Business Law 1

BUSINESS LAW

CONTENTS

Introduction

The Legal Profession

Hints on Answering Law Questions

Core Subjects in the Syllabus

The Law of Contract

Offer
Acceptance
Consideration
Vitiating Factors in a Contract
Mistake
Representations & Misrepresentations
Duress and Undue Influence
Suggestions on Answering Law Questions
Illegal Contracts
Contracts in Restraint of Trade
Contracts of Employment
Remedies for Breach of Contract
Remoteness of Damage

Suggestions for Answering Questions

Summary of Selected Cases

The Law of Agency

The Sale of Goods

The Law of Tort Negligence Nuisance Defamation

Partnership

Company Law

Conclusion

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 INTRODUCTION

This is not an alternative to a comprehensive text book. It is an account of the basic concepts
that any candidate would need to pass the examination in Business Law. It is hoped that these
notes will show the way to answer a question, what to avoid and what to put in. This is
particularly important regarding the use of cases. It is very difficult to get a good grade in law
without using decided cases as the basis for your account. The best way is to read the cases in
detail, and then get a short summary of the point that came out of them.

THE LEGAL PROFESSION

The following account of the legal profession is for your information only. There will be no
questions on this area of the law.

Lawyers

In England there are two different kinds of lawyers, as described below.

1. Solicitors

These are the lawyers who usually work (practice!) from an office in a town. They are governed
by a body of senior solicitors called the Law Society, with its headquarters in Chancery Lane in
London. To become a solicitor you would normally require a law degree from an English
university, and you would have to work as a clerk, usually for three years, for a firm of
established solicitors. After this period, if you manage to pass the examinations, you would
receive a practice certificate, and your name is written on the Roll of Solicitors in Chancery
Lane. Usually you would then be offered a job in the firm that you worked in as a clerk. This
would be as a salaried partner. At the end of a period of time, the other partners may offer you
a full partnership in the firm.

Solicitors offer a large range of services to the general public. They may also take some cases
in the lower courts, particularly magistrates courts and county courts.

2. Barristers

These are the lawyers who wear wigs and gowns in the higher courts in England and Wales. To
become a barrister you would need a law degree (usually, though some have degrees in other
subjects). You then have to join one of the four Inns of Court, all of which are in London. They
are the Middle Temple, the Inner Temple, Grays Inn and Lincolns Inn. Which one of these is
your decision, but you will have an interview and need to satisfy a group of the leading
barristers who run that particular Inn, i.e. the benchers, that you should become a member.
After a period of time and, having successfully taken examinations, you will go through an
ancient ceremony involving an evening dinner in your particular Inn (a large hall, several
hundred years old). At such an event the senior bencher, almost always a judge, will stand and
call out your name, e.g. John Smith, I call you to the bar and pronounce you barrister. You go
up and shake hands, and you are then a barrister for the rest of your life.

Barristers work from chambers, i.e. an office which is part of the Inn of Court. They must
employ a clerk who keeps a record of all the cases and negotiates with the public and/or a
solicitor. Barristers must not interview members of the public except in the presence of the

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solicitor that the member of the public has employed to help. They take cases in the higher
courts, and are primarily, advocates.

HINTS ON ANSWERING LAW QUESTIONS

You must expect questions on any of the following

Sources of Law

This section deals with where law comes from. When you say This is the law and someone
says Oh yes, who says so? you have to be able to justify what you have just said, i.e. you
have to know the source of the particular law. In England there are really just two sources of
law case law and statute law. The first is the law that comes out of decided cases in court,
and the second is the law that Parliament has made in the form of an Act of Parliament. We will
consider each of these in turn.

Case Law

There are a number of courts in England with different degrees of authority. At the bottom is the
County Court, then the High Court (which is split into a number of divisions), and then at the top
there is the Court of Appeal and the Supreme Court (formerly the House of Lords). New laws
can be made in all of these except the County Court.

How does this work? A civil case is between two contesting parties (people or companies). The
person bringing the case, i.e. making the complaint is called the complainant (or in the old
terms: the plaintiff). The other person is the defendant. There are two lawyers (barristers in the
higher courts, and possibly solicitors in the County Court) and a judge. In the Court of Appeal
there can be three or five judges as is also the case in the Supreme Court.

The complainants lawyer puts his side of the argument, i.e. his case and then the other lawyer
puts his side. The judge listens to all the arguments and makes notes. When this is finished the
judge leaves to consider. When the judge returns he gives his summing-up of the case together
with his decision. This decision becomes a new law. It is written down by clerks in the court,
published in the Law Reports and is binding on all future cases.

It is however, a little more complicated than that. The summing-up of the judge consists of two
different things:

First, there is the logical reasoning which leads to his decision (the judges finding). This
logical reasoning and the decision which results from it is called the rationes decidendi,
i.e. the reason for the decision and it is this that becomes the new law. Other things the
judge might have said have no bearing on the case or on his final decision. These are
called obiter dicta, i.e. things said by the way, and they do not have any binding effect.
Second, there are Acts of Parliament. These take precedence over all other types of law
making. So if a decision in the High Court is different to the ruling made by an Act of
Parliament, the Act will always take precedence.

Summary of points to remember:

Case Law made in High Court judges summing up reason for decision = new law other
things said no effect.

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One final tip: it is a good idea whenever you quote a case in your answer to underline it.

Statute Law

The making of an Act of Parliament can be quite long and sometimes very complicated.
However, all that you need to know are the general rules. First of all, a member of the
government (usually) decides after consulting his colleagues and, of course, the Prime Minister,
that there is a need for a law in a particular area. He writes down his ideas and then gives it to a
Parliamentary draughtsman. These people are barristers who specialise in writing out what will
eventually become a new law. This preliminary draft is called a Bill. Most Bills originate in the
House of Commons.

On the day appointed for the introduction of these new laws, copies of the Bill are put on the
seats of the members of the House and at the appointed time they read it. The first reading is
for information only and can be followed by the second reading where the members of the
House debate the different parts. Then there is the third reading which is followed by a vote.
The members of the House (MPs) file out of the chamber into one of two corridors, they are the
Yes and the No corridors. At the end of each corridor there is a table where an official counts
each member as he goes past. The number of Yes votes and the number of No votes is
recorded and the officials (known as Tellers) go to the Speaker of the House of Commons and
give him the results. The Speaker then reads out the numbers both for and against, and then
declares the result by saying either The Noes have it or The Ayes have it. (Aye is an old
fashioned word for yes). It is then sent to the House of Lords for a similar procedure, and if it is
passed, the original Bill is taken to the Queen for Her signature. Once this is done it then
becomes an Act of Parliament and the original document is stored in St. Stephens Tower which
is part of the Houses of Parliament building.

Summary of points to remember:

New law starts as Bill 1st reading, 2nd reading, 3rd reading, votes, goes to other chamber,
Queenss signature. Following these stages this becomes new statute law.

CORE SUBJECTS IN THE SYLLABUS

1. There are certain parts of the Business Law syllabus which are essential, i.e. they are
the core subjects. You must make sure that you understand and can remember these.

2. The basic subjects of any Business Law syllabus are as follows:

Contract: You should make sure that you are familiar with the following aspects of
this particular subject.
1. Offer and acceptance, i.e. the main headings and some cases to illustrate, such
as the familiar Carlill case.
2. Consideration: You need a definition and the best one is probably the Currie v
Misa definition given by the judge. Simply memorise it.
3. The effect of mistake, undue influence and, duress on a contract.
4. The meaning of an exclusion clause and how it affects a contract. You should
know the case law and the statute law attitude towards putting an exclusion
clause into a contract.
5. You should know what kind of contract is permitted for minors.

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 6. Finally, you should know how a contract may be discharged, and separately,
the remedies for breach of contract. You should know the difference between
common law and equitable remedies and be able to illustrate them.
Tort: This is the next basic subject in Business Law. This means:
o negligence,
o nuisance, and
o defamation
By far the most important from this point of view is negligence. It would be wise to
make an effort to really understand it the requirements of duty of care, breach and
resulting damage.
Agency: This is a small area of business law but you need to understand the:
o types of agent,
o how an agency is formed and
o the duties, rights and responsibilities of both agent and principal
Sale of Goods Act: Certain aspects of this Act should be learned thoroughly. In
particular, sections 12, 13, 14, and 18.
Company Law: This is a very large subject. The basic requirements that you should
understand would be:
o the formation of a company
o its dissolution
o the major characteristics of a limited company, and
o the powers, responsibilities and duties of the directors
Partnerships and Defamation: Finally, although these are relatively small subjects,
try to read the relevant chapters.

Remember that the above are suggestions to help you focus on the more important
aspects of the Business Law syllabus. You must not assume that all the questions on
the examination paper will be confined to the above. You can assume though, that in
every paper you will have questions on some of them.

THE LAW OF CONTRACT

The fundamental area of business law is the law of contract. If you do not know this you cannot
pass the exam. A contract is an agreement between two people which is legally enforceable.
There is, however, more to it than that. An agreement can be rejected, changed, denied or
forgotten about. So it is necessary to know what the legal position is in some of these
eventualities.

Most of the law regarding contracts is based on cases which have come up in the High Court
and which form precedent, i.e. the decisions that will bind later cases which have the same set
of facts and problems. To be able to answer a question properly you will need to know a
number of these cases as well as the facts and results. In an examination answer you will
simply not have the time to write out all the facts of these cases. What is needed is a summary
which you could use in the answer. So as mentioned above, whenever a case is set out in the
text as part of the explanation of a point made, a separate summary of the case will be made
which you should memorise for a possible examination answer.

The first requirement for a valid contract is to make an offer and to get back an acceptance. Let
us deal with each of these aspects in turn.

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Offer

This is defined as a willingness to be bound to a contract. However:

1. It is necessary to distinguish an offer from what is really an invitation to someone else to

make an offer. This is called an invitation to treat. The best examples of this are goods in shop
windows and on the shelves. It is the customer who makes the offer, i.e. he or she offers to buy
the goods on display. This is quite important because if, say, a customer says he will have one
of the goods on a shelf in a shop and the assistant says he cannot because those goods are
going to be withdrawn, the customer cannot sue for breach of contract. This was decided in the
case of Fisher v Bell 1961. Although it is difficult you should try to remember the name of the
case, what happened, the decision of the judge (do not use the word verdict this is used only
in criminal cases) and most importantly the point of law that came out of the case. This point of
law becomes what is known as case law and can be used to decide other cases or problems in
the exam which have the same facts.(Note: When referring to a case the v is short for versus
which means against. However, in civil cases such as contract, the v is always referred to as
and. So Fisher v Bell is spoken as Fisher and Bell. When you give the result of the case it is
best simply to use the expression the court decided. Do not use the expression the court of
law, it is unnecessary.) In this case a shopkeeper had put a flick knife on the shelf of his shop
in the window. He was prosecuted for offering a flick knife for sale in his shop. He was found
not guilty since the knife was not an offer but an invitation to treat. Other types of invitation to
treat are auction sales, advertisements, and invitations for tenders. (A tender is a written
estimate of the cost of doing a particular job, e.g. painting a door). Auctions are a type of sale
where the auctioneer has possession of other peoples goods and tries to sell them. The goods
are displayed in the auction house and on the day of the sale the auctioneer invites the public
to make offers to buy. He accepts the highest offer by hitting the desk with a small hammer
called a gavel. This then means there is a binding contract.

2. The offer, whether it is made by you or someone else must be certain.

If it is vague then you cannot really know what you are accepting. In the case of Guthing v
Lynn (it is a good idea to underline the name of the case you are quoting) the two parties to the
contract were discussing the sale of a horse. The offer or, who was thinking of buying the
horse, offered a sum of money for it and then said he would pay a larger sum if the horse was
lucky. A dispute occurred later and the judge decided that there had been no contract since the
word lucky was so vague that it had no meaning.

3. The next point about offers is to decide for whom the offer is meant. You can make an offer
to a particular person or to everybody. The distinction is quite important. This was shown in the
well-known case of Carlill v Carbolic Smoke Ball Co. 1893. Here, the company had produced
an inhaler which you had to use three times a day. It was supposed to guard against infections
especially influenza. They published an advert offering 100 reward to anyone who contracted
influenza after having used their product three times a day for two weeks. The advert also
stated that to show our sincerity in the matter we have deposited 1,000 in the Alliance Bank in
Regent Street, London. Mrs Carlill saw the advert and bought the product, used it according to
the directions but still caught influenza. She then sued the company. They argued that the offer
could not be accepted since it was too vague and was not directed at anyone in particular.
Anyway, they did not know that Mrs Carlill had bought one since she had not written and told
them. The court rejected these arguments and held that it was an offer to the whole world and
anyone could accept the offer by simply buying the product and using it according to the

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directions. This has now become a precedent. An offer may be made to the whole world and
accepted by following the directions in the offer.

4. You must make a distinction between what is an offer and what really is just a request for
some information. If you said to someone How much do you want for your car? and he replied
Oh about 3,000 you could not then say OK Agreed and assume that you have bought it. All
he has said is that to tell you the amount of money about which he would maybe sell the car if
you made an offer. This was shown clearly in Harvey v Facey 1893. Here all the dealing was
done in the form of telegrams. The claimant (i.e. the plaintiff as he was formerly known)
telegraphed Will you sell us Bumper Hall Pen? (the name of a farm) Telegraph lowest cash
price. He got a reply by telegram lowest price for Bumper Hall Pen 900. The claimant then
replied to the effect that he accepted 900 and would buy the farm. When the defendant
refused, he sued for breach of contract. In court it was held that the original telegram was
simply a request for information and not an offer. Therefore there was no contract.

5. You should understand the difference between a cross offer and a counter offer.
a) A cross-offer occurs when one person makes an offer to sell something and the other
person makes an offer to buy the same thing. The offers are often sent by letter and
cross in the post. Here there are two offers but no acceptance, so there is no contract.
b) A counter-offer occurs where one person offers, e.g. to sell something for 30 and the
other persons offers to buy it for 25. What has really happened is that the second
person has rejected the offer of 30 and then made his own offer to buy at 25. So at
this point there is no contract unless the first person accepts the new offer and agrees to
sell for 25.

Acceptance

An offer must be accepted to become a valid contract. There must be an unqualified agreement
to the actual offer. This can clearly be done by word of mouth, by writing, or by some action
which counts as an acceptance as was shown above in the Carlill case. Here Mrs Carlill did
what the advert required, i.e. she bought a smoke ball and used it according to the directions. It
really cannot be inferred if the other party simply keeps silent. It could however be inferred from
the other partys conduct. In this case, Mrs Carlill buying one of the products. However, you
cannot accept an offer if you did not know about it. So if you found a lost dog and returned it to
its owner, you cannot claim the reward if you read about it later in the newspaper. At the time
you returned the dog you did not know about the offer.

In Brogden v Metropolitan Railway Co. 1877 the claimant had supplied coal to the defendant
for many years even though there was no written contract. There was a draft contract but it had
never been signed. The court took the view that having been supplied with coal for such a long
time the defendants had, by implication, accepted the terms of the draft agreement. There was
therefore a contract.

You sometimes hear of a contract having been accepted subject to contract. This means that
the other party suggests that there should be a negotiation about the terms before he really
accepts it. So subject to contract does not mean acceptance.

Since the acceptance must be unqualified, as mentioned above, any attempt to put extra terms
into the so-called acceptance means there is actually no contract. If a counter offer is made,
then the other party may accept it if he wishes. In which case there will be a valid contract. But
if he says no, then there is no contract at all. The usual case here is Hyde v Wrench 1840.

Business Law 8
Here one party offered to sell some property to the other for 1,000. The other party, Hyde,
offered 950 which Wrench rejected. Hyde then wrote and said he accepted 1,000, and sued
Wrench when the latter refused to complete. The court took the view that Hydes offer of 950
was a counter offer which had the effect of terminating the offer from Wrench. The case
therefore failed.

Communication of the Acceptance

There are different aspects to the need for the acceptance to be communicated after all, if the
other party does not communicate his acceptance to you, then you have no way of knowing
whether or not there is a contract! These different aspects may be dealt with as follows:

1. You can actually waive the need for communication. (Waive means to do without.) This was
done in the Carlill case mentioned above. Here, according to the advert, all that was required
for a contract to be established was for someone, in this case Mrs Carlill, to buy the product
and use it according to instructions.

2. You can decide, in your offer, which kind of acceptance you require, e.g. by post, by email,
by telephone etc. If the other person accepts by using another kind of method from the one you
wanted, then there is not necessarily a contract. You can accept it if you want but you dont
have to.

3. If you make it clear, expressly or by implication, that you want the acceptance to be made by
post, then the postal rules apply. These are:
a) The acceptance is complete, i.e. there is a valid contract, when the letter is posted. This
is the case if you use words such as I require acceptance to be done by post, or in
course of post then the postal rules apply
b) However, if you use words such as I require acceptance by notice in writing and you
dont get the acceptance letter if, e.g. it has been lost in the post, then there is no
contract because you never got the notice! It all depends on the way it was written.

4. Silence however is not an acceptance

How may an offer come to an end?

The issue here is how an offer may end if it has not been accepted to form a contract. There
are a number of ways, all of which are fairly obvious.

1. If either one or the other of the parties to the transaction dies then that ends the offer.

2. If the person to whom the offer has been made simply says no, i.e. it has been rejected.

3. If the offer was stated to be for a specific time and that time has lapsed then the offer is at an
end. It is also the case that even if there is no specified time limit in the offer, it will come to
an end at the expiry of a reasonable time. This was shown in the case of Ramsgate
Victoria Hotel Co. v Montefiore 1866. The defendant had applied for some shares in the
claimant company in June. They replied at the end of November and sent him a letter of
allotment of the shares. When he refused to pay for them they sued for breach of contract.
The court decided that the offer (to buy the shares) was for a reasonable time and a wait of
nearly six months was unreasonable. Therefore, the offer had lapsed and there was no
contract.

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4. The person making the offer may withdraw his offer at any time before acceptance. This is
known as revocation. In the case of Routledge v Grant 1828, the defendant offered to buy
the house belonging to the claimant and asked for the acceptance to be within the next six
weeks. Before the end of the six weeks he withdrew his offer. After this, but before the end of
the six weeks the claimant accepted the offer and sued Grant for breach when he refused to
continue. The court decided that the defendant was entitled to withdraw his offer any time
before acceptance, even though it was within the six weeks stated. There was therefore no
contract.
However, there is more to it than this.
For example:
a) If the person who is making the revocation decides to use the post, then the rule of the
post does not apply and his letter is effective only when actually received.
b) The revocation information may be communicated to the other party by anyone who is
sufficiently reliable, e.g. another person who is working with him, or perhaps a member
of his own family.

Consideration

This is one of the most important areas in the law of contract. Basically it means there must be
something in return for something to make a legal contract, usually the exchange of money for
goods. So if I say I will come round to your house tomorrow at 10 oclock and if I do not arrive,
you cannot sue me for breach of contract because you have not given anything in return for the
promise. There is a definition of consideration which is accepted as the standard definition. It is
from the case of Currie v Misa 1875. It is a good idea to try to learn it by heart.

Consideration is: some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken by the
other.

If this is too difficult to remember, then you could state that consideration is the element of
exchange in a contract, i.e. something for something, usually goods for money.

There are some aspects of consideration which should be understood.

1. Executory consideration is where a person makes a promise in return for another promise,
e.g. if you go into a shop and ask the shopkeeper to order some goods for you, then he
promises to get the goods and you promise to pay when they arrive.

2. Executed consideration is a promise given in return for an act already having been made,
e.g. in the above case when the shopkeeper has got the goods that he ordered for you and
you promise to pay for them. If you later refuse to, then this amounts to a breach of contract.

3. Implied consideration. There is an exception to the general rule. If you ask someone to do
something for you and afterwards offer to pay them something, this is binding.

4. Adequate or Sufficient Consideration? This often causes confusion. It is not too difficult to
remember. Consideration does not have to be adequate. This means that whatever is
exchanged for the goods you are buying does not have to be equal in value. 50 for a one
year old car is not adequate, but if both parties are satisfied then it is legal and therefore
sufficient and can result in a contract.

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 Consideration does, however, need to be something more than you are already bound to do.
This is what is meant by sufficient. The difference can be explained by reference to two
cases.

In the case of Collins v Godefroy 1831 the claimant had been given a summons to appear
in court on behalf of the defendant. He claimed that the defendant had promised him six
guineas for doing so. The case here obviously failed since when you are given a summons
you are obliged by law to appear in court and so he was not promising to do something that
he was not already bound to do. It was not sufficient. However, in Thomas v Thomas 1842
in his will, the claimants husband stated that his widow should be allowed to live in the
house for the rest of her life. The defendants allowed her to do so provided she paid 1 a
year rent. They later tried to evict her on the grounds that 1 a year was nowhere near
enough rent. She won her case and was allowed to stay, since although the money was
obviously not adequate it was something and therefore was sufficient.

5. Past consideration. This is a promise in return for an act that has already been done it is
already in the past. One of the standard cases to illustrate this is Re.McArdle 1951. (Re just
means in the case of) This concerns a house which was the property of the mother of a
family. They were all going to benefit when she died under the terms of her will. However,
while she was still alive the wife of one of her sons, who was living in her house with her, did
some decorating and improvements to the building. After it was finished the other children
wrote to her agreeing to pay her 488 in consideration for her having carried out certain
improvements to the building. When the mother later died, they refused to pay. The court
decided that they were not liable since when they wrote the letter the decorating had already
been completed, i.e. it was past.

There is however an exception to this idea. It was first set out in the old case of Lampleigh v
Braithwaite 1615 This case took place in the 17th century and so may seem odd today. These
two were friends and in a quarrel Braithwaite had killed a man and had been arrested and was
likely to face the death penalty. He asked his friend Lampleigh to obtain a Kings Pardon. This
involved Lampleigh travelling long distances (on horseback) until he eventually managed to get
an audience with the King who granted a pardon for Braithwaite. When he got back and told
Braithwaite, he was so pleased that he promised to pay him 100. Later on he changed his
mind and refused to pay. So Lampleigh sued him for the money. Braithwaite argued in court
that the consideration was past since he already had obtained a Kings Pardon when he
promised to pay the money. He lost the case, however, and had to pay the money because the
court took the view that when he asked Lampleigh to get the Pardon he implied that he would
pay something for his trouble. The consideration was therefore not in the past.

There are also some situations where you agree to a contract in which you have to do some
work that you are already bound to do. This is against the law of consideration and you are not
entitled to it. One of the best cases to remember regarding this point is the old case of Stilk v
Myrick 1809. In this case, two of the crew members of a ship deserted at a port in a foreign
country. The ships captain could not find two replacements and so he said to the crew that if
they would do the work of the two men who had deserted they could share their wages when
they arrived back in England. The crew agreed. When they got back the captain refused to pay
and the crew sued him. They lost the case however because the judge decided that they were
already bound by their contract of service to do any extra work that may be needed. So they
were agreeing to do work that they were already bound to do.

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6. Payment of part of a debt. This is concerned with what are called waivers. A waiver occurs
where a person agrees (for no extra consideration) to take a sum of money which is smaller
than the agreed amount that is owing to him.

This is not a particularly easy part of contract. The general rule is that if you owe someone
some money you cannot discharge the debt by paying a smaller sum than you owe him. So if
you owe John 100 you cannot discharge the debt by paying him 80. You would still owe
him 20 and he could sue you for it. However, there are some exceptions.

a) If you paid John 80 and also gave him something else as well (provided he agreed)
then he cannot later ask for the 20.
b) If you owed him 100 and it was to be paid by the end of October, then if you paid 80 in
September and he agreed, then you have discharged the debt. This is because you paid
him the money before the date he was entitled to.
c) If you owed John 100 to be paid at his office, and instead he came round to your house
and paid the 80, and he agreed, then again you have discharged the debt.

There is one final aspect of part payment which has developed in Equity. You must
remember that Equity is concerned with morals and fairness rather than the strict application
of the law. It was the idea of a famous judge in England called Lord Denning, who was for
years the Master of the Rolls. This means he was the senior judge of the civil side of the
courts in England. The idea, which came to be known as Promissory or Equitable Estoppel,
arose from a well-known case. It is worth trying to remember the facts and result of this case:

Central London Property Trust Ltd v High Trees House 1947

The facts were that in 1939 the claimants let a block of flats to the defendants for 2,500 a year
rent. 1939 was the beginning of the war and it became very difficult to let flats during the war,
so in 1940 the owners of the flats agreed in writing to accept half the rent each year. So the
defendants only paid 1,250 each year. By 1945 the war was ended and the flats were fully let.
So the owners sued for the half rents both for the period after 1945 and also for all the war-time
years. The court applied the rules of Equity and said that they could get the full rent for the
period 1945 onwards, but not for the war-time years since they had agreed to the half rent and
should keep to their word. The concept of Equitable Estoppel can only be used as a defence. It
cannot be used to commence a case.

There is always the possible situation of implied consideration as shown above.

Vitiating factors in a contract

Vitiating simply means anything that can make a contract void.

These are circumstances which can have an effect on a contract so that it becomes void or
voidable. Remember, void means does not exist and voidable means could become void,
These factors are: contracts entered into by mistake, or as a result of a misrepresentation, or
because one of the parties was subject to duress or undue influence, or lastly if for some
reason the contract is illegal. They must be considered in turn.

Business Law 12
Mistake

Mistakes can be called either operative or non operative. An operative mistake has the effect of
making the contract void, whereas a non operative mistake has no effect on the contract.
Everyone is assumed to understand the law and so a mistake of law is non operative. There
are three kinds of mistake which must be distinguished from each other.

1. Common mistake.
This is where both the parties to the contract have made the same mistake, i.e. they have made
it in common. There are two kinds of common mistake which should be remembered. They are
given Latin names: a) Res extincta (Latin for the thing does not exist). This is where both
parties think that something in the contract exists whereas it actually does not. An easy case to
remember is: Couturier v Hastie 1856. This was about a contract made in London for the sale
of a cargo of corn on a ship at sea on the way to England. Unknown to either party the corn had
started to ferment and the captain had sold it. The contract was therefore void for mistake b)
Res Sua (Latin for his own thing). This is the situation where a person makes a contract to buy
something that, unknown to him, is already his. Obviously the contract is void.

2. Mutual mistake.
This is easy to remember by calling it the mistake of cross purposes. Whether the resulting
contract is considered to be void will depend on the view taken by the court. They take what
could be described as the common sense view of the contract. There are a number of cases on
mutual mistake, but the easiest to remember is Raffles v Wichelhaus 1864. This was a case
where the parties made an agreement to buy a cargo of cotton. The cotton was on a ship called
the SS Peerless and was sailing from Bombay. Unknown to either party there were two ships
both called the Peerless, one sailed from Bombay in October and the other in December.
Raffles thought he was buying the cotton from the October ship whereas Wichelhaus thought
he was selling the cotton from the December ship. The court simply took the view that the
contract was void for mistake.

3. Unilateral mistake.
This occurs where only one party to the contract is mistaken. The other party knows that a
mistake has been made. Here there are two situations which may make the contract void: a)
where one party makes an offer and realises that the other party is mistaken about the offer.
Here the contract is void for mistake, b) where one party is mistaken about the identity of the
other party.

Representations and misrepresentations

This area of contract is very important and is common in commercial life. People do not often
enter a contract without having some idea of what is involved. This is either by reading about
the goods or by listening to what the other person is telling them. Of course they may not take
any notice of what they have been told and simply just buy the goods. In this case there is no
representation nor misrepresentation because the words did not have any influence on the
person who bought them. This topic is very common in law so you should take some time to
make sure that you actually do understand it.

Representation

A representation is a statement of FACT that induces the other person to enter the contract,
e.g. This car is only one year old. Other statements are not representations, i.e. statements of

Business Law 13
law, statements of a persons intention, or his opinion, e.g. I have been told that this car is one
year old, it probably is. So if the car was found later after you had bought it, to be three years
old, you could sue for misrepresentation if you had bought it on the strength of the first
statement, (the car is one year old) but not the other (it probably is one year old) It must not
only be a statement of fact, but it must also have induced the other party to have entered the
contract. If someone says something about an article he wants to sell but the other person
takes no notice of it, then if it turns out to be false he cannot sue for misrepresentation. Silence,
i.e., keeping quiet about the goods is not considered to be a representation.

Misrepresentation

This is a false statement of fact that has induced the other person to enter into a contract.
These are three different kinds of misrepresentation; make sure you know the difference.

1. Fraudulent misrepresentation
This is where someone gives a statement of fact to another person knowing it is untrue or not
caring at all whether it is true or untrue. If the persons making the statement honestly believed
that what he was saying was correct, then it is not fraudulent misrepresentation. The remedies
for this are: you can rescind the contract, which in practice means tear the contract up and have
no more to do with it, or simply refuse to perform your part of it, and also you can sue for
damages.

2. Negligent misrepresentation
Here the difference between this and fraudulent is that the person making the statement
thought it was correct, but he could have found out with a little bit of effort. Here again you can
rescind the contract and sue for damages, but you will have to prove that the other person, who
made the statement, had a special relationship with you and that the wrong statement was in
breach of that statement. There is a well-known case which will make this point fairly clear, in
Esso Petroleum v Mardon 1976, Mr Mardon was interested in buying the tenancy of a petrol
station. In the negotiations the representative of Esso had told Mardon that he could expect to
sell at least 200,000 gallons of petrol a year. Mardon took the lease of the garage on the
strength of this statement. He never sold anything like this amount because the local authority
refused Essos application for an exit from the garage onto the main road. Mardon successfully
sued Esso for misrepresentation since there was clearly a special relationship between them.

3. Innocent misrepresentation.
This is where a person says something about the goods to be sold which is wrong, but which
he thought, quite honestly, was correct. In this case the only remedy is damages.

4. Silence
It is possible for silence to amount to a misrepresentation. This was shown in With v
OFlanagan. In this case a contract had been made for the sale of a doctors practice, and a
date had been agreed for its completion. The price had been agreed on the basis of the income
from the doctors practice and in between the original agreement and the date for completion
the doctor became ill and the revenue fell considerably. The court decided that the silence had
amounted to a misrepresentation and the contract was void.

Business Law 14
Duress and undue influence

Duress
This arises when a person is forced into a contract by the threat of violence. This does not
happen very frequently and so there is another side to duress called economic duress. This
comes into force when there is a contract where one of the parties A, has been forced into it
often by the other party B, refusing to complete one part of the contract until A agrees to
something that A does not really want. This is best explained by reference to a real case.
Probably the easiest case is D & C Builders v Rees 1966. Here Rees had some building work
done by D & C Builders at an agreed cost of 482. He later refused to pay more than 300 and
told them that if they did not agree he would not pay anything! They agreed to the 300
because they were in financial trouble and needed the money and so they signed an
agreement form. Later they sued Rees for the 182 outstanding. Here Lord Denning decided
that they had been forced into signing the agreement and ruled that the builders were entitled to
the balance.

Undue Influence
This occurs where a contract is made by one person because of the influence of another
person who is in a dominant position, i.e. he has a lot of influence over him. This can occur in
relationships such as parent and child, bank manager and client, doctor and patient, and
sometimes husband and wife. There are two situations where there may be undue influence:
1. Where there is a special relationship like those set out above. Here there is a presumption of
undue influence. This just means that the court will assume that there has been some influence
and so the person receiving the benefit must prove that he/she did not actually exert some kind
of influence to get the benefit.
2. Where there is no special relationship. In this case the proof is the job of the person who was
persuaded to make the contract. He has to convince the court that there was undue influence.
The other party does not have to prove that there was not. A very old case, but one which
explains the idea well is Allcard v Skinner 1887. In this case Miss Allcard joined a Protestant
nunnery run by the defendant Miss Skinner, the Lady Superior. When Miss Allcard became a
nun, in obedience to the rules, she made over all her money to the nunnery. This came to the
(then) very large sum of 7,000. Eight years later she decided to leave the nunnery and
become a Roman Catholic. At this time there was about 1,671 left of her original 7,000. She
sued the nunnery for its return. The court decided that there had been so much pressure put on
her to make over all her wealth if she wanted to become a nun that this amounted to undue
influence and she was entitled to her money back.

Exclusion clauses

These are clauses commonly put into contracts in order to minimise or avoid liability for some
part of the contract. The company will not be liable for any injury sustained in the use of this
product is a type of exclusion, probably useless these days. There are some rules that apply to
the use of exclusion clauses and these are important and the source of many examination
questions. When dealing with an exclusion clause, there are two main approaches to enable
you to decide whether or not the clause is valid. These are:

1. The common law approach, i.e. decisions from a number of cases where a principle of law
has emerged.
2. The approach to the particular clause from statute

Business Law 15
1. The common law approach simply means the rules that have come out of the results of
some decided cases.

The first approach is to decide whether or not the exclusion clause has been incorporated into
the contract which has not been signed. This really means, did the other party see or have
notice of the clause before he entered into the contract? If he did not, then the clause is
ineffective. Of course, to be able to decide this it is first necessary to find the exact point in time
when the contract was agreed upon, i.e. when it became legally binding. This is usually
managed by both parties signing the contract.

In Chapelton v Barry UDC 1940 (UDC means Urban District Council and signifies that it was a
town) the claimant went down to the beach at Barry, a town in South Wales, with a friend and
said he would get some deck chairs. There was a pile of deck chairs on the beach with a notice
which said Barry UDC, hire of deckchairs 2d per session of three hours. The public is
requested to pay at the ticket office. Mr Chapelton took two chairs from the pile and went over
to the ticket office and paid his 4d (four pence) and got a ticket in return. On the back of the
ticket was an exclusion clause to the effect that the council would not be liable for injury when
using the chairs. Mr Chapeltons chair collapsed and he was injured. When he sued the council
they relied on the clause on the back of the ticket. The question then was was the clause part
of the contract? To answer that they had to decide when the contract was formed, i.e. when
was there an offer and an acceptance? The court decided that the contract was formed when
Mr Chapelton took the chairs off the pile. Therefore the clause on the ticket was not part of the
contract and therefore the council was liable.

This decision might not seem to you to be fair, but it does show the importance of deciding on
the time of the contract. This question was answered in Thompson v LMS 1930 (LMS was the
London Midland and Scottish Railway company in those days). Here a railway ticket containing
an exclusion clause on the back was considered valid and part of the contract even though the
person who bought the ticket could not read. This was sensible really because it must be the
case that the contract is when you actually buy the railway ticket, and the fact that you cannot
read is not the fault of the railway company What else could they do?

The second approach concerns contracts which have been signed. If you sign a contract it is
assumed that you have read it beforehand. Therefore, you are bound by the exclusion clause.
However, this may not always be the case. If you are given a contract to sign, and before you
sign it the other party tells you what the clause means, then, even if you have subsequently
signed the contract, you are bound only by the verbal description of the clause made by the
other party. The two most usual cases to illustrate this are:

a) LEstrange v Graucob 1934.

Here the claimant bought a slot machine from the defendant and signed the contract without
first reading it. There was an exclusion clause in the contract which protected the defendant
from the effects of a breach of some of the conditions of the Sale of Goods Act 1893. The
machine was faulty and the claimant sued. The court decided that she had no remedy as the
exclusion clause was valid. (Note: this would probably not be the case today and the law has
changed regarding the Sale of Goods Act which is now 1979).

b) In Curtis v Chemical Cleaning Co. 1951 the claimant took her wedding dress to be
cleaned. In the agreement there was a clause which excluded liability for any loss or damage to
the dress. She asked the shop assistant what it meant and was told that the firm would not be

Business Law 16
liable to damage to beads or sequins. She then signed the contract. The dress was returned
stained and shrunk. She successfully sued the firm as the court ruled that the only exclusion
was for beads and sequins as explained by the assistant.

2. The Statutory approach to the problem. This is contained mainly in the Unfair Contract
Terms Act 1977. It is a very important part of legislation and you should try to remember the
most appropriate parts of it. First of all it is restricted. That means it applies mainly to firms
making use of exclusion clauses in contracts. Generally, private people can put whatever kind
of exclusion they like into a contract. Secondly, it does not apply to contracts relating to transfer
of land, to company formation or insurance contracts. What then does it do?

a) It prohibits the use of an exclusion clause to avoid liability for death or personal injury which
results from the other partys negligence. I will not be liable for any injury howsoever caused is
meaningless.

b) If you are trying to restrict your liability for some other kind of loss or damage, i.e. not death
or personal injury, then the court will use the test of was it reasonable? for you to do so. This
means that every case is tried on its merits.

The Sale of Goods Act states (in clauses 12, 13, 14) certain requirements regarding the
description of the goods, their fitness for purpose and whether they are of satisfactory quality.
None of these requirements may be excluded in a contract

Suggestions on answering law questions

1. Questions in law fall into two possible categories. There is the straightforward type which rely
to a large extent on your memory, and there is the problem type. Quite often the two kinds are
mixed together into one question having two parts a memory type question, followed by a
problem which will always be based on the first part of the question. Marks are awarded for the
whole question and you will not lose any marks if you spend more time on one half than the
other.

2. Most people lose marks and sometimes fail simply because they do not know enough. One
of the best things you can do is to make a list of some of the major cases and learn them by
heart. You should remember the name of the case, the facts of the case and the result, and,
quite as importantly, the principle that came out of the judges decision.

3. You will always get at least one question on the law of contract and usually two. One of the
most interesting topics in contract is the use of exemption or exclusion clauses. The following is
what I would expect as a reasonably good answer to the question:

Explain the meaning of incorporation and interpretation as applied to the use of

exemption clauses in contracts.

Suggested answer

An exclusion clause is a clause in a contract which attempts to limit or exclude the liability of
one of the parties in a contract. This is normally satisfactory as between equals, but not when it
is imposed on the weaker party. The courts have for a long time attempted to curtail the unfair
imposition of these clauses by decisions which result in a body of case law. This must
necessarily be piecemeal since it is completely dependent upon the emergence of situations

Business Law 17
coming up before the court. The government, therefore, decided to legislate in this field and we
now have the resulting Unfair Contract Terms Act 1977 together with the Unfair Terms in
Consumer Contracts Regulations 1999. These statutes supplement rather than replace the
common law and so any problem relating to the use of exclusion clauses must be dealt with by
the application of both common and statute law.

Regarding incorporations, anyone wishing to rely on an exclusion clause will have to show that
it was incorporated into the contract. If the clause is contained in a document signed by the
other party it will form part of the contract. It will be assumed that the signer has read and
understood it. This was established in LEstrange v Graucob where the plaintiff bought a
cigarette machine for her caf and signed a contract containing an exclusion clause. The
machine did not work properly and she refused to pay for it. It was, however, held by the court
that she had signed the contract and was therefore bound by the clause. This position,
however, may no longer apply in the light of subsequent legislation, nor where there has been
some previous representation as to the meaning of the clause before the plaintiff signed. To
determine whether or not a clause is actually incorporated in the contract it is essential to
establish the point at which the contract was made. This is not always easy. In Chapelton v
Barry Council, the plaintiff took two deckchairs from a pile of chairs and then paid for them. He
received a ticket with a clause on the back excluding the Councils liability for personal injury.
His chair collapsed and he was injured. In the subsequent case the court took the view that the
clause was invalid since the contract had been formed when he took the chairs from the pile
and not when he paid for the ticket.

As regards the interpretation of clauses, the court will apply the contra proferentum rule, i.e. the
clause will be interpreted against the person trying to rely upon it. This means that he must
prove that it should be included in the contract. This attitude was clearly shown in Hollier v
Rambler Motors where the plaintiffs car was damaged by a fire in the defendants garage.
They sought to rely on a clause in the contract which exempted them from liability for damage
caused by fire. They failed since the court decided that the exemption could properly apply only
to fire caused accidentally and not, as in this case, as a result of the defendants negligence.

More examples of answering questions may be found later in this study aid.

How may a contract come to an end?

A contract can come to an end, or in other words it is discharged, in a number of ways. They
are: performance, agreement, frustration and breach.

1. Performance. This is usually described as complete performance. Most contracts come to

an end like that. The performance must be complete, i.e. the other party must have done
everything he promised to do under the contract. However, it is a little more complicated than
that. There is what is known as Substantial performance. This means that where a person has
done most of the work required under the contract, he may claim the cost of what he has done
less an amount for the outstanding work. This can be shown in the case of Hoenig v Isaacs
1952. Here Hoenig was employed to decorate and furnish Isaacs flat for an all in price of 750.
When he had finished there were some defects in the furniture which would cost 56 to put
right. When he sued Isaacs for the price the court decided that he was only entitled to 750 less
the sum of 56. This seems sensible. This can be contrasted to Partial performance. This
means that only a part of the contract has been performed, not most of it as in substantial
performance. Clearly in this case the other party to the contract may refuse to pay anything until

Business Law 18
it has been completed. However, if he does accept what has been done, he must pay a sum
which is reasonable to cover the work done. If he does, then the contract is complete.

The last problem under the heading of performance relates to the time of completion of the
contract. If the time of completion is important, then the other party to the contract must put this
into the contract. If he does not, and the performance is delayed a little, then he still must pay
the contract price. This is sometimes known as making time of the essence.

2. Discharge by agreement. If both parties agree that they wish to end the contract, then it is
discharged. Sometimes there is a condition precedent, i.e. something written into the contract
that has to be fulfilled before the contract is valid. The word precedent means beforehand. If I
agree with you to buy your car subject to it having an MOT beforehand, then there is no liability
for me to buy the car unless you actually get the MOT. There is also a condition subsequent
(meaning afterwards in an agreement. This can occur in pre-incorporation contracts where the
promoters make a contract on behalf of the company that is being formed. Since the company
is not yet in existence it cannot be liable on the contract. Nor can it ratify the contract after it has
been formed. So the promoters are liable. To avoid this, the contract is often set out so that the
contract made by the promoters is considered discharged if either the company is not actually
formed, or if it does not accept the contract within a reasonable time of formation.

3. Discharge by frustration. This idea is more precise than you may think. Frustration means
that something has happened which a) you could not have realised would happen, b) you could
not do anything about, and c) makes the contract impossible to carry out. It is not frustration if it
simply makes the contract more difficult to carry out. So if, for instance, you had made a
contract to hire a room in order to have a birthday party for your son, and, unknown to you and
the owner of the room, it had been burned down, then there can be no contract. It is not,
however, frustrated if the contract becomes harder or more expensive to fulfil. So if you had
made a contract with a builder to put up a house and after the contract had been signed he
found that the cost of the materials had gone up unexpectedly, the contract is still valid even
though he may possibly make a loss. This was the case with Davis Contractors v Fareham U
D C 1956. Here, the builders had made a contract with the local council (U D C means urban
district council) to build 78 houses in 8 months for a price of 94.000. Because of the
unexpected shortage of labour it actually took 22 months and cost the builders 115,000. So
they went to court and claimed that the contract had been frustrated so they could then be paid
the full 115,000. They lost the case because the court decided that the contract is not
frustrated just because it is more difficult to carry out.

4. If one of the parties breaks the contract, then it is considered to be ended and the party
suffering the resulting loss can sue for breach.

Illegal contracts

All illegal contracts are void, and therefore no action may be taken on them. The basic idea
behind all this is the concept of morality. The courts take the view that it is wrong to allow
someone to take a legal action in court on a contract which is illegal. If they did allow it the
reputation of the court would be ruined. The different types of illegal contract are as follows:
(You should be able to remember all these and to write a few words to illustrate what each one
means).

1. Contracts prohibited by statute.

2. Contracts to defraud the Revenue.

Business Law 19
3. Contracts which involve a crime or a tort.
4. Contracts of a sexually immoral kind.
5. Contracts against the interests of the UK or of a friendly state.
6. Contracts involving corruption in public life
7. Contracts to interfere with the course of justice.

1. The kind of contract prohibited by statute which apply here involve the regulation of such
areas as consumer credit, import and export licences, and the kind of licences required by
commercial hauliers. They are very technical and probably would not appear in an examination
question.

2. This area involves the attempts made from time to time, to evade tax, both national and local
taxes.

3. In this kind of contract the court will look at the purpose behind it and decide whether or not
the purpose is illegal. One rather sad example of this is the case of Beresford v Royal
Insurance Co 1938. Here a man had a life insurance policy which would benefit his successors
when he died. To make sure of this he shot himself a few minutes before the policy came to an
end. His executor claimed the money on the policy but the court would not allow it.

4. This usually means payment for sex, or any kind of contract which is linked with it. The most
common example is the case of Pearce v Brooks 1866. This was a long time ago and people
then went around either on foot, on horseback or by carriage. The defendant (who was a
prostitute) made a contract of hire with the plaintiff, who was a coach builder, for her to be
provided with a coach so that she could drive around Hyde Park, in London, and attract men for
sex. When she defaulted on the hire payments he sued her for the money. The case failed
since the coach builder knew from the beginning what she wanted the coach for and so the
contract was illegal and void.

5. Any contract which is against the interests of the UK is void. Trading with the enemy in war
time is an obvious example.

6. Any contract which could lead to corruption in public life is void. There are, alas, quite a
few examples of this to be found. They include attempts to bribe officials, attempts to buy
honours (e.g. a knighthood). They are all illegal even though no actual crime has been
committed.

7. These include contracts where a person agrees to pay someone not to prosecute him,
when there was a very good case for him to do so.

What is the Result of an Illegal Contract?

The main thing to remember is that no action can be taken on an illegal contract. So:

1. You cannot sue to recover money already paid under the contract.

2. You cannot sue for breach of contract.

3. Even if a part of the illegal contract would have been legal if by itself, it is considered as part
of the illegal contract and therefore void.

Business Law 20
Contracts in Restraint of Trade

These are the kinds of illegal contract you are most likely to meet. Basically it occurs where the
seller of a business, or an employer, tries to attach some conditions to the contract. In one case
a young trainee solicitor left his employment in Tamworth and opened an office as a solicitor
more than 7 miles from his original office. His former employers attempted to enforce a restraint
in his original contract which said that on leaving he would not work as a solicitor within seven
miles of the office. This was considered reasonable.

The other kind of restraint occurs when someone buys a business and attaches conditions to
the sale, preventing the person who was selling the business from competing unfairly with the
new owner. This was shown in the case of Nordenfelt v Maxim Nordenfel 1894. In this case
Nordenfelt had invented a new mechanism for firing guns and carried on a business making
guns with this new mechanism for some years. When he sold it he agreed, as part of the
contract, that he would not engage in selling guns anywhere in the world for a period of 25
years. Some years later he tried to start up a new business and was sued over the agreed time
limit. The court decided that the idea of a limitation was OK, but the period of 25 years was far
too long and would not be enforced.

Contracts of employment

This topic fits partly in contract, partly in tort, and often as a subject on its own. The problem
that frequently arises is that of vicarious liability. The word vicarious means in the place of
and so vicarious liability has to do with deciding who is liable in the case of some damage
which was caused as a result, usually, of someones negligence. To understand this you first
have to decide which of two types of employment contract is involved in the particular problem.
They are:

1. A contract of service and

2. A contract for services

1. A contract of service means the type of contract you have if you work as an employee for a
business. If your employer exercises overall control over what kind of work you must do, when
you do it and how it is to be done (the control test) then this is a contract of service and your
employer is liable for damage you may have caused while at work. One example of this is the
case of Century Insurance v Northern Ireland Road Transport Board. Here, the driver of a
petrol tanker arrived at a garage, connected the tanker to the garage petrol pump reservoir,
turned on the tap and then lit a cigarette! The resulting explosion and fire severely damaged the
garage. It was decided in court that the tanker driver was still in the course of his employment
when he lit the cigarette and therefore the employers were liable for the damage.

2. A contract for services. Please note that this is a contract for services with a letter S not a
contract for service. This is where you work as an independent contractor for someone else,
almost always on an agreement for a fixed term, or a fixed type of work. The employer relies on
your experience and skill and does not interfere in where or how you do the work. In this
situation you would be liable for damage caused by your own negligence.

The problem often arises trying to decide whether a particular contract is for service or for
services. In other words how do you decide if a person is an independent contractor? If you get

Business Law 21
a question on employment contracts you should remember these tests and be able to write an
account of them.

These are the tests to find out if a person is simply an employee, i.e. he works for someone
else in a firm. The first one is called the control test. Here, the question is simply does the
employer control the employee? Can he tell the employee what he has to do and also how to
do it? If the answer is yes then it is probably a contract of service. The second test was
developed later and is called the integration test. This asks the question how far is the
employee integrated into the employers business? If he only comes to work on one day a week
then he may not be a part of the firm and is an independent contractor. So the courts have
developed another test called the multiple test. This is a more general test and takes a lot of
factors into account such as who pays his wages? Who pay his tax? Who pays his national
insurance? If the answer is he does then it is likely he is an independent contractor.

Remedies for breach of contract

Where there has been a breach of contract, the party that has suffered as a result of the breach
should obviously be entitled to some compensation as mentioned above. This can be done
under the rules of either common law or of Equity.

So if the damage is not too remote, what are the remedies?

1. Common law remedy

Remember that if the action is taken under common law, then the injured party the plaintiff or,
these days the claimant has a right to compensation if he proves his case. The only common
law remedy for you to remember is DAMAGES. This is monetary compensation for the breach
and there are a number of aspects of damages which should be remembered.

a) Liquidated and Unliquidated damages. In Liquidated damages, law allows one party to put a
sum of money into the contract which is to be used to compensate the injured party in the case
of a breach. The point to remember is that the sum should be a reasonable estimate of the
possible loss. (Suppose the contract was for the sale of a car for the price of 3,000. If the
contract was broken and the buyer had to get another one, he might have to pay 3,400. Here,
Liquidated damages set at 400 would be OK, but not if the sum were to be put at 4,000.)

Unliquidated damages are where the two parties to the contract do not put in the contract any
sum at all. Here, it is at the discretion of the court as to how much damages have to be paid. So
in effect, the judge decides the amount.

2. Remedies in Equity

These remedies are allowed if considered to be fair by the judge. There is no absolute right to
an equitable remedy as there is for a common law remedy. The first equitable remedy is that of
specific performance. This means that if the remedy of damages is considered not to be in the
interest of the injured party, then the judge will tell the defendant to complete the contract. This
is particularly useful in the case of the sale of land. Since the court must be able to supervise
the remedy, it is not available in the case of employment contracts or contracts of personal
service. Again, if the claimant himself is in some way at fault then he will not get an order of

Business Law 22
specific performance. This is because of the maxim (the saying) of Equity that he who comes
to Equity must come with clean hands.

The normal remedies in equity are:

a) Specific performance where the defendant is told by the court to complete his side of the
contract.

b) Getting an injunction, i.e. being told by the court not to do something and

c) Rescission, which means cancelling the whole contract and going back, in financial terms, to
the position before the contract was made.

Remoteness of damage

This is an important aspect of what happens when a contract is breached and the claimant is
suing for damages. What the question really means is is what you are asking for too remote
to be allowed? There must be some way of deciding this question and this is called the criteria.
Remember that the criteria for deciding remoteness of damage is different in contract to what it
is in tort. It is perhaps a good idea to deal with both sets here.

First Contract

Like most things the rules for deciding remoteness of damage in contract comes from the
judges decision in a particular case. The case to remember here is Hadley v Baxendale 1854.
This case happened a long time ago when there were no cars or vans to carry things about.
Most goods were moved by horse and cart. Hadley was a miller in Gloucestershire in England.
He owned and ran a water mill. Water from a stream turned a wheel which moved all the
machinery needed to grind corn into flour for sale. The wheel was fixed on a large metal rod
called a crankshaft, about 8 feet long and very heavy. One day the crankshaft broke and the
mill came to a stop. Hadley made a contract with a carrier called Baxendale to have the broken
shaft taken to London and a new one brought back. The carrier had a horse and cart and the
distance to London was over 100 miles. So it was going to take a long time. Baxendale did not
hurry and got back three days later than he could have done if he had been quicker. Hadley
sued him for the loss of profits for the three days when the mill was not working. He lost the
case since the court decided that the damages were too remote. The criteria used were:

1. Did the damage flow as a natural consequence of the breach? The answer was yes. If the
carrier arrived three days later than he could have done then the mill would be closed for those
three days.

2. Did the defendant know, or should he have known about the possible damage? The answer
was no, since the miller did not ask Baxendale to get back quickly, nor did he say that he did
not have a spare crankshaft. It was usual for millers to keep a spare shaft. If Hadley had told
Baxendale to hurry back because he did not have a spare shaft then the result would have
been different

Business Law 23
 SUGGESTIONS FOR ANSWERING QUESTIONS

1. It is almost always the case that an answer needs to be illustrated or justified by referring to a
decided case. You should remember the name of the case, the key facts of the case, the result
and the principle of law that was used in the decision. Simply writing down the name of the
case without any amplification will not gain many marks.

2. As an example we could take the well-known case of Donoghue v Stevenson. If you can
remember that this case was in 1932 then that would be good, but you will not lose marks if you
cannot. To really understand a case you should read up the law reports account in detail. You
will never forget it if you do. However, this information may not be available to you and so a
short, abbreviated version of each case will be sufficient. For example, in the Donoghue v
Stevenson case the facts were as follows:

One day Mrs Donoghue and a friend were walking in Glasgow and went in to Alfredo
Minchellas Caf/Bar. She and her friend both had a drink. He then asked her if she would
like anything else and she asked for an ice-cream. When she got the ice-cream she asked
for a ginger beer which her friend bought. She poured some of it on the ice-cream and ate
it. She asked her friend to get her a glass from the bar which he did. She then poured out
the rest of the ginger beer from the opaque glass bottle and in the glass she saw what she
thought was the remains of a decomposed snail.
She was off work sick for three days. However, a local solicitor heard of this and
persuaded her to sue the manufacturer of the ginger beer for negligence. There was in
Scotland, a Paupers Act, which allowed her to claim all her expenses from public funds.
The case was heard in the senior court in Scotland, the Court of Session, where she lost
the case. She was then persuaded by the same solicitor to take the case on appeal to the
House of Lords in London. Here she won the case by three judges to two. She was
awarded a sum of money as damages, but in fact never received it. She died some short
time after.
However the case set the precedent for the requirements to make a case in negligence,
which, as a separate tort really dates from this case. These requirements are: i) the
existence of a duty of care, ii) the breach of that duty and iii) resulting damage.

3. When describing the above case, you could not be expected to write all these details out in
an exam, so something like the following description would be satisfactory:

To make a case in negligence it is necessary for the plaintiff to establish the existence of
a duty of care, breach of that duty and resulting damage. This was established in
Donoghue v Stevenson where the plaintiff was ill after drinking some contaminated
ginger beer which her friend had bought for her. She could not sue in contract or Sale of
Goods as she had not actually bought the drink. The House of Lords, by a majority, held
that a manufacturer owed a duty of care to those people who use his products. This
established a precedent for future cases.

4. In the Business Law examination, problem questions are very common. You must expect at
least one of them. If you get a problem question, then you should try to link it to a decided case
that you know. Once you have found the case or possibly the cases relevant to the problem,
then state what the principle was from that case and apply it to the problem. If you do this
logically you will gain marks even if it is not quite right. To decide what cases to learn, there is a
list at the end of these notes. Try to learn the key facts, result and principle of each one. Write

Business Law 24
them out in a note book and keep referring back to them so that these cases become familiar to
you.

5. If you cannot remember the name of the case, then simply say In a decided case the facts
were ..

6. When writing out an answer to a straightforward memory-type question first write out the
main headings. After that go over each one and explain it in more detail. Always assume that
the examiner knows nothing about law so that you make a full account of the explanation!

7. It is better not to spend too much time illustrating your answer with personal or make-believe
situations. They are very often not to the point and you can spend far too much time in writing
them out and gain very few marks.

8. ANSWER THE CORRECT NUMBER OF QUESTIONS! One of the worst things you can do
is to answer only four questions instead of the five required. This very often means a failure on
the whole paper. If you are running out of time on one question then leave it and start the next.
You will gain more marks that way. Similarly, do not answer more than the five required. Quite
a lot of candidates answer all the questions on the assumption that the examiner will mark them
all and choose the five best. This is not the case, and generally only the first five questions will
be marked.

9. If you cannot link the problem to a particular case, then think what area of law is covered by
the various parts of the problem. There will never be more than one, two or possibly three
separate aspects of the problem. So you should ask yourself:

Is this about contract?

Or tort?
Or agency?
Or company law?
Or Sale of Goods?

10. Once you have decided, think of what aspect it refers to. For example, if it relates to
Agency:

Is it to do with the formation of agency?

Is it to do with the various kinds of agents and their responsibilities?

11. When you have decided, you should state in your answer which area of law you think is
relevant and set out the principles. Then you should say something like the following:

Applying these principles it would seem that and then give your answer to the problem.

12. Even if you are wrong, if your answer is logical and based on legal principles, you will gain
some marks.

More examples of answering law questions

1. Suppose the question simply asked you to explain what exclusion clauses are and after this
there was a problem. First of all you should set out the requirements of exclusion clauses as
shown in the notes above. Then look at the problem. Suppose this was the problem set:

Business Law 25
 Mr Jones took an old coat of his to be cleaned. He had used the coat for a number of
years and the buttons were loose. The assistant at the cleaners handed him a form to sign
which stated in small print that the cleaners would not be liable to Mr Jones for any
damage to the coat. He asked the assistant what it meant and was told that the cleaners
would not be liable if the buttons were lost. Mr Jones thought this was reasonable and
signed the form. When he got his coat back it had been torn badly. He tried to sue the
cleaners and they pointed out that he had signed a contract which said they were not
liable for any damage. This problem is based on a well-known case set out in the notes
above on exclusion clauses Curtis v Chemical Cleaning and Dying Co. If you do not
know the case you probably will not be able to answer this part of the question. However
you could get enough marks on the first part, if done well, to get a pass on this particular
question. In this case Mrs Curtis took her wedding dress to be cleaned and was asked to
sign a contract which excluded the cleaning company from all responsibility for any
damage. She asked the assistant what it meant and was told that the cleaners would not
be liable for damage to the beads and sequins on the dress. So Mrs Curtis signed. When
she got her dress back it was stained and was shrunk. When she sued the company they
relied on the exclusion clause which Mrs Curtis had signed. Mrs Curtis won her case since
the court decided that when an exclusion clause is explained to the other party before the
contract is signed, then the only thing that they can exclude is what they had set out in the
explanation. This is really because it is a representation by the shop assistant. In this case
it was damage to beads and sequins, NOT staining or shrinking of the dress. So to answer
the question the facts of the Curtis case should be set out and the result. Then the answer
should say something like: The problem is very similar to the Curtis case, in this instance
the cleaners were trying to avoid liability for the coat being torn, when all they told Mr
Jones was that they would not be liable for lost buttons. Mr Jones should win the case.

For the second example we could look at the popular topic of offer and acceptance .If you
had a question in two parts and the first asked for an account of offer and acceptance,
then you should write out something along the lines set out above. If the second part of
the question is a problem, again it is very likely to be based on one of the usual cases
relating to offer and acceptance. For example: Mr Smith saw an advert in a newspaper
which was for a new kind of tyre for a motor car. The advert stated that this was made with
a new compound rubber and would last much longer and was safer to drive than ordinary
tyres. It cost more money but Mr Smith thought it was worth it and he bought two for the
front wheels of his car. He found that it was much harder to drive with the new tyres, and
they lasted only six months and began to wear out so he had to replace them. He asked
the manufacturer for his money back and when they refused he sued them. Their defence
was that there was no contract since they had no idea he had bought the tyres. They said
he should have written and told them. You would then be asked to analyse the case and
say what you think would be the result. It should be clear to you that this is based on the
well-known case of Carlill as written out above. Mr Smith had accepted the offer by simply
buying the tyres. For extra marks you could mention that the manufacturers would be
liable anyway under the Sale of Goods Act where section 14 makes it a requirement of
any sale that the goods should be of satisfactory quality and fit for the purpose which they
quite clearly were not in the example above.

Business Law 26
 SUMMARY OF SELECTED CASES

Some of these cases have already been mentioned in the text. These are the tools you should
use in answering questions. If, say, the question was on the effect of undue influence on a
contract, the right thing to do is set out the meaning of undue influence, and write what you
know about it, then illustrate by writing out Allcard v Skinner shown below.

Allcard v Skinner

This is a good case to illustrate the effect of undue influence in a contract. Miss Allcard
entered a nunnery run by sister superior Skinner. Although not directly ordered to, she made
over all her money to the nunnery. When later she left to become a Roman Catholic she sued
for the return of the balance. The court decided that she had been subject to undue influence,
but could not get the money back since she had waited too long before taking the legal case.

Aluminium Industrie Vaasen v Romalpa

Area of law; The Romalpa clause. Facts: Romalpa often bought strips of foil from Aluminium
Industrie (a Dutch company) under an agreement that the foil should still belong to Aluminium
Industrie until all the bill had been paid. Romalpa got into financial difficulties and a receiver
was called in to wind up the company. He found a lot of foil in the premises of Romalpa and
asked the court if he could sell it. They said no since the foil still belonged to Aluminium
Industrie. This has now been used as the Romalpa clause.

Butler Machine Tool Co. v Ex-Cell-O Corp

Area of law: counter offers. Facts: Butler offered to sell some tools to Ex-Cell and enclosed their
terms on a separate sheet. Ex-Cell replied by enclosing their own conditions with a tear-off
sheet. Butler returned the tear off sheet and supplied the tools. The question later arose as to
what were the conditions of the contract. The court held that there was a counter offer which
had been accepted by Butler and therefore the contract was on Ex-Cells terms.

Home Office v Dorset Yacht Club

Area of law: Negligence, vicarious liability. Facts: Some boys from a Borstal institution escaped
one day due to the negligence of the officers in charge. They caused damage to some boats
belonging to the Dorset Yacht Club. The court decided that the Home Office, their employers
were liable for the damage.

Central London Property Trust v High Tree House Ltd

Area of law: contract, waivers. Facts: In 1937 the plaintiffs let a block of flats to the defendants.
During the war it was difficult to get people to live in the flats and so the plaintiffs agreed to take
just half the rent. In 1945 all the flats were fully let and the plaintiffs sued for the back rents that
had not been paid according to the agreement. The court decided that the waiver, i.e. the
agreement to take only half the rent was valid and binding and therefore they were not entitled
to the back rents. In this case the judge said that people should keep to their word.

Business Law 27
Century Insurance v N. Ireland Road Transport

Area of law: tort/employment law. Vicarious liability. Facts: A petrol lorry driver, delivering petrol
to a filling station, started the pumps and then decided to have a cigarette. When he lit the
match it caused an explosion which damaged the building. The question arose as to who was
liable for the damage. The court decided that although he was negligent, he was still working
for the Northern Ireland Transport and therefore they were vicariously liable for the damage.
This case can be used together with the Home Office case above.

Couturier v Hastie

Area of law: mistake, Res Extincta. Facts: A contract was made in London for the sale of some
corn which at the time was on a ship. Unknown to either the buyer of the seller the corn had
already been sold by the captain of the ship. The court decided that there was no contract,
since the subject did not exist at the time of the contract.

Another case which can be used for the subject of mistake in contract is:

Raffles v Wichelhaus

Area of law: mistake. Facts: An agreement was made in London to sell and to buy a cargo of
cotton from Bombay in India. The agreement was that the cotton was to come to London on the
ship Peerless. Unknown to either party there were two ships both called Peerless and both in
Bombay. One ship was to sail in October and the other in December. The buyer thought it was
the October ship and the seller thought it was the December ship. The court decided that the
contract was void for mutual mistake.

Curtis v Chemical Cleaning and Dyeing Co

Area of law: contract exclusion clauses. Facts Mrs Curtis took her wedding dress to be cleaned.
Before she signed the contract she asked the assistant what one of the clauses meant and was
told that the cleaners would not be liable for damage to buttons or sequins. She then signed the
contract. Unknown to her the clause actually said that the cleaners would not be liable for any
damage. When she got the dress back it was stained and shrunk. She sued the cleaners who
relied on the exclusion clause that Mrs Curtis had actually signed. The court decided that the
cleaners were liable, since the only exclusion they could rely on was in relation to buttons and
sequins.

D & C Builders v Rees

Area of law: contract, waivers. Facts: The defendants owed the plaintiffs 482 (this was in
1966) but they would only pay 300. The plaintiffs were in financial difficulties and therefore
accepted in full settlement. Later they tried to claim the balance. The court decided that they
had to pay the full amount since the waiver had been made under duress and was not
voluntary.

Davis Contractors v Fareham UDC

Area of law: frustration of contract. Facts: The plaintiffs made a contract with Fareham council
(a town in Britain) to build a certain number of houses in 8 months. Due to the shortage of
labour it took 22 months to complete and cost more than the original price. The plaintiffs sued

Business Law 28
for the extra amount of money claiming that the contract had been frustrated because of the
shortage of labour. The court decided that the contract had not been frustrated, only made
harder, and they could not claim the extra costs.

Donoghue v Stevenson

Already dealt with above.

Felthouse v Bindley

Area of law: acceptance/silence. Facts: An uncle wrote to his nephew offering to buy the
nephews horse. In the letter he wrote that if he did not hear from the nephew he would
consider the horse was now his. He did not get a reply and some weeks later the horse was
sold at auction. The uncle sued for the return of the horse claiming that it was now his and not
his nephews. The court decided that he had no case, since silence could not amount to an
acceptance.

Fisher v Bell

Area of law: offers/invitation to treat. Facts: A shopkeeper put a flick knife in his window with a
price ticket on it. He was prosecuted for offering an offensive weapon for sale. The court
decided that goods in shop windows are not offers but invitations to treat and therefore he was
not liable.

It is suggested that the following cases form a good basis for the study of the subject. Try to
remember the facts, result and general principle of each of the following cases.

Aluminium Industrie Vaasen v Romalpa

This has been dealt with under the Romalpa clause in the text.

Candler v Crane Christmas Co

This is a case in negligence and was strongly criticised in court by Lord Denning. The
defendants had prepared a set of accounts for a client. The plaintiff used these accounts as a
basis for investing some money in a firm that went into liquidation. The court dismissed his
claim for compensation since the accounts had not been prepared for him. Denning argued that
an accountant who prepares a set of accounts for a client owes a duty of care not just to the
client but to all other persons who could be expected to use them. His view was upheld later in
the case of Hedley Byrne v Heller see later.

Caparo Industries v Dickman

This is a case in negligence which shows the limits of the liability of a person making a
negligent statement. In this case Caparo relying on a set of accounts prepared by the auditors
Dickman made a takeover bid for a firm called Fidelity plc. The accounts were negligently
prepared and showed a profit when they should have shown a loss. The question was: were
the auditors liable to an outsider who read and relied on their accounts? The House of Lords
decided that they were not liable. Liability only extended to those persons who had
commissioned the audit and not to the general public.

Business Law 29
Carlill v Carbolic Smoke Ball Co

This is one of the leading cases in offer and acceptance and will very often come in useful in
an exam. Here the defendant company put an advert in a newspaper offering the product a
carbolic smoke ball as a cure for influenza. The advert said that the company would pay 100
to anyone who used the smoke ball for 14 days and then caught influenza. The advert also said
that to show they were sincere they had deposited 1,000 with the Alliance Bank in Regent
Street, London. Mrs Carlill bought one and used it and then caught the flu. She sued the
company for the 100. They put up a number of defences which you should remember.

1. The offer was to the whole world which was impossible. The Court of Appeal said no it was
not impossible. It could be accepted by anyone in the world.

2 The company then argued that the advert was too vague to be a proper offer and therefore
could not be accepted. The Court disagreed and said it was quite clear to anyone who read it.

3. The company then argued that Mrs Carlill had not provided any consideration and therefore
there was no contract. The Court decided that buying and using the smoke ball as directed was
enough to be good consideration.

4 Finally the company argued that Mrs Carlill had not informed them that she had bought the
product and therefore there was no acceptance. The Court decided that in this kind of contract
an advert to the whole world simply buying and using the product was sufficient notification
of acceptance. Mrs Carlill therefore won the case.

Chapelton v Barry Urban District Council

This is a useful case to illustrate one aspect of exclusion clauses in a contract. In this case Mr
Chapelton and a friend of his went down to a beach near Barry, a town in South Wales. He
went to a stack of deckchairs on which was a notice stating the price per hour, and requesting
the public to buy a ticket at the ticket office a little way off. Mr Chapelton took two chairs from
the stack and went to the office and bought a ticket. On the back of the ticket was a clause
which stated that the council, the owners of the deckchairs, would not be liable to any injury
resulting from the use of the chairs. When Mr Chapelton sat in his chair it collapsed and he was
injured. When he sued the council for damages they relied on the exclusion clause. They lost
the case and had to pay damages because the court decided that to be effective the exclusion
clause should be brought to the attention of Mr Chapelton before the contract. The time of the
contract was when he took the chairs off the stack, not when he paid the money for the ticket.

Couturier v Hastie

This is a useful case to illustrate two aspects of contracts. It can be used for an illustration of
mistake as to the existence of the subject matter of the contract, and it can also be used to
illustrate agency of necessity.

A contract had been made between two parties for the sale of Indian corn which both parties
believed to be on board ship. Unknown to the owners of the corn it had started to ferment and
had been sold off, so therefore the subject matter of the contract did not exist at the time of the
contract. The contract was declared void by the House of Lords. You could also note that the
captain of the ship had been acting as an agent of necessity. In those days (1856) there was no
way of getting in touch with anyone on shore.

Business Law 30
Davis Contractors v Fareham UDC

In this case the plaintiffs had agreed to build a number of houses for a fixed price and within a
certain time limit. Due to a shortage of labour it took much longer and cost more money. They
sued Fareham council for the difference on the grounds that the contract had been frustrated.
They lost the case since the court decided that the contract had not been frustrated only made
more difficult. They therefore had to accept the original contract price.

Olley v Marlborough Court Hotel

Mrs Olley signed in at the reception desk of the defendants hotel and was given the key to her
room. On the wall of the room was a notice which said that the management would not be liable
for any loss or damage. She went out for a while and left the key at the reception. When she
returned she found her fur coat had been stolen. When she sued the hotel for the cost they
relied on the exemption clause in the bedroom. She won the case since the court decided that
the clause was not part of the contract which had been made when she signed in at the
reception desk.

Esso Petroleum v Mardon

This is a good case on misrepresentation; in this case it was negligent misrepresentation. The
facts were that Mr Mardon was negotiating to take over the tenancy of a petrol station owned by
Esso. In the negotiations Esso told him that the filling station had a turnover of 200,000 gallons
a year. So Mardon signed the agreement. In fact it never sold more than 86,000 gallons. The
court decided that there had been negligent misrepresentation since Esso could easily have
found out the true figure. Mardon was entitled to damages.

Hadley v Baxendale

This is an important case since it sets out the requirements for remoteness of damage in
contract. The facts were that Hadley was a miller in the county of Gloucester. He had a water
mill which worked by the stream turning a shaft which powered the mill. The shaft cracked and
could no longer be used. He made a contract with Baxendale for him to take the broken shaft to
London and bring back a new one. This was in 1854 and so the shaft was taken by horse and
cart from Gloucester to London, over 150 miles. Baxendale did not hurry and returned several
days later than he would have done if he had been quicker. Hadley sued him for the lost profits
because the mill had been shut. He lost the case because he had not told Baxendale that he
did not have a spare shaft as most other millers did. The rule regarding remoteness of damage
in contract (not tort) which came out of this case is: To be recoverable, the damage claimed
must 1) arise naturally from the breach and 2) must have been in the minds of both parties at
the time of the contract.

Halsey v Esso Petroleum

This is a good case to use when writing about nuisance. The facts were: Esso operated a
refinery at the end of a small cul-de-sac road in South Wales. Mr Halsey lived in one of the
houses in the road. Smoke from the chimney went all over the gardens and damaged the
washing put out to dry. Small particles of acid from the chimney damaged the plants in the
gardens, and also the paint on the cars parked in the road. In addition the people who lived in
the road could not sleep properly because of the noise of the lorries which went on all night.
The case succeeded and the court decided that Esso were liable for private nuisance regarding

Business Law 31
the washing and plants and for public nuisance in regard to the noise and damage to the cars.
As a matter of interest the defendants told the judge that if they could not use the lorries all
night they would have to close the refinery. Then close it, said the judge.

Hedley Byrne v Heller and Partners

This case can be used for negligence and also for exclusion clauses. Facts: Hedley Byrne were
advertising agents and were thinking of taking on a new client. Before doing so they asked the
clients bank for a financial reference and were told that they were a good firm and should
present no problems. In fact they were not and soon went into liquidation. As a result Hedley
Byrne lost a lot of money. They sued the bank for negligence. They lost the case because
Hellers had put a clause into the contract which said given without responsibility. This was an
exclusion clause and protected Hellers. Without it they would have been liable.

Holwell Securities v Hughes

This is a case to illustrate one point in acceptance in contract. If the contract says that the
acceptance is to be by notice in writing then it must have been received by the other side or
there is no contract. In this case Hughes granted the plaintiffs an option to buy some land. If
they decided to they had to do so by notice in writing. They wrote to Hughes but the letter was
lost in the post. The court decided that there was no acceptance and therefore no contract.

Hyde v Wrench

This is an easy case to illustrate a counter offer in contract. Wrench offered to sell his farm to
Hyde for 1,000 (this was in 1840) but Hyde said he would pay only 950 which Wrench
refused. Hyde then said he would buy it for 1,000 but Wrench refused. The court decided that
this was a counter offer and therefore there was no contract.

Krell v Henry

This case illustrates quite well how a contract can be frustrated. The facts were that Mr Henry
made a contract to hire a room belonging to Krell in order to watch the coronation procession of
King Edward VII. The room looked straight down on the road that the King would take.
Unfortunately the King became ill and the procession was cancelled. Krell sued Henry for the
amount agreed for the hire of the room. The court decided that the only reason to hire the room
was to watch the procession and since it had been cancelled the contract was frustrated and no
money was owed.

Lampleigh v Braithwaite

This is a very old case 1615 but is still useful to illustrate an exception to the past
consideration rule. Where a person asks another to do something for him there can be an
implied promise to pay so that the considerations are made at the same time. In this case
Braithwaite had killed a man and was in prison. He asked his friend Lampleigh, to find the King
and get a Kings pardon. Lampleight did so after a lot of riding about the country on his horse to
find the King. When he got back to the prison with the pardon his friend Braithwaite was
released. He was so grateful he promised to pay Lampleigh 100. Later on he changed his
mind and did not do so. Lampleigh sued for the money and won the case since the court took
the view that when he asked his friend to get the pardon he impliedly promised to pay him
something.

Business Law 32
Re. McArdle

This is a case which relates to past consideration. Re. means in the case of, and here it refers
to a will. A woman lived in her own house and during her lifetime one of her sons and his wife
lived with her. The wife made some improvements to the house and the children wrote
afterwards promising to pay her 488 for the work she had done. They later refused to do so.
The court decided that the promise to pay the money was made after the work had been done
and therefore it was past consideration and no action could be taken.

Nash v Inman

This is a case to illustrate one aspect of minors contracts. A minor is not liable on contracts
generally unless it is necessary. Here Nash, a tailor, supplied Inman, a minor, with eleven fancy
waistcoats at a cost of 145 (in 1908). When Inman refused to pay he was sued. The court
decided that since Inman had already got a lot of waistcoats they were not necessary and he
was not liable on the bill. (He did, however, have to return them to the tailor.)

Stilk v Myrick

This is a case on consideration. The facts happened a long time ago 1809, but the case is still
useful. Two members of the crew of a ship deserted and the captain told the rest of the crew
that if they would sail the ship home they would share the wages of the two members who had
deserted. They did, but when they arrived the captain would not pay them. The court decided
that the crew were doing no more than their duty and so had given no consideration for the
captains promise. They were therefore not entitled to the extra pay.

The Wagon Mound

This is dealt with below under the heading of negligence.

Watteau v Fenwick

This is dealt with below under agency.

With v OFlanagan

This is dealt with above under misrepresentation.

Youssoupoff v MGM

This is dealt with below under defamation.

THE LAW OF AGENCY

An agency arises when one person (the agent) enters into a contract on behalf of another
person (the principal), either buying or selling or any other commercial reason. It is quite
important because the agent might be acting for a company and very large sums of money
could be involved. Agents are very useful people since they act on behalf of business
men/women and take a lot of the work off their shoulders, leaving them free to make business

Business Law 33
decisions and to improve the business. The relationship of agency can arise under different
circumstances. Try to remember them. They are:

How does a situation of Agency arise?

1. Express agency this is where the agent is expressly appointed by the principal to act for him.
It may be an oral appointment, i.e. the principal merely asks the agent if he will act for him, but
more often, especially in business, the agent is appointed in writing. This makes all the terms of
the agency clear.

2. If the principal thinks that the agent is likely to have to sign contracts in the form of a deed,
then he must appoint him by a deed which is called a Power of Attorney.

3. Agency by ratification this is where an agent makes a contract on behalf of his principal
when he has no authority to do so. When the principal later on learns about it he can ratify the
contract, i.e. agree to pay for it. The agent therefore becomes appointed by ratification.

4. Agency of necessity this is what it says it is, i.e. where there is a commercial necessity and
someone acts in the emergency, he becomes an agent of necessity. The situations are really
restricted to goods which are being carried on land, or by sea and something happens to make
it necessary, usually, to sell the goods quickly. The agent must act in the best interests of the
owner of the goods, there must be an emergency, and there must be no practical way for him to
get in touch with the owner of the goods. In Great Northern Railway v Swaffield 1874 a horse
had been transported by railway to a particular station, but there was nobody there to collect it.
The station manager bought some hay and kept the horse overnight. He sued the owner of the
horse for the cost of stabling it during the night. The court decided that in the circumstances he
was an agent of necessity.

5. Agency by estoppels: this means that in some situations the principal is prevented
(estopped) from saying that the person making the contract on his behalf was his agent. It could
arise:
a) where an agent continues to make contracts with someone after his authority has been
ended, but where that person does not know about it.
b) where someone acts as an agent, to the knowledge of the principal who does nothing about
it.
c) where the agent acting for his principal, makes a contract with someone on a matter which is
beyond his authority to do so.

The most common case on agency is Watteau v Fenwick 1893. It is a good idea to learn this.
The facts were Fenwick was the owner of a hotel and he employed the previous owner H to
act as the manager. He told H not to buy cigars on credit, but H did so from Watteau. When
Fenwick refused to pay for the cigars, Watteau sued him. The court decided that since it was in
the usual authority of an agent to buy cigars Fenwick was liable. The reason for this was that
Fenwick had not told the supplier of the restriction he had put on H.

The Duties of an Agent

The duties of an agent are fairly obvious. They are:

1. Performance, i.e. he has a contractual duty to do the job he was taken on for.

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2. Skill, he is expected to use the level of skill he says he has.

3. Obedience, i.e. he must carry out the requests of his principal.

4. Personal performance, i.e. normally he is not allowed to delegate his duties to other people.

5. Accountability, he must provide full information of his work to his principal.

6. No conflict of interests, i.e. he must not put himself in a position where his interests conflict
with those of his principal (taking a job with a rival, or selling his own goods to his principal).

7. Confidence, i.e. he must keep all the information he has about his principal in confidence and
not divulge it to any other person.

8. Benefits, he must not personally accept benefits which should rightfully to his principal.

The Liabilities of an Agent

In a former section we dealt briefly with the concept of vicarious liability. That means the liability
of an employer for the torts of his employee. In Agency, the principal is vicariously liable for his
agents fraud, tort, and misrepresentation. This is always provided the agent is acting within the
scope of his contract. However, in these cases the principal can claim any money he had to pay
in compensation from his agent. So, an agent acting within the scope of his contract has no
liability on a contract he makes with another party on behalf of his principal. Neither can he
enforce it. But there are some situations where the agent is liable himself and can enforce the
contract. These are:

1. Where he intended to take personal liability, e.g. signing without mentioning that he was an
agent.

2. Where the principal was undisclosed.

3. Where it is a trade custom, e.g. in advertising.

4. Where he is actually acting on his own behalf, even though he mentions he is an agent. This
occurs where he makes a contract for a company that is not yet in existence.

5. Finally where he signs a deed without having the power to do so. (This is called a power of
attorney.)

Kinds of Agent

Finally, you may be asked what kinds of agent there are. This is really based on the type of
work they do and the amount of authority they have. They are as follows:

1. Del Credere agent: this is an agent who guarantees to his principal that the person he has
made a contract with will pay the price. He does not guarantee that the other party will accept
the goods just that he will pay. If the party does not, then the agent will pay his principal for the
goods.

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2. Factors: they are sometimes called mercantile agents (NOT merchantile agents!). They
have possession of the principals goods; they may sell them and give a valid receipt.

3. Brokers: these are middlemen who arrange contracts on behalf of his principal. He does not
have possession of the goods. When the contract has been arranged he sends a bought note
to the buyer and a sold note to the seller. His responsibility is then ended.

4. Auctioneers: he is an agent for someone who wishes to sell goods at auction. He has
possession of the goods and sells at the highest price. If there is a reserve price (i.e. a price
below which the seller will not sell), then he must not sell below.

5. Commercial Agents: this kind of agent was established on 1st January 1994 by a European
Directive The Commercial Agents (Council Directive) Regulations 1993. He is a self-
employed agent who can negotiate the sale or the purchase of goods for his principal. The
Directive therefore does not apply to agents who are employees, or to partners, or directors of
firms.

Types of authority that an agent can have

An agent can have different kinds of authority and this sometimes leads to problems. The kinds
of authority are:

1. Actual authority: That is the kind of authority which the principal gave him when they made
the agency contract. It is often written down in the contract to save disputes later on.
2. Apparent authority: This is, from the name, the kind of authority that the agent appears to
have. If you look back at Watteau v Fenwick the owner of the hotel was liable for the contract
made (against his orders) because that kind of contract was usual for an agent and so he had
the apparent authority to do so.
3. Authority by ratification: This is where an agent makes a contract outside his authority and
the principal, when he hears of it, accepts it, i.e. he ratifies it. However, the principal must
actually exist at the time of the contract and he also must have the capacity to make a contract.
4. Authority by necessity: This kind of agency arises usually in some emergency. A good
example would be where a ship is on a voyage from one country to another and the cargo
starts going bad and has to be sold quickly. If the captain cannot get in touch with the owner of
the cargo he can act as agent of necessity and sell them for the best price he can get. This was
dealt with above with the case of G N Railway v Swaffield.

THE SALE OF GOODS

This is a subject which is usually studied as a separate unit. It is quite clearly part of the general
subject of contracts, but it is so important that it merits a separate section. It is based on the
Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982. Like all Acts, the Sale
of Goods Act consists of a number of sections. Some of these sections are much more
important than others since they have a wide effect on contracts of many kinds. So these
sections are the ones that are commonly used in examinations. We will concentrate on them.

Section 12 deals with the sellers title. It says that there is an implied condition that the seller
has, or will have at the time the property in the goods is to pass, a right to sell the goods.
Note: The expression the property in the goods means the title or the ownership of the goods.

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If, at the time of the sale, the seller actually does not have this right to sell, then the buyer gets
no title and the goods must be returned to the rightful owner. This is illustrated in the case of
Rowland v Divall 1923. Here Divall had bought a car from another person and subsequently
sold it to Rowland. It later was found that the car had been stolen, before being sold to Divall,
so it was returned to the original owner. Rowland sued Divall for the money he had paid for the
car. He succeeded in getting all the money back since Divall was in breach of section 12 of the
Act, i.e. had no right to sell the goods.

This section also has an implied warranty that the buyer shall have quiet possession of the
goods he has bought and that they are free from any encumbrance. This last word means that
there is no one else who has any interest in the goods.

Section 13 deals with the description of the goods. There is an implied condition that the goods
will correspond with the description. (Remember the difference between a condition and a
warranty? Breach of a condition allows you to end the contract, whereas breach of warranty
only allows you to sue for damages.) The rule is that if the seller has described the goods to the
buyer, then it is a sale by description even though the buyer has looked at the goods himself
before the sale. Where there is a sale of the goods by sample as well as by description, the
bulk of the goods must correspond with both the description and the sample.

Section 14 deals with satisfactory quality. (This used to be called merchantable quality.) There
is an implied condition that the goods which are supplied are of satisfactory quality.
Note: this applies to goods which are sold in the course of a business. This does not therefore
apply to goods which are sold privately, such as in car boot sales.

What then does the expression satisfactory quality mean? There must be some attempt at
definition. What the Act says is that goods are of satisfactory quality if they meet the standard
that a reasonable person would consider as being satisfactory, taking into account all or any of
the following: the description, the price and any other relevant circumstances. This includes:
fitness for purpose, appearance and finish, freedom from minor defects, and its safety and
hardwearing qualities. Section 14 goes into the concept of fitness for purpose in a bit more
detail. It says that where the buyer makes known to the seller (either expressly or by
implication) the purpose for which he is going to buy the goods, then there is an implied
condition that the goods will be reasonably fit for that purpose.

Section 18 This is a long section and quite important. It is a good idea to memorise the various
parts and be able to write them out. It deals with the problem of who has the title to goods. This
is very important because risk goes with title. If you own some goods and they get damaged
you have to bear the risk. The section is divided into a number of what are called rules and
you should make an effort to remember them and what they relate to.

Rule1 If the contract is unconditional and the goods are specific or identified, the title (what is
called the property in the goods) passes when the contract is made. If you say to a
shopkeeper I will have that loaf of bread please, and he says very well or some similar
words, then the loaf is yours. This is the case even though you have not yet paid for it. Of
course many shops will make a condition that the title does not pass until the goods have been
paid for. But unless they do, this rule applies.

Rule 2 If there is a contract for specific goods and the seller is bound to do something to the
goods to put them into a deliverable state, the title does not pass until he has done so. There is

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a well-known case which illustrates this quite well. Underwood v Burgh Castle Brick and
Cement Syndicate 1922.

This concerned the sale of a large condensing machine which weighed 30 tons. It was to be
removed from the bed of concrete in the factory which belonged to the seller, and then loaded
onto a railway wagon. Unfortunately in this process of removing it from the concrete the sellers
dropped the machine and cracked it. The buyer refused to accept the machine and was sued
for the money by the sellers. The court decided that while it was still embedded in concrete the
machine was not in a deliverable state and therefore the title (and therefore risk) still remained
with the seller. The buyers were right to reject it and refuse to pay the price.

Rule 3 This rule logically follows on from rule 2. It states that where the seller is bound to weigh
measure or test the goods, the title to the goods does not pass until he has done so and
informed the buyer.

Rule 4 This applies to situations where goods have been delivered on approval. Here, the title
does not pass until the buyer has signified his approval, or he has retained the goods beyond
the time agreed in the contract, or if no time has been specified, then beyond a reasonable
time.

Rule 5 This relates to situations where you are buying some goods from a large stock of them.
It is a fairly common sense rule. It states that: where there is a contract for unascertained
goods, or future goods by description, and goods of that description (and in a deliverable state)
are unconditionally appropriated to the contract by the seller, with the agreement of the buyer
(or by the buyer with the assent of the seller) the title passes to the buyer. The term
unconditionally appropriated means put to one side and the buyer has been informed. It is no
use for the seller simply to take a few goods from a shelf and put them on another shelf. It must
be quite clear who the goods are for. So the buyer must be informed, and preferably the goods
should be sent to the buyer.

Passing of Title the Nemo Dat Rule

The normal rule, as mentioned above, is that the title to goods can be passed to a buyer only
by someone who actually owns those goods. So I cannot sell your bicycle to another person.
This is set out in the Latin phrase: nemo dat quod non habet (i.e. no one can give what he does
not have). The reason why this phrase and lots of others are in Latin is that for hundreds of
years the written record of what took place in the courts in England was always in Latin even
though the actual proceedings were spoken in French.

There are, however, exceptions to this nemo dat rule. These are:

1. Agency: there is a particular kind of agent called a Mercantile Agent, who normally has
possession of the owners goods and also has the title to them. If he sells goods to a genuine
buyer, then the buyer gets a good title to them.

2. Estoppel: (this is only an old-fashioned way of saying stopped) If the true owner of some
goods makes the buyer believe that the person who is selling the goods is actually the owner,
then he is stopped from later denying that the seller had the right to sell the goods.

3. Sale under Voidable Title: this means that where a person buys some goods under a
voidable title (i.e. one that may become void), e.g. if he buys under misrepresentation, and he

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then tries to resell those goods to another (innocent) buyer, the new buyer gets a good title to
the goods.

4. Resale by a seller in possession: this means that where the owner of some goods sells them
to, e.g. a, who does not collect them, i.e. they are still in the owners possession, and the owner
by mistake sells them to b, then b gets a good title a can do nothing except ask for his money
back.

5. Resale by a buyer in possession: this occurs when a seller transfers the goods to a buyer
before he has actually been paid for them. Then if the buyer, a mercantile agent, sells on the
goods to another party, that party gets a good title to the goods.

Please note that there used to be an exception to the nemo dat rule in what was called an
Open Market or Market Overt. That meant that if you bought goods in an open market,
between sunrise and sunset you got a good title to the goods even though the seller did not.
This is no longer the case. There is no exception any longer for an open market.

Remedies available to both parties in sale of goods

1. The sellers remedies against the goods. If someone sells goods and the buyer does not pay,
then the seller has some remedies:
a) He has a lien over the goods. This simply means that he has a right to keep the goods in his
possession until he is paid.
b) He has a right of stoppage in transit. This is useful if the buyer has gone insolvent.
Provided the goods have not actually been delivered, the seller can have them stopped and
returned to him.
c) He also has the right to re-sell them. This is useful if the goods are of a perishable nature
(e.g. food). The seller normally gives the buyer a time limit for him to pay. If he does not do so,
then the seller will re-sell them.

The seller will often protect himself against a buyer who may not pay for the goods by putting
what is known as a ROMALPA CLAUSE in the contract. It is called this after the case that first
involved this kind of clause. Aluminium Industrie Vaasen v Romalpa Ltd 1976. In this case
Romalpa bought some aluminium rods from the plaintiff company under a contract which
agreed that the title to the rods would remain with the sellers until all the money owing had
been paid. Romalpa got into financial difficulties and called in the receiver. He found a quantity
of rods in Romalpas warehouse and applied to the court to see whether or not they belonged
to Romalpa, or still belonged to the sellers. The court decided that the retention of title clause
was valid. So the rods still belonged to the suppliers. This is now a very common clause to put
into a contract.

THE LAW OF TORT

This is the second most common subject in the law examination. It is a general word, taken
from French, which simply means wrong. It is divided into the following areas: Negligence,
Nuisance, and Defamation. Each one will be considered in turn.

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Negligence

This is the largest area of tort and needs to be understood very well. It is usually agreed that
the modern law of negligence started in the case of Donoghue v Stevenson. This is a case
that started in Scotland and finished in the House of Lords in London. It set a precedent which
is still in force today .In this case probably one of the most well known of all cases, Mrs
Donoghue together with a friend of hers, went into a caf which was in a suburb of Glasgow in
Scotland. She sat down and her friend bought her an ice cream. He asked her if she would like
anything else and she said she would like some ginger beer. So he went to the bar and bought
some. When he opened the bottle she poured some of it onto the ice cream and ate it. She
then asked for a glass and when he brought it over she poured in the rest of the ginger beer
and noticed what she thought was a decomposed snail in the bottle. She was off work for three
days and then took a legal action against the manufacturer of the ginger beer, a David
Stevenson. She could not sue in contract because she had not bought the bottle. So she sued
in tort for negligence. Since it had happened in Scotland, the court was a Scottish court called
the Court of Session. She lost the case because the judge took the view that a manufacturer
owed no duty of care to the people who bought his product. She was persuaded to take the
case, on appeal, to the House of Lords in London. Here she won the case by a majority of three
judges to two. This case really started the modern law of negligence. In his summing-up the
presiding judge, Lord Atkin, stated the requirements for negligence. He said that reasonable
care must be taken to avoid acts and omissions which could be foreseen as likely to injure a
neighbour. He then went on to define what is meant by a neighbour. This is any person so
closely and directly affected by my act that I ought reasonably to have them in contemplation as
being so affected when I am directing my mind to the acts and omissions which are called in
question.

This, therefore, is the way a judge will look at a case of negligence. The question is not did I
think of the damage I caused by my negligence, but should I have thought of it?

The requirements needed to make a good case in negligence are:

1. You have to prove that a duty of care actually existed. The accepted explanation for this is
Lord Atkins definition underlined above. If you do not owe someone a duty of care, then you
cannot be sued for negligence.

2. You then have to prove that there was a breach of that duty and that from it actual damage
resulted. This is not always easy to see. Sometimes the damage that resulted is so far away
from the initial negligent act that it is considered as being too remote and the person would not
be liable. Two cases may show the difficulty. The first is Scott v Shepherd. Here the defendant
carelessly threw a firework which he had lighted, into a crowded market. It landed on a stall.
The owner immediately threw it away, It landed on another stall and the same thing happened.
As it travelled through the air it exploded in the face of a member of the public, (Scott) and he
was injured. The court took the view that the firework exploding in the face of a member of the
public was a natural result of the negligent action of Shepherd, and so he was liable for
negligence. So one of the tests for what is called remoteness, is simply was the damage a
natural result of the original negligent action? In contrast there is another case simply called
The Wagon Mound. (Its proper name is Morts Docks and Engineering Ltd v Overseas
Tankships Ltd.)

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PROFESSIONAL NEGLIGENCE

This is the area of negligence which relates to professional people such as doctors, lawyers
etc. The duty of care is higher than for ordinary people since they are professional and are
trained in their profession. This was shown in the case of Central London Property Trust Ltd
v High Trees House Ltd 1947. In this case the claimants let a block of flats during the last war
to the defendants at an annual rent of 2500. Because of the war it was difficult to let any flats
in London and the claimants agreed for no extra consideration to take half the rent each year
i.e. 1,250. At the end of the war the flats were fully let again and so the claimants asked for the
full amount of 2,500 which they got. But they also wanted the full amount backdated to the
war, claiming that their agreement was not binding since it had not been backed up with any
extra consideration. The court would not agree to this on the grounds that the waiver (the
agreement to take a smaller sum than they were entitled to) was made in good faith and had
been acted upon. They were prevented in Equity from getting the back rents.

REMOTENESS OF DAMAGE

The question of remoteness was dealt with under the general heading of contract. However, the
thinking behind it is different in tort to what it is in contract. In contract the idea is: was this kind
of damage in the minds of both parties at the time of the contract AND did the damage flow as
a natural consequence of the breach? The idea in tort is simpler. All that has to be considered
is was this kind of damage reasonably foreseeable? The earliest case probably is Scott v
Shepherd 1773. In this case the defendant lit a firework and threw it up in the air. It landed on a
stall in the market. The owner of the stall immediately threw it away and it landed on another
stall where the owner again threw it away. It exploded in the face of one of the customers and
blinded him in one eye. He sued the defendant. The court found that there was no break in the
chain of events and the resulting injury was reasonably foreseeable. So the defendant was
liable. In another well-known case called the Wagon Mound, a case from Australia, a ship
which was called the Wagon Mound was at anchor in the harbour of Sydney and the ships
engineer decided to clean out the engines. A lot of dirty oil was pumped from the ship onto the
water of the harbour. A wind sprang up and moved the oil round the harbour to a wharf where
some repair work was taking place. This involved using welding torches. The workmen saw the
oil and stopped work to ask the foreman what to do. He told them to carry on as it was not
possible to set fire to oil on water just from a welding torch. Unknown to him, since he could not
see them, there were lots of small pieces of cotton wool floating on top of the oil. They had
been thrown out by the engineer on the boat with the oil. Sparks from the welding set the cotton
wool alight and the wind fanned it into a large fire which damaged the wharf. The owners of the
wharf (Morts Docks and Engineering Co) sued the owners of the Wagon Mound for negligence.
The case was heard by the Privy Council in London who decided that the owners of the ship
were liable for the pumping of the oil onto the water and the resulting pollution, but not liable for
the damage to the wharf, since the sequence of events was not reasonably foreseeable.

This has now become the test for liability in negligence cases.

Nuisance

There are two types of nuisance Private Nuisance and Public Nuisance.

Private Nuisance: as the name suggests is any nuisance which affects a person or a small
number of persons. Private nuisance is a tort, i.e. a civil offence and so the person affected can

Business Law 41
sue for damages in the civil courts if he has been affected by the nuisance more than everyone
else.

1. Public nuisance is a tort as well, but can be a crime which means that the person who has
committed the nuisance could be prosecuted. This is done by the decision of the Attorney
General. The most common type of public nuisance is something obstructing the road. This is
provided it goes on far too long.

2. Private nuisance is something which affects one or only a very few people. There are one or
two things to remember about private nuisance: There is no need to prove that it is a danger to
health. If it is annoying, then it is a nuisance. You cannot take an action against someone for
making a noise (for example) if you yourself are particularly sensitive to noise.

A nuisance may be the result of the actions of several people. If so, then they are all liable and
if only one of them is fined he can take an action against the others for a contribution towards
his fine. A nuisance does not have to go on for a long time. Someone setting off a firework
could be a nuisance even though it only lasted a short time. However, in the case of private
nuisance, if this has gone on without the other side taking any action about it, for at least twenty
years, then it becomes legal for the person committing the private nuisance to continue. This
could happen if a person who lives near his neighbour has used the neighbours private road to
get in and out of his property for at least twenty years, then he acquires the right to continue to
do so. This is called acquiring a right by prescription

Remedies available for nuisance are:

1. The injured person may abate the nuisance. This means remove it himself.
2. He may sue for damages.
3. He may ask for an injunction. This is an order from the court to tell the accused to stop
carrying on the nuisance.

Defences available include:

1. Statutory authority, i.e. if the nuisance was sanctioned by Act of Parliament.
2. Prescription. This means that if the nuisance has been going on for a minimum of 20 years,
and nobody had taken any action to stop it, then it becomes legal to continue.
3. Consent. This simply means that the other party had consented to the action that is
complained about. If you are in the habit of playing loud music which can be heard next door,
and your neighbour told you he did not mind, he cannot change his mind and ask you to stop.
4. Act of God. This can be used when the nuisance complained about was caused not by you
but some natural happening such as a very bad storm, or even an earthquake.

Defamation

This is another tort, i.e. a civil wrong. It arises when people are upset and their reputation
suffers. The best definition is: a defamatory statement which damages the reputation of a
person and lowers his standing in society, causing him to be avoided by ordinary people, or
causing people to make comments which are damaging to him in his profession, business or
occupation.

Defamation can be one of two types. Libel is defamation in a permanent form, so it can be by
letter, on the internet, in a book, in the newspapers etc. Since this form of communication is
more or less permanent, libel is very serious. Slander is defamation in a non-permanent form,
which is usually the spoken word. These two must be studied separately.

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SLANDER

This is usually caused by people saying something about someone else. It is a tort and cannot
become a crime. The person defamed has to prove what is called special loss. This could be
mental suffering or simply being ignored by his former friends. There are however, some
situations where you can sue for slander without having to prove special loss. These are:
1. Where the words used say that a person is no good in his job, or not honest in his job.
2. Where the words say, or imply, that the person has committed a crime which is punishable
by imprisonment.
3. Where the words imply that a woman has been unchaste, i.e. has had sex with someone
other than her husband.
4. Where the words imply or state that a person has got a venereal disease, e.g. AIDS.

LIBEL

This is defamation in a more permanent form. So it can be by television, video, photographs or,
more commonly, in an article in the paper or in a book or pamphlet. It is more serious than
slander because the words are more or less permanent and so can have quite an effect on a
number of people. The result is:
1. You do not have to prove special loss.
2. It can be both a tort (subject to civil proceedings) and also it can be a crime (subject to
criminal proceedings). The criminal aspect is started by a senior lawyer called the Attorney
General. The way this is expressed is to say that proceedings in respect of the criminal aspect
of libel is begun at the suit of the Attorney General. It is always a good idea to have some
cases to illustrate the points that are made. In defamation the best cases to remember are:

Youssoupoff v MGM 1934

In this case a film had been made by MGM (the American film makers Metro Goldwyn Myer) in
which the Russian monk Rasputin had raped a lady. The claimant was Russian and had been
linked with one of the murderers of Rasputin and so the possible conclusion for people
watching the film would be that she was the lady who had been raped. She won the case since
a film would be Libel and not Slander and therefore there was no need to prove special
damage.

Hulton v Jones 1910

This is another well-known case. It raises a different point however, i.e. can you defame
someone without knowing it?

In this case a newspaper published a made-up story about the exploits of a churchwarden from
Peckham in London who had gone on holiday in France. This included some sexual exploits.
They gave the (made up) name of Artemus Jones to this churchwarden. Unknown to them
there was a real Artemus Jones who was a barrister. He did not live in Peckham, and he was
not a churchwarden, but he sued the newspaper on the grounds that people would assume it
was him in the story. He won the case since it had been published, people had read it and it
was defamatory since it suggested sexual misconduct.

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Defences to a case of defamation

1. The most obvious defence is truth. If what has been said or written is true, then it is not
defamation.
2. If what was said took place in a session of Parliament either in the Commons or the House of
Lords, then it is protected by what is called Parliamentary privilege and no proceedings can be
allowed.
3. Fair comment to succeed in this defence it must be shown that the comment was fair, on
a matter of public interest, the facts were accurate and there was no malice. This means that
the person giving the opinion must have honestly believed what he said or wrote, and he must
have believed they were true. It must be clear that he was giving his own opinion.

PARTNERSHIP

A partnership is a group of people working together to make a profit. The correct name for this
group of people is a firm. The largest number of partnerships occur in professions such as
doctors, lawyers and accountants. There is a standard definition for partnership which you
should learn and understand the various sections involved. It comes from the Partnership Act
1890: Partnership is the relation which subsists between persons carrying on a business in
common with a view of profit. Try to learn this definition.

Looking at the different sections of this definition:

1. Persons actually includes corporations as well as individual people. There is usually a
minimum of 2 people (one person would be a sole trader) and a maximum of 20. The idea is
that if there are more than 20, then you should form a company. However this rule does not
apply to the most common form of partnership, i.e. professional. So a partnership of doctors is
allowed to have any number of partners. This is the case with any form of professional partners
such as lawyers, accountants or surveyors.
2. Carrying on a business means that they must actually be doing something, not just investing
in shares.
3. In common means that they are all involved in the business and take joint responsibility.
4. With a view of profit means that they are there to make a profit. (they may of course make a
loss, but they still have the objective of making profits). So organisations which were formed
just to help people, i.e. charitable organisations cannot be partnerships.

KINDS OF PARTNERS

A partnership is made up of different kinds of partners:

A Full partner He takes responsibility for the debts and takes part in the management of the
firm.
A Dormant Partner Dormant means sleeping but he does not actually sleep! He simply
invests money in the firm but takes no active part in running it.

A Salaried Partner This is usually a young person who has just joined the firm. He is really
employed by the partners and gets a salary rather than sharing the profits. This kind of partner
is most common in professions such as solicitors.

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THE LIABILITY OF PARTNERS

This is an important part of partnership. The liability of the partners is joint and several. This
difference should be memorised. Joint means that all the partners are collectively responsible
for the firms debts. Several means that each partner is individually liable for the firms debts.
Most partnerships have unlimited liability, unlike companies which usually have limited liability.
A partner therefore stands the risk of losing all his capital and assets if necessary. It is possibly
therefore quite a risk to take. If one of the partners dies, then his estate is still liable for debts
which were incurred before his death. The same ruling applies when a partner retires. He is still
liable for debts of the firm which occurred before his retirement.

THE AGENCY OF PARTNERS

Partners are agents for each other. This means they can make contracts on behalf of the
partnership which are binding on the other partners. This is complicated a bit by the type of
contract that the partner made. If it was a kind that the partnership did not deal with and the
other person to the contract knew this, then the other partners would not be bound by it.
However, the partners would not be liable if one of them tried to:

1. Create a mortgage on the firms property.

2. To give a guarantee in the firms name.
3. To submit a dispute to arbitration.
4. To accept property in satisfaction to a debt owed to a firm.

PARTNERS AUTHORITY AND LIABILITY

Authority to bind the firm: Every partner is an agent for the partnership and therefore has the
power to bind the firm in transactions. This is always providing the transaction is the kind of
business that the firm normally carries out. This is known as a partners implied authority.
This implied authority really applies to the following transactions:
1. Selling goods for the firm.
2. Buying goods for the firm.
3. Giving receipts and collecting payments on behalf of the firm.
4. Taking on new staff for the firm.
5. In a legal case against the firm the partner can employ a solicitor.
6. Provided it is a trading partnership, the partner can accept bills of exchange.
7. He can borrow money on behalf of the firm.
8. He can take out a mortgage, and pledge the firms goods.

A partners liability is of three kinds:

1. Liability for debts: remember this odd phrase joint and several. This simply means that the
partners are jointly liable for the firms debts, i.e., altogether they are liable, and several means
they are also liable individually this means that any one partner may find himself liable to pay
for all the firms debts! It follows that if a legal action is taken against one partner and fails, there
is nothing to stop the party taking an action against any or all of the other partners. (This was
set out in the Civil Liability (Contributions) Act 1978.)

2. Liability for torts: this is again joint and several.

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3. The liability of incoming partners starts when they do. And the liability of outgoing (retiring)
partners ends when they do. It can be a bit more complicated, since if he agrees, the new
partner can make himself liable for the debts of the outgoing partner. He does this by a
complicated kind of contract called novation.

How may a partnership come to an end?

Again there is a list of ways. Some are self-evident and you can easily remember the rest!

1. If the partnership was formed for a fixed period of time, then it will end at the end of that time.

2. By giving notice.

3. By mutual consent, i.e. all the partners agree to end the firm.

4. By death or bankruptcy of one of the partners.

5. If the partnership business becomes illegal.

6. If the Court thinks it right it can close the partnership down if one of the partners becomes
mentally unstable, where the business can be carried on only at a loss, or for any other reason
which seems good to the court.

COMPANY LAW

This part of law refers to limited liability companies. This is in contrast to partnerships which
have unlimited liability. So if you are a shareholder in a limited company and the company
becomes bankrupt, you lose only the amount you have invested in it. If you were a partner and
the partnership becomes bankrupt you could lose all your money, house and assets.

Formation

A company is usually formed according to the provisions of the Companies Act 2006. The
method will be dealt with later on. The most important difference between companies and
partnerships is that once a company has been formed it becomes a legal person, quite different
to the people who make up the company. In contrast the partners and the partnership are one
and the same so everyone is liable for the partnerships debts. This is known as the rule of
Salomon v Salomon. This was a case in 1897. Mr Salomon with some of his family formed the
company and sold his existing company to it. He got payment partly in the form of debentures.
These are a type of share where you are entitled to be paid before the other shareholders.
When eventually the company came to an end Mr Salomon tried to get the value of his
debentures. He could not do so if Mr Salomon and Salomon & Co were the same thing (as in
partnerships). He could not owe himself his own money! The court decided that this was not the
case and Mr Salomon was distinct from the company and he was therefore entitled to the value
of the debentures. Since a company has no legal existence until it is formed you have to be
aware of the position regarding what are known as pre-incorporation contracts. Briefly, the
people who form a company are known as promoters. They sometimes make contracts with
other firms on behalf of the company they are forming. If the company they are in the process
of forming is (say) XZ company and the promoter signs the contract on behalf of this company,

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then he himself if liable, not the company. This is because the new company XZ has not yet
come into existence.

The Characteristics of a Company

1. Limited liability. This is explained above.

2. Perpetual Succession. Unlike a partnership, any change in the membership has no effect on
the existence of the company.
3. Company assets are owned by the actual company and not by the members of the company.
4. Action in the case of injury to the company. The legal action is for the company to take and
not any of the members. This is an important rule and is known as the rule in Foss v Harbottle
1841. In this case two of the shareholders in a company tried to sue some of the directors
because they had sold some assets to the company at a very inflated price. The court decided
that they could not do so because it was the company who should take the case and not the
shareholders. However, the 2006 Companies Act has introduced the idea of a derivative claim
which allows a shareholder to take action against a director of a company if the director has
been in breach of his duty. So it is possible that the decision in Foss v Harbottle would be
different if the case had come to court today.

How a company is formed

You should have a general idea of the steps that are taken in the formation of a company. They
are basically that certain documents have to be delivered to the Registrar of Companies who is
the head of a government agency called Companies House. After making sure they are OK he
will issue a certificate of incorporation. The company then has a legal existence and can
commence trading.

The documents required are first of all:

1. The Memorandum of Association. This is now completely changed from its original form
before the 2006 Act. This now simply states that the people who sign the memorandum wish to
start a company and that they will take at least one share.

2. An application form to become a company. This form must contain the proposed company
name, and where the registered office is situated. It must state whether or not it is going to be a
limited company and if so whether it is limited by shares of by guarantee. It will have a list of the
officials of the new company and the proposed address of the companys registered office.
Finally the form should state whether or not the model Articles of Association are to be used
and if not then the new Articles are to be shown.

3. A statement which says that the requirements of the Act have been met. This is called the
Statement of Compliance.

Directors

The 2006 Act sets out the duties of the directors. A full account is shown below. They are:
1. To act within their powers.
2. To promote the success of the company.
3. To exercise independent judgment.
4. To exercise reasonable care, skill and diligence.
5. To avoid Conflicts of interest.

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6. Not to accept benefits from third parties.
7. To declare an interest when appropriate.

Private Companies

The Act makes certain provisions regarding private companies.

They are:
1. There is no longer any need to have a company secretary.
2. There is no longer any need for 100% agreement in shareholders written resolutions. The
new figure is 75%
3. They do not need any longer to hold an Annual General Meeting.
4. The directors have unlimited authority to allot shares.

How a company comes to an end

This can be either a voluntary liquidation or a compulsory liquidation. You should understand
the difference between them.
1. Voluntary liquidation. Here the members of the company pass a special resolution to wind up
the company and then they appoint a liquidator. Once this is done the directors of the company
have 12 months to issue a declaration of solvency, i.e. they are saying that the company can
actually meet its debts. It they cannot do this, then the company is wound up and ceases to
exist.
2. Compulsory liquidation. This means liquidation by an order of the court. This can be because
the court thinks it cannot pay its debts, or that the company has not got a good chance of
making any profit in the future, or that the court thinks it would be just and equitable to do so.
3. Companies Act 2006. As mentioned above, The Companies Act of 1985 has now been
amended by the Companies Act 2006. You should make yourself familiar with the more
important parts of the Act. It came into force in stages ending in October 2009. The changes
you should remember are:

Directors

1. It sets out the duties of directors as:

a) To act within their powers, to keep within the powers set out in the Memorandum and Articles
and the decisions made by the shareholders.
b) To promote the success of the company and in particular to think of the long term
consequences of any decision they made (the interests of the employees), the need to improve
business relationships, the impact on the community, the need to maintain high standards and
act fairly.
c) To exercise an independent judgement.
d) To exercise reasonable care, skill and diligence.
e) To avoid a conflict of interest.
f) Not to accept benefits from third parties (i.e. not to take bribes).
g) To declare an interest where appropriate.

2. S.261 of the Act gives shareholders the right to sue the directors for wrong doing on behalf of
the company. This seems to be the opposite of the Foss v Harbottle ruling. The shareholders
however, still need the consent of the court to take the action.

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3. Directors are now allowed, with the consent of the shareholders, to obtain loans from the
company.

4. The age restriction of 70 for directors has been abolished, and there is a new lower age limit
of 16 years for all directors.

General Provisions

1. The procedure for company formation has been modernised. It is now possible for one
person to form a company.
2. The Articles of Association is now the main formation document and the Memorandum is
now treated as being a part of the Articles. Model Articles are now available for the formation of
private companies and they will replace Table A. Existing companies may switch over to these
Articles if they wish.
3. The capacity of a company will now be regarded as unlimited, unless they specifically say so.
This does away with the need for a long objects clause in the Memorandum.
4. Any document relating to the company may now be signed by only one director.
5. The requirement relating to share capital is abolished and companies may decide to obtain
share capital in any currency they wish.
6. Only 14 days notice is now required to an Annual General Meeting.
7. All communications may now be made by email or on the website.
8. Auditors may now restrict their liability in negligence provided the court considers it fair, and
the shareholders agree. This must make an impact of the general law of negligence relating to
professional bodies, and also on the use of exclusion clauses.

CONCLUSION

The above account of the basic ideas of business law will provide you with the scope and
flavour of the subject. If you find it interesting then there are a number of good detailed
textbooks to read. Pick on one topic and read it thoroughly. Then think about it. After that, make
notes which you can refer to from time to time. Please remember what I said before. When
answering a question, make a short draft of it on the answer paper. Then draw a line through it
and it will not be marked. When making a point try to back it up by reference to a case or Act.
Do not spend a long time on made-up examples of your own. It is a waste of time. May I wish
you good luck.

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