [1981] 2
WLR 1233
ii. The second most important character of a letters of
credit is that the doctrine of strict compliance. This would
mean that the banks could reject any documents that do
not strictly comply with the instructions.
The relationship of “agency” created between the banks and the
parties to the contract could play a vital role in the banks rejecting
or accepting the documents.
See the observation of Lord Sumner in
Equitable Trust Company of New York v Dawson Partners Ltd [1927]
27 LIR 49 (at 52)
Also see
Gian Singh & Co Ltd v Banque de L’Indochine [1974] 1 WLR 1234
250
See McNair J’s observations in the

Soproma SpA v Marine & Animal By-Products Corporation [1966] 1
Lloyd’s Rep 367
JH Rayner & Co Ltd v Hambro’s Bank Ltd [1943] 1 KB 37
The mandate of the letter of credit is to be followed by the bank.

The banks are to form their opinion strictly on the basis of the
documents presented and verify if they complied with the mandate.
The banks are not to travel beyond the mandate as they deal only in
finance and not in goods/ cargo (See Art 4 UCP).
See Devlin J’s comments in Midland Bank Ltd v Seymour [1955] 2
Lloyd’s Rep 147
Discrepancies in Documents
The banks face a dilemma when there is
i. Ambiguity in the credit instructions or
ii. Ambiguity in the documents tendered
In the first instance the best option would be to seek clarifications.
In the second instance the tender would be a bad tender.
The banks are not to act so rigidly and reject the tender but to use
their judgements. The Banking Commission of the ICC had stated in
its opinions (1980 – 1981, ICC Publications No 399, Page 35) that
“banks could not act as robots, but had to check each case
individually and use their judgement”.
See the following:
Hing Yip Hing Fat Co Ltd v Daiwa Bank Ltd [1991] 2 HKLR 35 and
Seaconsar Far East Ltd v Bank Markzi Jomhouri Islam Iran [1994] 1
AC 438
When deciding to reject the documents the banks are to follow the
procedure laid down under Art 14(d)(i) and (ii). The Article
outlines the procedure to be followed by a bank while refusing/
rejecting documents presented under a letter of credit.
Under the Article banks are required to
i. Specify all the discrepancies in the notice of rejection
ii. And to state if the documents are being retained or
returned to the concerned party
See the following:
Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135
Hing Yip Hing Fat Co Ltd v Daiwa Bank Ltd [1991] 2 HKLR 35
Article 13(b) prescribes a 7 day period to communicate the decision
to refuse/ reject the documents. To whom should the documents be
sent by the bank? See Bayerische Vereinsbank Aktiengesellschaft v
National Bank of Pakistan [1997] 1 Lloyd’s Rep 59
The UCP in this case assists the banks to take a final decision in the
case of sufficiency of documents under the Letters of Credit
arrangement. All the major transport documents are covered under
the UCP 500 in Articles 23 to 30. It covers the following documents
i. the ocean bills of lading, ii. the non-negotiable sea
waybills, iii. CP Bills of lading, iv. multimodal transport
documents, v. air transport documents, vi. road, rail and
inland waterway transport documents, vii. courier and post
251
receipts and viii. most importantly the transport documents

issued by freight forwarders.
The Articles 34 to 36 deals with insurance documents which covers
the goods sold while Article 37 covers the commercial invoice.
Duration of the Credit

The details of the type of credit and the time of opening of the
credit will be found in the sale contract. The credit is normally
opened on a particular date or on the performance of certain act by
the seller – advice that the goods will be ready by a certain date, the
seller forwarding a provisional invoice, etc.
i. See the following case The Sarah [1989] 2 Lloyd’s Rep
277 which required the seller to provide a performance
guarantee and also included a reciprocal sale agreement!
ii. If the sale contract is silent about such date of opening of
the credit and is unconditional then it should be opened
within a reasonable time. See how “reasonable time” is
interpreted/ calculated in the following cases
Diamond Cutting Works Federation v Triefus & Co Ltd [1956] 1
Lloyd’s Rep 216
Sinaison-Teicher Inter-American Grain Corporation v Oilcakes &
Oilseeds Trading Co Ltd [1954] 1 WLR 935
Article 42(a) UCP makes it clear that a letter credit

“…must stipulate an expiry date and a place for presentation
of documents for payment, acceptance, or with the exception
of freely negotiable Credits, a place for presentation of
documents for negotiation.”
Types of Letters of Credit

Documentary credits can be broadly distinguished with reference to
their revocability or otherwise. This refers to the obligation of the
issuing bank to the beneficiary/ seller.
i. Revocable & irrevocable Credit: Article 6 of UCP

clearly states that a credit could be revocable or
irrevocable. In a revocable credit the issuing bank can
amend or cancel the credit without notice to the
beneficiary/ seller. The issuing bank does not incur any real
commitment. It may not provide the seller with much
security.
ii. The presumption prior to 1993 version of the UCP was that
credits were revocable. Article 6 of the UCP provides that a
credit is deemed irrevocable unless it is clearly stated
otherwise.
iii. Unconfirmed & Confirmed Credit: A confirmed credit
is one in which the advising bank (or another bank) is
authorised by the issuing bank to add its confirmation. In
other words in a confirmed credit the issuing bank’s
undertaking under the irrevocable credit gets reinforced by
the advising bank. A confirmed credit is always irrevocable.
See Cape Asbestos Co Ltd v Lloyds Bank Ltd [1921] WN 274;
252
WJ Alan & Co Ltd v El Nasr Export & Import Co [1972] 2 QB

189
iv. Sight Payment, Acceptance & Deferred Payment
Credits: Letters of credit could be divided into sight
payment credits, acceptance credits and deferred payment
credits. Payment is to be made against documents in sight
payment credit.
v. In an acceptance credit the seller presents a term of bill to
the issuing bank, the advising bank or another bank for
acceptance against documents and payment by the
accepting bank. In a deferred payment credit payment is
made after the expiry of a stated period from shipment of the
goods or the bill of lading date or from presentation. See
Banco Satander SA v Bayern Ltd [2000] 1 All ER 776
vi. Standby Letters of Credit: This form of credit
originated in the United States. In this form of credit the
bank undertakes to make payment to the beneficiary or to
accept bills of exchange drawn on him. This is subject to
the condition that the seller complies with the terms of the
credit in tendering the documents stipulated.
Complying with the condition is important in this form of credit.

The standby letter of credit may seem similar to an ordinary credit,
but it is to be noted that the required documents need not include
the transport documents. See Hong Kong & Shanghai Banking Corp v
Kloeckner & Co AG [1989] 2 Lloyd’s Rep 323;
Society of Lloyd’s v Canadian Imperial Bank of Commerce [1993] 2
Lloyd’s Rep 579
i. Revolving Credits: If the parties have transactions on a
regular basis (not isolated) then the buyer would normally
arrange for a revolving credit in favour of the seller. How
does it work? A standing instruction is given to the issuing
bank by the buyer to arrange for a credit favouring the seller.
This credit would not then exceed a fixed maximum. See
The Future Express [1993] 2 Lloyd’s Rep 542
ii. Other types of Credits: Packing credits, red clause
credits, transferable credits, back-to-back credits
Question 8.1.1
Discuss the fundamental principles of letters of credit and their importance to a

trade contract.
253
8.2 Letters of Credit & UCP 600

The purpose of this section is to examine issues relating to letters of
credit and UCP 600.
Learning Objectives
□ Examine issues relating to letters of credit .
□ Examine UCP 600.
New Rules for Letters of Credit

On 25 October 2006, ICC Banking Commission approved and
adopted the UCP 600 for documentary credits which shall come
into effect on 1 July 2007. The UCP 600 is seen as the most
exhaustive review of the UCP to date, taking three and a half years
from commencement to approval. The new initiative brings changes
for all those involved in international trade which includes
exporters, importers, bankers, lawyers and transport professionals.
Are the Changes Significant?

One of the reasons stated for the revision of the existing rules is to
reduce unnecessary rejections of documentary tender and “to
address developments in the banking, transport and insurance
industries”. The number of articles is brought down from 49 to 39.
It is thought that the revision is more by way of clarification and
consolidation to make the rules more “user friendly” rather than
being radical.
There are 6 new articles in the UCP 600 which were not found in
the UCP 500. The new rules provide for Definitions, Interpretations,
Advising of Credits & Amendments, Nominations, Complying
Presentations and original Documents & Copies.
Letters of credit could be made “subject to the UCP 600” only from
1st July 2007. All letters of credit opened prior to the said date will
continue to be governed by UCP 500. This would mean the bankers
and the users (buyers and sellers) will have to operate both UCP
500 and UCP 600 regimes for a period of time. The UCP 600 will
only apply “when the text of the credit expressly indicates that it is
subject to these rules”. The rules also allow parties to exclude the
application of any part of the UCP 600.
The general provisions and definitions are covered in Articles 1 to 3
of the UCP 600. It includes terms such as “honour” and
“negotiation”.
Revocable and Irrevocable Credits

Under Art 6 of UCP 500, credits could be either revocable or
irrevocable and in Article 8 had established that a revocable credit
could be amended or cancelled at any time without notice to the seller.
The default credit envisaged under UCP 600 is different from the
one under UCP 500. The default credit set for the new rules is an
irrevocable credit. This comes as a huge relief to the seller as the
issuing banker’s undertaking to pay the sum of the credit cannot be
revoked by that bank.
254
The new rules under UCP 600 have moved firmly away from
revocable credits and there is no choice available for the buyers to
apply for a revocable credit. Article 2 now defines a credit as
follows;
“any arrangement, however named or described, that is
irrevocable and thereby constitutes a definite undertaking of
the issuing bank to honour a complying presentation.”
Article 3 moves further and interprets a credit as irrevocable even if
there is no indication to that effect. The UCP 600’s preference for
irrevocable credits is strengthened in Article 10, where it reads that
a credit cannot be cancelled without the agreement of the beneficiary.
It can be safely assumed that the UCP 600 favours irrevocable over
revocable credits. But the same cannot be said about confirmed
credits as there is no such presumption available under UCP 600.
Transport Documents and Examination

The Articles 14 to 17 contain the basic principles for examination of
original documents and their issuers. Particular documents are
covered under the following heads; Article 14 – freight forwarder
bills of lading, Article 19 – transport documents covering more than
one mode of transport, Article 20 – bills of lading & insurance
documents, Article 21 – non-negotiable sea waybill, Article 22 –
charter party bill of lading.
Article 14 of UCP 500 establishes the basic responsibility of the
bank to examine documents tendered under the letters of credit.
The position set out in Article 13 of UCP 500 has been slightly
altered under the new rules. Article 14(a) imposes a duty on the
banks to examine documents in order
“to determine, on the basis of the documents alone, whether
or not the documents appear on their fact to constitute a
complying presentation”
The expression “reasonable care” which appeared in Article 13(a)
of UCP 500 has been omitted here.
Under Article 13(b) of UCP 500 the banks were examine them
within a “reasonable time, not to exceed seven banking days following
the day of receipt of the documents”. The ICC National Committee
overwhelmingly recommended that that each bank be given a fixed
maximum number of days to examine the documents. Under Article
14(b) and 16(d) the time allowed to the banks to examine the
documents has been set at five banking days following the day of
presentation.
Article 13(a) of UCP 500 stated that documents appearing “on their
face to be inconsistent with one another” were to be considered
discrepant. This had now been replaced by Article 14 (d) which
reads as follows;
“Data in a document, when read in context with the credit,
the document itself and international standard practice, need
not be identical to, but must not conflict with, data in that
document, any other stipulated document or the credit.”
Article 17 of UCP 600 seeks to resolve difficulties arising out of the
“original documents” being presented for scrutiny. The Article states
that at least one original of each stipulated document must be
tendered.
255
Transport Documents
The articles setting the requirements for transport documents have
been re-drafted to avoid confusion over the identification of carriers
and agents. On this matter, UCP 600 follows the recommendations
set by ICC Banking Commission in ICC Publication No.645
(International Standard Banking Practice (ISBP) for the
Examination of Documents under Documentary Credits) which
provides that:
"If an agent signs a transport document (Bill of Lading,
multimodal transport document, air transport document) on
behalf of a carrier, the agent must be identified as agent, and
must identify the carrier on whose behalf it is signing, unless
the carrier has been identified elsewhere on the face of
transport document (Bill of Lading, multimodal transport
document, air transport document)."
If an agent signs the bill of lading/ or multimodal transport
document on behalf of the master (captain), the agent must be
identified as agent and the name of the master (captain) on whose
behalf it is signing must be stated."
The Art.14 (l) of UCP 600 provides that:

"A transport document may be issued by a party other than
the owner of a vessel or other means of transport provided
that the transport document meets the requirements of UCP
600 for multimodal transport document, bill of lading, sea
waybill, air transport document, road transport document,
rail transport document or inland waterway transport
document."
Hence, the elimination of the Article 30 (UCP 500) from the new
UCP will not affect the use with documentary credits of documents
issued by forwarders as long as such documents comply with UCP
requirements for content and signature.
UCP 600 recognizes the practice of shipping lines to use one form
of Bill of Lading for both port-to-port shipments and multimodal
shipments by eliminating the requirements of UCP 500 that Bill of
Lading bear the heading either "Marine/Ocean Bill of Lading" for
port-to-port shipments or "Multimodal Transport Bill of Lading" for
multimodal shipments. This change avoids misunderstandings that
did arise from the combination in one document of different terms
of carriage, namely the terms for sea carriage with terms for
multimodal transport.
Changes have also been made to the requirements for Charter Party
Bill of Lading which need no longer indicate the name of carrier
and for the release of time charterers can also be signed by "a
charterer or a named agent for or on behalf of a charterer." In
Charter Party Bill of Lading, the port of discharge may also be
shown as a range of ports or a geographical area. This is another
change which follows the recommendations of ICC Publication
No.645 (ISBP) which provides that:
"If a credit gives a geographical area or range of port of
discharge (e.g. any European Port) the charter party bill of
lading may show the geographical area or range of ports as
the port of discharge."
256
This new provision recognizes a practice adopted by the shipping

companies to respond to the need of oil traders for freedom in
deciding the ultimate destination of oil cargoes. To boost the string
trading and extend the price arbitrage possibilities of oil traders, the
tanker voyage charter parties give the charterer (CIF seller) the
option to reroute the vessel during the voyage to any port situated
within the geographical region defined in the charter party
contract, e.g. Mediterranean or North Western Europe, or to any of
the alternative ports of discharge specified in the charter party
contract, e.g. the so-called "ARA ports": Amsterdam, Rotterdam and
Antwerp. The same information is then inserted in Bills of Lading to
avoid the need of a Letter of Indemnity in favour of the carrier and
the risk of rejection of Bills of Lading by the paying bank for
showing a different port of discharge than stated on other
documents, for instance commercial invoice.
The acceptance of Charter Party Bills of Lading indicating
alternative ports of discharge will benefit those involved in string
trading dealing on L/C terms as there is no need for L/C
amendments anymore. Another provision which was previously
stated in ICC Publication No.645 (ISBP) is that Bills of Lading need
no longer bear the clause "Clean" to comply with documentary
credits that require "Clean on Board Bills of Lading".
The revision under UCP 600 is to be welcomed as the newly
introduced interpretations and definitions will be helpful in making
it more “used friendly” for both banks and traders. It will have to be
seen if the new rules help reduce the number of documentary
rejections.
Question 8.2.1
Discuss the new rules for letters of credit and the significance of such changes.
257
Summary__________________
The purpose of this chapter was to examine issues relating to
contract of finance and letters of credit. It examined payment in
Provide an overview of the legal points relating to contract of
finance and letters of credit. How have recent developments
changed the position for letters of credit?
258
Introduction
Overview
The purpose of this chapter is to explore legal issues relating to the
carriage of goods by sea. It will introduce you to the subject and
explore the contract of affreightment including bills of lading, types
and functions. It will discuss the Hague & Hague-Visby Rules and
highlight carrier's immunities & limitation of liability as well as the
concept of charterparties – types and formation.
Aims
 Explore the basis of contracts of affreightment, including bills of lading.
□ Develop an understanding of the Hague & Hague-Visby Rules.
□ Develop an understanding of carrier's immunities & limitation of liability.
Learning Outcomes
□ Explain the basis of contracts of affreightment, including bills of lading.
□ List and discuss the Hague & Hague-Visby Rules.
□ Discuss carrier's immunities & limitation of liability.
259
Resources
Essential readings

Lawtel or Lexis.

260
9.1 Contract of Affreightment – Bills of Lading

The purpose of this section is to explore legal issues relating to the
Contract of Affreightment including Bills of Lading, Types &
Functions.
Learning Objectives
□ Explore the basis of contracts of affreightment.
□ Examine the significance of bills of lading.
Introduction
Much of the cargo sold across national boundaries is carried by sea.
Parties to the contract are from more than one nationality and
hence it may be subject to more than one national law, conventions
and rules. It would be more appropriate to call it the international
carriage of goods by sea.
We will first look at the key transport documents used in the
carriage of goods by sea and the type of contracts they cover by
going through the various stages of the carriage contract.
The expression “contract of affreightment” refers to the practice of
goods being carried pursuant to entering into a contract (that is, a
contract to carry goods in consideration of the payment of freight).
The two contracts of charter parties and bills of lading are
witnessed by different documents and are entered into between
different parties, where they undertake to perform different
obligations. They together form the basis of the sea borne trade.
Only an overview of the charterparties is presented here to
understand the working of the bills of lading, as it would be dealt
with in detail in a later chapter.
Charter parties:
It is basically the hiring of a ship/vessel from the ship-owner. This
could be done in more than one form and the industry has invented
several forms to suit their commercial need
i. It is the agreement drawn up between a ship owner and a
charterer
ii. It is a contract for the hire of the vessel or her services
iii. The types could be broadly classified as Time charter,
Voyage charter, demise charter and its hybrids
iv. Time & Voyage charters are contracts for the hire of the
ship’s services
v. Demise charter is the contract for the hire of the ship
Also, please note the following:

i. The charterers on most of the occasion would be acting as
carriers of the cargo
ii. The shipper would have an independent contract with the
charterer for carriage of the goods
iii. A bill of lading (B/L) will be issued by the carrier to the
shipper/ seller
261
iv. Most importantly in a situation where the cargo gets

damaged it is important to know against whom to bring the
action for damages!
Bills of Lading – Early Days:

Some writers speculate that the bills of lading did not exist prior to
the 11th century. Bills of lading developed as documents of title in
response to the particular problems associated with the interna-
tional sale of goods - their original use assumed that the carrying
voyage by sea would take long enough to allow the seller of the
goods to send the bill of lading (as a document of title) to the buyer
of goods ahead of the goods themselves. This assumption does not
apply in today's sea transport as a bill of lading is not the most
suitable document and other documents such as the liner waybill,
the combined transport document, and EDI (Electronic Data
Interchange) are gaining ground.
The history of the bill of lading during the 19th century is important
for our study. A couple of centuries ago the public carrier was
always absolutely responsible for the safety of the cargo. The reason
for this is that the carrier was the only one who had physical control
of the cargo and knew what happened to the cargo while being
carried. As a result, the shippers could not prove negligence on the
part of the carriers or his agents. The carriers also devised methods
to wriggle out of the absolute responsibility/ strict liability situation
by introducing carefully drafted exception clauses into the Bills of
Lading to exonerate themselves for cargo losses. This is more
particularly referred to as contracting out (the freedom of contract
existing in common law).
Functions of the Bills of Lading:

The Bill of Lading is a commercial document and occupies a very
significant position in the carriage of goods by sea. It is studied
from various perspectives as it performs more functions than any
other document in both the international trade and carriage of goods.
It is one of the main contracts, which runs through the fabric of the
carriage operation in international trade.
Bills of Lading are contracts for the carriage of cargo, unlike charter
parties, which are contracts for the hire of the vessel or of her
services. They are at once
i. A receipt for the goods shipped – acknowledgement by the
carrier/ ship owner that he has received goods described
and shall contain statements as to their quantity, leading
marks, apparent good order and condition. It has an
evidentiary function. It is the evidence of the facts stated in
it including the condition in which it was received.
See the following case
Glyn Mills Currie & Co v East & West India Dock Co (1882) 7
App Cas 591
Smith v Bedouin Steam Navigation Co [1896] AC 70
As to the false statement about receipt of goods by the
carrier see Grant v Norway (1851) 10 CB 665
Also see Leduc v Ward (1888) 20 QBD 475
262
ii. The best evidence of the contract of carriage. See the

following cases Ardennes [1951] 1 KB 55; Pyrene v Scindia
Navigation Co [1954] 2 QB 402; Sewell v Burdic [1884] 10
App Cas 74, at 105
In the hands of the original shipper (between the carrier and the
shipper), it is merely evidence of the contract of carriage. It may not
be excellent evidence of the contract of carriage, but evidence
nonetheless.
The endorsee, on the other hand, is entitled to rely on the bill of
lading as the contract of carriage itself, conclusively. The main issue
is always if the pre-contractual oral terms bind the endorsees!
See Leduc v Ward (1888) 20 QBD 475 – Lord Esher based his
judgment on the parole evidence rule.
In The Emilie Marie (1875) 44 LJ Adm 9 the endorsee was able to
get 3 bills of lading! Heskell v Continental Express [1950] 1 All ER
1033 – but there has to be a contract in the first place! Pirelli Cables
Ltd v United Thai Shipping Corporation Ltd [2000] 1 Lloyd’s Rep
663 – one cannot argue that the terms or conditions of the bill of
lading are illegible either!
iii. Most importantly a document of title to the goods
represented (proprietary function).
See the following cases
Lickbarrow v Mason (1794) 5 Term Rep 683
Barber v Meyerstein (1870) LR 4 – House of Lords
iv. In the hands of the buyer (international sale contract) it is
security to raise finance with the banks
Document of title:
A document of title refers to a “negotiable document” which is
capable of transferring the property in the goods mentioned in the
document. A shipped bill of lading which is i. an order bill or ii. a
bearer bill will constitute a document of title. In a highly
commercial market this form of the document is more prevalent
than the others. Property in the goods carried is transferred to the
subsequent purchaser through endorsement.
See the following set of cases (customary origins);

Lickbarrow v Mason (1794) 5 TR 683 at 685 – recognised a custom
of merchants that transfer of a bill of lading enables one to transfer
possession of the goods where goods “shipped by any person or
persons to be delivered to order or assigns”
Sanders v Maclean (1883) 11 QBD 327 – Bowen L.J based the rule
that “indorsement and delivery of the bill of lading operates as a
symbolical delivery of the cargo” simply on the practical
considerations that a “cargo at sea while in the hand of the carrier
is incapable of physical delivery”.
Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC
53 at 60 – pledge of the bill of lading operates as a pledge of the
goods.
However, new and more contemporary “origins” are discovered for
this proprietary function of the bill of lading. See the following set
of cases;
263
The Berge Sisar [2001] 1 Lloyd’s Rep 663 – the “bill of lading as
evidencing a bailment with the carrier who has issued the bill of
lading as a bailee and the consignee as a bailor” – Per Lord
Hobhouse J.
But see the following…
The Aliakmon [1986] AC 785 – the notion of bailment was
dismissed (ratio) and the only bailment relationship was between
carrier/ shipowner and the sellers (shippers). Lord Brandon made it
clear that the bailment relationship was between the seller/
shippers and the carriers and not between the buyers as consignees
and the carriers.
See the article “Bills of lading as Documents of Title” by Paul Todd
[2005] JBL 762-779 – a must read!
An additional feature of the bills of lading is its ability to be
negotiable. One can either be a consignee under a negotiable bill of
lading or a consignee under a non-negotiable bill of lading. The
shipper would have the choice to insert the magic words “to order
or assigns” into the bill of lading (depending on the contract agreed
upon).
A bill of lading making goods deliverable to a named person “or
order” or “to order or assigns” is an order bill transferable by
endorsement and delivery. A bill of lading making goods
deliverable to bearer [name left blank] is a bearer bill and can pass
from hand to hand by delivery.
In sharp contrast to the above position a bill making goods
deliverable to a named person only is a straight consigned bill and
is not a document by which title to goods can be transferred by
endorsement and delivery.
The Bills of Lading Act 1855:

It is probably the first ever Act of Parliament to be passed to govern
a bill of lading. One may notice that there are no Acts of Parliament
yet to govern any other transport document. This Act is one of the
smallest Acts, with a preamble and 3 sections. Strangely it did not
define a bill of lading. This Act was repealed in 1992 after being in
force for about 137 years. The importance of the Act could be
summarised up as follows:
i. The 1855 Act could be called the first legislative attempt to
address the question of title to sue (to be explained) for
cargo loss in transit
ii. The one major problem prior to the Act of 1855 was the
inability of the shipper to transfer his rights & liabilities
under the contract of affreightment
iii. This was so because contracts were not assignable under
common law
iv. The Act of 1855 inter alia provided that the consignee and
every endorsee of a bill of lading shall have transferred in
them all rights of suit, and
v. The bill of lading shall be conclusive evidence of shipment as
against the master or other person signing the same.
vi. The sections would not apply where the holder of the bill
had notice of the fact of any non-shipment
vii. The section would apply against the person who signed the
bill of lading
264
See the case Grant v Norway (1851) 10 CB 665
This decision could have probably triggered off the 1855 Act. The
master of the ship signed a bill of lading acknowledging shipment
of 12 bales of silk which were never put on board the vessel. A third
party endorsee brought an action against the shipowner for a
secured debt (on the basis of the bill of lading). The case was
dismissed when the master established that no bales were shipped!
The court held that a bill of lading signed in respect of goods not on
board the vessel did not bind the shipowner.
Note 1 Try to find out if the court would have handed down a
different judgement if the 1855 Act had been in operation.
Note 2 As a matter of academic interest it is worth looking at the
US situation. United State’s bill of lading Act is the Pomerene Act
1916, has 44 sections. It applies to bills of lading issued in the USA
and relates to all interstate and foreign commerce. The Act makes
the carrier liable to a bill of lading holder for non-delivery/ short-
delivery or when delivery does not conform to the description found in
the bill of lading. See The Delfini [1990] 1 Lloyd’s Rep 252
The Carriage of Goods by Sea Act 1992:

1. The Carriage of Goods by Sea Act 1992 made radical changes
to the law governing the bills of lading, or more precisely on
the actions brought against carriers by the consignees/ endorsees
of the bill of lading. The mechanism by which the 1992 Act
seeks to achieve these ends is different from its predecessor.
2. Following the judgment in The Gosforth (sometime in 1985) by
the Commercial Court in Rotterdam (as per English Law),
there was growing concern amongst the traders in bulk cargo.
The Commercial Court had observed that a holder of a
merchant’s delivery order did not have a right of delivery against
a sea carrier but only against the person issuing it.
3. The Grain and Feed Trade Association (GAFTA) had serious
concerns over the same. The English and Scottish Law
Commission examined the law relating to the rights of buyers of
goods at sea which formed part of a larger bulk.
4. In 1989, the Law Commission published Working Paper No
112 and the Scottish Law Commission published Discussion
Paper No 83, both identifying two problems in the existing
system of law relating to title to sue. In 1991 the Law
Commissions tabled their report, identifying the major areas
where changes were required.
5. The first of it was connected to s.16 of the Sale of Goods Act
1979 (now replaced by Sale of Goods Act 1995). It states that,
in a contract of sale of unascertained goods, the property in
the goods did not pass unless and until they were ascertained.
This in fact produced a disastrous effect in the event when the
seller becomes insolvent before the property in the goods passed.
This left the buyer just the rights of a general creditor, though he
though he may be in the possession of a document of title. This
though is not a carriage problem.
6. The second of it concerned s.1 of the Bills of Lading Act 1855,
which allowed a consignee (named in a bill of lading) or an
265
indorsee to have transferred to him the rights of the shipper

vis-à-vis the carrier – provided the property in the goods
passed to him by reason of endorsement or consignment. For
the buyer of part of a bulk cargo, in the backdrop of s.16 of the
Sale of Goods Act 1979, property in the bulk cargo would not
have come to pass before the goods are separated at the port of
discharge!
Case laws – Pre COGSA 1992:

The Aliakmon [1986] AC 785 – property in goods did not pass as
there was a reservation of the right to disposal
The Aramis [1989] 1 Lloyd’s Rep 213 – property could not pass
since no delivery was effected as regards one of the BoLs
The Delphini [1990] 1 Lloyd’s Rep 242 – property could not pass as
the relevant endorsement took place after 11 days after the
completion of delivery
Note: In all the above cases (decided as per law found in the Bills
of Lading Act 1855) the transfer of the B/L is in no way causative of
the transfer of the property – the property had either not passed, or
passed independently, or before or after consignment/ endorsement
i. The Carriage of Goods by Sea Act 1992 seeks to eliminate
the/ this link between passing of the property and the
transfer of the right of suit under the contract
ii. It provides for a statutory transfer of contractual rights
iii. Applies to bills of lading (if it would apply to both shipped
and received for shipment bills is being debated)
iv. Waybills and
v. Ship’s delivery orders
vi. It does not define a bill of lading
What does the Act achieve?

i. The Act vests the title to sue on the lawful holder of the bill
(notice that ownership is irrelevant), which is a clear
departure from the old Act
ii. The lawful holder being the person in possession of the bill
of lading in good faith
iii. By virtue of s.3(1) of the Act, the liabilities under the
contract of carriage only attaches to those circumstances
which involves the shipper and any person who takes or
demands delivery or makes a claim against the carrier
iv. In other words the Act seeks to transfer the contractual
rights and the imposition of contractual liabilities
v. The Carriage of Goods by Sea Act 1992 deals with transfer
of contractual rights and not with the transfer of possessory
or proprietary rights in the goods covered by the bill of
lading. See The Berge Sisar [2001] 1 Lloyd’s Rep 663
vi. Under the Carriage of Goods by Sea Act 1992 the
consignor’s rights are extinguished once the bill of lading is
transferred to the consignee. Once the shipper/ the original
party to the contract of carriage has indorsed and delivered
the bill of lading, he now has no right to sue the carrier/
shipowner.
266
vii. His rights are extinguished even if he remains the owner of

the goods – situations where the consignee is his agent.
Unlike the old law, if there was no intention to transfer
property (which is the case when the consignee is the
consignor’s agent) his rights are extinguished.
viii. But see the case in P&O Nedlloyd v Utaniko [2003] 1 Lloyd’s
Rep 239 where the court separated the right to possession
of goods from the right to sue under the contract of
carriage. It should also be noted that the old notion of a bill
of lading transferring constructive possession remains albeit
to grant you a right to sue under the doctrine of bailment.
ix. Would the rights also transfer the liabilities? See section 3,
which makes it clear that the rights are & liabilities are not
transferred simultaneously. Liabilities are activated if one
takes delivery/ make a claim/ demand deliver, subject to the
same liabilities as if you had been party to the contract.
Are straight bills documents of title under the Carriage of Goods by
Sea Act 1992? This question will be discussed later.
See The Happy Ranger [2001] 2 Lloyd’s Rep 530, [2002] 2 Lloyd’s
Rep 357 CA the judgment of Justice Tomlinson.
Also see the House of Lords' view in The Rafaela S [2005] 1 Lloyd's
Rep 347
Question 9.1.1
What is the importance of a bill of lading?
267
9.2 Common law and The Hague-Visby Rules

The purpose of this section is to discuss the Hague & Hague-Visby
Rules.
Learning Objectives
□ Develop an understanding of the Hague & Hague-Visby Rules
Implied Undertaking of the Carrier under Common Law

Under common law the sea carrier has three implied undertakings
which are as follows;
i. To provide a seaworthy vessel at the start of a voyage
ii. Proceeding with due despatch and to take reasonable care
of the cargo
iii. Not to deviate from the contractual voyage
It is to be noted that these obligations are not only implied into bills
of lading contracts but also charterparty contracts.
Duty to provide a seaworthy vessel

There is a general duty to provide a seaworthy vessel that is, it
should be in such a state at the start of the voyage that it could
perform the contracted voyage. This includes the vessel being safe to
carry the contracted cargo. The carrier’s duty would be to provide a
vessel which was tight, staunch & properly manned and equipped for
the voyage (this expression is invariably found in most contracts).
See Lyon v Mells (1804) 5 East 428. It is thought that the Common
law obligation crystallised in this case. Also see Kopitoff v Wilson
(1876) 1 QBD 377
“Where there is no agreement to the contrary, the shipowner
is by the nature of the contract impliedly and necessarily
held to warrant that the ship … in ordinary language, is
seaworthy, that is, fit to meet and undergo the perils of the
sea and other incidental risks to which she must of necessity
be exposed in the course of the voyage”
- Per Field J Kopitoff v Wilson (1876) 1 QBD 377
The obligation of making the vessel is seen as being absolute in
nature but often described as being a warranty. The courts apply a
relative standard. This means the standard the ship must meet is
relative but not the duty. Once the standard has been defined the duty
on the part of the shipowner becomes absolute.
See Steel v State Line (1877) 3 App Cas 72
McFadden & Co v Blue Star Line [1905] 1 KB 697
“Would a prudent owner have required the defect to be
remedied before sending his ship to sea if he had known it?
If he would, the ship is unseaworthy.”
- McFadden & Co v Blue Star Line [1905] 1 KB 697
The following cases illustrate a two-pronged duty,

i. Fit to sail on the particular voyage and/ or fit for a
particular stage of the voyage (*the doctrine of stages) and
268
ii. Fit to receive the particular cargo (without endangering the

safety/ fitness of the vessel to undertake the voyage)
So, when does the duty take effect?

The Vortigen [1899] P 140 Here the courts permitted to stretch the
warranty that the ship is seaworthy after the ship has sailed -
doctrine of stages!
Darling v Raeburn [1907] 1 KB 846 – safety of the vessel
McFadden & Co v Blue Star Line [1905] 1 KB 697 Illustrates a
general position
Virginia Carolina Chemical v Norfolk & North American Steam
Shipping [1912] 1 KB 229
Hang Fung Shipping & Trading Co Ltd v Mullion & Co Ltd [1966] 1
Lloyd’s Rep 511
AE Reed & Co Ltd v Page, Son & East Ltd [1927] 1 KB 743 – Per Lord
CJ
Cargoworthiness takes effect at time of loading. The vessel must be
seaworthy at the commencement of the voyage.
Content of Seaworthiness
As to the content of seaworthiness see Hong Kong Fir Shipping Co v
Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. See the observation of
Lord Diplock J.
“the most complex of obligations … [embracing] obligations
with respect to every part of the hull machinery, stores and
equipment and the crew itself.”
– Per Diplock L J
i. The vessel:
Stanton v Richardson (1874) LR 9 CP 390 – here the ship was not fit
to receive cargo.
The Apostolis [1997] 2 QB 241
ii. The crew:

The Star Sea [1997] 1 Lloyd’s Rep 360
Hong Kong Fir Co v Kawasaki Kisen Kaisha [1962] 2 QB 26
iii. Cargoworthiness only if it affects seaworthiness:

Elder Dempster & Co v Paterson, Zochonis & Co [1924] AC 522. It
dealt with the duty of stowage. See the observation of Viscount
Cave. See the test set out in Kopittoff v Wilson (1876) 1 QBD 377
Applying test see The Thorsa [1916] P 257 and The Maori King v
Hughes [1895] 2 QB 550
iv. Possessing the necessary documentation to set sail:

The ship before it could set sail should possess the necessary
documentation on board the vessel. See the following cases –
The Medeleine [1967] 2 Lloyd’s Rep 224
Ciampa V British India Steam Navigation Co [1915] 2 KB 774
The Derby [1985] 2 Lloyd’s Rep 325
269
v. Burden of Proof
The party alleging that the vessel is unseaworthy will have to prove
it (the standard in civil cases – he that alleges proves). Sometimes
one does not have to prove anything – it can be presumed.
Pickup v Thomas & Mersey Marine Insurance Co (1878) 3 QBD 594
Proceeding with Due Despatch

It is a term implied into every contract of affreightment (both bills
of lading & charterparties). See The Kriti Rex [1996] 2 Lloyd’s Rep
171; Freeman v Taylor (1831) 8 Bing 124 per Tindal CJ; MacAndrew
v Chapple (1866) LR 1 CP 643
This plays a more important role in the voyage and time
charterparty contracts. It is seen as an innominate term of the
contract. See MacAndrew v Chapple (1866) LR 1 CP 643; Freeman v
Taylor (1831) 8 Bing 124.
See the following cases where express provisions are included in
the contract;
The Mihalis Angelos [1971] 1 QB 164 – Per Megaw L J and Lord
Denning; The Baleares [1993] 1 Lloyd’s Rep 215 – Per Neville L J;
The Democritos [1976] 2 Lloyd’s Rep 149; The Madeleine [1967] 2
Lloyd’s Rep 224; Hyundai Merchant Marine v Karander Maritime
[1996] 2 Lloyd’s Rep 66; Universal Bulk Carriers v Andre et Cie
[2001] 2 Lloyd’s Rep 65
The “No Deviation” Rule

What is deviation? Scrutton defines it as follows;
“In the absence of express stipulations to the contrary, the
owner of a vessel …. impliedly undertakes to proceed in that
ship by a usual and reasonable route without unjustifiable
departure from that route and without unreasonable delay.”
It is just not the straying of the vessel from the contracted route but
could also include the deliberate reduction of speed along the route.
See the following;
i. Davies v Garrett (1830) 6 Bing 716 per Tindal supposed to
be the first reported English decision on the sea carrier’s
implied duty not to deviate.
ii. Some deviations may be justified, if they are made for the
purposes of saving life or cargo carried at sea. See
Scaramanga v Stamp (1880) 5 CPD 295 – per Cockburn CJ.
iii. Deviation would be justified if there was a usual
commercial practice – Reardon Smith Line v Black Sea &
Baltic General Insurance [1939] AC 562, HL; Cunard
Steamship v Buerger [1927] AC 1
Voluntary v Involuntary Deviation:

See the following
Rio Tinto v Seed Shipping (1926) 24 LiL 316 – per Roche J
Hain SS Steamahip Co v Tate & Lyle [1936] 2 All ER 597
270
Justifiable Deviation
If the vessel had deviated to save life and property, then Common
law views the same as justifiable. In the same way, if the vessel had
departed from the agreed/ contractual route to save only property,
then Common law will not view the same as justified. It is to be
noted that the Hague and H-Visby Rules have a different position
on the issue.
See Scaramanga v Stamp (1880) 5 CPD 295.
Liberty Clauses
A deviation may also be justified by the terms of a specific clause in
the bill of lading or charterparty. This clause would ideally give the
shipowner the “liberty” to call at other additional ports during the
voyage. These are referred to as “liberty clauses”.
See Glynn v Margetson [1893] AC 351;
Luis Monta of Genoa v Cechofracht Co Ltd [1956] 2 All ER 769
Leduc v Ward (1888) 20 QBD 475
Stag Line Ltd v Foscolo, Mongo & Co [1932] AC 328
James Morrison & Co v Shaw Savill & Albion [1916] 2 KB 783
Legal Consequences of Deviation

The legal consequences of deviation had progressively changed
since the decision in Davies v Garrett (1830) 6 Bing 716. A
deviation automatically debars the shipowner from relying on any
term of the contract, whether it is a defence or an exception clause.
It could also possibly deprive the shipowner from claiming freight
or demurrage. See Thorley v Orchis [1907] 1 KB 660. What we see
is that the defences available to the shipowner for any cargo
damage are reduced to that of Act of God and acts of the King’s
enemies, inherent vice and fault of the consignor.
There had been a shift in the position the courts have modified the
approach since. See the following cases; Hain Steamahip Co v Tate
& Lyle [1936] 2 All ER 597 – Per Lord Atkin J. Here the House of
Lords tried to limit the severity of the rule to those events that
occurred after the deviation. It is a must read case. Paterson
Steamahip v Robin Hood Mills (1937) 58 Lloyd’s Rep 33 – Per Lord
Roche
Corollary to Deviation – Deck Stowage

Unauthorised stowage of cargo “on deck” is seen as breach of
contract and regarded as “quasi-deviation”. If there is a loss of the
cargo as a result of “quasi-deviation” the shipowner will be unable
to rely on any exceptions or limitations in the contract of carriage.
See the following cases;
The Anteras [1986] 2 Lloyd’s Rep 626; [1987] 1 Lloyd’s Rep 424
(CA); The Chanda [1989] 2 Lloyd’s Rep 494
The Kapitan Petko Voivoda [2003] 2 Lloyd’s Rep 1
271
Fundamental Breach & Deviation 20

The Anteras [1986] 2 Lloyd’s Rep 626
The Kapitan Petko Voivoda [2003] 2 Lloyd’s Rep 1
Photo Production v Securicor [1980] 1 Lloyd’s Rep 545
The Sea Carriage Conventions

Three different conventions govern the carriage of goods by sea.
The differences between the three being connected to time-bars, the
types of recoveries allowed and extent that a carrier could limit.
The reasons for the carriage conventions have their origins in the
later part of the 19th century and the early part of the 20th century.
The markets were dictated by the carriers who introduced cleverly
crafted terms and conditions into the bills of lading which allowed
them to escape from any liability.
The need for a uniform convention was felt by both the cargo and
ship owning nations. In 1924 a draft Sea Carriage Convention was
arrived at in Brussels which later came into force in 1928. The
United Kingdom gave it the force of law under the Carriage of
Goods by Sea Act 1928.
The Hague Rules

The Hague Rules are loosely based on the American Harter Act
1893. The background to the Hague Rules can be summarised as
follows;
i. Shipowners in the pre World War I era had a dominant
market position
ii. Exploiting/ abusing this position owners incorporated
widely drafted exclusion clauses into the Bills of Lading
iii. 1924 - Brussels Convention gave birth to the Hague Rules
The Hague rules were aimed at

i. Providing a basic framework (compulsory) for the contract
of carriage
ii. It sought to protect cargo interests from the “wide
exclusion clauses”
iii. To bring about uniformity into contractual terms found in
the bills of lading
iv. The Rules required a certain minimum of contractual
obligations on the part of the carrier – Article III
v. Listed a maximum of contractual defences & exceptions that
were available to the carrier – Article IV
vi. It declared null & void any clause which aimed to exclude or
water-down the prescribed basic liabilities – Article III (8)
vii. In other words Article III (8) avoided any contracting out
which might have the effect of lessening the carrier’s
obligations
viii. UK Act – Carriage of Goods by Sea Act 1924
20
. Would be dealt with later
272
Hague-Visby Rules:
The existing regime of Hague Rules was found to be more
favourable to the carriers leading to their amendment by Visby
Protocol in 1968.
i. The H-Visby Rules applied to every bill of lading relating to
the carriage of goods between ports in two different states.
ii. It applied a) when the bills are issued in a contracting state,
or b) when the carriage is taken from a port in a
contracting state, or c) when the bill expressly says that the
Rules or the legislation of the contracting states would
apply – Art. X (important provision).
iii. Deck cargo & live animals excluded from the definition of
goods!
UK Act – Carriage of Goods by Sea Act 1971

i. It covers all bills of lading issued for shipments in the ports
in UK – see The Rafaela S [2005] 1 Lloyd’s Rep 347
ii. Rules made applicable to deck cargo & live animals –
Section 1(vii)
See the case The Morviken [1983] 1 Lloyd’s Rep 1 (London

Arbitration clause). It almost became certain that in cargo claims
litigated in England the Hague-Visby Rules would apply, even if a
contrary clause were to be found in the B/L.
Duties of the Carrier under the Hague-Visby Rules
A. Duties regarding goods

i. Art III (8) of the H-V Rules imposes minimum obligations
on the carrier and declares null and void any contracting
out clauses
ii. Art II – makes the carrier subject to the responsibilities and
liabilities for loading, handling, stowage, carriage, custody,
care and discharge of such goods
iii. Art III (2) – carrier shall properly & carefully load, handle,
stow, carry, keep, care for, discharge the goods carried
iv. See the Article I (e) – the definition clause for carriage,
which goes on to establish “tackle to tackle” rule. Also see
Article VII
See the case Pyrene v Scindia [1954] 2 QB 402 (Pre H-V Days, see
how the provisions get interpreted). Does it exclude deck stowage?
See Article 1(c) where the term “goods” is defined.
See the case The Antares [1987] 1 Lloyd’s Rep 424
The H-V Rules do not apply in circumstances where
a) The goods are actually carried on deck and
b) The bill of lading expressly states so.
B. Duties regarding the vessel and voyage

It is purely a question of seaworthiness. To provide a seaworthy
vessel is implied. English Common Law implies this duty into any
contract of carriage (including charterparties).
273
 The duty to provide a seaworthy vessel is described in Article III

(1), which extends to manning and equipping the vessel
(before and at the beginning of the voyage)
 This duty is seen as one of due diligence (Prior to the Rules the
duty to provide a seaworthy vessel was absolute)
See the following cases on Seaworthiness
The Hong Kong Fir [1962] 2 QB 26, CA
The Muncaster Castle [1961] AC 807
Question 9.2.1
What is the legal significance of the Hague- Visby Rules?
274
9.3 Types of Cargo & Carrier’s Immunities

The purpose of this section is to discuss types of carriage and
carrier’s immunities.
Learning Objectives
□ Develop an understanding of Carrier's Immunities & Limitation of Liability.
Part A
Types of Cargo Covered by the Rules
The Hague Rules and the Hague-Visby Rules only cover certain
types of cargo. When the Hague Rules were first drafted it was
thought that the carriers should not be subject to the mandatory
responsibilities found in Art III in respect of “risky” cargoes. Live
animals and deck cargo were identified as potentially risky.
Carriage of animals could present its own health problems, leading
to delays. These two types of cargo are excluded from the
application of the Rules.
The definition of carriage is to be found in Art I(b) which reads as
follows:
"contract of carriage" applies only to contracts of carriage
covered by a bill of lading or any similar document of title, in
so far as such relates to the carriage of goods by water,
including any bill of lading or any similar document as
aforesaid issued under or pursuant to a charter-party from
the moment at which such bill of lading or similar document
of title regulates the relations between a carrier and a holder
of the same;
The definition of goods is found in Art I(c) which reads as follows:
"Goods" includes goods, wares, merchandise and articles of every
kind whatsoever, except live animals and cargo which by the contract
of carriage is stated as being carried on deck and is so carried;
This means that the carriers could make their own contract
arrangements for carriage of animals without being subject to the
provisions of the Hague-Visby Rules. It should be noted that many
standard forms exclude all liability for loss of or injury to animals or
severely restrict possible liabilities.
Deck Cargo
Deck cargo is an important exception as any cargo carried on deck
is exposed to the elements. As seen earlier, at common law it is a
breach of contract to carry goods on deck. See Royal Exchange Co v
Dixon (1886) 12 App Cas 11. At common law the contract of
carriage often provided that deck cargo was carried at shipper’s
risk.
The provisions of the Hague and Hague-Visby Rules would not be
applicable
i. When the cargo is actually stowed/ carried on deck
ii. When it is clearly stated so in the bill of lading issued regarding
the said cargo
275
In the event the above requirements are not met the contract would
be covered by the Rules. The Rules would govern the bill of lading
contract,
i. When the bill of lading issued in relation to the cargo carried
on deck makes no reference to the deck stowage, but cargo is
still carried on deck
ii. Or when the bill of lading contains a statement that good are
carried/ stowed on deck but is nevertheless carried in the ship’s
holds
A mere liberty to carry cargo on deck is not sufficient. See Svenska
Traktor v Southampton Agencies (Maritime) Ltd [1953] 2 QB 295 (a
must read case) where a provision that “steamer has liberty to carry
goods on deck” did not exclude the operation of the Rules.
Also see Encyclopaedia Britannica v Hong Kong Producer [1969] 2
Lloyd’s Rep 536 where the bill of lading stated, “unless shipper
informs carrier in writing before the delivery of goods to carrier
that he requires under deck cargo” with a further clause stating that
the carrier was excluded from all liabilities for loss or damage to
cargo.
The deck cargo exception has the effect of removing the carrier’s
ability
i. To rely on Article IV rule 2 exceptions to exclude liability
ii. To limit, by reference to the Article IV rule 5 package limit, any
liability which he may have had
iii. To take advantage of the one year time bar under Article III
rule 6
Can it then be said that the carrier could be able to limit his liability
if he carries cargo on deck in breach of the contract of carriage? See
Kapitan Petko Voivoda [2003] 2 Lloyd’s Rep 1. Also see The Happy
Ranger [2002] 2 Lloyd’s Rep 357 and The Chanda [1989] 2 Lloyd’s
Rep 494.
Dangerous Cargo
Common imposes a duty on the shipper not to ship dangerous
goods unless the shipowner had express notice and agreed to it.
This obligation was originally formulated in Brass v Maitland
(1856) E & B 470.
“Where the owners of a general ship undertake that they will
receive goods and safely carry them and deliver them at the
destined port, I am of the opinion that the shippers
undertake that they will not deliver, to be carried in the
voyage, packages of goods of a dangerous nature, which
those employed on behalf of the shipowner may not on
inspection be reasonably expected to know to be of a
dangerous nature, without expressly giving notice that they
are of a dangerous nature.”
- Brass v Maitland (1856) E & B 470
The position under the Hague-Visby Rules is almost in line with the
common law principles. Article IV rule 6 of the Rules reads as
follows:
Goods of an inflammable, explosive or dangerous nature to
the shipment whereof the carrier, master or agent of the
carrier has not consented, with knowledge of their nature
276
and character, may at any time before discharge be landed at

any place or destroyed or rendered innocuous by the carrier
without compensation, and the shipper of such goods shall
be liable for all damages and expenses directly or indirectly
arising out of or resulting from such shipment. If any such
goods shipped with such knowledge and consent shall
become a danger to the ship or cargo, they may in like
manner be landed at any place or destroyed or rendered
innocuous by the carrier without liability on the part of the
carrier except to general average, if any.
Where the Rules apply the common law duty is supplanted. See The
Fiona [1993] 1 Lloyd’s Rep 257 affirmed in [1994] 2 Lloyd’s Rep
506. Under common law the duty is one of contractual undertaking
not to load dangerous cargo. Under the Hague-Visby Rules in Article
IV rule 6 contains an indemnity which is incidental to the right of
the carrier to land the dangerous cargo.
The majority view expressed in Brass v Maitland was approved by
the House of Lords in The Giannis NK [1998] 1 Lloyd’s Rep 337,
where it was held (obiter) that the carrier’s liability in relation to
dangerous goods under Article IV rule 6 of the Hague-Visby Rules
was the same as it was at common law, which is strict.
At common law the expression “dangerous goods” is not defined.
Nevertheless, the courts have interpreted the concept of dangerous
goods in wider terms which would mean that the danger is to be
found in the “surrounding circumstances”. A list is found in the
Merchant Shipping (Dangerous Goods) Regulation 1981. Any goods
classified under the Blue Book, the IMDG Code or any other IMO
Publication will also be deemed as dangerous in nature.
Section 446 of the UK Merchant Shipping Act lists a few explosives
like, Aquafortis, vitriol, naphtah, benzine, gunpowder, lucifer-
matches, nitro-glycerine, pertroleum, and any explosives within the
meaning of Explosives Act 1875, and any other goods of dangerous
nature. It takes into account a potentially dangerous or hazardous
situation! See The Athanasia Comninos [1990] 1 Lloyd’s rep 277
According to the orthodox view a strict liability is attached. When
dangerous goods are shipped without notice the shipper would be
liable for any damage to the vessel and other cargo on board. The
object of notice is that the carrier will have
i. The opportunity to either refuse to carry, or if accepting
ii. To take necessary precaution to protect the vessel and
other cargo on board from any eventualities
As seen earlier, the Hague-Visby Rules contemplate two
eventualities, namely,
i. When goods are carried without knowledge and with consent
and
ii. When carried with knowledge and consent
On both occasions, if the goods pose any danger, the carrier has the
liberty to land them in any place or destroy them without any
liability.
i. The first situation is when the carrier takes it on board
without knowledge of its dangerous nature.
277
ii. He could in such an event land and destroy them without

paying any compensation and could also hold the shipper
for such expenses arising out of such damages
i. In the second situation when they become dangerous.

ii. He is permitted to take such action as seen in the first
instance but the shipper will not be liable for the damages
Article IV rule 3 by way of protecting the carrier states that

“The shipper shall not be responsible for loss or damage
sustained by the carrier or the ship arising or resulting from
any cause without the act, fault or neglect of the shipper, his
agents or his servants.”
See the following cases

The Albacora v. Westcott [1966] 2 Lloyd’s Rep 53;
The Amphion [1991] 2 Lloyd’s Rep 101
Part B
Carrier’s Duties & Immunities
The Hague rules were aimed at providing a basic framework
(compulsory) for the contract of carriage and to protect cargo
interests from the “wide exclusion clauses”. This was seen as the
first step in achieving uniformity into contractual terms found in
the bills of lading.
Under Article III, the Rules required a certain minimum of
contractual obligations on the part of the carriers. Article II of the
Rules set out the obligation of the carrier and also his immunities in
clear terms by stating as follows:
“Subject to the provisions of Article VI, under every contract
of carriage of goods by water the carrier, in relation to the
loading, handling, stowage, carriage, custody, care and
discharge of such goods, shall be subject to the
responsibilities and liabilities and entitled to the rights and
immunities hereinafter set forth.”
Article III of the Rules, we saw laid down the duties of the carrier in
clear terms.
Defences & Immunities

Having defined the obligations of the carrier, the convention then
proceeds to list the defences and immunities available to it in the
event of facing a potential cargo claim. Article IV of the Rules sets
out in clear terms the defences and immunities available to the
carrier under the Hague-Visby Rules.
Art IV rule 1 provides the carrier with the “due diligence” defence in
respect of loss or damage caused by unseaworthiness. Art IV rule 2
contains a long list of excepted causes, for which the carrier will not
be liable, provided that none of the breaches contemplated under
Art III rule 1 had been causative of the loss or damage.
278
i. Art IV rule 2 lists 17 exceptions as ‘carrier immunities’ for “loss or

damage” caused to the cargo. Some are similar to the common
law principles. See Nugent v Smith (1876) 1 CPD 423; Liver Alkali
v Johnson (1874) LR 9 Ex 338 (Act of God defence).
ii. These ‘immunities/ exceptions’ are not available to the carrier if
the loss or damage is caused by its “failure to take due diligence” to
provide a seaworthy ship.
iii. Art IV (2)(f): Act of public enemies. See The Loch Dee [1948] 82
LI LR 430; The Silver Sky [1981] 2 Lloyd’s Rep 95; The Anita
[1970] 2 Lloyd’s Rep 365 (this decision was reversed later on
other grounds); Rickards v Forrestal [1942] AC 50 – ordered by
German government to berth ship in a neutral port.
iv. Art IV (2)(j): Strikes/ Lockouts. See Leonis v Rank (No. 2) (1908)
13 Com Cas 295; Reardon Smith Line v Ministry of Agriculture
[1962] 1 QB 501 – per Willmer LJ; The Onisilos [1971] 2 QB 501;
The New Horizon [1975] 2 Lloyd’s Rep 314 – good case on
definition; The Laga [1966] 1 Lloyd’s Rep 582
v. Art IV (2)(a): Act/ Neglect/ Default of Master/ Mariner/ pilots/
servants of carrier – a provision unique to the Hague-Visby Rules.
See The Portland Trader [1964] 2 Lloyd’s Rep 443; The Satya
Kailash [1984] 1 Lloyd’s Rep 588; The Glenochil [1896] P 10 – per
Sir Francis; Gosse Millard Ltd v Canadian Government Merchant
Marine Ltd [1929] AC 223 – where the House of Lords considered
the meaning of “management of the ship” and concluded that it
reflected the common law meaning; Kawasaki Kisen Kaisha Ltd v
Whistler International Ltd [2000] 3 WLR 1954; The Star Sea
[1995] 1 Lloyd’s Rep 651; The Emmanuel C [1983] 1 Lloyd’s Rep
310
vi. Art IV (2)(c): Perils/ Dangers/ Accidents at Sea/ Navigable
Waters – the same approach to common law, to be natural. See
The Xantho (1887) 12 App. Cas. 503 – per Lord Herschell;
Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd
[1941] AC 55 – the loss was not caused by perils of the sea but
caused through heat and damage and not something the
shipowner could have stopped.
vii. Art IV (2)(b): Fire unless caused by the actual fault or privity of
the carrier. See Lennards Carrying Co v Asiatic Petroleaum Co Ltd
[1915] AC 705; The Diamond [1906] P 282; Macieo Shipping Ltd v
Clipper Shipping Lines Ltd (The MV Clipper Sao Luis) [2000] 1
Lloyd’s Rep 645
viii. Art IV (2)(I): Saving or Attempting to save life or property at sea
ix. Art IV (2)(p): Latent defects not discoverable by due diligence.
See The Antigoni [1991] 1 Lloyd’s Rep 209
x. Art IV (2)(q): No fault/ neglect/ privity of carrier nor his agents/
servants – The catchall provision! See Goodwin, Ferreira & Co v
Lamport & Holt (1929) 34 LI LR 192; Philips & Co v Clan Line
Steamers Ltd (1943) 76 LI LR 58 at 61 – per Atkins J; Leesh River
Tea Co Ltd v British India Steam Navigation Co Ltd [1967] 2 QB
250 – per Lord Sellers J.
279
Question 9.3.1
Discuss the concept of carrier's immunities.
280
9.4 Limitation of Liability & Hamburg Rules

The purpose of this section is to explore the limitations of liability
and the Hamburg Rules.
Learning Objectives
□ Explore limitations of liability.
□ Examine the Hamburg Rules.
Part A
Limitation of liability under Hague-Visby Rules
One of the primary objectives of The Hague and the Hague-Visby
Rules was to allow the carrier to limit his liability. Hence the
package limitation is of great importance for our study. In common
law there were no standardised equivalent for limitations of
liability. The mandatory package limitation would only work
provided the carrier performed his obligations as laid down under
Article III. See The El Greco [2004] 2 Lloyd’s Rep 537.
Article IV rule 5 which concerns the package limits. Under The
Hague Rules a sum of £100 was the fixed as the limitation per
package or unit. It should be noted this sum was fixed in the 1920s
when it was felt as a relatively large sum.
For a discussion on the issue of package/ unit/ weight limitation,
see article by Diamond [1978] LMCLQ 225. The expressions
‘package’ and ‘unit’ are unclear in their meaning. See The River
Gurara [1998] 1 Lloyd’s Rep 225; Studebaker [1938] 1 KB 459.
One of the controversies is whether the word ‘unit’ refers to a
“physical” unit – does it refer to one separate item or article or a
“shipping unit”. In shipping practice it is considered to mean a
“shipping unit”.
Containerisation developed in the 1960s. While the Hague Rules
came into force in the 1920s did not envisage such a development
in the transportation of goods, The Hague-Visby Rules which
although came into force in the 1960s did not include any
provisions for the same. This had been criticised by both the legal
profession and the shipping industry. Containerisation had
revolutionised the carriage of goods by all modes of transportation.
Nevertheless, questions are raised when cargo is containerised and
is damaged. Some of the issued could be identified as follows:
i. Should the container be treated as being part of the ship or
cargo in a given situation?
ii. What can be carried in a ship and in a container without
being “separately packed”?
iii. What is the meaning of phrase “enumerated … as packed”
occurring in Article IV rule 5(c) in the Hague-Visby Rules?
See the The El Greco [2004] 2 Lloyd’s Rep 537 and The River Gurara
[1998] 1 Lloyd’s Rep 225.
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Financial Limits:
Article IV (5)
- Nabob Foods Ltd v Cape Corso [1954] 2 Lloyd’s Rep 40
[Canadian case]
- Mayhew Foods Ltd v Overseas Containers Ltd [1984] 1
Lloyd’s Rep. 317
- Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, HL
- New Zealand Shipping Co. Ltd v AM Satterthwaite & Co. Ltd,
The Eurymedon [1974] 1 Lloyd’s Rep 534, PC
- Anticosti Shipping Co. v Viateur St Amand [1959] 1 Lloyd’s
Rep 352, Canadian case
- General Electric Co. v MV (The Lady Sophie) [1979] 2
Lloyd’s Rep 173, US case
- Browner International Ltd v MonarcH Shipping Co. Ltd (The
European Enterprise) [1989] 2 Lloyd’s Rep. 185
- The Mormaclynx [1971] 2 Lloyd’s Rep 476, US Case
- Standard Electrica SA v Hamburg and Columbus Lines Inc
[1967] 2 Lloyd’s Rep 193, US Case
- International Factory Sales Service Ltd v Ship Aleksandr
Serafimovich and Far Eastern SS Co., The Aleksandr
Serafimovich [1975] 2 Lloyd’s Rep 346, Canadian
- Island Yachts Inc v Federal Pacific Lakes Line [1972] 1
Lloyd’s Rep 426, US case
- Primary Industries Corpn v Barber Lines A/S and Skilos A/S
Tropic, The Fernland [1975] 1 Lloyd’s Rep 461, US
- Van Breems v International Terminal Operating Co. Inc and
Holland America Line, The Prinses Margriet [1974] 1 Lloyd’s
Rep 599, US
- Hartford Fire Insurance Co. v Pacific Far East Line Inc, The
Pacific Bear [1974] 1 Lloyd’s Rep 359, US
- Shinko Boeki Co Ltd v SS Pioneer Moon and United States
Line Inc, The Pacific Bear [1974] 1 Lloyd’s Rep 199, US
- The Kulmerland [1973] 2 Lloyd’s Rep. 428
- The Aegis Spirit [1977] 1 Lloyd’s Rep 93
- The River Guarara [1998] QB 610
- Case to be read:
- El Greco (Australia) Pty Ltd v Mediterrenean Shipping Co. SA
[2004] 2 Lloyd’s Rep 537
- Diamond [1978] LMCLQ 225
Time Limit
Article III (6)
- Transworld Oil (USA) Inc v Minos Compania Naviera SA, The
Leni [see below]
- Empressa Cubana Importadora v Octavia Shipping, (The
Kefalonia Wind) [1986] 1 Lloyd’s
- Compagnia Colombiana de Seguros v Pacific Steam Navigation
Co. Ltd [1965] 1 QB 101
- Zainalabdin Payabi v Amstel Shipping Corporation Ltd (The
Jay Bola) [1992] 2 Lloyd’s Rep 62
- The Captain Gregos (No. 2) [1990] 1 Lloyd’s Rep 310
- The Kaptean Markos [1986] 1 Lloyd’s Rep 211
- The Nordglimt [1987] 2 Lloyd’s Rep. 470
- Aries Tanker Corp v Total Transport (The Aries) [1977] 1
Lloyd’s Rep. 334, HL
- Bua International Ltd v Hai Hing Shipping Co. Ltd (The Hai
Hing) [2000] 1 Lloyd’s Rep 300
- Goulandris v Goldman [1958] 1 QB 74
282
- Trafigura Beher BV v Golden Stavraetos Maritime Inc [2003]

EWCA Civ 664, CA
- The Ot Sonja [1993] 2 Lloyd’s Rep 48
- Salmond and Spraggon (Australia) Pty Ltd v Port Jackson
Stevedoring Pty Ltd (The New York Star) [1980] 2 Lloyd’s Rep
317
- Kenya Railways v Antares Co. Pte Ltd (The Antares) [1987] 1
Lloyd’s Rep 424
- The Kapitan Petko Voivoda [2003] EWCA Civ. 451* financial
limit case
- The Happy Ranger [2002] 2 All ER (Comm) 24, CA *
financial limit case
- The Merak [1965] P 223, CA
- Harbour Assurance Co. (UK) v Kansas General Insurance Co.
Ltd [1993] 1 Lloyd’s Rep 455
- The Finrose [1994] 1 Lloyd’s Rep 559
- Thyssen Inc. v Calypso Shipping Corporation [2000] 2 Lloyd’s
Rep 243
- Allianz Versicherungs-Aktiengesellschaft Ors v Fortuna Co. Inc.
[1999] 1 WLR 2117
- Seabridge Shipping AB v AC Orssleff’s Eftf’ A/S [1999] 2
Lloyd’s Rep. 685
- Lauritzen Reefers v Ocean Reef Transport Ltd SA (The Buhkta
Russkaya) [1997] 2 Lloyd’s Rep. 744
Part B
The Hamburg Rules
The UNCTAD Report pointed out that the Hague and Hague-Visby
Rules were outdated and defective and that they were they were
produced by developed industrialised countries to which developing
nations were unable to contribute. Following the report the
UNCTAD (UN Conference on Trade and Development) drafted a set
of rules which were designed to replace the Hague & Hague-Visby
Rules which resulted in the Hamburg Rules 1978.
The Hamburg Rules is seen as the first truly comprehensive attempt
to codify & allocate the risks between vessel interests and cargo
interests in the shipping industry. The Rules increase the liability of
the carriers as against the cargo interests and the period of the
carrier’s responsibility is extended beyond the ship’s rail. This would
mean the carrier’s responsibility would also cover the period when
the cargo is in his charge in a port.
Some of the important issues covered by the Hamburg Rules could
be summarised as follows:
i. Hamburg Rules apply to all contracts of carriage
ii. Under Article IV rule 1 the carrier’s liability is covered from
the period while it is in charge of the goods at the port of
loading, during the carriage and at the port of discharge –
extending the carrier’s liability
iii. Under Article 2 the Rules would apply to all contracts of
carriage by sea, if the port of loading is located in a
contracting state, if the port of discharge is located in a
contracting state, if the bill of lading or other document
evidencing a contract is issued in a contracting state and if
it is voluntarily incorporated into the contract
iv. Article 1(2), 10 and 15(1) of the Rules makes the
contracting carrier responsible for the acts of the actual
carrier
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v. Carrier is defined under Article 1(1) as the person in whose

name the contract of carriage has been concluded, the
‘actual carrier’ is defined under Article 1(2) as the person
with whom the performance of the carriage of the goods
has been entrusted and the carrier under Art 10 remains
responsible for acts and omissions of the actual carrier and
his servants and agents
vi. Under the Hamburg Rules the liability of the carrier is
based on the principle of presumed fault or neglect – this
means that the burden of proof rests on the carrier
vii. The Hamburg Rules allows only two carrier defences,
namely, a) damage or delay caused due to fire and b) where
it resulted from a response to an SOS call
viii. Any claims for cargo loss or damage is to be brought within
two years
ix. The limits under The Hamburg Rules are 25% higher than
the Hague-Visby Rules
“It is largely a political, rather than a legal, question
as to whether the Hamburg Rules will ultimately be
more widely accepted than the Hague or Hague-
Visby Rules.”
– Nicholas Gaskell
Question 9.4.1
Discuss the legal significance of the Hamburg Rules.
284
Summary__________________
The purpose of this chapter was to explore legal issues relating to
the Carriage of Goods by Sea. It introduced you to the subject and
explored the contract of affreightment including bills of lading,
types & functions. It discussed the Hague and Hague-Visby Rules
and highlighted carrier's immunities and limitation of liability as
well as the concept of charterparties, its types and formation.
Outline the development of international trade contracts and their significance to
the development of international trade.
285
Introduction
Overview
The purpose of this chapter is to explore legal issues relating to the
Carriage of Goods by Sea. It will introduce you to the subject and
explore the concept of Charterparties – Types & Formation.
Aims
□ Develop an understanding of Charterparties – Types & Formation.
Learning Outcomes
□ Discuss Charterparties – Types & Formation.
287
Resources
Essential readings

Lawtel or Lexis.

288
10.1 Charterparties Introduction and Voyage

Charters
The purpose of this section is to examine charterparties, including
the formation of the charterparty, the construction of the contract,
the choice of law and voyage charterparty - Freight.
Learning Objectives
□ Examine formation of the charterparty.
□ Examine construction of the contract.
□ Examine the choice of law.
□ Examine voyage charterparty – freight.
Charter parties – Introduction/ Formation

A contract of affreightment could either be contained in a bill of
lading or a charterparty depending on the manner in which the
vessel is employed. We are concerned with charterparty contract in
this chapter. Charterparty contracts are basically the hiring of a ship
or her services from the ship owner by the charterer.
This could be done in more than one form and the industry has
invented several forms to suit their commercial needs&
requirements.
i. It is the agreement drawn up between a ship owner and a
charterer
ii. It is a contract for the hire of the vessel or her services
iii. The contract is contained in a document called the
charterparty
iv. Time charter, Voyage charter, demise charter and hybrids
v. Time & Voyage charters are contracts for the hire of the
ship’s services
vi. Demise charter is the contract for the hire of the ship
Also, please note the following:

i. The charterers on most of the occasion would be acting as
carriers of the cargo
ii. The shipper would have an independent contract with the
charterer for carriage of the goods
iii. A bill of lading (BoL) will be issued by the carrier to the
shipper/ seller
iv. Most importantly in a situation where the cargo gets
damaged it is important to know against whom to bring the
action for damages!
Formation of the Charterparty

There are quite a few standard forms available in the shipping
industry, which could be chosen by the parties according to their
needs. By the time the charterparty is finalised, the form will not
look the same as several clauses would have been deleted, added,
modified and or amended for the particular "fixture" - a perfect
example of "freedom of contract".
289
Why is it so important?
i. Charterparties are contracts
ii. English Law "does not require the contract for the services
of a ship on a voyage should be made or recorded in any
particular form"
iii. See Lidgett v Williams [1845) 4 Hare 456, 462. The
judgement delivered in this case is still good law!
iv. It all depends on the negotiating party's strength, as there is
no codified law governing the CPs. It is entirely up to the
parties to choose the law and the forum!
v. The parties need to be extremely careful when they add
"rider clauses" and make sure they are clear
vi. And do not incorporate inconsistent or unworkable clauses!
Case Law: The Peter Shmidt [1995]1 LLR 202

The Bills of lading issued contained the terms of the CP. While the
CP provided for arbitration at New York the telex message
contained arbitration in London. Lesson: do not be sloppy in your
negotiation while you finalise a CP!
Can you say the Charterparty is contained in a single document,
assuming it is a written contract? It cannot be said it is contained in
a single document for the following reasons:
i. Since the CP is negotiated in stages it cannot be on
occasion constituted in one single document.
ii. The negotiation goes through stages and hence each piece
of information exchanged between the parties would go to
constitute the contract.
iii. It would contain telex messages, e-mails (more recent
times), the printed/ standard form - with lots of deletions
and amendments, and the rider clauses.
iv. The standard form, therefore would represent only a part
of the concluded contract
v. The sum product of all the above could then be referred to
law as the Charterparty
See the following cases Sociedade Portuguesa de Navios v Polaris
[1952] 1 LLR 71; Okura v Navara [1982] 2 LLR537
What do we need to know?

i. To clearly identify the rider clauses to the standard form
ii. To ensure that the clauses are not inconsistent with any of
the standard clauses
iii. To bear in mind that the rider clauses are part and parcel of
the CP and ensure that they are agreed upon at the same
time as the CP!
Case Law: i) Indian Oil Corp v Vanol Inc [1992] 2 Lloyd’s Rep 563,
ii) The Leonidas [2001] 1 Lloyd’s Rep 533
In the event of inconsistencies between standard form and rider
clauses, riders would prevail.
Construction of the Contract

The rules of construction as regards bills of lading and charter
parties are similar in nature and the intentions of the parties are to
be considered first. Charterparties are to be construed in the light of
290
the adventure contemplated by the parties to the contract. Where

different parts of the document are contradictory to each other
leading to ambiguity, the document must be considered as a whole
to arrive at its general meaning.
Also bear in mind that
i. General principles of contract dictates that a contract is
concluded when there is an identical acceptance to an offer
ii. When certainty of the terms to the contract is achieved
iii. See case law Hyde v Wrench (1840) 3 Beav. 334
iv. Does a valid contract come into existence even before the
parties sign a document?
v. If the answer is yes, then what if one of the parties want to
withdraw from the “deal/ CP/ fixture”?
vi. Is it possible for the parties to simply withdraw from the
negotiations/ contract at any point of time?
Choice of Law
The general rule is that the law chosen by the parties governs a
contract. But in a situation involving a choice between the laws of
different countries, it would have to be the provisions of the Rome
Convention on the Law Applicable to Contractual Obligations. The
United Kingdom has given effect to the same by the Contracts
(Applicable Law) Act 1990. The Convention applies to contracts
made after 1st April 1991. See Article 3.4 of the Convention for its
applicability where parties have opted for a foreign law.
In the event where
i. There is no express choice of law found in the contract
ii. Or choice of law is not demonstrated by the terms of the
contract
iii. Or the circumstances of the case, then
iv. The law of the country with which it is most closely
connected to will govern the contract.
See The Komninos S [1991] 1 Lloyd’s Rep 370; The Hamburg Star
[1994] 1 Lloyd’s Rep 399 where there is no express choice of
applicable law to the contract.
Voyage Charterparty - Freight:

The payment obligation under the voyage charter is called freight.
Although it developed in relation to the carriage of goods by sea, it
has now found application in all forms of carriage. See United
Carriers v Heritage Food Group [1995] 2 Lloyd’s Rep 269. By
payment obligation we mean the price fixed for a particular voyage
carrying a particular cargo or cargoes. This would invariably
include the operational costs (wages, fuel, etc).
In shipping terms freight is ‘earned’ by the ship owner. In order to
earn freight the cargo is to be carried to its agreed destination by
the ship owner and be ready to be discharged. As stated earlier
charterparties come in standard forms (printed) to suit the
requirement of a particular type of cargo and trade. Each caters to
the need of a particular trade and is used freely.
Freight is normally calculated on the basis of per ton or on the
entire cargo carried as a lump sum.
291
Freight is normally agreed to be calculated in terms of weight or

volume of the cargo or by number of units shipped. Depending on
the trade involved freight may be calculated on the basis of
published scales – “Worldscale” or “Intascale”. Worldscale stands
for Worldwide Tanker Nominal Freight Scale and Intascale stands for
International Tanker Nominal Scale. These scales are periodically
amended. See Mitsui OSK v Agip [1978] 1 Lloyd’s Rep 263; The
Mercin [1973] 1 Lloyd’s Rep 532; The Seiko Maru [1970] 2 Lloyd’s
Rep 235; The Yoho Maru [1973] 1 Lloyd’s Rep 409.
In some cases the freight rates vary according to the routes used.
See The Seiko Maru [1970] 2 Lloyd’s Rep 235; Achille Laura v Total
[1969] 2 Lloyd’s Rep 65; The Maritsa [1979] 1 Lloyd’s Rep 581.
When cargo is specified in tons, a clause is inserted which specifies
the minimum & maximum cargo to be loaded. In case the cargo
loaded is less than the minimum, the owner could claim freight on
the shortfall. This is referred to as deadfreight.
i. The question of paying deadfreight would not arise when
freight is payable in a lumpsum.
ii. A lumpsum freight or lump freight is often compared to a
sum payable for the rent or hire of a vessel for a certain
voyage.
iii. Freight would be payable only when the ship owner carries
the cargo to the agreed destination and is ready for
delivery.
iv. The charterer must pay freight in full and cannot seek to
deduct counter claims against the ship owner.
v. Here the Common law rules “equitable set-off” would not be
applicable
See the case laws The Brede [1974] QB 233; The Aries [1977] 1
WLR 185 – House of Lords. For a discussion on freight payable on
outturned quantities see The Tarva [1973] 2 LLR 385, and The
Dominique [1989] 1 LLR 431.
In terms of payment of freight the question when and where always
arises along with ‘is it before or after delivery?’ Right & true delivery
was the traditional way of paying freight, which was after delivery.
Advance freight appears to be the modern day practice. A major
portion of the freight is paid in advance with the balance being paid
on delivery (e.g., 80% - 20%).
However, the true test was summed up by Willes CJ in Dakin v
Oxley
“if the service in respect of which the freight was contracted
to be paid had been substantially performed … and freight is
earned by the carriage and arrival of the goods ready to be
delivered to the merchant.”
– Per Willes CJ in Dakin v Oxley (1864) 143 ER 938
i. What happens when cargo is lost? Does the charterer still

have to pay?
See the case Allison v Bristol Marine Insurance Co (1876) 1
App Cases 209 – House of Lords.
ii. What if freight was to be paid in advance and the ship
owner fails to make right & true delivery?
The charterer in such instances may have to sue the ship
owner for “breach of contract”.
292
See William Thomas & Sons v Harrowing Steamship Co.

(1915) AC 58 – House of Lords
The vital question that arises is who is to pay freight? Is it the

charterer or is it the receiver of the cargo/ bill of lading holder at
the port of discharge? How does it work?
i. Under voyage charters the liability is joint – on the

charterer and the bill of lading holder
ii. What is the situation if there is a head charterer, a
charterer and a bill of lading holder?
iii. Who is liable to pay freight?
iv. See case law The Constanza M [1980] 1 LLR 505
v. See “freight prepaid” cases, where the doctrine of estoppel
comes into operation
vi. The Indian Reliance [1997] 1 LLR 52 and
vii. Cho Yang Shipping v Coral UK Ltd [1997] 2 LLR 641
What does a ship owner do in the event of non-payment of freight?

Is he to sue the charterers?
i. Proceed for summary judgement under Order 14 (its part

24 now)
ii. Arbitrate – if the contract contains a term and seek an
interim award
iii. Obtain freezing orders (or in other words mareva injunction)
over the charterer’s assets
iv. Or seek to enforce the freight as a lien against cargo or on
subfreights.
Question 10.1.1
Explain and discuss the term "choice of law"?
293
10.2 Voyage Charters – Laytime, NORs &

Demerrage
The purpose of this section is to examine voyage charters in greater
depth, including laytime, NORs & demerrage, voyage charters –
laytime & demurrage, and calculating laydays, commencement of
Laytime.
Learning Objectives
□ Examine Voyage Charters in greater depth.
□ Examine Laytime.
□ Examine NORs & Demerrage
□ Examine Commencement of Laytime.
Voyage Charters – Laytime & Demurrage

A voyage charterparty would normally set out a time for loading
and discharging of the cargo at the load port and discharge port.
This is referred to as Laytime. In the words of John Wilson laytime
“… is at the charterer’s free disposal in that he is regarded as having
paid for it in the freight”
“A liability for demurrage is a liability for liquidated damages
for breach of contract. The breach of contract is the failure to
discharge (or load) within the permitted laytime. The
obligation has two different aspects; the first is the obligation
to discharge and the second is to do so within the limited
time ... Once the limited time has been exceeded there is a
continuing breach for which the liability is liquidated
damages (that is to say demurrage) ...”
– Per Hobhouse J in The Forum Craftsman [1991] 1
Lloyd’s Rep 81
The topic of laytime is very large and a few committees had been
comprised to look into the several terms used in the charterparty
contracts with reference to laytime. This has also resulted in the
production of two documents namely, Charterparty Laytime
Definitions 1980 (as amended) and Voyage Charterparty Laytime
Interpretation Rules 1993. It is to be noted that these definitions and
rules do not have the force of law unless incorporated into the
charterparty agreement.
If freight were to be treated as the primary payment obligation
under a voyage charter, then what is the secondary obligation that
would arise under the loading and discharging operations? The
charterer would be obliged to nominate a port/ berth within a
reasonable time and thereafter complete the loading and
discharging operations within a reasonable time.
In a voyage charterparty the expression “reasonable time” for
loading & discharging cargo is referred to as laytime. A “set period of
time” would be allowed for loading and discharging. If the
operations take more than the agreed time the owner would claim
demurrage. Laytime is usually calculated based on fixed number of
days (calendar days & conventional days). The number of days
allowed in a charterparty contract to perform the loading and
discharging operations is referred to as the laydays.
294
In order to avoid demurrage the charterer should have to perform

all tasks in connection with the loading or discharging of the cargo
within this set period of time. The process of loading includes
placing goods into the vessel and also stowage or other operations
necessary to ensure that the vessel can proceed on her voyage in
safety. Parties normally define laytime in the contract providing for
enough space to carry out the loading and discharging obligations.
Where laytime is not agreed (very, very rare in modern day
practice) the law normally implies an obligation to load and unload
within a reasonable time. But see The Spiros C [2000] 2 Lloyd’s Rep
319.
Some of the expressions used in printed forms while defining
laytime:
i. Weather permitting
ii. Weather working days
iii. Sundays and holidays excepted
iv. Unless used, in which case time actually used to count
Calculating laydays
Calculating time from midnight to midnight is calendar days and it
is also presumed that days refer to calendar days. This presumption
is rebuttable. The continuity of lay days could be interrupted by
Sundays & holidays if there is an express provision to this effect in
the charterparty.
In contrast time runs in conventional days in periods of 24 hrs. Also
see working days and weather working days. Could a part of a day
be counted as a whole day? It could also be calculated at the daily
rate of loading/ discharge. See Reardon Smith Line v Ministry of
Agriculture, Fisheries & food [1963] AC 691.
How to then calculate the laydays if a vessel has hatches with
different capacity? Case laws to look into: Aegis Progress [1983] 2
Lloyd’s Rep 570; The General Capinpin [1991] 1 Lloyd’s Rep 1 -
House of Lords.
What happens when the charterer performs his loading and
discharging operations well within the laydays provided for in the
charterparty contract? Does he get any incentives for saving time of
the ship owner? Some charterparties contain a dispatch clause,
contemplating payment to charterers in the event of them
completing the operations before the expiry of the laytime.
Charterers would then normally want to avoid paying demurrage
and complete loading/ discharging before the expiry of laytime
specified in the charterparty. It should also be noted that speeding
up the process may cause problems as the bill of lading may not
contain the specified date. See case Laws: The Vrontados [1965] 1
QB 300; The Eurus [1996] 2 LLR 403 – a must read case.
Commencement of laytime – NORs

Notice of readiness (NOR) is a notification of the vessel that it is
ready to commence either the loading or discharging operations.
The Gencon form contains no requirement for the NOR to be given
in writing.
On the ship owner issuing the charterer with a “notice of readiness”
at the port the laytime would be triggered off, provided the same is
295
accepted as a valid NOR by the charterer. The contents of the NOR

depend upon the terms of the charterparty contract. It normally
would state
a) That the vessel has arrived at the place where under the
terms of the charterparty she may tender notice
b) That she is ready to load or discharge
i. If the NOR fails to give a specific time as to its readiness
and merely states that it would be ready at some time in
the future is not a valid NOR. See The Antclizo No.2 [1992]
1 Lloyd’s Rep 558.
ii. What is meant here is at the time when the NOR is given
the vessel should be actually ready to load and not at the
expiry of the notice.
“The notice of readiness should be actual, not
anticipated readiness.”
– Simon Baughen
iii. See The Mexico 1 [1990] 1 LLR 507 – discharge operations,
The Petr Schmidt [1997] 1 LLR 284 – NOR given outside
office hours. Also see The Jay Ganesh [1994] 2 LLR 358.
iv. What if the charterers had accepted a NOR which was
premature and contrary to the terms of the CP? See The
Helle Skou [1976] 2 LLR 205. Also see the different types of
Charter parties, like Port CP & Berth Charter
v. See The Johanna Oldendorff [1974] AC 479 – a must read
case; The Maratha Envoy [1978] AC 1
Demurrage
The charterer is obliged to load and discharge within the time
(laytime) stipulated in the CP. Failure to do so constitutes a breach.
A ship owner would be entitled to make a demand on failure to
load or discharge within the agreed/ stipulated time. Laytime being
an innominate clause and not a condition the owner cannot
withdraw from the contract for the breach of the same. See Union
of India v Compania Naviera Aeolus SA [1964] AC 868
When there is no agreement to pay demurrage the owner would be
entitled to un-liquidated damages. Though demurrage is due from a
charterer it could also be recovered from a bill of lading holder in the
event the terms of the CP are incorporated into it and the
demurrage clause in such a way to include the bill of lading holder.
The obligation of the charterers to load and discharge is neither a
condition nor a warranty and is an innominate clause. This means
the ship owner cannot terminate the contract on the expiry of the
laytime and the loading or discharging operations had not been
completed by then. When the delay beyond the laytime becomes
unreasonable (resulting in frustration of the contract) the owner
would be entitled to terminate. See Universal Cargo Carriers Corp
[1957] 2 QB 401
The famous quote is “Once on demurrage always on demurrage.”
Reading list: The Eurus [1998] 1 Lloyd’s Rep 351; The Mexico 1; The
Johanna Oldendorf
i. What is and is not demurrage? – See The Lips [1987] 2 LLR 311 –
a good case to read on the issue from the House of Lords.
296
“It is not money payable by a charterer as the consideration

for the exercise by him of a right to detain a chartered ship
beyond the stipulated lay days. If demurrage were that, it
would be a liability sounding in debt.”
– Lord Brandon The Lips [1987] 2 LLR 311 at 315
A ship owner is obliged to keep his vessel at the port of loading,

discharge or call even after the time allowed for the charterer to
perform his operations. See the Aktieselskabet Reidar v Arcos Ltd.
(1926) 25 LIL R 513
The only damages payable by the charterer in the event of
detention of the vessel in breach of the CP laytime provision is
demurrage. If the ship owner can prove a separate breach of
charter, and that the consequences extended beyond the detention of
his vessel can he recover damage? See Suisse Atlantique [1966] 1
LLR 529.
Also see Aktieselskabet Reidar (1926) 25 LIL R 513; The Altus
[1985] 1 LLR 423; The Adelfa [1988] 2 LLR 466; Leeds Shipping Co
Ltd (1932) 42 LI LR 123
Question 10.2.1
What is meant by the term Demurrage?
297
10.3 Time Charters – Hire & Off-Hire

The purpose of this section is to examine the concepts of time
charters, hire and off-hire.
Learning Objectives
□ Examine the concept of time charters, hire and off-hire.
Time Charters – Introduction

A time charter is an agreement drawn up between a ship owner and
a charterer for the hire of his ship for a particular period. The ship
owner places his ship at the disposal of the charterer in return for
the payment of hire at regular and agreed intervals. Under a time
charter the actual possession and control of the ship remains with
the ship owner, with the master and crew continuing to be the
servants of the ship owner.
The ship owner pays the costs of running the ship as a ship, e.g.
crew's wages, stores, repairs, and hull insurance (but not any extra
insurance consequent upon the ship's trading area); whilst the
charterer pays the costs of using the ship as a carrier - e.g. fuel, port
charges, pilotage, tugs, stevedores etc.
It is usual to supplement the bare details of the ship stated in the
opening lines of a standard form charterparty with appended
clauses listing the ship's specifications and capacities – in addition,
the charterer may be provided with copies of relevant plans of the
ship.
The stated description must relate to the ship at the time of fixing
the charter – save that the speed and consumption warranty must
apply at the time of delivery of the ship to the charterer.
Hire Period & Off-Hire

The period of hire runs from the time of the 'delivery' of the vessel
to the charterer to the time of her 'redelivery' to the ship
owner - the ship may come on hire immediately (spot) or the ship
owner may be required to deliver his ship within a spread of dates
(LAYCAN - with the charterer being given the option of cancelling
the charter if the ship is not delivered on or before a given date).
At the time of fixing, the charterer must choose a period of
sufficient length to enable him to achieve his proposed trading
objectives and to redeliver the ship to the ship owner at the expiry
of the charter period. Where the ship is redelivered outside the
charter period, the charterer will be in breach of contract.
It is impossible, however, to arrange that the expiry of the charter
period and the end of the last voyage under the charter will be
coincidental. In the absence of an express margin of the period of
hire (e.g. '...20 days more or less in Charterer's option'), the courts
will imply a reasonable margin.
Where a ship is redelivered outside the charter period, the payment
for the extended hire will depend on whether the last voyage under
the charter was a 'legitimate' last voyage (a voyage which could
reasonably be expected to be completed before the end of the
charter period), or an 'illegitimate' last voyage (a voyage which
298
could not reasonably be expected to be completed within the

charter period).
If, during a legitimate last voyage, the ship is delayed by matters for
which neither the charterer nor the ship owner is responsible, the
charter is presumed to continue in operation until the end of the
voyage. The hire is payable at the charter rate until redelivery, even
though the market rate may have gone up or down.
If the charterer instructs that the ship proceed on an illegitimate
last voyage, the ship owner is entitled to refuse that instruction and
call for another. If the charterer refuses to give it, the ship owner
can accept his conduct as going to the root of the contract, fix a
fresh charter for the ship, and sue for damages. If the ship owner
agrees to the illegitimate voyage, he is entitled to be paid at the
current market rate for the excess period.
The time for the determination of the lawfulness or otherwise of the
charterer's orders for the ship to proceed on the final voyage is
when the time for performance of the voyage arrives. See The
Gregos [1992] Lloyds Rep.
Hire & Off-Hire

Hire is the ship owner's remuneration for making his ship available
for the charterer's service - it is paid from the time of delivery of the
ship to the charterer until her redelivery to the ship owner (subject
always to non-payment for any time lost when the ship comes off
hire under the terms of the charterparty).
The rate of hire may be at a stipulated sum of money per day (e.g.
$10,000), or at a given figure per (summer) deadweight tonne (e.g.
$20 per dwt tonne), or on Worldscale rates (for tankers) - the hire
being paid in advance at regular intervals (e.g. every 15 days, 30
days, or per calendar month). Instructions as to how the hire
monies are to be paid should be clearly stated in the charterparty.
The hire must be paid in advance - a late payment is not a payment
in advance. If the hire falls due on a day when the banks are shut it
must be paid on an earlier day when the banks are open; see The
Laconia [1977] A.C. 850. Where a ship is off-hire on the day that
the payment of hire is due, the charterers are not obliged to pay
until the ship comes on hire again.
All time charterparties recognise the importance to the ship owner
of the regular receipt of hire by the inclusion of a provision which
allows the ship owner to terminate the charter and withdraw the
ship from the service of the charterer in default of payment of hire.
This right of withdrawal is, without more, strict - the ship owner
may withdraw his ship immediately the charterer defaults.
The payment method contemplated is something that could be
irrevocable and also giving the owners the immediate use of the hire.
Payment includes interbank transfers, banker’s drafts and at times
payment orders. Line 58 of NYPE contemplates “payment in cash” –
what could this mean? See case law The Brimnes [1972] 2 LLR 465.
This strictness may, however, be allayed by the inclusion of an
‘anti-technicality’ clause - a clause which requires the ship owner to
give the charterer notice of the non-payment of hire, and allows a
period of grace (e.g. 3 banking days) during which the charterer
may make good his default and so avoid withdrawal of the ship.
299
Notice under an anti-technicality clause cannot be given until after

midnight on the day when the payment falls due.
See The Afovos [1983] 1 Lloyd's Rep 335.
A ship owner may not temporarily withdraw his ship for non-
payment of hire unless such a withdrawal is expressly allowed
under the terms of the charter.
See The Mihalios Xilas [1979] 2 Lloyd's Rep 303. Also see The
Georgios C [1971] 1 LLR 7, and The Afovos [1983] 1 LLR 335 (telex
transfer).
What happens in a situation where the payment of hire falls due
when the vessel is off-hire?
See The Lutetian [1982] 2 LLR 140
The off-hire clause operates as an exception to the basic rule that
the charterer must pay hire continuously during the charter period.
The wording of the clause provides that the ship comes off-hire on
the happening of one of many listed incidents whereby the
charterer, through no fault of his own, is deprived (wholly or
partially) of the efficient use of the ship.
The list of incidents which trigger the off-hire clause generally
includes: breakdown of machinery, damage to hull, deficiency or
default of men or stores, dry docking or other necessary measures
to maintain the efficiency of the ship. The list may be extended to
cover, e.g. 'other accident' (Baltime), or 'any other similar cause
preventing the full working of the vessel' (NYPE).
It appears that such 'accidents' or 'causes' are limited only to those
which hinder or prevent the efficient working of the ship.
See The Appollonius [1978] 1 Lloyd's Rep 53.
It may be that the off-hire clause is fused by a threshold, e.g. as in
the Baltime, where the rule is only triggered when a delay
continues for more than 24 hours; once the threshold is exceeded
the whole period of the delay is time off-hire (thus, with a delay of
30 hours under a Baltime charterparty the whole of the 30 hours is
off-hire).
Deductions from hire

If the ship owner wrongly, and in breach of contract, deprives the
charterer of the use of the ship for a time, the charterer may, by
equitable set-off, deduct from the next payment of hire a sum
equivalent to the time so lost - the sum deducted must, however, be
a reasonable assessment made in good faith.
See The Nanfri [1978] 2 Lloyd's Rep 132.
It is important for the charterers to ensure that any deduction is
made pursuant to a right expressly given under a term of the
charter - e.g. the off-hire clause (see above), or the 'disbursements'
clause - or, in the absence of such a right, that the deduction is
made with the ship owner's approval.
Deprivation of the use of ship

i. What if the charterers had suffered loss when the vessel
was not available due to the delays caused by the owners?
300
ii. And what if the loss/ claimed by the charterers exceeded

the month’s hire, can the same then be deducted from the
following month?
See Adithya Vaibhav [1991] 1 LLR 573 and Halcyon Steamship v
Continental Grain (1943) 75 LI.LR 80 at 84.
“In fields of commercial law certainty of contractual rights
and remedies is of the greatest importance. The right to be
paid time charter hire and the right to withhold payment are
particularly clear examples where such certainty of the law
must exist.”
– Per Hobhouse J, The Leon [1985] 2 LLR 470
Reading list: The Trident Beaty [1994] 1 LLR 365; The Tropwind
[1977] 1 LLR 397; The Scraptrade [1983] 146; Chrysovalandou Dyo
[1981] 1 LLR 159
Delivery, final voyage and redelivery of the vessel

It was earlier stated that the charter period begins with delivery.
The owner of the vessel places the vessel and her crew at the
disposal of the charterer at the place stipulated, so that the
charterers may give orders (within the terms of the charterparty) as
to the employment of the vessel to the master, officers and crew.
And these orders shall be obeyed by the master, officers and crew.
The charterers are to redeliver the vessel to its owners upon
completion of the time specified in the contract as per terms and
conditions. The Contract would also specify a margin to help the
charter give his final orders. This is not the story quite often. The
vessel is either delivered after the period specified in the CP
(overlap) or before the period specified (underlap)
The redelivery of the vessel brings to an end the contract. So hire
shall be payable till the redelivery of the vessel. So, what happens
when the charterer issues final orders to the master and it exceeds
the charter period? Will the charterer then have to terminate the
voyage half way through and redeliver? Will it be treated as a valid
order? Does the charterer commit breach in ordering the final
voyage?
Final voyage orders will be given by the charterers in advance,
allowing enough time for the redelivery of the vessel by the end of
the charter period. The owners cannot refuse if these orders are
within the express/ implied margin. The owners could still refuse
and withdraw if the orders are not legitimate (like in the cases we
discussed). See the House of Lords decision in The Gregos [1995] 1
LLR 1.
The following three cases decided an important issue in the field of

Time charterparties:
The London Explorer [1971] 1 LLR 523
The Peonia [1991] 1 LLR 100
The Gregos [1995] 1 LLR 1
301
Question 10.3.1
What is meant by the term Time Charters?
302
Summary__________________
The purpose of this chapter was to examine charter parties and
voyage charters, and time charters, hire and off-hire.
List and discuss the various legal issues relating to charterparties.
303

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International

 Jonathan Black-Branch, Professor of International Law Royal Holloway University of London

Published by the University of London

© Royal Holloway, University of London 2013

About the Author

Prof Jonathan Black-Branch

How to approach the module

 First of all, go back to your reading materials to check if you

It is also important for your learning to attempt the ‘short’

Finally, remember that learning is fun! Enjoy the module.

Chapter 1: International Business Contracts

Chapter 2: Case study questions

Chapter 3: Company Law – The constitution of the company

Chapter 4: Company Law – Finances

Chapter 5: Sale Contracts

Chapter 6: Sale of goods

Chapter 7: Buyer’s & seller’s rights & remedies

Chapter 8: Contract of finance and letters of credit

Chapter 9: Carriage of goods by sea

Chapter 10: Charterparty contracts

Chapter 1: International Business Contracts

Readings for further study

1.1 International Business Contracts

its directors and shareholders). Legal personality is important

That is unlikely in criminal cases, but then we are not really

Where do the rules of the common law come from?

expert practitioners with banking and commercial experience. They

enough and declines to appeal, perhaps by reaching a post-trial

International contract law

Contracts. The London Court of International Arbitration is an

 What is the difference between international law and national law?

1.2 A Synopsis of English Contract Law

The “Essentials” of contract

In addition, it is worth considering

Some introductory remarks

Tenders Harvela v Royal Trust Of Canada [1985] 2 All ER

Acceptance must be unqualified and match the offer. There can be

The terms of the agreement must be certain

Consideration must be legal

Consideration must move from the promisee

Consideration must be sufficient though it need not be adequate.

Performance of an existing duty

(b) Contractual duty

Pao On v Lau Yiu Long [1980] AC 614

2. Promise to pay part of a debt.

Exceptions to the rule in Pinnel's case

The conditions for the application of promissory estoppel:

Is the doctrine merely to suspend legal rights rather than to

Intention to create legal relations

Commercial contracts will barely be concerned with this but there

Trading contracts are always unenforceable against the minor

Restitution - s3(1) Minors’ Contracts Act 1987 will be ordered

Mental disability and drunkenness

enforce ultra vires agreements (shareholders may restrain

1. Mistake at common law

(a) Common mistake

Mistake as to the quality of the subject matter of the contract

(b) Consensus mistake

Mutual mistake (the parties are at cross purposes) .

Where one party is actually aware of the other party's mistake

as to the identity of the person contracted with.

Joscelyne v Nissen [1970] 2 QB 86

Mistake and the allocation of risk